The DCIT, Circle-1(2), Baroda V. M/s. Himalaya Machinery Pvt.Ltd., Baroda

ITA 3296/AHD/2009

• Counselvise Citation: 329620514 RSA 2009
• Duration Of Justice: 1 year(s) 9 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-09-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 13-09-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 11-12-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: J P SHAH
• Keywords: Capital asset; Gift; Depreciation; Reasonable cause; Revenue expenditure; Capital expenditure
• Section: 142(1); 11

Judgement Text

- 1 - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH CAHMEDABAD BEFORE S/SHRI D. K. TYAGI, J.M. AND A. K. GARODIA, A.M. DY. CIT, CIR.1(2), BARODA. V/S . HIMALAYA MACHINERY P. LTD., 608, GIDC INDL. ESTATE MAKARPURA, BARODA-390010. (APPELLANT) .. (RESPONDENT) APPELLANT BY :- SHRI VINOD TANWANI, SR.DR RESPONDENT BY:- SHRI J.P. SHAH, AR DATE OF HEARING :13/9/2011. DATE OF PRONOUNCEMENT : 23/9/2011 O R D E R PER D. K. TYAGI, JUDICIAL MEMBER. THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF LD. CIT(A) DATED 23.9.2009 RAISING FOLLOWING GROUNDS :- (1) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS .3,94,840/- MADE ON ACCOUNT OF WELFARE EXPENDITURE. (2) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS.1,9 6,090/- MADE ON ACCOUNT OF REPAIRS TO MACHINERY. (3) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE OF RS .9,60,118/- RELATING TO SET OFF OF BROUGHT FORWARD OF LONG TERM CAPITAL LOSS. ITA NO. ASST. YEAR 3296/AHD/2009 2005-06 ITA NO.3296/AHD/2009 ASST. YEAR 2005-06 2 2. THE FIRST GROUND RELATES TO DISALLOWANCE OF RS.3 ,94,840/- OUT OF STAFF WELFARE EXPENSES. 3. THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS A PRIVATE LIMITED COMPANY ENGAGED IN MANUFACTURING OF ENGINEERING GOO DS VIZ., METAL FORMING MACHINES LIKE PLATE BENDING MACHINE, SPECIA L PURPOSE MACHINES ETC. WHICH ARE CAPITAL GOODS FOR ASSESSEES CLIENTS . THE RETURN OF INCOME WAS FILED ON 25.10.2005 DECLARING INCOME AT RS.1,34 ,49,170/-. THE RETURN WAS PROCESSED U/S 143(1) ON 08.03.2005. THE CASE WA S SELECTED FOR SCRUTINY UNDER CASS. NOTICE U/S 143(2) WAS ISSUED O N 27.07.2006 WHICH WAS DULY SERVED UPON THE ASSESSEE. SUBSEQUENTLY A N OTICE U/S 142(1) WAS ISSUED ALONG WITH THE DETAILED QUESTIONNAIRE ON 02. 02.2007. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTED THAT OUT OF THE TOTAL AMOUNT OF RS.5,09,652/- DEBITED TO PROFIT AND LOSS ACCOUNT BEING STAFF WELFARE EXPENSES, A SUM OF RS.3,79,640/- RELATED TO FOOD GRAIN DISTRIBUTION AND RS.15,200/- RELATED TO GIFTS TO EM PLOYEES. THE AO HELD THAT SUCH EXPENDITURE COULD NOT BE SAID TO BE INCUR RED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND ACCORDI NGLY, AGGREGATE AMOUNT OF RS.3,94,840/- WAS DISALLOWED. 