[2024] 168 taxmann.com 328 (Mumbai - Trib.

) (SB)/[2025] 210 ITD 1 (Mumbai -

Trib.) (SB)[03-10-2024]

INCOME TAX : Capital gains arising out of sale of depreciable asset under section 50
even though deemed to be capital gain arising from transfer of a short term capital
asset, that fiction was to be confined only to section 50 and it couldnot convert
'short term capital asset' into a 'long term capital asset' and vice versa for other
purpose of Act, thus, rate of tax of would be in terms of section 112 at rate of 20 per
cent

■■■

[2024] 168 taxmann.com 328 (Mumbai - Trib.) (SB)

IN THE ITAT MUMBAI BENCH (SPECIAL BENCH)
SKF India Ltd.
v.
Deputy Commissioner of Income-tax*
AMIT SHUKLA, VIKAS AWASTHY, JUDICIAL MEMBER
AND OM PRAKASH KANT, ACCOUNTANT MEMBER
IT APPEAL NO. 7544 (MUM.) OF 2011
[ASSESSMENT YEAR 2000-01]
OCTOBER 3, 2024

Section 50, read with section 112, of the Income-tax Act, 1961 - Capital gains - Special
provision for computation of capital gains in case of depreciable assets (Scope of) -
Assessment year 2000-01 - During year under consideration, assessee had transferred
immovable properties which formed part of block of assets on which depreciation was
claimed by assessee-company - In return of income, assessee had offered capital gain
arising on transfer of depreciable assets as STCG in terms of section 50 - It had paid tax on
such capital gain at rate of 20 per cent as prescribed under section 112 - Assessing Officer,
however, held that capital gains was to be taxed as STCG as per provisions of section 50(1)
at rate of 30 per cent - Whether capital gains arising out of depreciable asset under section
50 even though deemed to be capital gain arising from transfer of a short term capital asset,
that fiction was to be confined only to section 50 and it couldnot convert 'short term capital
asset' into a 'long term capital asset' and vice versa for other purpose of Act, either for set
off against a long term capital loss or exemption provision where benefits were given from a
long term capital gain on transfer of a long term capital asset or rate of tax provided under
section 112 which clearly provides that income arising from transfer of a long term capital
asset chargeable under head capital gains, amount of income tax calculated on such a long
term capital gain shall be rate of 20 per cent - Held, yes - Whether thus, rate of tax applicable
would be in terms of section 112 of rate of 20 per cent and applicable surcharge - Held, yes
[Para 44] [In favour of assessee]
FACTS

■ During the years under consideration, the assessee had transferred immovable properties which formed
part of block assets on which the depreciation was claimed by the assessee-company.
■ In the return of income, the assessee had offered capital gain arising on transfer of depreciable assets as
short term capital gains (STCG) in terms of section 50. It had paid the tax on such capital gain at the rate
 of 20 per cent as prescribed under section 112 plus applicable surcharge.
■ The Assessing Officer, however, held that the capital gains was to be taxed as STCG as per the provisions
of section 50(1) at the rate of 30 per cent.
■ On appeal, the Commissioner (Appeals) confirmed the order passed by the Assessing Officer.
■ On the assessee’s appeal to the Tribunal:
HELD

As per Amit Shukla and Vikas Awasthy (JM) [majority view]

■ The main issue to be adjudicated by this special bench is, whether the capital gains under section 50,
arising out ofsale of a long term capital assets is chargeable at the rate applicable to the short term capital
gains or the ratesapplicable to the long term capital gains under section 112. [para 16]
■ Section 50 is a special provision for computation of capital gains in the case of depreciable assets. [Para
17]
■ The said section starts with non obstante clause, that is, exception has been carved out to section 2(42A),
which provides definition for a short-term capital asset. Ergo, if the capital asset which is an asset forming
part of the block of asset, in respect of which depreciation has been allowed, then even if it is held for
more than 36 months, the conditions of the 36 months will not be applicable and still it will be chargeable
as capital gains arising from transfer of a short-term capital asset. [Para 18]
■ The ''long-term capital asset'' and ''long-term capital gain'' has been defined in section 2(29AA) and
2(29B). Thus, capital gain arising from transfer of a long-term capital asset is taxed as a long-term capital
gain and long-term capital assets means which is held for more than 36 months. So taxability is on transfer
of long-term capital asset. [Para 19]
■ Normally capital gain is required to be computed according to the provisions contained in sections 48 and
49. But section 50 by deeming fiction amends the mode of computation of capital gain and cost with
reference to certain modes of acquisition. Section 50 provides that where the capital asset is forming part
of the block of assets in respect on which depreciation has been allowed to the assessee and has been
transferred, then the provisions of sections 48 (mode of computation) and 49 (cost with reference to
certain mode of acquisition) has been modified, that is, the computation of depreciable assets has to be
done in the mechanism provided in sub-sections (1) and (2) of section 50.Since in this case sub section (1)
is applicable, which provides that, where the full value of consideration received or accruing as a result of
transfer of the assets together with the full value of such consideration received or accruing as a result of
transfer from any other capital asset falling within the block of asset during the previous year, which
exceeds the aggregate of the following amounts, that is; (i)expenditure incurred wholly and exclusively in
connection with such transfer or transfers; (ii) the written downvalue 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. In other words, (i) Where the consideration received as a result of
transfer of an asset falling within the block of asset and such consideration received, exceeds the amount
after making the computation provided in clauses (i), (ii) and (iii) of sub-section (1), then such excess is
deemed to be capital gains arising from transfer of short-term capital assets. (ii) Where the block of asset
cease to exist then the income received or accruing as a result of such transfer shall be deemed to be the
capital gains arising from the transfer of short-term capital assets. Thus, in a situation where because of
transfer of a depreciable assets forming part of the block of the assets, any gain arising to the assessee
shall always be deemed to be the capital gains from the transfer of a short-term capital asset. [Para 20]

■ Section 50 starts with a non obstante clause and is a deeming provision which should be strictly limited to
the purpose mentioned therein. The exclusion prescribed by the non obstante clause is limited to the
purpose of modification of sections 48 and 49 and such non obstante clause cannot be applied to any other
provisions contained in the Act. Here section 50, firstly, deems that any capital asset which is held for a
long-term period, that is, beyond specified time limit as provided in section 2(42A) is transferred, and if
there is excess after computation provided in sub-clauses (i), (ii) and (iii) of sub-section (1), then it is
taxed as capital gains arising from transfer of a short-term capital asset. Secondly, the deeming provisions
 has been confined only to the purpose of computation of sections 48 and 49 and the capital gains then
arising is deemed to be from transfer of short-term capital assets. The deeming provision does not extend
for any other purpose. In other words provisions of section 50 changes the characteristic of the gain that in
some cases a long-term to a short-term capital gain where assets are held beyond the specific term.
However, the section does not change the characteristic of the capital asset held by the assessee, that is,
the long-term capital asset will remain a long-term capital asset for all other purposes, but for the deeming
fiction under section 50, capital gains is taxable as if it is gain arising from transfer of a short-term capital
asset and it does not extend beyond this fiction to convert long-term capital asset into short-term capital
asset for other purposes of the Act. [Para 21]
■ Section 2(42B) defines short-term capital gains, ''a short-term capital gains means capital gains arising
from transfer of a short-term capital asset''. Though the gain on transfer of a depreciable asset have been
deemed to be in the nature of a short-term capital gain in case of transfer, but that does not alter the
characteristic of that capital asset, whether ''long-term capital asset'' or ''short-term capital asset'' for the
purpose of other provisions of the Act. In order to apply section 50, the mode of computation on the
transfer of the asset, only sections 48 and 49 has been modified to deem it as transfer of a short-term
capital asset. Here in this case, the assessee has computed the capital gains in alignment with the provision
of section 50 despite holding the asset for a period longer than three years and offered it as STCG. Thus,
there are two steps in arriving at the final tax liability; (a) step 1 - computation of income; and (b) step 2 -
determining the tax rate. The tax rate of long-term capital gain has been defined in section 112. Section
112 deals with tax rate on long-term capital gains which clearly provides that, where the total income of
the assessee includes any income arising from transfer of long-term capital asset which is chargeable
under the head capital gain, then tax is to be calculated at the rate of 20 per cent. [Para 22]
■ Section 112 deals with the rate on which long-term capital gain has to be taxed. The pre-requisite for
applicability of 20 per cent rate as per section 112 for the domestic companies is that firstly, there must be
long-term capital asset and secondly, income must arise from transfer of long-term capital asset. If the
long-term capital asset has been held for more than 36 months immediately preceding the date of transfer,
then transfer of such long-term capital asset has to be taxed at the rate of profit under the Act. In the
present case it is not in dispute that the asset has been held for more than 36 months prior to its transfer.
Hence, both the conditions prescribed in section 112 stands satisfied. [Para 23]

■ Now various courts have held that the deeming fiction in section 50 has been brought out for differential
treatment of depreciable asset which has limited application and is confined for the purpose of mode of
computation of capital gains under sections 48 and 49. [Para 24]

■ The sequitur of CIT v.Ace Builders Pvt. Ltd [2005] 144 Taxman 855/281 ITR 210 (Bombay) is that
fiction created by the legislature in section 50 has to be confined to the purpose for which it is created.
Section 50 was enacted with the object of denying multiple benefits to the owners of a depreciable asset,
however, that restriction is limited to the computation of capital gains and not to the exemption provision.
If depreciation has been availed on long-term capital asset, then, the capital gains has to be computed in
the manner prescribed under section 50 and the capital gains tax will be charged as if such capital gain is
arising out of short-term capital asset. In that case, the capital gains was invested in the manner prescribed
in section 54E wherein exemption is provided on transfer of a long-term capital asset then long-term
capital gains was subject to deduction. There also, the asset was a depreciable asset, however, while
granting exemption under section 54E, which is applicable for long-term capital gains, the jurisdictional
High Court has held that for the purpose of exemption under section 54E, it has to be treated as long-term
capital gains. [Para 25]
■ The legal fiction created is deemed to the capital gain as a short-term capital gain and not to deemed that
asset as a short-term capital asset and therefore cannot be said that section 50 converts the long-term
capital asset into a short-term capital asset. This principle and ratio of the Jurisdictional High Court if is to
be followed, then it is clear that the tax rate provided under section 112 which is applicable for a long-
term capital gains will prevail. Once the High Court has held that section 50 does not convert a ''long-term
capital asset'' to a ''short-term capital asset'', then the rate of tax is applicable for the transfer of a long-term
capital asset has to be in accordance with section 112. The deeming fiction of section 50 cannot be
imported under section 112. [Para 26]

■ Now, finally this issue has been set at rest by the Supreme Court in the case of CIT v. V.S. Dempo
 Company Ltd. [2016] 74 taxmann.com 15/242 Taxman 434/387 ITR 354 (SC), wherein the Supreme
Court had the occasion to examine the eligibility of assessee to claim exemption under section 54E in
respect of capital gains arising on transfer of a capital asset on which depreciation has been allowed. The
Apex Court reiterated and affirmed the judgment of Bombay High Court in the case of CIT v. Ace
Builders (P.) Ltd. [2005] 144 Taxman 855/281 ITR 210 (Bombay). [Para 31]

■ Though most of the decisions have been rendered in the context of Section 54E but the principle laid
down therein will apply mutatis mutandis on this issue also for the reason that Section 54E provides for
exemption from capital gain where the capital gain arises from transfer of "long term capital asset" --------
--. Thus, even if under section 50, long term capital asset is taxed as short term capital gain because of the
deeming fiction, but that does not lead to convert long term capital asset into short term capital asset for
the purpose of other section.Similarly, under section 112 uses the word "where the total income of an
assessee includes any income, arising from the transfer of a long-term capital asset, which is chargeable
under the head "Capital gains", the tax payable by the assessee on the total income shall be the aggregate
of --------------. Thus, wherein the statute had used the word"long term capital asset, it has to be given the
same meaning as defined in said provision of the section. Thus,all these judgments of Jurisdictional High
Court as well as Supreme Court in the context of section 54E which is applicable on capital gain arising of
long term capital asset will also apply here. Thus, respectfully following the aforesaid judgments, the legal
fiction created by the statute is to deem the capital gain as ''short term capital gain'' and not to deem the
''asset'' as ''short term capital asset''. Therefore, it cannot be said that section 50 converts long term capital
asset into a short term capital asset. This principle of law has been exactly held by the Jurisdictional High
Court and approved by the Supreme Court.[para 33]

■ Accordingly, it is held that capital gains arising out of the depreciable asset under section 50 even though
deem to be capital gain arising from transfer of a short term capital asset, that fiction has to be confined
only to section 50 and it cannot convert ''short term capital asset'' into a ''long term capital asset'' and vice
versa for the other purpose of the Act, either for set off against a long term capital loss or exemption
provision were benefits is given from a long term capital gain on transfer of a long term capital asset or
the rate of tax provided under section 112 which clearly provides that income arising from transfer of a
long term capital asset chargeable under the head capital gains, the amount of income tax calculated on
such a long term capital gain shall be the rate of 20 per cent.Thus, even section 50 treats that excess is to
be taxed as capital gain arising from transfer of a short term capital asset but the rate of tax has to be
applicable in terms of section 112, because the treatment of a short term capital asset is only a purpose of
section 50 and not otherwise can convert a ''long term capital asset'' into a ''short term capital asset'' for the
purpose of rate of tax or any other provision of the Act. Accordingly, this question is answered in favour
of the assessee holding that rate of tax applicable would be in terms of section 112 of the rate of 20 per
cent and applicable surcharge. [Para 44]
As per A.M Om Prakash Kant (Minority Dissenting View)

■ In the instant case, the assessee itself has computed income arising from transfer of depreciable assets as
STCG in terms of section 50 under the head “capital gains? as part of the total income, though, said assets
were held for a period of more than 36 months. [Para 8.6]

■ Once the said excess on transfer of residential properties is admittedly part of the “total income? in the
character of “short term capital gain?, clearly the provisions of section 112(1) would not apply, as for
invoking of section 112(1), the component of the “total income? should be first of all in the character of
“long term capital gain? chargeable under the head “capital gain? (i.e. from section 45 to section 55A) and
secondly that “long term capital gain? should be part of total income. Under the provisions of capital gain
head, a capital asset otherwise may qualify as long term capital asset and transfer of same may give rise to
long term capital gain, but once depreciation has been availed on said asset under the business of the
assessee, express provision by way of section 50 gets attracted and any excess on transfer of said asset is
deemed to be short term capital gain. But, in the facts of the case of assessee, it is not in dispute that
assessee has availed depreciation on those three residential properties forming part of the block of asset,
thus excess from their transfer is deemed to be “short term capital gain? and can’t be classified under
section 112(1) as “long term capital gain". [Para 8.7]

■ The section 112(1) is designated for application of concessional tax rate on the income, chargeability of
which has been determined under the head “Capital Gains”, but it can’t alter the character of the income
 itself. The section 112(1) cannot decide whether gain or excess arising from transfer of a long term capital
asset would be chargeable as “long-term capital gain? or “short-term capital gain?. The chargeability of
gain or excess arising from transfer of a capital asset is governed by the provisions under the head “capital
gain” under section 45 to 55A and not by the section relevant for invoking of tax rate. The assessee argued
that the transfer of a capital asset held for more than 36 months, though it is depreciable asset and excess
arising on the same has been computed by the assessee for the purpose of total income as “short term
capital gain? as per the provisions of section 50, but while application of section 112(1), it should be
treated as “long term capital gain?. It is opined that this argument of the assessee is without appreciation
of express language of section 112(1). [Para 8.8]

