DCIT 12(2), MUMBAI V. BHARAT ENTERPRISES, MUMBAI

ITA 1764/MUM/2010

• Counselvise Citation: 176419914 RSA 2010
• Duration Of Justice: 1 year(s) 3 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 24-05-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 05-03-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D EVI SINGH
• Assessee Lawyers: KANTILAL B PAREKH
• Keywords: Capital asset; Business income; Depreciation; Cost of acquisition; Fair market value; Valuation report; Capital Gains
• Section: 43D; 54EC; 54

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH B MUMBAI BEFORE SHRI R.S. SYAL (AM) AND SMT. ASHA VIJAYARAG HAVAN (JM) ITA NO. 1764/MUM/2010 ASSESSMENT YEAR-2006-07 THE DCIT - 12(2), AAYAKAR BHAVAN, MUMBAI-400 020 VS. M/S. BHARAT ENTERPRISES, 252A, JOLLY MAKER APARTMENT NO.1 CUFFE PARADE, MUMBAI-400 005 PAN-AAAFB 2025N (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI DEVI SINGH RESPONDENT BY: SHRI KANTILAL B. PAREKH O R D E R PER ASHA VIJAYARAGHAVAN (JM) THIS APPEAL PREFERRED BY THE REVENUE IS DIRECTED AG AINST THE ORDER DATED 9.12.2009 PASSED BY THE LD. CIT(A)-23 FOR THE ASSESSMENT YEAR 2006-07. 2. THE GROUNDS OF APPEAL OF THE REVENUE ARE AS UNDE R: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD CIT(A) HAS ERRED IN LAW IN ALLOWING EXEMPTION U/S 54EC FROM THE SHOR T TERM CAPITAL GAIN COMPUTED U/S 50, ON THE DEPRECIABLE ASSET AND HAS FAILED TO APPRECIATE THAT AS PER THE PROVISIONS OF SECTION 54 EC OF INCOME TAX ACT 1961, THE EXEMPTION IS AVAILABLE ONLY IN RESPEC T OF LONG TERM CAPITAL GAIN. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN LAW IN ALLOWING THE BENEFIT OF COST INFLAT ION INDEX U/S 48 OF THE INCOME TAX ACT 1961. TO SHORT TERM CAPITAL GAI N ARISING FROM THE SALE OF A DEPRECIABLE ASSET U/S 50, AND HAS FAILED TO APPRECIATE THAT ITA NO. 1764/M/2010 2 AS PER THE PROVISIONS OF SECTION 48, THE COST INFLA TION INDEX IS TO BE APPLIED ONLY IN RESPECT OF LONG TERM CAPITAL ASSET. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD CIT(A) HAS ERRED IN LAW IN ALLOWING THE ASSESSEE TO ADOPT FAIR MARKE T VALUE AS ON 1.4.1981 IN RESPECT OF A DEPRECIABLE ASSET WHICH IS A SHORT TERM CAPITAL ASSET AS PER SECTION 50 AND HAS FAILED TO A PPRECIATE THAT AS PER THE PROVISIONS OF THE ACT, THE FAIR MARKET VALU E AS ON 1.4.1981 NEEDS TO BE ADOPTED ONLY IN RESPECT OF LONG TERM CA PITAL ASSETS. 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD CIT(A) HAS ERRED IN LAW IN ALLOWING THE SET OFF THE SHORT TERM CAPIT AL GAIN ARISING FROM THE SALE OF A DEPRECIABLE ASSET U/S 50 OF THE INCOM E TAX ACT 1961. AGAINST THE BROUGHT FORWARD LONG TERM CAPITAL LOSS AND HAS FAILED TO APPRECIATE THAT AS PER THE PROVISIONS OF SECTION 70(3) THE SHORT TERM CAPITAL GAIN CAN BE SET OFF ONLY AGAINST THE S HORT TERM CAPITAL LOSS BROUGHT FORWARD. 3. IN ITS RETURN OF INCOME, THE ASSESSEE DECLARED T HE LONG TERM CAPITAL GAIN OF RS 5,77,35,538/- FROM THE TRANSFER OF FLAT NO.41B OWNED BY ASSESSEE IN MAKER TOWER B, CUFFE PARADE, MUMBAI 400 005. THIS FLAT WAS PURCHASED BY ASSESSEE FROM M/S. HARIBHAI ESTATE S PVT. LTD., AT THE PRICE OF RS 6,09,000/- VIDE AN AGREEMENT DATED 26.0 2.1979. ASSESSEE USED THIS AS A BUSINESS ASSET WHICH WAS REFLECTED I N THE ASSESSEES BALANCE SHEET. SINCE THE ASSESSEE WAS USING THE FL AT FOR BUSINESS PURPOSES, DEPRECIATION HAS BEEN CLAIMED ON IT FROM YEAR TO YEAR. FROM THE ACQUISITION COST OF RS. 6,09,000/- IN 1979, THE ACTUAL COST OF THE FLAT GOT DIMINISHED TO THE WRITTEN DOWN VALUE OF RS 1, 94,747/- ON 01.04.2005 AS AT THE BEGINNING OF THE PREVIOUS YEAR . ASSESSEE SOLD THE SAID FLAT TO SMT. PRATIBHA V. BANSAL AND VIMAL BANS AL FOR A CONSIDERATION OF RS 765,00,000/- VIDE A DEED OF SALE DATED 24.05. 