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Facts
The assessee sold a business asset for Rs.1,34,95,000/- and claimed an exemption of Rs.50,00,000/- under Section 54EC of the Income Tax Act. The Assessing Officer (AO) denied the exemption, holding that since the asset was depreciable, it was treated as a short-term capital gain under Section 50(1), and Section 54EC applies only to long-term capital gains.
Held
The Tribunal held that the fiction created by Section 50 is restricted to the computation of capital gains under Sections 48 and 49 and does not alter the character of a long-term capital asset for other provisions like Section 54EC. Therefore, the assessee is eligible for the exemption under Section 54EC.
Key Issues
Whether exemption under Section 54EC is available when capital gains are computed under Section 50(1) for depreciable assets.
Sections Cited
50, 54EC, 48, 49, 2(29B)
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Income Tax Appellate Tribunal, ‘C’ BENCH
(Assessment Year :2016-17) Omnific Vs. Income Tax Officer 607, Nirman Kendra 21(2)(4),Mumbai Dr. E.Moses Road Mahalaxmi Maharashtra-400 011 PAN/GIR No.AAAFO0223D (Appellant) .. (Respondent) Assessee by Shri Ashish Thakurdesai Revenue by Shri Krishna Kumar Date of Hearing 27/11/2024 Date of Pronouncement 27/ 11/2024 आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeal has been filed by the assessee against order dated 19/08/2024 by NFAC Delhi for the quantum of assessment passed u/s.143(3) for the A.Y.2016-17.
2. In the grounds of appeal, assessee has raised following grounds:- “1.On facts and in circumstances of the case and in law, the learned Commissioner of Income Tax - Appeals, National Faceless Appeal Centre, erred in confirming disallowance by Assessing Officer, of claim for exemption of Rs. 50,00,000/- u/s 54EC of I. T.
3. The brief facts qua the issue involved are that during the relevant assessment year assessee sold its business asset at Rs.1,34,95,000/- and has claimed exemption u/s.54EC of Rs.50,00,000/- on investment in NREC and NHAI from capital gain arising from transfer of long term capital asset. The ld. AO held that since property sold was a depreciable asset therefore, as per Section 50(1), the same is to be taxed under short term capital gain and exemption u/s.54EC will not be applicable because same is available as deduction against long term capital gains. According to ld. AO, section 54EC qualifies for deduction out of chargeable capital gains of a long term capital asset which is not the case of the assessee because assessee had sold business asset on which depreciation has been claimed which is deemed to be short term capital gain u/s.50. This has also been confirmed by the ld. CIT(A).
4. The short question before us is, whether investment made in terms of 54EC, assessee is eligible for exemption when the capital gain has been computed u/s. 50(1) which was on account of business assets on which depreciation has been claimed. This issue now stands covered by the series of judgments of the Hon’ble Jurisdictional High Court following the ratio of VIT vs. Ace Builders reported in 281 ITR 210. This judgment of the Hon’ble High Court has also been confirmed by the Hon’ble Supreme Court in the case of CIT vs. Dempo & Company Ltd.
Omnific The relevant observation of the Hon’ble Supreme Court confirming the order of the Bombay High Court is as under:- “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 capital asset contained in Section 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 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 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 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 Le. Section 54E of the Act. Section 48 deals with the mode of computation and Section 49 relates to cost with Omnific 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. Mumbal 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 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 Omnific 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. 5. Thus, the Hon’ble Supreme Court held that Section 50 is for computing capital gains in the case of depreciable assets iand s only restricted to the purpose of Section 48 and Section 49 of the Act and therefore, such a fiction in Section 50 has a limited application only in the context of mode of computation and gains therefore, it cannot change the character of long term capital asset into short term capital asset u/s.50. Accordingly, this issue stands covered by the judgment of the Hon’ble Supreme Court which is neither been referred and relied upon by the authorities below. Accordingly, the order of the ld. CIT(A) is reversed and claim of the assessee is allowed.
In the result, appeal of the assessee is allowed.
Order pronounced on 27th November, 2024.