Section 50 Is Only a Computation Fiction: Long-Term Capital Loss Can Be Set Off Against Deemed STCG

ACIT Vs Reliance Infrastructure Limited (ITAT Mumbai)

Section 50 Is Only a Computation Fiction: Long-Term Capital Loss Can Be Set Off Against Deemed STCG

The Mumbai ITAT has held that capital gains computed as short-term capital gains under Section 50 on transfer of a depreciable asset do not lose their underlying character as gains arising from a long-term capital asset. Consequently, current year and brought-forward long-term capital losses can be set off against such gains.

In this case, Reliance Infrastructure Ltd. had transferred a depreciable asset and computed capital gains of about ₹752.34 crore under Section 50. The company also had substantial long-term capital losses available for set-off. However, while passing a rectification order under Section 154, the Assessing Officer denied the set-off on the ground that once Section 50 deemed the gain to be short-term capital gain, Section 74 prohibited adjustment of long-term capital losses against it.

The Tribunal rejected this approach and reiterated that the legal fiction in Section 50 is restricted only to the computation of capital gains. It does not convert a long-term capital asset into a short-term capital asset. Therefore, while the gain is computed as deemed short-term capital gain, the nature of the underlying asset continues to remain long-term for the purposes of other provisions such as Section 74.

Relying on the jurisdictional Bombay High Court decision in CIT v. Parrys (Eastern) Pvt. Ltd. (384 ITR 264) and the principles approved by the Supreme Court in Dempo Company Ltd., the ITAT upheld the CIT(A)’s direction to allow set-off of long-term capital losses against the gains computed under Section 50 and dismissed the Revenue’s appeal

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The aforesaid appeal has been filed by the Revenue against the order dated 30.07.2025 passed by the learned Addl./JCIT (Appeals)-1, Noida, arising out of the rectification order passed under section 154 of the Income Tax Act, 1961 for Assessment Year 2021-22. The Revenue has challenged the impugned order primarily on the ground that the learned CIT(A) erred in directing the Assessing Officer to allow set-off of current year’s and brought forward long-term capital losses against the gain arising from transfer of a depreciable asset amounting to Rs.752,34,47,478/-, which had been computed as short-term capital gain in terms of section 50 of the Act. According to the Revenue, once the gain stands characterised as short-term capital gain by virtue of the deeming provisions contained in section 50, the provisions of section 74 do not permit adjustment of long-term capital losses against such gain. The controversy before us is thus mainly centred around the interplay between section 50 and section 74 of the Act and the extent to which the legal fiction created under section 50 can be carried while determining the availability of set-off of long-term capital losses.

2. The relevant facts are that the assessee company filed its original return of income on 11.03.2022 declaring business loss of Rs.1,249.98 crores. During the relevant previous year, the assessee had transferred a depreciable capital asset and computed capital gain therefrom in accordance with the provisions of section 50 at Rs.752.34 crores. The assessee had also incurred long-term capital loss amounting to Rs.257.25 crores and disclosed income from other sources at Rs.65.40 crores. After considering all the components of income, the return resulted into a gross total loss of Rs.432.22 crores. Subsequently, a revised return was filed on 30.03.2022 wherein the business loss was revised to Rs.1,239.19 crores. The gain computed under section 50 continued to remain at Rs.752.34 crores and the long-term capital loss remained at Rs.257.25 crores. Consequently, the revised return disclosed gross total loss of Rs.421.43 crores. Thus, right from the stage of filing of the return, the assessee had consistently disclosed the gain arising from transfer of the depreciable asset and had simultaneously reflected long­term capital losses available for carry forward and set-off in accordance with law.

3. The revised return was processed under section 143(1) vide intimation dated 22.09.2022. While processing the return, an adjustment of Rs.445.00 crores was made under section 41 on account of cessation of liability. As a result of such adjustment, the returned loss stood converted into positive income and the total income was determined at Rs.23.56 crores. Aggrieved by the aforesaid adjustment, the assessee preferred an appeal before the first appellate authority. While the said appeal was pending, the case was selected for scrutiny assessment and assessment under section 143(3) was completed on 30.12.2022. In the scrutiny assessment, the Assessing Officer proceeded on the basis of the income determined under section 143(1) and further made additions of Rs.1009.50 crores on account of principal loan written off and Rs.51.75 crores on account of foreign exchange loss. Consequently, the total income came to be assessed at Rs.1084.82 crores.

