Bookmark
PDF
Share
CaseIQ

Commissioner Of Income-Tax v. Assam Petroleum Industries (P.) Ltd.

Gauhati High Court

Jun 24, 2003

Judgment

Subsequent
References

CaseIQ

Smart Summary (Beta)

Structured Summary of the Provided Opinion

Factual and Procedural Background

The appeal was admitted on a question of law concerning whether the Tribunal was correct in upholding an order that allowed exemption under Section 54E of the Income-tax Act, 1961, on gains arising from the transfer of depreciated assets when unabsorbed depreciation of earlier years had been claimed and allowed to be set off.

Brief factual matrix (as stated in the opinion):

The assessee (referred to in the opinion as "Assam Petroleum Industry" and described as a company) derived income from house property and business.
The assessment year in question was 1991-92. During the relevant previous year the assessee received compensation from the Deputy Commissioner, Kamrup, for acquisition of its land and building.
The assessee invested the entire compensation in IDBI Bonds and claimed exemption of the capital gain under Section 54E of the Income-tax Act, 1961.
The Assessing Officer allowed the Section 54E claim in respect of the land but rejected the claim in respect of the building on the ground that depreciation had been claimed and allowed earlier; hence the AO treated the gain on the building as arising from a depreciable (short-term) asset under Section 50 and not eligible for Section 54E.
It was on record that depreciation on the building had been allowed in assessment year 1987-88; subsequently no depreciation was claimed or allowed, but unabsorbed depreciation was carried forward and was set off against house property income in assessment year 1989-90.
The assessee appealed to the Commissioner of Income-tax (Appeals), Guwahati, who held the gain on the building to be a long-term capital gain and directed the AO to allow benefits under Section 54E.
The Revenue appealed to the Income-tax Appellate Tribunal (ITAT), Guwahati Bench, which upheld the CIT(A)'s decision and dismissed the Revenue's appeal. The Revenue then filed the present appeal to the court whose opinion is summarized here.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Tribunal was correct in upholding the Commissioner of Income-tax (Appeals) in allowing exemption under Section 54E of the Income-tax Act, 1961, on gains arising out of transfer of depreciated assets when unabsorbed depreciation of earlier years was claimed and allowed to be set off?

Arguments of the Parties

Revenue's Arguments

As advanced by Mr. K.P. Sarma (counsel for the Revenue): once depreciation has been allowed on a capital asset, that asset should be treated as outside the purview of Section 54E, and the capital gain arising on transfer of such an asset is chargeable to income-tax (i.e., the assessee is not entitled to claim exemption under Section 54E).

The opinion does not contain a detailed account of the assessee's separate written submissions beyond the factual statement that the assessee invested the compensation in IDBI Bonds and claimed exemption under Section 54E; the court's analysis focused on statutory interpretation and the Revenue's contention.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The court's analysis proceeds from statutory definitions and the relationship between the provisions invoked by the parties. The reasoning steps, as stated in the opinion, are:

Statutory definitions: The court recalls the definitions relevant to capital gains: Section 2(42A) (short-term capital asset — held for not more than 36 months), Section 2(29A) (long-term capital asset — not a short-term asset), and Section 2(29B) (long-term capital gain — gain from transfer of a long-term capital asset). This establishes the basic temporal test for classifying assets as short-term or long-term.
Computation framework: Sections 48 and 49 govern the computation of capital gains generally. The court notes that Section 48(1)(a) applies to short-term assets and Section 48(1)(b) (with Sub-section (2)) provides for further deductions specific to long-term capital assets.
Effect of Section 50: The court reviews Section 50, a special provision for computation of capital gains in the case of depreciable assets. Section 50 modifies the operation of Sections 48 and 49 "notwithstanding anything contained in clause (42a) of section 2" and prescribes how gains on assets forming part of a block of assets, in respect of which depreciation has been allowed, are to be treated for computation—potentially deeming amounts to be short-term capital gains in certain circumstances.
Separate purpose of Section 54E: The court emphasizes that Section 54E is an independent provision that provides for exemption (i.e., a deduction from income) where specified conditions are met; it is concerned with the mode by which an assessee may obtain exemption when capital gains arise from the transfer of a long-term capital asset and the net consideration is invested in specified assets within six months.
Intersection of Sections 50 and 54E: The court addresses the Revenue's contention by distinguishing the two provisions. The critical analytical point made by the court is that Section 50 is a special provision that modifies the computational rules (Sections 48 and 49) if depreciation has been allowed; however, Section 50 does not itself declare that any depreciated asset is, by that fact alone, to be treated as a short-term asset for the purposes of the definitions in Section 2. In other words, Section 50 prescribes a modified method of computing gains where depreciation has been claimed, but it does not remove the separate requirement in Section 54E that the gain arise from the transfer of a long-term asset.
Requirements for Section 54E to apply: The court sets out the essential prerequisites for Section 54E to operate: (i) the capital gain must arise from the transfer of a long-term capital asset; and (ii) the assessee must, within six months of the transfer, invest or deposit the whole or any part of the net consideration in any specified asset. If these conditions are satisfied, the assessee is entitled to the exemption under Section 54E.
Application to the present facts: Applying these principles, the court concluded that the assessee's transfer of the building gave rise to a long-term capital gain (the court accepted the CIT(A) and the Tribunal's findings to this effect) and that the assessee had invested the consideration in IDBI Bonds within the statutory period. Because Section 54E is independent and its prerequisites were met, the assessee was entitled to the exemption even though depreciation had been allowed in an earlier year and unabsorbed depreciation had been carried forward and set off in a later year.

