2016 (2) TMI 804 - HC - Income Tax

Set off of loss from assets on which depreciation claimed - Capital gain arising from transfer of depreciable assets - whether was liable to be set off against brought forward Long Term Capital Loss - Held that - We find that the issue stands concluded by the decision of this Court in ACE Builders (P) Ltd (2005 (3) TMI 36 - BOMBAY High Court) in favour of the Respondent-Assessee. Moreover, the impugned order relies upon the order of the Tribunal in Komac Investments and Finance Pvt Ltd (2011 (4) TMI 705 - ITAT MUMBAI ) to dismiss the Revenue s appeal before it. The deeming fiction under Section 50 is restricted only to the mode of computation of capital gains contained in Sections 48 and 49 of the Act. It does not change the character of the capital gain from that of being a long term capital gain into a short term capital gain for purpose other than Section 50 of the Act. Thus, the respondent - assessee was entitled to claim set off as the amount of ₹ 7.12 Crores arising out of sale of depreciable assets which are admittedly on sale of assets held for a period to which long term capital gain apply. Thus for purposes of Section 74 of the Act, the deemed short term capital gain continues to be long term capital gain. Moreover, it appears that the Revenue has accepted the decision the Tribunal in Komac Investments and Finance Pvt Ltd (supra), as our attention has not been drawn to any appeal being filed from that order. - Decided in favour of Respondent-assessee.

Summary

Issues:
1. Interpretation of Section 50 of the Income Tax Act, 1961 regarding set off of capital gains against long term capital losses.
2. Applicability of Section 74 of the Income Tax Act, 1961 in relation to set off of capital gains against long term capital losses.

Analysis:

Issue 1: Interpretation of Section 50 -
The appellant challenged the Tribunal's order regarding the set off of capital gains arising from the transfer of depreciable assets against brought forward Long Term Capital Loss. The appellant argued that under Section 50 of the Income Tax Act, such capital gains should be treated as Short Term Capital Gain. However, the respondent had disclosed a deemed short term capital gain under Section 50 of the Act, arising from the sale of depreciable assets, which was set off against brought forward long term capital losses and unabsorbed depreciation. The Assessing Officer disallowed this set off, citing Section 74 of the Act, which prohibits the set off of long term capital loss against short term capital gain.

Issue 2: Applicability of Section 74 -
The Commissioner of Income Tax (Appeals) allowed the respondent's appeal, relying on a previous decision of the court in a similar case. The Tribunal upheld this decision, citing the same court precedent and its own previous order. The Revenue contended that Section 74 of the Act prohibits the set off of carry forward long term capital loss against deemed short term capital gain under Section 50. However, the court found that the deeming fiction under Section 50 only affects the computation of capital gains and does not change the character of the gain. Therefore, the respondent was entitled to claim the set off as the capital gain arising from the sale of depreciable assets was considered long term capital gain for the purposes of Section 74.

In conclusion, the court dismissed the appeal, stating that the questions of law raised by the Revenue were already settled in favor of the Respondent-assessee by a previous court decision. The court emphasized that the deeming fiction under Section 50 does not alter the character of the capital gain for purposes other than computation. Therefore, no substantial questions of law were found to arise for consideration, and the appeal was dismissed with no order as to costs.