Ramakrishna Theater Ltd., V. DCIT, Udupi

ITA 93/BANG/2013

• Counselvise Citation: 9321114 RSA 2013
• Duration Of Justice: 7 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2006-2007
• Appeal Filed On: 24-01-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: L V BHASKAR REDDY JT
• Keywords: Capital asset; Depreciation; Cost of acquisition; Benefit of exemption
• Section: 2(14)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER ITA NO.93/BANG/2013 ASSESSMENT YEAR : 2006-07 SRI RAMAKRISHNA THEATRES LTD., KALPANA THEATRE BUILDING, UDUPI 576 101. PAN : AACCS 8963R VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 1, UDUPI. APPELLANT RESPONDENT APPELLANT BY : SMT. SHEETAL BORKAR, ADVOCATE RESPONDENT BY : SHRI L.V. BHASKAR REDDY, JT. CIT (DR) DATE OF HEARING : 20.08.2014 DATE OF PRONOUNCEMENT : 28.08.2014 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER D ATED 19.10.2012 OF THE CIT(APPEALS), MYSORE RELATING TO ASSESSMENT YEAR 2006-07. 2. THE ASSESSEE IS A COMPANY. IT IS ENGAGED IN THE BUSINESS OF EXHIBITION OF MOTION PICTURES IN CINEMA THEATRE. T HE ASSESSEE TOOK ON LEASE PROPERTY COMPRISING OF LAND & BUILDING AT UDU PI FROM M/S. GENERAL ITA NO.93/BANG/2013 PAGE 2 OF 11 INVESTMENT & COMMERCIAL CORPORATION (GICC). THE LEA SE WAS OF LAND & BUILDING. ORIGINALLY, THERE WAS LEASE DEED DATED 2 8.7.1950. THE LEASE DEED RENEWING THE OLD LEASE WAS EXECUTED ON 3.9.197 3 AND WAS FOR A PERIOD OF 25 YEARS FROM 1.4.1973. IT IS NOT IN DIS PUTE THAT THE ASSESSEE PUT UP BUILDINGS ON THE PROPERTY TAKEN ON LEASE AND RAN A CINEMA THEATRE. CLAUSE 2.5 OF THE LEASE DEED DATED 3.9.1973 PROVIDE S AS FOLLOWS:- 2.5 THAT ON THE EXPIRATION OF THE SAID TERM, THE THEATRE BUILDING AT THAT TIME SHALL VEST IN THE LESSOR ABSOLUTELY, W ITHOUT PAYMENT OF ANY COMPENSATION THEREFORE AND FORTHWITH THE LESSEE WILL PEACEABLY AND QUIETLY SURRENDER TO THE LESSOR THE D EMISED PREMISES. IT CAN BE SEEN FROM THE AFORESAID CLAUSE THAT ON EX PIRY OF THE LEASE PERIOD, THE LESSEE HAS TO SURRENDER THE PROPERTY LEASED AS WELL AS THE BUILDING THAT THE LESSEE MAY PUT UP OVER THE PROPERTY TO THE LESS OR. 3. AFTER THE EXPIRY OF THE LEASE PERIOD, THERE WE RE LITIGATIONS BETWEEN THE LESSOR AND THE LESSEE (ASSESSEE). ULTIMATELY, THE MATTER ENDED IN A COMPROMISE. THE LESSOR AGREED TO PAY A SUM OF RS.2 8 LAKHS IN THE FOLLOWING MANNER:- (A) RS.22 LAKHS FOR THE BUILDING; (B) RS. 3 LAKHS FOR FURNITURE; AND (C) RS. 3 LAKHS FOR EQUIPMENTS. 