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TMI Blog2024 (10) TMI 477X X X X Extracts X X X X X X X X Extracts X X X X ..... a long term capital gain shall be the rate of 20%. Thus, even section 50 treats that excess is to be taxed as capital gain arising from transfer of a short term capital asset but the rate of tax has to be applicable in terms of section 112 of the Act, because the treatment of a short term capital asset is only a purpose of section 50 and not otherwise can convert a long term capital asset into a short term capital asset for the purpose of rate of tax or any other provision of the Act. Accordingly, this question is answered in favour of the assessee holding that rate of tax applicable would be in terms of section 112 of the rate of 20% and applicable surcharge. Since, this is the only question referred to the Special Bench by the Hon ble President, therefore, for the deciding other issues as raised in cross appeals filed by the assessee as well as the revenue, same shall be fixed before the regular bench to decide. In the result, the question of law referred to the Special Bench is answered in favour of the assessee. As PER OM PRAKASH KANT, A.M - Section 50 of the Act has provided chargeability of income arising from transfer of depreciable assets. Since the sections related to exem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Member And Shri Om Prakash Kant, Accountant Member For the Assessee : Ms. Sailee Gujarathi For the Revenue : Shri Bishwanath Das ORDER PER AMIT SHUKLA (J.M): In the aforesaid appeal, reference has been made by the Hon'ble President, Income-Tax Appellate Tribunal, to Special Bench to decide the following question: "Whether, on the given facts and circumstances of the case and in law, the capital gains under section 50 of the Act arising out of sale of long term capital asset is chargeable at the rate applicable to short term capital gains or rates applicable to long term capital gains under section 112 of the Act?" 2. Brief facts qua the question referred are that, in the return of income, assessee has offered capital gain at Rs. 2,62,63,582/-as short term capital gains computed as per section 50 of the Act. Assessee paid the tax on such capital gain at the rate of 20% as prescribed u/s 112 of the Act plus applicable surcharge. In response to the show cause notice by the AO as to why rate of 30% should not be applied which is applicable on short term capital gain, the assessee submitted that its claim was based on decision of ITAT Mumbai, Bench in the case of Ace Builders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the circumstances and the facts tally. This has been the well settled and consistent view of several High Courts and Supreme Court laid down in the following decisions: 1. CIT Vs. Sun Engineering Works (198 ITR 227, 297) (Supreme Court) 2. CWT Vs. Dr. Karan Singh & Others (200 ITR 614) (Supreme Court) 3. Chamber of Income Tax consultants Vs. CBDT (209 ITR 660) (Bombay) 4. SRF Finance Ltd. Vs. CBDT (211 ITR 861) (Delhi) 12.7 In view of the above, the contention of the assessee company is not acceptable and accordingly, the capital gains are taxed as short term capital gains as per the provisions of section 50(1) of I.T. Act, 1961. 3. The Ld. CIT (A) had confirmed the order of AO in the following manner:- "The issue has already been decided in the appellant's own case for A. Yrs 2001-02 and 2002-03 as has been pointed out by the appellant itself in its letter dated 07.02.2011. Following the same, the issue for the current year is decided against the appellant. As regards the appellant's reliance on the decision in the case of Manali Investment, I find that it is not the contention of the appellant that the relevant facts in its case were similar to those in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of short-term capital assets.] 769. Subs. by Taxation Laws (Amendment and Misc. Provisions) Act, 1986, s. 9 (w.e.f. 1-4-1986). Prior to that, it stood as under: "50. Special provision for computing cost of acquisition in the case of depreciable assets.-Where the capital asset is an asset in respect of which a deduction on account of depreciation has been obtained by the assessee in any previous year either under this Act or under the Indian Income-tax Act, 1922 (11 of 1922), or any Act repealed by that Act or under executive orders issued when the Indian Income-tax Act, 1886 (2 of 1886), was in force, the provisions of sections 48 and 49 shall be subject to the following modifications:- (1) The written down value, as defined in clause (6) of section 43, of the asset, as adjusted, shall be taken as the cost of acquisition of the asset. (2) Where under any provision of section 49 read with sub-section (2) of section 55, the fair market value of the asset on the *[1st day of April, 1974,] is to be taken into account at the option of the assessee, then, the cost of acquisition of the asset shall, at the option of the assessee, be the fair market value of the asset on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d judgment of the Hon'ble Jurisdictional High Court, the ground raised by the assessee is dismissed. 