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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI AMARJIT SINGH & SHRI SANDEEP SINGH KARHAIL
PER SANDEEP SINGH KARHAIL, J.M.
The present appeal has been filed by the Revenue challenging the impugned order dated 14/12/2018, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by learned Commissioner of Income Tax (Appeals)– 8, Mumbai, [“learned CIT(A)”], for the assessment year 2013–14.
The present appeal has been listed for hearing before us pursuant to the order dated 27/05/2022, passed by the Co–ordinate Bench of the Tribunal in ITO v/s Eurofinance Training & Publishing Pvt. Ltd., M.A. no.316/ Mum./2021 (in ITA no.835/Mum./2019, for the A.Y. 2013–14) whereby
M/s. Eurofinance Training & Publishing P. Ltd. ITA No.835/Mum./2019 earlier order dated 17/03/2021, passed under section 254(1) of the Act was recalled and appeal was directed to be fixed for hearing afresh.
In this appeal, the Revenue has raised following grounds:–
“1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was justified in directing the AO to tax capital gain on the sale of property being shown as a depreciable asset @ 20% of Rs.3,09,74,662, as claimed by the assessee instead of at 30% on on Rs. 5,48,34,449/- as calculated by that capital ins on transfer of long term capital asset on which depreciation had been claimed and allowed in earlier years, is to be treated as short term capital gains as per section 50 of the I.T. Act and for the purpose of Section 48 & 49 of the Act? 2. Whether on the facts and circumstances of the case and in law, Ld. CIT(A) was correct in accepting the contention of the assessee that indexation was allowable to the assessee on sale of impugned capital asset even though the said capital asset was part of block of assets of the assessee on which depreciation had been claimed by the assessee and on which profit had been shown by the assessee as 'profit on sale of fixed assets' in its 'Profit & Loss A/c"? 3. Whether on the facts and circumstances and in law, the Ld. CIT (A) was correct in giving relief to the assessee on the basis of the order of the Hon'ble Supreme Court in the case of CIT Vs. Dempo Company Ltd. (2016) as the said judgment referred to the applicability of section 50 in a case where exemption had been claimed u/s 54E, and as such, the said judgment was not relevant to the present case?
The only grievance of the Revenue, in the present appeal, is against taxing the capital gains arising on transfer of capital asset, which is a depreciable asset, at the rate of 20% instead of 30%.
The brief facts of the case pertaining to the issue, as emanating from the record, are: For the year under consideration, the assessee filed its return of income on 31/03/2015, declaring total income of Rs.3,05,60,320. The assessee has declared capital gain of Rs.3,09,74,862, on sale of premises being Flat no.143–A, Twin Tower, Building–A, Off Veer Savarkar Marg, Prabhadevi, Mumbai 400 025. As per the Profit & Loss Account submitted by Page | 2
M/s. Eurofinance Training & Publishing P. Ltd. ITA No.835/Mum./2019 the assessee, the capital gain on sale of premises was Rs.5,48,34,449. Accordingly, during the course of assessment proceedings, the assessee was asked to file the working of the capital gains along with the relevant documents. In reply, the assessee filed sale and purchase deed for the property sold and also filed working for capital gains. It was further observed that the said property was part of block of asset on which the assessee had claimed and has been allowed depreciation. However, in the return of income, the assessee has declared the capital gains as long term capital gain. Accordingly, vide order dated 26/03/2016, passed under section 143(3) of the Act, the Assessing Officer held that the capital gains arising on transfer of capital asset in respect of which the assessee has claimed and has been allowed depreciation in earlier years, is to be treated as short term capital gain under section 50 of the Act. Thus, the Assessing Officer computed the short term capital gain on sale of the aforesaid property at Rs.5,48,34,449, and inter–alia, added the same to the total income of the assessee.