■ If interpretation of the assessee is accepted, then the entire provision of section 50 will be rendered otiose,
because, if the excess or surplus arising from transfer of depreciable asset, held for more than 36 months,
has to be held as “long term capital gain? invoking section 112(1), then, there is no purpose of keeping the
section 50 in the statute. The entire purpose of introducing the deeming fiction of treating the surplus
arising from transfer of the depreciable asset, irrespective of the holding period whether it is more than 36
month or less than 36 month, is not to grant benefit of concessional rate of long term capital gain to the
depreciable capital asset which has been exploited for business purpose and depreciation has already been
claimed as revenue expenditure. The legislature has introduced section 50 with the objective to provide a
level playing field for both, the depreciable capital asset forming part of the business and the other capital
assets which may or may not be part of the business of an assessee. Once an assessee introduce a
depreciable capital asset as part of the business, the assessee is entitled for benefit of depreciation on the
same, and thus the value of the asset to the extent of the depreciation is already allowed to the assessee as
deduction being revenue expenditure while computing its income under the head “profit and gains of the
business?. Therefore, any excess or surplus arising from transfer of such depreciable capital asset has been
brought under the deeming fiction of “short term capital gain? under section 50. On the other hand, for
other capital asset, which may or may not be a part of the business of an assessee, chargeability of the
gain arising from their transfer is governed by the other provisions under the head “capital gains? from
sections 45 to 49. If such a capital asset, is held for less than prescribed period, then gain arising on
transfer of such asset shall be liable for “short term capital gain? and if it is held for more than prescribed
period, such gain arising shall be liable for “long term capital gain? and cost of acquisition or indexed cost
of acquisition shall be reduced from sale consideration for computing capital gain as per mode provided in
section 48 and 49. Now, the question arises, whether a further benefit for concessional tax rate should be
allowed for computing taxability under the head “capital gain? while transfer of depreciable capital assets,
when the part of cost of acquisition of such asset is already exhausted by the assessee as depreciation and,
balance left over is the written down value (WDV) of asset, which is considered for reduction from sale
consideration. Evidently, the legislature has not intended to give the benefit of concessional rate of tax on
gain arising from transfer in case of the depreciable capital assets, which have been utilised for the
purpose of the business and assessee exploited those assets for yielding income which is liable for tax
under the head “profit and gains of the business?. Accordingly, the legislature under section 50, excluded
the benefit of concessional rate of tax on excess arising if any from transfer of such depreciable capital
asset, on which benefit of the depreciation has already been availed by the assessee, and proposed to be
subjected to normal tax rates as “short term capital gain? under deeming fiction. Under section 50(1), out
of sale consideration of depreciable assets, three items are reduced for computation of STCG. The first
item is expenditure incurred wholly and exclusively in connection with transfer of such asset. This item is
identical to the item allowed under mode of computation provided in section 48 while computing gain
arising from other than depreciable capital assets. The second item is the opening WDV of the block of
asset out of the depreciable asset, which has been sold. The WDV is the residual value of the depreciable
assets remained after claim of deprecation. Thus, it is viewed that the intent of the legislature was to not
allow multiple benefit of deduction for cost of acquisition in respect of which depreciation has already
been availed by the assessee and therefore, deduction is allowed for the remaining cost of the asset (i.e.
WDV) only for computing capital gain on depreciable asset. The third item is the actual cost of any asset
falling in same block of asset acquired during the year. So if an assessee purchase or acquire new
depreciable capital asset under same block of asset against sale of old depreciable asset, the assessee may
reduce his tax liability under capital gain. This is kind of an incentive to an assessee for investment in new
assets for continuing the business activity. In the case of CIT v. Ace Builders (P.) Ltd. [2005] 144 Taxman
855/281 ITR 210 (Bombay), also it is held that section 50 is enacted with the object of denying multiple
benefits to the owners of the depreciable assets. [Para 8.9]
■ Once the capital gain is deemed to be a short term capital gain, the provisions contained in section 112
would not get attracted. The section 112 was introduced by way of Finance Act, 1992 and was specifically
designated for taxation of “long term capital gain?. Clause 53 of the Notes to Clause to Finance Bill, 1992
clearly stated that section 112 was enacted for taxation of long term capital gain exclusively and other
type of income would be taxable at normal rate of taxation. [Para 10]

■ The section 50 has provided chargeability of income arising from transfer of depreciable assets. Since the
sections related to exemptions/deductions including section 54E under the head “capital gains?, are
invoked only after computing of the capital gain and therefore those sections are independent from the
sections which create chargeability of the capital gains. The exemptions provisions provided under the
head capital gains from section 54 to 54GB, can be claimed once the chargeability of the gain arising on
transfer of a capital asset is determined under the head of capital gains. Conversely, the section 112(1) is
for invoking concessional rate of tax of 20 percentile on income arising from transfer of long term capital
asset, which is chargeable under the head “capital gain? and included in total income. The section 112(1)
is intended solely for prescribing concessional rate of tax and not for determining chargeability of income
under the head “Capital gain?, therefore, the section 112(1) cannot decide character of capital gain
whether it would be short term capital gain or long term capital gain. If the opinion of the JM is followed,
then an anomalous situation may arise, where the income under the head capital gain determined as
“short-term capital gain? under section 50 and included under “total income? would be rendered only as
ornamental item, undermining the purpose of exercise for computing short term capital gain . Such an
interpretation would contradict the legislative intent. The provision of section 50 in the statute has been
provided for achieving particular purpose of denying multiple benefit of depreciation and any
interpretation which frustrate that purpose, should be discouraged. In the case of the assessee, while
adjudicating appeals for assessment years 2000-01 to 2005-06, the Co-ordinate Bench in SKF Bearings
India Ltd. v. Asstt. CIT [IT Appeal No. 720 (Mum.) of 2006, dated 29-12-2011] for assessment year 2001-
02 had held that when section 50 deems that income earned from a depreciable asset has to be deemed as
short term capital gain, the question of applying the rate of tax specified in section 112(1) does not arise.
[Para 11]

■ In the light of foregoing, the decision of the co-ordinate bench of the Tribunal in the case of the assessee
that assessee is not entitled for concession rate of tax of 20 per cent provided under section 112(1) on the
short term capital gain computed under section 50 and included by the assessee in its total income, which
arose on transfer of three residential properties forming part of block of asset and on which deprecation
was availed by the assessee in earlier years. [Para 11.1]
CASE REVIEW

CIT v. Ace Builders Pvt. Ltd. [2005] 144 Taxman 855/281 ITR 210 (Bombay) and CIT v. V. S. Dempo
Company Ltd. [2016] 74 taxmann.com 15/242 Taxman 434/387 ITR 354 (SC) (para 33) followed.
CASES REFERRED TO

ACE Builders (P.) Ltd. v. Asstt. CIT [2001] 76 ITD 389 (Mumbai), J.P. Morgan Chase Bank v. JCIT [IT
Appeal No. 9189 (Mum.) of 2004], Smita Conductors Ltd. v. Dy. CIT [2014] 41 taxmann.com 514/152 ITD
417 (Mumbai), CIT v. ACE Builders (P.) Ltd. [2005] 144 Taxman 855/281 ITR 210 (Bombay), CIT v. Parrys
(Eastern) (P.) Ltd. [2016] 66 taxmann.com 330/238 Taxman 14/384 ITR 264 (Bombay), CIT v. Manali
Investment [2013] 39 taxmann.com 4/219 Taxman 113 (Bombay), CIT v. United Paper Industries [2014] 42
taxmann.com 79/221 Taxman 158 (Bombay), CIT v. Cadbury India Ltd. [2015] 53 taxmann.com 227/229
Taxman 5 (Bombay), CIT v. Polestar Industries [2014] 41 taxmann.com 237/221 Taxman 423 (Gujarat), CIT
v. Aditya Medisales Ltd. [2013] 38 taxmann.com 244/218 Taxman 477/362 ITR 600 (Gujarat), Dy. CIT v.
Himalaya Machinery (P.) Ltd. [2013] 29 taxmann.com 380/214 Taxman 291 (Gujarat), CIT v. Assam
Petroleum Industries (P.) Ltd. [2003] 131 Taxman 699/262 ITR 587 (Gauhati), HDFC Bank Ltd. v. Dy. CIT
[2016] 67 taxmann.com 42/383 ITR 529 (Bombay), CIT v. Sun Engineering Works (P.) Ltd. [1992] 64
Taxman 442/198 ITR 297 (SC), Rathi Brothers Madras Ltd. v. ACIT [IT Appeal No. 871 of 2015, dated 13-2-
2018], CIT v. Pursarth Trading Co. (P.) Ltd. [2013] 33 taxmann.com 482/217 Taxman 113 (Bombay), Dy. CIT
v. Voltas Limited [2021] 123 taxmann.com 227 (Mumbai - Trib.), CIT v. V.S. Dempo Company Ltd. [2016] 74
taxmann.com 15/242 Taxman 434/387 ITR 354 (SC), Sakthi Metal Depot v. CIT [2021] 130 taxmann.com
238/282 Taxman 384/436 ITR 1 (SC), Asstt. CIT v. Reliance Transport & Travels (P.) Ltd. [IT Appeal No.
5683 (Mum.) of 2017, dated 19-7-2017], Rathi Brother Madras Ltd. v. Asstt. CIT [IT Appeal No. 707 (Pun.)
of 2013, dated 30-10-2014], SKF Bearings India Ltd. v. Asstt. CIT [IT Appeal No. 720 (Mum.) of 2006, dated
29-12-2011], Madhav Rao Jivaji Rao Scindia v. Union of India [1971] 3 SCR 9, Amar Jewellers Ltd. v. Asstt.
CIT [2022] 137 taxmann.com 249/444 ITR 97 (Gujarat) and Velvet Holdings (P.) Ltd. v. ACIT [IT Appeal No.
6810 (Mum.) of 2008, 26-6-2014].
Ms. Sailee Gujarathi for the Appellant. Bishwanath Das for the Respondent.
ORDER

Amit Shukla, Judicial Member. - In the aforesaid appeal, reference has been made by the Hon'ble President,
Income-Tax Appellate Tribunal, to Special Bench to decide the following question:
"Whether, on the given facts and circumstances of the case and in law, the capital gains under section 50
of the Act arising out of sale of long term capital asset is chargeable at the rate applicable to short term
capital gains or rates applicable to long term capital gains under section 112 of the Act?"
2. Brief facts qua the question referred are that, in the return of income, assessee has offered capital gain at Rs.
2,62,63,582/-as short term capital gains computed as per section 50 of the Act. Assessee paid the tax on such
capital gain at the rate of 20% as prescribed u/s 112 of the Act plus applicable surcharge. In response to the
show cause notice by the AO as to why rate of 30% should not be applied which is applicable on short term
capital gain, the assessee submitted that its claim was based on decision of ITAT Mumbai, Bench in the case
of ACE Builders (P.) Ltd. v. Asstt. CIT [2001] 76 ITD 389 (Mumbai). However, the Ld. AO rejected the
assessee's contention after holding as under:-
12.3 A plain reading of the provisions of section 50 shows that the provisions are applicable in respect of
an asset forming part of block of assets on which depreciation has been claimed under this act. The gain
resulting on account of transfer of such asset will be short term capital gain disregarding the provisions of
Section 2(42A) of the I.T. Act, 1961 and the provisions of section 48 and 49 shall be subject to
modifications as enumerated in clause 1 of section 50 of 1.T. Act, 1961. Since the instant case the
assessee company has transferred immovable properties which formed part of block of assets on which
the depreciation has been claimed by the assessee company, the capital gains on transfer of these assets
shall naturally be taxed as short term capital gains. The transaction in question is squarely covered by the
provisions of section 50(1) of I.T. Act, 1961)
12.4 The only reason for the assessee company treating the capital gain on transfer of the assets in
question as Long Term Capital Gain is that it takes shelter behind the decision of Bombay Tribunal in the
case of Ace Builders Pvt. Ltd. v. ACIT ([2001] 76 ITD 389 (Mumbai) /ACE Builders (P.) Ltd. v. Asstt.
CIT [2001] 76 ITD 389 (Mumbai) ). I have gone through the decision of the Hon'ble Tribunal and feel
that the said decision is not applicable in the instant case due to vast difference in facts of the two cases.
The decision of the Bombay Tribunal has not been delivered in the context of applicability of provisions
of section 54E. Therefore, it would amounts to stretching the said decision too far to apply it in the
instant case, the facts of which have no similarity whatsoever with the facts in the case of Ace Builders
Pvt. Ltd.
12.5 The assessee company has stretched the facts of the case as prevailing in Ace Builders Pvt. Ltd. to
suit its convenience. It is a settled principle of interpretation of statutes that the judgment of a court has to
be understood in the case of Ace Builders Pvt. Ltd. cannot be stretched to make it applicable to the facts
present in the assessee's case.
12.6 The assessee company has conveniently quoted certain portions of the decision which it has found
suitable to its interest. It is again reiterated here that selective quoting of certain parts of decisions is not
relevant and the ratio of a case is applicable only where the circumstances and the facts tally. This has
been the well settled and consistent view of several High Courts and Supreme Court laid down in the
following decisions:

1. CIT v. Sun Engineering Works (198 ITR 227, 297) (Supreme Court)
2. CWT v. Dr. Karan Singh & Others [1993] 67 Taxman 3/200 ITR 614 (SC))

