I sold a building on which depreciation had been claimed in earlier years. The Assessing Officer applies s.50, calls the gain short-term and refuses the bond exemption. Can he?
Not on this Gujarat decision, for two independent reasons. Section 50 applies only where the asset both is depreciable and forms part of a block of assets, so an asset withdrawn from business use before the block-of-assets scheme began never entered a block and s.50 does not reach it. And in any event the legal fiction in s.50 is confined to the computation of capital gains and cannot cut down s.54EC, which exempts the gain where the assessee invests in the specified asset.
Decided by the High Court (K.S. Jhaveri J and K.J. Thaker J) on 2014-11-25, reported as Tax Appeal No. 245 of 2001, High Court of Gujarat at Ahmedabad. No law-report citation appears in the text retrieved.. It bears on section 54EC, section 54E, section 50, section 45 of the Income Tax Act 1961, in Capital Gains and Capital Gains Exemptions matters.
The s.50 objection is the standard answer to a s.54EC claim on business premises, and it is usually accepted because the officer's logic looks airtight — s.50 deems the gain short-term, s.54EC needs a long-term capital asset, claim refused. The answer is that a deeming fiction is read only for the purpose for which it is created. The judgment is short and the reasoning is borrowed from the Gujarat High Court's own earlier decision in Aditya Medisales, but it is a High Court applying that reasoning to s.54EC in terms, and it also supplies the separate and often overlooked threshold argument: s.50 has two cumulative conditions, and an asset taken out of business use before 1 April 1988 fails the block-of-assets condition outright. For assets withdrawn from use after that date the block-of-assets argument will not run and the whole weight falls on the deeming-fiction point.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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On 13 October 1969 the assessee purchased a godown at Nagdevi, Bombay for Rs 1,22,767. Depreciation was claimed and allowed up to assessment year 1984-85. From assessment year 1985-86 the property was not used for the purposes of business, no depreciation was claimed and none was allowed, and the written down value stood unchanged in the books for assessment years 1985-86, 1986-87 and 1987-88. The block-of-assets scheme was introduced by the Taxation Laws (Amendment and Miscellaneous Provisions) Act 1986 with effect from 1 April 1988, and s.50 was introduced from the same date as a special provision for computing capital gains on depreciable assets. On the sale of the property the Assessing Officer held the case covered by s.50, treated the gain as short-term and refused deduction under s.54E. The CIT(A) partly allowed the assessee's appeal, holding that the property had not formed part of any block of assets and the surplus was taxable as long-term capital gain. The Tribunal dismissed the Revenue's appeal by order dated 23 January 2001 in ITA No. 6030/Ahd/1994. The High Court admitted the appeal on 17 September 2001 on the question whether the Tribunal was justified in holding the case not covered by s.50 and the assessee entitled to a deduction admissible only on long-term capital gain.
The appeal was dismissed and the question answered in favour of the assessee. The Court agreed in full with the Tribunal's reasoning that s.50 requires two conditions — that the asset is depreciable and that it forms part of a block of assets — and that the second was not satisfied because the property, not having been used for business since assessment year 1985-86, was not a business asset when the block-of-assets concept came in on 1 April 1988 and so never entered a block; the property was a long-term capital asset and the gain fell to be computed under the ordinary provisions (para 6, adopting the Tribunal's para 3). Independently, the Court held the issue already concluded by its own decision in CIT v Aditya Medisales Ltd.: the legal fiction created by s.50 is restricted to the computation of capital gains and cannot restrict the application of s.54EC, so exemption cannot be denied merely because of that deeming fiction (para 7).
The Court proceeded in two steps. It adopted the Tribunal's construction of s.50 as imposing cumulative conditions and applied it to the chronology: depreciation allowed to assessment year 1984-85, no business use and no depreciation from assessment year 1985-86, the block-of-assets scheme beginning only on 1 April 1988, so there was 'no occasion for the asset to enter the block of asset' for the purposes of either s.32 or s.50, and the property was 'obviously a long term capital asset' (para 6). It then held, on the strength of Aditya Medisales, that even if s.50 had applied the deeming fiction would not have defeated the exemption, the fiction being confined to computation; and it recorded that counsel for the Revenue was unable to distinguish that decision (paras 7 and 8). It declined to interfere with the Tribunal's findings (para 9).
