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Capital gains depreciable asset converted for personal use

Rohit Khanna (Audit) (27 Points)

17 February 2014

One of my client is Doctor by Profession.He practised in a residenial flat for 5 years, claimed Depreciation and expenses related to tht flat. After 5 years, he took rented commercial space and shifted practise there. And started residing in the residential flat as self occupied. Also stopped taking depreciation & expenses of that flat. Client intends to sale off the residential flat after 3 years.

If the client wants to take benefit of LTCG u/s 54 by investing capital gains in New Residential Property after 3 years , whether it can be done??

WDV of Residential Flat (Used as Clinic) is Rs.2 Lacs & Market Value Rs.35 Lacs.

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5 Replies

Z ( ) (2965 Points)
Replied 18 February 2014

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Z ( ) (2965 Points)
Replied 18 February 2014

Exemption u/s 54 is available if the long term capital asset transfered is residential house property. So its imperative to know whether the property is residential or not. There are certain factors which should be considered while determining the nature of the property like electricity charges(slab rate) water charges since they are higher for commercial units. But probably the most important factor is HOW IS THE PROPERTY IS SHOWN IN RECORDS OF MUNICIPALITY . There are certain commercial activities which can be carried out from residential units but for other ,one needs to get the property listed in the records of the municipal corporation as commercial, like hotel So if the nature of the property is residential then as per s 54you can claim exemption if you invest ltcg in new residential unit Otherwise you can opt for sec 54F which allows exemption from cap gain for transfer of OTHER THAN RESIDENTIAL house property . But in s 54f entire consideration has to be invested

Rohit Khanna (Audit) (27 Points)
Replied 18 February 2014

Property shown in Municipality records is Residential Property, But My question still remains, if we have taken depreciation of said flat as dispensary, STCG arises on Sale of depreciable asset and is there any way out to take benefit of Sec 54 by investing gains in new residential property.

Also Sec 54F cannot be taken as he holds more than 1 residential house apart from this new property that he is intending to buy.

Z ( ) (2965 Points)
Replied 18 February 2014

S. 50 applies i depriciable asset is transferred and if there is a gain then for the purpose of computing cap gain there shall always be STCG. But its a trite law that a deeming fiction can not be used for any other purpose except for which it was brought for.Capital gain shall be STCG but exemption u/s 54/54F/54EC is allowed.

If you observe the sections(supra) , they are providing exemption on gain arising from transfer of LONG TERM CAPITAL ASSET. To determine wheter asset is long term or short term we refer to s.2(42A).

There are many high court judgement supporting this view, We have case laws on 54(I think its from delhi, i cant recall name), 54F (SHRI RAJIV SHUKLA)and 54EC(Himalaya Machinery (P.) Ltd) also

Since you are saying that assessee will be having more than 1 residential house property other than the new one, then he can not avail S.54 either, 'cause s. 54 also has this condition

Hence exemption can be availed u/s 54EC only

Dimpy Sanghavi (PROPRIETOR) (22 Points)
Replied 23 July 2023

Hi. Im having similar scenario, where in Assessee was claiming depreciation of commercial property till 2019-20.

Post which he has stopped claiming depreciation and the property was unused. now in fy 2022-23, he intends to sell the same. Can he take benefit of long term capital gain or will he be taxed under sec 50 under short term gain. this will have huge tax implication since notional depreciation till 2022-23 need to be considered