Article explains How to claim deduction under section 54EC on Short Term Capital Gain on depreciable assets held for more than 36 Months.
At the very outset let me reproduce extracts from relevant provisions of Section 2(29AA), Section 2(42), Section 50, Section 54EC and Section 54F the Income Tax Act 1961-
Section 2(29AA)-
“long-term capital asset” means a capital asset which is not a short-term capital asset”
Section 2(42)-
“”short-term capital asset” means a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer”
Section 50-
“Notwithstanding anything contained in clause (42A) of section 2, where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act or under the Indian Income-tax Act, 1922 (11 of 1922), the provisions of sections 48 and 49 shall be subject to the following modifications :—
(1) where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of the assets during the previous year, exceeds the aggregate of the following amounts, namely :—
(i) expenditure incurred wholly and exclusively in connection with such transfer or transfers;
(ii) the written down value of the block of assets at the beginning of the previous year; and
(iii) the actual cost of any asset falling within the block of assets acquired during the previous year,
such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets;”
Section 54EC-
“Where the capital gain arises from the transfer of a long-term capital asset, being land or building or both…….”
Section 54F–
“(1) Subject to the provisions of sub-section (4), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of any long-term capital asset, not being a residential house…….”
So let’s first agree on the following-
1. An asset shall become a Long-Term Capital Asset only if held for more than 36 months.
2. Gain on sale of depreciable assets even if held for more than 36 months shell still be considered short term capital gain as per section 50.
3. Under both section 54EC and 54F deduction are allowed only against sale of long term capital assets.
My View-
Section 50 of the Act is for the computation of capital gains arising from the transfer of depreciable assets and is a deeming provision. According, this deemed provision cannot be extended more than what is intended. If the property is held for more than 3 years though by deeming section, short-term capital gain has to be computed u/s. 50 of the Act for depreciable assets, it cannot be considered as short-term capital asset. The character of the assets will not change because of computation of capital gain u/s 50 of the Act. Even the Supreme Court in the case of CIT vs Amarchand N. Shroff [48 ITR 59 ] held that deeming provision is a fiction of law, it cannot be extended beyond the object for which it was enacted. By the above Supreme Court case, it is clear that in deeming provision fiction cannot be extended to other sections of the Act. Therefore if the assets are held for more than 3 years they shall be considered as long-term capital assets even though their gains are taxed as short-term capital gain.
This has been upheld by Hon’ble Bombay High Court in case of CIT v. ACE Builders Pvt. Ltd. 281 ITR 210. and CIT v. M/s Delite Tin Industries in ITA 1118/2008 dated 26th September, 2008.
Further, the aforementioned judgements were relied upon by Hon’ble Delhi High Court in case of CIT Vs Rajiv Shukla, relevant extracts of which is reproduced for ready reference.
“3. In appeal, the CIT(A) deleted the addition and order of the CIT(A) is confirmed by ITAT. On perusal of the order of the Tribunal, we find that it has relied upon the judgment of Bombay High Court in the case of CIT v. ACE Builders Pvt. Ltd. 281 ITR 210. This decision of the Bombay High Court was followed by the same Court in CIT v. M/s Delite Tin Industries in ITA 1118/2008 dated 26th September, 2008. Against the order passed inDelite (supra) proceedings, Revenue had preferred Special Leave Petition which has also been dismissed by Supreme Court 21st August, 2009.
4. We have gone through the judgment of Bombay High Court in the aforesaid two cases. Learned counsel for the respondent has also submitted that even Gauhati High Court has taken identical view in CIT v. Assam Petroleum Industries (P.) Ltd. (2003) 262 ITR 587.
5. We do not find any reason to take a different view. In these circumstances, we are of the opinion that no substantial question of law arises for consideration.“
Based on above I am of the belief that deduction under section 54EC and 54F can be claimed even in case of of depreciable assets if if they are held for more than 36 months.
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