mankaran (student) (53 Points)
15 February 2010I have a query on capital gain.
My client has sold an office premises which he uses for business and upon which he has been claiming depreciation.
he sold it for a huge sum but purchased it for a small amt in 1985-86.
As he has been claiming depn on it the sale would come under sec 50 ( Short term Capital Gain)
Is there any section where i can book this transaction under long term gain.
i.e depreciation amt reversed as business income, and excess over cost as LTCG
Ashish Sharma
(Service)
(1028 Points)
Replied 15 February 2010
No, i have not seen any section for reversal of section 50.
CA Dhiraj Ramchandani
(CA, M. com)
(10823 Points)
Replied 15 February 2010
Mankaran, u r challenging the act???
I mean, why will any of the act or law allow u to carry on such transaction or reversal??
mankaran
(student)
(53 Points)
Replied 15 February 2010
no, i heard of a section from a friend which charges the gain as mentioned above
i dont know the section though
Max Payne
(employed)
(2574 Points)
Replied 15 February 2010
Dear Mankaran,
There is no depreciation reversal provision in the IT act, like Dhiraj said…..
In
Sec 50 says that the CG arising on depreciable asset shall be short term capital gain, but nowhere DID it say that depreciable assets are short term assets. as per the attached case, the period of holding is relevant for determining whether the gain is ST or LT.... Hence decided in favour of assessee...............
I am attaching the judgement for
HOWEVER, SEC54E AS BEEN OMITTED and replaced by section 54EC.
U may note that section 50 says that the "balance shall be taxed as gain arising on transfer of STCA....... "
But the section 50 has not been amended, nor has 2(42A) been amended to the effect that depreciable assets are always short term..
The judgement appears to be in your favour....
54EC , like 54E, deals with the CG arising on transfer of long term capital assets... and from the judgemnt, the depreciable assets can also be long term capital assets....
I AM NOT AWARE OF JUDGEMENTS THAT POINT TO THE CONTRARY.....
You can find the case at
https://law.incometaxindia.gov.in/Directtaxlaws/act2005/%5B2003%5D131Taxman0699(Gau).htm
Amir
(Learner)
(4016 Points)
Replied 15 February 2010
Dear Makran,
UR friend has rightly told u about that section - 41(2) - Balancing charge in case of Depreciation claimed on SLM Basis by Power Generation Units..
In this case amount claimed as depreciation is taxable as Business Income (U can say a reversal of Depreciation)
Any amount realised over & above the actual cost is taxable under capital gains & it can be Long Term as well..
Actual cost = 1 lacs
Depreciation till last year = 50k
Sold for = Rs. 1.50 Lacs
Now, Rs. 50 K will be treated as Business Income u/s 41(2) - Reversal of Depreciation,
Capital Gain (which can be Short term as well as Long term) = 50K (i: Sale Price - Cost)
This is the same treatment followed for Scientific research Asset.
G.K. Bhai u r rite that famous Assam case is still valid for 54EC & can be applied...
angelicscoop
(article)
(48 Points)
Replied 15 February 2010
this will come under STCG only . u cant go for LTCG as dep is claimed
angelicscoop
(article)
(48 Points)
Replied 15 February 2010
this will come under STCG only . u cant go for LTCG as dep is claimed
Nithin Chettoor
(Assistant Manager)
(388 Points)
Replied 15 February 2010
hey... i don think any provisions which justifies ur query... The reversal which u r talking about is about the deemed income as per 41(2). But that does not affect the cost of the asset and for capital gain purpose only cost of the asset wil be valid. And by virtue of S50 all the depreciable assets are in the nature of Short tem capital asset. therefore, i dont find any possibility of treating this as LTCG.
Amir
(Learner)
(4016 Points)
Replied 15 February 2010
Dear Friends,
In case of Power Generating Co's i:e SLM Method, the computation of Capital Gain is made u/s 50A & NOT 50.
Now Sec 50 - First of all it begins with non-obstante clause w.r.t. definition of Long Term Capital Asset & thereafter it has specifically provided that "Gains will be from Short Term Capital Asset"
Now i m reproducing sec 50A here, then plz decide that the above two things as mentioned in Sec 50 are not there in case of Sec 50A, THEREFORE THE GAINS COMPUTED CAN BE LONG TERM AS WELL AS SHORT TERM -
50A. Where the capital asset is an asset in respect of which a deduction on account of depreciation under clause (i) of sub-section (1) of section 32 has been obtained by the assessee in any previous year, the provisions of sections 48 and 49 shall apply subject to the modification that the written down value, as defined in clause (6) of section 43, of the asset, as adjusted, shall be taken as the cost of acquisition of the asset.]
I hope this resolves the issue....
sivadas chettoor
(CA)
(2644 Points)
Replied 15 February 2010
On a close reading of the question I find that it is confined to the treatment of the resulting gain as long or short term gains.The answer is that you cannot treat it as long term for computation of gain. The provisions of Sec 50 categorically lays down the rule that for the purpose of computaion of capital gains in respect of depreciable assets Sections 48 and 49 shall stand modified. Nothing more nothing less. You must stop there. Do not drag that fictional provision to any other sections of the Act. It is settled law that a fictional provision should be allowed to have its operation only in its legitimate areas permitted under the Act.
