1. This is an appeal by the assessee against the order of the CIT (Appeals) for assessment year 1992-93. A short but an interesting question has been raised in this appeal and that is as to whether the assessee is entitled to the deduction under section 54E in respect of the capital gain arising on transfer of a capital assets on which depreciation has been allowed and which is deemed as short-term capital gains under section 50 of the Act.
2. The assessee is a private limited company. It was a partner in a firm called M/s. D Manekji & Associates. It 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 flat has thereafter been shown as a capital asset in assessee's books of account and depreciation 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 31-3-1991 was Rs. 44,875. The resulting written down value as on 31 -3-1991 was Rs. 1,42,515. The flat was sold in the previous year under consideration for a sum of Rs. 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 nilin 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 gain provisions of the Act. According to him following points have been incorporated in section 50(2): one, where any block of assets ceased to exist on account of transfer of all assets in the block, then 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; two, the income received or accruing as a result of transfers shall be deemed to be the capital gain arising from the transfer of short-term capital assets. He further held that assessee was not entitled to any deduction under section 48(2). He also held that no deduction under section 54E can be given to assessee because it is available only in respect of long-term capital gain whereas the capital gain in this case was of the short-term nature.
4. Before the CIT (Appeals) the assessee contended that it fulfils all the conditions specified in section 54E and there is nothing in section 50 of the Act to indicate that these provisions override the benefit of exemption under section 54E of the Act. It was further submitted that the intention of inserting section 50 was to modify sections 48 and 49 to a certain extent, namely, the definition of "short-term capital assets" as given in section 2(42 A) is to be disregarded, meaning thereby that if any capital gain arises on transfer of depreciate asset, the capital gain, instead of being computed under section 48(1) and (2), is to be computed under section 50. That however, it was submitted, does not mean that for applying other provi- sions of capital gain, the definition of short-term capital asset as given in section 2(42A) is to be disregarded. It was submitted that section 50 is deeming provision and its scope is restricted to the provisions of seclions 48 and 49 alone and the same cannot go beyond the charging section viz., section 45 which itself provides amongst other, the exemptions under section 54E. Reliance on the decision of the Bombay High Court in the case of Gokuldas Dossa & Co. v. J.P. Shah [1995] 211 1TR 706 (FB) was placed to support the claim. The CIT (Appeals) did not find any force in any of the submissions of the assessee. He held that the decision of Bombay High Court has no relevance as the same was not in connection with exemption under section 54E of the Act. According to him section 50 provides for a special provision for the computation of capital 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 asscssce's share on its dissolution in 1984. It was therefore a "long-term capital asset". It is true that it was being used for the purposes of business and depreciation has been allowed from year to year thereon and therefore it was a depreciable asset within the meaning of section 50 of the Act which provides the treatment to be given to the gain arising on transfer of depreciable asset to be "short-term capital gain", yet section 50 does not exclude the operation of section 54E which grants exemption in ease of "long-term capital gain" namely, the gain arising on transfer of a "long-term capital asset" (as the asset was held for more than 36 months before the date of transfer)- According to him, the changes brought in the assessment of capital gains with effect from 1-4-1988 was not to disturb the exemptions relating to the long-term capital gain but to ensure that when the block of asset ceases to exist for the reason that the sale proceeds of any of the assets within a block exceeded the written down value of the block of assets together with new additions, an assessee should not get the benefit of claiming the cost of asset in respect of which the sale proceeds were realised for the second time, as the original cost would have already been absorbed in the earlier years through the sale of other assets within the block and so also in such a situation the assessee should not be accorded concessional treatment in respect of the long-term capital gains for the reason that under the new method of depreciation an assessee is not required to maintain otherwise the details of the cost of assets, depreciation and written down value from year to year which makes it difficult to a certain estimate that the resultant gain is a long-term capital gain of short-term. Therefore, the deeming fiction in section 50, according to him, seeks to ensure that the concessional treatment accorded to the long-term capital gains is not available in such situation to the assessee. It is not to deny the exemption of long-term capital gain provided under section 54E. He also referred to the provisions of the Explanation inserted with effect from the same date under section 53 of the Act and the CBDT circular No. 560 elated 18-5-1990. He further submitted that the fiction created under section 50 to treat the gain as short-term capital gain is only for the purposes of sections 48 and 49 and therefore should 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 C1T (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 capita! 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 the income chargeable under the head "Capital gains" is to be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset-- (i) the expenditure incurred wholly and exclusively in connection with such transfer; and (ii) the cost of acquisition of the asset and the cost of any improvement thereto. Clause (b) provides for the deductions to be allowed where the capital gain arises from the transfer of a long-term capital asset by making the further deductions as specified in sub-section (2); namely, (a) Where the amount of long-term capital gain arrived at after making the deductions under clause (a) of sub-section (1) does not exceed fifteen thousand rupees, the whole of such amount; and (&) in any other case, fifteen thousand rupees as increased by a sum equal to ten per cent. Of the amount of such gain in excess of fifteen thousand rupees if the long-term capital gain so arrived at related to capital assets, being buildings or lands or any rights in buildings or lands or gold, bullion or jewellery, and fifty per cent of the amount of such gain in excess of fifteen thousand rupees in case of other assets. The other clauses in the section provide for the deductions to be allowed in case of other assets and therefore are not discussed here.
