THE issues before the Bench are - Whether Sec 54EC benefits are
available to the assessee if it invests short-term capital gains on transfer of
long-term depreciable assets and Whether such benefit is available to the
assessee in case computation of capital gains is done either under Sections 48
and 49 or under Section 50. And the verdict goes against the Revenue.
Facts of the
case
Assessee had sold
a property with superstructure, plant and machinery for the total sale
consideration of Rs.24,99,000/-. Yet another Plot was also sold along with the
same for sale consideration of Rs.4,93,104/-. Assessee had purchased REC bond of
Rs.41,70,000/- to claim deduction u/s 54EC. The LTCG in respect of property was
computed by the AO after allowing the CII at Rs.2,35,266/-. In respect of the
other property, no deduction u/s 54EC was allowed. However, the STCG was
computed at Rs.41,53,722/-. On appeal, CIT(A) relying on the decision of the
Bombay HC and Gauhati HC had allowed the deduction u/s 54EC on the sale of
depreciable assets, which according to it was held by the assessee for more than
36 months. On further appeal, Tribunal had confirmed such findings of the CIT
(A).
Before HC, the Revenue's counsel
had submitted
that the Tribunal’s order was erroneous inasmuch as the view taken by the Bombay
HC and Gauhati HC and thereafter, followed by this Court, was not a correct
approach. It was further urged that no double benefits can be made available to
assessee, who had already enjoyed a LTCG. It was further urged that for
computation of capital gain arrived at on sale of depreciable assets a method
was introduced to disentitle indexing to such owners. And, as section 54EC was
applicable in transfer of LTCGs, assessee was not entitled to claim exemption
u/s 54EC.
On appeal, the HC held
that,
++ we
notice that this Court in Tax Appeal No.730 of 2013, in the case of CIT v.
Aditya Medisales Limited (2013-TIOL-806-HC-AHM-IT), dealt
with an identical issue and also discussed both the decisions of Bombay High
Court and that of Gauhati High Court. As could be noted from the findings of the
tribunal it 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) from which short term capital
gain is offered for the tax. The tribunal also held that exemption available u/s
54EC 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;
++
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 subsections (1) and (2) of Section 50 is restricted only to the mode
of computation of capital gains contained in Sections 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 July 19, 1969. The respondent therein who had joined the bank on July
1, 1972, claimed extension of service because he was deemed to be appointed in
the bank with effect from October 26, 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
nondepreciable 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 longterm 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 Incometax 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 the exemption provisions. In other words,
where the longterm capital asset has availed of 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 and 49 or under Section 50.
The contention of the Revenue that by amendment to Section 50 of the longterm
capital asset has been converted into a shortterm capital asset is also without
any merit. As stated hereinabove, the legal fiction created by the statute is to
deem the capital gain as shortterm capital gain and not to deem the asset as
shortterm capital asset. Therefore, it cannot be said that Section 50 converts a
longterm capital asset into a shortterm capital asset.” 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. reported in [2003] 262
ITR 587. 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, this Tax Appeal is disposed of. The questions
raised in the present Tax Appeal are also answered along the same line. For the
foregoing reasons, the present Tax Appeal fails and is, accordingly, dismissed.
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