Case Name:

Commissioner of Income Tax vs. V.S. Dempo Company Ltd.

Civil Appeal No(s).4797/2008

Key Takeaways:

- The fiction created by Section 50 for computing capital gains on depreciable assets is limited to Sections 48 and 49 of the Income Tax Act.

- Section 54E, which provides exemption for capital gains invested in specified assets, does not distinguish between depreciable and non-depreciable assets.

- The exemption under Section 54E cannot be denied to an assessee solely based on the fiction created by Section 50.

Issue:

Can an assessee be denied exemption under Section 54E of the Income Tax Act for capital gains from the sale of a depreciable asset, based on the fiction created by Section 50 for computing capital gains on such assets?

Facts:

- The assessee, V.S. Dempo Company Ltd., sold a loading platform (M.V. Priyadarshni) in 1989, which was a long-term capital asset purchased in 1972.

- The assessee claimed exemption under Section 54E for the capital gains from the sale of this asset.

- The Assessing Officer rejected the claim, stating that since the assessee had claimed depreciation on the asset, the provisions of Section 50 were applicable.

- The Commissioner of Income Tax (Appeals) upheld the Assessing Officer's decision, but the Income Tax Appellate Tribunal allowed the assessee's appeal.

Arguments:

- The Revenue argued that since the assessee had claimed depreciation on the asset, the fiction created by Section 50 for computing capital gains on depreciable assets should apply, disallowing the exemption under Section 54E.

- The assessee contended that the fiction in Section 50 is limited to Sections 48 and 49 (computation of capital gains) and cannot be extended to Section 54E, which provides exemption without distinguishing between depreciable and non-depreciable assets.

Key Legal Precedents:

- The Bombay High Court's judgment in "The Commissioner of Income-tax, Mumbai City-II, Mumbai vs. ACE Builders Pvt. Ltd." (2005) 3 Bom CR 598

- The Supreme Court's judgment in "State Bank of India vs. D. Hanumantha Rao" (1998) 6 SCC 183

- The Gujarat High Court's judgment in "Commissioner of Income tax V. vs. Polestar Industries"

Judgement:

The Supreme Court agreed with the Bombay High Court's view and dismissed the Revenue's appeal. The court held that:

- The fiction created under Section 50 is confined to the computation of capital gains under Sections 48 and 49 and cannot be extended beyond that purpose.

- Section 54E does not make any distinction between depreciable and non-depreciable assets for the purpose of exemption.

- The exemption under Section 54E cannot be denied to the assessee solely based on the fiction created by Section 50.

The court relied on its own judgment in "State Bank of India vs. D. Hanumantha Rao" and the judgments of the Gujarat and Gauhati High Courts, which had taken a similar view.

FAQs:

Q1. What is the significance of this judgment?

A1. This judgment clarifies that the fiction created by Section 50 for computing capital gains on depreciable assets is limited to Sections 48 and 49 and cannot be extended to deny the exemption under Section 54E, which does not distinguish between depreciable and non-depreciable assets.

Q2. Can an assessee claim exemption under Section 54E for capital gains from the sale of a depreciable asset?

A2. Yes, based on this judgment, an assessee can claim exemption under Section 54E for capital gains from the sale of a depreciable asset, provided the other conditions of Section 54E are met.

Q3. What is the legal reasoning behind the court's decision?

A3. The court relied on the principle that a legal fiction created by the legislature must be confined to the purpose for which it was created and cannot be extended beyond that purpose. The court also emphasized that Section 54E does not make any distinction between depreciable and non-depreciable assets for the purpose of exemption.

Q4. What are the implications of this judgment for assessees and the Revenue?

A4. This judgment provides clarity and certainty for assessees claiming exemption under Section 54E for capital gains from the sale of depreciable assets. It also limits the Revenue's ability to deny such exemptions based solely on the fiction created by Section 50.

Q5. Are there any other relevant legal precedents cited in the judgment?

A5. Yes, the court cited the judgments of the Gujarat High Court in "Commissioner of Income tax V. vs. Polestar Industries" and the Gauhati High Court, which had taken a similar view.

In the return filed by the respondent/assessee for the Assessment Year 1989-90 the assessee had disclosed that it had sold its loading platform M.V. Priyadarshni for a sum of Rs. 1,37,25,000/- on which it had earned some capital gains. On the said capital gains the assessee had also claimed that it was entitled for exemption under Section 54E of the Income Tax Act. Admittedly, the asset was purchased in the year 1972 and sold sometime in the year 1989. Thus, the asset is almost 17 years old. Going by the definition of long term capital asset contained in Section 2(29B) of the Income Tax Act, 1995 (hereinafter referred to as 'the Act'), it was admittedly a long-term capital asset. Further the Assessing Officer rejected the claim for exemption under Section 54E of the Act on the ground that the assessee had claimed depreciation on this asset and, therefore, provisions of Section 50 were applicable. Though this was upheld by the Commissioner of Income Tax (Appeals), the Income Tax Appellate Tribunal allowed the appeal of the assessee herein holding that the assessee shall be entitled for exemption under Section 54E of the Act. The High Court has confirmed the view of the Commissioner of Income Tax (Appeals) and dismissed the appeal of the Revenue. While doing so the High Court has relied upon its own judgment in the case of “The Commissioner of Income-tax, Mumbai City-II, Mumbai vs. ACE Builders Pvt. Ltd. [(2005) 3 Bom CR 598]. The High Court has 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 has limited application only in the context of mode of computation of capital gains contained in Sections 48 and 49 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 deals with the mode of computation and Section 49 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 “The Commissioner of Income-tax, Mumbai City-II, Mumbai vs. ACE Builders Pvt. Ltd.” (2005) 3 Bom CR 598 in the following manner:

“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 vs. D. Hanumantha Rao reported in 1998 (6) SCC 183. In that case, the Service Rules framed by the bank provided for granting extension of service to those appointed prior to 19.07.1969. The respondent therein who had joined the bank on 1.7.1972 claimed extension of service because he was deemed to be appointed in the bank with effect from 26.10.1965 for the purpose of seniority, pay and pension on account of his past service in the army as Short Service Commissioned Officer. In that context, the Apex Court has held that the legal fiction created for the limited purpose of seniority, pay and pension cannot be extended for other purposes. Applying the ratio of the said judgment, we are of the opinion, that the fiction created under Section 50 is confined to the computation of capital gains only and cannot be extended beyond that. Thirdly, Section 54E does not make any distinction between depreciable asset and non-depreciable asset and, therefore, the exemption available to the depreciable asset under Section 54E cannot be denied by referring to the fiction created under Section 50. Section 54E specifically provides that where capital gain arising on transfer of a long term capital asset is invested or deposited (whole or any part of the net consideration) in the specified assets, the assessee shall not be charged to capital gains. Therefore, the exemption under Section 54E of the I.T. Act cannot be denied to the assessee on account of the fiction created in Section 50.”

We are in agreement with the aforesaid view taken by the High Court.

We are informed that the Gujarat High Court as well as Guahati High Court have also taken the same view in the following cases:

1. Commissioner of Income tax V. vs. Polestar Industries [2013 SCC online Gu 5517]

2. Commissioner of Income – Tax vs. Assam Petroleum Industries (P.) Ltd. [(2003) 262 ITR 587].

We are also informed that against the aforesaid judgments no appeal has been filed.

In view of the foregoing, we do not find any merit in the instant appeal which is, accordingly, dismissed.

[A.K. SIKRI]

[ROHINTON FALI NARIMAN]

NEW DELHI;

SEPTEMBER 05, 2016.