7. Section 49 deals with the cost with reference to certain modes of acquisition where the capital asset became the property of the assessee not by purchase but otherwise. It deems the cost of acquisition of such asset to be the cost for which the previous owner of the property acquired it, as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be.
8. Section 50, which is the core of issue in this case, provides for a special provision for computation of capital gains in case of depreciable assets. It reads as under :-- "Notwithstanding anything contained in clause (42A) of Section 2, where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act or under the Indian Income-tax Act, 1922 (11 of 1922), the provisions of sections 48 and 49 shall be subject to the following modifications :-- (1) Where the full value of the consideration received or accruing as a result of the transfer 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 deemed to be the capital gains arising from the transfer of short-term capital assets." 9. Section 54E provides for certain cases in which the capital gain on transfer of capital asset is not to be charged. It reads as under : "(1) Where the capital gain arises from the transfer of a long-term capital asset before the 1st day of April, 1992, (the capital asset so transferred being hereafter in this section referred to as the original asset) and the assessee has, within a period of six months after the date of such transfer, invested or deposited the whole or any part of the net consideration in any specified asset (such specified asset being hereafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,-- (a) If the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45; (b) If the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of acquisition of the new asset bears to the net consideration shall not be charged under section 45." 10. The term 'long-term capita! asset" is defined in section 2{29A) to mean a capital asset which is not a short-term capital asset. The term "short-term capital asset" is defined in section 2(42A) to mean an assets held by an assessee for not more than 36 months before the date of transfer. Ordinarily therefore the gain arising to the assessee in this case has to be a gain arising from the transfer of "long-term capital asset". As per the Explanation to section 53 such capital gain is to be the amount as computed under clause (a) of sub-section (1) of section 48. It is the amount arrived at by deducting from the full value of consideration received or accruing as a result of transfer of capital asset, the expenditure incurred wholly and exclusively in connection with such transfer and the cost of acquisition of the asset including the cost of improvement thereto.
11. There is no dispute in this case that the capital asset, namely, the residential house held by the assessee was a depreciable asset within the meaning of section 50. This section provides, as 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 makes a difference between the two, and provide for a differential treatment for the two. Firstly, there is a difference in the tax payable in respect of the two; the short-term capital gain is chargeable to the normal rates whereas the special rate is provided for taxing the long-term capital gain under section 112. Secondly, there are different provisions for set off and carry forward of the losses incurred under the capital gains for the two type of assets. The losses arising from the transfer of short-term capital asset are set off against the other income of the assessee in the previous year whereas the losses arising from the transfer of long-term capital asset is to be set off only against the income arising from the transfer of long-term capital asset in that year and in absence thereof it is carried forward to be so set off against the income arising from the transfer of long-term capital asset in the years to come. Thirdly, there arc many provisions providing for exemptions for capital gains arising from the transfer of long-term capital asset. They are sections 48 (incorporating earlier provisions under section 80T), 53, 54, 54B, 54D, 54E, 54F, 54G and 54H etc.
Neither the provisions of section 50 are made 'subject to' or 'notwithstanding the other provisions of the Act' excepting the provisions of sections 48 and 49; nor the provisions of section 54E arc so made 'subject to' or 'notwithstanding the other provisions of the Act'.
13. It is true that section 50 contains a special provision for computing capital gain in case of depreciable asset and therefore it has to override the general provision for computing the capital gains under section 48 of the Act but that does not mean that it overrides all other provisions of the Act. The language used in section 50 states that the provisions of sections 48 and 49 shall be subject only to certain modifications contained therein. Section 48, as seen earlier, provides for certain deductions to be made from the full value of consideration received or accruing as a result of transfer and they arc, as aforesaid, the expenditure incurred wholly and exclusively in connection with the transfer and the cost of acquisition of the asset and the cost of improvement thereto. If the gain arises from the transfer of a long-term capital asset then sub-section 2 thereof provides for certain other deductions for computing 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 section 54E is the amount of full consideration as reduced by the expenditure incurred wholly and exclusively in connection with the transfer. Again for the purposes of section 54E the amount of capital gain is to be understood as the amount computed under section 48(1)(a) of the Act and that is the amount arrived at after deducting from the full value of the consideration arising from the transfer of the capital is, the expenditure incurred in connection with the transfer and the cost of acquisition of the capital asset and to this extent the provisions of section 48 have not been modified by section 50 of the Act.
15. The Kerala High Court in the case of CIT v. V.V. George [1997] 227 ITR 893 held that section 48(1)(a) speaks of the ways of computation of capital gain and the first aspect is in the process of computation, by deduction from the full value of consideration received, two items, namely, expenditure incurred wholly and exclusively in connection with the transfer and the cost of acquisition in regard thereto.
