Sec. 54F Relief Available on Sale of Depreciable Long-Term Capital Asset Taxable u/s 50 | ITAT

Case Details: Sonia Pathak Khanna vs. Income Tax Officer - [2024] 164 taxmann.com 607 (Mumbai-Trib.)

Judiciary and Counsel Details

• • Prashant Maharishi, Accountant Member
  • K. Gopal, AR for the Appellant.
  • R.R. Makwana, DR for the Respondent.

Facts of the Case

The assessee, a fashion designer, earned income from manufacturing garments and interest income. During the relevant assessment year, the assessee sold an industrial gala on which she claimed depreciation in earlier years. The capital gain arising on the sale of depreciable asset was utilized by the assessee in purchasing a house property. While furnishing the return of income, the assessee claimed exemption under Section 54F of the Act.

Subsequently, the case was selected for scrutiny. The Assessing Officer (AO) contended that the gain on the sale of depreciable assets was short-term capital gain and denied the exemption under Section 54F. The assessee contended that the benefit of Section 54F is available to the assessee since the property sold was held for more than 36 months and is a long-term capital asset.

However, AO rejected the assessee’s claim. On appeal, CIT(A) confirmed the order of AO and the matter reached before the Mumbai Tribunal.

ITAT Held

The Tribunal held that section 54F provides that if the assessee, being an individual or HUF, has any long-term capital gains, not to include any gains arising from the transfer of a long-term capital asset if, within a period of one year before or two years after the date on which the transfer took place, he purchased a residential house. The capital gain so arose is granted as exemption in proportion to net consideration to the amount of investment in new house property.

Section 50 determines the gain arising from any asset as short-term capital gain. Thus, it characterizes the gain and not the capital asset. Undoubtedly, the capital gain earned by the assessee under section 50 may be chargeable to tax as short-term capital gain; however, as the building was held for more than 36 months, the transfer of long-term capital asset has resulted in the such gain.

Thus, the deeming fiction under section 50 may be restricted to the chargeability of gain as short-term capital gain but the asset remains a long-term capital asset and does not become a short-term capital asset by virtue of section 50.

Therefore, the Commissioner (Appeals) should have granted the claim of the assessee under section 54F. Accordingly, the issue was restored back to the file of the AO to compute the income of the assessee considering the provisions of section 41(2) and section 50C, and thereafter from the capital gain, allow the claim of the assessee under section 54F, if the other conditions are satisfied.

List of Cases Reviewed

• CIT v. Ace Builders Private Limited 281 ITR 210, CIT v. V.S. Dempo Co Ltd. in 387 ITR 354 (Para 23) followed.
• CIT v. Shakthi Metal Depot 333 ITR 492 (Para 24) distinguished.

List of Cases Referred to

• Goetze (India) Ltd. v. CIT [2006] 157 Taxman 1/284 ITR 323 (SC) (para 12)
• CIT v. Sakthi Metal Depot [2010] 189 Taxman 329/[2011] 333 ITR 492 (Kerala) (para 14)
• CIT v. ACE Builders (P.) Ltd. [2005] 144 Taxman 855/[2006] 281 ITR 210 (Bombay) (para 15)
• CIT v. V.S. Dempo Company Ltd. [2016] 74 taxmann.com 15/242 Taxman 434/387 ITR 354 (SC) (para 15).