Concessional rate of 20% applicable to long term capital gains cannot be applied for gain on depreciable asset held for more than 36 months
ACIT Vs. SKF Bearings India Ltd. (ITAT Mumbai) – Sections 54EC and 74 refer to capital gain arising from the transfer of a long term capital asset and not with respect to a short term capital asset. Further, section 112(1 )(b)(i) and (ii) specifically refers to only long term capital gains. Hence, where section 50 by a legal fiction, deems the income earned from a depreciable asset as short term capital gain, applying the tax rate specified for long term capital gains in section 112(1) would not arise. On a plain reading of section 50, the excess shall be deemed to be the capital gains arising from the transfer of a short term capital asset. The beneficial rate of tax @ 20% would not be applicable to capital gains arising on transfer of depreciable asset even though the asset was held for more than thirty-six months.
INCOME TAX APPELLATE TRIBUNAL, MUMBAI
Asst. Commissioner of Income
v/s
M/s. SKF Bearings India Ltd.
ITA No. 616/Mum./2006 – (Assessment Year: 2001- 02)
ITA No. 720/Mum./2006 – (Assessment Year: 2001- 02)
ITA No. 617/Mum./2006 -(Assessment Year: 2002- 03)
ITA no. 721/Mum./2006 – (Assessment Year: 2002- 03)
ITA No. 2640/Mum./2007 -(Assessment Year: 2003- 04)
ITA No. 2660/Mum./2007 – (Assessment Year: 2003- 04
ITA No. 4625/Mum./2008 -(Assessment Year : 2004- 05)
Date of Order – 29.12.2011
ORDER
PER BENCH
Cross appeals for assessment year 2001-02, are directed against the impugned order dated 28th October 2005, cross appeals for assessment year 2002- 03, are directed against the impugned order dated 31st October 2005, cross appeals for assessment year 2003-04, are directed against the impugned order dated 11th January 2007, passed by the Commissioner (Appeals)-XIV, Mumbai, and the appeal preferred by the assessee for assessment year 2004- 05, is directed against the impugned order dated 29th April 2008, passed by the Commissioner (Appeals)-XV, Mumbai, respectively. As the issues arising in all these appeals are common, for the sake of convenience, these appeals were heard together and are being disposed off by way of this consolidated order.
2. Facts in brief:- The assessee is engaged in the business of manufacture in ball and roller bearings and textile components. The assessee company is also engaged in marketing of SKF imported bearing accessories and maintenance products.
3. We have heard the learned Counsels, Mr. Kanchan Kaushal a/w Mr. Dhanesh Bafna & Ors., representing the assessee and Mrs. Malathi Sridharan, representing the Revenue.
We first take up assessee’s appeal in ITA No. 720/Mum./2006, for assessment year 2001- 02.
4. Grounds no.1 and 2, are on the issue of valuation of closing stock under section 145A of the Income Tax Act, 1961 (for short “the Act”)
5. Learned Counsel for the assessee submitted before us that the Assessing Officer has, at Para-5.2 / Pg.3 of his order, agreed with the assessee that the opening stock for the accounting year should be increased by the MODVAT element in it. He submitted that the Commissioner (Appeals) confirmed this and, hence, he has no grievance and did not wish to press these grounds. Consequently, grounds no.1 and 2, are dismissed as “not pressed”.
6. Ground no.3, is on the issue of dis allowance under section 14A of the Act.
7. Learned Counsel submits that the assessee has sufficient surplus funds which he had invested in investments and the dis allowance of interest of ~ 52,95,600, is bad-in-law. A statement is filed at Pg.110, which gives the value of investments during the year and the profits earned by the assessee company during the year. On a query from the bench, the learned Counsel admitted that this document is not before the authorities below. He relied on a number of decisions for the proposition that the presumption should be, that when interest free funds were available with the assessee, it should be held as that which is utilized for investment purpose.
8. Learned Departmental Representative, on the other hand, agreed that the issue should be restored to the file of Assessing Officer, as the ground on rate of interest has been taken by the Revenue.
9. After hearing the rival contentions, we restore this issue to the file of Assessing Officer for adjudication afresh in line with the judgment of Hon’ble Jurisdictional High Court in CIT Vs. Reliance Utilities & Power Ltd., [2009] 313 ITR 0340 (Bom.) and other decisions of the Tribunal on the issue. Thus, ground no.3, is allowed for statistical purposes.
10. Ground no.4, is on the issue of dis allowance under section 40A(9) of the Act in respect of contribution of 50,000, made to SKF Christian Employee Association.
11. Learned Counsel submitted that he has not pressed a similar issue in the earlier assessment year due to smallness of the amount. In view of this, we dismiss ground no.4, as “not pressed”.
12. Ground no. 5, reads as follows:-
“5. on the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming that the capital gains of r 19,72,77,000, under section 50 of the Act, arising on sale of long term capital asset, is chargeable to tax at the rate applicable to short term capital gains instead of the rate applicable to long term capital gain.”
