Benefit of concessions related with long-term capital assets is available for long-term depreciable assets also when income is computed under section 50.

[C.A. DEV KUMAR KOTHARI]

Relevant provisions and references:

From Income-tax act, 1961:

Meaning of “short-term capital asset” vide S. 2 (42A).

Meaning o “short-term capital gain” vide S. 2 (42B).

Meaning o “long-term capital asset” vides s. 2 (29A).

Meaning of “long-term capital gain” vide s. 2 (29B).

Special provisions for computation of capital gains in case of depreciable assets – S. 50.

Special provision about WDV deemed as cost of acquisition – S. 50A

Special provisions in case of slump sale of undertaking – s. 50B.

Special rates of tax in case of transfer of long-term capital assets vide S. 112.

Commissioner of Income-tax Versus Rajiv Shukla 2011 -TMI - 204018 - Delhi High Court / [2011] 334 ITR 0138.

CIT v. Assam Petroleum Industries P. Ltd. [2003 -TMI - 11870 - GAUHATI High Court ]  

Commissioner of Income-Tax Versus Ace Builders (P.) Ltd. (2005 -TMI - 9448 - BOMBAY High Court)-

CIT v. Delite Tin Industries in I. T. A. 1118 of 2008 dated September 26, 2008.  http://bombayhighcourt.nic.in/data/original/2008/ITXA156308260908.pdf

CIT v. Delite Tin Industries - special leave petition of revenue has been dismissed by Supreme Court on August 21, 2009 ([2010] 322 ITR (St.) 8  (SC).  

http://courtnic.nic.in/supremecourt/temp/pc%201143109p.txt

Summary:

For computation purposes gains on sale of an asset on which depreciation has ever been allowed, and which forms part of block of assets, is deemed as short term capital gain and computation is made as per special provisions contained in section 50. Written down value of depreciable assets is deemed to be ‘cost of acquisition’ of depreciable asset.  In case of slump sale of an undertaking the gains of entire undertaking are considered as long-term if the undertaking was held for more than thirty six months before transfer. If the asset was held for more than thirty-six months, it will be a long-term capital asset and consideration accruing and gains arising will remain sale value and gains arising on transfer of long-term capital asset. Therefore, in spite of application of special computation provisions of section 50 and 50A, concessions for re-investment and for special concessional rate of tax under section 112 may be applied if the depreciable asset was held for more than thirty six months before its transfer.

Certain important Meanings:

For the purpose of this study, it is sufficient to say that an asset which is held for more than 36 months is a long-term capital asset and an asset which is held for 36 months or less is a short-term capital asset.  For going through intricacies of the provisions, the relevant part of meaning with highlights is reproduced below:-

“short-term capital asset” means a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer; S. 2 (42A)

“short-term capital gain” means capital gain arising from the transfer of a short-term capital asset; S. 2 (42B)

“long-term capital asset” means a capital asset which is not a short term capital asset;  s. 2 (29A).

“long-term capital gain” means capital gain arising from the transfer of a long-term capital asset; s. 2 (29B).

Therefore, it can be said that capital gains arising on sale of a capital asset forming block of assets, would be long-term capital gain if the capital asset was held for more than thirty six months before it was sold.

Words used in some beneficial provisions:

In relation to re-investment we find in various provision words used are gains arising from transfer of long-term capital assets. For example, we find use of words as follows:

[Capital gain on transfer of capital assets not to be charged in certain cases.

54E. (1) Where the capital gain arises from the transfer of a long-term capital asset] ³[before the 1st day of April, 1992], (the capital asset so transferred being hereafter in this section referred to as the original asset)

54EC. (1) Where the capital gain arises from the transfer of a long-term capital asset (the capital asset so transferred being hereafter in this section referred to as the original asset) and the assessee has, at any time within a period of six months

54F. (1) ²[Subject to the provisions of sub-section (4), where, in the case of an assessee being an individual or a Hindu undivided family], the capital gain arises from the transfer of any long-term capital asset, not being a residential house (hereafter in this section referred to as the original asset), and the assessee has, xxx

Special rate for tax on long term capital gain –

Section 112 of the I.T. Act, 1961 prescribes special rates for tax on long term capital gains.  This section falls within the chapter XII under the heading “determination of tax in certain special cases”.  The heading and opening wordings of the section reads as follows:-

Tax on long-term capital gains.

