TMI Blog2005 (3) TMI 36X X X X Extracts X X X X X X X X Extracts X X X X ..... ax Act, 1961 ("the I.T. Act" for short) by the Commissioner of Income-tax, Mumbai City-II, Mumbai, was admitted on the following substantial question of law: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee is entitled to deduction under section 54E in respect of the capital gain arising on the transfer of a capital asset on which depreciation has been allowed and which is deemed as short-term capital gain under section 50 of the Income-tax Act, 1961?" The assessment year relevant herein is the assessment year 1992-93. The respondent (hereinafter referred to as "the assessee") is a private limited company. The assessee was a partner in a firm called M/s. D. Manekji and Associates. The said firm was dissolved 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 writte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 of the Income-tax Act has to be restricted only for the method of computing the capital gain and cannot be read into while considering the case for non-charge-ability of capital gain. Accordingly, the Tribunal held that the assessee is entitled to the exemption under section 54E of the Income-tax Act. Hence this appeal is filed by the Revenue. Mr. R.V. Desai, learned senior advocate appearing on behalf of the Revenue, submitted that section 50 of the Income-tax Act introduced with effect from April 1, 1988, is a special provision for computation of capital gains in the case of depreciable assets. He submitted that the capital gains derived from the sale of depreciable assets are to be computed in the manner provided in section 50 of the Income-tax Act. He submitted that section 50(2) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... puted is entitled to the benefit under section 54E of the Income-tax Act on fulfilment of the conditions set out therein. In the present case, since the assessee had complied with the conditions set out in section 54E of the Income-tax Act, the assessee cannot be denied the benefit under the said section. Mr. Inamdar submitted that the capital gain arising on transfer of a capital asset is computed under section 48 of the Income-tax Act by deducting from the full value of consideration, the actual cost of the capital asset and any expenditure incurred in connection with such transfer. Section 49 of the Income-tax Act allows cost of the previous owner (and consequently market value as on April 1, 1981, if the capital asset was held by the previous owner before that date) to be substituted 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Income-tax Act should not be allowed to be clouded by the wording or fiction in section 50 which is employed or created for a limited purpose. Relying upon the decision of the apex court in the case of CIT v. Canara Workshops (P.) Ltd. [1986] 161 ITR 320, Mr. Inamdar submitted that section 54E is an incentive and beneficial provision to encourage investment in desired channels. Accordingly, counsel submitted that the question raised in the appeal be answered in favour of the assessee and against the Revenue. Before dealing with the rival contentions, it would be appropriate to refer to the relevant provisions of the Income-tax Act which deal with the taxability of the capital gains. Section 2 of the Income-tax Act defines various terms used in the Income-tax Act. Section 2(14) defines "capital 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 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 deemed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of short-term capital asset? Section 54E of the Income-tax Act grants exemption from payment of capital gains tax, where the whole or part of the net consideration received from the transfer of a long-term capital asset is invested or deposited in a specified asset within a period of six months after the date of such transfer. In the present case it is not in dispute that the assessee fulfills all the conditions set out in section 54E to avail of the exemption, but the exemption is sought to be denied in view of fiction created under section 50. 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-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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s done either under sections 48 and 49 or under section 50. The contention of the Revenue that by amendment to section 50 the long-term capital asset has been converted into a short-term capital asset is also without any merit. As stated hereinabove, the legal fiction created by the statute is to deem the capital gain as short-term capital gain and not to deem the asset as short-term capital asset. Therefore, it cannot be said that section 50 converts a long-term capital asset into a short-term capital asset. For all the aforesaid reasons, we concur with the decision of the Gauhati High Court in the case of CIT v. Assam Petroleum Industries (P.) Ltd. [2003] 262 ITR 587 and hold that the Tribunal was justified in allowing the benefit of exemption under section 54E of the Income-tax Act to the assessee in respect of the capital gains arising on the transfer of a capital asset on which depreciation has been allowed. Accordingly, the appeal fails. The substantial question of law raised by the Revenue is answered in the affirmative, i.e., in favour of the assessee and against the Revenue. The appeal is disposed of in the above terms with no order as to costs. - - TaxTMI - TMITa ..... 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