Income Tax Appellate Tribunal - Mumbai
Miranda Exports, P Ltd, Mumbai vs Department Of Income Tax on 17 May, 2007
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "B"
Before Shri D. Manmohan (VP) & Shri Pramod Kumar (AM)
I.T.A.No. 1696/Mum/2010 (Assessment year : 2006-07)
ITO 3(2)(2) Vs. M/s. Miranda Exports P. Ltd.
Room No. 673, 6th Floor 33, Sherly, Ground Floor
Aayakar Bhavan Bandra West
M.K. Road Mumbai-400 050.
Mumbai-400 020.
APPELLANT RESPONDENT
PAN/GIR No. : AABC0923C
Assessee by : Shri H.S. Parikh
Department by : Shri Naresh Kumar Balodia
ORDER
Per D. Manmohan, VP:-
Revenue preferred an appeal contending, inter alia, that learned CIT(A) erred in granting deduction u/s. 54EC of the Income Tax Act, 1961 in disregard to the fact that such deduction is not allowable on short term capital gain.
2. Facts necessary for disposed of the appeal are stated in brief. Assessee company owned an industrial gala which was shown as part of a block of asset and depreciation was claimed on the said immovable property in the earlier years. In the year under consideration the assessee sold the said immovable property for a consideration of ` 50 lakhs and invested entire amount in the Bonds i.e. NABARD Capital Account so as to claim exemption u/s. 54EC of the Act. Accordingly, in the year under consideration, assessee declared total income of ` 70,351/-. During the course of scrutiny assessment proceedings the Assessing Officer took a view that the assessee having claimed depreciation on the immovable property, gain arising from sale of such property requires to be considered in terms of provisions of section 50 of the Act i.e. 'short term capital gain' in which event further deduction u/s. 54EC cannot be allowed. In this regard the Assessing Officer observed 2 M/s. Miranda Exports P. Ltd.
that the fiction governs the whole tax treatment of such capital gain by which exemption u/s. 54EC, which can be claimed only in regard to long term capita gain, cannot be claimed. The Assessing Officer admitted that the decision of Hon'ble Bombay High Court in the case of Ace Builders Pvt. Ltd., 281 ITR 210 squarely applies to the facts of the case but the revenue having not accepted the said decision, the Assessing Officer chose to err in favour of the revenue and assessment was completed accordingly.
3. On an appeal filed by the assessee, learned CIT(A) accepted the claim of exemption u/s. 54EC, by respectfully following the decision of Hon'ble Bombay High Court (supra). In this regard he observed as under:-
"I have considered the submissions of the appellant and the findings of the Assessing Officer and observe that the Hon'ble ITAT decision passed in the case of ACIT Vs. M/s. Imperial Motor Stores (ITA No. 6325/Mum/2004) dated 17.5.2007 and the Judgement passed by the Jurisdictional High Court in the case of CIT Vs. Ace Builders Pvt. Ltd., 281 ITR 210 squarely covers the case of the appellant. It is noted that in the aforementioned decision of the High Court, the Hon'ble court has specifically considered the provisions of section 50 while discussing the availability of section 50E of the Act. The concluding extracts of the judgement are reproduced as under :-
"In our opinion, the assessee cannot be denied exemption under section 50E, because, firstly there is nothing in section 50 to suggest that the fiction created in section 50 is not only restricted to section 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) and (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 Vs. D. Hanumantha Rao reported in (1998) 6 SCC 183...
The Hon'ble Court has further observed "It is true that section 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 of depreciation, then the capital gain has to be computed in the manner prescribed under section 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 section 54E, then the capital gain shall not be charged under section 45 of the Income Tax Act. To put it simply, the 3 M/s. Miranda Exports P. Ltd.
benefit of section 54E will be available to the assessee irrespective of the fact that the computation of capital gains is done either under section 48 and 49 or under section 50. The connection 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 coverts 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 Vs. Assam Petroleum Industries (P) Ltd. (203) 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 capita 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 ruling given by the Hon'ble Jurisdictional High Court in the above mentioned case fully covers the issue raised in the grounds by the appellant in the instant case. Hence, respectfully following the above judgement of Hon'ble Jurisdictional High Court, I hold that the assessee's claim for deduction u/s. 54EC succeeds and accordingly the addition made by the Assessing Officer in view of the provisions of section 50 of the Act is deleted."
4. Aggrieved, revenue is in appeal before us. Learned DR filed detailed written submissions wherein it was contended that on a proper interpretation of section 50 of the Act, deeming fiction provided in section 50 has to be taken to its legible end in which event assessee cannot be allowed to claim exemption u/s. 54EC of the Act which is admissible only in case if capital gain arises on transfer of 'long term capital asset'. According to him, extending benefit of u/s. 54EC will make section 50 of the Act redundant since transfer of a depreciable asset is treated as transfer of 'short term capital asset' whereas section 54EC is applicable in the case of transfer of long term capital asset. Paragraphs 12 to 20 of his written submissions are extracted for ready reference.