3. Chamber of Income Tax consultants v. CBDT [1994] 75 Taxman 669/209 ITR 660 (Bombay)
4. SRF Finance Ltd. v. CBDT [1994] 76 Taxman 432/211 ITR 861 (Delhi)
 12.7 In view of the above, the contention of the assessee company is not acceptable and accordingly, the
capital gains are taxed as short term capital gains as per the provisions of section 50(1) of I.T. Act, 1961.
3. The Ld. CIT (A) had confirmed the order of AO in the following manner:-
"The issue has already been decided in the appellant's own case for A. Yrs 2001-02 and 2002-03 as has
been pointed out by the appellant itself in its letter dated 07.02.2011. Following the same, the issue for
the current year is decided against the appellant. As regards the appellant's reliance on the decision in the
case of Manali Investment, I find that it is not the contention of the appellant that the relevant facts in its
case were similar to those in the case of Manali Investment. In the case of Manali Investment, the block
of assets ceased to exists whereas it is not the contention of the appellant that the relevant block of assets
that extinguished as a result of sale. The decision in the case of Manali Investment is, therefore, not
applicable in the instant case. The appeal on this ground is, therefore, not allowed.
4. It has been pointed out that, the Tribunal in assessee's own case for the assessment year 2001-02, had
decided this issue against the assessee after holding as under:-
20. We have heard the rival contentions. Section 50 of the Act, reads as follows:-
SECTION 50
769 [Special provision for computation of capital gains in case of depreciable assets.
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.]
769. Subs. by Taxation Laws (Amendment and Misc. Provisions) Act, 1986, s. 9 (w.e.f. 1-4-1986). Prior
to that, it stood as under:
"50. Special provision for computing cost of acquisition in the case of depreciable assets.-Where the
capital asset is an asset in respect of which a deduction on account of depreciation has been obtained by
the assessee in any previous year either under this Act or under the Indian Income-tax Act, 1922 (11 of
1922), or any Act repealed by that Act or under executive orders issued when the Indian Income-tax Act,
1886 (2 of 1886), was in force, the provisions of sections 48 and 49 shall be subject to the following
modifications:-
(1) The written down value, as defined in clause (6) of section 43, of the asset, as adjusted, shall be taken
as the cost of acquisition of the asset.
(2) Where under any provision of section 49 read with sub-section (2) of section 55, the fair market value
of the asset on the *[1st day of April, 1974,] is to be taken into account at the option of the assessee, then,
the cost of acquisition of the asset shall, at the option of the assessee, be the fair market value of the asset
 on the said date, as reduced by the amount of depreciation, if any, allowed to the assessee after the said
date, and as adjusted.".
21. On plain reading of the above section shows that the excess in question shall be deemed to be the
capital gains arising from the transfer of a short term capital asset. Both the section 54EC and section 74,
do not speak about short term capital gain or long term capital gain. These sections deal with capita gains
/ loss arising from transfer of long term capital assets. Section 112, also deals with income arising from
transfer of long term capital assets. Section 112(b)(i) and (ii) specifically mentions "long term capital
gain". When section 50 deems that income earned from a depreciable asset has to be deemed as short
term capital gain, the question of applying the rate of tax specified in section 112(1) does not arise. This
is what the Hon'ble Jurisdictional High Court stated at para-26 of its judgment in the case of Ace Builders
(supra). We extract the same for ready reference:-
"26. It is true that s. 50 is enacted with the object of denying multiple benefits to the owners of
depreciable asset. However, that restriction is limited to the computation of capital gains and not to
the exemption provisions. In other words, where the long term capital asset has availed depreciation,
then the capital gain has to be computed in the manner prescribed under section 50 and the capital
gains tax will be charged as if such capital gain has arisen out of a short term capital asset but if such
capital gain is invested in the manner prescribed in s. 54E, then the capital gain shall not be charged
under section 45 of the Act. To put is simply, the benefit of s. 54E will be available to the assessee
irrespective of the fact that the computation of capital gains is done either under section 48 and 49 or
under section 50. The contention of the Revenue that by amendment to s. 50, the long term capital
asset has been converted into a short term capital asset is also without any merit. As stated
hereinabove, the legal fiction created by the statute is to deem the capital gain as short term capital
gain and not to deem the asset as short term capital asset. Therefore, it cannot be said that s. 50
converts long term capital asset into a short term capital asset." [emphasis own]
22. Respectfully following the aforesaid judgment of the Hon'ble Jurisdictional High Court, the ground
raised by the assessee is dismissed.
5. While hearing this matter in the appeal for the A.Y. 2000-01, the Division Bench observed that decision of
the Tribunal in the case of Smita Conductors Ltd. v. Dy. CIT [2014] 41 taxmann.com 514/152 ITD 417
(Mumbai), this precise issue was decided in favour of the assessee. Apart from this judgment, there were
various other judgments of the Tribunal in the favour of the assessee on this point following Bombay High
Court in the case of CIT v. Ace Builders Pvt. Ltd [2005] 144 Taxman 855/281 ITR 210 (Bombay).
Accordingly, the Bench after referring to the decision of the Bombay High Court in the case of Ace Builders
Pvt. Ltd (supra), wherein the Hon'ble High Court has categorically held that deeming fiction of section 50 of
the Act is restricted only to section 48 & 49 for the computation of capital gains and does not extend to other
provisions or exemption provisions. Since the decision of the Tribunal in assessee's own case was
contradictory to various decisions of the Tribunal following the decision of the Hon'ble High Court, therefore,
reference was made to the special bench to decide the aforesaid issue.
6. Before us the Ld. Counsel for the assessee submitted now the issue that, section 50 is limited to the scope
of only computation of capital gains of section 48 and 49 and does not extend to the other provisions of the
Act, has been settled by series of the judgments of Hon'ble jurisdictional High Court and other High Courts.
Ld. Counsel relied upon the following judgments in her support of her arguments:-
Sr.No Particulars
1. Decision of the Bombay High Court in the case of Ace Builders Pvt Ltd (supra).
2. Decision of the Mumbai Bench of the Income-Tax appellate Tribunal in the case of Deputy
Commissioner of Income Tax v. Voltas Limited Dated 06 October 2020 [ITA No. 7029,
6613/Mum/2018, 3307 & 2257/Mum/2019]/[2021] 123 taxmann.com 227 (Mumbai - Trib.)
A Section 50 of the Income-Tax Act, 1961 does not change character of the long term capital asset to
short term capital asset and hence loss on long term capital asset (which is depreciable asset) can be set
off against brought forward long term losses:
3. Decision of the jurisdictional Bombay High Court in the case of CIT v. Parrys (Eastern) Pvt Ltd
reported in [2016] 66 taxmann.com 330/238 Taxman 14/384 ITR 264 (Bombay)
4. Decision of the Bombay High Court in the Case of CIT v. Pursarth Trading Co. (P.) Ltd. [2013] 33
taxmann.com 482/217 Taxman 113 (Bombay)
5. Decision of the Bombay High Court in the case of CIT v. Manali Investment [2013] 39 taxmann.com
4/219 Taxman 113 (Bombay)
B. Deeming fiction of a long term capital gain to be treated as short- term capital gain is restricted only to
section 50 and it would have no application to other provisions such as 54EC
Decision of the Bombay High Court in the case of CIT v. United Paper Industries [2014] 42
taxmann.com 79/221 Taxman 158 (Bombay)
7. Decision of the Bombay High Court in the case of CIT v. Cadbury India Ltd. [2015] 53 taxmann.com
227/229 Taxman 5 (Bombay)
8. Decision of the Gujarat High Court in the case of CIT v. Polestar Industries [2014] 41 taxmann.com
237/221 Taxman 423 (Gujarat)
9. Decision of the Gujarat High Court in the case of CIT v. Aditya Medisales Ltd. [2013] 38 taxmann.com
244/218 Taxman 477/362 ITR 600 (Gujarat)
10. Decision of the Gujarat High Court in the Case of Dy. CIT v. Himalaya Machinery (P.) Ltd. [2013] 29
taxmann.com 380/214 Taxman 291 (Gujarat)
11. Decision of the Gauhati High Court in the case of CIT v. Assam Petroleum Industries (P.) Ltd. [2003]
131 Taxman 699/262 ITR 587 (Gauhati)
C. Decision of the High Court is a binding precedent only for the issue which was raised before the
decided by it:
12. Decision of the Bombay High Court in the case of HDFC Bank Ltd. v. Dy. CIT [2016] 67 taxmann.com
42/383 ITR 529 (Bombay)
13. Decision of the Apex Court in the case of CIT v. Sun Engineering Works (P.) Ltd. [1992] 64 Taxman
442/198 ITR 297 (SC)
D. Question as to whether gains computed on depreciable asset u/s 50 is to be given the benefit of lower
tax rate u/s 112 of the Income Tax Act, 1961 admitted by the Bombay High Court:
14. In Rathi Brothers Madras Ltd. v. ACIT [IT Appeal No. 871 of 2015, dated 13-2-2018]arising out of the
decision of the Pune Bench of the Tribunal in ITA No. 707/Mum/2013.

7. Besides this she heavily relied upon the judgment of Hon'ble Supreme Court in the case of CIT v. V.S.
Dempo Company Ltd. [2016] 74 taxmann.com 15/242 Taxman 434/387 ITR 354 (SC),wherein the following
decisions of the Hon'ble High Court have been approved;

(i) Ace Builders (P). Ltd (supra);

(ii) Polestar Industries(supra); and

(iii) Assam Petroleum Industries (P.) Ltd (supra).

Thus, she submitted that once it has been categorically held that section 50 creates a deeming fiction only for
the mode of computation of capital gains under sections 48 and 49 and not for other provisions, therefore, the
rate of tax provided in section 112 of the Act which is applicable for transfer of a long term capital asset
should be applied, even though the same is taxed as short term capital gain u/s 50 of the Act. Ld Counsel
further submitted that, deeming fiction is about treatment of an asset appearing in the block of asset, is to be
computed in the manner provided in section 50 and excess is to be taxed as capital gain arising from transfer
of short term capital assets. Thus, asset forming part of block of asset, for the limited purpose is to be taxed
(even if it is long term capital asset forming part of block of asset), as short term capital gain. This deeming
fiction does not mean section 112 has no applicability when tax rate has been provided on transfer of long
term capital asset. This aspect has been clarified now by series of judgment.
8. On the other hand the Ld. CIT DR on behalf of the Revenue submitted that the Tribunal in assessee's own
case for the immediately preceding year has interpreted judgment of Ace Builders Pvt. Ltd (supra) while
holding that it is short term capital gain and rate of tax shall be same as is applicable for short term capital
gain, that is 30% therefore, same should be followed. Apart from that, he submitted that section 50 is very
clear that any asset which is part of the block of asset, whether held for a long term has to be treated as short
term capital asset in terms of section 2 (42A) of the Act and it further provides mode of computation on such
depreciable asset and if there is any excess, it is deemed to be capital gains arising from transfer of short term
capital assets and once that is so, then tax should be levied at the rate on which a short team capital gains is
charged, i.e., @ rate of 30% of the charge.
9. The ld. CIT-DR strongly relied upon the decision of the Hon'ble Supreme Court in the case of Sakthi Metal
Depot v. CIT [2021] 130 taxmann.com 238/282 Taxman 384/436 ITR 1 (SC). He submitted that in this case
before the Hon'ble Supreme Court a flat was used by the assessee for business purposes and availed
depreciation on this asset from the year of acquisition. However, assessee discontinued claim of depreciation
for 2 years before the sale of the flat and showed capital gain out of transfer of this flat as Long-Term Capital
Gain (in short LTCG). Hon'ble Kerala High Court decided this issue referring the section 50 & 50A and held
that character of the building can't be changed and converts to an investment due to non-use as business asset.
Finally, profit arising on sale of said flat would be assessed as a Short- Term capital gain fin short STCG)
under section 50.
10. He further submitted that non obstante clause of section 50 makes an exception to the definition of short-
term capital asset which means that even though the duration of holding of an asset is more than the period
mentioned in section 2(42A), still the asset would be treated as short-term capital asset. The assets covered by
section 50 are depreciable assets forming part of block of assets as per section 2(11). Once the capital asset
that has been transferred is found to form of a block of assets in respect of which depreciation has been
allowed, the surplus if any computed under section 50 will be treated as STCG. Use of asset is important for
the purposes of depreciation, but not for application of section 50. Once it is brought to use, it enters the block
and once it enters the block, its identity gets submerged in block identity so that it is not necessary or possible
to infer that any particular asset in the block is being used or not, as long as block is used.
11. Hon'ble Apex Court also held that the description of the asset by the appellant in the balance sheet as an
investment asset is meaningless and is only to avoid payment to tax on STCG on sale of building. So long as
the appellant continued business, the building forming part of the block of assets will retain its' character as
such, no matter one or two of the assets in one or two years not used for business purposes disentitlement the
appellant for depreciation for these years.
12. The decision in Sakthi Metal is applicable to this case also. Main extract of this decision is excess out of
transfer of any depreciable assets would be STCG and to be computed as per section 50 of the I. T. Act. Since
treatment of capital gain is STCG and not LTCG, therefore section 112 is not attracted at all. Tax rate
applicable for STCG will be applicable.
13. Ld. CIT DR submitted that in the assessee's case, the question before the Hon'ble Special Bench is already
decided by the Hon'ble Co-ordinate Bench ITAT Mumbai in the assessee's own case for the A/Yrs. 2001-02 to
2005-06 in favour of the revenue citing the decision of Hon'ble Jurisdictional High Court in the case of Ace
Builders (P) Ltd (supra) . Details of the appeals are given in a tabular form.
ITA No. A/Yr Date of Members of the Bench Issue raised in Decision in
order Ground no para no.
616/M/2006 2001- 29.12.2011 Hon'ble Shri B. R. Mittal (JM) & .Hon'ble Shri Gr-5 21
02 J. Sudhakar Reddy (AM)
721/M/2006 2002- 29.12.2011 Do Gr-3 49
03
2660/M/2007 2003- 29.12.2011 Do Gr-3 71
04
4625/M/2008 2004- 29.12.2011 Do Gr-1 91
05
6461/M/2009 2005- 24.02.2012 Hon'ble Shri Vijay Pal Rao (JM) & Hon'ble Gr-3 7&8
06 Shri Rajendra Singh (AM)

13.1. In all these years there was a common issue involved which was as under:-
"On the facts & in the circumstances of the case and in Saw the Id. CITA) erred in confirming Capital
Gain under section 50 of the Act arising on sale of Long-term Capita! Asset is chargeable to tax at the
rate applicable to STCG instead of the rate applicable to LTCG."
Hon'ble Bench held as follows:
"On plain reading of the section 50 shows that the excess in question shall be deemed to be the capital
gain arising from the transfer of a short-term capital asset. Both the sections 54 EC & Section 74 do not
speak about STCG or LTCG. These sections deal with capital gain / loss arising from transfer of long-
 term gain. Section 112 deals with income arising from transfer of long-term capital asset. Section 112(b)
(i) & (ii) specifically mention "LTCG". When section 50 deems that income earned from a depreciable
asset has to be deemed as STCG, the question of applying the rate of tax specified in section 112(1)
doesn't arise."
14. Finally, he concluded that the decision of the Hon'ble Jurisdictional High Court in the case of Ace Builders
(P) Ltd (supra) in para 26, following points are relevant:-
"1. Section 50 is enacted with the object of denying multiple benefits to the owners of depreciable assets.
2. Restriction is limited to the computation of capital gain and not to the exemption provisions.
3. In other words, where the long-term capital asset has availed depreciation, then capital gain has to be
computed in the manner prescribed u/s 50 and the capital gain tax will be charged as if such capital gain
has arisen out of short-term capital asset.
Therefore, it is clear that excess earned from transfer of any depreciable assets will be treated as STCG
and taxed as per rate applicable to STCG."
15. In rejoinder, ld. Counsel for the assessee submitted that the decision of Shakti Metal Depot (supra) is not
applicable and she gave the following facts for distinguishing the case:

1.1. The appellant used a flat for business purposes and claimed depreciation on the same for 21 years
from the year of its acquisition.
1.2. Thereafter, the appellant discontinued the claim of depreciation for 2 years and subsequently sold
the flat. The appellant returned the income on sale of such flat as longterm capital gain.
1.3. In the said case, the appellant contended that the asset ceased to be a business asset since the asset
was not being used for business purpose and was held as investment (i.e. personal asset). In view of
the same, the appellant offered the income on sale of the asset as long-term capital gains.

