2003 (6) TMI 23 - HC - Income Tax

High Court: Section 54E Exemption Granted for Capital Gains on Depreciated Assets

Commissioner of Income-Tax Versus Assam Petroleum Industries (P.) Ltd.

The High Court ruled in favor of the assessee, affirming their entitlement to exemption under section 54E of the Income-tax Act on capital gains from the ... 'Whether, on the facts and in the circumstances of the case, the Tribunal was correct in upholding the order of the Commissioner of Income-tax (Appeals) in allowing exemption under section 54E of the Income-tax Act, 1961, on gains arising out of transfer of depreciated assets, when unabsorbed depreciation of earlier years was claimed and allowed to be set off?' - whether the assessee who has claimed and allowed depreciation on capital assets is entitled for benefits under the provisions of section 54E and claimed deduction while calculating his income or by virtue of section 50 - question is answered in favour of the assessee and it is held that the assessee is entitled for exemption or deduction as provided under section 54E of the Income-tax Act on capital gains. Issues:Interpretation of provisions under section 54E of the Income-tax Act, 1961 regarding exemption on gains from transfer of depreciated assets.Detailed Analysis:The case involved a question of law regarding the correctness of upholding exemption under section 54E of the Income-tax Act, 1961, on gains from the transfer of depreciated assets when unabsorbed depreciation of earlier years was claimed and allowed to be set off. The assessee, a company deriving income from house property and business dealing, received compensation for the acquisition of its land and building. The Assessing Officer allowed the claim for land but considered the building as a depreciated asset due to earlier depreciation claims, leading to a dispute on the nature of capital gains. The Appellate Commissioner ruled in favor of the assessee, determining the capital gain as long-term and directing the benefit under section 54E. The Revenue appealed to the Income-tax Appellate Tribunal, which upheld the Commissioner's decision, prompting the Revenue's appeal to the High Court.The main issue was whether an assessee claiming and allowed depreciation on capital assets is entitled to benefits under section 54E or is bound by section 50 of the Income-tax Act, which treats capital gains from depreciable assets as short-term. The Revenue contended that once depreciation is allowed on a capital asset, the asset falls out of section 54E's purview, making the capital gain taxable. Section 2(42A) defines short-term capital asset, while section 2(29A) defines long-term capital asset, with section 2(29B) covering long-term capital gain. Sections 48 and 49 outline the computation of capital gains, with section 50 providing special provisions for depreciable assets.Section 50 modifies the computation of capital gains for depreciable assets, subject to certain conditions. However, section 54E provides for exemption on capital gains from the transfer of long-term capital assets if reinvested in specified assets within a specified time frame. The High Court clarified that section 50 does not dictate that a depreciated asset should be treated as a short-term asset, emphasizing that section 54E applies when a long-term capital asset is transferred and the consideration reinvested as required.In conclusion, the High Court held in favor of the assessee, affirming their entitlement to exemption under section 54E of the Income-tax Act on capital gains from the transfer of depreciated assets.