5. While hearing this matter in the appeal for the A.Y. 2000-01, the Division Bench observed that decision of the Tribunal in the case of Smita Conductors Ltd vs. DCIT (2015) (152 ITD 417), this precise issue was decided in favour of the assessee. Apart from this judgment, there were various other judgments of the Tribunal in the favour of the assessee on this point following Bombay High Court in the case of CIT vs. Ace Builders Pvt. Ltd 281 ITR 210 (Bombay). Accordingly, the Bench after referring to the decision of the Bombay High Court in the case of CIT vs. Ace Builders Pvt. Ltd (supra), wherein the Hon'ble High Court has categorically held that deeming fiction of section 50 of the Act is restricted only to section 48 & 49 for the computation of capital gains and does not extend to other provisions or exemption provisions. Since the decision of the Tribunal in assessee's own case was contradictory to various decisions of the Tribunal following the decision of the Hon'ble High Court, therefore, reference was made to the special bench to decide the aforesaid issue. 6. Before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cided by it: 12. Decision of the Bombay High Court in the case of HDFC Bank Ltd vs. DCIT reported in [2016] 383 ITR 529 13. Decision of the Apex Court in the case of CIT vs Sun Engineering Works Pvt Ltd reported in [1992] 198 ITR 297 D. Question as to whether gains computed on depreciable asset u/s 50 is to be given the benefit of lower tax rate u/s 112 of the Income Tax Act, 1961 admitted by the Bombay High Court: 14. In Rathi Brothers Madras Ltd. Vs ACIT (ITA No. 871 of 2015) arising out of the decision of the Pune Bench of the Tribunal in ITA No. 707/Mum/2013. 7. Besides this she heavily relied upon the judgment of Hon'ble Supreme Court in the case of CIT vs. Dempo Company Ltd., 387 ITR 354 (SC),wherein the following decisions of the Hon'ble High Court have been approved; i) CIT v. Ace Builders (P). Ltd [2006] 281 ITR 210 (Bom); ii) CIT v. Polestar Industries [2014] 221 Taxman 423 (Guj); and iii) CIT v. Assam Petroleum Industries (P.) Ltd [2003] 262 ITR 587 (Gau). Thus, she submitted that once it has been categorically held that section 50 creates a deeming fiction only for the mode of computation of capital gains under sections 48 and 49 and not for other pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 50 & 50A and held that character of the building can't be changed and converts to an investment due to non-use as business asset. Finally, profit arising on sale of said flat would be assessed as a Short- Term capital gain fin short STCG) under section 50. 10. He further submitted that non obstante clause of section 50 makes an exception to the definition of short-term capital asset which means that even though the duration of holding of an asset is more than the period mentioned in section 2(42A), still the asset would be treated as short-term capital asset. The assets covered by section 50 are depreciable assets forming part of block of assets as per section 2(11). Once the capital asset that has been transferred is found to form of a block of assets in respect of which depreciation has been allowed, the surplus if any computed under section 50 will be treated as STCG. Use of asset is important for the purposes of depreciation, but not for application of section 50. Once it is brought to use, it enters the block and once it enters the block, its identity gets submerged in block identity so that it is not necessary or possible to infer that any particular asset in the block ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital asset. Both the sections 54 EC & Section 74 do not speak about STCG or LTCG. These sections deal with capital gain / loss arising from transfer of long-term gain. Section 112 deals with income arising from transfer of long-term capital asset. Section 112(b)(i) & (ii) specifically mention "LTCG". When section 50 deems that income earned from a depreciable asset has to be deemed as STCG, the question of applying the rate of tax specified in section 112(1) doesn't arise." 14. Finally, he concluded that the decision of the Hon'ble Jurisdictional High Court in the case of Ace Builders in para 26, following points are relevant:- "1. Section 50 is enacted with the object of denying multiple benefits to the owners of depreciable assets. 2. Restriction is limited to the computation of capital gain and not to the exemption provisions. 3. In other words, where the long-term capital asset has availed depreciation, then capital gain has to be computed in the manner prescribed u/s 50 and the capital gain tax will be charged as if such capital gain has arisen out of short-term capital asset. Therefore, it is clear that excess earned from transfer of any depreciab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion for those years. In our view instead of selling the building, if the assessee started using the building after two years for business purposes the assessee can continue to claim depreciation based on the written down value available as on the date of ending of the previous year in which deprecation was allowed last." Decision 16. We have heard both the parties and also perused the various judgments relied upon. As noted above, the main issue to be adjudicated by this special bench is, whether the capital gains under section 50, arising out of sale of a long term capital assets is chargeable at the rate applicable to the short term capital gains or the rates applicable to the long term capital gains u/s 112 of the Act. Interestingly, this tribunal in the earlier year in the case of the assessee on same issue has quoted the judgment of Hon'ble Jurisdictional High Court in CIT v. Ace Builders (P). Ltd (supra), to decide against the assessee. Accordingly, we have to decide this referred question in light of this judgement and other judgments and also the true purport of section 50. 