TMI Blog2000 (1) TMI 1001X X X X Extracts X X X X X X X X Extracts X X X X ..... ed from year to year. The cost of the gross block was ₹ 1,87,390 and depreciation up to 31-3-1991 was ₹ 44,875. The resulting written down value as on 31-3-1991 was ₹ 1,42,515. The flat was sold in the previous year under consideration for a sum of ₹ 5,20,000. The net proceeds on the sales were invested in the units of UTI Capital Gains Scheme for claiming deduction under section 54E and consequently the amount under the head Income under the capital gain was declared at nil in the return of income filed for the assessment year under consideration. 3. The Assessing Officer did not accept the claim of the assessee. He observed that it was a depreciate asset and therefore the provisions of section 50 of the Act were applicable. He further observed that since the entire block of building had ceased to exist on account of sale of the flat during the year, written down value of the asset was to be taken as cost of acquisition under section 50(2) of the Act. He held that section 50 of the Act constitute a special provision for computation of capital gain in case of depreciate asset and therefore this section is a rider to the other sections of the capital g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital gain in case of depreciable assets and the Assessing Officer has rightly computed capital gain under section 50(2) as the block of assets ceased to exist. He held that in view of the deeming provision, the capital gain has arisen in the case of assessee from the transfer of short-term capital asset and therefore the same was not exempt under section 54E. If the intention of the legislature was to provide exemption under section 54E, the CIT (Appeals) observed, there should have been a reference under section 54E for providing deduction from such capital gains arising from short-term asset also, whereas section 54E only provides exemption on capital gains arising from transfer of long-term capital assets. He therefore held that in view of the special provision of section 54E, assessee was not entitled to exemption on capital gains which is deemed to have arisen on transfer of short-term capital asset by virtue of section 50. 5. The learned counsel of the assessee submitted that the impugned residential flat which was solely forming part of block of assets was acquired by the erstwhile firm of which the assessee was the partner and it came to the assessee s share on its d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be extended to section 54E which would amount to extending the fiction beyond its legitimate field. The learned Departmental Representative on the other hand supported the order of the CIT (Appeals) as well as of the Assessing Officer and contended that a bare reading of section 50 makes it clear that the gain arising on the transfer of a capital asset is to be treated as a short-term capital gain and consequently the provisional section 54E which grant exemption to long-term capital gain would not apply as otherwise the provisions of section 50 would become redundant. 6. We have heard the parties and considered their rival submissions. Section 45 provides for the charge of Capital gains. It 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 53, 54, 54B, 54D, 54E, 54F and 54G, 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. Mode of computation and deductions is provided in section 48. Clause (a) of sub-section (1) as it stood in the year under consideration provided that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of the assets during the previous year, exceeds the aggregate 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 the 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 such, for the reason 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 de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aforesaid, for a special treatment for the depreciable assets and as the title to the section indicates, the speciality is only for computing the capital gain. The provisions of this section are made notwithstanding anything contained in clause (42A) of section 2. This means that irrespective of the period of holding of the asset, the provisions of this section would apply, i.e., whether the asset is a long-term capital asset of a short-term capital asset. On a further reading of this section, it becomes evident that by this section, the provisions of sections 48 and 49 are to be read with some modifications stated therein. One of such modification is regarding determination of the cost of acquisition of the asset and the second is of the deductions to be allowed in computing capital gain. The income received or accruing as a result of such transfers is deemed to be the capital gain arising from the transfer of short-term capital assets irrespective of the period of holding of a particular asset or assets. 12. What follows from the treatment of such gains as capital gains arising from transfer of short-term capital assets? There are many provisions in the Income-tax Act, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the income chargeable under the head capital gain. Section 49 on the other hand provides for the determination of cost of the acquisition in cases where the capital asset has been acquired otherwise than purchase by the assessee. There is no dispute in this case as regards the cost of acquisition either under section 48 or under section 49. The fiction thus created under section 50 for deeming any gain arising on transfer of a depreciable asset as short-term capital gain is for the purposes of section 48 only. It should not extend to other provisions dealing with the exemptions provided in charging the long-term capital gain by prescribing a different method for computing the capital gains on fulfilment of certain conditions. 14. One of such exemption is in section 54E. It provides that the capital gain is either to be not charged at all under section 45 if the cost of the specified asset acquired is not less than the net consideration of the transferred asset giving rise to the capital gain, or the proportionate amount of such capital gain is not to be charged under section 45 that bears to the investment or deposit in new asset. Net consideration as per Explanation 5 to se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rising on transfer of the depreciable asset as short-term capital gain is for the purposes of sections 48 and 49 only and therefore in our opinion cannot be extended to the provisions of section 54E which would amount to extending the deeming provisions beyond its legitimate field. 17. The submission of the Departmental Representative that after the introduction of the concept of block of assets neither the identity of the asset nor its year of acquisition are kept intact or maintained and therefore it would be difficult to find out the period of holding of any asset in the block of asset where the assets therein are more than one. The difficulties by themselves may not be an impediment in interpreting the true meaning and scope of the provision. In any case for the purposes of granting depreciation it may not be necessary to the record of the year of acquisition or the identity or the particulars of an asset falling in a block of asset but there is no difficulty in maintaining such records for the purposes of Capital Gain and if an assessee maintains such records the benefit can be denied to it merely on the ground that no such distinction or record is maintained for granting d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, only if one of the two classes of assessees exercises his option. Section 55(2), however, makes it clear that the option is available only for the purposes of sections 48 and 49 and it is not available for a case falling under section 50. Though the provisions of section 55(2) would be available to every kind of capital asset, whether the same has enjoyed depreciation allowance or not, whether in the hands of the assessee or the previous owner, in the case of the assessee in whose case depreciation allowance has been availed of before the transfer of capital asset, the meaning of cost of acquisition as stated in sections 48 and 49 would appear to have been modified in the manner stated in section 50. Thus, where the assessee has not availed of depreciation allowance in respect of the capital asset section 50 has no application. In this view of the matter, there is no conflict between the provisions of sections 50 and 55(2). Section 55(2) would be applicable to all assets depreciable or non-depreciable for the purposes of arriving at the cost of acquisition under sections 48 and 49, but section 50 carves out a category of those capital assets which had been subjected to gran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be computed. Therefore in our opinion that provisions of section 50 providing for the treatment of the gain resulting from the transfer of a depreciable asset as short-term capital gain cannot be read into while considering a case for non-chargeability of capital gain, wholly or partly, under section 54E on the ground that the provisions of section 50 are special provisions for dealing with the capital gain arising on transfer of a depreciable asset in all circumstances. The speciality attached to section 50 is to be restricted to only for the method of computing the capital gain and not for determining the nature of capital gain. In that view of the matter section 50 provides that the gain arising on sale of a depreciable asset, whether long-term or short-term, is short-term capital gain whereas section 54E provides for the non-chargeability of the amount, fully or partly, in case the gain arises on transfer of a long-term capital asset. Both stand together in their respective field. In such a situation in our opinion the benefit should be given to the assessee and it should be left open to him as to which provisions of the law he wants to invoke. The assessee has invoked and cla ..... X X X X Extracts X X X X X X X X Extracts X X X X
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