2025 (4) TMI 264 - AT - Income Tax

Property sale treated as short-term capital gain under section 50 despite long-term holding period for depreciable business asset

Late Pravinchandra Dwarkadas Dalal (Legal Heir Hiten Pravinchandra Dalal) Versus Deputy Commissioner of Income Tax, Circle – 42 (3) (1) Erstwhile Circle 33 (2), Mumbai

The ITAT Mumbai held that sale of Pragee Office constituted short-term capital gain under section 50, as the property was a depreciable business asset on ... Gain on sale of Pragee Office - short-term capital gain u/s 50 OR long term capital gain - HELD THAT:- We note that section 50 provides for assessment of depreciable asset in respect of which depreciation has been allowed as “short term capital gain” and deductions available u/s. 48 and 49 are to be allowed subject to provisions contained in section 50(1) and (2). The, impugned property which was purchased in AY 2001-02 and in respect of which depreciation was allowed on the same as the business asset up to AY 2003-04, continued to be the part of the business asset as a depreciable asset. Assessee has in fact, carried on business in the subsequent years, i.e., during the period from AY 2004-05 to AY 2017-18 as noted by ld. CIT(A) in the table extracted above. Submission made by the assessee that asset was reported as an asset in his personal balance sheet as an investment asset has no bearing on the issue before us, since for the purpose of accounting and reporting in financial statements, assets forming part of gross block under the Act, would always be so reported as fixed assets in the balance sheet. Accordingly, impugned property forming part of the block of the asset will retain its character as such, irrespective of assessee not claiming depreciation for certain years. The said asset was always available with the assessee withing the gross block for the purpose of using it in the business. In the present case before us, depreciation “actually allowed” has to be taken, based on claim made by the assessee up to Assessment Year 2003-04, subsequent to which, there has been no claim made and allowed. Hence, no occasion for computing notional depreciation as done by AO from Assessment Year 2004-05. Accordingly, for the purpose of computation of capital gain u/s 50, WDV as at 31.03.2003 at Rs. 33,02,106/- is to be reduced from sale consideration of Rs. 1,45,00,000/-. We have held that the capital gain is to be computed u/s.50, impugned asset being depreciable asset by taking into account written down value as on 31.03.2003. Though, capital gain will be deemed to be short term capital gain by virtue of section 50, yet the impugned asset remains to be a long term capital asset and therefore rate of tax would be in terms of section 112 of the Act. Also, brought forward long term capital loss is allowed to be set off against short term capital gain computed u/s 50. Thus, on the issue relating to taxability of capital gain on transfer of “Pragee office”, ground no.1 is dismissed. ISSUES: Whether gain on sale of an immovable property, which was used in business and depreciation was claimed, is taxable as short-term capital gain under section 50 of the Income-tax Act or as long-term capital gain. Whether notional depreciation can be computed for the period after depreciation claim was discontinued when computing capital gains under section 50. Whether the tax rate applicable on capital gain computed under section 50 should be the higher short-term capital gains rate or the concessional long-term capital gains rate under section 112. Whether management fees paid to Category-II Alternative Investment Funds can be disallowed as excess expenditure against interest expenditure. Whether brought forward long-term capital loss can be set off against short-term capital gain computed under section 50 on depreciable assets. RULINGS / HOLDINGS: Gain on sale of an asset forming part of the block of depreciable business assets, on which depreciation was claimed or allowable, is taxable as short-term capital gain under section 50 of the Act, notwithstanding discontinuation of business or cessation of depreciation claims. Notional depreciation for years subsequent to the last year in which depreciation was actually allowed cannot be computed or deducted while calculating capital gains under section 50; only depreciation 'actually allowed' is relevant for determining written down value. The rate of tax applicable on capital gain computed under section 50 is governed by section 112, and since the asset is held for more than 36 months, the concessional long-term capital gains tax rate of 20% applies despite the short-term capital gain characterization under section 50. The disallowance of management fees paid to Alternative Investment Funds was not pressed and thus dismissed as not pressed. Brought forward long-term capital loss is allowable to be set off against short-term capital gain computed under section 50, as section 50 only substitutes computation provisions and does not affect the application of section 74 relating to set off and carry forward of losses. RATIONALE: The Court applied the provisions of sections 50, 43(6), 48, 49, 74, and 112 of the Income-tax Act, relying heavily on the Supreme Court decision in Sakthi Metal Depot, which held that a depreciable asset remains part of the business asset block for capital gains computation even if depreciation was not claimed in some years after discontinuation of business. The Court emphasized that 'depreciation actually allowed' as per section 43(6) means depreciation actually claimed and allowed in assessments, rejecting the Assessing Officer's attempt to compute notional depreciation for unclaimed years, consistent with the Supreme Court's ruling in CIT vs. Doom Dooma India Ltd. For the rate of tax, the Special Bench decision in SKF India Ltd. was followed, which clarified that the deeming fiction in section 50 is confined to computation of capital gains and does not alter the nature of the asset for other provisions, including tax rates under section 112. On set off of losses, the Court relied on the Bombay High Court decisions in CIT vs. Manali Investments and CIT vs. Ace Builders, which held that short-term capital gains computed under section 50 on depreciable assets can be set off against brought forward long-term capital losses under section 74. The Court admitted the additional ground on set off of brought forward long-term capital loss as it went to the root of the matter and all relevant facts were on record, with no objection from the other side. The disallowance of management fees was dismissed as not pressed, reflecting procedural propriety.