Deeming fiction for depreciable assets is confined to computation, leaving the capital gains tax rate question contested.

Section 50's deeming fiction for depreciable assets was treated as confined to the computation of capital gains under sections 48 and 49, and not as extending to alter the character of the asset or the gain for rate purposes. One opinion held that where the underlying asset was held long term, the concessional rate under section 112 remained available because the fiction did not convert the gain into short-term capital gain for all purposes. The contrary opinion held that section 112 applies only to genuine long-term capital gain and that section 50 gain is short-term for tax-rate purposes. The Special Bench recorded divergent views and the matter was not finally decided.

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Issues: Whether capital gains computed under section 50 on transfer of depreciable assets held as long-term capital assets are taxable at the rate applicable to short-term capital gains or at the concessional rate under section 112.

Analysis: The view favouring the assessee held that section 50 creates a legal fiction only for the limited purpose of computation under sections 48 and 49, and does not convert a long-term capital asset into a short-term capital asset for all other purposes. On that basis, the rate provision in section 112 was treated as applicable because the underlying asset was held for more than the prescribed period and the fiction under section 50 was confined to the computation mechanism.

Conclusion: The referred question was answered in favour of the assessee in that opinion, holding that the concessional rate under section 112 applies.

Dissenting Opinion: The contrary opinion held that section 112 applies only where the income included in total income is itself long-term capital gain, whereas the gain computed under section 50 is short-term capital gain. It reasoned that the deeming fiction in section 50 cannot be extended to alter the character of the gain for the purpose of rate of tax, and that the assessee was therefore not entitled to the concessional rate under section 112.

Final Conclusion: The Special Bench delivered divergent opinions on the referred question and did not finally determine the connected cross appeals, which were directed to be placed before the regular Bench.

Ratio Decidendi: A deeming fiction enacted for computation of capital gains is confined to that limited purpose and is not to be extended to alter the character of the asset or the gain for other charging or rate provisions unless the statute expressly so provides.

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