2013 (9) TMI 409 - AT - Income Tax

Computation of the capital gains - Block of assets exists or not after Sale of the premises - Computation u/s 50 - Balance of WDV after sale of asset - Held that - underlying presumption in the foregoing computation of the WDV, as well as in the manner of computing the capital gain u/s.50, is that all the assets comprising the block for the time being continue to be business assets and, thus, eligible for being considered as a part of the relevant block of assets. However, when a capital asset, as the Nariman Bhavan property in the instant case, is let by the assessee, the same no longer qualifies as a business asset. That is, it becomes ineligible for being considered as part of the relevant block of assets. The question of computing either depreciation or capital gains with reference to its value, therefore, just does not arise - no depreciation for the relevant year would be eligible on the said block in that case despite a positive WDV. This is for the reason that the block ceases to exist, with one asset being sold out and the other removed from the block by being let, and not for the reason of non-user, as stated by him. Where, one may ask, is the question of user, when the asset itself is no longer a business asset? To clarify this aspect further, take the example of three, instead of two, assets comprising the block as at the beginning of the year. While one stands sold, the second is let out and the third continues to be retained in and used for business. Could depreciation be claimed with reference to the block comprising the two remaining assets? Clearly not, and an adjustment for the asset let, as it no longer forms part of or qualifies as an asset of the business, has necessarily to be made, in computing the WDV or the capital gain, on the asset sold or the depreciation on the sole remaining business asset, as the case may be, as under the scheme of the Act it would be an either or situation, and both cannot obtain. The asset let would be akin to any other independent capital asset owned by the assessee, though the fact of it having been used for business purposes and depreciated in the past would impact its date and cost of acquisition. The assessee s case clearly falls u/s. 50(2); the only asset, namely, the property at Arun Chambers, Mumbai, constituting the block at the relevant time, being sold in September, 2005, with no subsequent additions to the block. It would, we may though clarify, again, not matter if the other property rented out was so done subsequently, and not prior thereto in July, 2005. This is as the question of applicability of sec. 50(1) or s. 50(2) is to be seen as at the year-end, whereat only the depreciation u/s.32 as well as capital gain u/s.50 is to be computed, taking the entire transactions during the year into account. The WDV of the block, adjusted for the removal of the property let out during the year in July, 2005, is to be taken into account for computing the STCG u/s.50. - Decided in favour of Revenue.

Summary

Issues Involved:
1. Condonation of Delay in Filing Cross Objection
2. Applicability of Section 50 vs. Section 50C for Computation of Capital Gains
3. Computation of Capital Gains on Sale of Depreciable Asset

Condonation of Delay in Filing Cross Objection:
The assessee's Cross Objection (C.O.) was delayed by 120 days due to the non-receipt of the appeal memo from the department because of a change in the registered office. The assessee initially did not prefer an appeal as partial relief was granted by the CIT(A). Upon learning of the Revenue's appeal, the assessee decided to contest the matter fully. The tribunal admitted the C.O. as it allowed the assessee to contest the impugned order and deliberate on all relevant issues. The non-receipt of the appeal memo was a matter of record and not disputed by the Revenue.

Applicability of Section 50 vs. Section 50C for Computation of Capital Gains:
The primary issue was whether the computation of capital gains on the sale of a depreciable asset should be governed by Section 50 or Section 50C of the Income Tax Act. The CIT(A) had allowed relief to the assessee by applying Section 50, but the Revenue appealed, seeking the application of Section 50C, which would substitute the sale consideration with the stamp duty value. The tribunal, referencing the Special Bench decision in ITO vs. United Marine Academy, clarified that both sections could apply simultaneously. Section 50 deals with the computation of capital gains on depreciable assets, while Section 50C deems the sale consideration to be the stamp duty value.

Computation of Capital Gains on Sale of Depreciable Asset:
The assessee argued that capital gains should be computed under Section 50, which involves reducing the opening Written Down Value (WDV) of the relevant block of assets from the deemed sale consideration. The assessee's WDV at the beginning of the year was Rs.72.36 lacs, and the deemed sale consideration was Rs.72.63 lacs, resulting in a capital gain of Rs.0.27 lacs. The Revenue, however, computed the gain by reducing only the WDV of the sold asset (Rs.50,000), resulting in a Short Term Capital Gain (STCG) of Rs.72.13 lacs.

The tribunal held that Section 50 adopts the same basis as Section 43(6), which defines WDV. The computation of WDV involves reducing the transfer value of the asset from the block's opening value. The tribunal noted that the Nariman Bhavan property, being let out, no longer qualified as a business asset and should be excluded from the block. The assessee's case fell under Section 50(2), as the block ceased to exist with the sale of the Arun Chambers property. The WDV, adjusted for the removal of the let-out property, was to be considered for computing the STCG.

Conclusion:
The tribunal allowed the Revenue's appeal and dismissed the assessee's Cross Objection. The capital gains were to be computed by considering the WDV of the block, adjusted for the removal of the let-out property, and substituting the sale consideration with the stamp duty value as per Section 50C. The order was pronounced in the open court on July 24, 2013.