the legal fiction created under Section 50 of the Act is restricted to computation of capital gains and such deeming fiction cannot restrict application of section 54EC which allow exemption of capital gains, if the assessee makes investment in the specified assets
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Handle my notice → Ask a CA on WhatsAppNot on this Gujarat decision, for two independent reasons. Section 50 applies only where the asset both is depreciable and forms part of a block of assets, so an asset withdrawn from business use before the block-of-assets scheme began never entered a block and s.50 does not reach it. And in any event the legal fiction in s.50 is confined to the computation of capital gains and cannot cut down s.54EC, which exempts the gain where the assessee invests in the specified asset. This was decided by the High Court (K.S. Jhaveri J and K.J. Thaker J) and bears on section 54EC, section 54E, section 50, section 45 of the Income Tax Act 1961. It is reported as Tax Appeal No. 245 of 2001, High Court of Gujarat at Ahmedabad. No law-report citation appears in the text retrieved.. The s.50 objection is the standard answer to a s.54EC claim on business premises, and it is usually accepted because the officer's logic looks airtight — s.50 deems the gain short-term, s.54EC needs a long-term capital asset, claim refused. The answer is that a deeming fiction is read only for the purpose for which it is created. The judgment is short and the reasoning is borrowed from the Gujarat High Court's own earlier decision in Aditya Medisales, but it is a High Court applying that reasoning to s.54EC in terms, and it also supplies the separate and often overlooked threshold argument: s.50 has two cumulative conditions, and an asset taken out of business use before 1 April 1988 fails the block-of-assets condition outright. For assets withdrawn from use after that date the block-of-assets argument will not run and the whole weight falls on the deeming-fiction point. If it applies to you, the first step is this: Take the threshold point first where it is available: check whether the asset actually formed part of a block of assets at the relevant time, not merely whether depreciation was once allowed on it. Both conditions in s.50 must be satisfied.
On 13 October 1969 the assessee purchased a godown at Nagdevi, Bombay for Rs 1,22,767. Depreciation was claimed and allowed up to assessment year 1984-85. From assessment year 1985-86 the property was not used for the purposes of business, no depreciation was claimed and none was allowed, and the written down value stood unchanged in the books for assessment years 1985-86, 1986-87 and 1987-88. The block-of-assets scheme was introduced by the Taxation Laws (Amendment and Miscellaneous Provisions) Act 1986 with effect from 1 April 1988, and s.50 was introduced from the same date as a special provision for computing capital gains on depreciable assets. On the sale of the property the Assessing Officer held the case covered by s.50, treated the gain as short-term and refused deduction under s.54E. The CIT(A) partly allowed the assessee's appeal, holding that the property had not formed part of any block of assets and the surplus was taxable as long-term capital gain. The Tribunal dismissed the Revenue's appeal by order dated 23 January 2001 in ITA No. 6030/Ahd/1994. The High Court admitted the appeal on 17 September 2001 on the question whether the Tribunal was justified in holding the case not covered by s.50 and the assessee entitled to a deduction admissible only on long-term capital gain. The matter was decided on 2014-11-25 by the High Court (K.S. Jhaveri J and K.J. Thaker J). On those facts the High Court held as follows. The appeal was dismissed and the question answered in favour of the assessee. The Court agreed in full with the Tribunal's reasoning that s.50 requires two conditions — that the asset is depreciable and that it forms part of a block of assets — and that the second was not satisfied because the property, not having been used for business since assessment year 1985-86, was not a business asset when the block-of-assets concept came in on 1 April 1988 and so never entered a block; the property was a long-term capital asset and the gain fell to be computed under the ordinary provisions (para 6, adopting the Tribunal's para 3). Independently, the Court held the issue already concluded by its own decision in CIT v Aditya Medisales Ltd.: the legal fiction created by s.50 is restricted to the computation of capital gains and cannot restrict the application of s.54EC, so exemption cannot be denied merely because of that deeming fiction (para 7).
The Court proceeded in two steps. It adopted the Tribunal's construction of s.50 as imposing cumulative conditions and applied it to the chronology: depreciation allowed to assessment year 1984-85, no business use and no depreciation from assessment year 1985-86, the block-of-assets scheme beginning only on 1 April 1988, so there was 'no occasion for the asset to enter the block of asset' for the purposes of either s.32 or s.50, and the property was 'obviously a long term capital asset' (para 6). It then held, on the strength of Aditya Medisales, that even if s.50 had applied the deeming fiction would not have defeated the exemption, the fiction being confined to computation; and it recorded that counsel for the Revenue was unable to distinguish that decision (paras 7 and 8). It declined to interfere with the Tribunal's findings (para 9). In the words reproduced by the source cited on this page: "the legal fiction created under Section 50 of the Act is restricted to computation of capital gains and such deeming fiction cannot restrict application of section 54EC which allow exemption of capital gains, if the assessee makes investment in the specified assets" The decision followed or applied CIT v. Aditya Medisales Ltd., 2014 362 ITR 600 (Guj) — followed; the Court held the issue concluded by it.
