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TMI Blog2022 (10) TMI 215X X X X Extracts X X X X X X X X Extracts X X X X ..... d the liability and determined the liability in the financial year 2012-13 relevant to Assessment Year 2013-14, the liability has definitely crystallised in this year only and, therefore, the same has rightly been claimed in this year. Accordingly, the order of the ld. CIT (A) is confirmed and the grounds raised by the Revenue is dismissed. Rate of tax on sale of depreciable assets - Long term capital gains on sale of helicopter - AO noted that the helicopter was part of block of assets and was a depreciable asset and why it should not be treated as Short term capital gains - Applicability of section 50 - whether sale of a depreciable asset (i.e. helicopter), which was part of block of assets and held for more than 3 years, is taxable u/s 50 as Short term capital gains, then whether the rate of tax would be of Long term capital gains treating it to be a long term capital asset or rate of short term capital gain? - HELD THAT:- As per Section 2(42A) of the Act, short term capital asset means capital asset held by the assessee for not more than 36 months immediately preceding the date of transfer. Section 50 is a special provision for computing the capital gains in case of a de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITA NO. 5683/MUM/2017 - - - Dated:- 19-7-2022 - SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER Appellant by: Shri Nimesh Yadav Respondent by: Shri Yogesh Thar, Shri Chaitanya Joshi Shri Hardik Nirmal ORDER PER AMIT SHUKLA, JM : The aforesaid appeal has been filed by the Revenue against the impugned order dated 12.06.2017 passed by the Commissioner of Income Tax (Appeals)-9, Mumbai (in short ld. CIT(A) ) for the quantum of assessment passed under Section 143(3) of the Income Tax Act, 1961 (in short the Act ) for the Assessment Year 2013-14. 2. The Revenue has raised the following grounds in its appeal:- 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to delete the disallowance of Rs.26,49,31,101/- being custom duty paid towards Yacht. 2. On the facts in the circumstance of the case and in law, the Ld.CIT(A) erred in directing AO to tax the profit on transfer of Capital Asset i.e. Helicopter of Rs.19,09,32,707/- as Long Term Capital Gain as against Short Term Capital Gain as assessed by the AO. 3. Facts in brief qua the issue raised in ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uty and the yacht was valued at Rs.86,91,97,421/-. In the petition filed before the Customs Settlement Commission, the Commission had finally levied Customs Duty of Rs.26,49,31,101/- and further penalty of Rs.5,63,59,144/- was imposed. 5. In his order, the Assessing Officer has also referred to the report of the Joint Director of Income Tax (Intelligence Criminal Investigation) Unit-1, Mumbai that since the yacht was purchased for personal use, therefore, the payment of Customs Duty cannot be allowed as business expenses in the hands of the assessee-company, i.e. M/s. Reliance Transport Travels Pvt. Ltd. From this report, the Assessing Officer deduced that the yacht was purchased for personal use of Shri Anil Ambani and family and the charter agreement entered into by the assessee-company with M/s. Ammolite Holding Limited is nothing but a devise to avoid tax implication, especially Customs Duty by making it foreign flag vessel . He further held that the Customs Duty is applicable only if it is paid on revenue items, i.e. stock-in-trade which is imported or import of capital asset. In the case of assessee-company, it is neither stock-in-trade nor capital asset; therefore, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose is served, is beyond rationality. When the charter agreement of yacht does not satisfy the condition of wholly and exclusively for the business purpose, how can customs duty based on that charter agreement be wholly and exclusively for the business purpose. In addition to that, the use of yatch for personal purposes excludes the criterion of 'wholly and exclusively for business purpose'. (vi) The SCN alleged in para 49(xxix) while considering the application of Shri Anil D. Ambani that the applicant purchased the Yacht for personal use with the assistance of Shri Hari Nair, Vice President of M/s. Reliance ADAG, routed the money for the purchase and effected the import of the Yacht with the help of Shri Gautama Dutta and Sh. Sohel Kazani in order to evade applicable customs duty. In respect of the same, the applicant has submitted that purchasing the Yacht, routing the money for purchasing the Yacht does not amount to any action or omission, attracting liability to confiscation of the Yacht under section 111(m) or (n) and further Bill of Entry in the Customs and therefore, Section 111(m) is not applicable as the Yacht was declared properly. From the above, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t dated 8.10.2008. As per the agreement, the Yacht was used to provide services to Reliance ADA Group Pvt. Ltd. and the assessee has done the same and provided the services