2009 (8) TMI 680 - HC - Income Tax

Capital gains - Whether on the facts and in the circumstances of the case the Appellate Tribunal was right in confirming the order of the Commissioner of Income-tax (Appeals) holding that only the capital gains on the building had to be computed as short-term capital gains and the balance value of the land should be treated as long-term capital gains even though the land and building being one composite asset and the assessee having claimed depreciation on the said asset as per the provisions of section 50 the entire profit was assessable as short-term capital gains ?2. Whether on the facts and in the circumstances of the case the Appellate Tribunal was right in holding that the assessee was entitled to exemption under section 54EC of the Income-tax Act ? Held that - land is not a depreciable asset section 50 of the Act deals only with the transfer of depreciable assets. Once land forms part of the assets of the undertaking and the transfer is of the entire undertaking as a whole it is not possible to bifurcate the sale consideration. Section 50 applies when depreciable assets alone are transferred.

Summary

Issues:
1. Whether the entire profit from the sale of a composite asset should be treated as short-term capital gains when depreciation has been claimed on the asset.
2. Whether the assessee is entitled to exemption under section 54EC of the Income-tax Act.

Analysis:
1. The court addressed the issue of whether the profit from the sale of a composite asset should be treated as short-term capital gains. The appellant argued that the entire profit should be assessed as short-term capital gains, while the Commissioner of Income-tax (Appeals) held that only the capital gains on the building should be considered short-term, with the land value treated as long-term capital gains. The court referred to a previous Division Bench decision stating that when land is part of the assets of an undertaking and the transfer is of the entire undertaking, it is not possible to separate the sale consideration for a particular asset. Section 50 of the Income-tax Act applies only to depreciable assets, and in this case, where the land was not depreciable, the entire profit could not be assessed as short-term capital gains. The court dismissed the appeal based on this reasoning.

2. The second issue involved the entitlement of the assessee to exemption under section 54EC of the Income-tax Act. The assessee had sold a property along with superstructures and claimed exemption under section 54EC. The assessing authority initially denied the claim, but the Commissioner of Income-tax (Appeals) allowed it, and the Tribunal upheld this decision. The court, following the precedent set in a previous case, reiterated that section 50 of the Act applies only to depreciable assets. Since the land in question was not depreciable, the assessee was entitled to the exemption under section 54EC. The court dismissed the appeal and upheld the decision of the Tribunal in granting the exemption.

In conclusion, the court ruled in favor of the assessee on both issues, holding that the profit from the sale of the composite asset should not be entirely treated as short-term capital gains and that the assessee was entitled to exemption under section 54EC of the Income-tax Act. The judgment was based on the interpretation of relevant provisions of the Act and previous court decisions, emphasizing the distinction between depreciable and non-depreciable assets in determining tax implications.