It was decided by the High Court on 2014-11-25 and is reported as Tax Appeal No. 245 of 2001, High Court of Gujarat at Ahmedabad. No law-report citation appears in the text retrieved.. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 54EC, section 54E, section 50, section 45, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeal was dismissed and the question answered in favour of the assessee. The Court agreed in full with the Tribunal's reasoning that s.50 requires two conditions — that the asset is depreciable and that it forms part of a block of assets — and that the second was not satisfied because the property, not having been used for business since assessment year 1985-86, was not a business asset when the block-of-assets concept came in on 1 April 1988 and so never entered a block; the property was a long-term capital asset and the gain fell to be computed under the ordinary provisions (para 6, adopting the Tribunal's para 3). Independently, the Court held the issue already concluded by its own decision in CIT v Aditya Medisales Ltd.: the legal fiction created by s.50 is restricted to the computation of capital gains and cannot restrict the application of s.54EC, so exemption cannot be denied merely because of that deeming fiction (para 7). It arises in Capital Gains and Capital Gains Exemptions matters, on section 54EC, section 54E, section 50, section 45 of the Income Tax Act 1961, and was decided by K.S. Jhaveri J and K.J. Thaker J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Document the year from which depreciation ceased to be claimed and was not allowed, and the years in which the written down value stood unchanged in the books — that was the evidence here. Argue the deeming-fiction point in the alternative and in the words of para 7: the fiction in s.50 is restricted to computation and cannot restrict the application of s.54EC. Read the underlying authority, CIT v Aditya Medisales Ltd., reported in this judgment as 2014 362 ITR 600 (Guj), before citing it; I did not read it. Check the s.54EC conditions for the year in hand separately. From assessment year 2019-20 the exemption is confined to gains on land or building or both; for bonds issued on or after 1 April 2018 the lock-in is five years; and the Rs 50 lakh cap operates across two financial years, which defeats splitting an investment over March and April. None of those points arose in this case and it is no authority on any of them.
Searched for later treatment; none was found. That is not the same as a source affirming it. The citator returns nothing for this judgment. A second, differently framed search on the party name returns 17 documents, all of them other Gujarat litigation involving a firm of the same name (motor and State of Gujarat matters, including a Supreme Court order of 27 January 2015 in State of Gujarat v Parikh Transport Company that has nothing to do with capital gains). No decision applying, affirming, overruling or doubting this tax judgment was found and no Supreme Court challenge to it is traceable. The proposition that the deeming fiction in section 50 is confined to the mode of computation and does not deny exemption under section 54EC/54E is well supported elsewhere, but this particular judgment has attracted no citable later treatment, so it should be used as persuasive Gujarat authority rather than as a judgment shown to have been followed. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The transcript carries scanning artefacts throughout, including soft hyphens rendered inside words ('appellantrevenue', 'respondentassessee'), 'Section 450' for 'section 50' in the passage quoted from the Tribunal, 'section 45 and 49' where the sense requires 48 and 49, 'Income Tax At' for 'Act', and 'which allow exemption' for 'allows'. The quoted material in para 7 is the High Court's own reproduction of what was held in its earlier decision in Aditya Medisales; the quotation below is the Court's consecutive words as printed, including the grammatical slip. Note also that the section actually in issue on the referred question was s.54E, the transfer being an old one; s.54EC enters through para 7, where the Court holds the issue 'already concluded' by Aditya Medisales, a s.54EC decision. The document was fetched once. Note the assessment history is unusually long — property bought 13 October 1969, depreciation claimed to AY 1984-85, Tribunal order 23 January 2001, appeal admitted 17 September 2001, decided 25 November 2014. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed and the question answered in favour of the assessee. The Court agreed in full with the Tribunal's reasoning that s.50 requires two conditions — that the asset is depreciable and that it forms part of a block of assets — and that the second was not satisfied because the property, not having been used for business since assessment year 1985-86, was not a business asset when the block-of-assets concept came in on 1 April 1988 and so never entered a block; the property was a long-term capital asset and the gain fell to be computed under the ordinary provisions (para 6, adopting the Tribunal's para 3). Independently, the Court held the issue already concluded by its own decision in CIT v Aditya Medisales Ltd.: the legal fiction created by s.50 is restricted to the computation of capital gains and cannot restrict the application of s.54EC, so exemption cannot be denied merely because of that deeming fiction (para 7).
TaxSphere, “ITO v Parikh Transport Co.”, https://taxnotice.vittsphere.com/caselaw/case/ito-v-parikh-transport-54ec-section-50-deeming-fiction/ (validity last checked 2026-09-08)
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I sold a depreciable asset held for over three years. Can I still claim the capital gains exemption?
I sold a building I had held for years and claimed depreciation on. The gain is computed as short-term under section 50. Can I still claim the capital gains exemption for investing the proceeds?
I sold property in February and put Rs.50 lakh into bonds in March and another Rs.50 lakh in June, both within six months. Can I claim section 54EC on the whole Rs.1 crore?
The 54EC bonds weren't on sale before my six months ran out. Have I lost the exemption?
