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Income Tax Appellate Tribunal, MUMBAI BENCH “D”, MUMBAI
Before: SHRI AMIT SHUKLA & SHRI S. RIFAUR RAHMAN
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “D”, MUMBAI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO. 5683/MUM/2017 : A.Y : 2013-14 Asst. Commissioner of Income Vs. M/s. Reliance Transport & Tax – 4(3)(1), Travels Pvt. Ltd., Mumbai (Appellant) 6th floor, Nagin Mahal, 82, Veer Nariman Road, Churchgate, Mumbai 400 020. PAN : AAACR2380M (Respondent)
Appellant by : Shri Nimesh Yadav Respondent by : Shri Yogesh Thar, Shri Chaitanya Joshi & Shri Hardik Nirmal Date of Hearing : 21/06/2022 Date of Pronouncement : 19/07/2022
O R D E R PER AMIT SHUKLA, JM :
The aforesaid appeal has been filed by the Revenue against the impugned order dated 12.06.2017 passed by the Commissioner of Income Tax (Appeals)-9, Mumbai (in short „ld. CIT(A)‟) for the quantum of assessment passed under Section 143(3) of the Income Tax Act, 1961 (in short „the Act‟) for the Assessment Year 2013-14.
2 ITA No. 5683/Mum/2017 Reliance Transport & Travels Pvt. Ltd. 2. The Revenue has raised the following grounds in its appeal:- “1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to delete the disallowance of Rs.26,49,31,101/- being custom duty paid towards Yacht. 2. On the facts & in the circumstance of the case and in law, the Ld.CIT(A) erred in directing AO to tax the profit on transfer of Capital Asset i.e. Helicopter of Rs.19,09,32,707/- as Long Term Capital Gain as against Short Term Capital Gain as assessed by the AO.” 3. Facts in brief qua the issue raised in ground no. 1 are that the assessee-company is engaged in the business of travel agent and chartering of yacht and helicopters, etc. The Assessing Officer noticed that in the Profit & Loss account, assessee has debited expenses under the head „Custom paid‟ of Rs.32,12,90,245/-, out of which, Customs duty was Rs.26,49,31,101/-, and the remaining was in the nature of penalty which was added back by the assessee. The assessee has taken the yacht named as „Tian‟ on rent from M/s. Ammolite Holding Limited, Channel Island, Jersey. The Assessing Officer has referred to some report and investigation carried out by the Customs authorities wherein it was reported that the yacht was purchased for €1,16,40,875 by M/s. Ammolite Holding Limited having its registered office at Temiplar House, Don Road, St. Heller, Jersey JE1, 2TR, Channel Island, which was a foreign based company of the Reliance ADAG Group, from M/s. Ferretti SPA, Italy in August, 2008. The same was registered at Jersey with British Registry and named the Yacht as „TIAN' with registration No. 741256, in September, 2008. As per the report, the Yacht was purchased in the name of M/s. Ammolite Holding Limited with an intention to claim the 'Foreign Flag Vessel' status
3 ITA No. 5683/Mum/2017 Reliance Transport & Travels Pvt. Ltd. in India. As per the report, the finance for the purchase was made by M/s. Reliance Capital Limited, M/s. Worldtel Holding Limited and M/s. Gateway Net Trading Pvt. Ltd., Singapore, a subsidiary of M/s. Reliance Communications Limited which has made direct payment for purchase of yacht. The yacht was dispatched to India vide Bill of Lading No.2 dated 30.09.2008. The investigations revealed that a letter dated 01.01.2009 was written under the signatures of Shri V.R. Mohan of M/s. Ammolite Holdings Limited issued M/s.Assar Lines saying that the owners had entered into a Bare Boat Chartering Agreement with the assessee, M/s. Reliance Transport & Travels Pvt. Ltd. for a period of one year. 4. Further, in the report it was also alleged that the yacht was used for the personal purposes of Shri Anil Ambani and his family. The yacht was brought to India without paying Customs Duty. The Assessing Officer has also referred to certain statements recorded by the Customs authorities that how the yacht was purchased and used by Shri Anil Ambani and family for their personal use. The Customs Department had attached the yacht for non-payment of Customs Duty and the yacht was valued at Rs.86,91,97,421/-. In the petition filed before the Customs Settlement Commission, the Commission had finally levied Customs Duty of Rs.26,49,31,101/- and further penalty of Rs.5,63,59,144/- was imposed.