4. Thereafter, the assessee filed an application under section 154 pointing out various computational mistakes in the assessment order. In the meantime, the appeal filed against the adjustment made under section 143(1) was decided in favour of the assessee and the learned CIT(A) deleted the addition of Rs.445.00 crores made under section 41. Consequent order giving effect was passed on 16.03.2023 restoring the computation substantially to the returned position. Thereafter, the Assessing Officer disposed of the rectification application by passing an order under section 154 dated 24.03.2023. While passing the rectification order, the Assessing Officer accepted certain computational mistakes and granted adjustment of brought forward short-term capital loss and unabsorbed depreciation. However, he declined to allow adjustment of current year’s and brought forward long-term capital losses against the gain of Rs.752.34 crores arising from transfer of the depreciable asset. According to him, once such gain stood characterised as short-term capital gain by virtue of section 50, long-term capital losses could not be adjusted against the same under section 74. Consequently, even after the rectification proceedings, the total income came to be determined at Rs.493.60 crores.

5. Before the learned CIT(A), the assessee contended that the very foundation of the Assessing Officer’s reasoning was contrary to the settled position of law. It was submitted that there was no dispute regarding the nature of the asset transferred, which admittedly had been held for a period substantially exceeding the period prescribed for a long-term capital asset under the Act. According to the assessee, section 50 merely creates a limited legal fiction for computation of capital gains in the case of depreciable assets and such fiction does not convert the underlying long-term capital asset into a short-term capital asset. The assessee further pointed out that substantial long-term capital losses were available for set-off and carry forward and denial of such adjustment had resulted in an artificially inflated taxable income. The learned CIT(A), after examining the statutory provisions and the judicial precedents governing the issue, particularly the judgment of the Hon’ble Bombay High Court in the case of CIT vs. Parrys (Eastern) Pvt. Ltd. (384 ITR 264), accepted the contention of the assessee and held that the fiction contained in section 50 is confined only to the mode of computation and cannot be extended to alter the nature and character of the capital asset itself. He accordingly directed the Assessing Officer to allow set-off of current year’s and brought forward long-term capital losses against the gain arising from transfer of the depreciable asset. Aggrieved by the aforesaid findings and directions, the Revenue is in appeal before us.

6. We have heard the rival submissions, perused the orders of the authorities below and carefully examined the entire material available on record. The controversy before us is not with regard to the computation of capital gain under section 50. There is no dispute that the gain arising on transfer of the depreciable asset has to be computed in accordance with section 50 and that the figure of Rs.752.34 crores has been correctly adopted. The dispute is confined to a much narrower issue, namely, whether after such computation is made under section 50, the gain loses every attribute of a gain arising from a long-term capital asset and consequently disentitles the assessee from claiming adjustment of long­term capital losses under section 74. The answer to this issue depends upon the true scope and extent of the legal fiction incorporated in section 50.

7. In order to appreciate the controversy in its correct perspective, it is necessary to examine the factual chronology emerging from the record. The synopsis of assessed income clearly demonstrates that in the revised return the assessee had disclosed business loss of Rs.1239.19 crores, gain under section 50 of Rs.752.34 crores, long-term capital loss of Rs.257.25 crores and income from other sources of Rs.65.40 crores, resulting in gross total loss of Rs.421.43 crores. Thereafter, on account of adjustment of Rs.445 crores under section 41 while processing the return under section 143(1), the returned loss stood converted into positive income. Subsequently, in the scrutiny assessment under section 143(3), further additions aggregating to more than Rs.1061 crores were made resulting in assessed income of Rs.1084.82 crores. Thereafter, in rectification proceedings, the Assessing Officer himself accepted that certain computational mistakes had crept into the assessment order and granted consequential relief. However, while granting such relief, he declined to permit adjustment of current year’s and brought forward long-term capital losses against the gain arising from transfer of the depreciable asset. Consequently, even after rectification, taxable income stood determined at Rs.493.60 crores. Thus, the entire dispute before us and the resultant tax effect flow solely from the Assessing Officer’s interpretation that long-term capital losses cannot be adjusted against gains computed under section 50.

8. In our considered opinion, the aforesaid approach adopted by the Assessing Officer proceeds on an incorrect understanding of the legal fiction embodied in section 50. It is trite law that a deeming provision has to be construed strictly and confined to the purpose for which it has been enacted. While the fiction created by the legislature must be carried to its logical conclusion, it cannot be enlarged beyond the object sought to be achieved. Therefore, before extending the operation of section 50 to section 74, it becomes necessary to ascertain the precise purpose for which the fiction under section 50 was enacted and whether the legislature intended such fiction to travel beyond the computation provisions.

