DY CIT - 8(3)(1), MUMBAI vs. M/S VOLTAS LTD., MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL (VIRTUAL COURT) “F” BENCH, MUMBAI BEFORE SHRI LALIET KUMAR, HON'BLE JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER ITA NO. 94/MUM/2021 (AY: 2012-13) DCIT – 8(3)(1) v. M/s. Voltas Limited Room No. 615 Voltas House, A Block Aayakar Bhavan, M.K. Road Dr. Babasaheb Ambedkar Rod Mumbai - 400020 Chinchpokli, Mumbai – 400033 PAN: AAACV2809D (Appellant) (Respondent) Assessee by : Shri Nitesh Joshi Department by : Shri Milind Chavan

Date of Hearing : 16.12.2021 Date of Pronouncement : 21.02.2022 O R D E R PER S. RIFAUR RAHMAN (AM)

2 ITA NO. 94/MUM/2021 (AY: 2012-13) M/s. Voltas Limited “(i) On the facts and circumstances of the case and in law the Ld. CIT(A) erred in in directing the AO to re-compute the Capital Gain Tax on sale of flats at the rate applicable for long term capital gains i.e. 20% instead of 30% applicable to short term capital gains as the flats were held for more than 3 years without appreciating the fact that the income received or accruing as a result of transfer of assets being part of a block of assets shall be deemed to the capital gains arising from the transfer of short term capital assets as per sec.50C and hence taxable at the rate of 30%”. (ii)` “On the facts and circumstances of the case and in law the Ld. CIT(A) erred in holding that for tax rate purpose sec. 112 of the Act is applicable on capital gains arising from transfer of depreciable assets and deeming fiction of sec 50 will not apply without appreciating the law that sec.112 is applicable only in case of Capital gains from the transfer of a long term capital assets and not to the capital gains arising from the transfer of short term capital assets as per sec.50C.” (iii) “On the facts and circumstances of the case and in law the Ld. CIT(A) ought to have upheld the decision of AO of computing the capital gain tax on sale of flats, being depreciable assets at the rate 30% based on the decision of Hon’ble Bombay High Court in the case of Smt. Meena Pamnani vs. Commissioner of Income-tax, Mumbai [2017]86 taxmann.com175(Bombay). 2. The Ld.CIT (A)’s order is contrary in law and on facts and deserves to be set aside. 3. The appellant prays that the order of CIT (A) on the above grounds be set aside and that of the AO restored. The appellant craves leave to amend or alter any ground or add a new ground that may be necessary at the time of hearing.”

3 ITA NO. 94/MUM/2021 (AY: 2012-13) M/s. Voltas Limited has considered and adjudicated the issue in favour of the assessee. Copy of the order is placed on record.

4 ITA NO. 94/MUM/2021 (AY: 2012-13) M/s. Voltas Limited 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. 35. In this regard we may also refer to the decision of Hon'ble Bombay High Court and Hon'ble Supreme Court decision relied upon in this regard by learned Counsel of the assessee.  CIT Vs. V.S. Dempo Company Ltd. (387 ITR 354)  CIT Vs. M/s. Manali Investment (ITA No. 1658 of 2012). 36. In the case of V.S. Dempo Company Ltd. (supra) the facts were that 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 capital asset contained in Section

5 ITA NO. 94/MUM/2021 (AY: 2012-13) M/s. Voltas Limited 2 (29B) of the Income Tax Act, 1995 (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 learned Commission of Income Tax (Aappeals), 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 ‘The Commissioner of Income-tax, Mumbai City-II, Mumbai vs. ACE Builders Pvt. Ltd.’ [(2005) 3 Bom CR 598]. The High Court has observed that Section 50 of the Income Tax 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 “The Commissioner of Income-tax, Mumbai City-II, Mumbai vs. ACE Builders Pvt. Ltd.” (2005) 3 Bom CR 598 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 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

6 ITA NO. 94/MUM/2021 (AY: 2012-13) M/s. Voltas Limited 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.” We are in agreement with the aforesaid view taken by the High Court. We are informed that the Gujarat High Court as well as Guahati High Court have also taken the same view in the following cases: 1. Commissioner of Income tax V. vs. Polestar Industries [2013 SCC online Gu 5517] 2. Commissioner of Income Tax vs. Assam Petroleum Industries (P.) Ltd. [(2003) 262 ITR 587]. We are also informed that against the aforesaid judgments no appeal has been filed. In view of the foregoing, we do not find any merit in the instant appeal which is, accordingly, dismissed. 38. We may gainfully refer to the decision of Hon'ble Supreme Court in the case of CIT Vs. M/s. Manali Investment (ITA no. 1658 of 2012) in which Hon'ble Supreme Court has held as under :- “1. In this appeal by the Revenue for A.Y. 2005-06, following re-framed question of law has been proposed for our consideration. 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 ff 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 Limited even though the said decision was rendered in the context of eligibility of deduction under Section 54E ? 2 The respondent – assessee had during the subject assessment year sold its meters and transformers on which it had claimed depreciation. On sale, the respondent assessee claimed long term capital gains and sought to set off the same against its

7 ITA NO. 94/MUM/2021 (AY: 2012-13) M/s. Voltas Limited carried forward long term capital loss in terms of Section 74 of the Income Tax Act, 1961. The assessing officer disallowed the claim and held that in view of Section 50 of the Act, the gain is in the nature of short term capital gain. 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 transformers and meters. In the case of Ace Builders Limited, this Court held that by virtue of Section 50 of the Act only the capital gains is to be computed in terms thereof and be deemed to be short term capital gains. This deeming fiction is restricted only for the purposes of Section 50 of the Act and the benefit under Section 54E of the Act which is available only to long term capital gains was extended. Further, an identical issue with regard to set off against long term capital loss arose in an appeal filed by the Revenue in the matter of Commissioner of Income Tax 9 V/s. Hathway Investments Private Limited, being Income Tax Appeal No.405 of 2012. This court by its order dated 31st January, 2013 refused to entertain the appeal filed by the Revenue. The Revenue has not been able to point out any distinguishing features in the present case warranting a departure from the principles laid down by this court in the matter of Ace Builders (P) Limited (supra) and in our order dated 31st January 2013 in Income Tax (L) No. 405 of 2012. 39. Upon careful consideration we find that Hon'ble Higher Courts as above have held that deeming fiction of section 50 is limited and cannot be extended beyond method of computation of the gain. That the distinction between short term and long term capital gain is not obliterated by this section. Hence, we respectfully follow the same and reject this submission of learned Departmental Representative. This additional ground is allowed and the Assessing Officer is directed to reexamine the detailed facts and allow as per the ratio of above said decisions as discussed above.”

8 ITA NO. 94/MUM/2021 (AY: 2012-13) M/s. Voltas Limited 8. The decision relied on by the Ld.DR in the case of CIT v. V.S. Dempo company Ltd., (supra) has been considered by the Tribunal and decided the issue in favour of the assessee.

Order pronounced on 2102.2022 as per Rule 34(4) of ITAT Rules by placing the pronouncement list in the notice board. Sd/- Sd/- (LALIET KUMAR) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai / Dated 21/02/2022 Giridhar, Sr.PS

Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. The CIT(A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file.

//True Copy// BY ORDER

(Asstt. Registrar) ITAT, Mum