In his order, the Assessing Officer has also referred to the report of the Joint Director of Income Tax (Intelligence & Criminal Investigation) Unit-1, Mumbai that since the yacht was
4 ITA No. 5683/Mum/2017 Reliance Transport & Travels Pvt. Ltd. purchased for personal use, therefore, the payment of Customs Duty cannot be allowed as business expenses in the hands of the assessee-company, i.e. M/s. Reliance Transport & Travels Pvt. Ltd. From this report, the Assessing Officer deduced that the yacht was purchased for personal use of Shri Anil Ambani and family and the charter agreement entered into by the assessee- company with M/s. Ammolite Holding Limited is nothing but a devise to avoid tax implication, especially Customs Duty by making it „foreign flag vessel‟. He further held that the Customs Duty is applicable only if it is paid on revenue items, i.e. stock-in- trade which is imported or import of capital asset. In the case of assessee-company, it is neither stock-in-trade nor capital asset; therefore, the Customs Duty is not applicable on the yacht in the hands of the assessee-company. Insofar as the assessee‟s contention that Customs and Excise Settlement Commission has levied Customs Duty on the assessee and, therefore, the expenses should be allowed, the same he held that it is not tenable because the Settlement Commission has not adjudicated, whether it is applicable on the assessee or M/s. Ammolite Holding Limited or M/s. Reliance Transport & Travels Pvt. Ltd. or the persons who have used the yacht.
The Assessing Officer further held that the expenses claimed by the assessee-company cannot be allowed as expenses under Section 37(1) of the Act because it does not satisfy the following conditions :-
(i) It is not incurred during the previous year. The yacht was brought in India in AY 2009-10 for which the expenses belongs
5 ITA No. 5683/Mum/2017 Reliance Transport & Travels Pvt. Ltd. to whereas the expenses were claimed in the A.Y.2013-14. The assessee may argue it is customs duty and can be claimed on payment basis u/s.43B of the Act. However, it is to be noted that the assessee has not shown any expenses payable as customs duty in the A.Y.2009-10.
(ii) It is not covered under section 30 to 36 of the Act.
(iii) These expenses are not a revenue expense in nature. If it is an expense at all, it is enduring and having impact beyond the year under consideration. It is not recurring.
(iv) The expense is purely personal in nature. As per the findings of the Customs Authorities and the report of the JDIT (I &CI), Mumbai of the Income-tax Department (as discussed above), the yacht was brought to India for personal purposes.
(v) 'Wholly and exclusively' for the purpose of business. This expense is not incurred 'wholly and exclusively' for the purpose of business. The Charter Agreement entered with M/s Ammalite Holding Limited itself contradicts the business purpose. The assessee company carrying out its business in India chartering a yacht with 'foreign flag' which can stay at Indian Shores for a limited and permissible duration and which cannot be used as an Indian Yacht cannot be used as an Indian Yacht for any purpose, how can be used for business in India. An assessee who is neither an importer nor exporter nor does it venture in the coastal trades or offshore operation, if enters in a time charter agreement with a sister concern for a foreign flag vessel, then what business purpose is served, is beyond rationality. When the charter agreement of yacht does not satisfy the condition of wholly and exclusively for the business purpose, how can customs duty based on that charter agreement be wholly and exclusively for the business purpose. In addition to that, the use of yatch for personal purposes
6 ITA No. 5683/Mum/2017 Reliance Transport & Travels Pvt. Ltd. excludes the criterion of 'wholly and exclusively for business purpose'.
(vi) The SCN alleged in para 49(xxix) while considering the application of Shri Anil D. Ambani that the applicant purchased the Yacht for personal use with the assistance of Shri Hari Nair, Vice President of M/s. Reliance ADAG, routed the money for the purchase and effected the import of the Yacht with the help of Shri Gautama Dutta and Sh. Sohel Kazani in order to evade applicable customs duty. In respect of the same, the applicant has submitted that purchasing the Yacht, routing the money for purchasing the Yacht does not amount to any action or omission, attracting liability to confiscation of the Yacht under section 111(m) or (n) and further Bill of Entry in the Customs and therefore, Section 111(m) is not applicable as the Yacht was declared properly. From the above, it is seen that the SCN has alleged that the Yacht was purchased for personal purposes only. However, the allegation raised by the SCN was neither answered nor rejected. From the above, it is crystal clear that the Yacht was purchased for personal purposes only.
