2018 (10) TMI 1100 - AT - Income Tax

Exemption u/s 54F - short term capital gain from sale of depreciable assets u/s 50 - sale of factory shed - failure to deposit the net consideration in the capital gain account scheme within the time specified under section 139(1) - Held that - As relying on case of DY COMMISSIONER OF INCOME TAX VERSUS HIMALAYA MACHINERY (P) LTD. 2012 (12) TMI 607 - GUJARAT HIGH COURT the capital gain income earned by the assessee on the sale of depreciable assets being factory shed is eligible for exemption u/s 54F of the Act as it is long term capital assets as per the provision of Section 2(42A) of the Act. Thus, we have no hesitation in deleting the addition made by the AO by disallowing the exemption available to the assessee. Similarly, we also note that there is no dispute the net consideration was utilized by the assessee before filing the income tax return within the due date as specified under section 139(4) of the Act. Therefore, in our considered view the assessee is eligible for exemption under section 54F of the Act, though he failed to deposit the net consideration in the capital gain account scheme within the time specified under section 139(1) of the Act. See ASHOK KAPASIAWALA VERSUS THE ITO WARD-7 (1) , SURAT 2015 (10) TMI 2045 - ITAT AHMEDABAD - decided in favour of assessee

Summary

Issues Involved:
1. Whether the gain on the sale of a factory shed is to be treated as short-term or long-term capital gain.
2. Eligibility of exemption under Section 54F of the Income Tax Act for the gain on the sale of the factory shed.
3. Compliance with the requirement to deposit the net consideration in the capital gain account scheme.

Detailed Analysis:

Issue 1: Treatment of Capital Gain on Sale of Factory Shed
The primary issue revolves around whether the gain from the sale of a factory shed should be classified as short-term capital gain (STCG) or long-term capital gain (LTCG). The assessee argued that the factory shed, held for more than 36 months, qualifies as a long-term capital asset under Section 2(42A) of the Income Tax Act. However, the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] treated the gain as STCG based on Section 50, which deals with depreciable assets. The CIT(A) upheld the AO's decision, stating that the factory shed, being a depreciable asset, falls under the purview of Section 50, which mandates treating the gain as STCG irrespective of the holding period.

Issue 2: Eligibility for Exemption under Section 54F
The assessee claimed exemption under Section 54F, which provides for exemption on capital gains arising from the transfer of long-term capital assets if invested in a residential house. The AO and CIT(A) denied this exemption, asserting that Section 54F applies only to LTCG, and since the gain was treated as STCG under Section 50, the exemption was not applicable. The CIT(A) emphasized that specific provisions like Section 50 override general provisions, thus precluding the application of Section 54F to gains treated as STCG.

Issue 3: Compliance with Deposit Requirement in Capital Gain Account Scheme
The AO also disallowed the exemption on the grounds that the assessee failed to deposit the net consideration in the capital gain account scheme as required under Section 54F(4). The assessee contended that the funds were utilized for constructing a residential house within the time frame specified under Section 139(4), thus fulfilling the exemption criteria. The CIT(A) dismissed this argument, maintaining that the exemption is contingent upon adherence to the deposit requirement under Section 139(1).

Tribunal's Decision:
1. On Capital Gain Classification: The Tribunal acknowledged that the factory shed, held for more than 36 months, qualifies as a long-term capital asset under Section 2(42A). However, due to the deeming provisions of Section 50, the gain is treated as STCG for computation purposes. The Tribunal noted that Section 50 and Section 54F are mutually exclusive and should be applied independently. The factory shed, inherently a long-term capital asset, is eligible for exemption under Section 54F despite the deeming provision of Section 50 treating the gain as STCG.

2. On Exemption under Section 54F: The Tribunal relied on the judgment of the Jurisdictional High Court in the case of Himalaya Machinery Pvt. Ltd., which held that the nature of the asset as a long-term capital asset remains unchanged despite the computation method under Section 50. Thus, the assessee is entitled to the exemption under Section 54F for the gain on the sale of the factory shed.

3. On Compliance with Deposit Requirement: The Tribunal referred to precedents where courts held that if the net consideration is utilized for purchasing or constructing a residential house within the extended period under Section 139(4), the exemption under Section 54F is still applicable. The Tribunal concluded that the assessee's utilization of the net consideration within the extended period satisfies the exemption criteria, even though the deposit was not made in the capital gain account scheme within the time specified under Section 139(1).

Conclusion:
The Tribunal allowed the appeal, granting the exemption under Section 54F for the gain on the sale of the factory shed, recognizing it as a long-term capital asset and acknowledging the utilization of the net consideration within the permissible period under Section 139(4). The Tribunal's decision emphasizes the independent application of Sections 50 and 54F, ensuring that the assessee benefits from the provisions intended for long-term capital assets.