2005. THE CAPITAL GAIN ARISING OUT OF THE TRANSFER OF THE FLAT HAS BE EN CONSIDERED BY ASSESSEE AS LONG TERM CAPITAL GAINS. BASED ON THE V ALUATION REPORT OBTAINED FROM THE REGISTERED VALUER SHRI KANTILAL V . VIKAMSEY VIDE HIS REPORT DATED 10.5.2005, ASSESSEE HAS OPTED FOR THE FAIR MARKET VALUE OF RS 33,00,000/- AS ON 01.04.1981 AS THE COST OF ACQU ISITION OF THE FLAT ITA NO. 1764/M/2010 3 UNDER THE PROVISIONS OF SECTION 55(2)(B)(I). ASSESS EE COMPUTED THE CAPITAL GAIN FROM THE SALE PRICE AFTER REDUCING THE INDEXED PURCHASE COST UNDER SECTION 48 AND DETERMINED THE LONG TERM CAPITAL GAI N OF RS 5,77,35,538/- THE LONG TERM CAPITAL GAIN CHARGEABLE TO TAX ON TRA NSFER OF THE ASSET HAS BEEN SHOWN BY ASSESSEE AT RS. NIL WORKED OUT BY I T AS UNDER: SALE CONSIDERATION RECEIVED RS. 7,65,00,000/- LESS: I) SHARE OF ASSESSEE IN STAMP DUTY/REG CHARGES 10,00,000 II)COST OF SALE 13,63,462 RS. 23,63,462/- ------------------------- RS. 7,41,36,538 LESS: COST OF ACQUISITION 33,00,000 INDEXED COST OF ACQUISITION= RS 33,00,000 X 497 ------ = RS. 1,64,01,000 100 ------------------------ CAPITAL GAIN RS. 5,77,35,538 LESS: INVESTMENT OF RS 5,71,50,000 U/S. 54EC RS. 5,71,50,000 -------------------------- LONG TERM CAPITAL GAIN RS. 5,85,538 LESS: BROUGHT FORWARD LOSSES RS. 5,85,538 -------------------- NIL 4. IN THE ABOVE COMPUTATION OF CAPITAL GAINS ASSES SEE ADOPTED THE FAIR MARKET VALUE OF THE FLAT SOLD A RS 33 LAKHS AS ON 1.1.1981 BASED ON VALUATION REPORT OF A REGISTERED VALUER. THE COST OF PURCHASE OF THE SAID FLAT IN 1979 WAS ONLY RS 6,09,000/- TO THE ASSESSEE . ACCORDING TO THE ASSESSEES VALUATION REPORT THERE HAD BEEN AN INCRE ASE OF 542% TO THE VALUE OF THE FLAT WITHIN A SHORT PERIOD OF 2 YEARS I.E, FROM 1979 TO 1981. ITA NO. 1764/M/2010 4 THE ASSESSING OFFICER WAS OF THE VIEW THAT THE VALU ATION OF THE ASSESSEE AS ON 1/4/1981 ADOPTED BY ASSESSEE WITH SUCH A SHAR P INCREASE IN PROPERTY VALUE IS UNBELIEVABLE. THE VALUATION OF T HE SAID FLAT TO DETERMINE THE FAIR MARKET PRICE AS ON 1.4.1981 WAS REFERRED BY THE ASSESSING OFFICER TO THE DISTRICT VALUATION OFFICE R OF THE DEPARTMENT. VIDE REFERENCE U/S 55A (B)(II) DATED 14/5/2008. THE REPORT OF THE DEPARTMENTS VALUER WAS NOT BEEN RECEIVED TILL DATE OF ASSESSMENT ORDER. SINCE THIS ASSESSMENT WAS GETTING BARRED BY LIMITAT ION OF TIME SHORTLY, THE ASSESSMENT WAS FINALIZED TO BE SUITABLY MODIFIE D LATER WITH REGARD TO THE FAIR MARKET VALUE AS ON 1.4.1981 WITH THE VALUE DETERMINED BY THE DEPARTMENTAL VALUER, IF A NEED ARISES TO DO SO. THI S WAS DONE OPTIONALLY WITHOUT PREJUDICE TO THE COMPUTATION OF CAPITAL GAI NS DONE SUBSEQUENTLY IN THIS ORDER WITHOUT RESORTING TO THE FAIR MARKET VALUATION AS ON 1.4.1981 AT ALL. 5. THE ASSESSING OFFICER HELD THAT IT IS A SETTLED LAW NOW THAT IN THE COMPUTATION OF CAPITAL GAIN OF DEPRECIABLE ASSETS U /S 50, SUBSTITUTION