ITO vs. Legal Heir of Shri Durgaprasad Agnihotri (ITAT Mumbai)

The assessee sold a shop and earned long-term capital gains. The assessee invested Rs.25,50,000 in capital gain bonds of National Highway Authority of India and claimed exemption under section 54EC of the Act against the aforesaid capital gain earned. The Assessing Officer denied the benefit of exemption under section 54EC on the ground that the shop was a depreciable asset and the resultant gain was a short term capital gain whereas the exemption under section 54EC was available only on long term capital gain (LTCG). The CIT(A) allowed the appeal by relying on CIT v/s Ace Builder Pvt. Ltd., 281 ITR 210 where it was held that s. 54EC deduction is allowable for short term capital gain u/s 50 of the Act on depreciable assets. On appeal by the department to the Tribunal HELD:

(i) By virtue of the deeming provision of section 50, cost of a long-term capital asset (LTCA), i.e., as per section 2(29A), where depreciable, forming part of a block assets on which depreciation stands claimed, the capital gain on its transfer would have to be computed in terms thereof, i.e. by treating the WDV of the relevant block of assets (or, as the case may be, the relevant asset) as its cost of acquisition. The second deeming per the provision of section 50 is qua the nature of such capital gains, i.e., as capital gains arising from the transfer of a STCA. Section 54EC is available on capital gain arising on the transfer of a LTCA, i.e., which is not a STCA by definition. The same shall, therefore, not apply to capital gains computed u/s.50.

(ii) The rationale for this far is not far to seek. Depreciation on a capital asset represents the consumption of an asset to that extent. A depreciable asset gets exhausted on its deployment and user for the purpose of business/profession over its useful life. The depreciation allowed represents the depletion of an asset to that extent, i.e., over the holding period, so that it signifies its consumption to that extent. This would, in our view, also explain or bring forth the prescription of a separate computation mechanism for capital gain on transfer of capital assets that are depreciable (per s. 50), and also not extending thereto the indexation benefit, to adjust for the inflation factor, per s. 48, for such assets even where held for long-term. Why, the WDV of an asset, which u/s.50 substitutes for its’ cost, is itself not determinable, i.e., where depreciable, forming part of a block of assets, even as held by the Hon’ble Courts. Section 50 is thus a self contained code for determining the nature and the quantum of the capital gain arising on the transfer of depreciated assets. The deeming of section 50, even otherwise separately provided for (per s. 50(2)), would thus prevail. We, therefore, find merit in the contention of ld. DR with regard to this aspect of the matter.

(iii) So, however, the Hon’ble jurisdictional High Court has in Ace Builders (P.) Ltd. (supra), clearly held deduction u/s.54EC to be available on the capital gains computed u/s.50 of the Act. We are bound by the said case law. We, therefore, respectfully following the same, uphold the CIT(A)’s decision in the matter. The foregoing discussion, which represents our humble opinion in the matter, is only to project the view point of the Revenue, for the consideration of the Hon’ble Court in appropriate proceedings.