2010 (1) TMI 659 - HC - Income Tax

Short-term capital gains - Depreciable asset - The sale of a building on which depreciation was allowed for several years -The asseessee using the building for business purposes and after claiming depreciation for 21 years the assessee deliberately did not claim depreciation for two succeeding years 1996-97 and 1997-98 but simultaneously used the building for business purposes - the sale of a depreciable asset in respect of which depreciation was allowed to the assessee should always be treated as short-term capital gains by virtue of operation of sections 50 50A and 50B of the Act - Held that the building being depreciable asset and was being used for business purposes sale of the same attracts tax on short-term capital gains under section 50 of the Act.

Summary

Issues:
Challenge to short-term capital gains assessment on profit arising from the sale of a building due to depreciation claims.

Analysis:
The case involved an appeal by the Revenue challenging the cancellation of short-term capital gains assessment by the Income-tax Appellate Tribunal on profit from the sale of a building. The controversy arose from the treatment of the profit as long-term capital gains due to the cessation of depreciation claims for two years prior to the sale. The assessee, a firm with a branch in Mumbai, purchased a flat in 1974 for business purposes and claimed depreciation until 1995-96. The flat was sold in 1997-98, resulting in a profit declared as long-term capital gains. The Assessing Officer treated the profit as short-term capital gains under section 50 of the Income-tax Act, leading to appeals and the Tribunal's decision in favor of long-term capital gains assessment.

The High Court analyzed the provisions of sections 50 and 50A of the Act to determine the treatment of depreciable assets upon sale. Section 50 provides for the computation of capital gains for depreciable assets, mandating the assessment of such assets as short-term capital gains if depreciation has been allowed. It also addresses the cost of acquisition and allowable deductions. Section 50A supplements section 50 by specifying the cost of acquisition for depreciable assets with allowed depreciation. The court emphasized that the sale of a depreciable asset with prior depreciation claims should be assessed as short-term capital gains, regardless of temporary non-usage for business purposes.

The court rejected the assessee's argument that discontinuation of depreciation claims disqualifies the asset from short-term capital gains assessment. It highlighted that the asset's classification as depreciable and part of a block of assets remains unchanged, even if not used for business temporarily. The court deemed the description of the asset as an investment in the balance-sheet as an attempt to avoid short-term capital gains tax. It clarified that as long as the business continues, the asset retains its depreciable status, allowing for depreciation claims based on the last available written down value.

In conclusion, the High Court allowed the Revenue's appeal, overturning the Tribunal's decision and reinstating the assessment of the profit from the building sale as short-term capital gains, as confirmed in the first appeal.