3.1 IN APPEAL BEFORE THE LD. CIT(A) IT WAS SUBMITTE D THAT THE ASSESSEE HAS BEEN CONSISTENTLY MAKING PAYMENT OF SMALL AMOUN TS TO ITS EMPLOYEES ON THE OCCASION OF BIRTHDAY, MARRIAGE, ETC. BY WAY OF GIFTS. THIS IS A CUSTOMARY PRACTICE KNOWN AS CHANDLA. SIMILARLY, T HE ASSESSEE REGULARLY AND CONSISTENTLY MADE PRESENTS OF GOOD GRAIN PACKS TO ITS EMPLOYEES BY WAY OF INCENTIVE. THIS WAS ALSO A CUSTOMARY PRACTIC E. RELYING ON VARIOUS DECISIONS, IT WAS STATED THAT THE HIGH COURTS HAVE HELD SUCH EXPENSES TO BE INCURRED FOR BUSINESS PURPOSES SINCE WELFARE OF THE STAFF MEMBERS WAS ITA NO.3296/AHD/2009 ASST. YEAR 2005-06 3 INVOLVED. MOREOVER, IT WAS SUBMITTED THAT IN THE AP PEALS FOR ASST. YEAR 2003-04 AND 2004-05 SAME ISSUES HAVE BEEN DECIDED I N FAVOUR OF THE ASSESSEE. THE LD. CIT(A) CONSIDERED THE FACTS OF TH E CASE AND SUBMISSIONS OF THE ASSESSEE AND DELETED THE IMPUGNED ADDITIONS BY OBSERVING AS UNDER:- 6.2 I HAVE CONSIDERED THE SUBMISSIONS OF THE LD. A R AND THE FACTS OF THE CASE. I FIND THAT INDEED THIS ISSUE HAS BEEN DECIDE D IN FAVOUR OF THE ASSESSEE BY MY LD. PREDECESSOR IN RESPECT OF APPEAL FOR ASST. YEAR 2004- 05 AND BY MYSELF IN THE APPEAL FOR ASST. YEAR 2003- 04. SINCE THE FACTS AND ISSUE FOR CONSIDERATION ARE IDENTICAL, THE ADDITION ON ACCOUNT OF STAFF WELFARE EXPENSES AMOUNTING TO RS.3,94,840/- IS DIRE CTED TO BE DELETED. AGGRIEVED BY THIS ORDER OF LD. CIT(A), THE REVENUE HAS COME IN APPEAL BEFORE THE TRIBUNAL. 4. THE LD. DR VEHEMENTLY SUBMITTED THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AO NOTED THAT OUT OF TOT AL AMOUNT OF RS.5,09,652/- DEBITED TO PROFIT AND LOSS ACCOUNT BE ING STAFF WELFARE EXPENSES, A SUM OF RS.3,79,640/- RELATED TO FOOD GR AIN DISTRIBUTION AND RS.15,200/- RELATED TO GIFTS TO EMPLOYEES. THESE EX PENDITURE COULD NOT BE SAID TO BE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND ACCORDINGLY THE AO WAS JUSTIFIED IN DISALLOWING AN AMOUNT OF RS.3,94,840/-. THE LD. CIT(A) WITHOUT APPRECIATING THE FACTS OF THE CASE HAS DELETED THE IMPUGNED ADDITION WHICH IS NOT CORR ECT. THE ORDER OF LD. CIT(A) BE SET ASIDE AND THAT OF THE AO BE RESTORED. 5. ON THE OTHER HAND, THE LD. COUNSEL OF THE ASSESS EE SUBMITTED THAT ACCORDING TO CUSTOMARY PRACTICE THE ASSESSEE HAD IN CURRED THE EXPENSES TOWARDS CHANDLA AND PRESENTS OF FOOD GRAIN PACKS TO ITS EMPLOYEES BY WAY OF INCENTIVE. ACCORDING TO HIM HIGH COURTS HAVE HELD SUCH EXPENSES TO BE INCURRED FOR BUSINESS PURPOSES. MOREOVER, SIM ILAR EXPENSES HAD ITA NO.3296/AHD/2009 ASST. YEAR 2005-06 4 BEEN ALLOWED BY THE LD. CIT(A) FOR ASST. YEAR 2003- 04 AND 2004-05. FOLLOWING THE EARLIER ORDERS, THE LD. CIT(A) HAS RI GHTLY ALLOWED THE CLAIM OF THE ASSESSEE, WHICH MAY KINDLY BE UPHELD. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL ON RECORD. IN OUR CONSIDERED VIEW THE LD. CIT(A) HA S RIGHTLY DELETED THE IMPUGNED ADDITION BY FOLLOWING EARLIER ORDERS. THE ASSESSEE IS MAKING GIFTS ON THE OCCASION OF BIRTHDAY, MARRIAGE ETC. TO ITS EMPLOYEES AS A CUSTOMARY PRACTICE KNOWN AS CHANDLA. THE ASSESSEE I S ALSO CONSISTENTLY MAKING PRESENTS OF GOOD GRAIN PACKS TO ITS EMPLOYEE S BY WAY OF INCENTIVE. THESE EXPENSES ARE INCURRED FOR THE BUSI NESS PURPOSES SINCE WELFARE OF THE EMPLOYEES IS INVOLVED. THE LD. CIT(A ) HAS ALLOWED THE CLAIM OF ASSESSEE BY STATING THAT SUCH EXPENSES WER E ALSO ALLOWED IN EARLIER YEARS. THIS COULD NOT BE REBUTTED BY THE RE VENUE. THEREFORE, WE FIND NO INFIRMITY IN THE ORDER OF LD. CIT(A) AND UP HOLD THE SAME ON THIS ISSUE. THIS GROUND OF REVENUE IS DISMISSED. 