Whether legal fiction created u/s 50 can also curb application of Sec 54EC if assessee makes investment in tax-free bonds - NO: Gujarat HC

THE issues before the Bench are - Whether the legal fiction created u/s 50 can also curb application of Sec 54EC if assessee makes investment in tax-free bonds and Whether exemption benefit u/s Sec 54EC available for depreciable assets can also be availed on short term capital gains. And the verdict goes against the Revenue.

Facts of the case

The assessee for the Assessment Year 2007- 08 had filed the return of income. Assessee Company had sold ‘Automatic Electric Load Monitoring System’ for the sum of Rs.240 lacs and had invested the gain amount in Rural Electrification Bonds and claimed exemption under Section 54EC. On scrutiny of the assessment under Section 143(3) of the Act, the Assessing Officer found that short term capital gain was offered by the assessee in respect of Automatic Electric Load Monitoring System under Section 50 of the Act being the amount of Rs.30,28,732/-. It had also claimed exemption under Section 54EC of the Act for investing the said amount in Rural Electrification Bond. The Assessing Officer disallowed such exemption on the ground that the same was not available on short term capital gain and invocation of Section 54EC was permissible only on long term capital gain.On appeal, the CIT(A) partly allowed the issue in favour of the assessee. The Tribunal also held in favour of the assessee.

On appeal the HC held that,

++ the question to be addressed is whether the exemption permitted by the statute under Section 54EC for the depreciable assets can also be claimed for short term capital gain. Section 50 of the Act is the deeming provision made for the purpose of computation of capital gain as far as depreciable assets are concerned;

++ section 45 of the Act is a charging Section, which provides that in any profit or gains arising from the transfer of a capital asset effected in the previous year, shall, save as otherwise provided in Sections 54, 54B, 54D and 54E, chargeable to income tax under the head ‘capital gains’ and shall be deemed to be the income of the previous year in which the transfer took place. Sections 48 and 49 are machinery Sections for computation of capital gains;

++ section 50 is an exception in relation to the depreciable assets and provides that where depreciation is claimed and allowed on the assets the computation of capital gain on transfer of such asset under Sections 48 and 49 shall be modified under Section 50. Thus, Section 50 is meant for computation of capital gains in case of depreciable assets. It provides for a method of computation of capital gains in relation to capital assets on which depreciation is allowable;

++ the Tribunal in its order has essentially relied upon the decision of the Bombay High Court and concurred with the finding of the CIT(A) by holding that the exemptions under Section 54EC is to be allowed subject to the verification by the Assessing Officer that investment in long term capital asset was made by the assessee within the period prescribed under Section 54EC(1) of the Act from which short term capital gain is offered for the tax. The tribunal also held that exemption available under Section 54EC of the Act is available on short term capital gain arising from transfer of long term capital assets. There is no condition in the provision, which would preclude such interpretation. Admittedly, depreciable assets sold by the assessee were held by it for 10 years and therefore on such sale, investment in Rural Electrification Bond was made;

++ we notice that the Bombay High Court was dealing with somewhat identical question where the long term capital gain arose on transfer of a depreciable long term capital asset. The Court questioned whether the assessee could be denied exemption under Section 54E only on the ground that Section 50 of the Act provides for computation of long term capital gains and capital gain offered was arising from the transfer of depreciable capital asset?

++ the Bombay High Court dealt with the entire issue and ruled in favour of the assessee. We also notice that while doing so it has concurred with the decision of the Gauhati High Court in the case of CIT Vs. Assam Petroleum Industries (P.) Ltd. We are in agreement with both the decisions of the Gauhati High Court as well as the Bombay High Court in holding that capital gain arising of long term capital asset, if invested in specified asset, the assessee is not to be charged capital gains and exemption provided under Section 54EC of the Act cannot be denied to the assessee only on account of the fact that deeming fiction is created under Section 50 of the Act. In other words, legal fiction created under Section 50 of the Act is though restricted to computation of capital gains, such deeming fiction cannot restrict application of Section 54EC which allows exemption of capital gains, if assessee makes investment in the specified assets. Thus, the assessee cannot be charged to capital gains when short term gains of long terms capital assets get invested in the areas specified under the law;

++ neither the tribunal nor the CIT(A) committed any error applying these judgments to the facts of the instant case. The questions of law since is accordingly answered.