4. THE ASSESSEE FILED RETURN OF INCOME FOR THE A.Y. 2006-07 DECLARING LONG TERM CAPITAL GAIN OF RS.22,00,000. THE ASSESS EE CLAIMED EXEMPTION OF RS.22 LAKHS U/S. 54EC OF THE ACT ON THE GROUND T HAT THE ASSESSEE HAD ITA NO.93/BANG/2013 PAGE 3 OF 11 MADE INVESTMENTS IN PURCHASE OF RURAL ELECTRIFICATI ON CORPORATION LTD. BONDS. 5. THE ASSESSING OFFICER EXAMINED THE CLAIM OF THE ASSESSEE AND WAS OF THE VIEW THAT THE ASSESSEE HAD RECEIVED RS.22 LA KHS FOR THE VALUE OF THE BUILDING THAT IT HAD PUT UP (COST OF THE BUILDING T O THE ASSESSEE WAS RS.3,92,3438 AT THE TIME OF RENEWAL OF THE LEASE). THE AO ALSO NOTICED THAT THIS BUILDING ALREADY FORMED PART OF THE BLOCK OF A SSETS UNDER THE HEAD BUILDING OF THE ASSESSEE AND THE ASSESSEE HAD BEE N CLAIMING DEPRECIATION ON THE SAID BUILDING. IN THE CIRCUMSTANCES, THE AO WAS OF THE VIEW THAT THE PROVISIONS OF SECTION 50 OF THE ACT WILL APPLY AND ACCORDINGLY THE SALE VALUE RECEIVED ON TRANSFER OF THE BUILDING HAD TO BE REDU CED FROM THE BLOCK OF ASSETS UNDER THE HEAD BUILDING. THE WRITTEN DOWN VALUE (WDV) OF THE BLOCK OF THE ASSETS AS ON 31.3.2006 WAS RS.7,06,911 . FROM THE SAID WDV, THE AO REDUCED A SUM OF RS.22 LAKHS AND ARRIVED AT A SHORT TERM CAPITAL GAIN OF RS.14,93,089 AS PER THE PROVISIONS OF SECTI ON 50 OF THE ACT. THE AO WAS OF THE FURTHER VIEW THAT SINCE THE GAIN ON T RANSFER OF THE THEATRE BUILDING WAS DEEMED TO BE OF SHORT TERM CAPITAL GAI N UNDER THE PROVISIONS OF SECTION 50 OF THE ACT, THE ASSESSEE CANNOT CLAIM THE BENEFIT OF SECTION 54EC OF THE ACT, WHICH BENEFIT WAS AVAILABLE ONLY W HEN THERE IS LONG TERM CAPITAL GAIN ARISING ON THE TRANSFER OF LONG TERM C APITAL ASSET. ACCORDINGLY, THE AO BROUGHT TO TAX THE SUM OF RS.14,93,089 AS SH ORT TERM CAPITAL GAIN. 6. ON APPEAL, THE CIT(APPEALS) CONFIRMED THE ORDER OF THE AO. ITA NO.93/BANG/2013 PAGE 4 OF 11 7. AT THE TIME OF HEARING OF THE APPEAL, IT WAS SUB MITTED BY THE LD. COUNSEL FOR THE ASSESSEE THAT THOUGH THE ASSESSEE H AS RAISED QUESTIONS REGARDING TAXABILITY OF CAPITAL GAIN IN QUESTION AN D CERTAIN OTHER ISSUES, THE CLAIM OF THE ASSESSEE IS RESTRICTED IN THIS APPEAL ONLY TO DEDUCTION U/S. 54EC OF THE ACT. THE LD. COUNSEL BROUGHT TO OUR NO TICE THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT V. ACE BUILDERS PVT. LTD., 281 ITR 210 , WHEREIN THE HONBLE BOMBAY HIGH COURT HELD THAT THE DEDUCTION ENSHRINED IN SECTION 50 OF THE ACT IS ONL Y FOR THE PURPOSE OF COMPUTATION OF CAPITAL GAIN AND CANNOT EXTEND TO TH E EXEMPTION PROVISIONS OF SECTION 54E