7. THE NEXT GROUND RELATES TO DELETION OF ADDITION OF RS.1,96,090/- OUT OF DISALLOWANCE OF RS.4,11,563/- MADE ON ACCOUNT OF REPAIRS OF MACHINERY. DURING THE COURSE OF ASSESSMENT PROCEEDI NGS THE AO HELD THAT BY INCURRING SUCH EXPENDITURE THE ASSESSEE HAD DERI VED ENDURING BENEFIT AND HENCE THE SAID EXPENDITURE SHOULD BE CLASSIFIED AS CAPITAL EXPENDITURE. ACCORDINGLY, THE AO DISALLOWED THE NET AMOUNT OF RS.3,60,118/- AFTER ALLOWING DEPRECIATION @ 12.5% I .E. RS.51,445/-. 7.1 IN APPEAL BEFORE LD. CIT(A) THE ASSESSEE SUBMIT TED THAT THE SAID EXPENSES WERE INCURRED MAINLY FOR IMPROVING PERFORM ANCE OF OLD MACHINERIES, RECONDITIONING OF GEAR BOX OF BORING M ACHINE, OTHER REPAIRING REWINDING CHARGES AND REPLACEMENT OF SOME PARTS OF VARIOUS MACHINES, COMPUTERS, TESTING CHARGES, CALIBRATION C HARGES ETC. WHICH IS ITA NO.3296/AHD/2009 ASST. YEAR 2005-06 5 REQUIRED TO MAINTAIN THE MACHINERIES IN OPERATIONAL CONDITION. THE AO HAD TREATED THE SAME AS PART OF CAPITAL EXPENDITURE WITHOUT REASONABLE CAUSE. THE AO HAS HELD THESE EXPENDITURE IN THE NAT URE OF ENDURING BENEFITS. THE ASSESSEE SUBMITTED THAT SUCH EXPENDIT URES ARE INCURRED FOR SMOOTH OPERATION OF THE MACHINERIES AND TO MAINTAIN QUALITY OF PRODUCTS BEING MANUFACTURED. IN ORDER TO CONSTITUTE CURRENT REPAIRS THE EXPENDITURE MUST HAVE BEEN INCURRED TO PRESERVE AND MAINTAIN AN ALREADY EXISTING ASSET AND OBJECT OF EXPENDITURE MUST NOT BE TO BRIN G A NEW ASSET INTO EXISTENCE OR FOR NEW ADVANTAGE. 7.2 THE LD. CIT(A) OBSERVED THAT COMPUTER SOFT WARE HAS BEEN INCLUDED IN THE LIST OF ASSETS CLASSIFIED AS CAPITAL ASSETS. ONCE AN ITEM HAS BEEN SPECIFICALLY INCLUDED IN THE DEPRECIATION SCHEDULE, THERE IS NO SCOPE FOR ARGUMENTATION AS TO WHETHER THAT ITEM IS A CAPITAL ASSET OR NOT. THE ONLY QUESTION COULD BE WHETHER THE ITEM CAN BE CLASSIFIE D AS SOFTWARE OR NOT. ON THIS POINT THERE IS NO DISPUTE. THE ITEMS ARE CL EARLY COMPUTER SOFTWARE. HENCE IT IS HELD THAT IN RESPECT OF THE AGGREGATE A MOUNT OF RS.2,15,473/- THE AO HAS CORRECTLY DISALLOWED THE EXPENDITURE BY TREATING IT AS CAPITAL IN NATURE. HOWEVER, THE AO IS DIRECTED TO ALLOW DEP RECIATION AT THE PRESCRIBED RATE OF 60% ON THIS AMOUNT IN PLACE OF 2 5% ALLOWED EARLIER. SO FAR AS THE BALANCE AMOUNT OF RS.1,96,090/- IS CONCE RNED, IT IS SEEN THAT IT RELATES TO RECONDITIONING OF GEAR BOX OF BORING MAC HINE, OTHER REPAIRS, REWINDING CHARGES AND REPLACEMENT OF VARIOUS PARTS. THESE ARE CLEARLY IN THE NATURE OF REVENUE EXPENDITURE. ACCORDINGLY, THE ADDITION TO THE EXTENT OF RS.1,96,090/- IS DIRECTED