The court therefore rejected the Revenue's argument that allowance of depreciation per se ousts the asset from the applicability of Section 54E.

Holding and Implications

Holding: The question is answered in favour of the assessee. It is held that the assessee is entitled to exemption/deduction as provided under Section 54E of the Income-tax Act in respect of the capital gains arising on the transfer of the building.

Implications (direct effect):

The direct consequence is that the assessee's claim for exemption under Section 54E in respect of the building is sustained and the Assessing Officer was directed (by the CIT(A) and affirmed by the Tribunal, and ultimately accepted by this court's reasoning) to allow the benefit under Section 54E.
The opinion makes clear that Section 50 is a provision prescribing a modified method of computing capital gains where depreciation has been allowed; it does not, by itself, convert a depreciable asset into a short-term capital asset for the purposes of Section 54E. Thus, the allowance of depreciation in earlier years does not automatically preclude an assessee from claiming Section 54E where the statutory prerequisites of Section 54E are otherwise met.
No broader precedent beyond the decision's direct application to the parties is stated in the opinion. The court's reasoning is statutory interpretation limited to the relationship between Sections 48, 49, 50 and 54E as applied to the facts of this case.

This summary has been prepared strictly on the basis of the content contained in the provided opinion. No information not present in the opinion has been added.

Show all summary ...

1. The appeal has been admitted on the following question of law :

"Whether, on the facts and in the circumstances of the case, the Tribunal was correct in upholding the order of the Commissioner of Income-tax (Appeals) in allowing exemption under Section 54E of the Income-tax Act, 1961, on gains arising out of transfer of depreciated assets, when unabsorbed depreciation of earlier years was claimed and allowed to be set off ?"

2. To answer the question, the brief facts necessary are--Assam Petroleum Industry is a company. The assessee derived income from house property as well as from his business dealing. The assessment year in question is 1991-92. During the previous year the assessee has received compensation from the Deputy Commissioner, Kamrup, for acquisition of its land and building. The assessee had invested the entire receipt of compensation by purchasing IDBI Bonds and claimed exemption of the capital gain under Section 54E of the Income-tax Act, 1961. The claim made by the assessee in regard to land was allowed by the Assessing Officer whereas the claim in regard to building the Assessing Officer was of the view that the depreciation of the said building having been claimed and allowed under the Income-tax Act, capital gain arising out of transfer of the said building is to be construed as short-term capital gain under Section 50 of the Act and not a long-term capital gain as claimed by the assessee and thus the assessee is not entitled to claim benefit under Section 54E of the Income-tax Act, 1961. It has come on record that the depreciation on the building has been allowed to the assessee in the year 1987-88 and thereafter no depreciation has been claimed by nor allowed to, the assessee. However, the unabsorbed depreciation was carried over from the preceding assessment years and was allowed set off against house property income in the assessment year 1989-90. The Assessing Officer, therefore, concluded that the assessee claimed the depreciation on the building and the Department allowed the same in the relevant year and therefore the building in question was a depreciated asset and thus capital gain arising out of transfer of the said property was short-term capital gains within the meaning of Section 50 of the Act. Consequently, the Assessing Officer rejected the claim of the assessee under Section 54E of the Act.

3. Aggrieved by the order of assessment the assessee preferred an appeal before the Commissioner of Income-tax (Appeals), Guwahati. The Appellate Commissioner has held that the capital gain claimed by the assessee on the transfer of its building was a long-term capital gain and, therefore, the addition made by the Assessing Officer was not sustainable in law. The Commissioner of Income-tax (Appeals) held that the Assessing Officer is not correct in invoking Section 50 of the Act for arriving at the conclusion that the assessee has transferred the short-term capital asset. The Assessing Officer was directed to allow the benefits of Section 54E of the Act to the assessee.

4. The Revenue was aggrieved by the order passed by the Commissioner of Income-tax (Appeals) and preferred an appeal before the Income-tax Appellate Tribunal, Guwahati Bench, Guwahati. The Tribunal upheld the findings and the view taken by the Commissioner of Income-tax (Appeals) and dismissed the appeal filed by the Revenue. That is how the Revenue has preferred this appeal in this court.

5. The question falls for determination is whether the assessee who has claimed and allowed depreciation on capital assets is entitled for benefits under the provisions of Section 54E and claimed deduction while calculating his income or by virtue of Section 50 of the Income-tax Act. The capital gains shall be considered to have arrived out of short-term capital asset and the assessee is not entitled to claim benefit.