OF WDV WITH FAIR MARKET VALUE OF ASSET AND INDEXATION OF THE ACTUAL COST OF ASSETS ARE NOT PERMISSIBLE. THIS IS BECAUSE CAPITAL GAINS IN SUCH INSTANCES HAVE TO BE COMPUTED WITH REFERENCE TO TH E ACTUAL COST OF THE CAPITAL ASSETS TRANSFERRED AND FOR DEPRECIABLE ASSE TS ACTUAL COST TO BE RECKONED WITH UNDER THE PROVISIONS OF SECTION 50A. THE WRITTEN DOWN VALUE MENTIONED ABOVE AS DEFINED IN THE PROVISIONS OF SECTION 43(6) (B) MEANS IN THE CASE OF ASSETS ACQUIRED BEFORE THE PR EVIOUS YEAR, THE ACTUAL COST TO THE ASSESSEE LESS ALL DEPRECIATION ACTUALLY ALLOWED TO HIM UNDER THE ACT. THE BENEFIT OF INDEXATION OF COST OF ACQ UISITION AND THE COST OF ANY IMPROVEMENT PROVIDED IN THE SECOND PROVISO TO SECTION 48 AND APPLIED BY THE ASSESSEE IN THE COMPUTATION OF CAPIT AL GAIN CAN BE APPLIED TO ONLY IN A LONG TERM CAPITAL GAIN ARISES OUT OF T RANSFER OF A LONG TERM CAPITAL ASSET. AS MENTIONED ABOVE, THE ACTUAL COST OF DEPRECIABLE ASSET SHALL BE ITS WDV AS ON DATE OF TRANSFER AND NOT THE COST OF PURCHASE. ITA NO. 1764/M/2010 5 UNDER THE PROVISIONS OF SECTION 50 THE CAPITAL GAIN DERIVED SHALL BE A SHORT-TERM CAPITAL GAIN. HENCE, THE PROVISIONS OF SECTION 48 AND 49 ARE NOT APPLICABLE HERE. THE BENEFIT OF ADOPTION OF FA IR MARKET VALUE AS ON 1.4.1981 AT THE OPTION OF THE ASSESSEE U/S 55(2)(B) IS ALSO NOT APPLICABLE BECAUSE THE SAID SECTION IS IN RELATION TO AND FOR THE PURPOSES OF SECTION 48 & 49 WHICH ARE OUT OF PURVIEW OF SECTION 50. TH IS VIEW IS SUPPORTED BY VARIOUS JUDICIAL DECISIONS OF HONBLE HIGH COURT S IN FAVOUR MENTIONED BELOW: 1. M. RAGHAVAN VS ACIT (2004) 266 ITR 145 (MAD) 2. RAJNAGAR VAKTAPUR GINNING PRESSING AND MAN CO. LTD VS CIT (1975 99 ITR 264(GUJ) 3. CIT VS UPPER DOAB SUGAR MILLS (1979) 116 ITR 240(AL L) 4. PRIME PRODUCTS PVT. LTD VS CIT (1979) 116 ITR 473(A LL) 5. INDIA TUBE CO. LTD VS CIT( 1982) 136 ITR 597 (CAL) 6. AND FINALLY THIS ISSUE HAS BEEN SETTLED WITH TH E JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF COMMON WEALTH TRUST LTD VS CIT (1997) 228 ITR 1 (SC). THE ASSESSEE HAS NOT OFFERE D ANY PROPER EXPLANATION ON THE ISSUES AT ALL EXCEPT MAKING SOME VAGUE STATEMENT ABOUT ACQUIRING THE PROPERTY PRIOR TO 1.4.1981 AND ASSESSEES ELIGIBILITY OF INDEXATION OF THE COSTS ON 1.4.1981. THE ASSESS ING OFFICER HELD THAT THE STAND TAKEN BY THE ASSESSEE WAS INCORRECT AND T HE CAPITAL GAIN NEED TO BE COMPUTED UNDER THE PROVISIONS OF SECTION 50(2 ) AS APPLICABLE IN THE ASSESSEES CASE AND WORKED OUT BELOW: RS. RS. SALE CONSIDERATION 76500000 LESS:I. WDV OF BLOCK OF ASSETS AS ON 4.4.05 1.4.05 1 94747 ITA NO. 1764/M/2010 6 II)COST OF SALES 236 3462 2558209 --------------- SHORT TERM CAPITAL GAINS 73941791 7. WHILE EXAMINING THE ASSESSEES CLAIM FOR EXEMPTI ON U/S 54C, THE ASSESSING OFFICER EXAMINED THE PROVISIONS OF SECTI ON 2(14), SECTION 2(42A) AND SECTION 2(42B) AND SECTION 2(29A) & SECT ION 2(29B) AND STATED THAT IT THEREFORE FOLLOWS THAT ON THE TRANSF ER OF A CAPITAL ASSET THE RESULTANT INCOME ARRIVING IS LONG TERM CAPITAL GAIN FROM A LONG TERM CAPITAL ASSET AND SHORT TERM CAPITAL GAIN FROM A SH ORT TERM CAPITAL ASSET, UNLESS THE PROVISIONS OF THE ACT SPECIFICALLY PROVI DES OTHERWISE. FROM THE DEFINITION OF CAPITAL ASSET IT IS EVIDENT THAT A BU SINESS ASSET ALSO COMES WITHIN THE CATEGORY OF