Case Note & Summary
The Commissioner of Income Tax, Mumbai City-II, appealed against the order of the Income Tax Appellate Tribunal which allowed deduction under Section 54E of the Income Tax Act, 1961 to the assessee, ACE Builders Pvt. Ltd., in respect of capital gains arising from the sale of a flat. The assessee, a private limited company, was a partner in a firm that was dissolved in 1984, and the assessee was allotted a flat against its capital account balance. The flat was shown as a capital asset in the books, and depreciation was claimed. The cost of the gross block was Rs.1,87,390, with depreciation up to 31/3/1991 of Rs.44,875, resulting in a written down value of Rs.1,42,515. In the previous year relevant to AY 1992-93, the flat was sold for Rs.5,20,000, and the net sale proceeds were invested in UTI Capital Gains Scheme to claim deduction under Section 54E. The Assessing Officer denied the deduction on the ground that the capital gain was deemed as short-term under Section 50, and Section 54E applies only to long-term capital gains. The Commissioner of Income Tax (Appeals) upheld the denial, but the Tribunal allowed the deduction. The High Court framed the substantial question of law as to whether the assessee is entitled to deduction under Section 54E in respect of capital gain arising on transfer of a capital asset on which depreciation has been allowed and which is deemed as short-term capital gain under Section 50. The Court analyzed the provisions and held that Section 54E does not restrict deduction only to long-term capital gains; it applies to capital gains arising from the transfer of a capital asset. The deeming provision under Section 50 does not alter the character of the asset as a capital asset. Therefore, the assessee is entitled to the deduction. The appeal was dismissed, and the question was answered in favor of the assessee.
Headnote
A) Income Tax - Capital Gains - Deduction under Section 54E - Deemed Short-Term Capital Gains under Section 50 - The issue was whether deduction under Section 54E is available on capital gains arising from transfer of a depreciable asset which is deemed as short-term capital gain under Section 50 of the Income Tax Act, 1961 - The Court held that Section 54E does not restrict deduction only to long-term capital gains and the deeming provision under Section 50 does not alter the character of the asset as a capital asset - Held that the assessee is entitled to deduction under Section 54E (Paras 1-6)
Issue of Consideration
Whether the assessee is entitled to deduction under section 54E of the Income Tax Act, 1961 in respect of capital gain arising on transfer of a capital asset on which depreciation has been allowed and which is deemed as short term capital gain under section 50 of the Income Tax Act, 1961
Final Decision
The appeal is dismissed. The question of law is answered in the affirmative, i.e., in favor of the assessee and against the Revenue. The assessee is entitled to deduction under Section 54E of the Income Tax Act, 1961 in respect of the capital gain arising on transfer of a capital asset on which depreciation has been allowed and which is deemed as short term capital gain under Section 50 of the Income Tax Act, 1961.
Law Points
- Section 54E deduction available on capital gains deemed as short-term under Section 50
- Section 54E not restricted to long-term capital gains
- Depreciable assets treated as short-term capital gains under Section 50 but eligible for Section 54E relief