1.4. The Hon'ble Kerala High Court decided the matter by discussing section 50 and 50A of the Act. It
concluded that the nature of building cannot change character and convert to an investment due to
non-use as business asset. Accordingly, the Hon'ble High Court held the profit on sale of building to
be as short-term capital gains. The Hon'ble Supreme Court affirmed the order of the Hon'ble Kerala
High Court by reproducing the below extract of High Court order:
"In other words, in our view, the building which was acquired by the assessee in 1974and in respect of
which depreciation was allowed to a as a business asset for 21 years, that is upto the assessment year
1995-96. still continued to be part of the business asset and depreciable asset, no matter the non-user
disentitles the assessee for depreciation for two years prior to the date of sale. We do not know how a
depreciable asset forming part of block of assets within the meaning Section 2(11) of the Act can cease to
be part of block of assets. The description of the asset by the assessee in the Balance Sheet as an
investment asset in our view is meaningless and is only to avoid payment to tax on short term capital
gains on sale of the building. So long as the assessee continued business, the building forming part of the
block of assets will retain it's character as such, no matter one of two of the assets in one or two years not
used for business purposes disentitles the assessee for depreciation for those years. In our view instead of
selling the building, if the assessee started using the building after two years for business purposes the
assessee can continue to claim depreciation based on the written down value available as on the date of
ending of the previous year in which deprecation was allowed last."
Decision
16. We have heard both the parties and also perused the various judgments relied upon. As noted above, the
main issue to be adjudicated by this special bench is, whether the capital gains under section 50, arising out of
sale of a long term capital assets is chargeable at the rate applicable to the short term capital gains or the rates
applicable to the long term capital gains u/s 112 of the Act. Interestingly, this tribunal in the earlier year in the
case of the assessee on same issue has quoted the judgment of Hon'ble Jurisdictional High Court in Ace
Builders (P). Ltd (supra), to decide against the assessee. Accordingly, we have to decide this referred question
in light of this judgement and other judgments and also the true purport of section 50.
17. Section 50 is a special provision for computation of capital gains in the case of depreciable assets. Section
reads as under:-
50. 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:]
[Provided that in a case where goodwill of a business or profession forms part of a block of asset for the
assessment year beginning on the 1st day of April, 2020 and depreciation thereon has been obtained by
the assessee under the Act, the written down value of that block of asset and short-term capital gain, if
any, shall be determined in such manner as may be prescribed.]
[Explanation.—For the purposes of this section, reduction of the amount of goodwill of a business or
profession, from the block of asset in accordance with sub-item (B) of item (ii) of sub-clause (c) of clause
(6) of section 43 shall be deemed to be transfer.]
18. The said section starts with non-obstante clause, that is, exception has been carved out to section 2(42A)
of the Act, which provides definition for a short term capital asset. The said definition reads as under: -
(42A) "short-term capital asset" means a capital asset held by an assessee for not more than [Thirty Six]
months immediately preceding the date of its transfer.
Ergo, if the capital asset which is an asset forming part of the block of asset, in respect of which depreciation
has been allowed, then even if it is held for more than 36 months, the conditions of the 36 months will not be
applicable and still it will be chargeable as capital gains arising from transfer of a short term capital asset.
19. The 'long term capital asset' and 'long term capital gain' has been defined in section 2 (29AA) and 29B
which reads as under:-
(29AA). "long term capital asset" means a capital asset which is not a short term capital asset;
(29B). "long term capital gain" means capital gain arising from the transfer of a long term capital asset;
Thus, capital gain arising from transfer of a long term capital asset is taxed as a long term capital gain and
long term capital assets means which is held for more than 36 months. So taxability is on transfer of long term
capital asset.
20. Normally capital gain is required to be computed according to the provisions contain in sections 48 & 49
of the Act. But section 50 by deeming fiction amends the mode of computation of capital gain and cost with
reference to certain modes of acquisition. Section provides that where the capital asset is forming part of the
block of assets in respect on which depreciation has been allowed to the assessee has been transferred, then
the provisions of sections 48 (mode of computation) and 49 (cost with reference to certain mode of
acquisition) has been modified, that is, the computation of depreciable assets has to be done in the mechanism
provided in sub section (1) and (2) of section 50. Since in this case sub section (1) is applicable, which
provides that, where the full value of consideration received or accruing as a result of transfer of the assets
together with the full value of such consideration received or accruing as a result of transfer from any other
capital asset falling within the block of asset during the previous year, which exceeds the aggregate of the
following amounts, that is; (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. In other words,

(i) Where the consideration received as a result of transfer of an asset falling within the block of asset
and such consideration received, exceeds the amount after making the computation provided in
clauses (i), (ii) & (iii) of sub-Section 1, then such excess is deemed to be capital gains arising from
transfer of short term capital assets.
(ii) Where the block of asset cease to exist then the income received or accruing as a result of such
transfer shall be deemed to be the capital gains arising from the transfer of short-term capital assets.
Thus, in a situation where because of transfer of a depreciable assets forming part of the block of the assets,
any gain arising to the assessee shall always be deemed to be the capital gains from the transfer of a short-
term capital asset.
21. Section 50 starts with a non-obstante clause and is a deeming provision which should be strictly limited to
the purpose mentioned therein. The exclusion prescribed by the non-obstante clause is limited to the purpose
of modification of Section 48 & 49 of the Act and such non-obstante clause cannot be applied to any other
provisions contained in the Act. Here Section 50, firstly, deems that any capital asset which is held for a long
term period, that is, beyond specified time limit as provided in section 2(42A) is transferred, and if there is
excess after computation provided in sub clauses (i), (ii) and (iii) of sub section (1), then it is taxed as capital
gains arising from transfer of a short term capital asset. Secondly, the deeming provisions has been confined
only to the purpose of computation of sections 48 and 49 of the Act and the capital gains then arising is
deemed to be from transfer of short term capital assets. The deeming provision does not extend for any other
purpose. In other words provisions of section 50 of the Act changes the characteristic of the gain that in some
cases a long term to a short term capital gain were assets are held beyond the specific term. However, the
section does not change the characteristic of the capital asset held by the assessee, that is, the long term capital
asset will remain a long term capital asset for all other purposes, but for the deeming fiction u/s 50 of the Act,
capital gains is taxable as if it is gain arising from transfer of a short term capital asset and it does not extend
beyond this fiction to convert long term capital asset into short term capital asset for other purposes of the
Act.
22. Section 2(42B) of the Act defines short term capital gains, "a short term capital gains means capital gains
arising from transfer of a short term capital asset". Though the gain on transfer of a depreciable asset have
been deemed to be in the nature of a short term capital gain in case of transfer, but that does not alter the
characteristic of that capital asset, whether 'long term capital asset' or 'short term capital asset' for the purpose
of other provisions of the Act. In order to apply Section 50 of the Act, the mode of computation on the
transfer of the asset, only sections 48 & 49 has been modified to deem it as transfer of a short term capital
asset. Here in this case, the assessee has computed the capital gains in alignment with the provision of section
50 despite holding the asset for a period longer than three years and offered it as STCG. Thus, there are two
steps in arriving at the final tax liability; (a) Step 1 - computation of income; and (b) step 2-determining the
tax rate. The tax rate of long term capital gain has been defined in Section 112.
112. (1) Where the total income of an assessee includes any income, arising from the transfer of a long-
term capital asset, which is chargeable under the head "Capital gains", the tax payable by the assessee on
the total income shall be the aggregate of,-

(a) in the case of an individual or a Hindu undivided family, [being a resident,]

(i) the amount of income-tax payable on the total income as reduced by the amount of such long-term
capital gains, had the total income as so reduced been his total income; and that
(ii) the amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent :
Provided that where the total income as reduced by such long-term capital gains is below the maximum
amount which is not chargeable to income-tax, then, such long-term capital gains shall be reduced by the
 amount by which the total income as so reduced falls short of the maximum amount which is not
chargeable to income-tax and the tax on the balance of such long-term capital gains shall be computed at
the rate of twenty per cent;

