Capital Gain Exemption u/s 54F is dependent on time period for which the asset is held not on the characteristic of asset being depreciable or not.
Section 54F Read as below:
When the asset transferred is a long term capital asset other than a residential house, and if out of the consideration, investment in purchase or construction of a residential house is made within 3 years, or purchased 1 year before or 2 years after the date of transfer, then exemption from the capital gains will be available as:
- If cost of new asset is greater than the net consideration received, the entire capital gain is exempt. Otherwise,
- Exemption = Capital Gains x Cost of new asset/ Net consideration.
It may be noted that the Finance Act 2000 has provided that with effect from assessment year 2001-2002, the above exemption shall not be available if assessee owns more than one residential house, other than new asset, on the date of transfer. This capital gain amount should be deposited in the Capital Gains Account Scheme of a public sector bank before the due date of filing of Income Tax Return.
So by reading above it is clear that to enjoy exemption under section 54F one should transfer/sale long term capital asset means there should be a long term capital gain.
But Delhi High Court in the Case : CIT v. Rajiv Shukla (2011) 334 ITR 138 (Delhi), held that if an asset is held for more than 36 months, whether depreciable or non-depreciable, the capital gain (short term in case of depreciable and long term in case of non-depreciable) arise on the sale/transfer of the asset can be used to buy new asset i.e. residential house to enjoy benefit of exemption under section 54F.
Conclusion: The exemption under section 54F on transfer of depreciable asset held for more than 36 months is a valid exemption and can not be denied.
Full Case Study: CIT v. Rajiv Shukla (2011) 334 ITR 138 (Delhi)
The assessee (Rajiv Shukla) had claimed benefit of exemption under section 54F in respect of capital gain arising on the sale of property, being a depreciable asset held for more than 36 months i.e. long term capital asset. However, the department contended that no exemption under section 54 F shall be granted in this case, as the said exemption is granted in respect of the capital gain arising from the transfer of a ling term capital asset whereas the capital gain arising on transfer of depreciable asset is deemed to be capital gain arising from transfer of short term capital asset by virtue of provision of section 50.
The Delhi High Court in the present case relying on the decision of Bombay High Court in the case of CIT v. Ace Builders pvt. Ltd. and the decision pronounced by the Gauhati High Court in CIT v. Assam Petroleum Industries Pvt. Ltd., in the relation to erstwhile section 54E, held that the deeming fiction created by section 50 that the capital gain arising on transfer of a depreciable asset shall be treated as capital gain arising on the transfer on transfer of short term capital asset is only for the purpose of section 48 and 49 not for the purpose of any other section. Section 54F being an independent section will not be bound by the provisions of section 50. The depreciable asset if held for more than 36 months shall be long term capital asset as per the provision of section 2(29A).
So, the exemption under section 54F on transfer of depreciable asset held for more than 36 months can not denied on the account of fiction created by section 50.