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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 ..... 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 exemptions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ber 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 Pvt. Ltd vs. AC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 case of Manali Investment. In the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 said date, as reduced by the amount of depreciation, if any, allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 us the Ld. Counsel for the assessee submitted now the issue that, section 50 is limited to the scope of only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 provisions, therefore, the rate of tax provided in section 112 of the Act which is applicable for transfer of a long term capital asset should be applied, even though the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lat 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 is being used or not, as long as block is used. 11. Hon'ble Apex Court also held that the description of the asset by the appellant in the balance sheet as an investment ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 depreciable assets will be treated as STCG and taxed as per rate applicable to STCG. 15. In rejoinder, ld. Counsel for the assessee submitted that the decision of Shakti Metal Depot (supra) is not applicable and she gave the following facts for distinguishing the case: 1.1. The appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich 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 depreciable assets. Section reads as under:- 50. Notwithstanding anything contained in clause (42A) of section 2, where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act or under the Indian Income- tax Act, 1922 (11 of 1922), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ths 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 which is held for more than 36 months. So taxability is on transfer of long term capital asset. 20. Normally capital gain is required to be computed according to the provisions contain in sections 48 49 of the Act. But section 50 by deeming fiction amends the mode of computation of capital gain and cost with reference to certain modes of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessee, that is, the long term capital asset will remain a long term capital asset for all other purposes, but for the deeming fiction u/s 50 of the Act, capital gains is taxable as if it is gain arising from transfer of a short term capital asset and it does not extend beyond this fiction to convert long term capital asset into short term capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount 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 immediately preceding the date of transfer, then transfer of such long term capital asset has to be taxed at the rate of profit under the Act. In the present case it is not in dispute that the asset has been held for more than 36 months prior to its transfer. Hence, both the conditions prescribed in Section 112 of the Act stands satisfied. 24. Now various courts have held that the deeming fiction in secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 denied exemption under section 54E merely because, section 50 provides that the computation of such capital gains should be done as if arising from the transfer of short term capital asset? 24. Section 54E of the Income Tax Act grants exemption from payment of capital gains tax, where the whole or part of the net consideration received from the transfer of a long term capital asset is invested or deposited in a spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 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 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 section 50 the long term capital asset has been converted into to short term capital asset is also without any merit. As stated hereinabove, the legal fiction created by the sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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 gain is treated as Short Term Capital Gain? (2) 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 according to Section 74 of the Income Tax Act, 1961 Long Term Capital Loss cannot be set off against the Short Term C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 though the said decision was rendered in the context of eligibility of deduction under Section 54E . The Hon ble High Court again followed the principle laid in case of CIT vs Ace Builders Pvt Ltd (supra) and observed and held that under:- 3. On further appeal, the Tribunal by the impugned order has allowed the claim of the respondent - assessee to set-off its long term losses in terms of Section 74 of the Act against the long term capital gains on sale of tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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. Though this was upheld by the CIT (Appeals), the ITAT allowed the appeal of the assessee herein holding that the assessee shall be entitled for exemption under Section 54E of the Act. The Bombay High Court confirmed the view of the CIT (Appeals) and dismissed the appeal of the Revenue. While doing so, the Hon ble High Court relied upon its own judgment in the case of CIT, Mumbai City-II, Mumbai vs. ACE Builders Pvt. Ltd. (supra). In the words of Hon ble Supreme C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 the fiction created Section in 50. 32. Their Lordships dismissing the appeal filed by the Revenue held that, we are in agreement with the aforesaid view taken by the Bombay High Court. Thus, the judgment of Hon ble Bombay High Court in the case of Ace Builders has been fully approved by the Hon ble Supreme Court, thereby settling the issue that the fiction created in sub section (1) and sub section (2) of section 50 has limited application only in the context of mode of comput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epreciation 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 Commissioner (Appeals) concurred with the Assessing Officer. However, on second appeal, the Tribunal, solely relying on the entry in the balance sheet of the assessee wherein the flat was shown as an investment, held that since the item was purchased in 1974, sale of the flat was assessable as long-term capital gain. 35. The Hon ble High Court after referring the provisions of Section 50 held as under:- 4. While the contention of the revenue is that the asset in respect of which depreciation has been clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 and in respect of which depreciation was allowed to it as a business asset for 21 years, that is up to the assessment year 1995-96, still continued to be part of the business asset and depreciable asset, no matter the non-user disentitles the assessee for depreciation for two