9. Section 50 is essentially a special computational provision falling within the scheme of computation of capital gains. The object behind the provision is to provide a special method for computation of gains arising on transfer of depreciable assets forming part of a block of assets in respect of which depreciation has been allowed over the years. The legislative intent is to ensure that while computing capital gains on transfer of such depreciable assets, the assessee does not derive computational benefits otherwise available in the case of ordinary long-term capital assets. Thus, section 50 modifies the normal computation provisions contained in sections 48 and 49 and creates a legal fiction whereby the resultant gain is deemed to be short-term capital gain. However, significantly, the section nowhere provides that the underlying capital asset itself shall cease to be a long-term capital asset. The fiction is directed towards computation of gain and not towards altering the intrinsic character of the asset.

10. In the present case, the factual position is undisputed that the asset transferred by the assessee had been held for a period far exceeding the statutory threshold prescribed under sections 2(29A) and 2(42A). Thus, independent of section 50, the asset was unquestionably a long-term capital asset. The Revenue has not disputed this position either before the lower authorities or before us. The entire controversy therefore boils down to whether the limited computational fiction contained in section 50 can be extended so as to rewrite the actual character of the capital asset itself. In our opinion, such an extension of the fiction is impermissible both on principle and on authority.

11. The issue stands squarely covered by the judgment of the Hon’ble Jurisdictional High Court in CIT vs. Parrys (Eastern) Pvt. Ltd. reported in 384 ITR 264 (Bom). The Hon’ble High Court, after examining the scope of section 50, categorically held that the deeming fiction contained therein is restricted only to the mode of computation of capital gains under sections 48 and 49 and does not convert a long-term capital asset into a short-term capital asset. Their Lordships specifically observed that section 50 deems only the gain to be short-term capital gain for the purpose of computation and does not deem the capital asset itself to be a short-term capital asset. Consequently, wherever another provision of the Act requires examination of the nature of the asset, the actual character of the asset and not the fiction created under section 50 must govern the matter.

12. The aforesaid principle has consistently been reiterated in various judicial pronouncements and has also received approval from the Hon’ble Supreme Court in the case of CIT vs. Dempo Company Ltd. reported in 387 ITR 354. The cumulative effect of these decisions is that the fiction created under section 50 cannot be imported into provisions where the legislature has not expressly extended its operation. Therefore, while section 50 undoubtedly governs the computation of gain, it cannot be invoked to deny statutory benefits available under other provisions merely by treating the long-term capital asset itself as a short-term capital asset.

13. Once the aforesaid legal position is applied to the facts of the present case, the conclusion becomes self-evident. For the purpose of section 74, what assumes significance is the character of the capital asset from whose transfer the gain has arisen. Since the asset transferred by the assessee was admittedly a long-term capital asset, the gain arising therefrom, notwithstanding the computational fiction contained in section 50, continued to retain its character as gain arising from transfer of a long-term capital asset for the purpose of set-off provisions. Consequently, the assessee was legally entitled to adjust current year’s as well as brought forward long-term capital losses against such gain. The learned CIT(A) has merely directed the Assessing Officer to give effect to the settled legal position and recompute the income accordingly. We do not find any infirmity in such direction.

14. We may also observe that the learned CIT(A) has not granted any relief dehors the statute nor has he entertained any fresh claim. The losses sought to be adjusted were already available on record and their quantum was never disputed by the Revenue. The only dispute was with regard to their admissibility against the gain computed under section 50. Once the issue stands concluded by the binding judgment of the Hon’ble Jurisdictional High Court, the learned CIT(A) was fully justified in directing the Assessing Officer to allow the adjustment. Acceptance of the Revenue’s contention would amount to enlarging the scope of the legal fiction far beyond the purpose intended by Parliament and would directly run contrary to the ratio laid down by the Hon’ble Bombay High Court.

15. Thus, having regard to the entire factual chronology beginning from the filing of the return of income, the processing under section 143(1), the assessment under section 143(3), the rectification proceedings under section 154 and the appellate proceedings thereafter, and further having regard to the binding judicial precedents governing the field, we find ourselves in complete agreement with the conclusion reached by the learned CIT(A). The impugned order is legally sound, factually well founded and fully supported by the ratio laid down in Parrys (Eastern) Pvt. Ltd. (supra). Accordingly, we uphold the order of the learned CIT(A) and dismiss all the grounds raised by the Revenue.

16. In the result, the appeal filed by the Revenue is dismissed.

Order pronounced on 8t^h June, 2026.