ITO 11(1)-3, MUMBAI V. NEW ERA TALKIES, MUMBAI

ITA 532/MUM/2010

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 4648 (ITAT-MUMBAI)
• Duration Of Justice: 8 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Assessment Year: 2006-2007
• Appeal Filed On: 21-01-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MRS NEERAJ VINAY BANSAL
• Keywords: Capital asset; Depreciation; Cost of acquisition; Benefit of exemption
• Section: 143(3)

Judgement Text

1 ITA 532/M/2010, M/S NEW ERA TALKIES IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES G BEFORE SHRI P.M. JAGTAP, A.M. AND SHRI VIJAY PAL RA O, JM ITA NO. 532/MUM/2010 ASSESSMENT YEAR 2006-07 I.T.O. 11(1)(3), ROOM NO. 438, AAYAKAR BHAWAN, MUMBAI -20. VS. NEW ERA TALKIES, 3E, NAAZ BUILDING, LAMINGTON ROAD, MUMBAI 400004. PAN AACFN7269A APPELLANT RESPONDENT APPELLANT BY MRS. NEERAJ VINAY B ANSAL RESPONDENT BY SHRI BHUPENDRA SHAH ORDER PER P.M. JAGTAP, A.M. THIS APPEAL IS PREFERRED BY THE REVENUE AGAINST TH E ORDER OF LD. CIT (A)- 3, MUMBAI DATED 23.11.2009 AND IN THE SOLITARY SUBSTAN TIVE GROUND RAISED THEREIN, THE REVENUE HAS CHALLENGED THE ACTION OF THE LD. CIT(A) IN ALLOWING THE CLAIM OF THE ASSESSEE FOR EXEMPTION OF ` 5 CRORES U/S 54EC FOR THE SUM INVESTED IN REC BOND S OUT OF SALE OF DEPRECIATED ASSET, THE PROFIT OF WHICH IS CHARGEABL E TO TAX AS SHORT TERM CAPITAL GAIN U/S 50. 2. THE ASSESSEE IN THE PRESENT CASE IS A PARTNERSHI P FIRM WHICH IS ENGAGED IN THE BUSINESS OF EXHIBITION OF CINE FILMS. DURING THE Y EAR UNDER CONSIDERATION, IT SOLD DEPRECIABLE CINEMA BUILDING FOR A TOTAL CONSIDERATI ON OF ` 5,40,00,000/-. AFTER REDUCING THE WRITTEN DOWN VALUE OF THE CINEMA BUILDING AS ON 1.4.05, AMOUNTING TO ` 20,56,851/- FROM THE SALE CONSIDERATION, CAPITAL GAIN WAS WORKE D OUT BY THE ASSESSEE AT ` 5,19,43,149/-. THE SAID LONG TERM CAPITAL GAIN WAS CLAIMED TO BE EXEMPT BY THE ASSESSEE TO THE EXTENT OF ` 5 CRORES U/S 54EC, BEING THE AMOUNT INVESTED IN RE C BONDS. DURING 2 ITA 532/M/2010, M/S NEW ERA TALKIES THE COURSE OF ASSESSMENT PROCEEDINGS, THE SAID CLAI M FOR EXEMPTION U/S 54EC WAS SOUGHT TO BE JUSTIFIED BY THE ASSESSEE BY CONTENDING THAT THE EXEMPTION U/S 54EC IS AVAILABLE IN RESPECT OF CAPITAL GAIN ON SALE OF LONG TERM CAPITA L ASSET AND THERE IS NOTHING TO SUGGEST THAT THE SAME IS AVAILABLE ONLY IN RESPECT OF LONG TERM CAPITAL GAIN. IT WAS CONTENDED THAT THE DEEMING FICTION CREATED IN SECTION 50 IS APPLIC ABLE TO TREAT THE CAPITAL GAIN ARISING FROM EVEN THE LONG TERM CAPITAL ASSET WHICH IS DEPR ECIABLE AS SHORT TERM CAPITAL GAIN, BUT THE SAME CANNOT BE EXTENDED TO TREAT THE LONG TERM CAPITAL ASSET AS SHORT TERM CAPITAL ASSET. IT WAS CONTENDED THAT THE PROVISIONS OF SEC TION 50 THUS HAVE A BEARING ON THE COMPUTATION PROVISIONS OF SECTION 48 AND THE SAME C ANNOT HAVE ANY BEARING ON THE EXEMPTION AVAILABLE U/S 54EC WHICH IS ALTOGETHER A DIFFERENT PROVISION. THIS STAND OF THE ASSESSEE, HOWEVER, WAS NOT FOUND ACCEPTABLE BY THE A.O. AND RELYING MAINLY ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CO MMONWEALTH TRUST LTD. VS. CIT 228 ITR 1(SC), HE DISALLOWED THE EXEMPTION CLAIMED BY T HE ASSESSEE U/S 54EC IN THE ASSESSMENT COMPLETED U/S 143(3) BY AN ORDER DATED 2 4.12.08. 