The Assessing Officer also rejected the assessee‟s contention that payment of Customs Duty was commercial expediency for the reason that chartering of foreign flag yacht was not for the purpose of business and chartering of such a yacht was not going to serve any business purpose. If there was no commercial or business purpose in chartering of such yacht, how can payment of Customs Duty on it be treated as business exigency? Thus, he disallowed the Customs Duty claimed by the assessee of Rs.26,49,31,101/- and added it back to the income of assessee.
7 ITA No. 5683/Mum/2017 Reliance Transport & Travels Pvt. Ltd. 8. Before the ld. CIT(A), detailed submissions were made which has been dealt with and incorporated in the appellate order on pages 5 to 19. The ld. CIT (A) after noting down the facts noted that the assessee had submitted that the yacht was used for business purpose insofar as the assessee is concerned and it was under bona fide belief that the yacht was having foreign flag which was decided to be used in various countries including Europe and India, therefore, Customs Duty is not leviable. Only due to circumstances beyond the control and that the yacht was seized as it remained in India, that the assessee agreed to pay the Customs Duty and settle the case so as to use the yacht in India. The Settlement Commission after considering the application had levied Customs Duty on the assessee itself. The order of Settlement Commission was delivered in Assessment Year 2012- 13, therefore, same had been claimed in the year under appeal, i.e. Assessment Year 2013-14. Insofar as the Assessing Officer‟s allegation that the yacht was used for personal purposes, he held that the Assessing Officer himself has not verified the fact whether the said yacht is actually used by the assessee for its personal use or not. The principal activity of the assessee is to carry on the business of travel and tourist agent and hiring, acquiring and chartering of aircrafts, helicopters, etc. In the course of its business, the assessee has hired the Yacht from Ammolite for use of its business and actually used the same to provide services to Reliance ADA Group Pvt. Ltd. vide agreement dated 8.10.2008. As per the agreement, the Yacht was used to provide services to Reliance ADA Group Pvt. Ltd. and the assessee has done the same and provided the services to Reliance
8 ITA No. 5683/Mum/2017 Reliance Transport & Travels Pvt. Ltd. ADA Group Pvt. Ltd. The assessee has produced year-wise ledger accounts of income earned from operation of yacht from 1.12.2008 to 31.3.2013 along with summary chart of income earned from yacht operation up to 31.3.2013. Further, a reference was also made to the Profit & loss account of the current year with respect to income earned from yacht operations during the year. Thus, he held that the yacht was used for the purpose of assessee‟s business through providing services to Reliance ADA Group Pvt. Ltd.
The ld. CIT (A) after considering the entire gamut of facts and the submissions of the assessee as well as the finding of the Assessing Officer held that the yacht was not used by the assessee for its own personal use. It has operated the yacht for the benefit and use of companies or entities of Reliance ADA Group for consideration by way of operating fee as per the agreement. The assessee-company has earned revenue from operating of yacht of Rs.53,16,319/- and for the period 01.12.2008 to 31.03.2013 it has earned revenue of Rs.1,58,45,786/-. The assessee has only acquired the chartering rights of the yacht and income has always been assessed as business income in all the years by the Assessing Officer. Insofar as the Assessing Officer‟s allegation that Customs Duty is not applicable in the case of assessee, he held that as per the order of Settlement Commission, the assessee alone was liable for payment of Customs Duty on yacht for using same in the territory of India and accordingly, assessee had paid the Customs Duty. Further, the assessee has taken the yacht on lease from
9 ITA No. 5683/Mum/2017 Reliance Transport & Travels Pvt. Ltd. M/s. Ammolite Holding Limited and, therefore, it has not been capitalised or treated as stock-in-trade. For coming to this conclusion, he has referred to the decision of Hon'ble Bombay High Court in the case of National Organic Chemicals Industries Ltd. Vs. CIT, 203 ITR 410 (Bom.). Again, insofar as the Assessing Officer‟s observation that the said expenses have not been incurred during the previous year because the yacht was brought in India in Assessment Year 2009-10 and, therefore, the expenses cannot be claimed in Assessment Year 2013-14, he held that since the assessee has paid the Customs Duty in the month of January, 2009 of Rs.25 crores and further payment of Rs.3 crores was made under protest in December, 2009 to provisionally vacate seizure of yacht by the Customs authorities and it is only when the Settlement Commission vide order dated 31.05.2012 had adjudicated the issue and settled the matter of payment on payment of determined Customs Duty upon the assessee, therefore, the liability had crystallized in Assessment Year 2013-14 and, therefore, it has rightly been claimed as deduction in this year. Final conclusion of the ld. CIT(A) reads as under :-
“I have gone through the contentions of the appellant and AO fully. The contentions of the AO are not found correct and in law. As discussed in the above paras, the said expenditure is not incurred for its personal purpose by the appellant. Further, the appellant has incurred the said expenses for its business purpose. Since the liability in respect of the custom duty is crystallized during the year as the order of the Settlement Commission was passed in the current year and the finality of payment of custom duty liability arises in the current year, it cannot be disallowed on the ground that the same is not related to the year under appeal. The said contention of the
10 ITA No. 5683/Mum/2017 Reliance Transport & Travels Pvt. Ltd. appellant also supported by the various High Courts and Tribunals decisions as discussed above. Accordingly, the Ground Nos. A(1) to A(6) raised in appeal is thus ALLOWED.”
