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Capital Gains Query

Aditya Maheshwari (CA in Practice) (35867 Points)

03 January 2010

If depreciation is claimed on a property used for business purpose and subsequently let out and no depreciation claimed when let out and then sold after holding it for a period of more than 36 months (even after being let out for a period of more than 36 months) how the sale will be taxed.

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18 Replies

shailendra (C.A. FINAL) (189 Points)
Replied 03 January 2010

Dear Aditya sir,

What i have seen in Income Tax Act is if depreciation is claimed on any property and subsequently such property is sold then there will always be STCG on such property.

According to me renting out such property will not alter the situation.

What i think is if this is allowed to be prevailed in the industry then there will be ample scope for the big industrialists for tax evasion, because LTCG attracts on 20% instead of 30% incase of STCG.

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@ CA. $ahar$h @ (Student) (338 Points)
Replied 03 January 2010

Dear Aditya,

In this case, the property on which earlier depriciation was claimed will be deducted from the block of asset and its wdv will be considered as the cost.when it will be taken out of the building its fair market value will be considered as its sale price and it will be taxed under section 50 (STCG) and taxability will be in the hands of the business.futher when it will be used for the purpose of renting out then its cost of acquisition will be considered as wdv of business and its sale value (after the period iof letting out) will be taxable in the hand of holder of the property (LTCG).

shailendra (C.A. FINAL) (189 Points)
Replied 03 January 2010

Dear saharsh,

Can you please explain it how the block of asset will be reduced from the WDV of the asset transferred. Basically WDV will not be reduced here because depreciation can also be claimed on a building which is used for residential purpose in the income tax act, however the rate of dep. is less i.e 5%.

Can you please quote the section and sub section where it is written that if an asset is first used for business purpose and subsequently it is rented out then WDV will be deducted from the cost of block.

Amir (Learner) (4016 Points)
Replied 04 January 2010

DEAR ADITYA,

AS FAR AS MY UNDERSTANDING GOES, ONCE ANY ASSET HAS ENTERED IN TO BLOCK THEN IT LOSES IT'S IDENTITY AND IT'S VALUE CANNOT BE DETERMINED AND REDUCED FROM THE BLOCK EXCEPT IN THE CASES WHERE LAW HAS SPECIFICALLY MENTIONED..

SO WHERE AFTER CLAIMING DEPRECIATION, U HAVE RENTED THE PROPERTY THEN I DON'T THINK ,NOTHING IN INCOME TAX STOPS U FROM CLAIMING THE DEPRECIATION ON THAT PROPERTY...DEPRECIATION WILL BE ALLOWED..

SALE PROCEED IN SUCH A CASE WOULD SIMPLY REDUCE THE WDV IN THE YEAR OF SALE..

" IN SHORT THE PROCEDURE WILL NOT CHANGE IN CASE OF AN ASSET ON WHICH DEPRECIATION HAS BEEN CLAIMED AND LATER ON WE HAVE RENTED OUT AND SELLS IT"..

Aditya Maheshwari (CA in Practice) (35867 Points)
Replied 04 January 2010

Some more details that may help.

Property purchased in 2006 for 20 lakhs

Used for business upto March 2007 and depreciation claimed on the same.

WDV of property as of March 2007 & 2009 17 lakhs.

Sale of property Rs. 80 lakhs.

The company has 4 more properties of which 3 are let out and 1 used for business purpose and rest 3 let out. The one used for business depreciation is being claimed.

WDV of assets on which depreciation being claimed Rs. 2 lakhs

WDV of Block of asset on which currently no dep being charged Rs. 1 cr.

So going by the above discussion it seems that if the same is liable for taxation u/s 50 then no capital gains will accrue as the block does not turn negative or zero.

So is my understanding correct?

