AHMEDABAD, DEC 18, 2012: THE issue before the Bench is - Whether the deeming fiction created u/s. 50 of the Act with respect to depreciable assets would be confined for the purpose of mode of computation of capital gains contained in Section 48 and 49 of the Act and would not cover the exemption u/s 54EC of the Act. And the verdict goes in favour of the assessee.

Facts of the case

For the AY 2003-04, the assessee had filed a return of income in which the assessee had claimed short term capital gain of Rs.40,99,947/- arising from the sale of assets included in the block of assets. With respect to such gain, assessee had claimed the exemption u/s. 54EC of the Act, for having made investment in the specified bond.

The AO previously accepted the assessment u/s. 143(1) of the Act . However, subsequently on the basis that such exemption was not available to the assessee and therefore income chargeable to tax has escaped assessment, issued notice u/s. 148 of the Act of reopening of the assessment. In the assessment framed by the AO pursuant to such notice, he disallowed the claim of exemption of the assessee.

CIT(Appeals) allowed the appeal holding that deeming fiction created u/s. 50 of the Act with respect to depreciable assets would be confined for the purpose of mode of computation of capital gains contained in Section 48 and 49 of the Act and would not cover the exemption u/s. 54EC of the Act. Finding that assets transferred were held for more than 36 months and that otherwise requirements of Section 54EC were fulfilled, CIT(A) deleted the addition, relying on the decision of Bombay High Court in case of Commissioner of Income Tax Vs. ACE Builders Pvt.Ltd. reported in (2005-TIOL-107-HC-MUM-IT).

On further appeal by the Revenue, the High Court held that,

++ from the statutory provisions, it emerges that in case not falling u/s 50 of the Act for computation of capital gains in case of transfer of the asset, mode of computation and the cost of acquisition of asset would be worked out by applying the provisions as contained in Section 48 and Section 49 respectively. However, in case of transfer of capital asset, forming part of block of assets in respect of which depreciation has been allowed, mode of computation and cost of acquisition shall be as per modifications provided in Section 50 of the Act. Thus, Special provision made for computation of capital assets in respect of which depreciation has been allowed, is confined for the purpose of Section 50 in relation to Section 48 and Section 49 only;

++ section 54EC thus provides for exemption from payment of capital gain subject to condition made therein be satisfied. The Revenue would refer to the beginning words of sub Section (1) of Section 54EC which refer to capital gain arising from the transfer of a long- term capital asset and would contend that by virtue of Section 50 of the Act, such exemption would not be available in the cases of transfer of assets on which depreciation has been allowed;

++ such an interpretation would not be warranted. It is true that u/s 54EC of the Act, exemption would be made available in case of transfer of long term capital assets. However, once such condition is fulfilled, by virtue of the fact that asset was such on which the depreciation was allowed and therefore, computation would be done as provided u/s. 50 of the Act by applying modifications in Section 48 and Section 49 would not change the nature of capital asset or availability of exemption specified u/s 54EC of the Act;

++ Gauhati High Court in case of Commissioner of Income Tax Vs. Assam Petroleum Industries (P) Ltd. had taken a similar view. In such decision, Court was concerned with the sale of an asset covered u/s 50 of the Act and exemption from payment of capital gain of Section 54E of the Act. High Court ruled in favour of Assessee and held that Section 54E is an independent provision, which is not controlled by Section 50 of the Act. It was held that for application of section 54E the necessary pre-requisite condition and enquiry would be, whether the assessee has transferred long-term capital asset and whether the consideration so received is invested or deposited within the time limit in specified asset. Capital gain may have been received by the assessee on depreciable assets, if the conditions necessary u/s 54E are complied with by the assessee, he will be entitled to the benefit envisaged in Section 54E of the Income Tax Act;

++ Section 54E of the Act also made similar provision of exemption of capital gain on transfer of capital assets along the line of Section 54EC of the Act with which we are concerned;

++ the decision of Gauhati High Court in case of Commissioner of Income Tax was taken note of and followed by the Bombay High Court in case of ACE Builders Pvt.Ltd. in the context of assets which was covered u/s 50 of the Act. The claim of assessee was exempted u/s. 54E of the Act was upheld the Bombay High Court;

++ our view is thus supported by two decisions of different High Courts. Independently also, assessee’s claim for exemption of Section 54EC was valid and therefore, rightly upheld by the Tribunal.

(See 2012-TIOL-1018-HC-AHM-IT)