3. AGAINST THE ORDER PASSED BY THE A.O. U/S 143(3), AN APPEAL WAS PREFERRED BY THE ASSESSEE BEFORE THE LD. CIT(A) AND THE STAND TAKEN BEFORE THE A.O. WAS REITERATED ON ITS BEHALF BEFORE THE LD. CIT(A) IN SUPPORT OF THE CLAI M FOR EXEMPTION U/S 54EC. THE LD. CIT(A) FOUND THE STAND OF THE ASSESSEE TO BE ACCEPT ABLE AND RELYING , INTER ALIA, ON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE O F ACE BUILDERS PVT. LTD. 281 ITR 210 (BOM), HE ALLOWED THE CLAIM OF THE ASSESSEE FOR EXEMPTION U/S 54EC. AGGRIEVED BY THE ORDER OF THE LD. CIT(A), THE REVENUE HAS PREFER RED THIS APPEAL BEFORE THE TRIBUNAL. 4. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AN D ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT THE CLAIM OF THE ASSESSEE FOR EXEMPTION U/S 54EC HAS BEEN ALLOWED BY THE LD. CIT(A) MAINLY RELYING O N THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF ACE BUILDERS PVT. LTD. (S UPRA). IN THE SAID CASE, A SIMILAR CONTROVERSY WAS INVOLVED IN THE CONTEXT OF ASSESSEE S CLAIM FOR EXEMPTION U/S 54E IN 3 ITA 532/M/2010, M/S NEW ERA TALKIES RESPECT OF PROFITS ARISING FROM SALE OF DEPRECIABLE ASSETS WHICH WAS CHARGEABLE TO TAX AS SHORT TERM CAPITAL GAIN U/S 50AND THE SAME WAS RESO LVED BY THE HONBLE BOMBAY HIGH COURT IN FAVOUR OF THE ASSESSEE BY HOLDING AS UNDER :- THE ASSESSEE CANNOT BE DENIED EXEMPTION UNDER SEC. 54E, BECAUSE, FIRSTLY THERE IS NOTHING IN S. 50 TO SUGGEST THAT THE FICTION CREATE D IN S. 50 IS NOT ONLY RESTRICTED TO SS. 48 AND 49 BUT ALSO APPLIES TO OTHER PROVISIONS. ON THE CONTRARY, S. 50 MAKES IT EXPLICITLY CLEAR THAT THE DEEMED FICTION CREATED IN SUB-SS. (1) AND (2) OF S. 50 IS RESTRICTED ONLY TO THE MODE OF COMPUTATION OF CAPIT AL GAINS CONTAINED ON SS. 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 C REATED. THE FICTION CREATED UNDER S.50 IS CONFINED TO THE COMPUTATION OF CAPITAL GAIN S ONLY AND CANNOT BE EXTENDED BEYOND THAT. THIRDLY, S. 54E DOES NOT MAKE ANY DIS TINCTION BETWEEN DEPRECIABLE ASSET AND NON-DEPRECIABLE ASSET AND, THEREFORE, THE EXEMPTION AVAILABLE TO THE DEPRECIABLE ASSET UNDER S. 54E CANNOT BE DENIED BY REFERRING TO THE FICTION CREATED UNDER S. 50. SEC. 54E SPECIALLY PROVIDES THAT WHER E CAPITAL GAIN ARISING ON TRANSFER OF A LONG TERM CAPITAL ASSET IS INVESTED OR DEPOSIT ED (WHOLE OR ANY PART OF THE NET CONSIDERATION) IN THE SPECIFIED ASSETS, THE ASSESSE E SHALL NOT BE CHARGED TO CAPITAL GAINS. THEREFORE, THE EXEMPTION UNDER S. 54E CANNO T BE DENIED TO THE ASSESSEE ON ACCOUNT OF THE FICTION CREATED IN S. 50. IT IS TRU E THAT S.50 IS ENACTED WITH THE PROJECT OF DENYING MULTIPLE BENEFITS TO THE OWNERS OF DEPRE CIABLE ASSETS. HOWEVER, THAT RESTRICTION IS LIMITED TO THE COMPUTATION OF CAPITA L GAINS AND NOT TO THE EXEMPTION PROVISIONS. IN OTHER