Section 54E of Income Tax Act,1961 does Not Make Any Distinction Between Depreciable Asset And Non-Depreciable Asset And, Therefore, The Exemption Available to the Depreciable Asset Under Section 54E Cannot Be Denied By Referring to the Fiction Created Under Section 50
Section 50 of the Income Tax Act, 1961(herein short referred to as the ‘Act’) contains the special provisions for computation of capital gains in the case of depreciable assets. While section 54E of the Act provides that capital gains on transfer of a long term capital asset not to be charged in certain cases.
A recent decision in CIT vs. V.S. Dempo Company Ltd. [Civil Appeal No(s). 4797/2008, decided on 05.09.16] of the Hon’ble Supreme Court is markable judgment in the above respect.
Facts & Decision In Brief of V.S. Dempo Company case (supra):
In the above-mentioned appeal before Supreme Court, in the income-tax return filed by the respondent/assessee for the A.Y. 1989-90, the assessee had disclosed that it had sold its loading platform M.V. Priyadarshni for a sum of Rs. 1,37,25,000/- on which it had earned some capital gains. On the said capital gains the assessee had also claimed that it was entitled for exemption under Section 54E of the Act. Admittedly, the asset was purchased in the year 1972 and sold sometime in the year 1989. Thus, the asset was almost 17 years old. Going by the definition of long term capital asset contained in Section 2(29B) of the Act, it was admittedly a long-term capital asset. Further the Assessing Officer rejected the claim for exemption under Section 54E of the Act on the ground that the assessee had claimed depreciation on this asset and, therefore, provisions of Section 50 were applicable. Though this was upheld by the CIT(Appeals), the ITAT allowed the appeal of the assessee herein holding that the assessee shall be entitled for exemption under Section 54E of the Act. The Mumbai High Court confirmed the view of the CIT (Appeals) and dismissed the appeal of the Revenue. While doing so the High Court relied upon its own judgment in the case of CIT, Mumbai City-II, Mumbai vs. ACE Builders Pvt. Ltd. [(2005) 3 Bom CR 598]. The High Court observed that Section 50 of the Act which is a special provision for computing the capital gains in the case of depreciable assets is not only restricted for the purposes of Section 48 or Section 49 of the Act as specifically stated therein and the said fiction created in sub-section (1) & (2) of Section 50 of the Act has limited application only in the context of mode of computation of capital gains contained in Sections 48 and 49 of the Act and would have nothing to do with the exemption that is provided in a totally different provision i.e. Section 54E of the Act. Section 48 of the Act deals with the mode of computation and Section 49 of the Act relates to cost with reference to certain mode of acquisition. This aspect is analysed in the judgment of the Bombay High Court in the case of CIT, Mumbai City-II, Mumbai vs. ACE Builders Pvt. Ltd.(supra), in the following manner:
“In our opinion, the assessee cannot be denied exemption under Section 54E, because, firstly, there is nothing in Section 50 to suggest that the fiction created in Section 50 is not only restricted to Sections 48 and 49 but also applies to other provisions. On the contrary, Section 50 makes it explicitly clear that the deemed fiction created in sub-section (1) & (2) of Section 50 is restricted only to the mode of computation of capital gains contained in Section 48 and 49. Secondly, it is well established in law that a fiction created by the legislature has to be confined to the purpose for which it is created. In this connection, we may refer to the decision of the Apex Court in the case of State Bank of India vs. D. Hanumantha Rao reported in 1998 (6) SCC 183. In that case, the Service Rules framed by the bank provided for granting extension of service to those appointed prior to 19.07.1969. The respondent therein who had joined the bank on 1.7.1972 claimed extension of service because he was deemed to be appointed in the bank with effect from 26.10.1965 for the purpose of seniority, pay and pension on account of his past service in the army as Short Service Commissioned Officer. In that context, the Apex Court has held that the legal fiction created for the limited purpose of seniority, pay and pension cannot be extended for other purposes. Applying the ratio of the said judgment, we are of the opinion, that the fiction created under Section 50 is confined to the computation of capital gains only and cannot be extended beyond that. Thirdly, Section 54E does not make any distinction between depreciable asset and non-depreciable asset and, therefore, the exemption available to the depreciable asset under Section 54E cannot be denied by referring to the fiction created under Section 50. Section 54E specifically provides that where capital gain arising on transfer of a long term capital asset is invested or deposited (whole or any part of the net consideration) in the specified assets, the assessee shall not be charged to capital gains. Therefore, the exemption under Section 54E of the I.T. Act cannot be denied to the assessee on account of the fiction created in Section 50.”
The learned judges of the Hon’ble Supreme Court dismissing the appeal filed by the Revenue held that we are in agreement with the aforesaid view taken by the Mumbai High Court. The Gujarat High Court as well as Guahati High Court have also taken the same view in the following cases, against these judgments no appeal has been filed:
1. CIT vs. Polestar Industries [2013 SCC online Gu 5517]
2. CIT vs. Assam Petroleum Industries (P.) Ltd. [(2003) 262 ITR 587].
Bottomline: The above decision of the Supreme Court has ended controversy on the issue and shall help assessees.