2005 (3) TMI 36 - HC - Income Tax

Section 54E exemption allowed for depreciable asset capital gains despite Section 50 computational fiction, revenue appeal dismissed

Commissioner of Income-Tax Versus Ace Builders (P.) Ltd.

The HC upheld the Tribunal, holding the assessee entitled to exemption under section 54E for capital gains on a depreciable asset despite section 50 ... Capital gain - Whether Tribunal was right in law in holding that the assessee is entitled to deduction under section 54E in respect of the capital gain arising on the transfer of a capital asset on which depreciation has been allowed and which is deemed as short-term capital gain under section 50 of the Income-tax Act, 1961? - HELD THAT:- 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-sections (1) and (2) of section 50 is restricted only to the mode of computation of capital gains contained in sections 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 v. D. Hanumantha Rao [1998 (3) TMI 679 - SUPREME COURT]. In that case, the Service Rules framed by the bank provided for granting extension of service to those appointed prior to July 19, 1969. The respondent therein who had joined the bank on July 1, 1972, claimed extension of service because he was deemed to be appointed in the bank with effect from October 26, 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 ration 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 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 income-tax Act cannot be denied to the assessee on account of the fiction created in section 50. It is true that section 50 is enacted with the object of denying multiple benefits to the owners of depreciable assets. However, that restriction is limited to the computation of capital gains and not to the exemption provisions. In other words, where the long-term capital asset has availed of depreciation, then the capital gain has to be computed in the manner prescribed under section 50 and the capital gains tax will be charged as if such capital gain has arisen out of a short-term capital asset but if such capital gain is invested in the manner prescribed in section 54E, then the capital gain shall not be charged under section 4$ of the Income-tax Act. To put it simply, the benefit of section 54E will be available to the assessee irrespective of the fact that the computation of capital gains is done either under sections 48 and 49 or under section 50. The contention of the Revenue that by amendment to section 50 the long-term capital asset has been converted into a short-term capital asset is also without any merit. As stated hereinabove, the legal fiction created by the statute is to deem the capital gain as short-term capital gain and not to deem the asset as short-term capital asset. Therefore, it cannot be said that section 50 converts a long-term capital asset into a short-term capital asset. We concur with the decision of the Gauhati High Court in the case of CIT v. Assam Petroleum Industries (P.) Ltd. [2003 (6) TMI 23 - GAUHATI HIGH COURT] and hold that the Tribunal was justified in allowing the benefit of exemption under section 54E of the Income-tax Act to the assessee in respect of the capital gains arising on the transfer of a capital asset on which depreciation has been allowed. Accordingly, the appeal fails. Issues Involved:1. Entitlement to deduction under section 54E for capital gains on depreciable assets deemed as short-term capital gains under section 50 of the Income-tax Act, 1961.Detailed Analysis:1. Entitlement to Deduction under Section 54E:The primary issue in this case is whether the assessee is entitled to a deduction under section 54E of the Income-tax Act, 1961, for capital gains arising from the transfer of a depreciable asset, which is deemed as a short-term capital gain under section 50 of the Act.- Background: The assessee, a private limited company, sold a flat that was part of a block of depreciable assets. The flat was sold for Rs. 5,20,000, and the net sale proceeds were invested in the 'UTI capital gains scheme' to claim deductions under section 54E. The Assessing Officer treated the capital gain as short-term under section 50 and denied the benefit of section 54E, which is available only for long-term capital gains.- Assessing Officer's Stand: The Assessing Officer held that since the entire block of assets ceased to exist due to the sale, the written down value of the asset was to be taken as the cost of acquisition under section 50(2). Consequently, the capital gain arising from the transfer was treated as short-term capital gain, and the benefit under section 54E was denied.- Commissioner of Income-tax (Appeals): The CIT(A) upheld the Assessing Officer's decision, stating that section 50 is a special provision for computing capital gains on depreciable assets, and the deeming provisions necessitate treating the capital gains as arising from the transfer of a short-term capital asset, thus denying the exemption under section 54E.- Tribunal's Decision: The Tribunal reversed the CIT(A)'s decision, holding that the deeming fiction in section 50 is restricted to the method of computing capital gains and does not extend to the non-chargeability of capital gains. Therefore, the assessee was entitled to the exemption under section 54E.- Revenue's Argument: The Revenue argued that section 50, introduced to prevent multiple benefits on depreciable assets, creates a fiction that converts long-term capital gains into short-term capital gains, thereby making section 54E inapplicable.- Assessee's Argument: The assessee contended that section 54E does not distinguish between depreciable and non-depreciable assets and is concerned only with the investment of net consideration in specified securities. The fiction in section 50 is limited to computation and does not affect the exemption under section 54E.Court's Analysis:- Relevant Provisions: The court examined sections 2(14), 2(29A), 2(29B), 2(42A), 2(42B), 45, 48, 49, and 50 of the Income-tax Act, focusing on the definitions of capital assets, long-term and short-term capital gains, and the computation methods.- Section 50's Scope: The court noted that section 50 is a special provision for computing capital gains on depreciable assets and modifies the application of sections 48 and 49. It creates a fiction that capital gains on depreciable assets are deemed short-term for computation purposes only.- Legal Fiction: The court emphasized that legal fictions are confined to their specific purposes. The fiction in section 50 is limited to computation and does not convert a long-term capital asset into a short-term capital asset. Therefore, the exemption under section 54E remains applicable.- Section 54E's Applicability: The court held that section 54E applies to capital gains arising from long-term capital assets, irrespective of the computation method under section 50. The exemption is available if the net consideration is invested in specified securities, fulfilling the conditions of section 54E.- Precedent: The court concurred with the Gauhati High Court's decision in CIT v. Assam Petroleum Industries (P.) Ltd., which supported the assessee's entitlement to the exemption under section 54E despite the deeming provisions of section 50.Conclusion:The court concluded that the Tribunal was correct in allowing the benefit of exemption under section 54E to the assessee. The substantial question of law was answered in favor of the assessee and against the Revenue. The appeal was disposed of with no order as to costs.