2011 (4) TMI 705 - AT - Income Tax

Set off of loss from assets on which depreciation was claimed - Gain on sale of a long term capital asset against the brought forward long term Capital Loss - Deeming provisions of section 50 - Held that - the gain is short term capital gain due to the fiction created by provisions of section 50(2) the asset remained as long term capital asset - Therefore in view of the ratio laid down by the Jurisdictional High Court the brought forward long term capital loss can be set off against the capital gain on account of transfer of the depreciable asset which has been held by the assessee for more than 36 months thereby making the asset a long term capital asset - under section 74(1)(b) the assessee is entitled to the claim of set off of long term capital loss against the income arising from the sale of office premises the gain of which is short term due to the deeming provision but the asset is long term. - Decided in favor of assessee.

Summary

Issues:
1. Denial of set off of gain on sale of long term capital asset against brought forward long term Capital Loss due to deeming provisions of section 50.

Detailed Analysis:
The appeal was filed against the order confirming the denial of set off of gain on the sale of a long term capital asset against brought forward long term Capital Loss due to the deeming provisions of section 50. The Assessing Officer noted the income from capital gain on the sale of office premises and business loss for the year. The issue arose because the block of asset ceased to exist due to the sale, triggering the deeming provisions of section 50(2) converting the income into short term capital gains. The assessee relied on a Bombay High Court decision stating that section 50 is limited to the computation of capital gains only and does not convert a long term capital asset into a short term one.

The Assessing Officer, however, rejected the claim of set off, stating that the jurisdictional High Court's decision does not apply to section 50 and that the restriction under section 50 is confined to the computation of capital gains only. The assessee argued before the ld. CIT(A) that the deeming provisions of section 50 should not deny privileges like exemption under section 54/54EC or set off losses under section 74(1)(b). They highlighted that the asset being short term or long term is crucial, not the nature of the gain. The ld. CIT(A) upheld the Assessing Officer's decision, emphasizing that once the asset is treated as short term, there is no basis for claiming set off against long term capital loss under section 74.

Upon further review, the tribunal considered the provisions of section 74(1)(b) and a CBDT circular explaining the set off of long-term capital losses against capital gains. Referring to the Bombay High Court's judgment in ACE Builders (P.) Ltd., the tribunal concluded that despite the gain being short term due to section 50(2), the asset remained a long term capital asset. Therefore, the tribunal allowed the appeal, holding that the assessee is entitled to set off the long term capital loss against the short term capital gain arising from the sale of the office premises.

In conclusion, the tribunal allowed the appeal, emphasizing that the deeming provision of section 50 does not convert the asset itself into a short term capital asset, thereby entitling the assessee to set off the long term capital loss against the short term capital gain as per section 74(1)(b).