(b) in the case of a 21[domestic] company,-

(i) the amount of income-tax payable on the total income as reduced by the amount of such long-term
capital gains, had the total income as so reduced been its total income; and
(ii) the amount of income-tax calculated on such long-term capital gains at the rate of 20 [twenty] per
cent :
The aforesaid section deals with tax rate on long term capital gains which clearly provides that, where the
total income of the assessee includes any income arising from transfer of long term capital asset which is
chargeable under the head Capital Gain, then tax is to be calculated at the rate of 20%.
23. Section 112 deals with the rate on which long term capital gain has to be taxed. The pre-requisite for
applicability of 20% rate as per Section 112 of the Act for the domestic companies is that firstly, there must be
long term capital asset and secondly, income must arise from transfer of long term capital asset. If the long
term capital asset has been held for more than 36 months immediately preceding the date of transfer, then
transfer of such long term capital asset has to be taxed at the rate of profit under the Act. In the present case it
is not in dispute that the asset has been held for more than 36 months prior to its transfer. Hence, both the
conditions prescribed in Section 112 of the Act stands satisfied.
24. Now various courts have held that the deeming fiction in section 50 has been brought out for differential
treatment of depreciable asset which has limited application and is confined for the purpose of mode of
computation of capital gains under sections 48 and 49 of the Act. In so far as the judgment of Hon'ble
Bombay High Court in the case of Ace Builders, (supra), wherein the Hon'ble High Court in the context of
claim of deduction under section 54E of the Act in respect of capital gain arising on transfer of a capital asset
on which depreciation has been allowed, which is deemed to be short term capital gains under section 50 of
the Act, had made the following observation:-
"21. On perusal of the aforesaid provisions, it is seen that Section 45 is a charging section and sections 48
and 49 are the machinery sections for computation of capital gains. However, Section 50 carves out an
exception in respect of depreciable assets and provides that where depreciation has been claimed and
allowed on the asset, then, the computation of capital gain on transfer of such asset under sections 48 and
49 shall be as modified under Section 50. In other words, Section 50 provides a different method for
computation of capital gain in the case of capital assets on which depreciation has been allowed.
22. Under the machinery sections the capital gains are computed by deducting from the consideration
received on transfer of a capital asset, the cost of acquisition, the cost of improvement and the
expenditure incurred in connection with the transfer. The meaning of the expressions 'cost of
improvement' and 'cost of acquisition' used in sections 48 and 49 are given in section 55. As the
depreciable capital assets have also availed depreciation allowance under section 32, section 50 provides
for a special procedure for computation of capital gains in the case of depreciable assets. Section 50(1)
deals with the cases where any block of depreciable assets do not cease to exist on account of transfer and
Section 50(2) deals with cases where the block of depreciable assets cease to exist in that block on
account of transfer during the previous year. In the present case, on transfer of depreciable capital asset
the entire block of assets has ceased to exist and, therefore, Section 50(2) is attracted. The effect of
Section 50(2) is that where the consideration received on transfer of all the depreciable assets in the block
exceeds the written down value of the block, then the excess is taxable as a deemed short term capital
gains. In other words, even though the entire block of assets transferred are long term capital assets and
the consideration received on such transfer exceeds the written down value, the said excess is liable to be
treated as capital gain arising out of a short term capital asset and taxed accordingly.
23. The question required to be considered in the present case is, whether the deeming fiction created
under Section 50 is restricted to section 50 only or is it applicable to section 54E of the Income Tax Act
as well? In other words, the question is, where the long term capital gain arises on transfer of a
depreciable long term capital asset, whether the assessee can be denied exemption under section 54E
merely because, section 50 provides that the computation of such capital gains should be done as if
arising from the transfer of short term capital asset?
 24. Section 54E of the Income Tax Act grants exemption from payment of capital gains tax, where the
whole or part of the net consideration received from the transfer of a long term capital asset is invested or
deposited in a specified asset within a period of six months after the date of such transfer. In the present
case it is not in dispute that the assessee fulfills all the conditions set out in section 54E to avail
exemption, but the exemption is sought to be denied in view of fiction created under section 50.
25. In our opinion, the assessee cannot be denied exemption under section 54E, because, firstly, 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-section (1) & (2) of section 50 is restricted only to the mode of
computation of capital gains contained in Section 48 and 49. Secondly, it is well established in law that a
fiction created by the legislature has to be confined to the purpose for which it is created. In this
connection, we may refer to the decision of the Apex Court in the case of State Bank of India V/s. D.
Hanumantha Rao reported in 1998 (6) S.C.C.183. In that case, the Service Rules framed by the bank
provided for granting extension of service to those appointed prior to 19/7/1969. The respondent therein
who had joined the bank on 1/7/1972 claimed extension of service because he was deemed to be
appointed in the bank with effect from 26/10/1965 for the purpose of seniority, pay and pension on
account of his past service in the army as Short Service Commissioned Officer. In that context, the Apex
Court has held that the legal fiction created for the limited purpose of seniority, pay and pension cannot
be extended for other purposes. Applying the ratio of the said Judgment, we are of the opinion, that the
fiction created under section 50 is confined to the computation of capital gains only and cannot be
extended beyond that. Thirdly, section 54E does not make any distinction between depreciable asset and
non depreciable asset and, therefore, the exemption available to the depreciable asset under section 54E
cannot be denied by referring to the fiction created under section 50. Section 54E specifically provides
that where capital gain arising on transfer of a long term capital asset is invested or deposited (whole or
any part of the net consideration) in the specified assets, the assessee shall not be charged to capital gains.
Therefore, the exemption under section 54E of the I.T. Act cannot be denied to the assessee on account of
the fiction created in section 50.
26. It is true that section 50 is enacted with the object of denying multiple benefits to the owners of
depreciable assets. However, that restriction is limited to the computation of capital gains and not to the
exemption provisions. In other words, where the long term capital asset has availed depreciation, then the
capital gain has to be computed in the manner prescribed under Section 50 and the capital gains tax will
be charged as if such capital gain has arisen out of a short term capital asset but if such capital gain is
invested in the manner prescribed in Section 54E, then the capital gain shall not be charged under Section
45 of the Income Tax Act. To put it simply, the benefit of section 54E will be available to the assessee
irrespective of the fact that the computation of capital gains is done either under sections 48 & 49 or
under section 50. The contention of the revenue that by amendment to section 50 the long term capital
asset has been converted into to short term capital asset is also without any merit. As stated hereinabove,
the legal fiction created by the statute is to deem the capital gain as short term capital gain and not to
deem the asset as short term capital asset. Therefore, it cannot be said that section 50 converts long term
capital asset into a short term capital asset."
[Emphasis in bold is ours]
25. Thus, sequitur of aforesaid judgment is that the fiction created by the legislature in Section 50 of the Act
has to be confined to the purpose for which it is created. Section 50 of the Act was enacted with the object of
denying multiple benefits to the owners of a depreciable asset, however, that restriction is limited to the
computation of capital gains and not to the exemption provision. If depreciation has been availed on long term
capital asset, then, the capital gains has to be computed in the manner prescribed under Section 50 of the Act
and the capital gains tax will be charged as if such capital gain is arising out of short term capital asset. In that
case, the capital gains was invested in the manner prescribed in Section 54E of the Act wherein exemption is
provided on transfer of a long term capital asset then Long term capital gains was subject to deduction. There
also, the asset was a depreciable asset, however, while granting exemption under Section 54E of the Act,
which is applicable for Long term capital gains, the jurisdictional High Court has held that for the purpose of
exemption under Section 54E of the Act, it has to be treated as Long term capital gains.
26. In Para 26 of the aforesaid judgment as highlighted in bold above, Hon'ble High Court specifically
rejected the contention of the revenue by amendment section 50 a long term capital asset has been converted
into a short term capital asset is without any merit. The legal fiction created is deemed to the capital gain as a
short term capital gain and not to deemed that asset as a short term capital asset and therefore cannot be said
that section 50 converts the long term capital asset into a short term capital asset. This principle and ratio of
the Hon'ble Jurisdictional High Court if is to be followed, then it is clear that the tax rate provided under
section 112 which is applicable for a long term capital gains will prevail. Once the Hon'ble High Court has
held that section 50 does not convert a 'long term capital asset' to a 'short term capital asset', then the rate of
tax is applicable for the transfer of a long term capital asset has to be in accordance with section 112 of the
Act. The deeming fiction of section 50 cannot be imported u/s 112 of the Act. Thus, our analysis is in line
with the judgement of the Jurisdictional High Court.
27. In another decision the Hon'ble Bombay High Court in the case of Parrys (Eastern) Pvt. Ltd. (supra),
wherein following question of law was admitted for consideration of Hon'ble High Court;
1) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in law
in holding that capital gain arising from transfer of depreciable assets was liable to be set off against
brought forward Long Term Capital Loss without appreciating that under section 50 of the Income Tax
Act, 1961 such capital gain is treated as Short Term Capital Gain?
(2) Whether on the facts and in the circumstances of the case and in law the Tribunal was justified in law
in holding that capital gain arising from transfer of depreciable assets was liable to be set off against
brought forward Long Term Capital Loss without appreciating that according to Section 74 of the Income
Tax Act, 1961 Long Term Capital Loss cannot be set off against the Short Term Capital Gain?.
The Hon'ble High Court observed and held that-
6. We find that the issue stands concluded by the decision of this Court in ACE Builders (P.) Ltd's case
(supra) in favour of the Respondent-Assessee. Moreover, the impugned order relies upon the order of the
Tribunal in Komac Investments & Finance (P.) Ltd's case (supra) to dismiss the Revenue's appeal before
it. The deeming fiction under Section 50 is restricted only to the mode of computation of capital gains
contained in Sections 48 and 49 of the Act. It does not change the character of the capital gain from that
of being a long term capital gain into a short term capital gain for purpose other than Section 50 of the
Act. Thus, the respondent - assessee was entitled to claim set off as the amount of Rs. 7.12 Crores arising
out of sale of depreciable assets which are admittedly on sale of assets held for a period to which long
term capital gain apply. Thus for purposes of Section 74 of the Act, the deemed short term capital gain
continues to be long term capital gain. Moreover, it appears that the Revenue has accepted the decision of
the Tribunal in Komac Investments and Finance (P.) Ltd.'s case (supra), as our attention has not been
drawn to any appeal being filed from that order.
7. In view of the above, the questions of law as framed stand concluded against the Revenue-appellant
and in favour of Respondent-assessee by the decision of this Court if ACE Builders (P.) Ltd's case
(supra). Therefore, no substantial questions of law arise for consideration.
28. Thus, in the context of set off against the brought forward of long term capital loss, the Hon'ble High
Court held that the deeming fiction under section 50 is restricted only to mode of computation of capital gains
contained in sections 48 and 49 of the Act and it does not change character of capital assets from of being a
long term capital asset or a short term capital asset for purpose u/s 50 of the Act. Thus, the capital gain arisen
in terms of section 50 was allowed to be set off against long term capital loss. This judgment again clarifies
the interpretation of section 50 and concept of a long term capital asset.
29. Again in another judgment Hon'ble Bombay High Court in Pursarth Trading Co. Pvt Ltd. (supra), the
Hon'ble High Court upheld the set off of a long term capital loss against gain arising from the depreciable
assets u/s 50 of the Act. This principle was reiterated in Manali Investment (supra), wherein following
question of law was admitted for adjudication.
"Whether on the facts and in the circumstances of the case and in law, the Tribunal was correct in holding
that the assessee is entitled to set-off under Section 74 in respect of capital gain arising on transfer of
capital assets on which depreciation has been allowed in the first year itself and which is deemed as short
term capital gain under Section 50 of the Income Tax Act relying upon the judgment of this Court in the
case of CIT V/s. Ace Builders (P.) Limited([2005] 144 Taxman 855/281 ITR 210 (Bombay)) even though
the said decision was rendered in the context of eligibility of deduction under Section 54E".
The Hon'ble High Court again followed the principle laid in case of Ace Builders Pvt Ltd (supra) and
observed and held that under:-
 3. On further appeal, the Tribunal by the impugned order has allowed the claim of the respondent -
assessee to set-off its long term losses in terms of Section 74 of the Act against the long term capital
gains on sale of transformers and meters. This was by following the decision of this Court in the matter
of CIT v. Ace Builders (P) Ltd [2006] [2005] 144 Taxman 855/281 ITR 210 (Bombay)/12[2005] 144
Taxman 855/281 ITR 210 (Bombay). In the case of Ace Builders (P) Ltd (supra), this Court held that by
virtue of Section 50 of the Act only the capital gains is to be computed in terms thereof and be deemed to
be short-term capital gains. However, this deeming fiction is restricted only for the purposes of Section
50 of the Act and the benefit under Section 54E of the Act which is available only to long term capital
gains was extended. In this case, the Tribunal held that the position is similar and the benefit of set-off
against long term capital loss under Section 74 of the Act is to be allowed. Further, an identical issue with
regard to set off against long term capital loss arose in an appeal filed by the Revenue in the matter of
CIT V Hathway Investments (P.) Ltd, being Income Tax Appeal (L) No. 405 of 2012. This Court by its
order dated 31 January 2013 refused to entertain the appeal filed by the Revenue. The Revenue has not
been able to point out any distinguishing features in the present case warranting a departure from the
principles laid down by this Court in the matter of Ace Builders (P.) Ltd. (supra) and in our order dated
31st January, 2013 in Income Tax Appeal (L) No.405 of 2012
30. Similar view has been taken in many other cases by the Hon'ble Bombay High Court, for instance, in the
case of United Paper Industries (supra) and Cadbury India Ltd (supra). For sake of repetition we are not
reproducing the relevant judgment as in all these judgments, Ace Builders have been followed.
31. Now, finally this issue has been set at rest by the Hon'ble Supreme Court in the case of V.S.Dempo
Company Ltd. (supra) wherein Hon'ble Supreme Court had the occasion to examine the eligibility of assessee
to claim exemption under section 54E of the Act in respect of capital gains arising on transfer of a capital
asset on which depreciation has been allowed. The Hon'ble Apex Court reiterated and affirmed the judgment
of Hon'ble Bombay High Court in the case of Ace Builders (P.) Ltd. (supra). In the said appeal before
Supreme Court, in the income-tax return filed by the respondent/assessee for the A.Y. 1989-90, the assessee
had disclosed that it had sold its loading platform M.V. Priyadarshni for a sum of Rs. 1,37,25,000/- on which
it had earned some capital gains. On the said capital gains the assessee had also claimed that it was entitled for
exemption under Section 54E of the Act. Admittedly, the asset was purchased in the year 1972 and sold
sometime in the year 1989. Thus, the asset was almost 17 years old. Going by the definition of long term
capital asset contained in Section 2(29B) of the Act, it was admittedly a long- term capital asset. Further the
Assessing Officer rejected the claim for exemption under Section 54E of the Act on the ground that the
assessee had claimed depreciation on this asset and, therefore, provisions of Section 50 were applicable.
Though this was upheld by the CIT (Appeals), the ITAT allowed the appeal of the assessee herein holding that
the assessee shall be entitled for exemption under Section 54E of the Act. The Bombay High Court confirmed
the view of the CIT (Appeals) and dismissed the appeal of the Revenue. While doing so, the Hon'ble High
Court relied upon its own judgment in the case of ACE Builders Pvt. Ltd. (supra). In the words of Hon'ble
Supreme Court, "the High Court observed that Section 50 of the Act which is a special provision for
computing the capital gains in the case of depreciable assets is not only restricted for the purposes of Section
48 or Section 49 of the Act as specifically stated therein and the said fiction created in sub-section (1) & (2) of
Section 50 of the Act has limited application only in the context of mode of computation of capital gains
contained in Sections 48 and 49 of the Act and would have nothing to do with the exemption that is provided
in a totally different provision i.e. Section 54E of the Act. Section 48 of the Act deals with the mode of
computation and Section 49 of the Act relates to cost with reference to certain mode of acquisition." Their
Lordships observed that, this aspect has been analysed in the judgment of the Bombay High Court in the case
of ACE Builders Pvt. Ltd. (supra), in the following manner:
"In our opinion, the assessee cannot be denied exemption under Section 54E, because, firstly, 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-section (1) & (2) of Section 50 is restricted only to the mode of
computation of capital gains contained in Section 48 and 49. Secondly, it is well established in law that a
fiction created by the legislature has to be confined to the purpose for which it is created. In this
connection, we may refer to the decision of the Apex Court in the case of State Bank of India v. D.
Hanumantha Rao reported in 1998 (6) SCC 183. In that case, the Service Rules framed by the bank
provided for granting extension of service to those appointed prior to 19.07.1969. The respondent therein
who had joined the bank on 1.7.1972 claimed extension of service because he was deemed to be
appointed in the bank with effect from 26.10.1965 for the purpose of seniority, pay and pension on
 account of his past service in the army as Short Service Commissioned Officer. In that context, the Apex
Court has held that the legal fiction created for the limited purpose of seniority, pay and pension cannot
be extended for other purposes. Applying the ratio of the said judgment, we are of the opinion that the
fiction created under Section 50 is confined to the computation of capital gains only and cannot be
extended beyond that. Thirdly, Section 54E does not make any distinction between depreciable asset and
nondepreciable asset and, therefore, the exemption available to the depreciable asset under Section 54E
cannot be denied by referring to the fiction created under Section 50. Section 54E specifically provides
that where capital gain arising on transfer of a long term capital asset is invested or deposited (whole or
any part of the net consideration) in the specified assets, the assessee shall not be charged to capital gains.
Therefore, the exemption under Section 54E of the I.T. Act cannot be denied to the assessee on account
of the fiction created Section in 50."
32. Their Lordships dismissing the appeal filed by the Revenue held that, "we are in agreement with the
aforesaid view taken by the Bombay High Court." Thus, the judgment of Hon'ble Bombay High Court in the
case of ACE Builders Pvt. Ltd. (supra) has been fully approved by the Hon'ble Supreme Court, thereby
settling the issue that the fiction created in sub section (1) and sub section (2) of section 50 has limited
application only in the context of mode of computation of capital gains contention of sections 48 and 49 of the
Act and beyond that nothing should be imported to other sections of the Act.
33. Though most of the decisions have been rendered in the context of Section 54E but the principle laid
down therein will apply mutatis mutandis on this issue also for the reason that Section 54E provides for
exemption from capital gain where the capital gain arises from transfer of "long term capital asset" ----------.
Thus, even if u/s.50, long term capital asset is taxed as short term capital gain because of the deeming fiction,
but that does not lead to convert long term capital asset into short term capital asset for the purpose of other
section. Similarly, u/s.112 uses the word "where the total income of an assessee includes any income, arising
from the transfer of a long-term capital asset, which is chargeable under the head "Capital gains", the tax
payable by the assessee on the total income shall be the aggregate of --------------. Thus, wherein the statute
had used the word "long term capital asset, it has to be given the same meaning as defined in said provision of
the Section. Thus, all these judgments of Jurisdictional High Court as well as Hon'ble Supreme Court in the
context of Section 54E which is applicable on capital gain arising of long term capital asset will also apply
here. Thus, respectfully following the aforesaid judgments, we hold that, the legal fiction created by the
statute is to deem the capital gain as 'short term capital gain' and not to deem the 'asset' as 'short term capital
asset'. Therefore, it cannot be said that section 50 converts long term capital asset into a short term capital
asset. This principle of law has been exactly held by the Hon'ble Jurisdictional High Court and approved by
the Hon'ble Supreme Court.
34. Now coming to the judgment relied upon by the ld. CIT DR in the case of Shakti Metal (supra), first of all
the Hon'ble Kerala High Court had passed the order in the context of asset on which assessee had
discontinued the claim of depreciation immediately prior to its sale and re-classified the asset as an
investment. The brief facts in that case were, the assessee-firm purchased a flat for business purposes in the
financial year ending on 31-3-1974. Since then it was used as the branch office of the assessee and on the
capitalised cost of the building the assessee was allowed depreciation until the assessment year 1995-96.
However, the assessee discontinued claiming depreciation for the flat for the assessment years 1996-97 and
1997-98. The flat was sold during the assessment year 1998-99 and profit arising on such sale was claimed by
the assessee as long-term capital gain. The Assessing Officer, however, held that profit arising on transfer of
depreciable asset was assessable as short-term capital gain under section 50. He rejected the assessee's
contention that it stopped using the flat for business purposes after the assessment year 1995-96 and
thereafter, the flat was treated as an investment and was so shown in the balance sheet. On appeal, the
Commissioner (Appeals) concurred with the Assessing Officer. However, on second appeal, the Tribunal,
solely relying on the entry in the balance sheet of the assessee wherein the flat was shown as an investment,
held that since the item was purchased in 1974, sale of the flat was assessable as long-term capital gain.
35. The Hon'ble High Court after referring the provisions of Section 50 held as under:-
"4. While the contention of the revenue is that the asset in respect of which depreciation has been claimed
when sold should always be assessed as short-term capital gains, the contention of the assessee is that
unless the asset sold forms part of the block asset in the previous year in which sale took place, it cannot
be assessed to short-term capital gains under section 50 of the Act. In our view section 50 has to be
understood with reference to the general scheme of assessment on sale of capital assets. The scheme of
the Act is to categorize assets between short-term capital assets and long-term capital assets. Section
 2(42A) defines short-term capital asset as an asset held for not more than 36 months. The non obstante
clause with which section 50 opens makes it clear that it is an exception to the definition of short-term
capital asset which means that even though the duration of holding of an asset is more than the period
mentioned in section 2(42A), still the asset referred to therein will be treated as shortterm capital asset.
No one can doubt that assets covered by section 50 are depreciable assets forming part of block assets as
defined under section 2(11) of the Act. Section 50 has two components, one is as to the nature of
treatment of an asset, the profit on sale of which has to be assessed to capital gains. The section mandates
that a depreciable asset in respect of which depreciation has been allowed when sold should be assessed
to tax as short-term capital asset. The other purpose of section 50 is to provide cost of acquisition and
