TaxTMI 
TaxTMI 
2026 (6) TMI 733
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....hort-term capital gain by virtue of the deeming provisions contained in section 50, the provisions of section 74 do not permit adjustment of long-term capital losses against such gain. The controversy before us is thus mainly centred around the interplay between section 50 and section 74 of the Act and the extent to which the legal fiction created under section 50 can be carried while determining the availability of set-off of long-term capital losses. 2. The relevant facts are that the assessee company filed its original return of income on 11.03.2022 declaring business loss of Rs. 1,249.98 crores. During the relevant previous year, the assessee had transferred a depreciable capital asset and computed capital gain therefrom in accordance with the provisions of section 50 at Rs. 752.34 crores. The assessee had also incurred long-term capital loss amounting to Rs. 257.25 crores and disclosed income from other sources at Rs. 65.40 crores. After considering all the components of income, the return resulted into a gross total loss of Rs. 432.22 crores. Subsequently, a revised return was filed on 30.03.2022 wherein the business loss was revised to Rs. 1,239.19 crores. The gain comput....
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....of the depreciable asset. According to him, once such gain stood characterised as short-term capital gain by virtue of section 50, long-term capital losses could not be adjusted against the same under section 74. Consequently, even after the rectification proceedings, the total income came to be determined at Rs. 493.60 crores. 5. Before the learned CIT(A), the assessee contended that the very foundation of the Assessing Officer's reasoning was contrary to the settled position of law. It was submitted that there was no dispute regarding the nature of the asset transferred, which admittedly had been held for a period substantially exceeding the period prescribed for a long-term capital asset under the Act. According to the assessee, section 50 merely creates a limited legal fiction for computation of capital gains in the case of depreciable assets and such fiction does not convert the underlying long-term capital asset into a short-term capital asset. The assessee further pointed out that substantial long-term capital losses were available for set-off and carry forward and denial of such adjustment had resulted in an artificially inflated taxable income. The learned CIT(A), after....
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.... Rs. 1084.82 crores. Thereafter, in rectification proceedings, the Assessing Officer himself accepted that certain computational mistakes had crept into the assessment order and granted consequential relief. However, while granting such relief, he declined to permit adjustment of current year's and brought forward long-term capital losses against the gain arising from transfer of the depreciable asset. Consequently, even after rectification, taxable income stood determined at Rs. 493.60 crores. Thus, the entire dispute before us and the resultant tax effect flow solely from the Assessing Officer's interpretation that long-term capital losses cannot be adjusted against gains computed under section 50. 8. In our considered opinion, the aforesaid approach adopted by the Assessing Officer proceeds on an incorrect understanding of the legal fiction embodied in section 50. It is trite law that a deeming provision has to be construed strictly and confined to the purpose for which it has been enacted. While the fiction created by the legislature must be carried to its logical conclusion, it cannot be enlarged beyond the object sought to be achieved. Therefore, before extending the opera....
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....t-term capital asset. Their Lordships specifically observed that section 50 deems only the gain to be short-term capital gain for the purpose of computation and does not deem the capital asset itself to be a short-term capital asset. Consequently, wherever another provision of the Act requires examination of the nature of the asset, the actual character of the asset and not the fiction created under section 50 must govern the matter. 12. The aforesaid principle has consistently been reiterated in various judicial pronouncements and has also received approval from the Hon'ble Supreme Court in the case of CIT vs. Dempo Company Ltd. reported in 387 ITR 354. The cumulative effect of these decisions is that the fiction created under section 50 cannot be imported into provisions where the legislature has not expressly extended its operation. Therefore, while section 50 undoubtedly governs the computation of gain, it cannot be invoked to deny statutory benefits available under other provisions merely by treating the long-term capital asset itself as a short-term capital asset. 13. Once the aforesaid legal position is applied to the facts of the present case, the conclusion becomes s....