ITO WD 21(3)(3), MUMBAI V. MEETA MACHINE TOOLS, MUMBAI

ITA 538/MUM/2010

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 4644 (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: D SONGATE
• Keywords: Capital asset; Depreciation; 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. 538/MUM/2010 ASSESSMENT YEAR 2006-07 I.T.O. WARD 21(3)(3), C-11 BLDG, 5 TH FLOOR, PRATYAKSH KAR BHAWAN, BKC, BANDRA (E), MUMBAI -51. VS. M/S MEETA MACHINE TOOLS, 36, CHANDIVALI FARM, OPP. FORBES AND FORBES CO. CHANDIVALI, MUMBAI 400072. PAN AAHFM 6061A APPELLANT RESPONDENT APPELLANT BY SHRI D. SONGATE RESPONDENT BY SHRI SATISH MODY ORDER PER P.M. JAGTAP, A.M. THIS APPEAL IS PREFERRED BY THE REVENUE AGAINST TH E ORDER OF LD. CIT (A)- 32, MUMBAI DATED 27.10.2009 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 ` 75,70,427 U/S 54EC FOR THE SUM INVESTED IN BONDS O F NATIONAL HOUSING BANK OUT OF SALE OF DEPRECIATED ASSET, THE PROFIT OF WHICH IS CHARGEABLE 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 BUYING AND SELLING OLD MACHINES. IT WA S OWNER OF THE LAND AND BUILDING WHICH HAD BEEN PURCHASED IN THE YEAR 1986. DEPRECI ATION ON THE SAID ASSET WAS REGULARLY CLAIMED BY THE ASSESSEE AND EVEN SOME ADDITION MADE TO THE FACTORY BUILDING SUBSEQUENTLY WAS ADDED TO THE VALUE OF BLOCK OF ASS ET. IT WAS CLAIMED BY THE ASSESSEE 2 ITA 532/M/2010, M/S NEW ERA TALKIES THAT THE ENTIRE FACTORY BUILDING, HOWEVER, WAS DEMO LISHED IN THE FLOODS OF 26.7.2005 AND WHAT REMAINED THEREAFTER WAS ONLY THE LAND WHICH WA S SOLD IN THE YEAR UNDER CONSIDERATION FOR ` 78 LACS. THE PROFIT ARISING FROM THE SAID SALE AMO UNTING TO ` 75,70,427/- THEREFORE WAS SHOWN AS LONG TERM CAPITA L GAIN BY THE ASSESSEE AND EXEMPTION U/S 54EC WAS CLAIMED FOR THIS ENTIRE CAPITAL GAIN U /S 54EC, SINCE THE AMOUNT OF ` 78 LACS WAS INVESTED IN THE BONDS OF NATIONAL HOUSING BANK. THE SAID CLAIM OF THE ASSESSEE FOR EXEMPTION U/S 54EC, HOWEVER, WAS NOT ALLOWED BY THE A.O. ACCORDING TO HIM, THE LAND AS WELL AS BUILDING COMPRISED ONE BLOCK OF ASSET AN D THE ASSESSEE HAVING ALREADY CLAIMED DEPRECIATION THEREON REGULARLY, LAND AND BUILDING W ERE INSEPARABLE. HE HELD THAT THE PROFIT ARISING FROM SALE OF THE SAID ASSET THEREFORE WAS C HARGEABLE TO TAX AS SHORT TERM CAPITAL GAIN UNDER SECTION 50 AND CONSEQUENTLY THE ASSESSEE WAS NOT ENTITLED FOR EXEMPTION U/S 54EC FOR THE AMOUNT INVESTED IN NATIONAL HOUSING BA NK. HE, THEREFORE, BROUGHT THE ENTIRE PROFIT OF ` 75,70,427/- ARISING FROM SALE OF THE ASSET TO TAX IN THE HANDS OF THE ASSESSEE AS SHORT TERM CAPITAL GAIN IN THE ASSESSME NT COMPLETED U/S 143(3) VIDE AN ORDER DATED 10.12.08. AGAINST THE ORDER PASSED BY THE A. O. U/S 143(3), AN APPEAL WAS PREFERRED BY THE ASSESSEE BEFORE THE LD. CIT(A) WHO UPHELD TH E ACTION OF THE A.O. IN TREATING THE PROFITS ARISING FROM SALE OF DEPRECIABLE ASSET BEIN G LAND AND BUILDING AS CHARGEABLE TO TAX AS SHORT TERM CAPITAL GAIN UNDER THE DEEMING PROVIS IONS OF SECTION 50. HE, HOWEVER, ALLOWED THE CLAIM OF THE ASSESSEE FOR EXEMPTION U/S 54EC FOR THE INVESTMENT MADE IN THE BONDS OF NATIONAL HOUSING BANK RELYING ON THE DECIS ION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. ACE BUILDERS PVT. LTD. 281 ITR 210 (BOM). AGGRIEVED BY THE ORDER OF LD. CIT(A), THE REVENUE HAS PREFERRED THIS APPEAL BEFORE THE TRIBUNAL. 3. 