CAPITAL ASSET LIKE ANY NON B USINESS INVESTMENT ASSET. UNLIKE IN THE HOLDING OF NON BUSINESS INVES TMENT ASSET, THERE ARE ADVANTAGES OR BENEFITS ACCRUED TO IN THE HOLDING OF A BUSINESS ASSET. THE FOREMOST IS THE DEPRECIATION ALLOWANCE THAT CAN BE CLAIMED FROM THE BUSINESS INCOME AS A DEDUCTION. THERE ARE ALSO OTHE R DEDUCTIONS FROM THE BUSINESS INCOME AVAILABLE TO BUSINESS ASSETS LI KE EXPENSES ON MAINTENANCE CURRENT REPAIRS. INSURANCE, AND INTERES T ON BORROWED CAPITAL UTILIZED FOR ACQUISITION OF THE ASSET ETC., AS PROVIDED IN SECTION 30 TO 43D IN THE COMPUTATION OF THE BUSINESS INCOME. T HE BENEFITS TO BUSINESS ASSETS ARE ALSO AVAILABLE THROUGHOUT ITS H OLDING PERIOD. FOR NON BUSINESS INVESTMENT ASSET NO SUCH DEDUCTIONS ARE AV AILABLE FROM INCOME TO WHICH IT HAS BEEN APPLIED. BUT FOR NON BUSINESS INVESTMENT LONG TERM ASSETS. THE BENEFITS OF INDEXATION ON COST OF ACQUI SITION AND COST OF IMPROVEMENT ARE PROVIDED IN SECTION 48. THE ADVANT AGE OF EXERCISING OPTION U/S 55(2)(B)(I) ARE ALSO AVAILABLE BY WHICH THE COST OF ACQUISITION OF THE ASSET PRIOR TO 1.4.1981 CAN BE SUBSTITUTED WITH THE FAIR MARKET VALUE OF THE ASSET AS ON 1.4.1981. THESE ADVANTAGES U/S 48 AND U/S 55(2)(B)(I) ARE HOWEVER NOT AVAILABLE TO A BUSINESS ASSET ON W HICH DEPRECIATION HAS BEEN CLAIMED. FROM THIS IT IS EVIDENT THAT A BUSIN ESS ASSET EVEN THOUGH ITA NO. 1764/M/2010 7 FALLS UNDER CAPITAL ASSET CATEGORY IS DISTINCT FROM OTHER CAPITAL ASSETS AND HAS ITS OWN SEPARATE IDENTITY. THE CAPITAL GAIN INV ESTED IN SPECIFIED BONDS BY THE ASSESSEE FOR EXEMPTION U/S 54EC HAS BE EN THE SHORT TERM CAPITAL GAIN COMPUTED U/S 50 ON TRANSFER OF THE DEP RECIABLE ASSET. SEC. 54EC QUALIFIES A DEDUCTION OUT OF CHARGEABLE CAPITA L GAIN ONLY ON TRANSFER OF A LONG TERM CAPITAL ASSET WHICH WAS NOT THE CASE WITH ASSESSEE. THE SECTION 54EC QUALIFIES AN EXEMPTION O UT OF CHARGEABLE CAPITAL GAIN NOT ON TRANSFER OF A LONG TERM CAPITAL ASSET ALONE BUT IT ALSO STIPULATE THAT THE CAPITAL GAIN OUT OF THE ORIGINA L ASSET TRANSFERRED SHOULD REMAIN INVESTED IN THE SPECIFIED LONG TERM C APITAL ASSET. IN OTHER WORDS CATEGORIZATION OF CAPITAL GAIN AS THE LONG TE RM CAPITAL GAIN IS ALSO AN ESSENTIAL REQUIREMENT. AS PER THE PROVISIONS OF SEC 54EC, THE CAPITAL GAIN REMAINING INVESTED IN THE SPECIFIED CAPITAL AS SETS SHOULD ARISE FROM THE TRANSFER OF THE ORIGINAL ASSET AND IT SHOULD ALSO BE A LONG TERM CAPITAL ASSET. HENCE BOTH THESE CONDITIONS OF TRANS FER OF A LONG TERM CAPITAL ASSET AS WELL AS INVESTMENT OF THE RESULTAN T CAPITAL GAIN BEING A LONG TERM CAPITAL GAIN ARE REQUIRED TO BE SATISFIED . IN THE CASE OF THE ASSESSEE THE CAPITAL ASSET TRANSFERRED WAS A DEPREC IABLE ASSET AND ITS COMPUTATION OF CAPITAL GAIN IS U/S 50. THE CAPITAL GAIN THUS COMPUTED HAD BEEN A SHORT TERM CAPITAL GAIN ARISING OUT OF S HORT TERM CAPITAL ASSET. THE INVESTMENT MADE IN SPECIFIED LONG TERM CAPITAL ASSET U/S 54EC BY THE ASSESSEE HAS BEEN OUT OF SHORT TERM CAPITAL GAI N ON THE TRANSFER OF A SHORT TERM CAPITAL ASSET, AND THEREFORE THE CONDITI ON TO BE SATISFIED FOR THE TRANSFER OF A LONG TERM CAPITAL ASSET FOR OBTAI NING THE DEDUCTION U/S 54EC HAS NOT BEEN FULFILLED, SINCE A SHORT TERM CAP ITAL GAIN ARISES ONLY FROM THE TRANSFER OF A SHORT TERM CAPITAL ASSET. IT ALSO FOLLOWS THAT THE PROVISIONS