We have heard both the parties at length, perused the relevant finding given in the impugned order as well as the material referred to before us at the time of hearing. The ld. Departmental Representative has referred to various observations of the Assessing Officer and submitted that once it is found that Customs Duty was paid on yacht, which was purely used for the personal purposes of Shri Anil Ambani and family, it cannot be allowed as business expenses. On the other hand, the learned counsel for the assessee submitted that insofar as the assessee- company is concerned, it had taken the yacht on rent from a foreign company, M/s. Ammolite Holding Limited and had used it for earning income from operation of the yacht and showed it as business income, therefore, it cannot be held that the yacht was used for personal purposes of assessee-company. Insofar as the liability to pay Customs Duty by the assessee-company is concerned, he submitted that once the Settlement Commission had fixed the liability of Customs Duty on the assessee for the yacht, then, it is purely a payment of duty which is allowable as business expenses of the assessee-company.
It is an undisputed fact that the assessee-company is in the business of travel and tourist agent and also chartering of aircrafts, helicopters, yachts, etc. The revenue earned from operation of yacht/helicopters, etc. has been shown as business income and same has been accepted by the Assessing Officer in
11 ITA No. 5683/Mum/2017 Reliance Transport & Travels Pvt. Ltd. all the years. If in the course of its business, assessee has hired a yacht for the use of its business and to provide services to other entities and companies, then, so far as the assessee is concerned, it is purely a business activity. The ld. CIT(A) has already noted that the revenue earned from operation of yacht over the period of time, which has been accepted by the Assessing Officer. Even if the company which is hiring the services or individuals who are using the yacht for their personal purposes, then insofar as the assessee is concerned, it does not automatically become personal use by the assessee-company. If any adverse inference was to be drawn, then, it has to be examined and looked into in their hands or in the context of the companies or persons hiring the yacht or paying charges for usage of the yacht. The yacht was never used for the personal use of the assessee-company, albeit by someone else, for which any claim of deduction of expenses cannot be disallowed on the ground of personal use in the hands of the assessee company. Therefore, the ld. CIT (A) has rightly concluded that the yacht was not used by the assessee for its own personal use as it has operated the yacht for the benefit and use of companies or entities paying operating fee as per the agreement.
Insofar as the controversy whether the liability to pay the Customs Duty was of assessee or not and in which year assessee could claim the expenses. As discussed above, the Customs and Excise Settlement Commission has categorically held that the liability to pay Customs Duty was on the assessee because the yacht was used in India and, therefore, the assessee alone should
12 ITA No. 5683/Mum/2017 Reliance Transport & Travels Pvt. Ltd. pay the Customs Duty. Thus, the payment of Customs Duty by the assessee was a statutory liability of the assessee company which has been dispensed with and accordingly, assessee has rightly claimed the payment of Customs Duty as expenses.
Insofar as the year of claim of expenses is concerned, though the assessee had paid the Customs Duty of Rs.28 crores in the year 2009, it was only to release the yacht attached with the Customs authorities and same was done under protest as it was contesting the levy of Customs Duty on the ground that since it is a „foreign flag vessel‟, there was no liability to pay the Customs Duty. Thus, when the Customs and Excise Settlement Commission had fixed the liability and determined the liability in the financial year 2012-13 relevant to Assessment Year 2013-14, the liability has definitely crystallised in this year only and, therefore, the same has rightly been claimed in this year. Accordingly, the order of the ld. CIT (A) is confirmed and the grounds raised by the Revenue is dismissed.
