Case Law Details
Short term capital gains on transfer of depreciable assets held for more than 36 months u/s. 50(2) of the Act can be set-off against brought forward loss from other long term capital assets
Recently, the Mumbai bench of Income-tax Appellate Tribunal (the Tribunal) in the case of Manali Investments Vs. ACIT (ITA No. 6646/Mum/2008 A.Y.2005- 06)) held that the short term capital gains arising from the transfer of depreciable assets held for more than 36 months under Section 50(2) of the Income-tax Act, 1961 (the Act) can be set-off against the brought forward long term capital losses under Section 74 of the Act. Further, Section 50 of the Act is a deeming provision and the same has to be restricted only to the computation of capital gain of depreciable assets. Once the computation part is over, the operation of Section 50 of the Act comes to an end and the capital gains so determined shall be dealt with as per the other provisions of the Act.
Facts of the Case
• The taxpayer was engaged in the business of investment and finance. The tax department contended that since taxpayer claimed full depreciation on the assets sold, their transfer would attract the provision of section 50 of the Act and as a result the gain would be deemed to be short term capital gain.
• During the year under consideration, the taxpayer sold depreciable capital assets which were held for more than three years for a total consideration of INR 14.599 million. The capital gain on the same was shown as long term capital gain, which was set off against the brought forward loss from long term capital assets under section 74 of the Act.
• The AO did not agree with the contentions of the taxpayer and treated the amount of INR14.599 million as short term capital gain on sale of depreciable assets. Accordingly, the AO did not allow set off against the brought forward loss from the capital gain realised from long term capital assets.
• The Commissioner of Income Tax [CIT (A)] also rejected taxpayer’s contentions.
Taxpayer’s Contentions
• The taxpayer relied on Bombay High Court decision in case of CIT v. ACE Builders Pvt. Ltd. [2006] 281 ITR 210 (Bom.)and contended that profit on the sale of Meters and transformers, which were otherwise long term capital assets, was to be considered as long term capital gain for the purpose of set off against the brought forward loss on long term capital assets.
• The taxpayer claimed that such gain was to be eligible for set off against the brought forward loss from long term capital assets as per Section 74 of the Act.
Tax department’s contentions
• The tax department contended that since depreciation was allowed on the assets their transfer would attract the provisions of section 50 of the Act and resultantly this gain would be deemed to be short term capital gain. Once such gain is held to be short term capital gain, the taxpayer would not qualify for the benefit of set off in terms of section 74 of the Act.
• The tax department relied on the decision of the High Court in case of CIT v. Citibank N.A [2003] 261 ITR 570 (Bom.) and contended that since taxpayer availed depreciation on the assets which was otherwise long term capital assets, the deeming provision under section 50 of the Act would apply and it would be treated as short term capital gain on sale of short term capital asset.
• Once such gain is held to be short term capital gain as per the provision of section 50 of the Act, the taxpayer would not qualify for the benefit of set off in terms of section 74 of the Act.
Tribunal’s rulings- The Tribunal observed that Section 50(2) of the Act is a deeming provision and only by legal fiction income from transfer of capital assets held for more than 36 months would be treated as short term capital assets which were otherwise long term capital assets. The Tribunal placed reliance on the Supreme Court’s decisions (Please See Note 1 For list) where the Supreme Court had held that the fiction created by the deeming provisions cannot be extended beyond the object for which it was enacted. Accordingly, the deeming provision of Section 50(2) of the Act can be extended only up to the computation of depreciable assets held for more than 36 months as short term capital gain. Once the amount of capital gain is determined in case of depreciable assets, the function of the provisions of Section 50(2) of the Act shall comes to an end and capital gains so determined shall be dealt with as per the other provisions of the Act. The Tribunal relied on the Bombay High Court decision in case of Ace Builders and held that if the taxpayer is otherwise eligible for any benefit under the Act which is attached to long term capital asset the same shall remain integral. Such benefits cannot be denied for the reason that, on transfer of such a long term capital asset, short term capital gain has been computed as per Section 50 of the Act. The Tribunal distinguished the decision relied by the tax department in case of Citibank N.A on facts and held that the taxpayer was eligible to set off brought forward long term capital loss against the gains arising from the transfer of long term depreciable assets.
Our Comments- This is a welcome decision by the Mumbai Tribunal where the Tribunal has held that the brought forward long term capital loss can be set off against the gains arising from the sale of depreciable assets held for more than 36 months even if such gains were deemed as short term capital gain under Section 50(2) of the Act. The Tribunal has made an important observation that the function of deeming provisions cannot restrict the taxpayer to claim benefits provided under other provisions of the Act. This decision will provide relief to the taxpayers facing a similar issue.
Note – 1
CIT v. Amarchand N Shroff [1963] 48 ITR 59 (SC
CIT v. Mother India Refrigeration Industries P. Ltd. [1985] 155 ITR 711 (SC)
The Supreme Court in the above cases had held that the fiction created by the deeming provisions cannot be extended beyond the object for which it was enacted