OF SECTION 50, DESPITE BEING THE DEEMING PROVISIONS SHALL APPLY EQUALLY FOR THE PURPOSE OF SECTION 54EC ALSO, THE ACT UNDER THE PROVISIONS OF SECTION 50 RECOGNIZES THE DEPRECIABLE ASSET AS A SHORT TERM CAPITAL ASSET ONLY. IT WAS ALSO STATED BY THE ASSES SING OFFICER THAT THE ASSESSEE HAS PLACED RELIANCE ON THE DECISION OF BOM BAY HIGH COURT IN ITA NO. 1764/M/2010 8 THE CASE OF M/S ACE BUILDERS PVT. LTD (281 ITR 210) (BOM) DEPARTMENT HAS NOT ACCEPTED THE BOMBAY HIGH COURT DECISION IN PRINCIPLE. IN SUM, THE ASSESSING OFFICER HELD THAT THE TWO MAIN ISSUES GERMANE TO THE CASE ARE THE COMPUTATION OF CAPITAL GAIN AND THE ADMISSI BILITY OF EXEMPTION U/S 54EC. THE ASSESSEE CONCEDED THAT THE CAPITAL AS SET TRANSFERRED HAD BEEN A DEPRECIABLE ASSET AND THE CAPITAL GAIN WORKI NG COMES WITHIN THE PURVIEW OF SECTION 50. THE CAPITAL GAIN WORKING OU T UNDER THE PROVISIONS OF SECTION 50 COMES TO RS 7,39,41,791/- WHERE AS AS SESSEE HAD COMPUTED THE CAPITAL GAIN AT RS 577,35,538/- THE AS SESSING OFFICER HELD THAT THE ENTIRE EXEMPTION OF RS 571,50,000/- CLAIME D BY ASSESSEE U/S 54EC IS NOT ALLOWABLE AND THE SHORT TERM CAPITAL G AIN OF RS 739,41,791/- IS CHARGEABLE TO TAX. 8. ON APPEAL BEFORE THE LD. CIT(A), IT WAS STATED THAT DURING THE YEAR, THE ASSESSEE FIRM HAS SOLD THE PREMISES FOR THE CON SIDERATION OF RS 7,55,00,000/- AND THE WORKING OF THE CAPITAL GAINS ARISING THERE FROM IS GIVEN IN THE COMPUTATION OF TOTAL INCOME FILED ALON G WITH THE RETURN OF INCOME. THE CAPITAL GAIN ARISING THERE FROM IS RS 5 ,77,35,538/- RS 5,71,50,000/- HAVE BEEN INVESTED IN NABARD CAPITAL GAINS BONDS TO CLAIM THE EXEMPTION U/S 54. THE BALANCE CAPITAL G AIN OF RS 535,538/- HAS BEEN SET OFF AGAINST THE CARRIED FORWARD LONG T ERM CAPITAL GAIN/LOSS OF RS 5,80,238/- THE ASSESSEE FIRM HAS CLAIMED DEPR ECIATION ON THE SAID PREMISES FROM YEAR TO YEAR AND HENCE AS PER SECTION 50, THE GAIN ARISING THERE FROM IS DEEMED TO BE THE SHORT TERM CAPITAL G AIN. SECTION 50 OF THE IT ACT, 1961 CARVES OUT AN EXCEPTION IN RESPECT OF DEPRECIABLE ASSETS AND PROVIDES THAT WHERE DEPRECIATION HAS BEEN CLAIMED A ND ALLOWED ON THE ASSET, THEN THE COMPUTATION OF CAPITAL GAIN ON TRAN SFER OF SUCH ASSET U/S 48 AND 49 SHALL BE AS MODIFIED U/S 50. THE EFFECT OF SECTION 50(2) IS THAT WHERE THE CONSIDERATION RECEIVED ON TRANSFER OF DEP RECIABLE ASSET EXCEEDS THE WRITTEN DOWN VALUE OF THE ASSET, THEN THE EXCES S IS TAXABLE AS A ITA NO. 1764/M/2010 9 DEEMED SHORT TERM CAPITAL GAIN. IT IS TO BE NOTED THAT THE FICTION CREATED U/S 50 IS CONFINED TO THE COMPUTATION OF CAPITAL GA INS ONLY AND CANNOT BE EXTENDED BEYOND THAT. THE BENEFIT OF SECTION 54E WILL BE AVAILABLE TO THE ASSESSEE FIRM IRRESPECTIVE OF THE FACT THAT TH E COMPUTATION OF CAPITAL GAINS IS DONE EITHER U/S48 AND 49 OR U/S 50. THERE IS NOTHING IN SECTION 50 TO SUGGEST THAT THE FICTION CREATED IN SECTION 50 IS NOT ONLY APPLICABLE TO SECTION 48 AND 49 BUT ALSO APPLIES TO OTHER PROV ISIONS. ON THE CONTRARY, THIS SECTION MAKES IT EXPLICITLY CLEAR TH AT THE DEEMING PROVISION CREATED IN SUB SECTION (1) AND (2). IS RESTRICTED O NLY TO THE MODE OF COMPUTATION OF GAINS CONTAINED IN SECTION 48 AND 49 . THE LEGAL FICTION IS TO DEEM THE CAPITAL GAINS AS SHORT TERM CAPITAL GAI N AND NOT TO DEEM THE ASSET AS SHORT TERM CAPITAL