(2006) 281 ITR 210 (Bom)
Computation for depreciable assets; exemption on investment in specified bonds
Yes. Section 50 creates a deeming fiction only for the purpose of computation. It does not convert a long-term asset into a short-term one for every purpose of the Act, so the exemption remains available.
Where gain on a depreciable asset is deemed short-term under Section 50, is the taxpayer still entitled to the exemption available for long-term capital gains?
The assessee transferred a depreciable capital asset — a flat forming part of a block of assets on which depreciation had been claimed — which had been held for well beyond the period that would ordinarily make the gain long-term. Because the asset was depreciable, Section 50 applied and the resulting gain was computed and deemed to be a short-term capital gain. The assessee invested the gain in specified bonds and claimed exemption under Section 54EC, which by its terms is available in respect of long-term capital gains. The Assessing Officer denied the exemption on the ground that the gain, being deemed short-term under Section 50, could not qualify.
The Commissioner (Appeals) and the Tribunal decided in favour of the assessee. The Revenue appealed to the Bombay High Court.
For the assessee
Section 50 is confined to the computation of the gain on depreciable assets within the block-of-assets scheme. It does not alter the period for which the asset was actually held, nor does it recharacterise the asset itself. The exemption provision is keyed to the asset being a long-term capital asset, a condition that was satisfied on the facts.
For the Revenue
Section 50 expressly deems the gain arising on transfer of a depreciable asset to be a short-term capital gain. An exemption available only for long-term capital gains cannot be claimed in respect of a gain the statute itself characterises as short-term.
The Court applied the settled rule that a legal fiction is to be limited to the purpose for which it was created and is not to be extended beyond that purpose by importing consequences the statute did not intend. Section 50, it observed, appears within the group of provisions dealing with the mode of computation, and operates as a special rule for assets forming part of a block on which depreciation has been allowed. Its function is to compute the gain by reference to the written down value of the block rather than by the ordinary method. Nothing in it addresses the period of holding, and nothing in it declares the asset itself to be a short-term capital asset. The exemption provision, by contrast, is engaged where the asset transferred is a long-term capital asset, which depends on how long it was in fact held. Since the asset had been held beyond the statutory period, the condition was met, and the fiction in Section 50 could not be carried across to defeat a relief located elsewhere in the Act. The exemption was therefore available.
The same structure is carried into the IT Act 2025 — Section 74 computes gains on depreciable assets and Section 85 gives the bond exemption. The reasoning applies unchanged, and this remains the standard authority where the Revenue resists a reinvestment exemption on depreciable-asset gains. The principle has been followed widely and applied by analogy to other reliefs that turn on long-term character.