.
Facts
Taxpayer is engaged in manufacturing of ball and roller bearings and textile components. The relevant year is assessment year 2001-02.
The taxpayer has sold a non-residential building held for more than thirty-six months. The tax payer had claimed depreciation in the past years on such building.
The taxpayer had computed gain on such sale in terms of section 50 of the Income-tax Act, 1961 (the Act).
As the capital asset was held for more than thirty-six months, the taxpayer considered it as long term capital gains and offered the same to tax at the rate of 20%
The Assessing Officer (AO) disagreed with the taxpayer‟s contention and held that the amount should be taxed as short term capital gain which was upheld by the Commissioner of Income-Tax Appeals [„CIT (A)‟].
Issue before the Income-tax Appellate Tribunal (ITAT)
Whether capital gains arising on sale of long term capital asset and computed under section 50 of the Act is chargeable to tax at the rate applicable to short term capital gains or at rate applicable to long term capital gain?
Contentions of the taxpayer
Section 54EC of the Act refers to capital gain arising from the transfer of a long term capital asset. Similar wordings have been used in section 74 as well as section 112 of the Act.
Any other benefit which is attached to the long term capital asset should continue to apply for depreciable assets even though such gains are to be computed in the manner provided in section 50 of the Act.
Accordingly, the benefit of reduced rate of tax of 20% under section 112 of the Act, as applicable to long term capital gains is also applicable to depreciable assets which were held for more than thirty-six months.
Contentions of the department
Where the long term capital asset has availed depreciation, the capital gain has to be computed in the manner prescribed under section 50 of the Act and the capital gains tax has to be charged as if such capital gain has arisen out of a short term capital asset.
If tax is levied under section 112 of the Act, then the wordings under section 50 deeming the gain as short term capital gain would have no relevance.
Observations and Ruling of the ITAT
Sections 54EC and 74 refer to capital gain arising from the transfer of a long term capital asset and not with respect to a short term capital asset. Further, section 112(1)(b)(i) and (ii) specifically refers to only long term capital gains.
Hence, where section 50 by a legal fiction, deems the income earned from a depreciable asset as short term capital gain, applying the tax rate specified for long term capital gains in section 112(1) would not arise.
On a plain reading of section 50, the excess shall be deemed to be the capital gains arising from the transfer of a short term capital asset.
Conclusion
The beneficial rate of tax @ 20% would not be applicable to capital gains arising on transfer of depreciable asset even though the asset was held for more than thirty-six months.
Source: SKF Bearings India Ltd. v. ACIT (Mumbai ITAT) (ITA No. 720 / Mum / 06) order dated 29 December 2011
Facts
Taxpayer is engaged in manufacturing of ball and roller bearings and textile components. The relevant year is assessment year 2001-02.
The taxpayer has sold a non-residential building held for more than thirty-six months. The tax payer had claimed depreciation in the past years on such building.
The taxpayer had computed gain on such sale in terms of section 50 of the Income-tax Act, 1961 (the Act).
As the capital asset was held for more than thirty-six months, the taxpayer considered it as long term capital gains and offered the same to tax at the rate of 20%
The Assessing Officer (AO) disagreed with the taxpayer‟s contention and held that the amount should be taxed as short term capital gain which was upheld by the Commissioner of Income-Tax Appeals [„CIT (A)‟].
Issue before the Income-tax Appellate Tribunal (ITAT)
Whether capital gains arising on sale of long term capital asset and computed under section 50 of the Act is chargeable to tax at the rate applicable to short term capital gains or at rate applicable to long term capital gain?
Contentions of the taxpayer
Section 54EC of the Act refers to capital gain arising from the transfer of a long term capital asset. Similar wordings have been used in section 74 as well as section 112 of the Act.
Any other benefit which is attached to the long term capital asset should continue to apply for depreciable assets even though such gains are to be computed in the manner provided in section 50 of the Act.
Accordingly, the benefit of reduced rate of tax of 20% under section 112 of the Act, as applicable to long term capital gains is also applicable to depreciable assets which were held for more than thirty-six months.
Contentions of the department
Where the long term capital asset has availed depreciation, the capital gain has to be computed in the manner prescribed under section 50 of the Act and the capital gains tax has to be charged as if such capital gain has arisen out of a short term capital asset.
If tax is levied under section 112 of the Act, then the wordings under section 50 deeming the gain as short term capital gain would have no relevance.
Observations and Ruling of the ITAT
Sections 54EC and 74 refer to capital gain arising from the transfer of a long term capital asset and not with respect to a short term capital asset. Further, section 112(1)(b)(i) and (ii) specifically refers to only long term capital gains.
Hence, where section 50 by a legal fiction, deems the income earned from a depreciable asset as short term capital gain, applying the tax rate specified for long term capital gains in section 112(1) would not arise.
On a plain reading of section 50, the excess shall be deemed to be the capital gains arising from the transfer of a short term capital asset.
Conclusion
The beneficial rate of tax @ 20% would not be applicable to capital gains arising on transfer of depreciable asset even though the asset was held for more than thirty-six months.
Source: SKF Bearings India Ltd. v. ACIT (Mumbai ITAT) (ITA No. 720 / Mum / 06) order dated 29 December 2011
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