Incidentally, section 48(1)(b) speaks of the statutory provision relating to the transfer of long-term capital asset providing for further deductions specified in section 48(2). Thus it would be found that after knowing about the concept of capital gains, the statutory provisions speak of consequential mode of computation and deductions in regard thereto. Taking into consideration the provisions of the Explanation to section 53 providing that in section 54E etc. reference to capital gains is to be construed as reference to the amount of capital gain as computed under clause (a) of sub-section (1) of section 48, their Lordships held that in computing capital gains the provisions of section 48(2) should be given effect to before giving effect to the provisions of section 54E of the Act.
16. The treatment of capital gain arising in case of a transfer of a depreciable asset as short-term capital gain is to be thus restricted to only for the purposes of section 48(2) of the Act as that is the only provision in both the sections 48 and 49 which makes a distinction between a long-term capita! gain and a short-term capital gain. The deductions provided under this sub-section (2) is not to be allowed in this case because it was a depreciable asset the transfer of which gave rise to capital gain. This assumption of treating/deeming any gain arising 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 depreciation. In this case however that difficulty is not there because the residential house which was sold by the assessee was the only asset forming part of the block of assets and its year of acquisition and its identity is known.
18. The scope of section 50 before its amendment with effect from 1-4-1988 came up for consideration before their Lordship of Supreme Court in the case of Commonwealth Trust Ltd. v. CIT [1997] 228 ITR 1.
This was a ease where the right of the assessee to opt the market value as cost of acquisition in case of a depreciable asset was the subject-matter of consideration. Their Lordships held that section 55(2) providing for an option to adopt market value, 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, section 50 carved out a category of those capital assets which had been subjected to grant of depreciation. Section 50 provides for a special method to determine the cost of acquisition in such cases.
Their Lordships further held that provisions of section 55(2) are not subject to the provisions of section 50. The provisions of section 50(2) are subject to provisions of sections 55(2) and 49. And therefore to sections 48 and 49, the provisions of section 55(2) would like as modified by those of section 50. Their Lordships held that section 50(1) has no dependence on the provisions of section 55(2). There is no mention of "Fair market value" in section 50(1) and besides that the adjustments stated therein are with reference to written down value only, which has nothing to do with the fair market value. Section 50(2) does not apply to any capital asset other than that which has been acquired by any other modes mentioned in section 49. It does not apply to the case of person who has himself purchased the asset, which has enjoyed the depreciation allowance. Section 50 is in absolute terms specifically providing for fixing the cost of acquisition in the case of depreciable assets only. It is further held "section 55(2) gives an option to both kinds of assessees, that is, those who have purchased the capital asset, as well as those who have acquired it by any of the modes mentioned in section 49 to substitute for the actual cost of acquisition, the fair market value of the assets as on January 1, 1954.
Section 55(2) will have application, 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 assessec or the previous owner, in the case of the asscssee 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 nondepreciable 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 grant of depreciation allowance and section 50 provides a special method for determining the cost of acquisition in such cases. The provisions of section 55(2} are not subject to the provision of section 50. The provisions of section 50(2) are subject to the provisions of sections 55(2) and 49. Now, to sections 48 and 49 the provisions of section 55(2) would apply as modified by section 50." 19. This case has reversed the decision of Bombay High Court in the case of Gokuldas Dossa and Co. relied upon learned counsel of the assessee. The decisions of Allahabad High Court in the case of CIT v.Upper Doab Sugar Mills [1979] 116 1TR 240, of Gujaral High Court in the case of Rajnagar Vaktapur Ginning, Pressing & Mfg. Co. Lid v. CIT [1975] 99 ITR 264, of Calcutta High Court in the case of India Jute Co.
Ltd. v. CIT [1982] 136 1TR 597 and of the Kerala High Court in the case of CIT v. Commonwealth Trust Ltd. [1982] 135 ITR 19 (FB) have been approved wherein it was held that section 50(1) being a special provision for computing cost of acquisition in the case of depreciable assets, would override the general provisions of section 55(2) which according to these High Court would be applicable to cases of non-depreciable assets or depreciable assets on which depreciation had not been claimed. These are cases for exercising option of the substituted value as cost of acquisition where the assessee has acquired a capital asset otherwise than by any other modes mentioned in section 49 of the Act. The Supreme Court in this case however considered the applicability of the section 48 where the assessee has acquired the capital asset by himself and not by any of the modes mentioned in section 49 of the Act. The special provision contained in section 50 at the time was only for determining the cost of acquisition in case of depreciable asset and not for computing capital gain in case of depreciable asset. The title to the old provisions, which were considered by the Supreme Court and the title to the new provisions of section 50 are thus altogether different. The nature of the capital gain as to whether it is a long-term capital gain or short-term capital gain is not provided in either section 48 or section 49. These two sections provide as to how the capital gain is to be computed or how the cost of acquisition of the asset giving rise to the capital gain is to 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 claimed deduction under section 54E and that in our opinion is to be granted to it because the gain is arising on transfer of long-term capital asset. We direct accordingly.