"12. It is submitted that exemption u/s. 54EC is admissible only in case of capital gain arising on transfer of 'long term capital asset'. It is submitted that the capital gain arriving on transfer of depreciable asset is capital gain arising on transfer of a 'short term capital asset' as per section 50. This deeming provision has been provided to tax the surplus above the written down value, on transfer of a depreciable fixed asset because benefit of depreciation has already been allowed to the assessee in earlier years for use of the asset for the business. The Legislature in its wisdom has consciously made the definition of 'short term capital asset' provided in section 2(42A), based on period of holding of the asset 4 M/s. Miranda Exports P. Ltd.
by assessee, not applicable to the transfer of depreciable assets, and provided that the gains on transfers of all depreciable assets, irrespective of the period for which they are held by the assessee before transfer, will be fixed as capital gain arising out of transfer of 'short term capital assets' only. It is also submitted that the capital gain once computed as capital gain on transfer of 'short term capital asset' as per section 50, cannot simultaneously be regarded as capital gain on transfer of 'long term capital asset' for any other provision of the Act including section 54EC. Such a construction would not only be self contradictory but also against express provision of law.
13. Since exemption u/s. 54EC is available only in case of capital gain arising on transfer of 'long term capital assets' only, it cannot be allowed on gains arising out of 'short term capital assets'. It is submitted that if the judgmenet of Bombay High Court in the case of Ace Builders (281 ITR 210) and that of Guwhati High Court (262 ITR 587) are extended to section 54EC also, it will make the provision of section 50 redundant to the extent that the gain on transfer of a depreciable asset is capital gain on transfer of 'short term capital asset'. It will also make the non obstante nature of section 50 with relation to section 2(42A) ineffective. Therefore, it is submitted that the judgement of Bombay High Court delivered in respect of section 54E should not be extended to section 54EC also.
14. In this regard your attention is drawn to para 30 of Circular No. 794 - Finance Act, 2000- Explanatory Notes on provisions relating to Direct Taxes dated 9.8.2000, which reads as under :-
"Sunset clauses to section 54EA and 54EB and introduction of a new section 54EC to ensure focused investment of capital gains in agricultural finance and highway infrastructure.
30.1 Under the existing provisions, section 54EA and 54EB of the Income Tax Act offer a basket of investment option to absorb capital gains arising from transfer of long term capital assets. The notified instruments providing the roll-over to capital gains include shares, bonds, units and deposits of banks and various other instruments. The two sections were introduced in 1996 to give an incentive to the development of infrastructure. However, the objective has been diluted in the presence of a large number of varied and diverse instruments. Further, incentives to infrastructure are also available under other sections of the Income Tax Act such as, sections 80-IA, 80-IB and 10(23G). In a regime of low tax rate on long term capital gains, there is a very little justification for having such an omnibus basket of exemptions. Therefore, it has been decided to insert sunset clauses to sections 54EA and 54EB limiting their application to transfer of long term capital asset made on or before 31.3.2000. Where the capital gain has arisen on transfer made before 31.3.2000, the investments in notified securities can be made under section 54EA and 54EB beyond that date but within the stipulated period.
30.2 In place of section 54EA and 54EB, which are being terminated, a new section namely, 54EC, has been inserted for transfer of capital assets made on or after 1-4-2000. The new section will 5 M/s. Miranda Exports P. Ltd.
allow exemption from tax on long term capital gains, if invested in bonds, targeted exclusively on agricultural finance and highway infrastructure. The instruments in question shall be bonds, redeemable after three years, to be issued by the National Bank for Agriculture and Rural Development (NABARD) and the National Highway Authority of India (NHAI). The exemption from long term capital gains shall be to the extent of investment in these bonds.
30.3 These bonds will have a lock-in period of three years. Any transfer or conversion of bonds into money during the lock in period will make the amount so converted as deemed capital gains taxable in the year of transfer or conversion. Such deemed capital gains will also arise, if any, loan or advance is taken on the security of these bonds. Further, any amount invested in these bonds will not be eligible for deduction under section 88 of the Income Tax Act.
30.4 These amendments will take effect from 1st day of April, 2001 and will, accordingly, apply to the assessment year 2001-2002 and subsequent years."