17. Section 50 is a special provision for computation of capital gains in the case of deprec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said section starts with non-obstante clause, that is, exception has been carved out to section 2(42A) of the Act, which provides definition for a short term capital asset. The said definition reads as under:- (42A) "short-term capital asset" means a capital asset held by an assessee for not more than [Thirty Six] months immediately preceding the date of its transfer. Ergo, if the capital asset which is an asset forming part of the block of asset, in respect of which depreciation has been allowed, then even if it is held for more than 36 months, the conditions of the 36 months will not be applicable and still it will be chargeable as capital gains arising from transfer of a short term capital asset. 19. The 'long term capital asset' and 'long term capital gain' has been defined in section 2 (29AA) and 29B which reads as under:- (29AA). "long term capital asset" means a capital asset which is not a short term capital asset; (29B). "long term capital gain" means capital gain arising from the transfer of a long term capital asset; Thus, capital gain arising from transfer of a long term capital asset is taxed as a long term capital gain and long term capital assets means whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e strictly limited to the purpose mentioned therein. The exclusion prescribed by the non-obstante clause is limited to the purpose of modification of Section 48 & 49 of the Act and such non-obstante clause cannot be applied to any other provisions contained in the Act. Here Section 50, firstly, deems that any capital asset which is held for a long term period, that is, beyond specified time limit as provided in section 2(42A) is transferred, and if there is excess after computation provided in sub clauses (i), (ii) and (iii) of sub section (1), then it is taxed as capital gains arising from transfer of a short term capital asset. Secondly, the deeming provisions has been confined only to the purpose of computation of sections 48 and 49 of the Act and the capital gains then arising is deemed to be from transfer of short term capital assets. The deeming provision does not extend for any other purpose. In other words provisions of section 50 of the Act changes the characteristic of the gain that in some cases a long term to a short term capital gain were assets are held beyond the specific term. However, the section does not change the characteristic of the capital asset held by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt which is not chargeable to income-tax and the tax on the balance of such long-term capital gains shall be computed at the rate of twenty per cent; (b) in the case of a ²¹[domestic] company,- (i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been its total income; and (ii) the amount of income-tax calculated on such long-term capital gains at the rate of 20 [twenty] per cent : The aforesaid section deals with tax rate on long term capital gains which clearly provides that, where the total income of the assessee includes any income arising from transfer of long term capital asset which is chargeable under the head Capital Gain, then tax is to be calculated at the rate of 20%. 23. Section 112 deals with the rate on which long term capital gain has to be taxed. The pre-requisite for applicability of 20% rate as per Section 112 of the Act for the domestic companies is that firstly, there must be long term capital asset and secondly, income must arise from transfer of long term capital asset. If the long term capital asset has been held for more than 36 months immedia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) deals with cases where the block of depreciable assets cease to exist in that block on account of transfer during the previous year. In the present case, on transfer of depreciable capital asset the entire block of assets has ceased to exist and, therefore, Section 50(2) is attracted. The effect of Section 50(2) is that where the consideration received on transfer of all the depreciable assets in the block exceeds the written down value of the block, then the excess is taxable as a deemed short term capital gains. In other words, even though the entire block of assets transferred are long term capital assets and the consideration received on such transfer exceeds the written down value, the said excess is liable to be treated as capital gain arising out of a short term capital asset and taxed accordingly. 23. The question required to be considered in the present case is, whether the deeming fiction created under Section 50 is restricted to section 50 only or is it applicable to section 54E of the Income Tax Act as well? In other words, the question is, where the long term capital gain arises on transfer of a depreciable long term capital asset, whether the assessee can be denie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xemption 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. 