Assessee allowed deduction for new premises in capital gains calculation, upheld exemption for REC Bonds investment.

The Tribunal allowed the assessee to deduct the cost of new premises from the sale consideration for computing capital gains under section 50 of the Income Tax Act. The Tribunal also upheld the exemption under section 54EC for the investment in REC Bonds, dismissing the department's appeal.

---

---

Issues Involved:
1. Deduction of the cost of new premises from the sale consideration while computing capital gains under section 50 of the Income Tax Act, 1961.
2. Eligibility for exemption under section 54EC of the Income Tax Act, 1961 for investment in REC Bonds.

Issue-wise Detailed Analysis:

1. Deduction of the cost of new premises from the sale consideration while computing capital gains under section 50 of the Income Tax Act, 1961:

The assessee, a firm engaged in the diamond business, sold its office premises for Rs. 67,68,750/-. The premises were purchased in 1992 for Rs. 41,28,500/- and had a Written Down Value (WDV) of Nil due to claimed depreciation. The assessee computed a Short Term Capital Gain (STCG) of Rs. 67,89,750/-. During the same assessment year, the assessee purchased new office premises for Rs. 54,82,500/- and claimed this amount as a deduction from the sale consideration of the old premises, resulting in a capital gain of Rs. 12,86,500/- under section 50(1) of the Act.

The Assessing Officer (AO) rejected this claim, arguing that the new premises could not form part of the block of assets because the assessee did not take possession of the new premises, and they were residential properties. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the new premises were not occupied by the assessee before 31.3.2007 and thus could not reduce the capital gains.

The Tribunal, however, reversed this decision, stating that under section 50(1), the only requirement is the acquisition of the asset during the previous year, and there is no necessity for the asset to be put to use for business purposes. The Tribunal cited several precedents, including the Special Bench decision in Chhabria Trust V/s ACIT and ITAT Mumbai decisions in Fluorescent Fixtures (P.) Ltd. and Artic V/s ACIT, which held that the use of an asset is not a condition precedent for adjustment in the block of assets. Consequently, the Tribunal allowed the assessee's claim to deduct the cost of the new premises from the sale consideration.

2. Eligibility for exemption under section 54EC of the Income Tax Act, 1961 for investment in REC Bonds:

The assessee invested Rs. 12,86,500/- in REC Bonds and claimed exemption under section 54EC. The AO denied this exemption, arguing that section 54EC applies only to long-term capital gains, whereas the gain in question was treated as STCG under section 50.

The CIT(A) ruled in favor of the assessee, relying on the Bombay High Court decision in CIT V/s ACE Builders (P.) Ltd., which held that section 50 does not override section 54E, and thus, the exemption under section 54EC could be claimed even for gains treated as STCG under section 50.

The Tribunal upheld the CIT(A)'s decision, noting that the issue was covered by the Bombay High Court ruling, which was not contested by the department due to the smallness of the tax effect. Therefore, the Tribunal dismissed the department's appeal and confirmed the assessee's entitlement to the exemption under section 54EC.

Conclusion:

The Tribunal allowed the assessee's appeal in part by permitting the deduction of the cost of new premises from the sale consideration while computing capital gains under section 50. The Tribunal also dismissed the department's appeal, upholding the CIT(A)'s decision to grant exemption under section 54EC for the investment in REC Bonds. The order was pronounced in open court on 8th November 2013.

---