2025 (4) TMI 264 - AT - Income Tax

Gain on sale of Pragee Office - short-term capital gain u/s 50 OR long term capital gain - HELD THAT - We note that section 50 provides for assessment of depreciable asset in respect of which depreciation has been allowed as short term capital gain and deductions available u/s. 48 and 49 are to be allowed subject to provisions contained in section 50(1) and (2). The impugned property which was purchased in AY 2001-02 and in respect of which depreciation was allowed on the same as the business asset up to AY 2003-04 continued to be the part of the business asset as a depreciable asset. Assessee has in fact carried on business in the subsequent years i.e. during the period from AY 2004-05 to AY 2017-18 as noted by ld. CIT(A) in the table extracted above. Submission made by the assessee that asset was reported as an asset in his personal balance sheet as an investment asset has no bearing on the issue before us since for the purpose of accounting and reporting in financial statements assets forming part of gross block under the Act would always be so reported as fixed assets in the balance sheet. Accordingly impugned property forming part of the block of the asset will retain its character as such irrespective of assessee not claiming depreciation for certain years. The said asset was always available with the assessee withing the gross block for the purpose of using it in the business. In the present case before us depreciation actually allowed has to be taken based on claim made by the assessee up to Assessment Year 2003-04 subsequent to which there has been no claim made and allowed. Hence no occasion for computing notional depreciation as done by AO from Assessment Year 2004-05. Accordingly for the purpose of computation of capital gain u/s 50 WDV as at 31.03.2003 at Rs. 33, 02, 106/- is to be reduced from sale consideration of Rs. 1, 45, 00, 000/-. We have held that the capital gain is to be computed u/s.50 impugned asset being depreciable asset by taking into account written down value as on 31.03.2003. Though capital gain will be deemed to be short term capital gain by virtue of section 50 yet the impugned asset remains to be a long term capital asset and therefore rate of tax would be in terms of section 112 of the Act. Also brought forward long term capital loss is allowed to be set off against short term capital gain computed u/s 50. Thus on the issue relating to taxability of capital gain on transfer of Pragee office ground no.1 is dismissed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

• Whether the gain on the sale of "Pragee Office" should be taxed as short-term capital gain under Section 50 of the Income-tax Act or as long-term capital gain.
• Whether notional depreciation should be computed in the absence of an actual depreciation claim by the appellant.
• Whether the tax rate applicable to the gain should be 20% as a long-term capital asset or 30% as a short-term capital gain.
• Whether the appellant is entitled to set off the brought forward long-term capital loss against the short-term gain computed under Section 50.
• The validity of disallowance of management fees paid to AIF.

ISSUE-WISE DETAILED ANALYSIS

1. Classification of Capital Gain on Sale of Pragee Office

• Relevant Legal Framework and Precedents: The key legal provision is Section 50 of the Income-tax Act, which deals with the computation of capital gains on depreciable assets. The court also considered precedents such as the Supreme Court decision in Sakthi Metal Depot.
• Court's Interpretation and Reasoning: The Tribunal agreed with the CIT(A) that the gain should be treated as short-term capital gain under Section 50 because the asset was part of a block of depreciable assets, even though depreciation was not claimed after the business was discontinued.
• Key Evidence and Findings: The property was used for business purposes and depreciation was claimed until the business was discontinued. The property was held as a fixed asset at its written down value (WDV) as of 31.03.2003.
• Application of Law to Facts: The Tribunal applied Section 50, concluding that the asset retains its character as a business asset, and thus the gain is a short-term capital gain.
• Treatment of Competing Arguments: The appellant's argument that the asset was a long-term capital gain was rejected based on the legal framework and precedents.
• Conclusions: The Tribunal upheld the CIT(A)'s decision that the gain is a short-term capital gain under Section 50.

2. Computation of Notional Depreciation

• Relevant Legal Framework and Precedents: Section 50 and Section 43(6)(c)(ii) regarding the determination of WDV were considered.
• Court's Interpretation and Reasoning: The Tribunal concluded that notional depreciation should not be computed since no depreciation was claimed after 2003-04.
• Key Evidence and Findings: The Tribunal found that the WDV as of 31.03.2003 should be used without further reduction for notional depreciation.
• Application of Law to Facts: The Tribunal applied the legal framework to determine that only actual depreciation allowed should affect the WDV.
• Treatment of Competing Arguments: The Tribunal rejected the AO's approach of reducing WDV by notional depreciation.
• Conclusions: The WDV as of 31.03.2003 should be used for computing capital gains without notional depreciation.

3. Tax Rate Applicable to Capital Gain

• Relevant Legal Framework and Precedents: Section 112 of the Income-tax Act, which deals with the tax rate on long-term capital gains, was considered alongside Section 50.
• Court's Interpretation and Reasoning: The Tribunal concluded that, although the gain is deemed short-term under Section 50, the asset remains a long-term capital asset for tax rate purposes.
• Key Evidence and Findings: The property was held for more than three years, qualifying it as a long-term capital asset.
• Application of Law to Facts: The Tribunal applied Section 112, determining the tax rate should be 20%.
• Treatment of Competing Arguments: The Tribunal disagreed with the AO's application of a 30% tax rate.
• Conclusions: The tax rate of 20% applies to the gain, despite its classification as short-term under Section 50.

4. Setoff of Brought Forward Long-term Capital Loss

• Relevant Legal Framework and Precedents: Section 74 of the Income-tax Act, dealing with the setoff of capital losses, and relevant case law were considered.
• Court's Interpretation and Reasoning: The Tribunal allowed the setoff of long-term capital loss against the gain computed under Section 50, following precedents like CIT vs. Manali Investments.
• Key Evidence and Findings: The appellant had a long-term capital loss available for setoff.
• Application of Law to Facts: The Tribunal applied the legal framework, allowing the setoff of long-term losses against the gain.
• Treatment of Competing Arguments: The Tribunal rejected the AO's denial of the setoff.
• Conclusions: The setoff of long-term capital loss against the short-term gain is allowed.

5. Disallowance of Management Fees

• Relevant Legal Framework and Precedents: Section 37 of the Income-tax Act, which deals with the allowability of business expenditure, was considered.
• Court's Interpretation and Reasoning: The Tribunal dismissed this ground as not pressed by the appellant.
• Key Evidence and Findings: No substantive arguments or evidence were presented by the appellant.
• Application of Law to Facts: The Tribunal did not address this issue substantively due to the appellant's stance.
• Treatment of Competing Arguments: The issue was not contested.
• Conclusions: The disallowance of management fees was upheld as not pressed.

SIGNIFICANT HOLDINGS

• Core Principles Established: The Tribunal reinforced the principle that Section 50 deems gains on depreciable assets as short-term for computation purposes, but this does not alter the asset's classification as long-term for other purposes, such as tax rates and setoff provisions.
• Final Determinations on Each Issue:
  • The gain on the sale of Pragee Office is a short-term capital gain under Section 50.
  • Notional depreciation should not be computed; WDV as of 31.03.2003 is applicable.
  • The tax rate of 20% applies, as the asset is a long-term capital asset.
  • The setoff of long-term capital loss against the gain is allowed.
  • The disallowance of management fees was not contested and thus upheld.