TO BE DELETED AND THE CORRESPONDING DEPRECIATION ALLOWED IS DIRECTED TO BE WITHDRAWN. AGAINST SUCH FINDING OF LD. CIT(A), THE REVENUE IS IN APPEAL BEFORE US. ITA NO.3296/AHD/2009 ASST. YEAR 2005-06 6 8. BEFORE US THE LD. DR SUPPORTED THE ORDER OF AO A ND SUBMITTED THAT BY INCURRING THE IMPUGNED EXPENDITURE THE ASSESSEE HAS DERIVED BENEFIT OF ENDURING NATURE AND SAID EXPENDITURE SHOULD BE CLAS SIFIED AS CAPITAL EXPENDITURE. THUS THE AO HAD RIGHTLY DISALLOWED THE AMOUNT IN QUESTION. THE LD. CIT(A) WAS NOT JUSTIFIED IN DELETING THE SA ME. THE ORDER OF LD. CIT(A) BE SET ASIDE AND THAT OF THE AO BE RESTORED. 9. ON THE OTHER HAND, THE LD. COUNSEL OF THE ASSESS EE SUPPORTING THE ORDER OF LD. CIT(A) SUBMITTED THAT THE EXPENSES WER E INCURRED MAINLY FOR IMPROVING PERFORMANCE OF OLD MACHINERIES, RECONDITI ONING OF GEAR BOX OF BORING MACHINE, OTHER REPAIRING, REWINDING CHARGES AND REPLACEMENT OF SOME PARTS OF VARIOUS MACHINES, COMPUTERS, TESTING CHARGES, CALIBRATION CHARGES ETC. WHICH IS REQUIRED TO MAINTAIN THE MACH INERIES IN SMOOTH OPERATIONAL CONDITION. THE AO HAD WRONGLY ASSUMED T HAT THE SAID EXPENDITURE ON SUCH REPAIRS ARE OF THE NATURE OF EN DURING BENEFITS. THE LD. CIT(A) HAS RIGHTLY DELETED THE ADDITION BY OBSERVIN G THAT IT RELATES TO RECONDITIONING OF GEAR BOX OF BORING MACHINE, OTHER REPAIRS, REWINDING CHARGES AND REPLACEMENT OF VARIOUS PARTS. THESE ARE CLEARLY IN THE NATURE OF REVENUE EXPENDITURE. THEREFORE, HIS ORDER MAY KI NDLY BE UPHELD. 10. WE HAVE HEARD THE RIVAL PARTIES AND PERUSED THE MATERIAL ON RECORD. WE ARE OF THE CONSIDERED OPINION THAT THERE IS NO I NFIRMITY IN THE ORDER OF LD. CIT(A) WHO HAS DELETED THE ADDITION IN QUESTION BY OBSERVING THAT IN RESPECT OF THE AGGREGATE AMOUNT OF RS.2,15,473/- TH E AO HAS CORRECTLY DISALLOWED THE EXPENDITURE BY TREATING IT AS CAPITA L IN NATURE. THE AO IS DIRECTED TO ALLOW DEPRECIATION AT THE PRESCRIBED RA TE OF 60% ON THIS AMOUNT IN PLACE OF 25% ALLOWED EARLIER. AS REGARDS THE BALANCE AMOUNT OF RS.1,96,090/- IT RELATES TO RECONDITIONING OF GE AR BOX OF BORING MACHINE, OTHER REPAIRS, REWINDING CHARGES AND REPLA CEMENT OF VARIOUS ITA NO.3296/AHD/2009 ASST. YEAR 2005-06 7 PARTS. THESE ARE IN THE NATURE OF REVENUE EXPENDITU RE. ACCORDINGLY, HE HAS DELETED THE SAME. WE ARE OF THE VIEW THAT LD. CIT(A ) HAS RIGHTLY DELETED THE IMPUGNED ADDITION AS IT IS OF REVENUE EXPENDITU RE AND NOT GIVING ENDURING BENEFITS TO THE ASSESSEE. THEREFORE, WE UP HOLD THE ORDER OF LD. CIT(A) ON THIS ISSUE AND THE GROUND RAISED BY THE R EVENUE IS DISMISSED. 