[Opinion] Policy Changes Matter in Income Tax Act 2025 – Capital Gains Perspective

Anil Chachra – [2026] 186 taxmann.com 96 (Article)

1. Introduction

The objective of reviewing the Income Tax Act, 1961 [ITA, 1961] to Income Tax Act, 2025 [ITA, 2025] was to simplifying the language, easy to read and understand the law by common man. As per Government assertion it was assured that there will be no policy changes in the new Act. As the ITA, 2025 has been implemented from the April 2026 and Tax year 2026-26 is the first year of new Act. From the Capital gains perspective there are some policy changes have been made in the new Act which was settled through judicial prouncements in ITA 1961. In this Write up the author will discuss the what are those policy changes has been happened in the new Act.

1. First Issue Involved

Section 50 [Corresponding to 74 of ITA, 2025]

1.1 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 24 months, the conditions of the 24 months will not be applicable and still it will be chargeable as capital gains arising from transfer of a short-term capital asset.

1.2 The ”long-term capital asset” and ”long-term capital gain” has been defined in section 2(29AA) and 2(29B). [Corresponding to section 2(67) and (68) of ITA, 2025]. 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 24 months.

1.3 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.

Next question is whether it is possible to claim exemption under section 54EC [Section 85] in respect of capital gain on depreciable asset

Under ITA, 1961

Section 54EC – Capital gains not to be charged on investment in certain bonds

(1) Where the capital gains arises from the transfer of long-term capital asset [being land or building or both,] (the capital asset so transferred being hereafter in this section referred to as the original asset) and the assessee has, at any time within a period of six months after the date of such transfer, invested the whole or any part of capital gains in the long-term specified asset, the capital gain shall be dealt with in accordance with the following provisions of this section.[Emphasis Supplied]

1.4 Section 54EC uses the word ‘long-term capital asset’ not the long-term capital gain. The capital gain u/s 50 is relating to depreciable assets will be deemed as gain arising from short term capital asset. It does not convert long term capital in to short term capital assets or vice versa for the purpose of the other provisions of the act.

1.5 In the case of transfer of a depreciable asset, section 50 is applicable. By virtue of section 50 (for the purpose of section 48 and 49), capital gain on transfer of a depreciable asset shall be treated as capital gain on transfer of short-term capital asset. Section 50 nowhere says that, for the purpose of section 54EC depreciable asset would be short term capital asset. Section 54EC is an independent section. Section 50 does not have an overriding effect over section 54EC.

Section 54EC has an application where long-term capital asset is transferred. Therefore, capital gain received by an assessee on the transfer of a depreciable asset (if conditions necessary under section 54EC are complied with by the assessee) is eligible for the benefit under section 54EC.

1.6 The Bombay high Court in the case of CIT v. Ace Builders Pvt. Ltd [2005] 144 Taxman 855 (Bombay)/[2006] 281 ITR 210 (Bombay) is held 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 have 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 were 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.

1.7 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 (SC)/[2016] 242 Taxman 434 (SC)/[2016] 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 Ace Builders (P.) Ltd. (supra)

1.8 The Mumbai Tribunal in the case of SKF India Ltd. v. Deputy Commissioner of Income-tax [2024] 168 taxmann.com 328 (Mumbai – Trib.)/[2025] 210 ITD 1 (Mumbai – Trib.)/121 ITR(T) 307 (Mumbai – Trib.) has held that:

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 could not convert ‘short term capital asset’ into a ‘long term capital asset’ and vice versa for other purpose of Act.

According as per the above judicial prouncements the gain on depreciable assets is allowed for exemption if it is invested u/s 54EC of the act.

Under ITA, 2025

Section 85 – Capital gains not to be charged on investment in certain bonds

(1) Where an assessee has:

(a) Long-term capital gains arising from the transfer of land or building, or both, (original asset); and

(b) Within six months after the date of such transfer, invested whole or part of the capital gains in a long-term specified asset (new asset) [Emphasis Supplied]

Comparison of ITA, 1961 to 2025 for exemption purpose [There is policy shift by the Government]

[Section 54EC of ITA 1961 vis a vis section 85 of ITA 2025]

1.9 Section 54EC (1) of the 1961 Act is read as under: “Where the capital gain arises from the transfer of a long-term capital asset, being land or building or both… and the same has now changed to long term capital gains arising from the transfer of land or building in section 85 of ITA, 2025. The difference has changed the shifting by changing the nomenclature from ‘long term capital asset to long term capital gain’. Irrespective of the fact the depreciable assets is long term but for the computation purpose of capital gains it will be treated as gains arising from short term capital assets. Although the nature of the assets is in long term, due to deeming provision the exemption can be availed u/s 54EC of ITA, 1961. But in section 85 the same has been changed from long term capital assets to long term capital gains. Meaning there by that now only the gains in the nature of long-term capital gains can be invested U/s 85 of ITA, 2025. As the gains from depreciable assets would be in the nature of short-term capital gains. So, the gains from the depreciable assets cannot be allowed u/s 85 of ITA, 2025. In simple terms SC judgement in the case V.S. Dempo Company Ltd. (supra) has been overruled in ITA, 2025.

As per ITA, 2025 the gains on depreciable assets will not be allowed exemption u/s 85.

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