2011 (4) TMI 116 - AT - Income Tax

Long term capital gain or short term capital gain - Set off in terms of section 74 - The assessee claimed the benefit of set off of the brought forward loss from the long term capital assets against the income from the transfer of Motors and transformers, which were admittedly held for a period more than 36 months - Section 50 contains a deeming provision and the same has to be restricted only for the purpose of which it is enacted - Since this deeming provision involves only the computation part of the capital gain in the case of depreciable assets, once this computation part is over, the operation of section 50 is also stopped - The amount so computed has to be dealt with in accordance with the relevant provision -Held that Capital gain has resulted from the transfer of an asset which was held for a period of more than three years and no long term capital gain has entered into the computation of total income of the assessee on this transaction - This amount would retain the character of long term capital gain for all other provisions and consequently qualify for set off against the brought forward loss from the long term capital assets - Hence, the appeal is allowed.

Issues Involved:

1. Delay in presenting the appeal.
2. Set off of long-term capital gain on the sale of depreciable assets against the brought forward loss from long-term capital assets.

Issue-wise Detailed Analysis:

1. Delay in Presenting the Appeal:

The appeal by the assessee was delayed by 19 days. The delay was attributed to the accountant proceeding to his hometown without informing his successor about the CIT(A)'s order. The Tribunal, satisfied with the reasonableness of the cause, condoned the delay and admitted the appeal for hearing on merits.

2. Set Off of Long-Term Capital Gain on the Sale of Depreciable Assets Against the Brought Forward Loss from Long-Term Capital Assets:

The core issue was whether the long-term capital gain from the sale of depreciable assets could be set off against the brought forward loss from long-term capital assets. The assessee sold depreciable assets (Meters and transformers) for Rs. 1,45,99,988, which were bought in earlier years for Rs. 8,75,99,928 with 100% depreciation claimed in the respective first years. The gain was shown as long-term capital gain and set off against the brought forward loss from long-term capital assets.

Assessing Officer's View:

The Assessing Officer treated the gain as short-term capital gain under Section 50, which resulted in the denial of set off against the brought forward loss from long-term capital assets. The officer argued that since depreciation was allowed on these assets, their transfer would attract the provisions of Section 50, deeming the gain as short-term capital gain.

Tribunal's Analysis:

The Tribunal noted that the assets were held for more than three years, qualifying them as long-term capital assets. Section 50, a special provision for the computation of capital gains in the case of depreciable assets, was discussed. The Tribunal emphasized that Section 50 is a deeming provision and should be restricted to the computation of capital gains, not extending beyond its purpose.

Relevant Case Law:

The Tribunal relied on the judgment of the Hon'ble Bombay High Court in CIT Vs. ACE Builders Pvt. Ltd., which held that Section 50 applies only to the computation of capital gains, and the benefit of Section 54E (exemption for long-term capital gains) is available irrespective of the computation under Section 50. The court clarified that Section 50 does not convert a long-term capital asset into a short-term capital asset.

Conclusion:

The Tribunal concluded that the provisions of Section 50 are applicable only up to the stage of computation of capital gain in the case of depreciable assets. Once the capital gain is computed, the amount retains the character of long-term capital gain for all other provisions, including set off under Section 74. Consequently, the assessee was entitled to set off the brought forward loss from long-term capital assets against the computed capital gain of Rs. 1,45,99,988.

Final Decision:

The Tribunal overturned the impugned order and allowed the appeal, granting the set off of the brought forward loss from long-term capital assets against the gain from the sale of depreciable assets. The appeal was thus allowed.

Order Pronounced:

The order was pronounced on the 13th day of April, 2011.

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