26. It is true that section 50 is enacted with the object of denying multiple benefits to the owners of depreciable assets. However, that restriction is limited to the computation of capital gains and not to the exemption provisions. In other words, where the long term capital asset has availed depreciation, then the capital gain has to be computed in the manner prescribed under Section 50 and the capital gains tax will be charged as if such capital gain has arisen out of a short term capital asset but if such capital gain is invested in the manner prescribed in Section 54E, then the capital gain shall not be charged under Section 45 of the Income Tax Act. To pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al asset. This principle and ratio of the Hon'ble Jurisdictional High Court if is to be followed, then it is clear that the tax rate provided under section 112 which is applicable for a long term capital gains will prevail. Once the Hon'ble High Court has held that section 50 does not convert a 'long term capital asset' to a 'short term capital asset', then the rate of tax is applicable for the transfer of a long term capital asset has to be in accordance with section 112 of the Act. The deeming fiction of section 50 cannot be imported u/s 112 of the Act. Thus, our analysis is in line with the judgement of the Jurisdictional High Court. 27. In another decision the Hon'ble Bombay High Court in the case of CIT vs. Parrys (Eastern) Pvt. Ltd, reported in 384 ITR 264, wherein following question of law was admitted for consideration of Hon'ble High Court; 1) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in law in holding that capital gain arising from transfer of depreciable assets was liable to be set off against brought forward Long Term Capital Loss without appreciating that under section 50 of the Income Tax Act, 1961 such capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose u/s 50 of the Act. Thus, the capital gain arisen in terms of section 50 was allowed to be set off against long term capital loss. This judgment again clarifies the interpretation of section 50 and concept of a long term capital asset. 29. Again in another judgment Hon'ble Bombay High Court in CIT vs Pursarth Trading Co. Pvt Ltd in Income Tax appeal no. 123 of 2013 judgment an order dated 13.03.2013, the Hon'ble High Court upheld the set off of a long term capital loss against gain arising from the depreciable assets u/s 50 of the Act. This principle was reiterated in CIT vs. Manali Investment reported in [2013] taxman 113, wherein following question of law was admitted for adjudication. "Whether on the facts and in the circumstances of the case and in law, the Tribunal was correct in holding that the assessee is entitled to set-off under Section 74 in respect of capital gain arising on transfer of capital assets on which depreciation has been allowed in the first year itself and which is deemed as short term capital gain under Section 50 of the Income Tax Act relying upon the judgment of this Court in the case of CIT V/s. Ace Builders (P.) Limited(281 ITR 210) even thou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of assessee to claim exemption under section 54E of the Act in respect of capital gains arising on transfer of a capital asset on which depreciation has been allowed. The Hon'ble Apex Court reiterated and affirmed the judgment of Hon'ble Bombay High Court in the case of Ace Builders (P.) Ltd. (supra). In the said appeal before Supreme Court, in the income-tax return filed by the respondent/assessee for the A.Y. 1989-90, the assessee had disclosed that it had sold its loading platform M.V. Priyadarshni for a sum of Rs. 1,37,25,000/- on which it had earned some capital gains. On the said capital gains the assessee had also claimed that it was entitled for exemption under Section 54E of the Act. Admittedly, the asset was purchased in the year 1972 and sold sometime in the year 1989. Thus, the asset was almost 17 years old. Going by the definition of long term capital asset contained in Section 2(29B) of the Act, it was admittedly a long- term capital asset. Further the Assessing Officer 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. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of service because he was deemed to be appointed in the bank with effect from 26.10.1965 for the purpose of seniority, pay and pension on account of his past service in the army as Short Service Commissioned Officer. In that context, the Apex Court has held that the legal fiction created for the limited purpose of seniority, pay and pension cannot be extended for other purposes. Applying the ratio of the said judgment, we are of the opinion that the fiction created under Section 50 is confined to the computation of capital gains only and cannot be extended beyond that. Thirdly, 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... akti Metal (supra), first of all the Hon'ble Kerala High Court had passed the order in the context of asset on which assessee had discontinued the claim of depreciation immediately prior to its sale and re-classified the asset as an investment. The brief facts in that case were, the assessee-firm purchased a flat for business purposes in the financial year ending on 31-3-1974. Since then it was used as the branch office of the assessee and on the capitalised cost of the building the assessee was allowed depreciation until the assessment year 1995-96. However, the