Therefore it is undebatable that exemption under section 54EC is allowable only in case of capital gains arising out of transfer of long term capital gains. The intention of Legislature in this regard is unambiguous as evident from the above Circular. The Hon'ble Bombay High Court or Hon'ble Gauhati High Court while deciding the allowability of exemption u/s. 54E in their respective cases for A.Y. 1992-93 and 1991-92 respectively, where not concerned with the above circular which is specific to exemption u/s. 54EC. It is also submitted that a capital gain which is held to be capital gain on transfer of 'short term capital assets' as per section 50, cannot be regarded as capital gain on transfer of 'long term capital assets' for any other provision of the Act including section 54EC more so when the definition of short term capital gain based on period of holding the asset as provided in section 2(42A) is not applicable to such assets. Therefore, it is submitted that the ratio laid down by Bombay High Court in Ace Builders case cannot be applied in the present case.
15. The Apex court had an occasion to examine the provisions of section 50 in the case of Commonwealth Trust Ltd. Vs. CIT (228 ITR 1)(SC). In this case the issue was whether provisions of section 55(2) can be applied while computing the capital gain on transfer of depreciable assets or not. Hon'ble Supreme Court has affirmed various High Court decisions on this issue and reversed the judgment of Bombay High Court and has held that section 50 is a special provision for computing the cost of acquisition in the case of depreciable asset and it overwrites the general provision of section 55(2) and the provisions of section 48 is modified and the cost of acquisition is taken as the written down value as in section 43(6). There is no conflict between the section 50 and 55(2). Section 55(2) would be applicable to all assets depreciable or non- depreciable for the purpose of arriving at the cost of acquisition u/s. 48 and 49 but section 50 carves out a category of those capital assets which have been subjected to grant of depreciation allowance and this section 50 therefore provides a special method for determining the cost of acquisition in such cases. Provisions of section 48, 49 and 55(2) would apply as modified by section 50. Section 50 has no dependence of 6 M/s. Miranda Exports P. Ltd.
section 55. In light of said judgment of Supreme Court, it is submitted that section 50 has no dependence on section 54EC or on section 2(42A). Therefore, the definition of long term capital assets as in 2(29A) has to be read with the definition of short term capital asset as in section 2(42A) and as modified by section 50 in case of depreciable asset. Therefore, it is submitted that an asset on which depreciation has been allowed is always a 'short term capital asset' irrespective of number of months or years for which it is held before transfer.
16. Your attention is also invested to a recent judgment of Kerala High Court in the case of Sakthi Metal Depot (232 CTR 279). In this Judgement, Kerala High Court has considered the issue of taxability of capital gain arising on transfer of an asset on which depreciation has been allowed, in detail. In this case the assessee had a flat purchased in 1974 and was used for the business and depreciation was allowed on the same until A.Y. 1995-96. The assessee did not claim depreciation in A.Y. 1996-97 and A.Y. 1997-98 and sold the flat in A.Y. 1998-99. The assessee offered the capital gain on sale of flat as 'long term capital gain'. The Assessing Officer assessed it as 'short term capital gain' applying provision of section 50.
17. Hon'ble Kerala High Court in para 4 of its order has discussed the provision of section 50 and assessability of surplus on transfer of an asset on which depreciation has been allowed, as capital gains arising on transfer of 'short term capital assets' only. Para 4 reads as under :-
"4. While the contention of the Revenue is that the asset in respect of which depreciation has been claimed when sold should always be assessed as short-term capital gains, the contention of the assessee is that unless the asset sold forms part of the block of asset in the previous year in which sale took place, it cannot be assessed to short-term capital gains under s. 50 of the Act. In our view s. 50 has to be understood with reference to the general scheme of assessment on sale of capital assets. The scheme of the Act is to categorise assets between short-term capital assets and long-term capital assets. Sec. 2(42A) defines short-term capital asset as an asset held for not more than 36 months. The non obstante clause with which s. 50 opens makes it clear that it is an exception to the definition of short-term capital asset which means that even though the duration of holding of an asset is more than the period mentioned in s. 2(42A), still the asset referred to therein will be treated as short-term capital asset. No one can doubt that assets covered by s. 50 are depreciable assets forming part of block of assets as defined under s. 2(11) of the Act. Sec. 50 has two components, one is as to the nature of treatment of an asset, the profit on sale of which has to be assessed to capital gains. The section mandates that a depreciable asset in respect of which depreciation has been allowed when sold should be assessed to tax as short-term capital asset. The other purpose of s. 50 is to provide cost of acquisition and other items of expenditure which are otherwise allowable as deduction in the computation of capital 7 M/s. Miranda Exports P. Ltd.
