JUDGMENT

R.V. Easwar, J.:

1. On 11.11.2011 the following substantial questions of law were framed: -

"(1) Whether the Income Tax Appellate Tribunal was right in holding that Assessing Officer was not justified in invoking Section 50(2) of the Income Tax Act, 1961?

In case the first question in answered against the Revenue;

(2) Whether the assessee is entitled to exemption under Section 54EC of the Income Tax Act, 1961 in respect of Rs.4,30,40,600/-?"

2. The appeal relates to the assessment year 2006-07. The assessee, who is the respondent herein, is a private limited company engaged in the business of publishing and trading of educational books.

3. The brief facts giving rise to the present appeal may now be noticed. In the return of income filed on 29.11.2006, the assessee declared long term capital gains of Rs. 2,83,99,571/- on sale of property at S-7 & 8, Green Park, New Delhi. The capital gains were invested in eligible REC bonds and exemption was claimed under Section 54EC of the Income Tax Act (hereinafter referred to as the "Act"). In addition to the long term capital gains, the assessee also declared short term capital gains of Rs.86,28,216/-. While examining the return in the course of the assessment proceedings under Section 143(3) of the Act, the Assessing Officer called upon the assessee to explain the long term capital gains and the basis on which exemption was claimed. The assessee, in response thereto, submitted the photocopy of the purchase and sale deeds in respect of the property and explained as follows: -

"We have purchased the property S-7, 8, Green Park for Rs. 2,16,00,000/- including stamp duty Rs. 16,00,000/- on 30.03.2001, 25.04.2001 and 03.07.2001 shown under the head Fixed Assets Land Rs. 1,48,00,000/- Building Rs. 68,00,000/-. We have made further construction/ alteration during the year as per requirement and charged depreciation accordingly year to year. We have never charged depreciation on Land. We have sold this property for Rs. 5,75,00,000/- under the bifurcation Land Rs. 4,72,00,000/- and Building Rs. 1,03,00,000/-. The capital Gain raised from sale of assets was invested in the Bonds 'Rural Electrification Corporation Limited' under section 54EC."

4. The Assessing Officer noticed that according to the agreement of sale, the assessee was to receive Rs. 7,25,00,000/- as consideration for the property which consisted of basement, ground, first and second floors with terrace rights. The building was found to have been sold with the furniture and fixtures installed therein. The Assessing Officer further found that the assessee had purchased the property on two dates i.e. 30.03.2001 and 25.04.2001 for a consideration of Rs. 2,16,00,000/- including stamp duty of Rs. 16,00,000/-. The assessee had bifurcated the total purchase price of Rs. 2,16,00,000/- (including stamp duty) as Rs. 1,48,00,000/- for the land and Rs. 68,00,000/- for the building. In the financial years 2001-02 and 2002-03 the assessee had made additions to the building in the amounts of Rs. 92,62,242/- and Rs. 62,54,181/-. The aggregate amount of additions came to be Rs. 1,58,16,423/-. In the income tax assessments for the assessment years 2002-03 and 2003-04 the assessee had claimed depreciation at the rate of 10% on the building which was allowed in the assessments. On 29.08.2005 the assessee sold the land and building comprised in the property, namely, S-7 & 8, Green Park, New Delhi for a consideration of Rs. 7,25,00,000/-. This price included Rs. 1,50,00,000/- for the fixtures and furniture in the building. Excluding the same, the sale consideration for the land and building came to Rs. 5,75,00,000/-. Out of the consolidated sale price of Rs. 5,75,00,000/-, Rs. 4,72,00,000/- was for the land and Rs. 1,03,00,000/- was received in respect of the building.

5. In computing the capital gains on transfer of the property in terms of Section 45 of the Act, the assessee declared long term capital gains of Rs. 2,83,99,571/- in th