2024 (10) TMI 477 - AT - Income Tax

Capital gains u/s 50 arising out of sale of long term capital asset - rate applicable to short term capital gains or rates applicable to long term capital gains u/s 112 - diversified views on the issue by both members JM and AM As PER AMIT SHUKLA (J.M) - HELD THAT - Capital gains arising out of the depreciable asset u/s 50 even though deem to be capital gain arising from transfer of a short term capital asset, that fiction has to be confined only to section 50 and it cannot convert short term capital asset into a long term capital asset and vice versa for the other purpose of the Act, either for set off against a long term capital loss or exemption provision were benefits is given from a long term capital gain on transfer of a long term capital asset or the rate of tax provided u/s 112 of the Act which clearly provides that income arising from transfer of a long term capital asset chargeable under the head capital gains, the amount of income tax calculated on such a long term capital gain shall be the rate of 20%. Thus, even section 50 treats that excess is to be taxed as capital gain arising from transfer of a short term capital asset but the rate of tax has to be applicable in terms of section 112 of the Act, because the treatment of a short term capital asset is only a purpose of section 50 and not otherwise can convert a long term capital asset into a short term capital asset for the purpose of rate of tax or any other provision of the Act. Accordingly, this question is answered in favour of the assessee holding that rate of tax applicable would be in terms of section 112 of the rate of 20% and applicable surcharge. Since, this is the only question referred to the Special Bench by the Hon ble President, therefore, for the deciding other issues as raised in cross appeals filed by the assessee as well as the revenue, same shall be fixed before the regular bench to decide. In the result, the question of law referred to the Special Bench is answered in favour of the assessee. As PER OM PRAKASH KANT, A.M - Section 50 of the Act has provided chargeability of income arising from transfer of depreciable assets. Since the sections related to exemptions/ deductions including section 54E of the Act under the head capital gains , are invoked only after computing of the capital gain and therefore those sections are independent from the sections which create chargeability of the capital gains. The exemptions provisions provided under the head capital gains from section 54 to 54GB of the Act , can be claimed once the chargeability of the gain arising on transfer of a capital asset is determined under the head of capital gains. Conversely, the section 112(1) of the Act is for invoking concessional rate of tax of 20 percentile on income arising from transfer of long-term capital asset, which is chargeable under the head capital gain and included in total income. The section 112(1) of the Act is intended solely for prescribing concessional rate of tax and not for determining chargeability of income under the head Capital gain , therefore, the section 112(1) cannot decide character of capital gain whether it would be short term capital gain or long term capital gain. If the opinion of learned JM is followed, then a anomalous situation may arise, where the income under the head capital gain determined as short-term capital gain u/s 50 and included under total income would be rendered only as ornamental item, undermining the purpose of exercise for computing short term capital gain. Such an interpretation would contradict the legislative intent. The provision of section 50 in the statute has been provided for achieving particular purpose of denying multiple benefit of depreciation and any interpretation which frustrate that purpose, should be discouraged. Thus held assessee is not entitled for concession rate of tax of 20% provided under section 112(1) of the Act on the short term capital gain computed u/s 50 of the Act and included by the assessee in its total income, which arose on transfer of three residential properties forming part of block of asset and on which deprecation was availed by the assessee in earlier years.question of law referred to the special bench is liable to be answered against the assessee and in favour of the revenue. Since the issue referred to the Special Bench has been adjudicated as above, for deciding other issues as raised in the cross appeals of the parties, the Registry may take up appropriate action for fixing the appeals before the regular Bench.

Summary

Issues Involved:
1. Applicability of tax rate under Section 112 of the Income Tax Act, 1961, on capital gains arising from the sale of depreciable assets computed under Section 50 of the Act.
2. Interpretation of the legal fiction created by Section 50 and its impact on the classification of capital gains as short-term or long-term.

Issue-Wise Detailed Analysis:

1. Applicability of Tax Rate Under Section 112:
The primary issue was whether the capital gains from the sale of depreciable assets, computed under Section 50 of the Income Tax Act, 1961, should be taxed at the rate applicable to short-term capital gains or the concessional rate applicable to long-term capital gains under Section 112. The assessee argued that despite being computed as short-term capital gains under Section 50, the gains should be taxed at the concessional rate of 20% applicable to long-term capital gains, as the assets were held for more than 36 months. The Revenue, however, contended that the gains should be taxed at the rate applicable to short-term capital gains, as Section 50 deems them to be short-term.

The Tribunal examined the language of Section 112, which applies to income arising from the transfer of a long-term capital asset. It was noted that the assessee had computed the gains as short-term under Section 50, and thus, they were included in the total income as short-term capital gains. The Tribunal highlighted that Section 112 is intended for long-term capital gains and cannot alter the character of the gains as determined under Section 50.

2. Interpretation of Legal Fiction Under Section 50:
The Tribunal delved into the interpretation of the legal fiction created by Section 50, which deems gains from depreciable assets as short-term capital gains. The assessee argued that this fiction should be limited to the computation of gains and not affect the tax rate under Section 112. The Tribunal, however, emphasized that the legal fiction under Section 50 is specifically for treating the gains as short-term, and thus, the concessional rate under Section 112 does not apply.

The Tribunal referred to the decision in CIT vs. Ace Builders, where it was held that the fiction under Section 50 is restricted to the computation of gains and does not convert a long-term capital asset into a short-term capital asset. However, for tax rate purposes, the gains are treated as short-term due to the legal fiction.

Conclusion:
The Tribunal concluded that the capital gains arising from the transfer of depreciable assets, computed under Section 50, should be taxed at the rate applicable to short-term capital gains. The legal fiction created by Section 50 is confined to the computation of gains and does not extend to the applicability of the concessional tax rate under Section 112. Thus, the question was answered in favor of the Revenue, and the gains were subject to the tax rate applicable to short-term capital gains.