assessee discontinued claiming depreciation for the flat for the assessment years 1996-97 and 1997-98. The flat was sold during the assessment year 1998-99 and profit arising on such sale was claimed by the assessee as long-term capital gain. The Assessing Officer, however, held that profit arising on transfer of depreciable asset was assessable as short-term capital gain under section 50. He rejected the assessee's contention that it stopped using the flat for business purposes after the assessment year 1995-96 and thereafter, the flat was treated as an investment and was so shown in the balance sheet. On appeal, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preciable asset in respect of which depreciation has been allowed as short-term capital gains and the deductions available under sections 48 and 49 should be allowed subject to the provisions provided in sub-sections (1) and (2) of section 50. Section 50A also deals with assessment of depreciable asset that too as short-term capital gains and it actually supplements section 50. In our view, the purpose of section 50A is to enable the assessee to claim deduction of the written down value of the asset in respect of which depreciation was claimed in any year as defined under section 43(6) of the Act towards cost of acquisition within the meaning of sections 48 and 49 of the Act. The condition for computation of short-term capital gains in the way it is stated in section 50A is that assessee should have been allowed depreciation in respect of a depreciable asset sold in any previous year which obvious means that for the purpose of assessment of profit on the sale of a depreciable asset, the assessee need not have claimed depreciation continuously for the entire period up to the date of sale of the asset, in other words, our view, the building which was acquired by the assessee in 1974 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee continued business, the building forming part of the block of assets will retain it's character as such, no matter one of two of the assets in one or two years not used for business purposes disentitles the assessee for depreciation for those years. In our view instead of selling the building, if the assessee started using the building after two years for business purposes the assessee can continue to claim depreciation based on the written down value available as on the date of ending of the previous year in which deprecation was allowed last." (emphasis supplied) 3. The reasoning by the High Court in view of the facts on record commends to us. 4. The High Court has, therefore, rightly restored the findings and addition made in the assessment order. Hence, we find no merits in this appeal and it is dismissed. 37. The ratio of the aforesaid decision is that once depreciable asset forming part of block of assets within the meaning Section 2(11) of the Act it does not cease to be part of block of assets and description of the asset by the assessee in the balance sheet as an investment is meaningless to avoid payment of tax on short term capital on sale of buildin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision before a coordinate or subordinate court. It is axiomatic that a decision cannot be relied upon in support of the proposition that it did not decide. (see Mittal Engineering Works P. Ltd. v. Collector of Central Excise [1997] 106 STC 201 (SC) ; (1997) 1 SCC 203. Therefore, it is only the ratio decidendi, i.e., the principle of law that decides the dispute which can be relied upon as precedent and not any obiter dictum or casual observations. (See Girnar Traders v. State of Maharashtra (2007) 7 SCC 555 and Shin-Etsu Chemical Co. Ltd. v. Aksh Optifibre Ltd. (2005) 127 Comp Cas 97 (SC) ; (2005) 7 SCC 234." (ii). Apex Court's decision in the case of CIT v/s. Sun Engineering Works (P.) Ltd. reported in 198 ITR 297 (1992) where in it has been held that: "It is neither desirable nor permissible to pick out a word or a sentence from the judgment of the Court, divorced from the context of the question under consideration and treat it to be the complete 'law' declared by the Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before the Court. A decision of the Court take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 319] 47. Normally the use of the phrase by the Legislature in a statutory provision like notwithstanding anything to the contrary contained in this Act is equivalent to saying that the Act shall be no impediment to the measure [See: Law Lexicon words notwithstanding anything in this Act to the contrary]. Use of such expression is another way of saying that the provision in which the non-obstante clause occurs usually would prevail over the other provisions in the Act. Thus, the non- obstante clauses are not always to be regarded as repealing clauses nor as clauses which expressly or completely supersede any other provision of the law, but merely as clauses which remove all obstructions which might arise out of the provisions of any other law in the way of the operation of the principle enacting provision to which the non-obstante clause is attached. [See: Bipathumma v. Mariam Bibi 1966 1 MYSLJ 162] 48. A non obstante clause has two parts the non obstante clause and the enacting part. The purpose of enacting a non obstante clause is that in case of a conflict between the two parts, the enacting part will have full sway in spite of the contrary provisions contained in the non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the learned counsel for the respondent. It is fairly conceded that the Tribunal has relied upon the judgment of this court in case of CIT vs. ACE Builders Pvt. Ltd, reported in [2006] 281 ITR 210. The said judgment has been approved by the Apex Court in the case of CIT. Panji vs. VS.Dempo Company Ltd. reported in [2016] 74. Taxmann.com 15 (SC). As the issue raised in the present appeal is already covered by the above referred judgment, no substantial question of law arises." 