The long term capital loss (LTCL) can be set off against the short term capital gain (STCG) arise on depreciable assets u/s 50 of income tax act, 1961

As per provisions of section 74(1)(b) loss related to a long term capital gain can be set off against the long term capital gain. Long Term Capital Loss cannot be set off against the Short Term Capital Gain. The Extract of Provisions of section 74(1)(b) is reproduced as under:-

“In so far as such loss relates to a long term capital asset, it shall be set off against income, if any, under the hear ‘Capital Gain’ assessable for that assessment year in respect of any other capital asset not being a short term capital asset.”

In contrarily to the provisions of section 74(1)(b) of Income Tax Act, 1961, short term capital gain arise on depreciable assets u/s 50 of Income Tax Act, 1961 and the long term capital loss can be set off against the short term capital gain arise on depreciable assets u/s 50 of Income Tax Act, 1961.

Section 45 is charging section of capital gain and sections 48 and 49 are the machinery sections for computation of gains. However, section 50 craves out an exception in respect of depreciable assets and provides that where depreciation has been claimed and allowed on the asset, then, the computation of capital gain on transfer of such asset under section 48 and 49 shall be as modified under section 50. In other words, Section 50 provides a different method for computation of capital gain in the case of capital assets on which depreciation has been allowed.

Further, the Hon’ble Bombay High Court in case of CIT vs Manali Investment [2013] 39 taxmann.com 4 (Bombay High Court) held that long term capital loss in terms of section 74(1)(b) can be setoff against the short term capital gain. The extract of relevant para of ruling of Hon’ble Bombay High Court is reproduced hereunder:-

“3. On further appeal, the Tribunal by the impugned order has allowed the claim of the respondent- assessee to set off its long term losses in terms of section 74 of the Act against the long term capital gains on sales of transformers and meters. This was by following the decision of this Court in the matter of CIT vs Ace Builders (P) Ltd. (2006) 281 ITR 210 (Bom). In the case of Ace Builders (P) Ltd. (supra), this court held that by virtue of section 50 of the Act only the capital gain is to be computed in terms thereof and be deemed to be short term capital gains. However, this deeming fiction is restricted only for the purpose of section 50 of the Act and the benefit under section 54E of the Act which is available only to long term capital gains was extended. In this case, the Tribunal held that the position is similar and the benefit of set off against long term capital loss is to be allowed. Further, an identical issue with regard to set off against long term capital loss arose in an appeal filed by the Revenue in the matter of CIT vs Hathway Investments (P) Ltd being Income Tax Appeal (L) No. 405 of 2012. This court by its order dt. 31-01-2013 refuse to entertain the appeal filed by the Revenue. The Revenue has not been able to point out any distinguishing features in the present case warranting a departure from the principles laid down by this court in the matter of Ace Builders (P) Ltd (Supra) and in our order dt. 31.01.2013 in Income Tax Appeal (L) No. 405 of 2012.

4. In view of the above, we see no reason to entertain the proposed re-framed question of law. Accordingly, the appeal is dismissed with no order as to costs.”

In identical issue in case of ITO vs Smart Sensors & Transducers Ltd. [2019] 176 ITD 104 (Mum, ITAT), the Hon’ble Mumbai ITAT held that long term capital loss in terms of section 74(1)(b) can be setoff against the short term capital gain u/s 50 of Income Tax Act. The extract of relevant para of ruling of Hon’ble Mumbai ITAT is reproduced hereunder:-

“8. We have heard the rival contentions and gone through the facts and circumstances of the case. We find that Hon’ble Bombay High Court in the given facts has considered this issue in the case of Manali Investments (supra), wherein, the question referred before the Hon’ble High Court reads as under:

“Whether on the facts and in the circumstances of the case and in law, the Tribunal was correct in holding that the assessee is entitled to set-off under Section 74 in respect of capital gain arising on transfer of capital assets on which depreciation has been allowed in the first year itself and which is deemed as short term capital gain under Section 50 of the Income Tax Act relying upon the judgment of this Court in the case of CIT v. ACE Builders (P.) Limited (281 ITR 210) even though the said decision was rendered in the context of eligibility of deduction under Section 54E.”

9. Hon’ble Bombay High Court has considered the issue of allowance of set off of long term capital loss in terms of section 74 of the Act against the short term capital gain computed under section 50 of the Act. Hon’ble High Court has observed that by virtue of Section 50 of the Act, only the capital gains is to be computed in terms thereof and be deemed to be short-term capital gains and this deeming fiction is restricted only for the purposes of Section 50 of the Act but the benefit of set off of long term capital loss under section 74 of the Act is to be allowed. Hon’ble High Court has also followed its decision in the case of CIT v. ACE Builders (P.) Ltd. [2005] 144 Taxman 855, 281 ITR 210 (Bom.).

10. As regards to set off of business loss against gain on sale of depreciable asset of factory building by the assessee, we find that the co-ordinate Bench of the Tribunal in the case of Raj Shree Roadlines (R) Ltd. v. ITO [IT Appeal No. 1627 (Mum.) 2012, dated 20-3-2013] has considered the issue of business loss of unabsorbed depreciation and eligible business loss can be set off against short term capital gain computed under section 50 of the Act. We find that the Tribunal after considering the provisions of sections 32(2), 72(2) and 73(3) of the Act opined that while deciding the issue of carrying forward of loss/unabsorbed depreciation and the amendment made in these section from time to time are applicable for carrying forward of depreciation/loss with effect from 1.4.2002. For this proposition, the Tribunal has relied on the decision of Hon’ble Bombay High Court in the case of CIT v. Hathway Investments (P.) Ltd., in [Income Tax Appeal (L) No. 405 of 2012 dated 31-1-2013]. We find the above proposition is supported by the decision of Hon’ble Bombay High Court in the case of Manali Investments (supra), wherein, it is held that short term capital gain computed under section 50 of the Act can be set off against brought forward capital loss and also brought forward business loss. Accordingly, we are of the considered view that the CIT(A) has rightly allowed the claim of the assessee and we affirm the same.

11. In the result, the appeal of the revenue is dismissed.”

In both the cases above CIT v. ACE Builders (P.) Ltd. [2005] 144 Taxman 855, 281 ITR 210 (Bom.) has been referred, wherein Hon’ble Bombay High Court held that “……. the legal fiction created by the statute is to deem the capital gain as short term capital gain and not to deem the asset as short term capital asset. Therefore, it cannot be said that section 50 converts long term capital asset into a short term capital asset.”

In view of CIT vs Manali Investment [2013] 39 taxmann.com 4 (Bombay High Court) and ITO vs Smart Sensors & Transducers Ltd. [2019] 176 ITD 104 (Mum, ITAT), the assessee can claim setoff  of long term capital loss in terms of section 74(1)(b) against the short term capital gain u/s 50 of Income Tax Act.

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