According to section 50 of Income tax Act if an assessee has sold a capital asset forming part of block of assets (building, machinery etc) on which the depreciation has been allowed under Income Tax Act, the income arising from such capital asset is treated as short term capital gain.  Section 50 modifies the provisions of section 48 (mode of computation) and section 49 (cost with reference to certain modes of acquisition).

Provisions such as section 54EC, 54 and 54F provide exemption for capital gain arises from the transfer of a long-term capital asset. 

An interesting issue arises as to whether exemption can be claimed for capital gain arising from the transfer of capital asset forming part of block of assets on which the depreciation has been allowed and if such asset qualify as long term capital asset.

Section 50 modifies the provisions of section 48 and section 49.  Section 50 deems excess sale consideration as short term capital gains.  It does not deem the asset itself to be short term capital asset.  Therefore, proper view would be that exemption sections 54EC, 54 and 54F would be available if the asset otherwise is long term.  This view is supported by following decisions.

In the case of CIT v. ACE Builders (P.) Ltd. [2006] 281 ITR 210/[2005] 144 Taxman 855 (Bom.), theHigh Court observed that Section 50 of the Act which is a special provision for computing the capital gains in the case of depreciable assets is 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.  The High Court held as follows:

“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 v. D. Hanumantha Rao 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.”

This view of High Court was upheld by Supreme Court in the case of CIT v V.S. Dempo Company Ltd. [2016] 74 taxmann.com 15 (SC); 387 ITR 354.

Same view has also taken in the following cases:

  1. CIT v. Polestar Industries [2014] 41 taxmann.com 237/221 Taxman 423 (Guj.)
  2. CIT v. Assam Petroleum Industries (P.) Ltd. [2003] 262 ITR 587/131 Taxman 699 (Gau.).
  3. Shrawan Kumar G Jain (2018) 99 taxmann.com 88 (Ahmedabad ITAT)
  4. DCIT vs. Hrishikesh D. Pai [2019] 197 TTJ 583 (Mumbai – Trib.) – The ITAT held that deeming fiction of section 50 cannot be extended to the deduction allowable u/s. 54F and therefore, assessee is entitled for deduction u/s. 54F on the capital gains arising on the sale of depreciable assets as these assets were held for a period of more than thirty-six months. 

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