ASSET. SECTION 50 DOES NOT CONVERT A LONG TERM CAPITAL ASSET INTO A SHORT TERM CAPITAL ASSET. THOUGH SECTION 50 HAS BEEN ENACTED WITH THE OBJECT OF DENYING MULTIPLE BE NEFITS TO OWN DEPRECIABLE ASSETS, YET THE RESTRICTIONS IS LIMITE D TO THE COMPUTATION OF CAPITAL GAINS AND NOT TO EXEMPTION PROVISIONS THUS THE EXEMPTION U/S 54E CANNOT BE DENIED TO THE ASSESSEE FIRM ON ACCOUN T OF THE FICTION CREATED IN SECTION 50. IT WAS FURTHER SUBMITTED TH AT THE ASSESSEE FIRM HAS RELIED UPON BEFORE THE AO ON THE FOLLOWING DECI SIONS EXACTLY ON THE SAME POINT AND IDENTICAL ISSUE WHICH IS IN APPEAL: 1. C.I.T. VS ACE BUILDERS P. LTD (2006) 281 ITR 210(BO M) 2. CIT VS ASSAM PETROLEUM INDUSTRIES P. LTD. (2003) 26 2 ITR 587(GAU) 3. DR. (MRS) SUDHA S TRIVEDI VS ITO (2009) 31 SOT 38(M UM) ORDER DATED 20.2.2009. 9. THE LD. CIT(A) HELD AS FOLLOWS: I HAVE CAREFULLY CONSIDERED THE ASSESSEES SUBMISS IONS AND THE RELEVANT ORDERS. SINCE THE ASSESSEE HAS CLAIMED DEPRECIATION ON THE SAID PREMISES FROM YEAR TO YEAR, THE PROVISIONS OF SECTION 50 ARE SQUARELY APPLICABLE AND THE GAIN SHALL BE TREATED AS A DEEMED SHORT TERM CAPITAL GAIN. IN THE THREE CASE LAWS CIT ED BY THE ASSESSEE WHICH INCLUDES THE DECISION OF THE JURISDICTIONAL B OMBAY HIGH COURT (ACE BUILDERS) AND JURISDICTIONAL ITAT,MUMBAI (SUDH A 5 TRIVEDI) ITA NO. 1764/M/2010 10 (SUPRA) IT HAS BEEN HELD THAT THE ASSESSEE IS ENTIT LED TO EXEMPTION U/.S 54E IN RESPECT OF CAPITAL GAIN ARISING ON THE TRANSFER OF A LONG TERM CAPITAL ASSET ON WHICH DEPRECIATION WAS ALLOWE D. ITAT, MUMBAI HAS HELD IN SUDHA S TRIVEDIS CASE THAT ,S ECTION 54EC IS ON INDEPENDENT PROVISION NOT CONTROLLED BY SECTION 50 IF THE CAPITAL ASSET IS HELD FOR MORE THAN 36 MONTHS THE BENEFIT O F SECTION 54EC CANNOT BE SNATCHED AWAY BECAUSE SECTION 50 IS RESTR ICTED ONLY TO THE MODE OF COMPUTATION OF CAPITAL GAIN CONTAINED I N SECTION 48 AND 49 AND THIS FICTION CANNOT BE EXTENDED BEYOND THAT FOR DENYING THE BENEFIT OTHERWISE AVAILABLE TO THE ASSESSEE U/S 54E C OF THE ACT, IF THE OTHER REQUISITE CONDITIONS OF THE SECTION ARE SATISFIED. OUR VIEW IS ALSO FORTIFIED BY CIT VS ASSAM PETROLEUM INDUSTR IES (P) LTD (2003) 262 ITR 587 (GAU). WE, THEREFORE, OVERTURN THE IMPU GNED ORDER AND DIRECT THAT THE EXEMPTION UNDER THIS SECTION BE AL LOWED TO THE ASSESSEE BECAUSE OF HER HAVING MADE INVESTMENT IN E LIGIBLE BONDS OUT OF THE SALE PROCEEDS FROM THE TRANSFER OF LONG TERM CAPITAL ASSET. THERE IS NO DISPUTE IN THE FACT THAT THE FLAT TRANS FERRED WAS PURCHASED IN THE YEAR 1979 AND HAS BEEN HELD FOR MO RE THAN 36 MONTHS. THERE IS ALSO NO DISPUTE THAT THE ASSESSEE FIRM HAS INVESTED OR DEPOSITED IN WHOLE OR PART OF THE NET CONSIDERAT ION IN THE SPECIFIED ASSETS WITHIN THE STIPULATED TIME. THUS, RESPECTFULLY FOLLOWING THE DECISIONS OF THE J URISDICTIONAL HIGH COURT AND THE JURISDICTIONAL ITAT, THE ASSESSI NG OFFICER IS DIRECTED TO ALLOW EXEMPTION U/S 54E ON ACCOUNT OF I NVESTMENT IN ELIGIBLE BONDS OUT OF THE SALE PROCEEDS FROM THE TR ANSFER OF THE LONG TERM CAPITAL ASSET. 