In appeal, the learned CIT(A), by following the decision of the Hon'ble Supreme Court in V.S. Dempo Company Ltd. [2016] 74 taxmann.com 15 (SC), allowed the appeal of the assessee, by observing as under:–
“During the appellate proceedings, the appellant has reiterated its contention of applicability of tax rate on the sale of depreciable assets. I find that this issue has been put to rest by the Hon'ble Apex Court recently in the case of CIT v Dempo Co Ltd [2016] [2016] 74 taxmann.com 15 (SC) dated 05.09.2016, the relevant extract of the same is reproduced below: “1. In the return filed by the respondent assessee for the Assessment Year 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 Income Tax Act. Admittedly, the asset was purchased in the year 1972 and sold sometime in the year 1989. Thus, the asset is almost 17 years old. Going by the definition of long term Page | 3
M/s. Eurofinance Training & Publishing P. Ltd. ITA No.835/Mum./2019 capital asset contained in Section 2(298) of the Income Tax Act, 19951 (hereinafter referred to as 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 Commissioner of Income Tax (Appeals), the Income Tax Appellate Tribunal allowed the appeal of the assessee herein holding that the assessee shall be entitled for exemption under Section 54E of the Act The High Court has confirmed the view of the Commissioner of Income Tax (Appeals) and dismissed the appeal of the Revenue. While doing so the High Court has relied upon its own judgment in the case of CIT v. ACE Builders (P.) Ltd. [2006] 281 ITR 210/[2005] 144 Taxman 855 (Bom.). The High Court has observed that Section 50 of the Act which is a special provision for computing the capital gains in the case of depreciable assets is not only restricted for the purposes of Section 48 or Section 49 of the Act as specifically stated therein and the said fiction created in sub-section (1) & (2) of Section 50 has limited application only in the context of mode of computation of capital gains contained in Sections 48 and 49 and would have nothing to do with the exemption that is provided in a totally different provision i.e. Section 54E of the Act. Section 48 deals with the mode of computation and Section 49 relates to cost with reference to certain mode of acquisition. This aspect is analysed in the judgment of the Bombay High Court in the case of ACE Builders (P) Ltd. (supra) in the following manner:
"In our opinion, the assessee cannot be denied exemption under Section 54E, because, firstly, there is nothing in Section 50 to suggest that the fiction created in Section 50 is not only restricted to Sections 48 and 49 but also applies to other provisions. On the contrary, Section 50 makes it explicitly clear that the deemed fiction created in sub-section (1) & (2) of Section 50 is restricted only to the mode of computation of capital gains contained in Section 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 extension of service to those appointed prior to 19.07.1969. 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 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 IT. Act cannot be denied to the assessee on account of the fiction created in Section 50." 2. We are in agreement with the aforesaid view taken by the High Court. 3. We are informed that the Gujarat High Court as well as Guahati High Court have also taken the same view in the following cases: Page | 4
M/s. Eurofinance Training & Publishing P. Ltd. ITA No.835/Mum./2019
CIT v. Polestar Industries [2014] 41 taxmann.com 237/221 Taxman 423 (Guj.) CIT v. Assam Petroleum Industries (P.) Ltd. [2003] 262 ITR 587/131 Taxman 699 (Gau.). 4. We are also informed that against the aforesaid judgments no appeal has been filed. 5. In view of the foregoing, we do not find any merit in the instant appeal which is, accordingly, dismissed. Respectfully following the decision of Hon'ble Apex Court which has clearly held. such capital gain as LTCG, the AO is directed to tax the said gain of the sale of property being shown as a depreciable asset @20% instead of 30%. This ground of appeal is allowed.”
Being aggrieved, the Revenue is in appeal before us.
During the course of hearing, the learned Departmental Representative (“learned D.R.”) submitted that the property in respect of which the assessee has earned capital gain formed part of the block of assets on which deprecation was claimed and allowed to the assessee. The learned D.R., by referring to the provisions of section 50 of the Act submitted that the capital gains arising on transfer of capital asset which forms part of block of assets in respect of which depreciation has been claimed and allowed to the assessee is treated as short term capital gain and, therefore, such gains should be taxed @ 30% i.e., the rate applicable on short term capital gain.
On the other hand, the learned Authorised Representative (“learned A.R”) submitted that this issue is covered in favour of tax payer by the decision of the Co–ordinate Bench of the Tribunal in Smita Conductors Ltd. v/s DCIT, [2014] 41 taxmann.com 514 (Mum. Trib.).
M/s. Eurofinance Training & Publishing P. Ltd. ITA No.835/Mum./2019 9. In a short rebuttal, the learned D.R. submitted that no further appeal was filed by the Department against the aforesaid decision in Smit Conductors Ltd. (supra) because of low tax effect.
We have considered the rival submissions and perused the material available on record. In order to decide the issue, it is relevant to note that the provisions of section 50 of the Act, which reads as under:–
“Special provision for computation of capital gains in case of depreciable assets. 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), the provisions of sections 48 and 49 shall be subject to the following modifications :— (1) where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of the assets during the previous year, exceeds the aggregate of the following amounts, namely :— (i) expenditure incurred wholly and exclusively in connection with such transfer or transfers; (ii) the written down value of the block of assets at the beginning of the previous year; and (iii) the actual cost of any asset falling within the block of assets acquired during the previous year, such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets; (2) where any block of assets ceases to exist as such, for the reason that all the assets in that block are transferred during the previous year, the cost of acquisition of the block of assets shall be the written down value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short-term capital assets: 44[Provided that in a case where goodwill of a business or profession forms part of a block of asset for the assessment year beginning on the 1st day of April, 2020 and depreciation thereon has been obtained by the assessee under the Act, the written down value of that block of asset and short-term capital gain, if any, shall be determined in such manner as may be prescribed45.] 46[Explanation.—For the purposes of this section, reduction of the amount of goodwill of a business or profession, from the block of asset in accordance Page | 6
M/s. Eurofinance Training & Publishing P. Ltd. ITA No.835/Mum./2019 with sub-item (B) of item (ii) of sub-clause (c) of clause (6) of section 43 shall be deemed to be transfer.]”