years prior to the date of sale. We do not know-how a depreciable asset forming part of block of assets within the meaning section 2(11) of the Act can cease to be part of block of assets. The description of the asset by the assessee in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 building. As long as assessee continues business, the building forming part of the block of asset will retain its character, no matter one of the assets in one of the two years has not been used for business purpose this entitles the assessee for depreciation for those years. This view of the Hon ble Kerala High Court has been upheld that instead of selling the building, the assessee starts using the building after two years for business purpose, the assessee can continue to claim the depreciation based on WDV available as on the date of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 takes its colour from the questions involved in the case in which it is rendered and while applying the decision to a latter case, the Courts must carefully try to ascertain the true principle laid down by the decision of the Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by the Court, to support their proceedings. (iii) Apex Court's decision in the case of Madhav Rao Jivaji Rao Scindia Bahadur v. Union of India [1971] reported in 3 SCR 9; AIR 1971 SC 530, where in it has been h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 obstante clause. Therefore, the object and purpose of the enacting part should be first ascertained and then the assistance of the non obstante clause should be taken to nullify the effect of any contrary provision contained in the clause. 40. Thus, non-obstante clause does not mean to completely supersede any other provisions of the Act. To remove the obstruction which might arise out of the provision of any other law in way of operation of the principle enacting provision to which the non-obstante clause is attached. If the non-obstante clause has been confined to Section 50 dealing wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gment 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, we hold that capital gains arising out of the depreciable asset u/s 50 even though deem to be capital gain arising from transfer of a short term capital asset, that fiction has to be confined only to section 50 and it cannot convert short term capital asset into a long term capital asset and vice versa for the other purpose of the Act, either for set off against a long term capital loss or exemption provision were benefits is given from a long term capital gain on transfer of a long term capital asset or the rate of tax provided u/s 112 of the Act which clearly provides that income arising from transfer of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erm 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 context, the Special Bench acknowledged that a similar issue was pending before the larger Bench of the ITAT in the case of J.P. Morgan Chase Bank in ITA No. 9189/Mum/2004 and C.O. No. 139/Mum/2013. The Special Bench further took note of the fact that both the parties involved had expressed their agreement to defer proceedings until the outcome of the decision of the larger Bench in the case of J.P. Morgan Chase Bank (supra), consequently, the Special Bench deemed it appropriate to adjourn the proceedings sine die, pending the outcome of the larger Bench of the ITAT in the case of in the case of J.P. Morgan Chase Bank (supra). 3. Subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 properties, though depreciable assets, but were held for more than 36 months, hence, being long-term capital asset, gain arising from transfer of those properties was to be subjected to tax rate of 20% under section 112(1) of the Act and deemed fiction under section 50 of the Act, which treats the gain from transfer of depreciable asset as STCG , should not apply while determining the applicable tax rate under section 112(1)of the Act. 6. In paragraphs 16 to 21 of decision section of the draft order, the learned Judicial Member has referred to the provisions of section 50 of the Act. Under the provisions, the excess arising from transfer of depr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 deemed to be short term capital gain under section 50 of the Act. For examining the issue, it is relevant to divide the section 112(1) in two parts, as under: 112. (1) Where the total income of an assessee includes any income, arising from the transfer of a long-term capital asset, which is chargeable under the head Capital gains , (First Part) the tax payable by the assessee on the total income shall be the aggregate of, (Second part) (a) in the case of an individual or a Hindu undivided family, being a resident, xxxxxxxxxxxxxxxx (b) in the case of a domestic company, (i) the amount of income-tax payable on the total income as reduced by the amount of such lon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 section 112(1) of the Act. Thus, it is essential that for application of the rate of the 20%, firstly, the gain must arise from transfer of a long-term capital asset , secondly, it must be chargeable under the head capital gain as long-term capital gain and , thirdly, the long term capital gain so computed should be part of the total income . 8.5. Upon holistic reading of entire section 112(1) of the Act, the only reasonable interpretation emerges is that the long term capital gain , arising from transfer of long term capital asset chargeable under the head Capital Gain , which constitute part of total income , is only subject to concessional rate of 20% provided u/s 112(1) of the Act. The legislative intent , as discernible form the plain langu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. (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 business loss/unabsorbed depreciation brought forward from A.Y. 1999-2000 to the extent of profits 131,776,129 Profits and gains of business after set off of b/f loss NIL II. Capital gains: Short term capital gains under section 50 (Working enclosed vide Annexure-1) 26,260,582 III. Income from other sources: Dividend as per Note 3 NIL Gross Total Income 26,260,582 Less: Deductions under Chapter-VIA As per Clause 26 of Form No. 3CD: Section 80G 51,775 Section 80HHC 4,995,655 5,047,430 Total Income 21,213,152 Income-tax @35% of total income 7,424,603 Add : Surcharge on above @ 10% 742,460 Income-tax including surcharge 8,167,064 Business loss of assessment year 1999-2000 to be carried forward ofr set off in subsequent assessment year(s):- (please refer note 10) Business loss as per return of income of assessment year 1999-2000 61,304,222 Unabsorbed depreciation as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital 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 gain or short-term capital gain . The chargeability of gain or excess arising from transfer of a