2013 (11) TMI 910 - HC - Income Tax

Deduction available u/s 54EC with capital gains u/s 50 - sale of depreciable assets Held that - 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 - 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 - 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 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. Following CIT Vs. Assam Petroleum Industries (P.) Ltd. reported in 2003 (6) TMI 23 - GAUHATI High Court - Capital gain arising of long term capital asset, if invested in specified asset, the assessee is not to be charged capital gains and exemption provided under Section 54EC of the Act cannot be denied to the assessee only on account of the fact that deeming fiction is created under Section 50 of the Act - Legal fiction created under Section 50 of the Act is though restricted to computation of capital gains, such deeming fiction cannot restrict application of Section 54EC which allows exemption of capital gains, if assessee makes investment in the specified assets - Decided against Revenue.

Summary

Issues Involved:
1. Deduction under Section 54EC for capital gains from depreciable assets.
2. Interpretation of Sections 50(1) and 50(2) concerning capital gains computation and its applicability to other provisions.

Issue-wise Detailed Analysis:

1. Deduction under Section 54EC for Capital Gains from Depreciable Assets:

The Revenue challenged the Tribunal's decision allowing the respondent-assessee to claim deductions under Section 54EC of the Income-tax Act for capital gains arising from the sale of depreciable assets. The respondent-assessee had sold properties and invested in REC bonds to claim deductions under Section 54EC. The Assessing Officer computed capital gains but disallowed deductions for one of the properties. The CIT(A) allowed the deductions, which the Tribunal upheld. The Revenue argued that Section 54EC should not apply to depreciable assets, citing the Supreme Court's ruling in Common Wealth Trust Ltd. v. Commissioner of Income-tax, which emphasized that Section 50 modifies the "cost of acquisition" for depreciable assets.

The Tribunal, however, followed the decisions of the Bombay and Gauhati High Courts, which did not distinguish between depreciable and non-depreciable assets for Section 54EC investments. The Tribunal concluded that the exemption under Section 54EC applies if the investment is made within the prescribed period, regardless of the asset's depreciation status.

2. Interpretation of Sections 50(1) and 50(2) Concerning Capital Gains Computation:

The core of the dispute was whether Sections 50(1) and 50(2) create a deeming fiction only for the computation of capital gains under Sections 48 and 49 or if it extends to other provisions like Section 54EC. The Revenue argued that Section 50, which provides a special method for computing capital gains on depreciable assets, should preclude deductions under Section 54EC. They relied on the Madras High Court's ruling in M. Raghavan v. Assistant Commissioner of Income-tax, which held that Section 50 aims to prevent multiple benefits from depreciable assets, including indexing benefits.

However, the Tribunal and the Gujarat High Court found that Section 50's deeming fiction is confined to computation purposes and does not extend to exemption provisions like Section 54EC. The Bombay High Court's decision in CIT v. Aditya Medisales Limited was pivotal, stating that Section 50 does not convert long-term capital assets into short-term ones but only affects the computation method. Hence, the exemption under Section 54EC remains applicable if the investment criteria are met.

Conclusion:

The Gujarat High Court upheld the Tribunal's decision, reaffirming that the legal fiction in Section 50 is limited to computation and does not affect the applicability of Section 54EC. The court agreed with the Bombay and Gauhati High Courts that capital gains from long-term depreciable assets, if invested in specified bonds, qualify for Section 54EC deductions. The appeal was dismissed, confirming that Sections 50 and 54EC operate independently concerning their respective provisions.