other items of expenditure which are otherwise allowable as deduction in the computation of capital gains
and covered by sections 48 and 49 of the Act. Here again section 50 provides an exception for deduction
of cost of acquisition and other items of expenditure otherwise allowable in the computation of capital
gains under sections 48 and 49 of the Act. In other words, section 50 provides for assessment of a
depreciable asset in respect of which depreciation has been allowed as short-term capital gains and the
deductions available under sections 48 and 49 should be allowed subject to the provisions provided in
sub-sections (1) and (2) of section 50. Section 50A also deals with assessment of depreciable asset that
too as short-term capital gains and it actually supplements section 50. In our view, the purpose of section
50A is to enable the assessee to claim deduction of the written down value of the asset in respect of
which depreciation was claimed in any year as defined under section 43(6) of the Act towards cost of
acquisition within the meaning of sections 48 and 49 of the Act. The condition for computation of short-
term capital gains in the way it is stated in section 50A is that assessee should have been allowed
depreciation in respect of a depreciable asset sold in any previous year which obvious means that for the
purpose of assessment of profit on the sale of a depreciable asset, the assessee need not have claimed
depreciation continuously for the entire period up to the date of sale of the asset, in other words, our
view, the building which was acquired by the assessee in 1974 and in respect of which depreciation was
allowed to it as a business asset for 21 years, that is up to the assessment year 1995-96, still continued to
be part of the business asset and depreciable asset, no matter the non-user disentitles the assessee for
depreciation for two years prior to the date of sale. We do not know-how a depreciable asset forming part
of block of assets within the meaning section 2(11) of the Act can cease to be part of block of assets. The
description of the asset by the assessee in the Balance Sheet as an investment asset in our view is
meaningless and is only to avoid payment of tax on short-term capital gains on sale of the building. So
long as the assessee continued business, the building forming part of the block of assets will retain its
character as such, no matter one or two of the assets in one or two years not used for business purposes
disentitles the assessee for depreciation for those years. In our view, instead of selling the building, if the
assessee started using the building after two years for business purposes the assessee can continue to
claim depreciation based on the written down value available as on the date of ending of the previous
year in which depreciation was allowed last. "
36. The decision of the Hon'ble High Court was confirmed by the Hon'ble Supreme Court in the following
manner:-
2. In our view the High Court justly over-turned the opinion recorded by the Commissioner of Income
Tax (Appeals) 11. Aayakar Bhavan North Block, Manachira, Calicut, vide Order dated 23-6-2004 in
Appeal NO.ITA57/M/00-01, inter alia, on the following basis-
"In other words, in our view, the building which was acquired by the assessee in 1974 and in respect
of which depreciation was allowed to it as a business asset for 21 years, that is upto the assessment
year 1995-96, still continued to be part of the business asset and depreciable asset, no matter the
non-user disentitles the assessee for depreciation for two years prior to the date of sale. We do not
know how a depreciable asset forming part of block of assets within the meaning Section 2(11) of
the Act can cease to be part of block of assets. The description of the asset by the assessee in the
Balance Sheet as an investment asset in our view is meaningless and is only to avoid payment to tax
on short term capital gains on sale of the building. So long as the assessee continued business, the
building forming part of the block of assets will retain it's character as such, no matter one of two of
the assets in one or two years not used for business purposes disentitles the assessee for depreciation
for those years. In our view instead of selling the building, if the assessee started using the building
after two years for business purposes the assessee can continue to claim depreciation based on the
written down value available as on the date of ending of the previous year in which deprecation was
allowed last." (emphasis supplied)
 3. The reasoning by the High Court in view of the facts on record commends to us.
4. The High Court has, therefore, rightly restored the findings and addition made in the assessment order.
Hence, we find no merits in this appeal and it is dismissed.
37. The ratio of the aforesaid decision is that once depreciable asset forming part of block of assets within the
meaning Section 2(11) of the Act it does not cease to be part of block of assets and description of the asset by
the assessee in the balance sheet as an investment is meaningless to avoid payment of tax on short term capital
on sale of building. As long as assessee continues business, the building forming part of the block of asset will
retain its character, no matter one of the assets in one of the two years has not been used for business purpose
this entitles the assessee for depreciation for those years. This view of the Hon'ble Kerala High Court has been
upheld that instead of selling the building, the assessee starts using the building after two years for business
purpose, the assessee can continue to claim the depreciation based on WDV available as on the date of ending
the previous year in which depreciation was allowed.
38. Nowhere, in the judgment deals with the situation or question, which is before us in the present reference
to this Special Bench. The Hon'ble High Court has only dealt with the controversy raised before it to a limited
application u/s.50 / 50A of the Act. It was rendered in view of the background that assessee had reclassified
the asset as a non-depreciable asset and held it as such at the time of sale. In contrast, in the present case the
asset continued to be depreciable asset and assessee has neither challenged the applicability of Section 50 of
the Act nor has it challenged the income determined in accordance with the Section 50. The issue before us is,
whether the rate of tax which is to be determined u/s.112 of the Act shall be applicable if asset is a long term
capital asset held for more than 36 months and due to deeming fiction, it is treated as short term capital gain
for the purpose of Section 50 and such deeming fiction is with regard to applicability of Section 48 & 49. The
decision of the Hon'ble Supreme Court cannot be a binding precedent on the issue which was not there at all.
It is axiomatic that the decision cannot be relied upon which was not the issue or context in which it was
decided and it is only the ratio decidendi, i.e., the principle of law that decides a dispute on a question is a
precedence to be followed. In support of this proposition it would be relevant to refer to the following
judgments:-
(i) . Hon'ble Bombay High Court in the case of HDFC Bank Ltd. (supra), wherein it has been held as
under:
"... One more aspect which needs to be adverted to and that is that a decision would be considered to
be a binding precedent only if it deals with or decides an issue which is the subject matter of
consideration or decision before a coordinate or subordinate court. It is axiomatic that a decision
cannot be relied upon in support of the proposition that it did not decide. (see Mittal Engineering
Works P. Ltd. v. Collector of Central Excise [1997] 106 STC 201 (SC) ; (1997) 1 SCC 203.
Therefore, it is only the ratio decidendi, i.e., the principle of law that decides the dispute which can
be relied upon as precedent and not any obiter dictum or casual observations. (See Girnar Traders v.
State of Maharashtra (2007) 7 SCC 555 and Shin-Etsu Chemical Co. Ltd. v. Aksh Optifibre Ltd.
(2005) 127 Comp Cas 97 (SC) ; (2005) 7 SCC 234."
(ii) . Apex Court's decision in the case of Sun Engineering Works (P.) Ltd. (supra) where in it has been
held that:
"It is neither desirable nor permissible to pick out a word or a sentence from the judgment of the
Court, divorced from the context of the question under consideration and treat it to be the complete
'law' declared by the Court. The judgment must be read as a whole and the observations from the
judgment have to be considered in the light of the questions which were before the Court. A decision
of the Court takes its colour from the questions involved in the case in which it is rendered and while
applying the decision to a latter case, the Courts must carefully try to ascertain the true principle laid
down by the decision of the Court and not to pick out words or sentences from the judgment,
divorced from the context of the questions under consideration by the Court, to support their
proceedings."
(iii) Apex Court's decision in the case of Madhav Rao Jivaji Rao Scindia Bahadur v. Union of India
[1971] 3 SCR 9; AIR 1971 SC 530, where in it has been held that:
"It is difficult to regard a word, a clause or a sentence occurring in a judgment of this Court,
divorced from its context, as containing a full exposition of the law on a question when the question
 did not even fall to be answered in that judgment."
39. One of the arguments also raised by the ld. CIT DR was that, since Section 50 starts with non-obstante
clause therefore, other provisions of that will not apply and once the Section itself is treated sale of long term
capital asset as short term capital gain, then Section 112 would not apply. As we have already stated that non-
obstante clause in Section 50 is only with regard to definition of a short term capital asset, i.e., an asset which
is held by the assessee in not more than 36 months, preceding the date of its transfer. Thus, the exclusion
prescribed by the non-obstante clause is limited to the purpose of modification of Section 48 & 49. In this
regard, the decision of Hon'ble Gujarat High Court in the case of Amar Jewellers Ltd. v. Asstt. CIT [2022] 137
taxmann.com 249/444 ITR 97 (Gujarat) would be relevant to quote wherein the scope of non-obstante clause
has been discussed.
"46. A non-obstante clause is generally appended to a section with a view to give the enacting part of the
section, in case of conflict, an overriding effect over the provision in the same or other Act mentioned in
the non-obstante clause. It is equivalent to saying that inspite of the provisions or Act mentioned in the
non-obstante clause, the provision following it will have its full operation or the provisions embraced in
the non-obstante clause will not be an impediment for the operation of the enactment or the provision in
which the non-obstante clause occurs. (See: Principles of Statutory Interpretation, 9th Edition by Justice
G.P. Singh Chapter V, Synopsis IV at pages 318 and 319]
47. Normally the use of the phrase by the Legislature in a statutory provision like notwithstanding
anything to the contrary contained in this Act is equivalent to saying that the Act shall be no impediment
to the measure [See: Law Lexicon words notwithstanding anything in this Act to the contrary]. Use of
such expression is another way of saying that the provision in which the non-obstante clause occurs
usually would prevail over the other provisions in the Act. Thus, the non- obstante clauses are not always
to be regarded as repealing clauses nor as clauses which expressly or completely supersede any other
provision of the law, but merely as clauses which remove all obstructions which might arise out of the
provisions of any other law in the way of the operation of the principle enacting provision to which the
non-obstante clause is attached. [See: Bipathumma v. Mariam Bibi 1966 1 MYSLJ 162]
48. A non obstante clause has two parts the non obstante clause and the enacting part. The purpose of
enacting a non obstante clause is that in case of a conflict between the two parts, the enacting part will
have full sway in spite of the contrary provisions contained in the non obstante clause. Therefore, the
object and purpose of the enacting part should be first ascertained and then the assistance of the non
obstante clause should be taken to nullify the effect of any contrary provision contained in the clause."
40. Thus, non-obstante clause does not mean to completely supersede any other provisions of the Act. To
remove the obstruction which might arise out of the provision of any other law in way of operation of the
principle enacting provision to which the non-obstante clause is attached. If the non-obstante clause has been
confined to Section 50 dealing with the mode of computation of Section 48 & 49 and that even if the asset
appearing in the block of asset on which depreciation has been claimed is more than 36 months, then the gain
of transfer of such asset is to be taxed as short term capital gain while computing the income. However, as
held by the Hon'ble Jurisdictional High Court in several cases as noted above, Section 50 cannot convert the
long term capital asset into a short term capital asset and therefore, the principle laid down by the Hon'ble
Jurisdictional High Court in all the above quoted cases acts as a binding precedent.
41. It came to our notice that this Tribunal in the case of Velvet Holdings (P.) Ltd. v. ACIT [IT Appeal No.
6810 (Mum.) of 2008, 26-6-2014] had decided the similar issue, whether the rate of tax should be 20% u/s
112 of the Act which is applicable for long term capital asset on the transfer of asset forming part of block of
asset which is taxed as short term capital gain u/s 50. This issue was decided in favour of the assessee
following the earlier decision of the Tribunal in the case of Smita Conductors Ltd. , (supra). The ground
before the Tribunal was as under:-
"The learned Commissioner of Income-tax (Appeals) has erred in law and in facts in not appreciating that
the tax on capital gain ought to have been charged at 20% and not at the normal tax rate."
42. The Tribunal followed the decision of Smita Conductors Ltd., which in turn was based on a judgment of
the Hon'ble Bombay High Court in the case of Ace Builders Pvt. Ltd., This judgment was challenged by the
Revenue before the Hon'ble Bombay High Court in ITA No.165 of 2015, judgment and order dated 10th July
2017 observed as under:-
 "1. Heard the learned counsel for the appellant and the learned counsel for the respondent. It is fairly
conceded that the Tribunal has relied upon the judgment of this court in case of CIT v. ACE Builders Pvt.
Ltd, reported in [2006] [2005] 144 Taxman 855/281 ITR 210 (Bombay). The said judgment has been
approved by the Apex Court in the case of CIT. Panji v. VS.Dempo Company Ltd. reported in [2016] 74
taxmann.com 15 (SC). As the issue raised in the present appeal is already covered by the above referred
judgment, no substantial question of law arises."
43. Ergo, this precise issue decided by the tribunal has been approved by the Hon'ble Bombay High Court
following its earlier judgment of Ace Builders Pvt. Ltd . (supra) which in turn has been approved by the
Hon'ble Supreme Court in the case of V.S. Dempo Company Ltd. (supra) which we have also analysed in the
earlier part of the order. Hence the issue, that the rate of tax of 20% as prescribed u/s 112 of the Act is
applicable on the transfer of an asset forming part of block of asset (which was held for more than 36 months)
which is deem to be taxed as short term capital gain u/s 50, has been approved by the Hon'ble Jurisdictional
High Court.
44. Accordingly, we hold that capital gains arising out of the depreciable asset u/s 50 even though deem to be
capital gain arising from transfer of a short term capital asset, that fiction has to be confined only to section 50
and it cannot convert 'short term capital asset' into a 'long term capital asset' and vice versa for the other
purpose of the Act, either for set off against a long term capital loss or exemption provision were benefits is
given from a long term capital gain on transfer of a long term capital asset or the rate of tax provided u/s 112
of the Act which clearly provides that income arising from transfer of a long term capital asset chargeable
under the head capital gains, the amount of income tax calculated on such a long term capital gain shall be the
rate of 20%. Thus, even section 50 treats that excess is to be taxed as capital gain arising from transfer of a
short term capital asset but the rate of tax has to be applicable in terms of section 112 of the Act, because the
treatment of a short term capital asset is only a purpose of section 50 and not otherwise can convert a 'long
term capital asset' into a 'short term capital asset' for the purpose of rate of tax or any other provision of the
Act. Accordingly, this question is answered in favour of the assessee holding that rate of tax applicable would
be in terms of section112 of the rate of 20% and applicable surcharge.
45. Since, this is the only question referred to the Special Bench by the Hon'ble President, therefore, for the
deciding other issues as raised in cross appeals filed by the assessee as well as the revenue, same shall be
fixed before the regular bench to decide.
46. In the result, the question of law referred to the Special Bench is answered in favour of the assessee.
ORDER
Om Prakash Kant, Accountant Member. - In view of divergent opinion of coordinate benches of the
Tribunal on the issue of application of tax rate provided u/s 112(1) of the Income-tax Act, 1961 (in short 'the
Act') on Short Term Capital Gain (STCG) computed on transfer of depreciable capital asset invoking section
50 of the Act, the Division Bench in the case found itself unable to concur with the view adopted by the
predecessor bench(s) in the assessee's own case for preceding assessment years 2000-01 to 2005-06, and made
reference to the Hon'ble President ITAT for constitution of Special Bench. On such reference, on 21-10-2020,
the Hon'ble President ITAT constituted a Special Bench u/s.255(3) of the Act for the captioned assessment
year comprising of Learned Members , (i) Shri Shamim Yahya, Ld.AM, (ii) Shri Shaktijit Dey, Ld.JM and (iii)
Shri Vikas Awasthy, Ld.JM, for deciding the following question:
"Whether on the given facts and circumstances of the case and in law, the Tribunal is right in holding that
the capital gains u/s. 50 arising out of the sale of long term capital asset is chargeable at the rate
applicable to the Short Term Capital Gain or rate applicable to Long Term Capital Gain u/s. 112 of the
Act."
2. The Special Bench so constituted, in its order dated 15-06-2021 observed that the Hon'ble Bombay High
Court in the case of Rathi Brothers Madras Ltd., (supra), admitted substantial question of law involving
identical issue for adjudication. The Special Bench deliberated on whether it could proceed to adjudicate the
issue, given that the same was pending for adjudication before the jurisdictional High Court. In this context,
the Special Bench acknowledged that a similar issue was pending before the larger Bench of the ITAT in the
case of J.P. Morgan Chase Bank v. JCIT [IT Appeal No. 9189 (Mum.) of 2004] and C.O. No. 139/Mum/2013.
The Special Bench further took note of the fact that both the parties involved had expressed their agreement to
defer proceedings until the outcome of the decision of the larger Bench in the case of J.P. Morgan Chase Bank
(supra), consequently, the Special Bench deemed it appropriate to adjourn the proceedings sine die, pending
the outcome of the larger Bench of the ITAT in the case of in the case of J.P. Morgan Chase Bank (supra).
3. Subsequently, in view of the transfer of the then, JM Shri Shaktijit Dey from ITAT, Mumbai, the Special
Bench was reconstituted on 02-05-2022. The reconstituted Bench comprised of the Members, namely, Judicial
Member Shri Amit Shukla, Judicial Member Shri Vikas Awasthy, and Accountant Member O.P. Kant. The
reconstituted Special Bench convened hearings during which both the assessee and Revenue were given
ample opportunity to present their arguments over multiple dates. Thereafter, the Ld JM Shri Amit Shukla,
having carefully considered submissions made, prepared a draft order, which has been circulated and placed
before other members of Special Bench for deliberation.
4. I have read the draft order of my learned brother JM Shri Amit Shukla. In his draft order, the Ld. JM has
expressed the view that notwithstanding the deeming fiction for treating excess arising on transfer of
depreciable assets, which has been computed by the assessee as deemed to have arisen from transfer of short
term capital asset u/s 50 of the Act, for the purpose of determining rate of tax, concessional rate of tax
provided in section 112(1) would still apply. While I have utmost respect for the opinion proposed by the Ld.
JM, I find myself unable to concur with the view expressed on the question referred to the Special Bench. The
Ld JM has thoroughly addressed all the relevant facts necessary for adjudication of the question referred to the
Special Bench and has captured submission of both parties succinctly in paragraphs 1 to 15 of the draft order.
In the light of the comprehensive presentation, I deem it unnecessary to reiterate the same facts and
submission here, and will therefore refrain from doing so for avoiding repetition.
5. In the instant case, in preceding assessment years, the assessee claimed depreciation on three residential
properties i.e. flats, which formed part of block of assets, but in the assessment year under consideration, the
assessee transferred/sold those properties. While computing the 'total income' for the purpose of filing return
of income for the year under consideration, the assessee determined excess of sale consideration over the
written down value (WDV) of the properties as Short Term Capital Gain(STCG) in terms of section 50 of the
Act, which amounted to Rs. 2,95,55,888/-. Against said 'STCG', the assessee further adjusted loss amounting
to Rs. 32,95,306/- under the head 'Capital Gain', which was carried forward from earlier assessment years and
arrived at balance amount of Rs. 2,62,60,582/- as STCG for including to total income. However, before the
Assessing Officer, the assessee sought to have this 'STGC' subjected to a concessional tax rate of 20%
invoking section 112(1) of the Act. The assessee's argument was that under the provisions of section 112(1) of
the Act, the gain arising from transfer of 'long term capital asset' is eligible for concessional tax rate of 20%
and the three residential properties, though depreciable assets, but were held for more than 36 months, hence,
being long-term capital asset, gain arising from transfer of those properties was to be subjected to tax rate of
20% under section 112(1) of the Act and deemed fiction under section 50 of the Act, which treats the gain
from transfer of depreciable asset as STCG , should not apply while determining the applicable tax rate under
section 112(1)of the Act.
6. In paragraphs 16 to 21 of decision section of the draft order, the learned Judicial Member has referred to the
provisions of section 50 of the Act. Under the provisions, the excess arising from transfer of depreciable asset,
irrespective of their holding period, is deemed to be short-term capital gain by virtue of legal fiction created
therein. It is pertinent to note that in the present case, the assessee itself has computed the excess or surplus
arising from transfer of the depreciable asset comprising of three residential properties, as STCG, so to that
extent, applicability of section 50 of the Act and treatment of excess or surplus arising from transfer of those
depreciable assets as short term capital gain is not in dispute between the parties.
7. In paragraph 22 of the draft order, the learned JM has merely reproduced the provisions of section 112(1) of
the Act. However in paragraph 23, the learned JM has proceeded to interpret the provisions of section 112 of
the Act and concluded that for applicability of concessional tax rate of 20%, two conditions are to be satisfied.
Firstly, there must be a long-term capital asset and, secondly income must arise from transfer of long-term
capital asset. The Ld. JM accordingly, held that in the instant case, the assessee satisfies both the conditions
and therefore the short-term capital gain computed under section 50 should be considered as 'long term capital
gain' for the purpose of section 112(1) of the Act and subjected to concessional tax rate provided under section
112 of the Act. With utmost respect to the views expressed by my learned brother, I find myself unable to
agree with interpretation, for the following reasons:
8. Firstly, the language of section 112(1) of the Act is unambiguous. It applies exclusively to income arising
from transfer of a long term capital asset, which is chargeable under the head 'capital gain' as "long term
capital gain", and is included in 'total income'. In the instant case, in the total income computed by the
assessee, income arising from transfer of depreciable asset has been shown under the head "capital gain" as
'short term capital gain'. It is noteworthy that the assessee has not disputed application of section 50 of the Act
for transfer of depreciable asset constituting three residential flats. The crux of dispute is the assessee's request
for application of concessional tax rate of 20% provided under section 112(1) on gain from transfer of those
residential properties. The assessee is claiming that deeming fiction of treating the capital gain arising from
transfer of depreciable asset is limited to section 50 itself and for the purpose of section 112(1) of the Act, the
assessee argues that the properties having been held for more than 36 months, qualify as 'long term capital
assets' and gain arising from their transfer should be taxed at concessional rate of 20%. Thus, the sole issue in
dispute is whether section 112(1) of the Act is applicable on the income arising from transfer of depreciable
assets consisting of three residential flats, notwithstanding that said excess on transfer of those properties is
deemed to be short term capital gain under section 50 of the Act. For examining the issue, it is relevant to
divide the section 112(1) in two parts, as under:
112. (1) Where the total income of an assessee includes any income, arising from the transfer of a (First
long-term capital asset, which is chargeable under the head "Capital gains", Part)
the tax payable by the assessee on the total income shall be the aggregate of,— (Second
(a) in the case of an individual or a Hindu undivided family, being a resident,— part)
xxxxxxxxxxxxxxxx
(b) in the case of a domestic company,—
(i) the amount of income-tax payable on the total income as reduced by the amount of such long-
term capital gains, had the total income as so reduced been its total income; and
(ii) the amount of income-tax calculated on such long-term capital gains at the rate of twenty per
cent;
(c) in the case of a non-resident (not being a company) or a foreign company,—
xxxxxxxxxxxxxxxxxx
(d) in any other case of a resident,—
xxxxxxxxxxxxxxxxxxxx
Explanation.—[***]
xxxxxxxxxxxxxxxxxxxxxx