OF THE ACT. IF THE CAPITAL ASSET IN QUESTION IS A LONG TERM CAPITAL ASSET, THEN THE BENEFIT OF EXEMPTION U/S. 5 4E OF THE ACT CANNOT BE DENIED TO THE ASSESSEE. SIMILAR VIEW IS ALSO TAKEN BY THE HONBLE GAUHATI HIGH COURT IN THE CASE OF CIT V. ASSAM PETROLEUM INDUSTRIES PVT. LTD., 131 TAXMAN 699 . THE LD. COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE THAT THE AFORESAID DECISIONS WERE BROUGHT TO THE NOTICE OF THE AO, BUT THE AO BY CASUAL OBSERVATION HELD THAT THE FACTS OF THE ASSESSEES CASE AND THAT DECIDED BY THE HONBLE HIGH COURTS ARE NOT ON ALL FOURS WITH THE FACTS OF THE ASSESSEES CASE. THE LD. COUNSEL ACCO RDINGLY PRAYED THAT THE DEDUCTION U/S. 54EC BE ALLOWED TO THE ASSESSEE. 8. THE LD. DR RELIED ON THE ORDER OF THE REVENUE AU THORITIES. ITA NO.93/BANG/2013 PAGE 5 OF 11 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IN T HE CASE OF ACE BUILDERS PVT. LTD. (SUPRA) BEFORE THE HONBLE BOMBAY HIGH COURT, THE ASSESSEE WAS A PRIVATE LIMITED COMPANY. THE ASSESSE E WAS A PARTNER IN A FIRM CALLED M/S D. MANEKJI & ASSOCIATES. THE SAID F IRM WAS DISSOLVED IN THE YEAR 1984 AND THE ASSESSEE WAS ALLOTTED A FLAT AGAI NST THE BALANCE STANDING TO ITS CREDIT IN THE CAPITAL ACCOUNT WITH THE FIRM. THE ASSESSEE HAD SHOWN THE SAID FLAT AS CAPITAL ASSET IN ITS BOOKS O F ACCOUNT AND DEPRECIATION IN RESPECT THERETO HAS BEEN CLAIMED FROM YEAR TO YE AR. THE COST OF THE GROSS BLOCK WAS RS. 1,87,390 AND DEPRECIATION UPTO 31ST MARCH, 1991 WAS RS. 44,875. THE RESULTING WRITTEN DOWN VALUE AS ON 31ST MARCH, 1991 WAS RS. 1,42,515. IN THE PREVIOUS YEAR RELEVANT TO THE ASST. YR. 1992-93, THE ASSESSEE SOLD THE SAID FLAT FOR A SUM OF RS. 5,20,0 00. THE NET SALE PROCEEDS WERE INVESTED IN THE UNITS 'UTI CAPITAL GA INS SCHEME' WITH A VIEW TO CLAIM DEDUCTIONS UNDER S. 54E OF THE IT ACT AND ACCORDINGLY, IN THE RETURN OF INCOME FILED FOR THE ASSESSMENT YEAR IN QUESTION , THE ASSESSEE DECLARED 'NIL' INCOME UNDER THE HEAD 'INCOME FROM CAPITAL GA INS'. THE AO, HOWEVER, IN HIS ASSESSMENT ORDER, HELD THAT SINCE THE ENTIRE BLOCK OF BUILDING HAD CEASED TO EXIST ON ACCOUNT OF SALE OF THE FLAT DURI NG THE YEAR, THE WRITTEN DOWN VALUE OF THE ASSET WAS LIABLE TO BE TAKEN AS C OST OF ACQUISITION UNDER S. 50(2) OF THE IT ACT. THE AO FURTHER HELD THAT AS THE ASSESSEE HAD AVAILED DEPRECIATION ON THE TRANSFERRED LONG-TERM CAPITAL A SSET, THE CAPITAL GAIN ARISING ON TRANSFER OF SUCH A LONG-TERM CAPITAL ASS ET WAS LIABLE TO BE TREATED UNDER S. 50 OF THE IT ACT, AS