6. The contention of Mr. K.P. Sarma, counsel for the Revenue, is that once depreciation is allowed on the capital asset, the capital asset goes out of purview of Section 54E and the capital gain shall be chargeable to income-tax and the assessee is not entitled to claim any exemption on capital gain and consequently from his income under that provision.

7. Section 2(42A) defines "short-term capital asset" which means a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer. Thus the assets, which have been already held for more than 36 months before it is transferred, would not be short-term capital assets, Section 2(29A) defines "long-term capital asset" means a capital asset, which is not short-term capital asset. Therefore, the asset, which has been held for more than 36 months before the transfer, would be long-term capital asset. Section 2(29B) provides for "long-term capital gain" which means capital gain arising from the transfer of a long-term capital asset.

8. All capital gains on the transfer of the capital asset whether short-term capital asset, or long-term capital asset except otherwise provided, in mentioned sections in Section 45 of the Income-tax Act are chargeable to income-tax. How the capital gains shall be computed is laid down under Sections 48 and 49 of the Income-tax Act, 1961. The capital gain arising from the transfer of short-term assets under Section 48 (as it stands at the relevant time), are wholly assessable to be as ordinary income after deduction as provided under section 48(1)(a) whereas the capital gain arising from the transfer of long-term capital assets are partially assessable as provided under Section 48(1)(b), which reads :

"48. (1)(b) where the capital gain arises from the transfer of a long-term capital asset (hereafter in this section referred to, respectively, as long-term capital gain and long-term capital asset) by making the further deductions specified in Sub-section (2)."

9. Thus by virtue of this section, long-term capital assets would be entitled for further deduction as provided in Sub-section (2) of Section 48. Section 49 is a provision whereunder the general principle is laid down for computing capital gains and certain exceptions are engrafted in the section. Thus, sections 48 and 49 provide for the principles on which the capital gains shall be computed and the benefit which can be given for the transfer of long-term capital assets while calculating the capital gain by virtue of Sub-section (2) of Section 48 wherein the assessee transferring long-term capital assets can claim further deduction as specified under Sub-section (2).

10. Section 50 of the Act, 1961, reads :

"50. Special provision for computation of capital gains in case of depreciable asssets.--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 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."

11. By virtue of this section, notwithstanding anything contained in clause (42a) of section 2, where the short-term capital asset has been defined, if the depreciation is allowed, the procedure for computing the capital gain as provided under Sections 48 and 49 would be modified and shall be substituted as mentioned in Section 50. Section 50 only provides that if the depreciation has been allowed under the Act on the capital asset then the assessee's computation of capital gain would not be under Sections 48 and 49 of the Income-tax Act and it would be with modification as provided under Section 50. Section 54E is the section which has nothing to do with sections 48 and 49 or with Section 50 of the Income-tax Act, 1961, wherein mode of computation of capital gain is provided. Section 54E is a provision whereby the assessee is entitled to claim exemption or deduction from his income if the condition laid down therein is fulfilled. The relevant provision of Section 54E reads as under :

"54E. Capital gain on transfer of capital assets not to be charged in certain cases.--(1) Where the capital gain arises from the transfer of a long-term capital asset (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,-. . ."

12. The essential requirements or ingredients to attract the provisions of Section 54E are--(i) the capital gains has arisen from the transfer of a long-term capital asset and not from any short-term capital asset, (ii) the assessee has, within period of six months after the date of transfer invested or deposited any part or whole of the net consideration in any specified asset, if these essential conditions are complied by the assessee then he would be entitled for the exemption as specified under Section 54E of the Act of 1961. The assessee has to satisfy that the transfer in question of the asset is that of a long-term capital asset. Secondly, that the amount received by him towards the transfer of a long-term capital asset has been invested or deposited in any specified asset which are mentioned in Section 54E partially or fully within a period of six months from the date of transfer. If these two conditions are satisfied by the assessee he shall be entitled for the benefit as provided under Section 54E of the Act. Section 54E is an independent provision, which is not controlled by Section 50 of the Act.

13. Section 50 is a special provision where the mode of computation of capital gains is substituted if the assessee has claimed the depreciation on capital assets. Section 50 nowhere says that depreciated asset shall be treated as short-term asset, whereas Section 54E has an application where long-term capital asset is transferred and the amount received is invested or deposited in the specified assets as required under section 54e. for application of section 54e the necessary pre-requisite condition and enquiry would be, whether the assessee has transferred long-term capital asset and whether the consideration so received is invested or deposited within the time limit in specified asset. Capital gain may have been received by the assessee on depreciable assets, if the conditions necessary under Section 54E are complied with by the assessee, he will be entitled to the benefit envisaged in Section 54E of the Income-tax Act.

14. Thus the question is answered in favour of the assessee and it is held that the assessee is entitled for exemption or deduction as provided under Section 54E of the Income-tax Act on capital gains.