Insofar as the issue raised in ground no. 2 that the assessee-company had offered Long term capital gains on sale of helicopter of Rs.19,09,32,707/-. The Assessing Officer noted that the helicopter was part of block of assets and was a depreciable asset and why it should not be treated as Short term capital gains.
The working of capital gains as per assessee was as under :-
13 ITA No. 5683/Mum/2017 Reliance Transport & Travels Pvt. Ltd. Particulars Amount (Rs.) Net block of helicopter as on 01.04.2012 11,19,47,371 Less : Deduction during the year (excluding spare parts of Rs.65,10,284/- and equipment of 30,28,80,078 R.3,73,438/-) Capital gains as per section 50(2) of the Act 19,09,32,707
The helicopter was purchased on 31.10.2006 and the same was sold on 25.03.2013 and, therefore, the period of holding was more than 3 years. Since the block became Nil, the provisions of Section 50(2) of the Act was attracted and the deeming provision of Section 50 of the Act are applicable with respect to computation of capital gains and it does not convert the long term capital asset into short term capital asset. However, the Assessing Officer held that in the section 50 of the Act, it is clearly stated the manner of calculation of capital gains on sale of depreciable assets, which is applicable here as it was sale of asset on which depreciation was allowed. In the instant case, the helicopter is a depreciable asset and the assessee has claimed depreciation on the same, therefore, as per the provisions of section 50 of the Act, 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. AO further held that as per provisions of section 2(42B) of the Act wherein the short term capital gains has been defined, it is clearly mentioned that "short term capital gain means capital gain arising from the transfer of a short term capital asset". From the above, it is clear that all the depreciable assets are in the nature of short term capital assets as per provisions of section 50 of the
14 ITA No. 5683/Mum/2017 Reliance Transport & Travels Pvt. Ltd. Act and any capital gains arising out of such transfer is short term capital gain as per provisions of section 2(42B) of the Act. AO further observed that, if the provisions of section 50 of the Act is read with the provisions of section 2(42B) of the Act, it is amply clear the capital gains arising out of sale of depreciable assets are short term capital gains only. In the section 50 of the Act which is incorporated for calculation of depreciable assets, it was nowhere mentioned that the capital gains will be calculated as per the holding period of the asset. He further held that for the purpose of computation of capital gains on such depreciable asset, the asset become short term and therefore he held it to be Short term capital gains and levied tax at the rate applicable for Short term capital gains.
The ld. CIT(A) after referring to the judgment of the Hon'ble Supreme Court in the case of V.S. Dempo Co. Ltd. [2016] 74 Taxmann.com 15 (SC) and Hon'ble Bombay High Court in the case of Ace Builders (P.) Ltd. [2005] 144 Taxmann 855 (Bom.) held that though for the purpose of computation of capital gains it will be treated as Short term capital gains under Section 50 of the Act, but for the purpose of applicability of tax rate, it has to be treated as Long term capital gains, if asset is held for more than 3 years.
After considering the Revenue‟s submission and on perusal of the impugned order, we find that, the only controversy is whether sale of a depreciable asset (i.e. helicopter), which was part of block of assets and held for more than 3 years, is taxable
15 ITA No. 5683/Mum/2017 Reliance Transport & Travels Pvt. Ltd. under Section 50 of the Act as Short term capital gains, then whether the rate of tax would be of Long term capital gains treating it to be a long term capital asset or rate of short term capital gain. The Assessing Officer has treated the capital gain on sale of helicopter amounting to Rs.19,09,32,707/- as Short term capital gains and taxing the same at normal rate of tax as per the provisions of Section 111A(1) of the Act @ 30%; whereas the ld. CIT(A) has held that for the purpose of rate of tax, same should be treated as Long term capital gains and, therefore, as per the provisions of Section 112(1) of the Act, the rate of tax should be 20%.