43. Ergo, this precise issue decided by the tribunal has been approved by the Hon'ble Bombay High Court following its earlier judgment of CIT vs. Ace Builders Pvt. Ltd. (supra) which in turn has been approved by the Hon'ble Supreme Court in the case of CIT vs. Dempo Company Ltd reported in (2016) 74 Taxmann.com 15 (SC) which we have also analysed in the earlier part of the order. Hence the issue, that the rate of tax of 20% as prescribed u/s 112 of the Act is applicable on the transfer of an asset forming part of block of asset (which was held for more than 36 months) which is deem to be taxed as short term capital gain u/s 50, has been approved by the Hon'ble Jurisdictional High Court. 44. Accordingly, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2005-06, and made reference to the Hon'ble President ITAT for constitution of Special Bench. On such reference, on 21-10-2020, the Hon'ble President ITAT constituted a Special Bench u/s. 255(3) of the Act for the captioned assessment year comprising of Learned Members , i) Shri Shamim Yahya, Ld.AM, ii) Shri Shaktijit Dey, Ld.JM and iii) Shri Vikas Awasthy, Ld.JM, for deciding the following question: "Whether on the given facts and circumstances of the case and in law, the Tribunal is right in holding that the capital gains u/s. 50 arising out of the sale of long term capital asset is chargeable at the rate applicable to the Short Term Capital Gain or rate applicable to Long Term Capital Gain u/s. 112 of the Act." 2. The Special Bench so constituted, in its order dated 15-06-2021 observed that the Hon'ble Bombay High Court in the case of Rathi Brothers Madras Ltd., (Income Tax Appeal No. 871/2015) vide order dated 13-02-2018, admitted substantial question of law involving identical issue for adjudication. The Special Bench deliberated on whether it could proceed to adjudicate the issue, given that the same was pending for adjudication before the jurisdictional High Court. In this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in preceding assessment years, the assessee claimed depreciation on three residential properties i.e. flats, which formed part of block of assets, but in the assessment year under consideration, the assessee transferred/sold those properties. While computing the "total income" for the purpose of filing return of income for the year under consideration, the assessee determined excess of sale consideration over the written down value (WDV) of the properties as Short Term Capital Gain(STCG) in terms of section 50 of the Act, which amounted to Rs. 2,95,55,888/-. Against said "STCG", the assessee further adjusted loss amounting to Rs. 32,95,306/- under the head "Capital Gain", which was carried forward from earlier assessment years and arrived at balance amount of Rs. 2,62,60,582/- as STCG for including to total income. However, before the Assessing Officer, the assessee sought to have this "STGC" subjected to a concessional tax rate of 20% invoking section 112(1) of the Act. The assessee's argument was that under the provisions of section 112(1) of the Act, the gain arising from transfer of "long term capital asset" is eligible for concessional tax rate of 20% and the three residential ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "total income". In the instant case, in the total income computed by the assessee, income arising from transfer of depreciable asset has been shown under the head "capital gain" as "short term capital gain". It is noteworthy that the assessee has not disputed application of section 50 of the Act for transfer of depreciable asset constituting three residential flats. The crux of dispute is the assessee's request for application of concessional tax rate of 20% provided under section 112(1) on gain from transfer of those residential properties. The assessee is claiming that deeming fiction of treating the capital gain arising from transfer of depreciable asset is limited to section 50 itself and for the purpose of section 112(1) of the Act, the assessee argues that the properties having been held for more than 36 months, qualify as "long term capital assets" and gain arising from their transfer should be taxed at concessional rate of 20%. Thus, the sole issue in dispute is whether section 112(1) of the Act is applicable on the income arising from transfer of depreciable assets consisting of three residential flats, notwithstanding that said excess on transfer of those properties is d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... less assessed by the AO under provisions 68 to 69D of the Act. 8.2. The First Part of the section 112(1) specifies that the "income" arising from transfer of long-term capital asset, which is chargeable under the head "capital gains", which means said income, whether classified as long-term capital gain or short-term capital gain, must necessarily be chargeable as under the head "capital gain" and forms part of "total income". Thus for invoking section 112(1), the first condition is that income arising from transfer of a "long-term capital asset" should be part of the "total income". 