gains and covered by ss. 48 and 49 of the Act. Here again s. 50 provides an exception for deduction of cost of acquisition and other items of expenditure otherwise allowable in the computation of capital gains under ss. 48 and 49 of the Act. In other words, s. 50 provides for assessment of a depreciable asset in respect of which depreciation has been allowed as short-term capital gains and the deductions available under ss. 48 and 49 should be allowed subject to the provisions provided in sub-ss. (1) and (2) of s. 50. Sec. 50A also deals with assessment of depreciable asset that too as short-term capital gains and it actually supplements s. 50. In our view, the purpose of s. 50A is to enable the assessee to claim deduction of the WDV of the asset in respect of which depreciation was claimed in any year as defined under s. 43(6) of the Act towards cost of acquisition within the meaning of ss. 48 and 49 of the Act. The condition for computation of short-term capital gains in the way it is stated in s. 50A is that assessee should have been allowed depreciation in respect of a depreciable asset sold in any previous year which obviously means that for the purpose of assessment of profit on the sale of a depreciable asset, the assessee need not have claimed depreciation continuously for the entire period upto the date of sale of the asset. In other words, in our view, the building which was acquired by the assessee in 1974 and in respect of which depreciation was allowed to it as a business asset for 21 years, that is upto the asst. yr. 1995-96, still continued to be part of the business asset and depreciable asset, no matter the non-user disentitles the assessee for depreciation for two years prior to the date of sale. We do not know how a depreciable asset forming part of block of assets within the meaning s. 2(11) of the Act can cease to be part of block of assets. The description of the asset by the assessee in the balance sheet as an investment asset in our view is meaningless and is only to avoid payment of tax on short-term capital gains on sale of the building. So long as the assessee continued business, the building forming part of the block of assets will retain its character as such, no matter one or two of the assets in one or two years not used for business purposes disentitles the assessee for depreciation for those years. In our view, instead of selling the building, if the assessee started using the building after two years for business purposes the assessee can continue to claim depreciation based on the WDV available as on the date of ending of the previous year in which depreciation was allowed last.
We therefore allow the appeal by reversing the order of the Tribunal and by restoring the assessment on the profit on sale of the building as short term capital gains, confirmed in first appeal."
19. Therefore, in light of all the discussions as above, it is submitted that surplus on transfer of a capital asset on which deprecation has been allowed, is always assessable as capital gain arising on transfer of 'short term capital asset' 8 M/s. Miranda Exports P. Ltd.
irrespective of the period for which it has been held by the assessee and therefore, exemption u/s. 54EC is not allowable in such case.
20. In case, Hon'ble Bench feels constrained by the order of Bombay High Court in case of Ace Builders, it is humbly submitted that the matter may be referred to a Special Bench for appropriate decision on facts of the case and in view of the Judgement of Supreme Cour in the case of Commonweath Trust Limited (supra) and that of Kerala High Court in the case of Sakthi Metal Depot (supra). The suggested question for reference to Special bench is "When surplus arising on transfer of a capital asset, on which deprecation has been allowed in earlier year/s, is taxable as 'capital gain' arising from transfer of 'short term capital asset' as per section 50 of Income Tax Act, whether such 'capital gain' can also be regarded as 'capital gain' arising on transfer of 'long term capital asset' ?"
5. On the other hand learned counsel for the assessee, submitted that the issue is squarely covered by the decision of Hon'ble Bombay High Court and hence decision of learned CIT(A) does not call for any interference since the same was in line with the view taken by Hon'ble Bombay High Court.
6. We have carefully considered the rival submissions and perused the record. Admittedly Hon'ble Bombay High Court had an occasion to consider the scope and ambit of provisions of section 50 of the Act read with exemption provisions and in this regard Hon'ble Court observed that nothing in section 50 would go to suggest that fiction created in section 50 is not only restricted section 48 & 49 of the Act but also applies to the other provisions. Hon'ble Court categorically observed that the deeming fiction created in section 50 is restricted only to mode of computation of capital gains contained in section 48 & 49. In otherwords, fiction created by the Legislature has to be confined to the purpose for which it is created and merely because it is treated as 'short term capital asset', for the purpose of application of section 50, benefit of exemption provided under other provisions of the Act cannot be denied since it is otherwise a 'long term capital asset'. Having regard to the circumstances of the case, we are of the view that the decision of Hon'ble Bombay High Court is applicable, on all fours, to the facts of the instant case. Since decision of Hon'ble Jurisdictional High Court is binding upon the Tribunal, by respectfully following the aforesaid decision, we uphold the order of learned CIT(A) and dismiss the appeal filed by the revenue.9
M/s. Miranda Exports P. Ltd.
Order has been pronounced on 9th Day of March, 2011.
Sd/- Sd/-
(PRAMOD KUMAR) (D. MANMOHAN)
ACCOUNTANT MEMBER VICE PRESIDENT
Dated : 9th March, 2011.
Copy to : 1. The Appellant
2. The Respondent
3. The CIT(A)-concerned.
4. The CIT, concerned.
5. The DR concerned, Mumbai
6. Guard File
BY ORDER
True copy
ASSTT. REGISTRAR, ITAT, MUMBAI
PS