CAPITAL GAIN ARISING OUT OF A SHORT-TERM CAPITAL ITA NO.93/BANG/2013 PAGE 6 OF 11 ASSET AND SINCE THE BENEFIT UNDER S. 54E OF THE IT ACT IS AVAILABLE ONLY TO THE CAPITAL GAIN ARISING ON TRANSFER OF A LONG-TERM CAPITAL ASSET, THE ASSESSEE IS NOT ENTITLED TO THE EXEMPTION UNDER S. 54E OF THE IT ACT. IN OTHER WORDS, THE AO HELD THAT IN VIEW OF S. 50 OF T HE IT ACT, THE TRANSFER OF A LONG-TERM CAPITAL ASSET ON WHICH DEPRECIATION HAS B EEN ALLOWED WAS LIABLE TO BE TREATED AS CAPITAL GAIN ARISING OUT OF A SALE OF A SHORT-TERM CAPITAL ASSET AND, THEREFORE, THE BENEFIT UNDER S. 54E OF T HE IT ACT WAS NOT AVAILABLE TO THE ASSESSEE. THE TRIBUNAL, HOWEVER, HELD THAT THE DEEMING FICTION ATTACHED TO S. 50 OF THE IT ACT HAS TO BE R ESTRICTED ONLY FOR THE METHOD OF COMPUTING THE CAPITAL GAIN AND CANNOT BE READ INTO WHILE CONSIDERING THE CASE FOR NON-CHANGEABILITY OF CAPIT AL GAIN. ACCORDINGLY, THE TRIBUNAL HELD THAT THE ASSESSEE IS ENTITLED TO THE EXEMPTION UNDER S. 54E OF THE IT ACT. ON FURTHER APPEAL BY THE REVENUE, THE H ONBLE BOMBAY HIGH COURT HELD: 15. BEFORE DEALING WITH THE RIVAL CONTENTIONS, IT WOULD BE APPROPRIATE TO REFER TO THE RELEVANT PROVISIONS OF THE IT ACT WHICH DEAL WITH THE TAXABILITY OF THE CAPITAL GAINS 16. SEC. 2 OF THE IT ACT DEFINES VARIOUS TERMS USED IN THE IT ACT. SEC. 2(14) DEFINES 'CAPITAL ASSET', S. 2(29A) DEFIN ES 'LONG-TERM CAPITAL ASSET' AND S. 2(29B) DEFINES 'LONG-TERM CAP ITAL GAIN'. SIMILARLY, S. 2(42A) DEFINES 'SHORT-TERM CAPITAL AS SET' AND S. 2(42B) DEFINES 'SHORT-TERM CAPITAL GAIN'. THUS, EAC H OF THE ABOVE TERMS USED IN VARIOUS PROVISIONS OF THE IT ACT HAVE DISTINCT MEANING AS DEFINED UNDER THE ACT. 17. SEC. 45 OF THE IT ACT (AS IT STOOD AT THE RELEVANT TIME) STATES THAT ANY PROFITS OR GAINS ARISING FROM THE TRANSFER OF A CAPITAL ASSET EFFECTED IN THE PREVIOUS YEAR, SHALL, SAVE AS OTHER WISE PROVIDED IN SS. 54, 54B, 54D AND 54E, BE CHARGEABLE TO INCOME-T AX UNDER THE HEAD 'CAPITAL GAINS' AND SHALL TOE DEEMED TO BE THE INCOME OF THE PREVIOUS YEAR IN WHICH THE TRANSFER TOOK PLACE. ITA NO.93/BANG/2013 PAGE 7 OF 11 18. SEC. 48(1)(A) OF THE IT ACT (AS IT STOOD AT THE REL EVANT TIME) STATES THAT WHILE COMPUTING THE INCOME UNDER THE HE AD 'CAPITAL GAINS' THE EXPENDITURE INCURRED WHOLLY AND EXCLUSIV ELY IN CONNECTION WITH SUCH TRANSFER AND THE COST OF ACQUI SITION OF THE ASSET AND THE COST OF ANY IMPROVEMENT THERETO SHALL BE DEDUCTED FROM THE VALUE OF CONSIDERATION. SEC. 48(1)(B) PROV IDES THAT WHERE