In view of this legal position courts have taken the view that Sec 54 etc providing for exemption are not controlled by Sec 50. In other words Sec 50 operates only in the areas mentioned in the Sec ie areas of Sec 48 and 49. Therefore benefit of exemption can be made available treating even gains related to depreciable assets as long term gains ie for the purpose of exemption since Sec 54 is not controlled by Sec 50.
Your attention is invited a more recent decision of the Bombay High court in CIT v Ace Builders 281 ITR 210 (bom). The relevat portion from the judgement is given below.
"Section 50 of the Income-tax Act, 1961, carves out an exception in respect of depreciable assets and provides that where depreciation has been claimed and allowed on the asset, then the computation of capital gain on transfer of such asset under sections 48 and 49 shall be as modified under section 50. The effect of section 50(2) is that where the consideration received on transfer of all the depreciable assets in the block exceeds the written down value of the block, then the excess is taxable as a deemed short-term capital gains. The fiction created under section 50 is confined to the computation of capital gains only and cannot be extended beyond that. However, the benefit of section 54E will be available to the assessee irrespective of the fact that the computation of capital gains is done either under sections 48 and 49 or under section 50.
The firm in which the assessee was a partner was dissolved and the assessee was allotted a flat towards its credit in the capital account with the firm. That flat was shown as capital asset in its books of account and depreciation was claimed and allowed from year to year. In the previous year relevant to the assessment year 1992-93, the flat was sold and the net sale proceeds were invested in the UTI capital gains scheme with a view to claim deduction under section 54E and hence “nil” income was declared under the head “Income from capital gains” for the assessment year 1992-93. The Assessing Officer held that the assessee had availed of depreciation on the transferred long-term capital asset and the capital gain arising on transfer of such a long-term capital asset was liable to be treated under section 50 as capital gain that arose out of a short-term capital asset and no exemption under section 54E was available to the assessee. The Commissioner (Appeals) held that the Assessing Officer had rightly computed the capital gains under section 50(2) and in view of the deeming provisions, the capital gains arising in the assessee’s case had to be treated as capital gain arising from the transfer of a short-term capital asset and therefore not exempted under section 54E. The Tribunal however held that the deeming fiction attached to section 50 had to be restricted only for the method of computing the capital gain and could not be read while considering the case for non-chargeability of capital gain. Accordingly the Tribunal allowed the exemption under section 54E. On appeal by the Revenue :
Held, dismissing the appeal, that there was nothing in section 50 to suggest that the fiction created in section 50 is not only applicable to sections 48 and 49 but also applies to other provisions. On the contrary, this section makes it explicitly clear that the deeming fiction created in sub-sections (1) and (2) is restricted only to the mode of computation of capital gains contained in sections 48 and 49. The legal fiction is to deem the capital gain as short-term capital gain and not to deem the asset as short-term capital asset. Section 50 did not convert a long-term capital asset into a short-term capital asset. Though section 50 was enacted with the object of denying multiple benefits to owners of depreciable assets, yet that restriction was limited to the computation of capital gains and not the exemption provisions. Thus, the exemption under section 54E could not be denied to the assessee on account of the fiction created in section 50.
State Bank of India v. Hanumantha Rao (D.) [1998] 6 SCC 183 applied.
CIT v. Assam Petroleum Industries P. Ltd. [2003] 262 ITR 587 (Gauhati) followed."
Hope this would clarify the matter.
siva208 @ yahoo.com
Max Payne
(employed)
(2574 Points)
Replied 16 February 2010
Dear Siva Sir,
So it can be treated as long term capital asset in this case also no.... 54EC can be claimed rite??? What about 54F?
What u have said, is that, the computation will be as if it is STCG, cos sec 50 says that,
but the gain retains its character as long term and can be avoided by investment.... thats the position rite?
In this case, tax rate will be 20% or normal rate of tax? It appears to be normal rate of tax, cos the sec 50 says the excess shall be taxable AS short term capital gain.... Pls correct me someone if i am wrong....
Hiten
(Article)
(21 Points)
Replied 16 February 2010
yes...u can save ur tax on capital gain by making investment as per sec 54EC...also it is important to note that ull be taxed as per normal rate of tax and not at the rate of 20%....one more alternative is to buy an another asset which falls under the same block which must be greater than or equal to sale consideration of the asset sold...so net position will be
opn block of asset xxx
Less Sale consideration (xxx)
Add: purchase cost of new asset xxx
cls block of assrt xxx
Amir
(Learner)
(4016 Points)
Replied 16 February 2010
G.K. Bhai,
The above gain will be taxable @ Normal rates & not @ 20%...
Now 54EC can be claimed...
Now with regards to Sec 54 F - Don't u think u r asking too much :))
But I think it will be allowed - subject to following
1) Assessee must be either Individual or HUF
2) Since the asset transfered in the question is an office premises - now 54F is available in case asset other then residential house is tranferred, but this is something which will be decided by the facts that whether present premises can be said as "residential house or not"...
CAclubindia