10. IN SO FAR AS SET OFF OF CARRIED FORWARD LONG TE RM CAPITAL LOSSES AGAINST THE CURRENT YEARS GAINS THE LD. CIT(A) DIS MISSED THE ASSESSEES CLAIM HOLDING AS UNDER: THE ASSESSING OFFICER HAS HELD THAT THE CAPITAL GA IN COMPUTED IN THE ORDER ON TRANSFER OF FLAT IS OF SHORT TERM CAPI TAL GAIN INSTEAD OF LONG TERM COMPUTED BY THE ASSESSEE, AGAINST THE CUR RENT YEARS SHORT TERM CAPITAL GAIN, THE SET OFF THAT CAN BE GIVEN AG AINST THE BROUGHT FORWARDED LOSSES OF EARLIER YEARS ARE THE SHORT TER M CAPITAL LOSS OF RS 23773/- AND RS 4575/- FOR AY 2004-05 AND 2005-06 RESPECTIVELY. THE LONG TERM CAPITAL LOSSES BROUGHT FORWARD FROM EARLIER YEARS ARE NOT ELIGIBLE FOR SET OFF AGAINST THE SHORT TERM CAPITAL GAIN OF THE CURRENT YEAR IN VIEW OF THE PROVISIONS OF SECTION 74. ITA NO. 1764/M/2010 11 THE PROVISIONS OF SECTION 50 DEEM THE CAPITAL GAIN ON DEPRECIABLE ASSET AS A SHORT TERM CAPITAL GAIN EVEN THOUGH THE EXEMPTION U/S 54EC IS ALLOWABLE IF THE ASSET IS HELD FOR MORE THA N 36 MONTHS. SINCE THE CAPITAL GAINS REMAIN AS SHORT TERM CAPITA L GAINS, THE ASSESSING OFFICERS STAND IS CONFIRMED. 11. AGGRIEVED THE REVENUE IS ON APPEAL. IN THIS CASE THE FLAT WHICH HAS BEEN HELD FOR MORE THAN THREE YEARS. WE FIND THAT THIS ISSUE HAS BEEN COVERED BY THE JURISDICTIONAL HIGH COURT IN THE CAS E OF CIT VS. A.S BUILDERS 281 ITR 210. THE JURISDICTIONAL HIGH COUR T HAS HELD THAT IN THE CASE OF DEPRECIABLE ASSETS THE DEEMED FICTION C REDIT UNDER SUB- SECTION 1 & 2 OF SEC.50 IS RESTRICTED ONLY TO THE M ODE OF COMPUTATION OF CAPITAL GAINS CONTAINED UNDER SEC.48 & 49 AND DOES NOT APPLY TO ANY OTHER PROVISION. THE FICTION CREATED BY THE LEGISL ATURE IS TO BE CONFINED TO THE PURPOSE FOR WHICH IT IS CREATED. FURTHER, SEC. 54E DOES NOT MAKE ANY DISTINCTION BETWEEN DEPRECIABLE ASSET AND NON-DEPRE CIABLE ASSET. EXEMPTION AVAILABLE UNDER SEC.54E CANNOT BE DENIED BY REFERRING TO THE FICTION CREATED UNDER SEC.50. BENEFIT OF SEC.54E I S AVAILABLE TO THE ASSESSEE IRRESPECTIVE OF THE FACT THAT THE COMPUTAT ION OF CAPITAL GAINS IS DONE EITHER UNDER SEC.48 & 49 OR U/S.50. THE LEGAL FICTION CREATED BY THE STATUTE UNDER SEC.50 IS ONLY TO DEAL CAPITAL GAIN A S SHORT TERM CAPITAL GAIN AND NOT TO DEEM THE ASSET AS SHORT TERM CAPITA L ASSET. THEREFORE, IT CANNOT BE SAID THAT SEC.50 CONVERTS LONG TERM CAPIT AL ASSET INTO A SHORT TERM CAPITAL ASSET. ACCORDINGLY IT WAS HELD BY HON BLE HIGH COURT THAT THE TRIBUNAL WAS JUSTIFIED IN ALLOWING EXEMPTION U/ S.54E IN RESPECT OF CAPITAL GAINS ARISING ON TRANSFER OF CAPITAL ASSET ON WHICH DEPRECIATION HAS BEEN ALLOWED. 12. IT CAN BE SEEN THAT THE RATIO OF THE ABOVE JURI SDICTIONAL HIGH COURT SQUARELY COVERS THE ISSUE ON APPEAL IN THIS CASE. THE LD. CIT(A) HAS RIGHTLY HELD THAT, FOLLOWING THE DECISION OF THE JU RISDICTIONAL HIGH COURT REFERRED TO ABOVE, THAT THE ASSESSEE IS ENTITLED TO RELIEF U/S.54E IN RESPECT OF CAPITAL GAINS COMPUTED U/S.50 IN RESPECT OF TRAN SFER OF DEPRECIABLE ITA NO. 1764/M/2010 12 ASSET. THEREFORE, THE APPEAL BY THE REVENUE REGARD ING GROUND OF EXEMPTION U/S.54 EC IN RESPECT OF GAINS ARISING U/S .50 FROM TRANSFER OF DEPRECIABLE ASSET IS DISMISSED. 