8.1. As far as First Part is concerned, the 'income' arising from transfer of a 'long-term capital asset', which is
chargeable under the head 'capital gain', should be included in the 'total income'. The word 'total income' has
been defined under section 2(45) of the Act, which means the total amount referred in section 5, computed in
the manner laid down in the Act. The section 5 refers to 'total income' of a resident includes all income i.e.
global income, from whatever sources derived and received or deemed to be received or accrues or deemed to
accrues to such resident person. Further, the sections 60 to 65 provide for inclusion of income of the other
person to the total income of an assessee. Further as per section 66 of the Act, the total income shall also
include income of the nature specified under chapter VII of the Act. Thereafter, the section 68 to section 69D
provide for 'headless income', which are assessed by the AO in certain circumstances. Thus, the 'total income'
refers to income computed under different 'heads of income' including 'income from salary', 'income from
house property', 'profit and gains of the business and profession', 'income from capital gains', 'income from
other sources', income as per section 60 to 66 of the Act and residual income or headless assessed by the AO
under provisions 68 to 69D of the Act.
8.2. The First Part of the section 112(1) specifies that the 'income' arising from transfer of long-term capital
asset, which is chargeable under the head 'capital gains', which means said income, whether classified as long-
term capital gain or shortterm capital gain, must necessarily be chargeable as under the head 'capital gain' and
forms part of 'total income'. Thus for invoking section 112(1), the first condition is that income arising from
transfer of a 'long-teimi capital asset' should be part of the 'total income'.
8.3. Now, we come to the second part of section 112(1) which is relevant to the assessee i.e. in case of a
domestic company, which is subsection 112(1)(b) of the Act
8.4. The Second Part of section 112(1) specifies the tax which is payable on the 'total income'. The section
112(1)(b)(i) of this part addresses to tax liability on the total income, excluding the portion attributable to the
'long-term capital gain'. The section 112(1)(b)(ii) of the part refers to calculation of the tax specifically on the
'long-term capital gain', which is part of the 'total income' as referred above in 'first part' of section 112(1) of
the Act. Thus, it is essential that for application of the rate of the 20%, firstly, the gain must arise from transfer
of a 'long-term capital asset', secondly, it must be chargeable under the head 'capital gain' as 'long-term capital
gain' and , thirdly, the long term capital gain so computed should be part of the 'total income'.
8.5. Upon holistic reading of entire section 112(1) of the Act, the only reasonable interpretation emerges is
that the 'long term capital gain', arising from transfer of 'long term capital asset' chargeable under the head
"Capital Gain", which constitute part of 'total income', is only subject to concessional rate of 20% provided u/s
112(1) of the Act. The legislative intent , as discernible form the plain language of the provision, clearly
mandated that only such long term capital gain could be taxed at the concessional rate of tax prescribed in
section 112(1) of the Act.
8.6. In the instant case before us, the assessee itself has computed income arising from transfer of depreciable
assets as short-term capital gain in terms of section 50 of the Act under the head 'capital gains' as part of the
total income, though, said assets were held for a period of more than 36 months. The relevant part of
computation of total income filed by the assessee is reproduced as under:
SKF BEARINGS INDIA LIMITED
Income-tax Assessment Year 2000-2001
Previous Year Ended 31st March, 2000
STATEMENT SHOWING COMPUTATION OF TOTAL INCOME
AND INCOME-TAX THEREON
I. Profits and gains of business: Rs. Rs.
Profit before tax as per Profit and Loss Account 139,236,441
Less: Dividend received considered separately 3,414,010
135,822,431
Add: Disallowable/inadmissible:
1. Depreciation as per Books 403,861,177
2. Capital expenditure debited to Profit and Loss Account, as per Clause 17(a) 667,789
of Form No. 3CD
3. Provision for wealth-tax 350,000
4. Disallowance under section 43B - as per Clause 21(i)(B) and 21(ii)(B) of 11,325,910
Form No. 3CD
5. Provision for doubtful debts 10,090,861
6. Donations 123,601
7. Interest payable to Small Scale Industries 1,228,979 427,648,317
563,470,748
Less: Allowance / Admissible
1. Depreciation under Section 32:
- As per Clause 14 of Form No. 3CD 367,538,537
- As per Note 1 135,317
367,673,854 563,470,748
Rs. Rs.
B/f 367,673,854 563,470,748
2. Sum duty, etc. offered for disallowance under section 43B in earlier years,
but paid/reversed during the 'Previous year' as per Clause 21(i)(A) and 21(ii)
(A) of Form No. 3CD:
- Paid 2,095,510
- Reversed 20,666
3. Book profit on sale of fixed assets credited to Profit and 32,264,095
 Loss Account
4. Interest under Section 36(1)(iii) - capitalized in Books 27,587,550
5. Reversal of interest payable to Small Scale Industries 1,545,634
6. Reversal of excess provision for interest under section 234C of the Income- 110,120
tax Act, offered for disallowance in the assessment year 1995-96
7. Reversal of excess provision for technical knowhow fees payable to 196,600
Aktiebolaget SKF, Sweden, disallowed in A.Y.1999-2000
8. Reversal of provision for excise duty refundable to customers disallowed in 92,485
A.Y. 1989-90 in case of Skefko India Bearing Co. Ltd. (merged with SKF
Bearings India Ltd.)
9. Reversal of provision for customs duty disallowed under section 43B in 108,105 431,694,619
A.Y.1990-91 in case of Skefko India Bearing Co. Ltd. (merged with SKF
Bearing Co. Ltd.) (merged with SKF Bearings India Ltd.)
Profit and gains of business 131,776,129
Less: Set off of business loss/unabsorbed 131,776,129
depreciation brought forward from A.Y. 1999-2000 to the extent of profits
Profits and gains of business after set off of b/f loss NIL
II. Capital gains:
Short term capital gains under section 50 (Working enclosed vide Annexure- 26,260,582
1)
III. Income from other sources: Dividend - as per Note 3 NIL
Gross Total Income 26,260,582
Less: Deductions under Chapter-
VIA
As per Clause 26 of Form No. 3CD:
Section 80G 51,775
Section 80HHC 4,995,655 5,047,430
Total Income 21,213,152
Income-tax @35% of total income 7,424,603
Add: Surcharge on above @ 10% 742,460
Income-tax including
surcharge 8,167,064
Business loss of assessment year 1999-2000 to be carried forward ofr set off 61,304,222
in subsequent assessment year(s):- (please refer note 10) Business loss as
per return of income of assessment year 1999-2000
Unabsorbed depreciation as per return of income of assessment year 1999- 3,69,065,328
2000
430,369,550
Less: Set off of business loss/unabsorbed depreciation against current years 131,776,129
business profits
Unabsorbed depreciation to be carried forward for set off in subsequent 298,593,421
assessment year/s

