2011 (2) TMI 1433 - AT - Income Tax

Computation of Capital Gain - LTCG or STCG - addition u/s 50 - Cost Indexation Benefit - assessee had stopped claiming depreciation in the income tax return - Assessee treated a flat as fixed asset in balance sheet - claimed the benefit of cost indexation while computing the capital gains on sale of that flat - whether the character of the asset did change and the asset became a fixed asset or investment and ceased to be a business asset? - CIT(A) noted assessee erred in not considering income from flat as business income. The sale gave rise only to short term capital gains. As regards the cost indexation benefit the benefit was available only where an asset held as investment is realized HELD THAT - The order in SAKTHI METAL DEPOT VERSUS INCOME-TAX OFFICER. WARD-2 2004 (11) TMI 507 - ITAT COCHIN is applicable where in held that if no depreciation had been claimed or allowed in respect of the asset even though for an earlier period depreciation was claimed and allowed from the year in which the depreciation claimed was discontinued the asset would cease to be a business or depreciable asset and if the asset had been acquired beyond the period of thirty six months from the date of sale it would be a case of long term capital gains. In our humble understanding the ratio of the order appears to be that the asset had ceased to be a business asset and had become an investment. The moment the assessee stopped claiming depreciation in respect of the flat and even let out the same for rent; it ceased to be a business asset. In the present case there is also no dispute that the flat under consideration was held for a period of more than thirty six months and therefore a long term capital asset. Accordingly the capital gains is directed to be assessed as long term capital gains after allowing the benefit of cost indexation as claimed by the assessee - Decision in favour of Assessee Applicability of Section 112 - In our view the capital gains are long term capital gains the assessee s contention regarding application of Section 112 is correct. However since the entire capital gains will then be exempt under section 54EC. Computation of Minimum Alternative Tax u/s 115JB - CIT(A) confirmed the action of AO in not reducing the profit earned by the petitioner on sale of flat for the purposes of computing the book profits u/s 115JB - HELD THAT - It is agreed by the parties that this ground is covered in favour of the department by the order of the Special Bench in the case of RAIN COMMODITIES LTD. VERSUS DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE-3(1) HYDERABAD 2010 (7) TMI 794 - ITAT HYDERABAD . Accordingly the orders of the departmental authorities in respect of this ground are confirmed - Decision Against Assessee

Summary

Issues Involved:
1. Classification of capital gains on the sale of depreciable assets.
2. Eligibility for cost indexation benefit on depreciable assets.
3. Computation of Minimum Alternative Tax (MAT) under section 115JB.

Issue-wise Detailed Analysis:

1. Classification of Capital Gains on the Sale of Depreciable Assets:
The primary issue revolves around whether the gains from the sale of Flat No. 901 at Pratiksha, Worli, should be classified as long-term or short-term capital gains. The assessee, a private limited company engaged in investment, sold the flat for Rs. 1,30,00,000/- and computed the capital gains as long-term, claiming the benefit of cost indexation. The Assessing Officer (AO) contended that since the flat was a depreciable asset, the gains should be computed as short-term capital gains under section 50 of the Income Tax Act, 1961, without cost indexation. The AO's stance was that the flat formed part of a block of assets and was the only asset in the block classified as office premises, thus invoking section 50(1).

2. Eligibility for Cost Indexation Benefit on Depreciable Assets:
The assessee argued that the flat should not be treated as a depreciable asset as no depreciation had been claimed since the assessment year 1991-92. The CIT(A) upheld the AO's view, emphasizing that the asset continued to be a business asset, and section 50 did not envisage cost indexation. The Tribunal examined the precedent set by the Hon'ble Bombay High Court in CIT vs. Ace Builders P. Ltd. and the Cochin Bench Tribunal's decision in Sakthi Metal Depot vs. ITO. The Tribunal concluded that the asset ceased to be a business asset once depreciation was no longer claimed, thus qualifying for long-term capital gains treatment with cost indexation benefits. The Tribunal noted that the flat had been let out for rent and the rental income was declared under "Income from house property," indicating a change in the asset's character from a business asset to an investment.

3. Computation of Minimum Alternative Tax (MAT) under Section 115JB:
The assessee contested the inclusion of profit from the sale of the flat in computing book profits under section 115JB. Both parties agreed that this issue was covered by the Special Bench's decision in Rain Commodities Ltd. vs. DCIT, which ruled in favor of the department. Consequently, the Tribunal upheld the departmental authorities' decision on this ground.

Conclusion:
The Tribunal allowed the appeal in part, directing that the capital gains from the flat's sale be treated as long-term capital gains with the benefit of cost indexation, thereby exempting the gains under section 54EC. The computation of MAT under section 115JB was upheld as per the Special Bench's ruling. The order was pronounced in the Open Court on 28th February 2011.