THE CAPITAL GAIN ARISES FROM THE TRANSFER OF A LONG -TERM CAPITAL ASSET, THEN, THERE SHALL BE FURTHER DEDUCTIONS AS S PECIFIED IN SUB-S. (2) OF S. 48 OF THE IT ACT. 19. SEC. 49 OF THE IT ACT PROVIDES THAT IN CERTAIN CASE S WHERE THE ASSET IS ACQUIRED WITHOUT INCURRING ANY COST, THE C OST OF ACQUISITION OF SUCH ASSET SHALL BE DEEMED TO BE THE COST FOR WH ICH THE PREVIOUS OWNER OF THE PROPERTY ACQUIRED IT, AS INCREASED BY THE COST OF ANY IMPROVEMENT OF THE ASSETS INCURRED OR BORNE BY THE PREVIOUS OWNER OR THE ASSESSEE, AS THE CASE MAY BE. 20. SEC. 50 IS A SPECIAL PROVISION FOR COMPUTING THE CA PITAL GAINS IN THE CASE OF DEPRECIABLE ASSETS AND THE SAME BEING R ELEVANT FOR THE PURPOSE HEREIN, IS QUOTED HEREIN BELOW : '50. SPECIAL PROVISION FOR COMPUTATION OF CAPITAL G AINS IN CASE OF DEPRECIABLE ASSETS.NOTWITHSTANDING ANYTHING CONTAI NED IN CL. (42A) OF S. 2, WHERE THE CAPITAL ASSET IS AN ASSET FORMING PART OF A BLOCK OF ASSETS IN RESPECT OF WHICH DEPRECIATION HA S BEEN ALLOWED UNDER THIS ACT OR UNDER THE INDIAN IT ACT, 1922 (11 OF 1922), THE PROVISIONS OF SS. 48 AND 49 SHALL BE SUBJECT TO THE FOLLOWING MODIFICATIONS : (1) WHERE THE FULL VALUE OF THE CONSIDERATION RECEI VED OR ACCRUING AS A RESULT OF THE TRANSFER OF THE ASSET TOGETHER W ITH THE FULL VALUE OF SUCH CONSIDERATION RECEIVED OR ACCRUING AS A RES ULT OF THE TRANSFER OF ANY OTHER CAPITAL ASSET FALLING WITHIN THE BLOCK OF THE ASSETS DURING THE PREVIOUS YEAR, EXCEEDS THE AGGREG ATE OF THE FOLLOWING AMOUNTS, NAMELY : (I) EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH SUCH TRANSFER OR TRANSFERS; (II) THE WRITTEN DOWN VALUE OF THE BLOCK OF ASSETS AT THE BEGINNING OF THE PREVIOUS YEAR; AND (III) THE ACTUAL COST OF ANY ASSET FALLING WITHIN T HE BLOCK OF ASSETS ACQUIRED DURING THE PREVIOUS YEAR, SUCH EXCESS SHALL BE DEEMED TO BE THE CAPITAL GAINS ARISING FROM THE TRANSFER OF SHORT-TERM CAPITAL ASSETS; (2) WHERE ANY BLOCK OF ASSETS CEASES TO EXIST AS SU CH, FOR THE REASON THAT ALL THE ASSETS IN THAT BLOCK ARE TRANSF ERRED DURING THE PREVIOUS YEAR, THE COST OF ACQUISITION OF THE BLOCK OF ASSETS SHALL BE ITA NO.93/BANG/2013 PAGE 8 OF 11 THE WRITTEN DOWN, VALUE OF THE BLOCK OF ASSETS AT T HE BEGINNING OF THE PREVIOUS YEAR, AS INCREASED BY THE ACTUAL COST OF ANY ASSET FALLING WITHIN THAT BLOCK OF ASSETS, ACQUIRED BY TH E ASSESSEE DURING THE PREVIOUS YEAR AND THE INCOME RECEIVED OR ACCRUI NG AS A RESULT OF SUCH TRANSFER OR TRANSFERS SHALL BE DEEMED TO BE THE CAPITAL GAINS ARISING FROM THE TRANSFER OF SHORT-TERM CAPIT AL ASSETS.' 