11. THE NEXT GROUND IS IN RESPECT OF DELETION OF DI SALLOWANCE OF RS.9,60,118/- RELATING TO SET OFF OF BROUGHT FORWAR D OF LONG TERM CAPITAL LOSS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS T HE AO NOTED THAT THE ASSESSEE HAD EARNED INCOME FROM SHORT-TERM CAPITAL GAIN OF RS.14,10,000/- AGAINST WHICH THE BROUGHT FORWARD LO NG TERM CAPITAL LOSS OF RS.9,98,738/- WAS CLAIMED AS SET-OFF. THE AO REF ERRED TO THE PROVISIONS OF SEC.50 AND SEC.74(1)(B) AND NOTED THA T SINCE DEPRECIATION HAD BEEN CLAIMED AND ALLOWED IN RESPECT OF THE ASSE TS IN QUESTION AS PER SEC.50 SUCH ASSETS WERE DEEMED TO BE SHORT TERM CAP ITAL ASSETS AND THE GAIN ARISING OUT OF TRANSFER THEREOF WOULD BE DEEME D TO BE SHORT-TERM CAPITAL LOSS, WHICH WAS NOT PERMITTED TO BE SET OFF AGAINST THE BROUGHT FORWARD LONG TERM CAPITAL LOSS. ACCORDINGLY, THE AO DENIED THE SET OFF. 12. THE ASSESSEE WENT IN APPEAL BEFORE THE LD. CIT( A) AND IT WAS SUBMITTED BEFORE HIM THAT THE AO TREATED THE GAIN A RISING FROM SALE OF DEPRECIABLE ASSETS AS SHORT TERM CAPITAL GAIN AND D ENIED THE SET OFF. THE CAPITAL GAIN DEEMED TO BE ARISING ON TRANSFER OF DE PRECIABLE CAPITAL ASSETS U/S 50 OF THE ACT IS RESTRICTED TO THE PURPOSE OF S ECTION 48 AND SECTION 49, BY VIRTUE OF WHICH ONLY THE PROVISIONS REGARDING IN DEXED COST ARE MADE NOT APPLICABLE. THE CAPITAL GAIN ARISING ON SALE OF PLANT AND MACHINERY IS A GAIN ARISING ON TRANSFER OF LONG TERM CAPITAL ASS ETS FOR THE PURPOSES OF SET-OFF U/S 74(1)(B), SINCE THE ASSETS TRANSFERRED WERE HELD FOR MORE THAN 36 MONTHS. THE LD. CIT(A) AFTER CONSIDERING THE FAC TS OF THE CASE AND ITA NO.3296/AHD/2009 ASST. YEAR 2005-06 8 PLACING RELIANCE ON THE DECISION OF HONBLE MUMBAI HIGH COURT IN THE CASE OF CIT VS. ACE BUILDERS (P) LTD. 281 ITR 210 A LLOWED THE APPEAL OF THE ASSESSEE BY OBSERVING AS UNDER :- 8.2 I HAVE CONSIDERED THE SUBMISSIONS OF THE LD. A R AND THE FACTS OF THE CASE. THE IDENTICAL ISSUE HAS BEEN CONSIDERED BY TH E MUMBAI HIGH COURT IN THE CASE OF CIT VS. ACE BUILDERS (P) LTD. 281 IT R 210. IN THAT CASE THE COURT WAS CONSIDERING A MATTER INVOLVING CLAIM OF E XEMPTION U/S 54E. THE HONBLE COURT OBSERVED AS UNDER - THE ASSESSEE CANNOT BE DENIED EXEMPTION U/S 54E BE CAUSE FIRSTLY THERE IS NOTHING IN S.50 TO SUGGEST THAT THE FICTION CREATED IN S.50 IS NOT ONLY RESTRICTED TO SS.48 AND 49 BUT ALSO APPLIED TO OTHER PROVISIONS. ON THE CONTRARY S ECTION 50 MAKES IT EXPLICITLY CLEAR THAT THE DEEMED FICTION CREATED IN SUB-SECTIONS (1) AND (2) OF SEC.50 IS RESTRICTED ONLY TO THE MODE OF COMPUTATION OF CAPITAL GAINS CONTAIN ED IN SECTIONS 48 & 49. SECONDLY, IT IS WELL ESTABLISHED IN LAW THAT A FICTION CREATE D BY THE LEGISLATURE HAS TO BE CONFINED TO THE PURPOSE FOR WHICH IT IS CREATED. THE FICTION CREATED UNDER SEC.50 IS CONFINED TO THE COMPUTATION OF CAPITAL GAINS ONLY AND CANNOT BE EXTENDED BEYOND THAT. THIRDLY, S.54E DOES NOT MAKE ANY DISTINCTION BETWEEN DEPRECI ABLE ASSET AND NON-DEPRECIABLE ASSET AND, THEREFORE, THE EXEMPTION AVAILABLE TO TH E DEPRECIABLE ASSET UNDER S.54E CANNOT BE DENIED BY REFERRING TO THE FICTION CREATE D UNDER S.50. SEC.54E SPECIFICALLY PROVIDES THAT WHERE CAPITAL GAIN ARISING ON TRANSFE R 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 CAPITA L GAINS. THEREFORE, THE EXEMPTION U/S 54E CANNOT BE DENIED TO THE ASSESSEE ON ACCOUNT OF THE FICTION CREATED IN S.50. IT