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TMI Blog2011 (4) TMI 116X X X X Extracts X X X X X X X X Extracts X X X X ..... capital assets. Briefly stated the facts of the case are that the assessee was engaged in the business of investment and finance. During the year it sold certain depreciable capital assets in the shape of Meters and transformers for a total consideration of Rs.1,45,99,988. The gain on the same was shown as long term capital gain, which was set off against the brought forward loss from long term capital assets. During the course of assessment proceedings it was noticed by the Assessing Officer that the assessee had purchased these Meters and transformers in earlier years for a total consideration of Rs.8,75,99,928 on which100% depreciation was claimed in the respective first years itself. In the backdrop of these facts, the Assessing Officer observed that the said assets sold by the assessee in this year for Rs.145.99 lakhs were in the nature of assets on which depreciation was claimed and allowed. In that view of the matter the assessee was called upon to explain as to why the provisions contained in section 50 be not applied and gain from the sale of said asset be not considered as short term capital gain. The assessee placed reliance on the judgment of the Hon'ble Bombay High Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that all the assets in that block are transferred during the previous year, the cost of acquisition of the block of assets shall be the written down value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year and the 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." 6. In the instant case we are concerned with section 50(2) because on the sale of capital assets in the shape of Meters and transformers, the block of assets under which these were placed, ceased to exist. Clause (2) provides that where any block of assets ceases to exist as such, for the reasons that all the assets in that block are transferred during the previous year, the cost of acquisition of the block of assets shall be the written down value of the block of assets at the beginning of theprevious year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year and the income receiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be extended beyond the purpose for which it is enacted. The Hon'ble Supreme Court in CIT Vs. Amarchand N Shroff [(1963) 48 ITR 59 (SC)] dealt with the scope of a deeming provision and laid down that the fiction cannot be extended beyond the object for which it is enacted. The same view has been reiterated by the Hon'ble Apex Court in CIT Vs. Mother India Refrigeration Industries P. Ltd. [(1985) 155 ITR 711 (SC)] holding that : "legal fictions are created only for some definite purpose and this must be limited to that purpose and should not be extended beyond their legitimate field". The enunciation of law by the highest Court of land in the above case divulges that the operation of a deeming provision cannot be extended beyond the purpose for which it is enacted. 8. We have noted above that section 50 is a deeming provision as is evident from clauses (1) and (2) of this section, which end by providing that the income "shall be deemed to be capital gains arising from the transfer of short term capital assets". Thus we have to restrict such deeming provision only up to the point which has been covered within the purview of section 50. It can be easily noticed that this section c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure it would be relevant to note that the short term capital gain has been defined u/s 2(42B) to mean "capital gain arising from the transfer of a short term capital asset". `Long term capital asset' has been defined in section 2(29A) to mean `a capital asset which is not a short term capital asset' and `long term capital gain' has been defined in section 2(29B) to mean `capital gain arising from the transfer of a long term capital asset'. When we closely read these provisions, it becomes apparent that the transfer of a long term capital asset resulting into gain leads to "long term capital gain" and the profit on the transfer of a short term capital asset results into `short term capital gain'. It, therefore, emerges that if any capital asset of the nature, not covered in proviso to sec. 2(42A), is sold by the assessee after holding for a period of 36 months or more, the capital gain arising there from shall be characterized as "long term capital gain". 11. Adverting to the facts of the instant case, it is noted that the assessee claimed the benefit of set off of the brought forward loss from the long term capital assets against the income from the transfer of Motors and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssible. When the matter came up before the Hon'ble Bombay High Court it was noticed that section 50 contains a deeming provision and such fiction was restricted only to the mode of computation of capital gain contained in sections 48 and 49 and hence it did not apply to other provisions. Consequently the assessee was held to be eligible for exemption u/s.54E in respect of capital gain arising on transfer of capital asset on which depreciation was allowed. The relevant observations of the Hon'ble High Court are as under:- "It is true that s. 50 is enacted with the object of denying multiple benefits to the owners of depreciable assets. However, that restriction is limited to the computation of capital gains and not to the exemption provisions. In other words, where the long-term capital asset has availed depreciation, then the capital gain has to be computed in the manner prescribed under s.50 and the capital gains tax will be charged as if such capital gain has arisen out of a short-term capital asset but if such capital gain is invested in the manner prescribed in s. 54E, then the capital gain shall not be charged under s. 45 of the IT Act. To put it simply, the benefit of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee returned short term capital gain on the sale of house property and long term capital gain on the sale of land. This working was not accepted by the A.O., who took the view that the house property had been constructed on land and therefore the gain arising on the transfer resulted into short term capital gain. The Tribunal came to hold that the land was a distinct and separate capital asset vis-à-vis the building and hence the profit was to be computed by viewing building as separate capital asset from land. Therefore, profit arising from the sale of land was held to be long term capital gain and from the sale of building as short term capital gain. The view of the Tribunal was upheld by the Hon'ble High Court by holding that section 50 provides for determination of the cost of acquisition of depreciable asset and since the land is not a depreciable asset, section 50 did not apply to that. We are unable to find as to how this judgment helps the Revenue in the instant case. There can be two stages, viz., firstly, the computation of capital gain on the transfer of otherwise long term capital assets u/s 50 and secondly, when such capital gain has been so computed, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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