Delhi ITAT denies indexation on sale of depreciable assets and treats gains taxable as short term capital gains

 Section 50 of the Income-tax Act, 1961 provides that any capital gains arising from the transfer of depreciable capital assets forming part of a block of assets are treated as short-term capital gains, even if the asset is held for more than 24 months which is the normal threshold for assets being qualified as long term. The effective tax cost on transfer of long term capital assets is lower due to availability of indexation and lower tax rates than in cases of short-term capital assets.

In a recent ruling, the Delhi Tribunal held that gains arising from sale of a depreciable factory building are required to be computed under section 50 as short-term capital gains even where the assessee claimed that the building had ceased to be used for business for more than 20 years and had been described as a residential property at the time of sale.

The assessee sold a factory building in the year 2016 on which depreciation had been claimed only in the year 1993 being the year of its acquisition. At the time of sale, the assessee contended that since the asset was not in commercial use, no depreciation was charged on the same post 1993, and the property was even described as a residential property in certain official documents. On this basis, the assessee argued that the asset had lost its commercial character and could no longer be treated as a depreciable asset, and therefore gains should be taxed as long-term capital gains with the benefit of indexation. The Assessing Officer, however, treated the asset as a depreciable capital asset and applied section 50 to assess the gains as short-term capital gains. The first appellate authority decided the issue in favour of assessee and revenue carried the matter before the Tribunal.

The Tribunal after hearing both the contentions upheld the Revenue’s position and ruled against the assessee. It held that once depreciation is claimed, even for a single year, the asset becomes part of the depreciable block and retains that character for purposes of computation of capital gains. The Tribunal observed that non-use of the property, encroachment, or change in description in sale deeds cannot alter the statutory character of the asset under the Income-tax Act. Accordingly, it concluded that section 50 was squarely applicable and that indexation benefit available for long-term capital assets could not be allowed in respect of the depreciable factory building.

This decision reinforces the principle that the character of an asset as a depreciable capital asset is determined under the Income-tax Act and not by its subsequent use or nomenclature in official documents such as sales deed. It underscores that once an asset enters the block of depreciable assets by virtue of depreciation being claimed, section 50 operates as a special deeming provision and overrides general capital gains provisions. In this context, readers may note that there are divergent decisions on the subject matter of applying the benefits of long-term capital assets to even depreciable assets covered under section 50 which has not been deliberated in the present case. Accordingly, taxpayers need to analyse their facts while taking a position on taxability.