to Reliance ADA Group Pvt. Ltd. The assessee has produced year-wise ledger accounts of income earned from operation of yacht from 1.12.2008 to 31.3.2013 along with summary chart of income earned from yacht operation up to 31.3.2013. Further, a reference was also made to the Profit loss account of the current year with respect to income earned from yacht operations during the year. Thus, he held that the yacht was used for the purpose of assessee s business through providing services to Reliance ADA Group Pvt. Ltd. 9. The ld. CIT (A) after considering the entire gamut of facts and the submissions of the assessee as well as the finding of the Assessing Officer held that the yacht was not used by the assessee for its own personal use. It has operated the yacht for the benefit and use of companies or entities of Reliance ADA Group for consideration by way of operating fee as per the agreement. The assessee-company has earned revenue from operating of yacht of Rs.53,16,319/- and for the period 01.12.2008 to 31.0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elated to the year under appeal. The said contention of the appellant also supported by the various High Courts and Tribunals decisions as discussed above. Accordingly, the Ground Nos. A(1) to A(6) raised in appeal is thus ALLOWED. 10. We have heard both the parties at length, perused the relevant finding given in the impugned order as well as the material referred to before us at the time of hearing. The ld. Departmental Representative has referred to various observations of the Assessing Officer and submitted that once it is found that Customs Duty was paid on yacht, which was purely used for the personal purposes of Shri Anil Ambani and family, it cannot be allowed as business expenses. On the other hand, the learned counsel for the assessee submitted that insofar as the assessee-company is concerned, it had taken the yacht on rent from a foreign company, M/s. Ammolite Holding Limited and had used it for earning income from operation of the yacht and showed it as business income, therefore, it cannot be held that the yacht was used for personal purposes of assessee-company. Insofar as the liability to pay Customs Duty by the assessee-company is concerned, he submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e payment of Customs Duty as expenses. 13. Insofar as the year of claim of expenses is concerned, though the assessee had paid the Customs Duty of Rs.28 crores in the year 2009, it was only to release the yacht attached with the Customs authorities and same was done under protest as it was contesting the levy of Customs Duty on the ground that since it is a foreign flag vessel , there was no liability to pay the Customs Duty. Thus, when the Customs and Excise Settlement Commission had fixed the liability and determined the liability in the financial year 2012-13 relevant to Assessment Year 2013-14, the liability has definitely crystallised in this year only and, therefore, the same has rightly been claimed in this year. Accordingly, the order of the ld. CIT (A) is confirmed and the grounds raised by the Revenue is dismissed. 14. Insofar as the issue raised in ground no. 2 that the assessee-company had offered Long term capital gains on sale of helicopter of Rs.19,09,32,707/-. The Assessing Officer noted that the helicopter was part of block of assets and was a depreciable asset and why it should not be treated as Short term capital gains. The working of capital gains as p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the holding period of the asset. He further held that for the purpose of computation of capital gains on such depreciable asset, the asset become short term and therefore he held it to be Short term capital gains and levied tax at the rate applicable for Short term capital gains. 16. The ld. CIT(A) after referring to the judgment of the Hon'ble Supreme Court in the case of V.S. Dempo Co. Ltd. [2016] 74 Taxmann.com 15 (SC) and Hon'ble Bombay High Court in the case of Ace Builders (P.) Ltd. [2005] 144 Taxmann 855 (Bom.) held that though for the purpose of computation of capital gains it will be treated as Short term capital gains under Section 50 of the Act, but for the purpose of applicability of tax rate, it has to be treated as Long term capital gains, if asset is held for more than 3 years. 17. After considering the Revenue s submission and on perusal of the impugned order, we find that, the only controversy is whether sale of a depreciable asset (i.e. helicopter), which was part of block of assets and held for more than 3 years, is taxable under Section 50 of the Act as Short term capital gains, then whether the rate of tax would be of Long term capital gains treat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 48 and 49 of the Act which cannot be extended beyond that. 19. This issue had come up for consideration before the Hon'ble Bombay High Court (jurisdictional High Court) in the case of CIT vs Ace Builders, 281 ITR 210 (Bom.) wherein the Hon'ble High Court in the context of claim of deduction under Section 54E of the Act in respect of capital gain arising on transfer of a capital asset on which depreciation has been allowed, which is deemed to be Short term capital gains under Section 50 of the Act, had made the following observation:- 21. On 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. 