Long Term capital loss can be setoff against Short Term gain u/s 50 (if the depreciable asset is a long term asset) – Bom HC


CIT v Pursarth Trading Co. (P.) Ltd. [IT Appeal (L) No. 123 of 2013] dtd March  13, 2013 (Bombay High Court)

Background:

The assessee sold its office premises and secured long term capital gains. However, being a depreciable asset computed its gains in terms of Section 50 of the Income-tax Act, 1961. The Assessing Officer disallowed the claim of the assessee to set off its carry forward long term capital loss against the long term capital gains made under Section 74 of the Act in view of Section 50 of the Act. The Commissioner of Income Tax (A) upheld the order of the Assessing Officer.

Tribunal’s Order:

Tribunal allowed the claim of the assessee to set off its long term capital loss in terms of Section 74 of the Act by following its decision in the matter of Manali Investments v. Asstt. CIT [2011] 45 SOT 128 (URO) (Mum.).

High Court’s order:

There is no reason to entertain the proposed reframed question of law.

Synopsis of ruling of Manali Investments v. Asstt. CIT [2011] 45 SOT 128 (URO) (Mum.)

  • Section 50 has marginal note : Special provision for computation of capital gains in case of depreciable assets.
  • This section begins with the non obstante clause excluding the operation of section 2(42A) and provides that where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act or under the Indian Income-tax Act, 1922, the provisions of sections 48 and 49 shall be subject to modifications set out in clauses (1) and (2) of this section. [Para 5]
  • From perusal of section 50, it becomes apparent that it contains a special provision for ‘computation of capital gains’ in case of depreciable assets. Further it is a deeming provision and only by legal fiction income from the transfer of otherwise long-term capital assets (held for a period of more than 36 months) is treated as capital gains arising from the transfer of short-term capital assets.
  • A deeming provision is one, the mandate of which does not exist but for such provision.
  • It is only as a result of such legal fiction contained in the provision that imaginary state of affairs is taken as actuality notwithstanding the fact that it is at variance with the otherwise legal position. It is trite that a deeming provision cannot be extended beyond the purpose for which it is enacted.
  • Once the amount of capital gain is determined in case of depreciable assets as per this section, ignoring the mandate of sections 48 and 49 which otherwise deal with the mode of computation of capital gains, the function of this provision shall come to an end and the capital gain so determined shall be dealt with as per the other provisions of the Act.
  • Bombay High Court in the case of CIT v. ACE Builders (P.) Ltd. [2006] 281 ITR 210: Capital gain on the transfer of depreciable asset held by the assessee for period of more than three years which was determined under section 50. It was held that the assessee was entitled to the benefit under section 54E which was available only against long-term capital gain.
  • Thus, it was to be held that the assessee was entitled to such set off in terms of section 74.

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