21. ON PERUSAL OF THE AFORESAID PROVISIONS, IT IS SEEN THAT S. 45 IS A CHARGING SECTION AND SS. 48 AND 49 ARE THE MACHINER Y SECTIONS FOR COMPUTATION OF CAPITAL GAINS. HOWEVER, S. 50 CARVES OUT AN EXCEPTION IN RESPECT OF DEPRECIABLE ASSETS AND PROV IDES THAT WHERE DEPRECIATION HAS BEEN CLAIMED AND ALLOWED ON THE AS SET, THEN, THE COMPUTATION OF CAPITAL GAIN ON TRANSFER OF SUCH ASS ET UNDER SS. 48 AND 49 SHALL BE AS MODIFIED UNDER S. 50. IN OTHER W ORDS, S. 50 PROVIDES A DIFFERENT METHOD FOR COMPUTATION OF CAPI TAL GAIN IN THE CASE OF CAPITAL ASSETS ON WHICH DEPRECIATION HAS BE EN ALLOWED. 22. UNDER THE MACHINERY SECTIONS, THE CAPITAL GAINS ARE COMPUTED BY DEDUCTING FROM THE CONSIDERATION RECEIVED ON TRA NSFER OF A CAPITAL ASSET, THE COST OF ACQUISITION, THE COST OF IMPROVEMENT AND THE EXPENDITURE INCURRED IN CONNECTION WITH THE TRA NSFER. THE MEANING OF THE EXPRESSIONS 'COST OF IMPROVEMENT' AN D 'COST OF ACQUISITION USED IN SS. 48 AND 49 ARE GIVEN IN S. 55. AS THE DEPRECIABLE CAPITAL ASSETS HAVE ALSO AVAILED DEPREC IATION ALLOWANCE UNDER S. 32, S. 50 PROVIDES FOR A SPECIAL PROCEDURE FOR COMPUTATION OF CAPITAL GAINS IN THE CASE OF DEPRECIABLE ASSETS. SEC. 50(1) DEALS WITH THE CASES WHERE ANY BLOCK OF DEPRECIABLE ASSET S DOES NOT CEASE TO EXIST ON ACCOUNT OF TRANSFER AND S. 50(2) DEALS WITH CASES WHERE THE BLOCK OF DEPRECIABLE ASSETS CEASE TO EXIS T IN THAT BLOCK ON ACCOUNT OF TRANSFER DURING THE PREVIOUS YEAR. IN THE PRESENT CASE, ON TRANSFER OF DEPRECIABLE CAPITAL ASSET THE ENTIRE BLOCK OF ASSETS HAS CEASED TO EXIST AND, THEREFORE, S. 50(2) IS ATTRACTED. THE EFFECT OF S. 50(2) IS THAT WHERE THE CONSIDERATION RECEIVED ON TRANSFER OF ALL THE DEPRECIABLE ASSETS IN THE BLOCK EXCEEDS THE WRITTEN DOWN VALUE OF THE BLOCK, THEN THE EXCESS IS TAXABLE AS A DEEMED SHORT-TERM CAPITAL GAINS. IN OTHER WORDS, EV EN THOUGH THE ENTIRE BLOCK OF ASSETS TRANSFERRED ARE LONG-TERM CA PITAL ASSETS AND THE CONSIDERATION RECEIVED ON SUCH TRANSFER EXCEEDS THE WRITTEN DOWN VALUE, THE SAID EXCESS IS LIABLE TO BE TREATED AS CAPITAL GAIN ARISING OUT OF A SHORT-TERM CAPITAL ASSET AND TAXED ACCORDINGLY. 23. THE QUESTION REQUIRED TO BE CONSIDERED IN THE PRESE NT CASE IS, WHETHER THE DEEMING FICTION CREATED UNDER S. 50 IS RESTRICTED TO S. 50 ONLY OR IS IT APPLICABLE TO S. 54E OF THE IT ACT AS WELL ? IN OTHER WORDS, THE QUESTION IS, WHETHER THE LONG-TERM CAPIT AL GAIN ARISES ON TRANSFER OF A DEPRECIABLE LONG-TERM CAPITAL ASSE T, WHETHER THE ASSESSEE CAN BE DENIED EXEMPTION UNDER S. 54E MEREL Y BECAUSE S. 50 PROVIDES THAT THE COMPUTATION OF SUCH CAPITAL GA INS SHOULD BE DONE AS IF ARISING FROM THE TRANSFER OF SHORT-TERM CAPITAL ASSET ? 