Annexure A-1
Statement showing computation of short term capital gains under
Section 50:
Sale consideration on transfer of following residential properties:
Rs. Rs.
Flat no. 5 in Kismet Apt. 20,500,000
 Flat no. 32 in Queens View 3,000,000
Flat no. A-171 in Twin Towers 17,000,000
40,500,000
Less: Expenses incurred inconnection with the transfer of above residential
properties:
1)Brokerage 637,875 (1,975,610)
2) Transfer fees 387,500
3) Legal fees 950,235
38,524,390
Less: Written Down Value as on 1/4/99 of 'Residential buildings' Short term capital (8,968,502)
gains under Section 50 29,555,888
Less: Loss under the head 'capital gains' brought forward from A.Y. 1997-98 (3,295,306)
Income from short term capital gains 26,260,582

8.7. Once the said excess on transfer of residential properties is admittedly part of the 'total income' in the
character of Shortterm capital gain', clearly the provisions of section 112(1) would not apply, as for invoking
of section 112(1), the component of the 'total income' should be first of all in the character of 'long-term
capital gain' chargeable under the head 'capital gain' (i.e. from section 45 to section 55A) and secondly that
'long term capital gain' should be part of total income. Under the provisions of capital gain head, a capital
asset otherwise may qualify as long term capital asset and transfer of same may give rise to long term capital
gain, but once depreciation has been availed on said asset under the business of the assessee, express
provision by way of section 50 gets attracted and any excess on transfer of said asset is deemed to be short
term capital gain. But, in the facts of the case of assessee, it is not in dispute that assessee has availed
depreciation on those three residential properties forming part of the block of asset, thus excess from their
transfer is deemed to be 'short term capital gain' and can't be classified under section 112(1) of the Act as 'long
term capital gain'.
8.8. Secondly, the section 112(1) is designated for application of concessional tax rate on the income,
chargeability of which has been determined under the head "Capital Gains", but it can't alter the character of
the income itself. The section 112(1) of the Act cannot decide whether gain or excess arising from transfer of
a long-term capital asset would be chargeable as 'long-term capital gain' or 'short-term capital gain'. The
chargeability of gain or excess arising from transfer of a capital asset is governed by the provisions under the
head "capital gain" u/s 45 to 55A of the Act and not by the section relevant for invoking of tax rate. The
learned counsel for the assessee argued that the transfer of a capital asset held for more than 36 months,
though it is depreciable asset and excess arising on the same has been computed by the assessee for the
purpose of total income as 'short term capital gain' as per the provisions of section 50, but while application of
section 112(1) of the Act, it should be treated as 'long term capital gain'. In my opinion, this argument of ld
counsel is without appreciation of express language of section 112(1) of the Act.
8.9. Thirdly, if interpretation of the assessee is accepted, then the entire provision of section 50 will be
rendered otiose, because, if the excess or surplus arising from transfer of depreciable asset, held for more than
36 months, has to be held as 'long-term capital gain' invoking section 112(1) of the Act, then, there is no
purpose of keeping the section 50 in the statute. The entire purpose of introducing the deeming fiction of
treating the surplus arising from transfer of the depreciable asset, irrespective of the holding period whether it
is more than 36 month or less than 36 month, is not to grant benefit of concessional rate of long-term capital
gain to the depreciable capital asset which has been exploited for business purpose and depreciation has
already been claimed as revenue expenditure. The legislature has introduced section 50 with the objective to
provide a level playing field for both, the depreciable capital asset forming part of the business and the other
capital assets which may or may not be part of the business of an assessee. Once an assessee introduce a
depreciable capital asset as part of the business, the assessee is entitled for benefit of depreciation on the
same, and thus the value of the asset to the extent of the depreciation is already allowed to the assessee as
deduction being revenue expenditure while computing its income under the head 'profit and gains of the
business'. Therefore, any excess or surplus arising from transfer of such depreciable capital asset has been
brought under the deeming fiction of 'short term capital gain' under section 50 of the Act. On the other hand,
for other capital asset, which may or may not be a part of the business of an assessee, chargeability of the gain
arising from their transfer is governed by the other provisions under the head 'capital gains' from sections 45
to 49 of the Act. If such a capital asset, is held for less than prescribed period, then gain arising on transfer of
such asset shall be liable for 'short-term capital gain' and if it is held for more than prescribed period, such
gain arising shall be liable for 'long-term capital gain' and cost of acquisition or indexed cost of acquisition
shall be reduced from sale consideration for computing capital gain as per mode provided in section 48 and 49
of the Act. Now, the question arises, whether a further benefit for concessional tax rate should be allowed for
computing taxability under the head 'capital gain' while transfer of depreciable capital assets, when the part of
cost of acquisition of such asset is already exhausted by the assessee as depreciation and, balance left over is
the written down value (WDV) of asset, which is considered for reduction from sale consideration. Evidently,
the legislature has not intended to give the benefit of concessional rate of tax on gain arising from transfer in
case of the depreciable capital assets, which have been utilised for the purpose of the business and assessee
exploited those assets for yielding income which is liable for tax under the head 'profit and gains of the
business'. Accordingly, the legislature under section 50 of the Act, excluded the benefit of concessional rate of
tax on excess arising if any from transfer of such depreciable capital asset, on which benefit of the
depreciation has already been availed by the assessee, and proposed to be subjected to normal tax rates as
'short-term capital gain' under deeming fiction. Under section 50(1) of the Act, out of sale consideration of
depreciable assets, three items are reduced for computation of STCG. The first item is expenditure incurred
wholly and exclusively in connection with transfer of such asset. This item is identical to the item allowed
under mode of computation provided in section 48 of the Act while computing gain arising from other than
depreciable capital assets. The second item is the opening written down value (WDV) of the block of asset out
of the depreciable asset, which has been sold. The WDV is the residual value of the depreciable assets
remained after claim of deprecation. Thus, in my view, the intent of the legislature was to not allow multiple
benefit of deduction for cost of acquisition in respect of which depreciation has already been availed by the
assessee and therefore, deduction is allowed for the remaining cost of the asset (i.e. WDV) only for computing
capital gain on depreciable asset. The third item is the actual cost of any asset falling in same block of asset
acquired during the year. So if an assessee purchase or acquire new depreciable capital asset under same block
of asset against sale of old depreciable asset, the assessee may reduce his tax liability under capital gain. This
is kind of an incentive to an assessee for investment in new assets for continuing the business activity. In the
case of CIT v. Ace Builders (supra), also it is held that section 50 is enacted with the object of denying
multiple benefits to the owners of the depreciable assets.
9. Further, the learned JM has referred to the decisions relied upon by both the parties rendered by the
Coordinate of Benches of Tribunal and decisions of various Hon'ble High Courts and Hon'ble Supreme Court.
In the decisions of the Coordinate benches of the Tribunal, the specific issue concerning the applicability of
concessional tax rate of 20% under section 112(1) on the short-term capital gain arising from transfer of the
depreciable asset under section 50 of the Act has been decided upon.
9.1. The first set of decisions rendered by the Tribunal are in favour of the assessee. While referring the issue
for consideration of special bench, the assessee had relied on the decision of the coordinate bench of the
Tribunal in the case of Smita Conductors Ltd. (supra). In the said decision, the coordinate bench, relying on
the decision of Hon'ble Bombay High Court in the case of Ace Builders (P) Ltd (supra), ruled in favour of the
assessee. During hearing before us, the Ld counsel for the assessee referred to another decision dated
26/06/2014 of coordinate bench in the case of M/s Velvet Holdings Pvt Ltd. (supra), wherein, the Bench
following the decision of coordinate bench in the case of Smita Conductors Ltd. (supra), allowed the decision
in favour of the assessee. The learned departmental representative in hearing dated 09/05/2024 brought to our
attention, a decision dated 19/07/2022 of the coordinate bench of the Tribunal, Mumbai (constituted by Ld.
JM Sh Amit Shukla and Ld. AM Sh Rifaur Rahman) , in the case of Asstt. CIT v. Reliance Transport &
Travels (P.) Ltd. [IT Appeal No. 5683 (Mum.) of 2017, dated 19-7-2017] In the said decision also, the Bench
followed the decision of the Hon'ble Bombay High Court in the case of Ace Builders (P) Ltd (supra), and
decided the issue of application of tax rate of 20% invoking section 112 of the Act on 'short-term capital gain'
computed under section 50 of the Act in favour of the assessee.
9.2. The second set of decisions stands against the assessee. The learned departmental representative has
relied on the decision of coordinate bench in the case of the assessee for assessment years 2001-02 to 2005-
06, which have been listed by the learned JM in para 13 of his draft order. In those decisions also the
coordinate benches have relied on the decision of the Hon'ble Bombay High Court in the case of Ace Builders
(P) Ltd (supra). Further, Pune bench of Tribunal in [IT Appeal No. 707 (Pun.) of 2013, dated 30-10-2014] in
the case of Rathi Brother Madras Limited in order dated 30.10.2014, relying on Ace Builders (P) Ltd (supra)
decided the issue against the assessee. The appeal of the assessee against the said decision is pending before
the Hon'ble Bombay High Court as noted by the Special Bench constituted of earlier members. The relevant
finding of the Tribunal (supra) is reproduced as under:
 "5.3 It is clear from the language used by the legislature that if the long term capital gain is computed
then it will suffer the tax @20% as against the normal rate of income-tax. Moreover, in the Ace Builders
Pvt. Ltd., (supra), their Lordships have explained that if the capital gain is computed as provided u/s. 50
then the capital gains tax will be charged as if such capital gain has arisen out of short term capital asset.
We have to interpret the judgment or decision as a whole and we cannot interpret in the piecemeal to
understand the ratio decidendi."
5.4. The Ld. Counsel has also relied on the decision in the case of M/s. P.D. Kunte & Co., (Regd.)(supra).
It is true that in said case the assessee had taken Ground No. 2 which is analogous to the plea of the
assessee. But on perusal of the said order, we find that the said ground remained to be adjudicated and
there is no decision on this issue. We are not therefore inclined to rely upon the decision in the case of
M/s. P.D. Kunte & Co., (Regd.)(supra). We accordingly approve the interpretation made by the
Ld.CIT(A) of section 50 and section 112 and confirm the order on this issue before us. Accordingly, the
grounds taken by the assessee are dismissed."
9.3. In the decisions of Hon'ble High Court's and Hon'ble Supreme Court relied upon by the parties , the
specific issue of application of tax rate of 20% under section 112(1) on the shortterm capital gain arising from
transfer of the appreciable asset under section 50 of the Act has not been decided. In all those cases, either the
issue of claim of exemption/deduction under the head capital gain or set off of losses has been adjudicated.
The assessee has relied on the decision of the Hon'ble Bombay High Court in the case of Ace Builders (P) Ltd
(supra) and decision of Hon'ble Supreme Court in the case of V.S. Dempo Company Ltd (supra), wherein the
Hon'ble Supreme Court has upheld the finding in the case of Ace Builders (P) Ltd (supra). The learned JM has
further referred to the two decisions of Hon'ble Bombay High Court , firstly, in the case of Parrays (Eastren)
Pvt ltd. (supra) and secondly in the case of Pursarth Trding Co. P Ltd (supra), wherein set off of long-term
capital loss against the gain arising from the depreciable asset under section 50 of the Act was allowed
following the principle laid down in the case of Ace Builders (P) Ltd (supra). The learned JM has further
referred to the decision of the Hon'ble Bombay High Court in the case of United Paper Industries (supra) and
Cadbury India Ltd (supra), wherein also the decision in the case of Ace Builders (P) Ltd (supra) has been
followed. The ld DR on the other hand relied on the decision of Hon'ble Supreme Court in the case of Shakti
Metal Depot (supra). In that case the dispute was whether the provisions of section 50 would apply on transfer
of those residential properties, which were part of block of assets in earlier years and depreciation was availed
but in the year under consideration the property was not put to business use. But in the instant case, the
invoking of section 50 on excess or surplus arising on transfer of depreciable residential properties is not in
dispute, hence said decision is not relevant to the facts of case.
9.4. Thus, in all the cases referred, the root or foundational decision which has been consistently followed is
in the case of Ace Builders (P) Ltd (supra). The finding of very same decision has been interpreted differently
in the two sets of decisions of Tribunal. For ready reference, the question of law raised before the Hon'ble
High Court is reproduced as under:
"Whether on the facts and in the circumstances of the case, sthe Tribunal was right in law in holding that
the assessee is entitled to deduction under section 54E in respect of the capital gain arising on the transfer
of a capital asset on which depreciation has been allowed and which is deemed as shortterm capital gain
under section 50 of the Income-tax Act, 1961."
9.5. The Hon'ble high Court has decided the substantial question of law in para 25 of the judgment observing
as under:
"25. In our opinion, the assessee cannot be denied exemption under section 54E, because, firstly, 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, it is well established in law that a
fiction created by the legislature has to be confined to the purpose for which it is created. In this
connection, we may refer to the decision of the Apex Court in the case of State Bank of India v. D.
Hanumantha Rao 1998 (6) SCC 183. In that case, the service rules framed by the bank provided for
granting extention of service to those appointed prior to 19-7-1969. The respondent therein, who had
joined the bank on 1-7-1972 claimed extension of service because he was deemed to be appointed in the
bank with effect from 2610-1965 for the purpose of seniority, pay and pension on account of his past
service in the army as short service commissioned officer. In that context, the Apex Court has held that
 the legal fiction created for the limited purpose of seniority, pay and pension cannot be extended for other
purposes. Applying the ratio of the said judgment, we are of the opinion, that the fiction created under
section 50 is confined to the computation of capital gains only and cannot be extended beyond that.
Thirdly, section 54E does not make any distinction between depreciable asset and non-depreciable asset
and, therefore, the exemption available to the depreciable asset under section 54E cannot be denied by
referring to the fiction created under section 50. Section 54E specifically provides that where capital gain
arising on transfer of a long-term capital asset is invested or deposited (whole or any part of the net
consideration) in the specified assets, the assessee shall not be charged to capital gains. Therefore, the
exemption under section 54E of the Income Tax Act cannot be denied to the assessee on account of the
fiction created in section 50. "
9.6. Thus, the Hon'ble High Court has decided that benefit of exemption under section 54E is allowed to the
assessee on gain arising from transfer of depreciable asset also. The learned JM in para 24 of the order has
also reproduced the relevant part of said decision of Hon'ble High Court, where in it is held that deeming
fiction created under section 50 of the Act for treating surplus arising on transfer of the depreciable asset as
short-term capital gain cannot be stretched while considering exemption provisions under section 54 E of the
Act. The assessee is relying on above part of the decision which says that deeming fiction under section 50 is
limited for the purpose of considering the excess arising on transfer of the depreciable asset as short-term
capital gain and can't be extended to section 112 of the Act, therefore for application of the tax rate of section
112, the gain has to be considered as arising from transfer of a long-term capital asset. The learned JM has
endorsed this view of the assessee in his order. However the coordinate bench of the Tribunal in the case of
the assessee for assessment year 200102 to 2005-06, has relied on the paragraph 26 of the decision in the case
of Ace Builders (P) Ltd (supra), wherein it is held that section 50 is enacted with the object of denying
multiple benefits to the owners of the depreciable assets. The Hon'ble High Court has clearly held that that
restriction is limited to computation of the capital gains and not to the exemption provisions. Hon'ble High
Court further clarified that in other words, when a long-term capital asset has availed depreciation, then the
capital gain has to be computed in the manner prescribed under section 50 and the capital gain tax will be
charged as if such capital gain has arisen out of a short-term capital asset. At the cost of repetition, said
paragraph of Hon'ble High Court is reproduced as under:
"26. It is true that section 50 is enacted with the object of denying multiple benefits to the owners of
depreciable assets. However, that restriction is limited to the computation of capital gains and not to the
exemption provisions. In other words, where the long term capital asset has availed depreciation, then the
capital gain has to be computed in the manner prescribed under Section 50 and the capital gains tax will
be charged as if such capital gain has arisen out of a short term capital asset but if such capital gain is
invested in the manner prescribed in Section 54E, then the capital gain shall not be charged under Section
45 of the Income Tax Act. To put it simply, the benefit of section 54E will be available to the assessee
irrespective of the fact that the computation of capital gains is done either under sections 48 & 49 or
under section 50. The contention of the revenue that by amendment to section 50 the long term capital
asset has been converted into to short term capital asset is also without any merit. As stated hereinabove,
the legal fiction created by the statute is to deem the capital gain as short term capital gain and not to
deem the asset as short term capital asset. Therefore, it cannot be said that section 50 converts long term
capital asset into a short term capital asset."
[Emphasis in bold is ours)
10. In the above judgment the Hon'ble Jurisdictional High Court has unequivocally held that under the legal
fiction created by Section 50 of the Act, the 'capital gain' is deemed to be a 'short term capital gain' (even
through it arises from transfer of depreciable asset held for more than 36 months). However, for the purpose
of grant of exemption under Section 54E of the Act, which is available in respect of transfer of long term
capital asset, the Hon'ble Bombay High Court rejected the contention of the Revenue that capital asset
transferred would also be deemed to be a short term capital asset by virtue of Section 50 of the Act. Thus, the
Hon'ble High Court extended the scope of beneficial provisions contained in Section 54E of the Act even to a
depreciable asset held for more than 36 months. Once the capital gain is deemed to be a short term capital
gain, the provisions contained in Section 112 of the Act would not get attracted. The Section 112 was
introduced by way of Finance Act. 1992 and was specifically designated for taxation of 'long term capital
gain'. Clause 53 of the Notes to Clause to Finance Bill, 1992 clearly stated that section 112 was enacted for
taxation of long term capital gain exclusively and other type of income would be taxable at normal rate of
taxation. The relevant part of Finance Bill, 1992 , is reproduced as under:
 "Clause 53 seeks to insert a new section 112 in Chapter XII of Income-tax Act.
The new section provides for taxation of long term capital gains at a flat rate of twenty per cent in the
case of individuals and Hindu undivided families at the rate of forty per cent in the case of companies,
firms, association of persons and bodies of individuals and at the rate of thirty per cent in the case of
others. In respect of income other than long-terms capital gains income tax will be levied as per the
normal provisions of the Act. The assessee will not get any deduction under Chapter VI-A or tax rebate
under section 88 on the income-tax in respect of long term capital gains.

This amendment will take effect from the 1st April, 1993, and will, accordingly, apply in relation to the
assessment year 1993-94 and subsequent years."
11. The section 50 of the Act has provided chargeability of income arising from transfer of depreciable assets.
Since the sections related to exemptions/ deductions including section 54E of the Act under the head 'capital
gains', are invoked only after computing of the capital gain and therefore those sections are independent from
the sections which create chargeability of the capital gains. The exemptions provisions provided under the
head capital gains from section 54 to 54GB of the Act, can be claimed once the chargeability of the gain
arising on transfer of a capital asset is determined under the head of capital gains. Conversely, the section
112(1) of the Act is for invoking concessional rate of tax of 20 percentile on income arising from transfer of
long-term capital asset, which is chargeable under the head 'capital gain' and included in total income. The
section 112(1) of the Act is intended solely for prescribing concessional rate of tax and not for determining
chargeability of income under the head 'Capital gain', therefore, the section 112(1) cannot decide character of
capital gain whether it would be short term capital gain or long term capital gain. If the opinion of learned JM
is followed, then a anomalous situation may arise, where the income under the head capital gain determined as
'short-term capital gain' under section 50 and included under 'total income' would be rendered only as
ornamental item, undermining the purpose of exercise for computing short term capital gain. Such an
interpretation would contradict the legislative intent. The provision of section 50 in the statute has been
provided for achieving particular purpose of denying multiple benefit of depreciation and any interpretation
which frustrate that purpose, should be discouraged. In the case of the assessee, while adjudicating appeals for
assessment years 2000-01 to 2005-06, the Co-ordinate Bench in SKF Bearings India Ltd. v. Asstt. CIT [IT
Appeal No. 720 (Mum.) of 2006, dated 29-12-2011] for AY. 2001-02 held as under:
"21. On plain reading of the above section shows that the excess in question shall be deemed to be the
capital gains arising from the transfer of a short term capital asset. Both the section 54EC and section 74,
do not speak about short term capital gain or long term capital gain. These sections deal with capital
gains/loss arising from transfer of long term capital assets. Section 112, also deals with income arising
from transfer of long term capital assets. Section 112(b)(i) and (ii) specifically mentions "long term
capital gain". When section 50 deems that income earned from a depreciable asset has to be deemed as
short term capital gain, the question of applying the rate of tax specified in section 112(1) does not arise.
This is what the Hon'ble Jurisdictional High Court stated at para-26 of its judgment in the case of Ace
Builders (supra).........."
11.1. In the light of foregoing, I am in complete agreement with the decision of the coordinate bench of the
Tribunal (supra) in the case of the assessee that assessee is not entitled for concession rate of tax of 20%
provided under section 112(1) of the Act on the short term capital gain computed under section 50 of the Act
and included by the assessee in its total income, which arose on transfer of three residential properties forming
part of block of asset and on which deprecation was availed by the assessee in earlier years.
11.2. In view of above discussion, I am of the opinion that question of law referred to the special bench is
liable to be answered against the assessee and in favour of the revenue.
12. Since the issue referred to the Special Bench has been adjudicated as above, for deciding other issues as
raised in the cross appeals of the parties, the Registry may take up appropriate action for fixing the appeals
before the regular Bench.
JASPREET
*In favour of assessee.