2018 (10) TMI 370 - HC - Income Tax

Capital gain - STCG or LTCG - Sale of property on which depreciation has been claimed - Land sold after demolition of building on such land - whether the sale of land/property was correctly subjected to capital gains taxation in terms of Section 50 as against the computation reported as per Section 45 read with Section 48 - Held that - AO is not correct in stating that the land sold is a short capital asset, on which, depreciation had been claimed. An identical issue came up for consideration before the Division Bench of this Court in the case of CIT Vs. Union Co. (Motors) Ltd. 2006 (2) TMI 93 - MADRAS HIGH COURT as held in the instant case, the fact remains that the purchaser had applied for demolition of the building and also demolished the building, which was taken into consideration by the Commissioner and the Tribunal, while arriving at a conclusion that Section 50 of the Act is not attracted, as, under the facts and circumstances of the case, it is clear that the sale consideration made by the purchaser is only for the land, since the building had no value and therefore, got demolished - Decided in favour of assessee Loss of sale of shares - AO found that the assessee had not filed proper details- Held that - in the absence of any evidence produced by the assessee to indicate that there were, indeed, transactions of purchase and sales of shares by the assessee, the Assessing Officer rejected the contention of the assessee and held that the purported loss of sale of shares is a speculation loss and cannot be set off against other gains except gains, if any, on any other speculation business as envisaged under Sub-Section (1) of Section 73 of the Act. Thus, we find that the reasons assigned by the Assessing Officer as confirmed by the CIT (A) as well as the Tribunal are perfectly legal, valid and do not call for any interference. Accordingly, substantial question of law No.2 is answered in favour of the Revenue and against the assessee.

Summary

Issues Involved:
1. Applicability of Section 50 of the Income Tax Act for capital gains taxation.
2. Treatment of long-term capital loss as speculation loss.

Issue-wise Detailed Analysis:

1. Applicability of Section 50 of the Income Tax Act for Capital Gains Taxation:

The Revenue challenged the Tribunal's decision that the sale of land/property was correctly subjected to capital gains taxation under Section 50 of the Act. The assessee, a partnership firm, had sold land and building under a joint development agreement. The Assessing Officer applied Section 50, treating the property as a depreciable asset, and computed short-term capital gains. The assessee contended that no depreciation was claimed on the land, which was not a depreciable asset. The Assessing Officer disagreed, stating the assessee failed to provide concrete proof that only the building was depreciated. The CIT (A) and Tribunal upheld this view.

However, the High Court referred to a similar case, CIT Vs. Union Co. (Motors) Ltd., where it was held that land, being non-depreciable, should not be subjected to Section 50. The court noted that the building was demolished as part of the development agreement, making the land the primary asset. The court concluded that the Revenue's position was incorrect and ruled in favor of the assessee, stating that Section 50 did not apply as the land was not a depreciable asset.

2. Treatment of Long-Term Capital Loss as Speculation Loss:

The second issue was whether the long-term capital loss from the sale of shares should be treated as a speculation loss. The assessee claimed a loss of ?1,05,52,013 from shares bought through M/s. Aditya Securities Limited. The Assessing Officer found discrepancies, noting that the depository participatory client name was different, and deemed the transactions speculative. The CIT (A) and Tribunal affirmed this view, referencing SEBI regulations and the Supreme Court's decision in Davenport & Co. Pvt. Ltd. Vs. CIT, which defined 'actual delivery' in speculative transactions.

The High Court upheld the lower authorities' decisions, agreeing that the assessee failed to provide sufficient evidence to prove the transactions were not speculative. Consequently, the court ruled in favor of the Revenue, treating the purported loss as speculation loss.

Conclusion:

The High Court's judgment resulted in a partial allowance of the appeal:
- The first substantial question of law was answered in favor of the assessee, ruling that Section 50 did not apply to the sale of land.
- The second substantial question of law was answered in favor of the Revenue, affirming the treatment of the long-term capital loss as speculation loss.