24. SEC. 54E OF THE IT ACT GRANTS EXEMPTION FROM PAYMEN T OF CAPITAL GAINS TAX, WHERE THE WHOLE OR PART OF THE N ET CONSIDERATION ITA NO.93/BANG/2013 PAGE 9 OF 11 RECEIVED FROM THE TRANSFER OF A LONG-TERM CAPITAL A SSET IS INVESTED OR DEPOSITED IN A SPECIFIED ASSET WITHIN A PERIOD O F SIX MONTHS AFTER THE DATE OF SUCH TRANSFER. IN THE PRESENT CASE, IT IS NOT IN DISPUTE THAT THE ASSESSEE FULFILS ALL THE CONDITIONS SET OU T IN S. 54E TO AVAIL EXEMPTION, BUT THE EXEMPTION IS SOUGHT TO BE DENIED IN VIEW OF FICTION CREATED UNDER S. 50. 25. IN OUR OPINION, THE ASSESSEE CANNOT BE DENIED EXEMP TION UNDER S. 54E, BECAUSE, FIRSTLY, THERE IS NOTHING IN S. 50 TO SUGGEST THAT THE FICTION CREATED IN S. 50 IS NOT ONLY RESTR ICTED TO SS. 48 AND 49 BUT ALSO APPLIES TO OTHER PROVISIONS. ON THE CON TRARY, S. 50 MAKES IT EXPLICITLY CLEAR THAT THE DEEMED FICTION C REATED IN SUB-SS. (1) AND (2) OF S. 50 IS RESTRICTED ONLY TO THE MODE OF COMPUTATION OF CAPITAL GAINS CONTAINED IN SS. 48 AND 49. SECOND LY, IT IS WELL ESTABLISHED IN LAW THAT A FICTION CREATED BY THE LE GISLATURE 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 T HE CASE OF STATE BANK OF INDIA VS. D. HANUMANTHA RAO 1998 (6) SCC 18 3. IN THAT CASE, THE SERVICE RULES FRAMED BY THE BANK PROVIDED FOR GRANTING EXTENTION OF SERVICE TO THOSE APPOINTED PRIOR TO 19 TH JULY, 1969. THE RESPONDENT THEREIN, WHO HAD JOINED THE BANK ON 1ST JULY, 1972 CLAIMED EXTENSION OF SERVICE BECAUSE HE WAS DEEMED TO BE APPOINTED IN THE BANK W.E.F. 26TH OCT., 1965 FOR TH E PURPOSE OF SENIORITY, PAY AND PENSION ON ACCOUNT OF HIS PAST S ERVICE 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 EXT ENDED FOR OTHER PURPOSES. APPLYING THE RATIO OF THE SAID JUDGMENT, WE ARE OF THE OPINION, THAT THE FICTION CREATED UNDER S. 50 IS CO NFINED TO THE COMPUTATION OF CAPITAL GAINS ONLY AND CANNOT BE EXT ENDED 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 DENIED BY REFERRING TO THE FICTION CREATED UNDER S. 50. SEC. 54E SPECIFICALLY PROVIDES THAT WHERE CAPITAL GAIN ARISI NG ON TRANSFER OF A LONG-TERM CAPITAL ASSET IS INVESTED OR DEPOSITED (W HOLE OR ANY PART OF THE NET CONSIDERATION) IN THE SPECIFIED ASSETS, THE ASSESSEE SHALL NOT BE CHARGED TO CAPITAL GAINS. THEREFORE, THE EXE MPTION UNDER S. 54E OF THE IT ACT CANNOT BE DENIED TO THE ASSESSEE ON ACCOUNT OF THE FICTION CREATED IN S. 50. 