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TMI Blog2012 (4) TMI 347X X X X Extracts X X X X X X X X Extracts X X X X ..... 06, the assessee declared long term capital gains of Rs. 2,83,99,571/- on sale of property at S-7 & 8, Green Park, New Delhi. The capital gains were invested in eligible REC bonds and exemption was claimed under Section 54EC of the Income Tax Act (hereinafter referred to as the "Act"). In addition to the long term capital gains, the assessee also declared short term capital gains of Rs.86,28,216/-. While examining the return in the course of the assessment proceedings under Section 143(3) of the Act, the Assessing Officer called upon the assessee to explain the long term capital gains and the basis on which exemption was claimed. The assessee, in response thereto, submitted the photocopy of the purchase and sale deeds in respect of the property and explained as follows: - "We have purchased the property S-7, 8, Green Park for Rs. 2,16,00,000/- including stamp duty Rs. 16,00,000/- on 30.03.2001, 25.04.2001 and 03.07.2001 shown under the head Fixed Assets Land Rs. 1,48,00,000/- Building Rs. 68,00,000/-. We have made further construction/ alteration during the year as per requirement and charged depreciation accordingly year to year. We have never charged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... X (497/406) 2001-02 58,00,000 x (497/426) 1,10,17,241 67,66,667 1,88,00,429 Long-term Capital Gain 2,83,99,571 6. It may be seen from the computation that the assessee computed the capital gains on the sale of land as long term capital gains and having invested the gains in REC Bonds which were eligible bonds, claimed the entire long term capital gains as exempt under Section 54 EC of the Act. 7. After noticing the aforesaid facts the Assessing Officer observed that it was not correct to say that the land, building and other assets in the building were separately sold by the assessee, that the land was not a long term capital asset as it was purchased together with the building for a consolidated price of Rs. 2,16,00,000/-, that it was, therefore, not proper for the assessee to bifurcate the value between the land and the building as was shown in the balance sheet or in the computation of the capital gains and, therefore, the claim of the assessee to treat the land as a long term capital asset cannot be accepted. He held that the provisions of Section 50(2) of the Act were applicable since the assets sold were pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim for deduction under Section 54EC of the Act on the ground that the said deduction was not allowable because the depreciable asset, namely, the building was purchased and additions were made up to the end of the financial year 2002-03 and since the building along with furniture and fixtures were sold on 29.08.2005, within a period of 3 years, the same cannot be said to be a long term capital asset as defined in Section 2 (29A) read with Section 2 (42A) of the Act, which require that the capital asset must be held by the assessee for more than 36 months immediately preceding the date of transfer in order that the same can be held to be a long term capital asset. The benefit of Section 54EC is available only in respect of capital gains arising on sale of a long term capital asset. Since the building was held to be a short term capital asset by the Assessing Officer, the benefit of deduction under Section 54EC of the Act was not allowed. 11. The assessee appealed against the assessment order and challenged the computation of short term capital gains under Section 50(2) of the Act and the refusal to allow deduction under Section 54EC of the Act before the CIT (Appeals). It would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n appeal before this Court. Section 50 of the Act makes "special provision for computation of capital gains in case of depreciable asset". The provisions of this section apply notwithstanding anything contained in Section 2(42A) of the Act. In other words, even if a depreciable capital asset was held by the assessee for a period exceeding 36 months and would have normally been considered as a long term capital asset, it will not be so considered, but would be considered only as a short term capital asset. The section, however, is applicable only in respect of sale of a capital assets forming part of a block of asset in respect of which depreciation has been allowed. If these conditions are satisfied then any surplus arising on the sale of the depreciable asset would be treated only as short term capital gains. Sub-section (2) provides for a situation where all the assets in the block of assets are transferred thus bringing about cessation of the block itself. In such case also the surplus arising on account of the transfer of the entire block of assets will be deemed to be capital gains arising from the transfer of short term capital assets, irrespective of the period of holding. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of Section 50(2) of the Act to the sale of the land and building comprised in S-7 & 8, Green Park, New Delhi on 29.08.2005. As the depreciation charts and the schedule of fixed assets forming part of the balance sheets show, the cost of the land has been taken at Rs. 1,48,00,000/- as on 31.03.2002 to 31.03.2005. No depreciation has been allowed on the land in any of the assessment years. In fact, as we have already found, no rate of depreciation has ever been prescribed for land. That land is not a depreciable asset is no longer res integra after the judgment of the Supreme Court in CIT, Punjab, Jammu & Kashmir and Himachal Pradesh v. Alps Theatre, (1987) 65 ITR 377. If land is not a depreciable asset and cannot form part of the block of assets in the absence of a rate of depreciation having been prescribed therefor, we do not see how the provisions of Section 50 of the Act can be invoked to the present case. The Assessing Officer was clearly acted contrary to law when he invoked Section 50(2) of the Act on the footing that the land formed part of the block of assets. 16. The assessee has sold the land and building. The land as an asset was held from April, 2001 to Aug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 years and, therefore, the sale of land cannot be considered as a sale of a long term capital asset. From this it was sought to be argued, as was observed in para 3.3 of the assessment order, that the land is not a long term capital asset because the assessee never really purchased the land but it actually purchased the ready built building. The Assessing Officer as well as the learned Sr. Standing Counsel perhaps intend to convey that what attracted the assessee to the property was the fact that there was a building on the land and not the land itself, since a substantial amount of Rs. 1,54,16,423/- was invested in putting up additions to the building to which the assessee had only ascribed a cost of Rs. 68,00,000/- when it purchased the property. Apart from the fact that this line of reasoning appears to us, with respect, to be somewhat convoluted, it also does not appear to take note of considerations that drive people to purchase landed property. What attracts them, as is common knowledge, is the land which appreciates phenomenally, depending upon the location and not the building which is on the land. The fact that the assessee incurred substantial expenditure on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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