13. The facts, as brought out by the Assessing Officer in his assessment order vide Para-11 and 11.1 / Page-9, are extracted below:-
“11. Capital Gains
In return of income assessee has offered capital gains of Ps. 19,57,77,000/- as long term capital gains computed as per section 50 and long term capital gains of Rs. 63,87,664/-. The assessee has relied on the decision of Ace Builders (P) Limited V/s ACIT, (2001) 76 ITD 389 and considered capital gains in respect of depreciable assets computed under section 50 as Long term capital gains instead of Short terms capital gains. In support of their contention, assessee has given following note in return of income.
“In the case of Ace Builders (P) Lid. V/s ACIT (2001) 76 lTD 389, the ITAT Mumbai Bench has observed that the assumption of treating/deeming any capital gain arising on transfer of a depreciable asset as short-term capital gain, uncle,- section 50, is for the purpose of section 48 mid 49 only and therefore it cannot be extended to other provisions of the income-tax Act, as if it is so extended, it would amount to extending the deeming provisions beyond its legitimate field. It has, further, been observed that the specialty attached to Section 50 is to be restricted to only for the method of computing the capital gain and not for determining the nature gain. in view of the above decision of the ITAT Mumbai Bench, and facts in our case, the capital gain computed vide Annexure—I as per provisions of section 50, have been treated as long term capital gains and accordingly taxed at 20% as per section 1 12(I)(‘b,).
Without prejudice to above, in case it is held that capital gains under section 50 should be treated as short term capital gains, then deduction under chapter VIA should be granted to the Company and accordingly, gross total income mentioned in the above computation should be reduced by the amount of Chapter VIA deductions, which are mentioned below:
Deduction under section 80G: Rs.850,625 (as per clause 26 of form No.3CD) Deduction under section 8OHHC: Rs. 712,011 (as per clause 26 of form No.3CD and Report in form no.10CCAC, enclosed in original).”
11.1 Further, the assessee has given its submissions in support of their above contention vide their letter dtd. 21.11.2002 and 27.11.2002. In its letter dated. 21.11.2002 the assessee has submitted the following:-
“Capital gains computed as per section 50 of the Income-tax Act, in respect of sale of non-residential building, are treated as long term capital gains, for the following reasons:- Section 2(29B,) defines ‘Long term capital gain’ as the capital gain arising from the transfer of a long-term capital asses. Section 2(29A) defines ‘long term capital asset’ as a capital asset held by an assessee for more than thirty six months immediately preceding the date of its transfer. Thus, capital gains arising on transfer of a capital asset held by an assessee for more than thirty six months immediately preceding the date of its transfer, are ‘long-term capital gains’. During the previous. year ended 31st March 2001, following non-residential properties, depreciable assets, were sold:-
1. Ground floor and first floor in in Udyog Bhavan, which acquired on 2nd February, 1994
2. 11th and 12th floor of Hoechst House, which was acquired on 12th April 1985.
Thus, both the above capital assets were held by the company for more than thirty six months before their transfer / sale, hence, were “long term capital assets” and accordingly, gain on their transfer, computed as per provisions of section 50, is long term capital gain.
It may be noted that the case of Ace Builders (P) Ltd. v/s ACIT, (2001) 76 ITD 389, the ITAT Mumbai Bench has observed that the assumption of treating/ deeming any capital gain arising on transfer of a depreciable asset as short term capital gain, under section 48 and 49 only and therefore it cannot be extended to other provisions of the Act, as if it is so extended, it would amount to extending the deeming provisions beyond its legitimate field. It has further been observed that the specialty attached to section 50 is to be restricted to only for the method of computing the capital gain and not for determining the nature gain.
In view of the above decision of the ITAT Mumbai Bench, and facts in our case, the capital gain of r 19,57,77,000 computed as per provisions of section 50, have been treated as long term capital gain, and accordingly taxed at 20% (plus applicable surcharge) as per section 112(1)(b).”
14. The Assessing Officer did not agree with the contention of the assessee. He held that the amount should be taxed as short term capital gain.
15. When the matter was carried before the Commissioner (Appeals), the findings of the Assessing Officer that the amount in question has to be taxed as short term capital gain was upheld. As there were certain investments, the first appellate authority granted part relief under section 54EC. Aggrieved, the assessee is in appeal before the Tribunal.
16. Before us, the learned Counsel relied on the wordings in section 54EC, and submitted that the legislature used the words “where the capital gains arises from the transfer of a long term capital assets” and submitted that similar wordings has been used in section 74, as well as in section 112 of the Act. He relied on the following decisions for the proposition that the provisions of section 50 of the Act are applicable only up to the stage of computation assets and once capital gains is computed on depreciable assets, as per section 50, which is in this case a long term capital asset, the operation of such section is ousted. His case is that, if the assessee is otherwise eligible for any benefit under the Act, which is attached to the long term capital asset, the same shall remain intact.