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Amir (Learner) (4016 Points)
Replied 04 January 2010

ADITYA,

PROPERTY A : COST 20 LACS (DEPRECIATION CLAIMED FOR 1st YEAR AND THEN LET OUT)

NOW, PROPERTY "A" SINCE AT ONE POINT IT WAS ENTERED IN THE BLOCK, IT CANNOT BE REMOVED FROM THE BLOCK IN THE ABSENCE OF SPECIFIC PROVISION.. I:E DEPRECIATION WILL BE ALLOWED EVEN IF IT IS LET OUT..NOW SALE OF PROPERTY "A" WILL BE DEALT ACCORDING TO SEC 50 i:e UNDER PGBP EXCEPT WHERE :-1) ENTIRE BLOCK IS TRANSFERRED OR (2) WDV BECOMES NEGATIVE

PROPERTY B: COST 15 LACS, LET OUT FROM 1ST YEAR ( NO DEPRECIATION HAS BEEN CLAIMED ON THIS)

NOW, PROPERTY B CAN NEVER BE SAID TO HAVE ENTERED IN THE BLOCK..THEREFORE IT'S SALE WILL RESULT IN THE CAPITAL GAIN WHICH CAN BE SHORT TERM AS WELL AS LONG TERM..

Aditya Maheshwari (CA in Practice) (35867 Points)
Replied 04 January 2010

We had earlier claimed leasing income as business income and claimed depreciation on the same. However depreciation on let out property disallowed by the ITO in view of the Supreme Court case law of Shambu Investment and income from leasing treated as income from house property. So no deprecaition has been allowed on property leased out by the ITO.

However depreciation allowed on property used for business purpose only

RADHIKA JALAN (agarwal) (1521 Points)
Replied 04 January 2010

i agree with amir...........

sanjeev (Manager- Accounts/Tax/Finance) (229 Points)
Replied 04 January 2010

Dear Sir,

Firstly, in your querry what i understood is that Property is firstly used for business purpose and then let out instead of using the same for business purpose.

If the prpoerty is owned by any individual/company and let out to someone else and letting out is not the primary business then Rent Received net of Related expenses ( which includes depreciation as well) would be taxable under the head Income From House Propery.( Deemed deduction u/s 24(a) 30%of NAV)

Now if the property has been sold then for computing the capital gain, you would not be allowed to claim the deprecation again, as the same has been claimed while calculating the House Property Income u/s24(a) as the intention of law was not to allow an expense again while calculating the capital gain.

Best'

Sanjeev

nikhil bapat (CA) (212 Points)
Replied 04 January 2010

I fully agree with sanjeev

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Amir (Learner) (4016 Points)
Replied 04 January 2010

Mr. Sanjeev,

U MIGHT BE RITE BUT UR EXPLANATION DOESN'T HOLD GOOD IN FOLLOWING SITUATION:-

REPAYMENT OF HOUSING LOAN

"U CAN TAKE DEDUCTION OF PRINCIPAL U/S 80 C" AND WHEN U SELLS THIS HOUSE U CAN AGAIN "DEDUCT COST OF ACQUISITION FROM SALE PRICE"

NOW DOESN'T IT AMOUNTS TO DOUBLE BENEFIT OF SAME EXPENDITURE..

Amir (Learner) (4016 Points)
Replied 04 January 2010

Mr. Sanjeev,

U MIGHT BE RITE BUT UR EXPLANATION DOESN'T HOLD GOOD IN FOLLOWING SITUATION:-

REPAYMENT OF HOUSING LOAN

"U CAN TAKE DEDUCTION OF PRINCIPAL U/S 80 C" AND WHEN U SELLS THIS HOUSE U CAN AGAIN "DEDUCT COST OF ACQUISITION FROM SALE PRICE"

NOW DOESN'T IT AMOUNTS TO DOUBLE BENEFIT OF SAME EXPENDITURE..

dilip (Propritor) (72 Points)
Replied 06 January 2010

i have a doubt please solve this problem

Equity shares are held jointly in name of Mr.A & Mrs.B(husband & Wife). Mr.A deies and these shares are transfered in name of Mr.C(Son of Mr.A) &Mrs.B jointly. now my doubt is is this transfer / gift to Mr.C and what will be cost of acquistion to Mr.C. if Mr.C does not have any details of Cost of Previous owner (Father) then can he adopt fair market value. please guide me with supporting judgements & circulars.