22. Under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer. In the present case it is not in dispute that the assessee fulfills all the conditions set out in section 54E to avail exemption, but the exemption is sought to be denied in view of fiction created under section 50. 25. In our opinion, the assessee cannot be denied exemption under section 54E, because, firstly, there is nothing in section 50 to suggest that the fiction created in Section 50 is not only restricted to sections 48 and 49 but also applies to other provisions. On the contrary, Section 50 makes it explicitly clear that the deemed fiction created in sub-section (1) (2) of section 50 is restricted only to the mode of computation of capital gains contained in Section 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/s. D. Hanumantha Rao reported in 1998 (6) S.C.C.183. In that case, the Service Rules framed by the bank provided for granting extention of service to those appointed prior to 19/7/1969. The respondent therein who had joined the bank on 1/7/1972 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l gain and not to deem the asset as short term capital asset. Therefore, it cannot be said that section 50 converts long term capital asset into a short term capital asset. 20. Thus, sequitur of aforesaid judgment is that the fiction created by the legislature in Section 50 of the Act has to be confined to the purpose for which it is created. Section 50 of the Act was enacted with the object of denying multiple benefits to the owners of a depreciable asset, however, that restriction is limited to the computation of capital gains and not to the exemption provision. If depreciation has been availed on long term capital asset, then, the capital gains has to be computed in the manner prescribed under Section 50 of the Act and the capital gains tax will be charged as if such capital gain is arising out of short term capital asset. In that case, the capital gains was invested in the manner prescribed in Section 54E of the Act wherein exemption is provided on transfer of a long term capital asset then Long term capital gains was subject to deduction. There also, the asset was a depreciable asset, however, while granting exemption under Section 54E of the Act, which is applicable for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the CIT (Appeals) and dismissed the appeal of the Revenue. While doing so the High Court relied upon its own judgment in the case of CIT, Mumbai City-II, Mumbai vs. ACE Builders Pvt. Ltd. [(2005) 3 Bom CR 598]. The High Court observed that Section 50 of the Act which is a special provision for computing the capital gains in the case of depreciable assets is not only restricted for the purposes of Section 48 or Section 49 of the Act as specifically stated therein and the said fiction created in sub-section (1) (2) of Section 50 of the Act has limited application only in the context of mode of computation of capital gains contained in Sections 48 and 49 of the Act and would have nothing to do with the exemption that is provided in a totally different provision i.e. Section 54E of the Act. Section 48 of the Act deals with the mode of computation and Section 49 of the Act relates to cost with reference to certain mode of acquisition. This aspect is analysed in the judgment of the Bombay High Court in the case of CIT, Mumbai City-II, Mumbai vs. ACE Builders Pvt. Ltd.(supra), in the following manner: In our opinion, the assessee cannot be denied exemption under Section 54E, becau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese judgments no appeal has been filed: 1. CIT vs. Polestar Industries [2013 SCC online Guj 5517] 2. CIT vs. Assam Petroleum Industries (P.) Ltd. [(2003) 262 ITR 587]. 21. The Special Bench of ITAT, Mumbai also in ITO vs United Marine Academy [2011] 10 Taxmann.com 320 (Mum.-Trib) has explained the deeming fiction of section 50 as per which the said section only modifies the term cost of acquisition used in sections 48 for the purpose of computing the capital gains arising from transfer of depreciable assets. 22. Thus, the applicability of section 50 is for the limited purpose of working out the cost of acquisition u/s.48 and 49 of the depreciable asset sold and the applicability of section 50 is restricted for that purpose only and for the purpose of other provisions of the Act, the capital gain has to be treated as long term capital gain if the period of holding is more than 3 years. The ratio and the principle as culled out from the aforesaid judgments are that, the legal fiction created in Section 50 of the Act deems capital gains as short term capital gains but does not deem the asset as short term capital asset and, therefore, it cannot be said that Section 50 o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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