Long-term capital losses available against gains from transfer of depreciable assets

 Recently, the Mumbai ITAT in ACIT v. Reliance Infrastructure Limited ruled in favour of the taxpayer and reaffirmed that the special computational treatment applicable to gains arising from transfer of depreciable assets does not alter the inherent character of the underlying asset. Accordingly, where the asset transferred is a long-term capital asset, the taxpayer remains entitled to utilise available long-term capital losses against such gains.

In the present case, the assessee company had transferred a depreciable capital asset which had been held for a period qualifying it as a long-term capital asset. The gain arising on such transfer was computed in accordance with the special provisions applicable to depreciable assets. The assessee also had substantial current year and brought forward long-term capital losses available for set-off.
During rectification proceedings, the tax authorities allowed certain computational adjustments but denied the set-off of long-term capital losses against the gains arising from transfer of the depreciable asset. According to the Revenue, since the gains were deemed to be short-term in nature for computation purposes, long-term capital losses could not be adjusted against such gains.

However, the assessee contended that the deeming fiction applicable to the computation of gains was limited in scope and did not convert the underlying long-term capital asset into a short-term capital asset. It was further submitted that the long-term capital losses sought to be adjusted were already available on record and their quantum had never been disputed by the department.

The Hon’ble Tribunal, after examining the facts and the settled legal position, ruled in favour of the assessee and made the following key observations:

• A legal fiction must be confined to the specific purpose for which it has been created and cannot be extended beyond its intended scope.
• The special method prescribed for computation of gains arising from transfer of depreciable assets does not change the inherent nature or character of the underlying asset.
• Where the asset transferred is, in fact, a long-term capital asset, it continues to retain such character for determining the availability of set-off of losses.
• The Revenue had not disputed either the period of holding of the asset or the availability and quantum of the long-term capital losses claimed by the assessee.
• Denial of the set-off would amount to enlarging the scope of the deeming provision beyond the legislative intent and contrary to settled judicial principles.

Accordingly, the Hon’ble Tribunal upheld the order of the first appellate authority and dismissed the appeal filed by the Revenue, thereby allowing the assessee to set off its current year and brought forward long-term capital losses against the gains arising from transfer of the depreciable asset.

This ruling is a significant reaffirmation of the principle that deeming provisions are to be interpreted strictly and only for the limited purpose for which they are enacted. The Hon’ble Tribunal has emphasised that computational provisions cannot be extended to alter the true nature of an asset or deprive taxpayers of otherwise available benefits. The decision provides important clarity that gains arising from transfer of long-term depreciable assets continue to retain their underlying character for the purpose of utilisation of long-term capital losses, notwithstanding the special mechanism prescribed for computation of such gains.