2018 (10) TMI 928 - AT - Income Tax

Deduction u/s 54F - capital gain arising on transfer of depreciable asset - whether the capital gain resulting from sale of depreciable assets is short term capital gain or long term capital gain for the purpose of exemption under Section 54F towards investment in new house - double deduction - Held that - In the case of CIT vs. ACE Builders (P.) Ltd. 2005 (3) TMI 36 - BOMBAY HIGH COURT has held that the legal fiction created in Section 50 is to deem capital gain as short term capital gain and not to deem an asset as short term capital asset and therefore it cannot be said that Section 50 converts long term capital asset into short term capital asset and therefore exemption under Section 54F is available for depreciable assets as Section 54F does not make any distinction between depreciable assets and non depreciable asset. CIT(A) also considered and followed the said decision of the Hon ble Jurisdictional High Court in deciding the issue in favour of the assessee. Capital gain arising from depreciable assets is long term capital gain for the purpose of claiming exemption under Section 54F/54E of the Act. - Decided against revenue

Summary

Issues:
1. Whether deduction under Section 54F of the Income Tax Act is allowable on capital gain arising on the transfer of a depreciable asset?
2. Whether allowing deduction under Section 54F of the Act would amount to double deduction once as depreciation and subsequently under Section 54F of the Act?
3. Whether the capital gain resulting from the sale of depreciable assets is considered short term or long term capital gain for the purpose of exemption under Section 54F of the Act?

Analysis:
1. The appeal filed by the Revenue challenged the order of the CIT(A) regarding the allowance of deduction under Section 54F of the Income Tax Act on the capital gain from the transfer of a depreciable asset. The Revenue contended that as per Section 50 of the Act, the gain from depreciable assets is taxable as short term capital gain, and allowing deduction under Section 54F would lead to double deduction. However, the CIT(A) allowed the appeal of the assessee, citing relevant case law and holding that the benefit of Section 54F is available even in cases where depreciable assets are involved.

2. The main contention revolved around whether the capital gain from the sale of depreciable assets should be treated as short term or long term capital gain for the purpose of claiming exemption under Section 54F of the Act. The ITAT analyzed the legal fiction created in Section 50, which deems the gain as arising from short term capital assets. Referring to the decision of the Hon'ble Bombay High Court in CIT vs. ACE Builders (P.) Ltd., it was established that Section 50 deems the capital gain as short term but does not convert the asset itself into a short term capital asset. Therefore, the ITAT concluded that exemption under Section 54F is available for depreciable assets, as this section does not differentiate between depreciable and non-depreciable assets.

3. The ITAT further supported its decision by referencing various judicial precedents such as CIT vs. F.S. Dempo Company Ltd., Smita Conductors Ltd., and CIT vs. Rajiv Shukla, where similar issues were decided in favor of the assessee. These cases established that capital gain arising from depreciable assets should be considered long term capital gain for the purpose of claiming exemption under Section 54F/54E of the Act. Therefore, the ITAT dismissed the appeal filed by the Revenue and upheld the order of the CIT(A) in favor of the assessee.

In conclusion, the ITAT Mumbai clarified the treatment of capital gains from depreciable assets under Section 54F of the Income Tax Act, emphasizing that such gains should be considered long term capital gains for exemption purposes, based on relevant legal provisions and judicial precedents.