PERSONAL TAX: Computation doesn't alter Section 54F benefits

This week's case is about a doctor taxpayer who had filed his return of income offering income from salaries, profession and income from other sources. The taxpayer had sold two sets of immovable properties during the relevant previous year. The first set of properties were two commercial units in Mumbai, that were used by the taxpayer for the purpose of his clinic and was regularly claiming depreciation on the same. The second property sold was a residential flat in Mumbai.

The taxpayer utilised the proceeds from the sale of both these set of properties and reinvested the same into a residential flat in Mumbai. Consequently, the taxpayer, in his return of income, had claimed exemption u/s 54F of the Income Tax Act ('the Act'). Section 54F of the Act provides an exemption from long-term capital gains on the sale of any capital asset, other than a residential house property if the sale proceeds are reinvested in a new residential house property within the prescribed time period.

During the course of assessment, the tax officer disallowed the claim for exemption u/s 54F on the grounds that the clinic property was being used by the taxpayer for the purpose of his profession and had even claimed depreciation on the same. The tax officer argued that as the property was a depreciable asset, any gains arising from the sale of such asset is deemed to be short-term capital gains under the relevant provisions of the Act ('deeming provision') and hence the exemption u/s 54F, being exemption available for long-term capital gains, is not allowable. The taxpayer contended that as the commercial units were held by him for a period of more than 36 months and with respect to the provisions under the Act for calculation of holding period, the said commercial properties qualify as long-term capital assets and hence any gains arising from their sale will be long-term capital gains. In view of this, the claim for exemption u/s 54 stands valid. The tax officer was not convinced.

At the first appellate level, the appellate authority relied on decisions by Bombay High Court and Delhi High Courts wherein it was held that when a depreciable asset qualifies to be treated as a long-term capital asset on account of the holding period, the taxpayer is entitled to the benefit u/s 54F of the Act. Hence, the appellate authority ruled against the tax officer and in favour of the taxpayer.

At the second level of appeal by the tax officer, it was argued by the latter that the deduction u/s 54F cannot be allowed to the taxpayer as the commercial properties sold, were not only used by the taxpayer for the purposes of his profession but were also depreciated over the past periods. The taxpayer argued before the Tax Tribunal that the relevant provisions for computing capital gains on the sale of depreciated assets were applicable for the purpose of calculating various deductions from the sale consideration received and cannot be said to extend to section 54F of the Act, which is an altogether different provision extending exemption benefits for taxpayers.

The Tribunal observed that although the deeming provision was enacted in order to deny multiple benefits to owners of depreciable assets, the restriction is limited to computation of capital gains and not to exemption provisions. For that reason, the Tribunal ruled that the benefit of section 54F will be available to the taxpayer irrespective of the fact whether the capital gains computation is done under the deeming provisions or otherwise, and thus dismissed the tax officer's claims.

The writer is a Sebi-registered investment adviser