2016 (10) TMI 62 - SC - Income Tax

Entitlmnet for exemption under Section 54E - AO rejected the claim for exemption under Section 54E of the Act on the ground that the assessee had claimed depreciation on this asset and, therefore, provisions of Section 50 were applicable - Held that - HC allowed assessee claim of deduction as relying upon its own judgment in the case of The Commissioner of Income-tax, Mumbai City-II, Mumbai vs. ACE Builders Pvt. Ltd. 2005 (3) TMI 36 - BOMBAY High Court . The High Court has observed that Section 50 of the Act which is a special provision for computing the capital gains in the case of depreciable assets is not only restricted for the purposes of Section 48 or Section 49 of the Act as specifically stated therein and the said fiction created in sub-section (1) & (2) of Section 50 has limited application only in the context of mode of computation of capital gains contained in Sections 48 and 49 and would have nothing to do with the exemption that is provided in a totally different provision i.e. Section 54E of the Act. Section 48 deals with the mode of computation and Section 49 relates to cost with reference to certain mode of acquisition. 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. Section 54E specifically provides that where capital gain arising on transfer of a long term capital asset is invested or deposited (whole or any part of the net consideration) in the specified assets, the assessee shall not be charged to capital gains. Therefore, the exemption under Section 54E of the I.T. Act cannot be denied to the assessee on account of the fiction created in Section 50.

Summary

Issues:
1. Exemption under Section 54E of the Income Tax Act for a long-term capital asset sold after claiming depreciation.

Analysis:
The case involved the appellant claiming exemption under Section 54E of the Income Tax Act for the sale of a loading platform, a long-term capital asset purchased in 1972 and sold in 1989. The Assessing Officer rejected the exemption, citing the appellant's claim of depreciation on the asset, thus invoking Section 50. The Income Tax Appellate Tribunal allowed the appeal, granting the exemption. The High Court upheld the Tribunal's decision, emphasizing that the fiction created in Section 50 for computing capital gains does not affect the exemption under Section 54E. The High Court's reasoning was supported by the judgment in the case of "The Commissioner of Income-tax, Mumbai City-II, Mumbai vs. ACE Builders Pvt. Ltd." The High Court clarified that Section 50's fiction is limited to the computation of capital gains and does not impact exemptions provided under other sections like 54E.

The High Court's decision was further reinforced by judgments from the Gujarat High Court and Guwahati High Court, which also upheld the interpretation that Section 50's provisions do not override the exemption under Section 54E for depreciable assets. These judgments were not appealed against. Consequently, the Supreme Court affirmed the High Court's decision, dismissing the appeal. The Supreme Court concurred with the view that the fiction created under Section 50 is confined to the computation of capital gains and cannot be extended to deny exemptions provided under other sections like 54E. The Court's decision aligned with the consistent interpretation across various High Courts, emphasizing the clear distinction between computation provisions and exemption provisions in the Income Tax Act.