(1) Where the total income of an assessee includes any income, arising from the transfer of a long-term capital asset, which is chargeable under the head “Capital gains”, the tax payable by the assessee on the total income shall be the aggregate of,- XXXX

 Thereafter rates of tax and computation related provisions are prescribed.  As per this section the special provisions apply to income arising from the transfer of a long-term capital asset, which is chargeable under the head capital gains.  Thus, the conditions for applicability of section 112 are as follows:-

The income should arise from the transfer of a long term capital asset;

Such income should be chargeable under the head capital gains.

If these two conditions prevail then the rate of tax shall be applicable as per section 112 which prescribes special rate is mandatory. It is worth mention that in this section term ‘long-term capital gain’ has not been used. The words used are income arise from the transfer of a long-term capital asset. Therefore, if an asset is held for more than 36 months, it will be a long-term capital asset and section 112 shall apply.

Long-term capital assets:

As noted earlier a capital asset is considered as long term capital asset or short term capital asset depending on the period of holding of the asset. In case of assets which had formed block of depreciation or in respect of which depreciation has been allowed at any time while computing income under the Income-tax Act, 1961 or old provisions, the gains on sale of such assets is treated separately under block of assets and if there is any gains the same are treated by way of deeming provisions as short-term capital gains.  The character of assets will however remain same as would be according to the holding period. Therefore, if a building or plant or machinery or furniture was held by assessee for more than thirty six months, the nature of assets shall be long term capital assets. The sale vale will be sale value of a long-term capital asset, though income computed as per prescribe method shall be deemed as short-term capital gains.  

Benefit of S.54F and similar provisions is allowable:

As noted earlier when a long-term capital asset is sold, the sale value is derived on sale of a long term capital asset.  Therefore when a benefit is allowable in respect of sale or transfer of a long-term capital asset, the same will be allowable even if, for the purpose of computation, the gains are deemed as short-term capital gains u/s 50 and when written down value is considered as ‘cost of acquisition’ u/s 50A. This view  also find support when we find that even in case of slump sale of an undertaking, the capital gains are considered as long-term capital gains if the undertaking was held for more than thirty six month before transfer.

Interpretation rules:

Various incentives on re-investment as allowed from time to time and also section 112 are special provision conferring some concessions or relief to the assessee. As discussed above there is reasonable view that section 112 apply only in those cases where a capital asset is a long-term capital asset and gains are taxable under the head capital gains. Section 50, is a special provision for computation of capital gains, in that section also it is not provided that the deemed short- term capital shall be assessable as ‘business income’, but it is clearly laid down that it will be deemed as short term capital gain but this is only for the purpose of computation of capital gains and rules out application of other provisions for computation of capital gains like benefit of indexatation of cost of acquisition and cost of improvement. Applicability of any other provision is not ruled out or made exception. We find no ambiguity or any confusion that beneficial provisions apply when a long-term capital asset is sold and capital gains are computed. Therefore, applying the rule of clear provisions, favorable interpretation to confer concessions and relief, it can be said that special concessional rate of tax will also apply if a depreciable asset was held for more than thirty-six months before its sale. 

S. 50 does not convert Long Term asset in to Short Term Capital Asset:

Section 50 merely deems long-term capital gains as short term capital gains for the purpose of computation made in the scheme of block of assets for depreciable assets. It does not treat long-term capital asset as short-term capital asset. The meaning of short-term capital assets, long-term capital assets , short-term capital gains and long-term capital gains are not altered in any manner. Therefore, the gains will remain gain arising on transfer of long term capital asset in case the asset transferred was held for more than thirty six months prior to transfer.

In the context of Section 54E read with S. 50 the Bombay High Court in the case of  Commissioner of Income-Tax Versus Ace Builders (P.) Ltd. (2005 -TMI - 9448 - BOMBAY High Court)- so held while confirming the decision of Mumbai ITAT reported at 71 TTJ 158.

In this case it was held that legal fiction created in S. 50 is to deem capital gain as short-term capital gain and not to deem an asset as short-term capital asset and, therefore, it cannot be said that S. 50 converts long-term capital asset into short-term capital asset. Section 54E does not make any distinction between depreciable asset and non-depreciable asset and, therefore, exemption available to depreciable asset under Section 54E cannot be denied by referring to fiction created under S. 50.

CIT v. Assam Petroleum Industries P. Ltd. [2003 -TMI - 11870 - GAUHATI High Court ]  – in this case assessee sold a building on which depreciation was availed by the assessee. The building was however held for more than thirty-six months. Therefore, the court held that the assessee is eligible to the benefit of section 54E for investment made in specified assets out of sale proceeds of long-term capital asset- building. 