8.3. Now, we come to the second part of section 112(1) which is relevant to the assessee i.e. in case of a domestic company, which is subsection 112(1)(b) of the Act 8.4. The Second Part of section 112(1) specifies the tax which is payable on the "total income". The section 112(1)(b)(i) of this part addresses to tax liability on the total income, excluding the portion attributable to the "long-term capital gain". The section 112(1)(b)(ii) of the part refers to calculation of the tax specifically on the "long-term capital gain", which is part of the "total income" as referred above in "first part" of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etc. offered for disallowance under section 43B in earlier years, but paid/reversed during the "Previous year" as per Clause 21(i)(A) and 21(ii)(A) of Form No. 3CD: - Paid 2,095,510 - Reversed 20,666 3. Book profit on sale of fixed assets credited to Profit and Loss Account 32,264,095 4. Interest under Section 36(1)(iii) - capitalized in Books 27,587,550 5. Reversal of interest payable to Small Scale Industries 1,545,634 6. Reversal of excess provision for interest under section 234C of the Income-tax Act, offered for disallowance in the assessment year 1995-96 110,120 7. Reversal of excess provision for technical knowhow fees payable to Aktiebolaget SKF, Sweden, disallowed in A.Y.1999-2000 196,600 8. Reversal of provision for excise duty refundable to customers disallowed in A.Y. 1989-90 in case of Skefko India Bearing Co. Ltd. (merged with SKF Bearings India Ltd.) 92,485 9. Reversal of provision for customs duty disallowed under section 43B in A.Y.1990-91 in case of Skefko India Bearing Co. Ltd. (merged with SKF Bearing Co. Ltd.) (merged with SKF Bearings India Ltd.) 108,105 431,694,619 Profit and gains of business 131,776,129 Less: Set off of busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and secondly that "long term capital gain" should be part of total income. Under the provisions of capital gain head, a capital asset otherwise may qualify as long term capital asset and transfer of same may give rise to long term capital gain, but once depreciation has been availed on said asset under the business of the assessee, express provision by way of section 50 gets attracted and any excess on transfer of said asset is deemed to be short term capital gain. But, in the facts of the case of assessee, it is not in dispute that assessee has availed depreciation on those three residential properties forming part of the block of asset, thus excess from their transfer is deemed to be "short term capital gain" and can't be classified under section 112(1) of the Act as "long term capital gain". 8.8. Secondly, the section 112(1) is designated for application of concessional tax rate on the income, chargeability of which has been determined under the head "Capital Gains", but it can't alter the character of the income itself. The section 112(1) of the Act cannot decide whether gain or excess arising from transfer of a long-term capital asset would be chargeable as "long-term capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. On the other hand, for other capital asset, which may or may not be a part of the business of an assessee, chargeability of the gain arising from their transfer is governed by the other provisions under the head "capital gains" from sections 45 to 49 of the Act. If such a capital asset, is held for less than prescribed period, then gain arising on transfer of such asset shall be liable for "short-term capital gain" and if it is held for more than prescribed period, such gain arising shall be liable for "long-term capital gain" and cost of acquisition or indexed cost of acquisition shall be reduced from sale consideration for computing capital gain as per mode provided in section 48 and 49 of the Act. Now, the question arises, whether a further benefit for concessional tax rate should be allowed for computing taxability under the head "capital gain" while transfer of depreciable capital assets, when the part of cost of acquisition of such asset is already exhausted by the assessee as depreciation and, balance left over is the written down value (WDV) of asset, which is considered for reduction from sale consideration. Evidently, the legislature has not intended to give the benefi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Court. In the decisions of the Coordinate benches of the Tribunal, the specific issue concerning the applicability of concessional tax rate of 20% under section 112(1) on the short-term capital gain arising from transfer of the depreciable asset under section 50 of the Act has been decided upon. 9.1. The first set of decisions rendered by the Tribunal are in favour of the assessee. While referring the issue for consideration of special bench, the assessee had relied on the decision of the coordinate bench of the Tribunal in the case of Smita Conductors Ltd in ITA No. 4004/Mum/2011 dated 17/09/2013. In the said decision, the coordinate bench, relying on the decision of Hon'ble Bombay High Court in the case of CIT Vs Ace Builders (supra), ruled in favour of the assessee. During hearing before us, the Ld counsel for the assessee referred to another decision dated 26/06/2014 of coordinate bench in the case of M/s Velvet Holdings Pvt Ltd Vs ACIT in ITA No. 6810/Mum/2008, wherein, the Bench following the decision of coordinate bench in the case of Smita Conductors Ltd (supra), allowed the decision in favour of the assessee. The learned departmental representative in hearing dated 09/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to rely upon the decision in the case of M/s. P.D. Kunte & Co., (Regd.)