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TMI Blog2005 (3) TMI 36X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the year 1984 and the assessee was allotted a flat against 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 of account and depreciation1 in respect thereto has been claimed from year to year. The cost of the gross block was Rs. 1,87,390 and depreciation up to March 31, 1991 was Rs. 44,875. The resulting written down value as on March 31,1991, was Rs. 1,42,515. In the previous year relevant to the assessment year 1992-93, the assessee sold the said flat for a sum of Rs. 5,20,000. The net sale proceeds were invested in the units "UTI capital gains scheme" with a view to claim deductions under section 54E of the Income-tax 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 gains". The Assessing Officer, however, in his assessment order, held that since the entire block of building had ceased to exist on account of sale of the flat during the year, the written down value of the asset was liable to be taken as cost of acquisition under section 50(2) of the Income-tax Act. The Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the Income-tax Act clearly provides that the capital gain arising or accruing as a result of transfer of a depreciable long-term capital asset which forms a part of the block of asset shall be deemed to be a capital gain arising or accruing from the transfer of a short-term capital asset and, therefore, benefit under section 54E which is restricted to capital gain arising or accruing on the sale of a long-term capital asset is not available on such capital gains. Mr. Desai further submitted that the object of introducing section 50 in the Income-tax Act as explained by the Madras High Court in the case of M. Raghavan v. Asst. CIT [2004] 266 ITR 145 is not to allow multiple benefits to the assessee selling a depreciable asset. He submitted that in the present case, the capital asset sold was forming part of the block of assets and admittedly depreciation was availed of on the said capital asset. Therefore, the capital gain arising on such asset had to be computed under section 50 and once section 50 is applicable, in view of the fiction created therein, the capital gain is liable to be treated as short-term capital gain and, consequently, benefit under section 54E which is res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the actual cost. Section 50 of the Income-tax Act prescribes a modification to the provisions to section 48 which granted a standard deduction as well as a further deduction in respect of long-term capital gains up to the assessment year 1992-93. From the assessment year 1993-94 onwards, benefit of indexation is also granted under section 48 of the Income-tax Act. Thus, the benefits available under sections 48 and 49 are curtailed or modified by section 50 of the Income-tax Act which prescribes a different mode and manner of computing the capital gains in respect of the asset on which depreciation is allowed. Mr. Inamdar further submitted that by creating a fiction that "income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short-term capital assets" in section 50 of the Income-tax Act, the Legislature made it clear that the purpose of the fiction is merely to deem gains as short-term capital gains and not to deem the asset itself as short-term capital asset. In this connection, Mr. Inamdar strongly relied upon the decision of the Gauhati High Court in the case of CIT v. Assam Petroleum Indus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital asset", section 2(29A) defines "long-term capital asset" and section 2(29B) defines "long-term capital gain". Similarly section 2(42A) defines "short-term capital asset" and section 2(42B) defines "short-term capital gain". Thus, each of the above terms used in various provisions of the Income-tax Act has a distinct meaning as defined under the Act. Section 45 of the Income-tax 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 otherwise provided in sections 54, 54B, 54D and 54E, be chargeable to income-tax under the head "Capital gains", and shall be deemed to be the income of the previous year in which the transfer took place. Section 48(1)(a) of the Income-tax Act (as it stood at the relevant time) states that while computing the income under the head "Capital gains" the expenditure incurred wholly and exclusively in connection with such transfer and the cost of acquisition of the asset and the cost of any improvement thereto shall be deducted from the value of the consideration. Section 48(1)(b) provides that where the capital gain arises from the transfer of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to be the capital gains arising from the transfer of short-term capital assets." On a perusal of the aforesaid provisions, it is seen that section 45 is a charging section and sections 48 and 49 are the machinery sections for computation of capital gains. However, section 50 carves out an exception in respect of depreciable assets and provides that where depreciation has been claimed and allowed on the asset, then, the computation of capital gain on transfer of such asset under sections 48 and 49 shall be as modified under section 50. In other words, section 50 provides a different method for computation of capital gain in the case of capital assets on which depreciation has been allowed. Under the machinery sections the capital gains are computed by deducting from the consideration received on transfer of a capital asset, the cost of acquisition, the cost of improvement and the expenditure incurred in connection with the transfer. The meaning of the expressions "cost of improvement" and "cost of acquisition" used in sections 48 and 49 are given in section 55. As the depreciable capital assets have also availed of depreciation allowance under section 32, section 50 provides fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntrary, section 50 makes it explicitly clear that the deemed fiction created in sub-sections (1) and (2) of section 50 is restricted only to the mode of computation of capital gains contained in sections 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 created. In this connection, we may refer to the decision of the apex court in the case of State Bank of India v. D. Hanumantha Rao reported in [1998] 6 SCC 183. In that case, the Service Rules framed by the bank provided for granting extension of service to those appointed prior to July 19, 1969. The respondent therein who had joined the bank on July 1, 1972, claimed extension of service because he was deemed to be appointed in the bank with effect from October 26, 1965, for the purpose of seniority, pay and pension on account of his past service 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 extended for other purposes. Applying the ration of the said judgment, we are of the opinion, that the fiction c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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