The article is written by CA Deepak Gadgil, who is into direct and indirect tax litigation and advisory from past 10 years. The article discusses the Exemption Available To Depreciable Assets Withdrawn In New Income Tax Bill 2025.
A contention is being put forth by some people that as per the new income tax bill 2025, the exemption available to depreciable assets in the present Income Tax Act (ITA) is being withdrawn / negated in the new Income Tax Bill 2025 (ITB).
For this purpose one needs to go back to the Apex Court Decision in case of CIT Panaji vs V S Dempo Company Ltd, wherein Apex Court had laid down that –
Section 50 creates a deeming fiction only for mode of computation of capital gains under Sections 48 and 49 and not for other provisions.
Section 54E does not make any distinction between depreciable asset and non depreciable asset and, therefore, exemption available to depreciable asset under section 54E cannot be denied by referring to fiction created under section 50
The New Income Tax Bill 2025 introduces key updates to capital gains taxation, aligning with existing provisions in the Income Tax Act:
- Section 48 (Clause 72): Defines the mode of computation of capital gains, ensuring clarity in taxable income calculations.
- Section 49 (Clause 73): Specifies cost determination for certain acquisitions, including gifts, inheritances, and mergers.
- Section 50 (Clause 74): Introduces special provisions for depreciable assets, refining capital gains computation for businesses.
- Section 54EC (Clause 85): Allows capital gains exemption on investments in specified bonds, encouraging long-term wealth preservation.
Now when we go through the wording of section 74 of ITB, we can safely conclude that for a limited purpose of computation of gains from Depreciable Asset this section creates a Deeming Fiction which treats the gains arising as STCG even though they may actually be emanating from a LTCA & actually be LTCG.
Its worth noting that section 74 does not make any reference to section 85 which deals with conditions set out for making investment in certain bonds, nor does section 85 make any reference to the deeming fiction in section 74.
The only change of words that has been made is that section 85 of Income Tax Bill talks about LTCG whereas section 54EC of ITA talked about capital gains arising from transfer of LTCA, with this in mind let us have a look at the definition of LTCA & LTCG in ITB –
(67) “long-term capital asset” means a capital asset which is not a short-term capital asset;
(68) “long-term capital gain” means capital gains arising from the transfer of a long-term capital asset;
As can be seen from above that
i. Definition of LTCA specifically excludes STCA
ii. Definition of LTCG specifically means gains from LTCA
iii. Section 74 in its opening para uses the term “Irrespective of” with reference to section 2(101) of ITB, which defines STCA which is specifically excluded from definition of LTCA
Therefore to conclude –
If one has to read the ratio laid down by Apex Court in case of CIT Panaji vs V S Dempo Company Ltd, with reference to ITB, then the same can be read as follows –
Clause 74 creates a deeming fiction only for mode of computation of capital gains under clause 72 and 73 and not for other clauses clause 85 does not make any distinction between depreciable asset and non-depreciable asset and, therefore, exemption available to depreciable asset under clause 85 cannot be denied by referring to fiction created under section 74.
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