(Supra). We accordingly approve the interpretation made by the Ld.CIT(A) of section 50 and section 112 and confirm the order on this issue before us. Accordingly, the grounds taken by the assessee are dismissed." 9.3. In the decisions of Hon'ble High Court's and Hon'ble Supreme Court relied upon by the parties , the specific issue of application of tax rate of 20% under section 112(1) on the short-term capital gain arising from transfer of the appreciable asset under section 50 of the Act has not been decided. In all those cases, either the issue of claim of exemption/deduction under the head capital gain or set off of losses has been adjudicated. The assessee has relied on the decision of the Hon'ble Bombay High Court in the case of CIT Vs Ace Builders P Ltd (supra) and decision of Hon'ble Supreme Court in the case of CIT Vs Dempo Company Ltd 387 ITR 354(SC), wherein the Hon'ble Supreme Court has upheld the finding in the case of CIT Vs Ace Builders (supra). The learned JM has further referred to the two decisions of Hon'ble Bombay High Court , firstly, in the case of CIT Vs Parrays (Eastren ) Pvt ltd reported ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions. On the contrary, section 50 makes it explicitly clear that the deemed fiction created in sub-sections (1) and (2) of section 50 is restricted only to the mode of computation of capital gains contained in sections 48 and 49. Secondly, it is well established in law that a fiction created by the legislature has to be confined to the purpose for which it is created. In this connection, we may refer to the decision of the Apex Court in the case of State Bank of India v. D. Hanumantha Rao 1998 (6) SCC 183. In that case, the service rules framed by the bank provided for granting extention of service to those appointed prior to 19-7-1969. The respondent therein, who had joined the bank on 1-7-1972 claimed extension of service because he was deemed to be appointed in the bank with effect from 26-10-1965 for the purpose of seniority, pay and pension on account of his past service in the army as short service commissioned officer. In that context, the Apex Court has held that the legal fiction created for the limited purpose of seniority, pay and pension cannot be extended for other purposes. Applying the ratio of the said judgment, we are of the opinion, that the fiction created unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the capital gain has to be computed in the manner prescribed under section 50 and the capital gain tax will be charged as if such capital gain has arisen out of a short-term capital asset. At the cost of repetition, said paragraph of Hon'ble High Court is reproduced as under: "26. It is true that section 50 is enacted with the object of denying multiple benefits to the owners of depreciable assets. However, that restriction is limited to the computation of capital gains and not to the exemption provisions. In other words, where the long term capital asset has availed depreciation, then the capital gain has to be computed in the manner prescribed under Section 50 and the capital gains tax will be charged as if such capital gain has arisen out of a short term capital asset but if such capital gain is invested in the manner prescribed in Section 54E, then the capital gain shall not be charged under Section 45 of the Income Tax Act. To put it simply, 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 & 49 or under section 50. The contention of the revenue that by amendment to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax rebate under section 88 on the income-tax in respect of long term capital gains. This amendment will take effect from the 1st April, 1993, and will, accordingly, apply in relation to the assessment year 1993-94 and subsequent years." 11. The section 50 of the Act has provided chargeability of income arising from transfer of depreciable assets. Since the sections related to exemptions/ deductions including section 54E of the Act under the head "capital gains", are invoked only after computing of the capital gain and therefore those sections are independent from the sections which create chargeability of the capital gains. The exemptions provisions provided under the head capital gains from section 54 to 54GB of the Act , can be claimed once the chargeability of the gain arising on transfer of a capital asset is determined under the head of capital gains. Conversely, the section 112(1) of the Act is for invoking concessional rate of tax of 20 percentile on income arising from transfer of long-term capital asset, which is chargeable under the head "capital gain" and included in total income. The section 112(1) of the Act is intended solely for prescribing concessional rate of ta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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