capital asset is governed by the provisions under the head capital gain u/s 45 to 55A of the Act and not by the section relevant for invoking of tax rate. The learned counsel for the assessee argued that the transfer of a capital asset held for more than 36 months, though it is depreciable asset and excess arising on the same has been computed by the assessee for the purpose of total income as short term capital gain as per the provisions of section 50, but while application of section 112(1) of the Act, it should be treated as long term capital gain . In my opinion, this argument of ld counsel is without appreciation of express language of section 112(1) of the Act. 8.9. Thirdly, if interpretation of the assessee is accepted, then the entire provision of section 50 will be rendered otiose, because, if the excess or surplus arising from transfer of depreciable as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see 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 benefit of concessional rate of tax on gain arising from transfer in case of the depreciable capital assets, which have been utilised for the purpose of the business and assessee exploited those assets for yielding income which is liable for tax under the head profit and gains of the business . Accordingly, the legislature under section 50 of the Act, excluded the benefit of concessional rate of tax on excess arising if any from transfer of such depreciable capital asset, on which benefit of the depreciation has already been availed by the assessee, and proposed to be subjected to normal tax rates as short-term capital gain under deeming fiction. Under section 50(1) of the Act, out of sale consideration of depreciable assets, three items are reduced for computation of STCG. The first item is expenditure incurred wholly and exclusively in connection with transfer of such asset. This item is identical to the item allowed under mode of computation provided in section 48 of the Act while c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ench 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 09/05/2024 brought to our attention, a decision dated 19/07/2022 of the coordinate bench of the Tribunal, Mumbai ( constituted by Ld. JM Sh Amit Shukla and Ld. AM Sh Rifaur Rahman) , in the case of M/s Reliance Transport Travel pvt Ltd in ITA No. 5683/Mum/2017. In the said decision also, the Bench followed the decision of the Hon ble Bombay High Court in the case of CIT Vs Ace Builders (supra), and decided the issue of application of tax rate of 20% invoking section 112 of the Act on short-term capital gain computed under section 50 of the Act in favour of the assessee. 9.2. The second set of decisions stands against the assessee. The learned departmental representative has relied on the decision of coordinate bench in the case of the assessee for assessment years 2001-02 to 2005-06, which have been listed by the learned JM in para 13 of his draft order. In those decisions also the coordinate benches have relied on the decision of the Hon ble Bombay High Court in the case of CIT Vs Ace B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in 384 ITR 264 and secondly in the case of CIT Vs Pursarth Trding Co. P Ltd in ITA No. 123 of 2013 in order dated 13/3/2013, wherein set off of long-term capital loss against the gain arising from the depreciable asset under section 50 of the Act was allowed following the principle laid down in the case of CIT Vs Ace Builders (supra). The learned JM has further referred to the decision of the Hon ble Bombay High Court in the case of United Paper Industries reported in (2014) 42 taxmann.com 79 and CIT Vs Cadbury India Ltd reported in (2015) 41 taxmann.com 227, wherein also the decision in the case of CIT Vs Ace Builders (supra) has been followed. The ld DR on the other hand relied on the decision of Hon ble Supreme Court in the case of Shakti Metal Depot Vs CIT (2021) 436 ITR 1(SC). In that case the dispute was whether the provisions of section 50 would apply on transfer of those residential properties, which were part of block of assets in earlier years and depreciation was availed but in the year un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ited 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 Income Tax Act cannot be denied to the assessee on account of the fiction created in section 50. 9.6. Thus, the Hon ble High Court has decided that benefit of exemption under section 54E is allowed to the assessee on gain arising from transfer of depreciable asset also. The learned JM in para 24 of the order has also reproduced the relevant part of said decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espective 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 section 50 the long term capital asset has been converted into to short term capital asset is also without any merit. As stated hereinabove, 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. [Emphasis in bold is ours) 10. In the above judgment the Hon ble Jurisdictional High Court has unequivocally held that under the legal fiction created by Section 50 of the Act, the capital gain is deemed to be a short term capital gain (even through it arises from transfer of depreciable asset held for more than 36 months). However, for the purpose of grant of exemption under Section 54E of the Act, which is available in respect of transfer of long term capital asset, the Hon ble Bombay High Court rejected the contention of the Revenue that capital asset transferred would also be deemed to be a short term capital asset by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the head capital gain and included in total income. The section 112(1) of the Act is intended solely for prescribing concessional rate of tax and not for determining chargeability of income under the head Capital gain , therefore, the section 112(1) cannot decide character of capital gain whether it would be short term capital gain or long term capital gain. If the opinion of learned JM is followed, then a anomalous situation may arise, where the income under the head capital gain determined as short-term capital gain under section 50 and included under total income would be rendered only as ornamental item, undermining the purpose of exercise for computing short term capital gain . Such an interpretation would contradict the legislative intent. The provision of section 50 in the statute has been provided for achieving particular purpose of denying multiple benefit of depreciation and any interpretation which frustrate that purpose, should be discouraged. In the case of the assessee, while adjudicating appeals for assessment years 2000-01 to 2005-06, the Co-ordinate Bench in ITA No. 720/Mum/2006 for AY. 2001-02 held as under: 21. On plain reading of the above section shows that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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