It is an undisputed fact that the holding period of the said asset was more than 3 years (i.e. 5 ½ years) and, therefore, same is a long term capital asset as per the provisions of Section 2(29AA) of the Act. Since the asset was a depreciable asset used for the purpose of business, assessee claimed depreciation from the date of its acquisition, i.e., from 31.10.2006. During the current year, the helicopter was sold for Rs.30,28,80,078/- which amount was higher than the net block of asset as on 01.04.2012. The resulting capital gain as per Section 50(2) of the Act was Rs. 19,09,32,707/- which assessee has offered for capital gains at the tax rate of 20%. As per Section 112 of the Act, the income arising from transfer of a long term capital asset is chargeable under the head „Capital gains‟ @ 20%. Long term capital gains on capital asset has been defined under Section 2(29AA) of the Act to mean capital asset which is not a short term capital asset. As per Section 2(42A) of the Act, short term capital asset means
16 ITA No. 5683/Mum/2017 Reliance Transport & Travels Pvt. Ltd. capital asset held by the assessee for not more than 36 months immediately preceding the date of transfer. Section 50 is a special provision for computing the capital gains in case of a depreciable asset and is not only restricted to provisions of Section 48 and 49 of the Act. It is a deeming fiction carved out for treatment of depreciable asset which has limited application for the purpose of mode of computation of capital gains contained in Section 48 and 49 of the Act. Ergo, it deals with capital asset which forms part of block of assets in which depreciation has been allowed under this Act and, therefore, the mode of computation of profit under Section 48 and 49 of the Act are applied with certain modifications. In other words, the fiction created in Section 50 of the Act is only restricted to the mode of computation under Section 48 and 49 of the Act which cannot be extended beyond that.
This issue had come up for consideration before the Hon'ble Bombay High Court (jurisdictional High Court) in the case of CIT vs Ace Builders, 281 ITR 210 (Bom.) wherein the Hon'ble High Court in the context of claim of deduction under Section 54E of the Act in respect of capital gain arising on transfer of a capital asset on which depreciation has been allowed, which is deemed to be Short term capital gains under Section 50 of the Act, had made the following observation:-
“21. On perusal of the aforesaid provisions, it is seen that Section 45 is a charging section and sections 48 and 49 are the machinery sections for computation of capital gains. However, Section 50 carves out an exception in respect of depreciable assets and provides that where depreciation has been claimed
17 ITA No. 5683/Mum/2017 Reliance Transport & Travels Pvt. Ltd. and allowed on the asset, then, the computation of capital gain on transfer of such asset under sections 48 and 49 shall be as modified under Section 50. In other words, Section 50 provides a different method for computation of capital gain in the case of capital assets on which depreciation has been allowed.
Under the machinery sections the capital gains are computed by deducting from the consideration received on transfer of a capital asset, the cost of acquisition, the cost of improvement and the expenditure incurred in connection with the transfer. The meaning of the expressions „cost of improvement‟ and „cost of acquisition‟ used in sections 48 and 49 are given in section 55. As the depreciable capital assets have also availed depreciation allowance under section 32, section 50 provides for a special procedure for computation of capital gains in the case of depreciable assets. Section 50(1) deals with the cases where any block of depreciable assets do not cease to exist on account of transfer and Section 50(2) 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.
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
18 ITA No. 5683/Mum/2017 Reliance Transport & Travels Pvt. Ltd. provides that the computation of such capital gains should be done as if arising from the transfer of short term capital asset ?
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 specified asset within a period of six months after the date of such transfer. In the present case it is not in dispute that the assessee fulfills all the conditions set out in section 54E to avail exemption, but the exemption is sought to be denied in view of fiction created under section 50.
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/s. D. Hanumantha Rao reported in 1998 (6) S.C.C.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 extention 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
19 ITA No. 5683/Mum/2017 Reliance Transport & Travels Pvt. Ltd. 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.
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 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.”
