Net consideration on sale of depreciable assets kept in capital gain deposit account vis a vis its validity for tax exemption:

Issue

Raj Industries owned by Shri.Raj sold entire plant and machinery for Rs.40 lakhs in December 2010. The written down value of the machinery was Rs.15 lakhs at the time of sale. All the plant and machinery were acquired way back in April 2004. Raj owns one residential house which is self occupied by him. He deposited the net sale consideration in capital gain deposit account in March 2011 and claimed that the amount so deposited is meant for acquiring a residential house and thus eligible for exemption under section 54F. Is the amount of capital gain exigible to tax?

Opinion

Section 50 deals with computation of capital gains in the case of depreciable assets. Excess of sale consideration over written down value is chargeable to tax as capital gain from the transfer of short term capital asset. It is apparent that the sale consideration exceeded the written down value of entire block of plant and machinery by Rs.25 lakhs and is chargeable to tax as capital gain.

In CIT v. Assam Petroleum Industries (P) Ltd (2003) 262 ITR 587 (Gau.) the assessee received compensation from the Dy.Commissioner, Kamrup for acquisition of its land and building. The assessee invested the entire compensation by purchasing IDBI bonds and claimed exemption of the capital gains under section 54E of the Income-tax Act. The Revenue rejected the claim of the assessee. The court held that section 50 is a special provision where the mode of computation of capital gain is substituted where the assessee has claimed depreciation on capital assets. Section 50 does not say that depreciated asset shall be treated as short term capital asset. Section 54E is meant for providing exemption in respect of the amount deposited in specified avenues on sale of long term capital asset. Section 54E is an independent provision which is not controlled by section 50 of the Act. It has application where long term capital asset is transferred and the amount is invested or deposited in any specified asset mentioned in section 54E. Capital gain received on sale of depreciable asset which was held for more than 36 months when invested or deposited under section 54E, the assessee is eligible for the benefit contained therein. The decision hence was in favour of the assessee.

In CIT v. Ace Builders (P) Ltd (2006) 281 ITR 210 (Bom) the assessee was a partner in a firm and got allotment of flat on dissolution of the firm. The assessee had claimed depreciation in respect of the flat. On sale of flat, the net sale consideration was deposited in `UTI Capital Gain Scheme’ with a view to claim exemption under section 54E. The court held that 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-sections (1) and (2) of section 50 is restricted only to the mode of computation of capital gains contained in sections 48 and 49. Secondly, that it is a well established law that a fiction created by the Legislature has to be confined to the purpose for which it was created. Thus section 50 is confined to computation of capital gains only and cannot be extended beyond what is not stated in the statute. Thirdly, section 54E does not make any distinction between depreciable asset and non-depreciable asset and therefore the exemption available under section 54E cannot be denied to depreciable asset by referring to the fiction created in section 50. The court accordingly held that the benefit of section 54E is available to the assessee irrespective of the fact that the computation of capital gains is done either under sections 48 and 49 or under section 50.

Similar such decision could be found in CIT v. Delite Tin Industries in ITA 1118 of 2008 dated 26.09.2008. The special leave petition of the Revenue against the order passed in Delite (Supra) was dismissed by the Supreme Court on 21.08.2009 (see 322 ITR (St.) 8 (SC)).

The assessee Raj had deposited the net consideration in capital gain account scheme within the prescribed time and seeks exemption under section 54F. Since the assessee has only one residential house at the time of transfer of long term capital asset, he is not hit by the disqualification contained in the proviso to section 54F(1). The amount deposited hence is eligible for exemption subject to the conditions to be satisfied as per section 54F(1) viz. acquisition of residential house within 2 years from the date of transfer or construction of residential house within a period of 3 years after the date of transfer of capital asset (though the subject matter of transfer was an asset on which depreciation was claimed earlier).

Readers may note a recent decision in CIT v. Rajiv Shukla (2011) 334 ITR 138 (Del) in which it was held that the deposit of sale proceeds from depreciable asset in capital gain account scheme was sufficient enough for claiming exemption under section 54F.

Position under DTC: In DTC, depreciable assets are subject to tax as per the provisions contained in sections 37 to 42. Any excess of sale consideration over the written down value of depreciable assets is chargeable to tax as business profit as per section 42. Where the sale consideration is less than the written down value of depreciable assets, such deficiency is deductible as terminal allowance under section 40 of the DTC. Parking of sale consideration on transfer of depreciable asset will not be considered whatsoever under the head ‘capital gains’ and therefore the controversy discussed above would not arise in DTC regime.

Source : The Tax Referencer Volume 120 dt. 25.07.2011
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