This Tax Alert summarizes a ruling of the Supreme Court (SC) dated 7 July 2021 in the case of Sakthi Metal Depot (Taxpayer), wherein the issue before the SC was whether on transfer of a capital asset on which depreciation was claimed and allowed to the Taxpayer for a long period but not used in business subsequently, would qualify as long-term or short-term capital gains under the provisions of the Indian Tax Laws (ITL).
The ITL has a special provision for computation of capital gains arising on transfer of a depreciable asset. The special provision deems that gains arising on transfer of a depreciable asset shall be short-term capital gains.
The Taxpayer claimed depreciation on a flat, as a business asset, for 21 years till tax year 1994-95. The Taxpayer stopped claiming depreciation from tax year 1995-96 and classified the flat as “investment” in its balance sheet. On sale of the flat in 1997-98, the Taxpayer claimed that there was transfer of long-term capital asset resulting in long-term capital gain. The Taxpayer contented that the flat ceased to be a depreciable asset since no depreciation was charged on it from tax year 1995-96 onwards and its nature was changed from business asset to “held as investment”. The tax authority held that capital gains on transfer of the flat be considered as short-term capital gains by virtue of the special provision.
The SC upheld the ruling of the Kerala High Court (HC) in which it was held that the flat will retain its character as a depreciable asset even if it was not used for business purposes later on and no depreciation was claimed thereon. Consistent with the special provision, gains were rightfully held as short-term capital gains
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