Thus, sequitur of aforesaid judgment is that the fiction created by the legislature in Section 50 of the Act has to be confined to the purpose for which it is created. Section 50 of the Act was enacted with the object of denying multiple benefits to the owners of a depreciable asset, however, that restriction is limited to the computation of capital gains and not to the
20 ITA No. 5683/Mum/2017 Reliance Transport & Travels Pvt. Ltd. exemption provision. If depreciation has been availed on long term capital asset, then, the capital gains has to be computed in the manner prescribed under Section 50 of the Act and the capital gains tax will be charged as if such capital gain is arising out of short term capital asset. In that case, the capital gains was invested in the manner prescribed in Section 54E of the Act wherein exemption is provided on transfer of a long term capital asset then Long term capital gains was subject to deduction. There also, the asset was a depreciable asset, however, while granting exemption under Section 54E of the Act, which is applicable for Long term capital gains, the jurisdictional High Court has held that for the purpose of exemption under Section 54E of the Act, it has to be treated as Long term capital gains. Later on, the same principle was reiterated by the Hon'ble Bombay High Court in the case of CIT vs Parrys (Eastern) (P) Ltd., 384 ITR 264 (Bom.) wherein the Hon'ble High Court has held that if deemed Short term capital gains is arising on account of sale of a depreciable asset that was held for a period to which Long term capital gains will apply, then, said gain would be set- off against brought forward Long Term Capital Loss and unabsorbed depreciation. Further, in case CIT vs Manali Investments [2013] 219 Taxman 113 (Bom.) again the same principle was reiterated by the Hon'ble Bombay High Court. Later on, the Hon'ble Supreme Court in the case of CIT V.S. Dempo Co. Ltd. Civil Appeal No(s). 4797/2008 vide order dated 15.09.2016 had the occasion to examine the eligibility 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
21 ITA No. 5683/Mum/2017 Reliance Transport & Travels Pvt. Ltd. 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. 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 High Court relied upon its own judgment in the case of CIT, Mumbai City-II, Mumbai vs. ACE Builders Pvt. Ltd. [(2005) 3 Bom CR 598]. The High Court 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
22 ITA No. 5683/Mum/2017 Reliance Transport & Travels Pvt. Ltd. created in sub-section (1) & (2) of Section 50 of the Act has limited application only in the context of mode of computation of capital gains contained in Sections 48 and 49 of the Act 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 of the Act deals with the mode of computation and Section 49 of the Act 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 CIT, Mumbai City-II, Mumbai vs. ACE Builders Pvt. 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 vs. D. Hanumantha Rao reported in 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
23 ITA No. 5683/Mum/2017 Reliance Transport & Travels Pvt. Ltd. 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 I.T. Act cannot be denied to the assessee on account of the fiction created in Section 50.” Their Lordships dismissing the appeal filed by the Revenue held that we are in agreement with the aforesaid view taken by the Mumbai High Court. The Gujarat High Court as well as Guahati
24 ITA No. 5683/Mum/2017 Reliance Transport & Travels Pvt. Ltd. High Court have also taken the same view in the following cases, against these judgments no appeal has been filed: 1. CIT vs. Polestar Industries [2013 SCC online Guj 5517] 2. CIT vs. Assam Petroleum Industries (P.) Ltd. [(2003) 262 ITR 587].
The Special Bench of ITAT, Mumbai also in ITO vs United Marine Academy [2011] 10 Taxmann.com 320 (Mum.-Trib) has explained the deeming fiction of section 50 as per which the said section only modifies the term "cost of acquisition" used in sections 48 for the purpose of computing the capital gains arising from transfer of depreciable assets.
Thus, the applicability of section 50 is for the limited purpose of working out the cost of acquisition u/s.48 and 49 of the depreciable asset sold and the applicability of section 50 is restricted for that purpose only and for the purpose of other provisions of the Act, the capital gain has to be treated as long term capital gain if the period of holding is more than 3 years. The ratio and the principle as culled out from the aforesaid judgments are that, the legal fiction created in Section 50 of the Act deems capital gains as short term capital gains but does not deem the asset as short term capital asset and, therefore, it cannot be said that Section 50 of the Act converts long term capital asset into short term capital asset. Thus, if we apply the same ratio and principle here then, as per Section 112 of the Act, the tax on long term capital gains on transfer of a long term capital asset is @ 20% and, therefore, even if the capital gains is
25 ITA No. 5683/Mum/2017 Reliance Transport & Travels Pvt. Ltd. deemed as short term capital gains in terms of Section 50 of the Act, but for all other purposes including for the purpose of Section 112, the deeming fiction cannot be extended for rate of taxes and, therefore, the rate of tax has to be as per Section 112 of the Act, i.e. 20%. Accordingly, the order of ld. CIT (A) is confirmed and ground no. 2 is dismissed.
In the result, appeal of the Revenue is dismissed. Order pronounced in the open court on 19th July, 2022.
Sd/- Sd/- (S. RIFAUR RAHMAN) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Date : 19.07.2022 *SSL* Copy to : 1) The Appellant 2) The Respondent 3) The CIT(A) concerned 4) The CIT concerned 5) The D.R, “D” Bench, Mumbai 6) Guard file By Order
Asstt. Registrar/Sr. Private Secretary I.T.A.T, Mumbai