IS TRUE THAT S.50 IS ENACTED WITH THE OBJECT OF DENYIN G MULTIPLE BENEFITS TO THE OWNERS OF DEPRECIABLE ASSETS. HOWEVER, THAT RESTRICTION IS LI MITED TO THE COMPUTATION OF CAPITAL GAINS AND NOT TO THE EXEMPTION PROVISIONS. IN OTHER WORDS, WHERE THE LONG TERM CAPITAL ASSET HAS AVAILED DEPRECIATION, THEN THE CA PITAL GAIN HAS TO BE COMPUTED IN THE MANNER PRESCRIBED U/S 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 S.54E THEN THE CAPITAL GAI N SHALL NOT BE CHARGED U/S 45.TO PUT IT SIMPLY, THE BENEFIT OF S.54E WILL BE AVAILAB LE TO THE ASSESSEE IRRESPECTIVE OF THE FACT THAT THE COMPUTATION OF CAPITAL GAINS IS DONE EITHER UNDER SS 48 AND 49 OR U/S 50. THE CONTENTION OF THE REVENUE THAT BY AMENDMENT TO S.50 THE LONG TERM CAPITAL ASSET HAS BEEN CONVERTED INTO A SHORT TERM CAPITAL ASSET IS ALSO WITHOUT ANY MERIT. THE TRIBUNAL WAS JUSTIFIED IN ALLOWING THE BENEFIT OF E XEMPTION U/S 54E TO THE ASSESSEE IN RESPECT OF THE CAPITAL GAINS ARISING ON THE TRANSFE R OF A CAPITAL ASSET ON WHICH DEPRECIATION HAS BEEN ALLOWED. 8.2 ALTHOUGH THE ABOVE JUDGMENT OF THE MUMBAI HIGH COURT WAS RENDERED IN THE CONTEXT OF EXEMPTION U/S 54E, YET A T THE HEART OF THE MATTER LIES THE OBSERVATION OF THE HON. COURT REGAR DING THE FACT THAT SEC.50 CREATES A LEGAL FICTION BY WHICH A LONG TERM CAPITAL GAIN IS TO BE TREATED AS SHORT-TERM CAPITAL GAIN. THE COURT HAS F URTHER LAID DOWN THE ITA NO.3296/AHD/2009 ASST. YEAR 2005-06 9 BOUNDARIES OF THE AREA OF OPERATION OF SECTION 50. IT HAS HELD THAT SECTION 50 MAKES IT EXPLICITLY CLEAR THAT THE DEEMED FICTIO N CREATED IN SUB-SECTIONS (1) & (2) OF SEC.50 IS RESTRICTED ONLY TO THE MODE OF COMPUTATIO N OF CAPITAL GAINS CONTAINED IN SECTION 48 & 49. SECONDLY, IT IS WELL ESTABLISHED I N LAW THAT A FICTION CREATED BY THE LEGISLATURE HAS TO BE CONFINED TO THE PURPOSE FOR W HICH IT IS CREATED. THE FICTION CREATED UNDER SEC.50 IS CONFINED TO THE COMPUTATION OF CAPITAL GAINS ONLY AND CANNOT BE EXTENDED BEYOND THAT. IT HAS FURTHER HELD THAT THE CONTENTION OF THE REVENUE THAT BY AMENDMENT TO S.50, THE LONG TERM CAPITAL AS SET HAS BEEN CONVERTED INTO A SHORT TERM CAPITAL ASSET IS ALSO WITHOUT ANY MERIT. AS ST ATED HEREINABOVE, THE LEGAL FICTION CREATED BY THE STATUTE IS TO DEEM THE CAPITAL GAIN AS SHORT-TERM CAPITAL GAIN AND NOT TO DEEM THE ASSET AS SHORT TERM CAPITAL ASSET. THEREFO RE, IT CANNOT BE SAID THAT S.50 CONVERTS LONG TERM CAPITAL ASSET INTO A SHORT TERM CAPITAL ASSET. THUS, THE PROVISIONS OF SECTION 50 WOULD BE APPLICABLE ONLY T O SECTION 48 AND SECTION 49. THIS IS ALSO APPARENT FROM THE LANGUAGE OF SECTION 50 WHICH SPECIFICALLY STATES THAT THE PROVISIONS OF SECTION 48 AND SECTION 49 SHALL BE SUBJECT TO THE FOLLOWING MODIFICATIONS :-.. . IT IS CLEAR THAT THE OPERATION OF SECTION 50 CANNOT HAVE THE EFFECT OF CONVERTING A L ONG TERM CAPITAL ASSET INTO A SHORT TERM CAPITAL ASSET FOR PURPOSES OTHER THAN SECTION 48 AND SECTION 49. IN OTHER WORDS, THE LEGAL FICTION