Thus, the provisions of section 50 of the Act provides for procedure for computation of capital gains in case of transfer of capital asset which forms part of block of assets and in respect of which depreciation has been allowed under the Act. The said intent of this provision is also clear from the heading of the section which is reproduced as under:–
“Special provision for computation of capital gains in case of depreciable assets.”
Therefore, only for this limited purpose, the capital gains arising from transfer of the assets, as covered in section 50 of the Act, is treated as capital gains arising from transfer of short term capital assets. Further, section 50 of the Act also clarifies that the same is restricted for the purpose of provisions of section 48 and 49 of the Act which, inter–alia, deals with mode of computation of capital gains.
We find that similar issue arose for consideration before the Co– ordinate Bench of the Tribunal in Smita Conductors Ltd. (supra), wherein it was held that even in case where capital gain has been computed under section 50 of the Act, tax rate applicable will be the rate in respect of the long term capital gain in respect of property held for more than three years. The relevant findings in the aforesaid decision are as under:–
“2.5 The assessee has also raised an additional ground that for the purpose of application of tax rate, the capital gain in case of the assessee has to be assessed as long term capital gain as the flat had been held by the assessee for more than three years. It has been argued that provisions of section 50 deeming the capital gain as short term capital gain is only for the purposes of section 48 and 49 which relate to computation of capital gain. The deeming Page | 7
M/s. Eurofinance Training & Publishing P. Ltd. ITA No.835/Mum./2019 provisions has, therefore, to be restricted only to computation of capital gain and for the purpose of other provisions of the Act, the capital gain has to be treated as long term capital gain. The view canvassed by the learned AR is supported by the judgment of Hon'ble High Court of Bombay in case of Ace Builders (P) Ltd. (Supra) in which it has been held that for the purpose of other provisions of the Act such as section 54EC the capital gain has to be treated as long term capital gain, if the asset is held for more than three years. The same view has been taken by the Mumbai bench of Tribunal in case of Manali Investments v. Asstt. CIT [2011] 45 SOT 128/10 taxmann.com 293 in which it has been held that the prescriptions of section 50 are to be extended only to the stage of computation of capital gain and, therefore, capital gain resulting from transfer of depreciable asset which was held for more than three years would retain the character of long term capital gain for the purpose of all other provisions of the Act. In this case the Ld. AR for the assessee submitted that flat had been held for 15 to 20 years which is supported by the fact that cost of the flat as shown in the balance sheet was only Rs. 1,30,000/ Therefore, if the flat is held for more than three years the tax rate has to be applied as provided in section 112 of the IT Act applicable in respect of capital gain arising from transfer of long term capital asset. 2.6 We, therefore, held that, for the purpose of computation of capital gain, the flat has to be treated as short term capital gain u/s 50 of the IT Act, but for the purpose of applicability of tax rate it has to be treated as long term capital gain if held for more than three years. We accordingly direct the AO to compute the capital gain from the sale of flat and apply the appropriate tax rate after necessary verification in the light of observations made in this order.”
We further find that the Hon'ble Supreme Court in CIT v/s V.S. Dempo Company Ltd. (supra) affirmed the conclusion reached by the Hon'ble Jurisdictional High Court in CIT v/s ACE Builders Pvt. Ltd., [2006] 281 ITR 210 (Bom.), wherein it was held section 50 of the Act, which is a special provision for computing the capital gains in the case of depreciable assets, is not only restricted for the purposes of Section 48 or Section 49 of the Act as specifically stated therein and the said fiction created in sub–section (1) & (2) of Section 50 has limited application only in the context of mode of computation of capital gains contained in Section 48 and 49.
In the present case, it is not the plea of the Revenue that the property from which the capital gains arose was held by the assessee for less than Page | 8
M/s. Eurofinance Training & Publishing P. Ltd. ITA No.835/Mum./2019 three years. The Assessing Officer only by application of provisions of section 50 of the Act treated the gains as arisen from transfer of short term capital asset and hence applied the rate of tax @ 30% as applicable in case of short term capital gain. Therefore, respectfully following the aforesaid judicial precedents, we find no infirmity in the impugned order passed by the learned CIT(A). As a result, grounds raised by the Revenue are dismissed.
In the result, appeal by the Revenue is dismissed. Order pronounced in the open Court on 23/09/2022 Sd/- Sd/- AMARJIT SINGH SANDEEP SINGH KARHAIL ACCOUNTANT MEMBER JUDICIAL MEMBER
MUMBAI, DATED: 23/09/2022 Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The CIT(A); (4) The CIT, Mumbai City concerned; (5) The DR, ITAT, Mumbai; (6) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary Assistant Registrar ITAT, Mumbai