WORDS, WHERE THE LONG TERM CA PITAL ASSET HAS AVAILED DEPRECIATION, THEN THE CAPITAL GAIN HAS TO BE COMPU TED IN THE MANNER PRESCRIBED UNDER S. 50 AND THE CAPITAL GAINS TAX WILL BE CHARG ED AS IF SUCH CAPITAL GAIN HAS ARISEN OUT OF A SHORT TERM CAPITAL ASSET , BUT IF S UCH CAPITAL GAIN IS INVESTED IN THE MANNER PRESCRIBED IN S. 54E, THEN THE CAPITAL GAIN SHALL NOT BE CHARGED UNDER S. 45. TO PUT IT SIMPLY, THE BENEFIT OF S. 54E WILL BE AVA ILABLE TO THE ASSESSEE IRRESPECTIVE OF THE FACT THAT THE COMPUTATION OF CAPITAL GAINS IS D ONE EITHER UNDER SS. 48 AND 49 OR UNDER S. 50. THE CONTENTION OF THE REVENUE THAT BY AMENDMENT TO S. 50, THE LONG TERM CAPITAL ASSET HAS BEEN CONVERTED INTO SHORT-TE RM CAPITAL ASSET IS ALSO WITHOUT ANY MERIT. AS STATED HEREINABOVE, THE LEGAL FICTIO N CREATED BY THE STATUTE IS DEEM THE CAPITAL GAIN AS SHORT-TERM CAPITAL GAIN AND NOT TO DEEM THE ASSET AS SHORT-TERM CAPITAL ASSET. THEREFORE, IT CANNOT BE SAID THAT S .50 CONVERTS LONG-TERM CAPITAL ASSET INTO A SHORT-TERM CAPITAL ASSET. THE TRIBUNAL WAS JUSTIFIED IN ALLOWING THE BENEFIT OF EXEMPTION UNDER S. 54E TO THE ASSESSEE IN RESPECT O F THE CAPITAL GAINS ARISING ON THE TRANSFER OF A CAPITAL ASSET ON WHICH DEPRECIATION H AS BEEN ALLOWED. 5. THE HONBLE GAUHATI HIGH COURT ALSO HAD AN OCCAS ION TO CONSIDER A SIMILAR ISSUE IN THE CASE OF CIT VS. ASSAM PETROLEUM INDUSTRIES P . LTD. 262 ITR 587 WHEREIN IT WAS HELD AS UNDER: THE ASSESSEE HAS TO SATISFY THAT THE TRANSFER IN QU ESTION OF THE ASSET IS THAT OF A LONG TERM CAPITAL ASSET. SECONDLY, THAT THE AMOUNT RECE IVED BY HIM TOWARDS THE TRANSFER OF A LONG TERM CAPITAL ASSET HAS BEEN INVESTED OR D EPOSITED IN ANY SPECIFIED ASSET 4 ITA 532/M/2010, M/S NEW ERA TALKIES WHICH ARE MENTIONED IN S. 54E PARTIALLY OR FULLY W ITHIN A PERIOD OF SIX MONTHS FROM THE DATE OF TRANSFER. IF THESE TWO CONDITIONS ARE SATISFIED BY THE ASSESSEE HE SHALL BE ENTITLED FOR THE BENEFIT AS PROVIDED UNDER S. 54E. SEC. 54E IS AN INDEPENDENT PROVISION, WHICH IS NOT CONTROLLED BY S. 50. SEC. 50 IS A SPECIAL PROVISION WHERE THE MODE OF COMPUTATION OF CAPITAL GAINS IS SUBSTITUTED IF THE ASSESSEE HAS CLAIMED THE DEPRECIATION ON CAPITAL ASSETS. SEC. 50 NOWHERE SA YS THAT DEPRECIATED ASSET SHALL BE TREATED AS SHORT-TERM ASSET, WHEREAS S. 54E HAS AN APPLICATION WHERE LONG TERM CAPITAL ASSET IS TRANSFERRED AND THE AMOUNT RECEIVE D IS INVESTED OR DEPOSITED IN THE SPECIFIED ASSETS AS REQUIRED UNDER S. 54E. FOR APP LICATION OF S. 54E THE NECESSARY RE-REQUISITE CONDITION AND ENQUIRY WOULD BE, WHETHE R THE ASSESSEE HAS TRANSFERRED LONG TERM CAPITAL ASSET AND WHETHER THE CONSIDERATI ON SO RECEIVED IS INVESTED OR DEPOSITED WITHIN THE TIME-LIMIT IN SPECIFIED ASSET. CAPITAL GAIN MAY HAVE BEEN RECEIVED BY THE ASSESSEE ON DEPRECIABLE ASSETS, IF THE CONDITIONS NECESSARY UNDER S. 54E ARE COMPLIED WITH BY THE ASSESSEE, HE WILL BE E NTITLED TO THE BENEFIT ENVISAGED IN 54E. SEC. 54E AN INDEPENDENT PROVISION, WHICH IS NOT CON TROLLED BY S. 50; WHEN THE BUILDING HELD FOR MORE THAN THIRTY-SIX MONTHS WAS S OLD, THOUGH ON WHICH DEPRECIATION HAD BEEN ALLOWED , WHOLE OF THE NET CO NSIDERATION INVESTED IN THE SPECIFIED ASSETS AS PER S. 54E WAS ENTITLED TO 4EXE MPTION. 