CREAT ED BY SECTION 50 IS CONFINED ONLY TO SECTIONS 48 & 49 AND WOULD NOT BE APPLICABLE IN THE CASE OF SET OFF OF BROUGHT FORWARD LOSSES. ACCORDINGLY, IT IS HELD THAT THE AO WAS NOT JUSTIFIED IN DENYING THE SET OFF. THE AO IS DIRECTED TO ALLOW THE SET OFF U/S 74(1)(B) R.W.S. 112(1)(B), TREATING THE GAI N AS LONG TERM CAPITAL GAIN SINCE THE ASSETS WERE HELD FOR MORE THAN 36 MO NTHS. AGAINST THIS ORDER OF LD. CIT(A), THE REVENUE IS IN APPEAL BEFORE US. 13. THE LD. DR SUPPORTING THE ORDER OF AO SUBMITTED THAT THE LD. CIT(A) HAS WRONGLY DELETED THE ADDITION. THE AO HAD NOTED THAT THE ASSESSEE HAD EARNED INCOME FROM SHORT TERM CAPITAL GAIN OF RS.14,10,000/- AGAINST WHICH THE BROUGHT FORWARD LO NG TERM CAPITAL LOSS OF RS.9,98,738/- WAS CLAIMED AS SET-OFF. THE AO RE FERRED TO THE PROVISIONS OF SEC.50 AND SEC.74(1)(B) AND OBSERVED THAT SINCE DEPRECIATION HAD BEEN CLAIMED AND ALLOWED IN RESPECT OF THE ASSE TS IN QUESTION, AS PER SEC.50 SUCH ASSETS WERE DEEMED TO BE SHORT-TERM CAP ITAL ASSETS AND THE GAIN ARISING OUT OF TRANSFER THEREOF WOULD BE DEEME D TO BE SHORT-TERM CAPITAL LOSS, WHICH WAS NOT PERMITTED TO BE SET OFF AGAINST THE BROUGHT FORWARD LONG TERM CAPITAL LOSS. THUS THE LD. CIT(A) WAS NOT JUSTIFIED IN ITA NO.3296/AHD/2009 ASST. YEAR 2005-06 10 DELETING THE ADDITION BY PLACING RELIANCE ON THE DE CISION OF HON. MUMBAI HIGH COURT IN THE CASE OF CIT VS. ACE BUILDERS (P) LTD. (SUPRA) WHEREIN THE ISSUE INVOLVED WAS CLAIM OF EXEMPTION U/S 54E O F THE ACT WHILE IN THE INSTANT CASE ASSESSEE CLAIMED SET OFF OF LONG TERM CAPITAL GAINS AGAINST BROUGHT FORWARD LOSS FROM LONG TERM CAPITAL ASSETS U/S 74(1)(B) R.W.S.112(1)(B) SINCE THE ASSETS WERE HELD FOR MORE THAN 36 MONTHS. THEREFORE, THE ISSUE UNDER APPEAL IS NOT COVERED BY THE DECISION OF HON. MUMBAI HIGH COURT RELIED BY THE LD. CIT(A). CONCLUD ING HIS ARGUMENTS LD. DR PRAYED THAT THE ORDER OF LD. CIT(A) BE SET A SIDE AND THAT OF AO BE RESTORED. 14. ON THE OTHER HAND, THE LD. COUNSEL OF THE ASSES SEE RELIED ON THE ORDER OF LD. CIT(A) AND FURTHER SUBMITTED THAT VIDE A RECENT JUDGMENT THE HONBLE ITAT MUMBAI BENCH B IN THE CASE OF MANALI INVESTMENTS VS. ACIT, CENTRAL CIRCLE 34, MUMBAI (2011) 10 TAXMANN.C OM 293 (MUM) HAS DECIDED AN IDENTICAL ISSUE IN FAVOUR OF THE AS SESSEE BY FOLLOWING THE DECISION OF HON. MUMBAI HIGH COURT IN THE CASE OF C IT VS. ACE BUILDERS (P) LTD.. (COPY OF ORDER PLACED ON RECORD) . THE ISSUE IS NOW SQUARELY COVERED IN FAVOUR OF ASSESSEE. THEREFORE, THE ORDER OF THE LD. CIT(A) MAY KINDLY BE UPHELD. 15. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE MATERIAL ON RECORD. IN OUR CONSIDERED OPINION THERE IS NO IN FIRMITY IN THE ORDER OF LD. CIT(A) WHO HAS DELETED THE IMPUGNED ADDITION BY FOLLOWING THE DECISION OF HONBLE MUMBAI HIGH COURT IN THE CASE O F CIT VS. ACE BUILDERS (P) LTD. (SUPRA). THE VIEW TAKEN BY THE LD . CIT(A) ALSO GETS SUPPORT FROM THE DECISION OF THE ITAT, MUMBAI BENCH B IN THE CASE OF MANALI INVESTMENTS VS. ACIT (SUPRA) ON IDENTICAL FA CTS WHEREIN THE HEAD NOTES OF THE DECISION ARE AS UNDER :- ITA NO.3296/AHD/2009 ASST. YEAR 2005-06 11 SECTION 50, READ WITH SECTION 74, OF THE INCOME-TA X AD, 1961 - CAPITAL GAINS - COMPUTATION IN CASE OF DEPRECIATION ASSETS - ASSESS MENT YEAR 2005-06 - WHETHER PRESCRIPTION OF SECTION 50 IS TO BE EXTENDED ONLY U P TO COMPUTATION OF CAPITAL GAINS AND, ONCE AMOUNT OF CAPITAL GAIN IS DETERMINED IN C ASE OF DEPRECIABLE ASSETS AS PER THIS SECTION. IGNORING MANDATE OF SECTIONS 48 AND 4 9 WHICH OTHER WISE DEAL WITH MODE OF COMPUTATION OF CAPITAL GAINS, FUNCTION OF THIS P ROVISION SHALL COME TO AN END AND CAPITAL GAIN SO DETERMINED SHALL BE DEALT WITH AS P ER OTHER PROVISIONS OF ACT - HELD, YES - ASSESSEE PURCHASED METERS AND TRANSFORMERS IN EARLIER YEARS ON WHICH 100 PER CENT DEPRECIATION WAS CLAIMED IN RESPECTIVE FIRST Y EAR ITSELF -THEREUPON, AFTER HOLDING THOSE ASSETS FOR A PERIOD OF MORE THAN 36 MONTHS, A SSESSEE SOLD SAME DURING ASSESSMENT YEAR IN QUESTION - IN RETURN OF INCOME, ASSESSEE DECLARED CERTAIN AMOUNT OF LONG-TERM CAPITAL GAIN ON SALE OF AFORESAID ASSE TS IN ACCORDANCE WITH PROVISIONS OF SECTION 50 - ASSESSEE CLAIMED SET-OFF OF LONG-TERM CAPITAL GAIN AGAINST BROUGHT FORWARD LOSS FROM LONG-TERM CAPITAL ASSETS UNDER SE CTION 74 - ASSESSING OFFICER TAKING A VIEW THAT GAIN ARISING FROM SALE OF METERS AND TR ANSFORMERS WAS SHORT-TERM CAPITAL GAIN, REJECTED ASSESSEE'S CLAIM FUR SE-OFF OF SAME AGAINST BROUGHT FORWARD LOSS FROM LONG-TERM CAPITAL ASSETS - WHETHER SINCE CAPITAL GA IN HAD RESULTED FROM TRANSFER OF AN ASSETS WHICH WAS HELD FOR A PERIOD OF MORE THAN THR EE YEARS, IN VIEW OF PROVISIONS OF SECTION 50 THIS AMOUNT WOULD RETAIN CHARACTER OF LO NG-TERM CAPITAL GAIN FOR AL\ OTHER PROVISIONS AND CONSEQUENTLY QUALIFY FOR SET-OFF AGA INST BROUGHT FORWARD LOSS FROM LONG-TERM CAPITAL ASSETS - HELD, YES IN VIEW OF THE ABOVE, THE LD. CIT(A) HAS RIGHTLY DE LETED THE IMPUGNED ADDITION. THE ORDER PASSED BY HIM IS HEREBY UPHELD. THE GROUND RAISED BY THE REVENUE IS DISMISSED. 16. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 23/9/2011 SD/- SD/- (A. K. GARODIA) (D. K. TYAGI) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD, DATED : 23/9/2011 MAHATA/- ITA NO.3296/AHD/2009 ASST. YEAR 2005-06 12 COPY OF THE ORDER FORWARDED TO :- 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD 1.DATE OF DICTATION 13/9/11. 2.DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE TH E DICTATING MEMBER 19/9/11. /OTHER MEMBER. 3.DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P.S./P.S. 4.DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT.. 5.DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR .P.S./P.S 6.DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 7.DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8.THE DATE ON WHICH THE FILE GOES TO THE ASSTT. REG ISTRAR FOR SIGNATURE ON THE ORDER 9.DATE OF DESPATCH OF THE ORDER..