13. THE GROUND NO.2 & 3 OF THE REVENUE IS REGARDING COMPUTATION OF CAPITAL GAINS ARISING FROM SALE OF ASSET U/S.50. T HE REVENUE ON THIS GROUND HAS RAISED THAT THE ASSESSEE CANNOT ADOPT AS COST OF ACQUISITION OF MARKET VALUE OF ASSET AS ON 1.4.81 AND APPLY THE INDEXATION PERMITTED UNDER PROVISION OF SEC.48. THE LD. DR WAS NOT CERT AIN AS TO HOW THESE GROUNDS ARISE FROM THE ORDER OF CIT(A). THE DEPUTY COMMISSIONER IN HIS ORDER OF ASSESSMENT HAS CLEARLY STATED THAT THE ASS ESSEE IS NOT ENTITLED TO ADOPT THE FAIR MARKET VALUE AS ON 1.4.81 OR APPLY T O INDEXATION. WE DO NOT FIND IN THE GROUNDS OF APPEAL RAISED BY THE ASS ESSEE BEFORE THE LD.CIT(A) REGARDING THE COMPUTATION OF CAPITAL GAIN S BY ADOPTING THE MARKET VALUE OF THE SHARE AS ON 1.4.81 AND APPLY TH E INDEXATION PERMITTED U/S.48. AGAIN, WHILE THE ASSESSEE HAS SU BMITTED THESE ARGUMENTS BEFORE THE CIT(A), THE CIT(A) HAS NOT DEC IDED THE SAME. FROM THE RECORDS IT WOULD APPEAR THAT THE ASSESSEE HAS N OT AGITATED THE ISSUE REGARDING RE-COMPUTATION OF CAPITAL GAINS BY ADOPTI NG MARKET VALUE OF THE ASSET AS ON 1.4.81 AND APPLYING INDEXATION THER ETO. IN THE CIRCUMSTANCES, WE HOLD THAT THE GROUNDS 2 & 3 RAISE D BY THE REVENUE REGARDING ADOPTION OF FAIR MARKET VALUE AS ON 1.4.8 1 AND GRANTING BENEFIT OF COST OF INFLATION INDEX U/S.48 IS MISCONCEIVED AND DOES NOT ARISE FROM THE ORDER OF CIT(A). THESE TWO GROUNDS ARE ACCORDI NGLY DISMISSED. 14. THE FOURTH GROUND OF THE REVENUE IS AGAINST THE LD. CIT(A) ALLOWING TO SET OFF OF SHORT TERM CAPITAL GAINS ARISING FROM SALE OF DEPRECIABLE ASSETS U/S.50 AGAINST THE BROUGHT FORWARD LONG TERM CAPITAL LOSS. HERE AGAIN, WE ARE NOT CERTAIN AS TO HOW THIS GROUND HAS BEEN RAISED BY THE DEPARTMENT. THE CIT(A) IN PARA 4.1 HAS CONCLUDED A S UNDER: ITA NO. 1764/M/2010 13 THE LONG TERM CAPITAL LOSSES BROUGHT FORWARD FROM EARLIER YEARS ARE NOT ELIGIBLE FOR SET OFF AGAINST THE SHORT-TERM CAP ITAL GAIN OF THE CURRENT YEAR IN VIEW OF THE PROVISIONS OF SECTION 7 4. 15. THUS, THE LD.CIT(A) HAS HELD AGAINST THE ASSESS EE AND WE DO NOT SEE HOW THE DEPARTMENT CAN BE AGGRIEVED ON THIS ISS UE. HOWEVER, WE HAVE POINTED OUT THAT APPLYING THE RATIO OF THE JUR ISDICTIONAL HIGH COURT THE CARRY FORWARD LONG TERM CAPITAL LOSSES CAN BE S ET OFF AGAINST THE GAINS ARISING FROM SALE OF DEPRECIABLE ASSET COMPUTED U/S .50 IN VIEW OF THE WORDING OF SEC.74(I)(B). HOWEVER, AS THE ASSESSEE HAS NOT COME ON APPEAL ON THIS ISSUE WE DISMISS THE FOURTH GROUND OF REVEN UES APPEAL REGARDING SETTING OFF OF BROUGHT FORWARD LOSSES AGAINST THE C APITAL GAINS COMPUTED U/S.50 AS MISCONCEIVED AND DOES NOT ARISE OUT OF OR DER OF LD. CIT(A). 16. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS TREATED AS DISMISSED. ORDER PRONOUNCED ON THIS 30 TH DAY OF JUNE, 2011 SD/- SD/- (R.S. SYAL) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEM BER MUMBAI, DATED 30 TH JUNE, 2011 RJ COPY TO : 1. THE ASSESSEE 2. THE RESPONDENT 3. THE CIT-CONCERNED 4. THE CIT(A)-CONCERNED 5. THE DR B BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR, I.T.A.T, MUMBAI ITA NO. 1764/M/2010 14 DATE INITIALS 1 DRAFT DICTATED ON: 10. 0 6 .2011 SR. PS/PS 2. DRAFT PLACED BEFORE AUTHOR: 10 .0 6 .2011 ______ SR. PS/PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER: _________ ______ JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER: _________ ______ JM/AM 5. APPROVED DRAFT COMES TO THE SR. PS/PS: _________ ______ SR. PS/PS 6. KEPT FOR PRONOUNCEMENT ON: _________ ______ SR. PS/PS 7. FILE SENT TO THE BENCH CLERK: _________ ______ SR. PS/PS 8. 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK: DATE ON WHICH FILE GOES TO AR _________ ______ 10. DATE OF DISPATCH OF ORDER: _________ ______