6. ALTHOUGH THE DECISION IN THE CASE OF ACE BUILDER S PVT. LTD. (SUPRA) WAS RENDERED BY THE HONBLE BOMBAY HIGH COURT IN THE CONTEXT OF ASSESSEES CLAIM FOR EXEMPTION U/S 54EC, THE SAME, AS HELD BY THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF DR.(MRS.) SUDHA S. TRIVEDI VS. ITO 125 TTJ 42 IS APPLICABLE E VEN IN THE CONTEXT OF ASSESSEES CLAIM FOR EXEMPTION U/S 54EC. IT WAS HELD BY THE TRIBUNA L IN THE SAID CASE FOLLOWING THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE O F ACE BUILDERS PVT. LTD. (SUPRA) THAT SECTION 50 IS RESTRICTED ONLY TO MODE OF COMPUTATIO N OF CAPITAL GAIN PRESCRIBED IN SS. 48 AND 49 AND THIS FICTION CANNOT BE EXTENDED BEYOND T HAT FOR DENYING THE BENEFIT OTHERWISE AVAILABLE TO THE ASSESSEE UNDER SECTION 54EC IF OTH ER REQUISITE CONDITIONS ARE SATISFIED. IT IS OBSERVED THAT WHILE DENYING THE CLAIM OF THE ASS ESSEE FOR EXEMPTION U/S 54EC, RELIANCE WAS PLACED BY THE A.O. ON THE DECISION OF HONBLE S UPREME COURT IN THE CASE OF COMMONWEALTH TRUST LTD. (SUPRA). THE ISSUE INVOLVED IN THE SAID CASE BEFORE THE HONBLE SUPREME COURT, HOWEVER, WAS RELATING TO THE DETERMI NATION OF COST OF ACQUISITION WHILE COMPUTING THE CAPITAL GAIN ARISING FROM DEPRECIABLE ASSET AND THE DECISION RENDERED IN THE SAID CASE THEREFORE IS NOT APPLICABLE IN THE PRESEN T CASE INVOLVING A DIFFERENT ISSUE RELATING TO ASSESSEES CLAIM FOR EXEMPTION U/S 54EC. ON THE OTHER HAND, THE ISSUE INVOLVED IN THE 5 ITA 532/M/2010, M/S NEW ERA TALKIES ASSESSEES CASE IS SQUARELY COVERED BY THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF ACE BUILDERS PVT. LTD. (SUPRA) AS WELL AS T HAT OF HONBLE GAUHATI HIGH COURT IN THE CASE OF ASSAM PETROLEUM INDUSTRIES PVT. LTD.(SU PRA) AND RESPECTFULLY FOLLOWING THE SAID JUDICIAL PRONOUNCEMENTS, WE UPHOLD THE IMPUGNE D ORDER OF LD. CIT(A) ALLOWING THE CLAIM OF THE ASSESSEE FOR EXEMPTION U/S 54EC. 7. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMISS ED. ORDER PRONOUNCED ON 30 TH SEPTEMBER, 2010. SD/- SD/- (VIJAY PAL RAO) (P.M. JAGTAP) JUDICIAL MEMBER ACCO UNTANT MEMBER MUMBAI, DATED 30 TH SEPTEMBER , 2010. RK COPY TO 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 3- MUMBAI 4. THE CIT- 11 MUMBAI 5. THE DR BENCH, G 6. MASTER FILE // TUE COPY// BY ORDER DY/ASSTT. REGISTRAR ITAT, MUMBAI 6 ITA 532/M/2010, M/S NEW ERA TALKIES DATE INITIALS 1. DRAFT DICTATED 21.9.10, 22.9.10 SR.P.S./P.S. 2. DRAFT PLACED BEFORE AUTHOR 22.9.10, 23.9.10 SR.P.S./P.S. 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER. - J.M./A.M. 4.DRAFT DISCUSSED/ APPROVED BY SECOND MEMBER. J.M./A.M. 5. APPROVED DRAFT COMES TO THE SR.P.S./P.S. SR.P.S./P.S. 6. KEPT FOR PRONOUNCEMENT ON SR.P.S./P.S. 7. FILE SENT TO THE BENCH CLERK SR.P.S./P.S. 8. DATE OF WHICH FILE GOES TO THE HEAD CLERK. 9. DATE OF DISPATCH OF ORDER.