2005 (3) TMI 36 - HC - Income Tax

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? - we concur with the decision of the Gauhati High Court in the case of CIT v. Assam Petroleum Industries (P.) Ltd. and hold that the Tribunal was justified in allowing the benefit of exemption under section 54E 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. The substantial question of law raised by the Revenue is answered in the affirmative, i.e., in favour of the assessee and against the Revenue

Summary

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.