On visiting website of the supreme Court we author did not find any SLP of revenue in above two cases.

Certain judicial pronouncements:

On aspect of benefit in case of specified re-investment of capital gains we find several decisions of various High Courts and Tribunal in favor of assessee. In one case department’s SLP has also been dismissed.

 Commissioner of Income-tax Versus Rajiv Shukla 2011 -TMI - 204018 - Delhi High Court / [2011] 334 ITR 0138. This appears latest reported judgment in which judgments of Bombay High Court and Gauhati High Court have been considered. It has also been noted that SLP of revenue has been dismissed in the case of  CIT v. Delite Tin Industries.

CIT v. Assam Petroleum Industries P. Ltd. [2003 -TMI - 11870 - GAUHATI High Court ] -discussed earlier. 

Commissioner of Income-Tax Versus Ace Builders (P.) Ltd. (2005 -TMI - 9448 - BOMBAY High Court)- discussed earlier.

CIT v. Delite Tin Industries in I. T. A. 1118 of 2008 dated September 26, 2008.

CIT v. Delite Tin Industries - special leave petition of revenue has been dismissed by Supreme Court on August 21, 2009 ([2010] 322 ITR (St.) 8 (SC).  From the website of the Supreme Court of India we find the order as follows:

Link           :  http://courtnic.nic.in/supremecourt/temp/pc%201143109p.txt

ITEM NO.32             COURT NO.3             SECTION IIIA

       SUPR EME COUR T OF I N D I A

           RECORD OF PROCEEDINGS

Petition(s) for Special Leave to Appeal (Civil)...CC 11431/2009

(From the judgment and order dated 26/09/2008 in ITA No. 1118/2008

of The HIGH COURT OF BOMBAY)

C.I.T.,BOMBAY                        Petitioner(s)

          VERSUS

M/S.DELITE TIN INDUSTRIES                     Respondent(s)

(With appln(s) for c/delay in filing & refiling SLP)

Date: 21/08/2009 This Petition was called on for hearing today.

CORAM :

   HON'BLE MR. JUSTICE S.H. KAPADIA

   HON'BLE MR. JUSTICE AFTAB ALAM

 

For Petitioner(s)       Mr. H.P. Rawal, ASG

                        Mr. H. Raghavendra Rao, Adv.

             Mr. B.V. Balaram Das,Adv.

 

For Respondent(s)

    UPON hearing counsel the Court made the following

              ORDER

       Delay condoned.

       Dismissed.

      (S. Thapar)                                      (Madhu Saxena)

     PS to Registrar                                    Court Master

The judgment of Bombay High Court:

IN THE HIGH COURT OF JUDICATURE AT BOMBAY

CIVIL APPELLATE JURISDICTION

Income Tax Appeal No. 1118 of 2008

The Commissioner of Income

Tax 20 ..Appellant

vs.

M/s Delite Tin Industries ..Respondents

Mr.R.Asokan for appellant.

Mr.P.R.Toprani for respondents.

CORAM: Dr.S.RADHAKRISHNAN &

S.J.KATHAWALLA JJ.

26th September,2008

P.C.

1. Heard the learned Counsel for the appellant and

the learned Counsel for the respondent.

2. Both the learned Counsel categorically state

that the question of law raised in the above appeal

is squarely covered against the revenue and in

favour of the assessee by judgment of this Court in

Commissioner of Income Tax Vs. Ace Builders P.Ltd.

reported in 281 ITR 210 (Bom). In view thereof the

appeal stands dismissed.

(S.J.KATHAWALLA J.) (Dr.S.RADHAKRISHNAN J.)

Thus, in this case appeal was dismissed and it is not a simple case of appeal dismissed as no substantial question of law was involved.

On visiting the website of the Supreme Court we do not find that any SLP was filed by revenue in the case of Ace Builders which was followed by Bombay High Court.  In any case in subsequent matter of Delite Tin Industries the Supreme Court allowed condonation of delay, heard counsels and then dismissed the civil appeal without any rider. This means that the judgment of Bombay High Court has attained finality and approval of the Supreme Court.  

Conclusion:

Now it can be said that the judgment of Bombay High Court and Tribunal in the cases of Ace Builders and Deline Tin Industries have been affirmed by the supreme court when the Supreme Court dismissed SLP of revenue in case of Delite Tin Industries. Applying the rule in relation to re-investment of LTCG vis a vis section 112 also it can be said that concessions will be available when a long-term capital asset is sold even if computation is made under section 50 of the Income-tax Act,1961.