26. IT IS TRUE THAT S. 50 IS ENACTED WITH THE OBJECT OF DENYING MULTIPLE BENEFITS TO THE OWNERS OF DEPRECIABLE ASSE TS. HOWEVER, THAT RESTRICTION IS LIMITED TO THE COMPUTATION OF C APITAL GAINS AND NOT TO THE EXEMPTION PROVISIONS. IN OTHER WORDS, WH ERE THE LONG- TERM CAPITAL ASSET HAS AVAILED DEPRECIATION, THEN T HE CAPITAL GAIN HAS TO BE COMPUTED IN THE MANNER PRESCRIBED UNDER S . 50 AND THE CAPITAL GAINS TAX WILL BE CHARGED AS IF SUCH CAPITA L GAIN HAS ARISEN OUT OF A SHORT-TERM CAPITAL ASSET BUT IF SUCH CAPIT AL GAIN IS INVESTED IN THE MANNER PRESCRIBED IN S. 54E, THEN THE CAPITA L GAIN SHALL NOT BE CHARGED UNDER S. 45 OF THE IT ACT. TO PUT IT SIM PLY, THE BENEFIT OF S. 54E WILL BE AVAILABLE TO THE ASSESSEE IRRESPE CTIVE OF THE FACT ITA NO.93/BANG/2013 PAGE 10 OF 11 THAT THE COMPUTATION OF CAPITAL GAINS IS DONE EITHE R UNDER SS. 48 AND 49 OR UNDER S. 50. THE CONTENTION OF THE REVENU E THAT BY AMENDMENT TO S. 50, THE LONG-TERM CAPITAL ASSET HAS BEEN CONVERTED INTO A SHORT-TERM CAPITAL ASSET IS ALSO W ITHOUT ANY MERIT. AS STATED HEREINABOVE, THE LEGAL FICTION CREATED BY THE STATUTE IS TO DEEM THE CAPITAL GAIN AS SHORT-TERM CAPITAL GAIN AN D NOT TO DEEM THE ASSET AS SHORT-TERM CAPITAL ASSET. THEREFORE, I T CANNOT BE SAID THAT S. 50 CONVERTS LONG-TERM CAPITAL ASSET INTO A SHORT-TERM CAPITAL ASSET. 10. IN OUR VIEW, THE AFORESAID DECISION RENDERED BY THE HONBLE BOMBAY HIGH COURT CLEARLY LAYS DOWN THE PROPOSITION THAT T HE DEEMING FICTION U/S. 50 OF THE ACT IS ONLY LIMITED FOR THE PURPOSE OF COMPU TATION OF CAPITAL GAIN AND CANNOT BE EXTENDED TO EXEMPTION PROVISIONS. ACCORD INGLY, THE CAPITAL GAIN IN QUESTION HAS TO BE REGARDED AS A LONG TERM CAPIT AL GAIN FOR THE PURPOSE OF ALLOWING DEDUCTION U/S. 54EC OF THE ACT. THERE IS NO DISPUTE THAT BUT FOR THE PROVISIONS OF SECTION 50 OF THE ACT, THE BUILDI NG IN QUESTION IS A LONG TERM CAPITAL ASSET. WE ACCORDINGLY DIRECT THE AO TO ALLOW THE CLAIM OF THE ASSESSEE FOR DEDUCTION U/S. 54EC OF THE ACT. 11. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS PARTLY ALLOWED . PRONOUNCED IN THE OPEN COURT ON THIS 28 TH DAY OF AUGUST , 2014 . SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVAN ) ACCOUNTANT MEMBER JUDICIAL MEMBE R BANGALORE, DATED, THE 28 TH AUGUST , 2014 . /D S/ ITA NO.93/BANG/2013 PAGE 11 OF 11 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.