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 3 ITA 532/M/2010, M/S NEW ERA TALKIES CONTROVERSY WAS INVOLVED IN THE CONTEXT OF ASSESSEE S CLAIM FOR EXEMPTION U/S 54E IN RESPECT OF PROFITS ARISING FROM SALE OF DEPRECIABLE ASSETS WHICH WAS CHARGEABLE TO TAX AS SHORT TERM CAPITAL GAIN U/S 50 AND THE SAME WAS RES OLVED 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 FICTI ON CREATED IN S. 50 IS NOT ONLY RESTRICTED TO SS. 48 AND 49 BUT ALSO APPLIES TO OTH ER PROVISIONS. ON THE CONTRARY, S. 50 MAKES IT EXPLICITLY CLEAR THAT THE DEEMED FICTIO N CREATED IN SUB-SS. (1) AND (2) OF S. 50 IS RESTRICTED ONLY TO THE MODE OF COMPUTATION OF CAPITAL GAINS CONTAINED ON SS. 48 AND 49. SECONDLY, IT IS WELL ESTABLISHED IN LAW TH AT A FICTION CREATED BY THE LEGISLATURE HAS TO BE CONFINED TO THE PURPOSE FOR W HICH IT IS CREATED. THE FICTION CREATED UNDER S.50 IS CONFINED TO THE COMPUTATION O F CAPITAL GAINS ONLY AND CANNOT BE EXTENDED BEYOND THAT. THIRDLY, S. 54E DOES NOT MAKE ANY DISTINCTION BETWEEN DEPRECIABLE ASSET AND NON-DEPRECIABLE ASSET AND, TH EREFORE, THE EXEMPTION AVAILABLE TO THE DEPRECIABLE ASSET UNDER S. 54E CANNOT BE DEN IED BY REFERRING TO THE FICTION CREATED UNDER S. 50. SEC. 54E SPECIALLY PROVIDES T HAT WHERE CAPITAL GAIN ARISING ON TRANSFER OF A LONG TERM CAPITAL ASSET IS INVESTED O R 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 S. 5 4E 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 PROJECT OF DENYING MULTIPLE BENEFITS TO THE OWN ERS OF DEPRECIABLE ASSETS. HOWEVER, THAT RESTRICTION IS LIMITED TO THE COMPUTA TION OF CAPITAL GAINS AND NOT TO THE EXEMPTION PROVISIONS. IN OTHER WORDS, WHERE THE LO NG TERM CAPITAL 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. 4. 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: 4 ITA 532/M/2010, M/S NEW ERA TALKIES 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 A MOUNT RECEIVED BY HIM TOWARDS THE TRANSFER OF A LONG TERM CAPITAL ASSET HAS BEEN INVE STED OR DEPOSITED IN ANY SPECIFIED ASSET WHICH ARE MENTIONED IN S. 54E PARTIALLY OR F ULLY WITHIN 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 AS SETS. SEC. 50 NOWHERE SAYS THAT DEPRECIATED ASSET SHALL BE TREATED AS SHORT-TERM AS SET, WHEREAS S. 54E HAS AN APPLICATION WHERE LONG TERM CAPITAL ASSET IS TRANSF ERRED AND THE AMOUNT RECEIVED IS INVESTED OR DEPOSITED IN THE SPECIFIED ASSETS AS RE QUIRED UNDER S. 54E. FOR APPLICATION OF S. 54E THE NECESSARY RE-REQUISITE CO NDITION AND ENQUIRY WOULD BE, WHETHER THE ASSESSEE HAS TRANSFERRED LONG TERM CAPI TAL ASSET AND WHETHER THE CONSIDERATION 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 ENTITLED 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. 5. 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 54E THE SAME, AS HELD BY THE CO-ORDINATE BENCH OF T HIS 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 THUS HELD BY THE TR IBUNAL 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. THE ISSUE INVOLVED IN THE ASSESSEES CASE THUS IS S QUARELY COVERED BY THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF ACE BUILDE RS PVT. LTD. (SUPRA) AS WELL AS THAT OF HONBLE GAUHATI HIGH COURT IN THE CASE OF ASSAM PETROLEUM INDUSTRIES PVT. LTD. (SUPRA) AND RESPECTFULLY FOLLOWING THE SAID JUDICIA L PRONOUNCEMENTS, WE UPHOLD THE IMPUGNED ORDER OF LD. CIT(A) ALLOWING THE CLAIM OF THE ASSESSEE FOR EXEMPTION U/S 54EC. 5 ITA 532/M/2010, M/S NEW ERA TALKIES 6. 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.