2016 (7) TMI 1097 - AT - Income Tax

Deduction u/s 54EC - short capital gain arising on sale of depreciable asset - Held that - As decided in ITO V/s ACE Builders 2005 (3) TMI 36 - BOMBAY High Court 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 had been converted into to short-term capital asset was also without any merit. 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 long-term capital asset into a short-term capital asset Therefore, 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 had been allowed. - Decided in favour of assessee.

Summary

Issues involved:
- Appeal filed by revenue against order of Ld. CIT(A)-31, Mumbai for A.Y. 2012-13 regarding deduction u/s 54EC of the Income Tax Act, 1961.
- Whether adjustment made during processing of income tax return disallowing appellant’s claim was within the ambit of section 143(1).

Analysis:
1. The appeal pertains to the denial of deduction u/s 54EC by the AO, which was later allowed by the ld. CIT(A). The main contention was about the direction to AO to allow deduction in respect of short capital gain arising on sale of depreciable asset. The ld. CIT(A) relied on the decision in the case of ITO V/s ACE Builders (281 ITR 210) to support the allowance of deduction u/s 54EC. The assessee had sold a unit in Chennai, made a surplus, and invested in specified bonds, but the AO rejected the deduction claimed. The ld. CIT(A) held that the claim of deduction u/s 54EC is allowed on transfer of a long-term capital asset, irrespective of whether the gain is short term by deeming fiction under section 50 of the Act.

2. The issue of adjustment made during processing of income tax return disallowing appellant’s claim under section 143(1) was also examined. The ld. CIT(A) observed that the processing should correct an incorrect claim apparent from the return. In this case, the appellant was denied the opportunity to correct errors, and the ld. CIT(A) supported the view that gains resulting from sale of depreciable assets are deemed short term capital gains under section 50, but this does not convert the asset into a short-term capital asset. The decision in ACE Builders case clarified that the benefit of exemption under section 54E is available to the assessee irrespective of the computation of capital gains under different sections.

3. The Tribunal upheld the order of ld. CIT(A) based on the decision in ACE Builders case, stating that the case of the assessee is covered by the judicial view. Therefore, the appeal of the revenue was dismissed, affirming the allowance of deduction u/s 54EC and clarifying the application of section 50 in determining capital gains on depreciable assets. The judgment was pronounced on 25th July, 2016.