I sold depreciable assets I had held for over three years and the whole block ceased to exist, so the gain was computed under section 50. The Assessing Officer says the gain is short-term and refuses to set it against my brought-forward long-term capital loss. Is he right?
No. The Mumbai Tribunal held that s.50 is a computation provision and a deeming provision, and that the fiction cannot be carried beyond the purpose for which it was enacted: once the capital gain on the depreciable asset has been computed under s.50, the operation of that section is spent and the gain must be dealt with under the other provisions of the Act. The asset having been held for more than thirty-six months, the gain retains the character of long-term capital gain for all other provisions and qualifies for set-off against the brought-forward long-term capital loss under s.74.
Decided by the ITAT (Shri R.S. Syal, Accountant Member, and Smt. Asha Vijayaraghavan, Judicial Member) on 2011-04-13, reported as ITA No. 6646/Mum/2008 (ITAT Mumbai, 'B' Bench); Assessment Year 2005-06. It bears on section 74, section 74(1), section 74(2), section 50, section 50(2), section 48, section 49, section 2(42A), section 2(42B), section 2(29A), section 2(29B) of the Income Tax Act 1961, in Capital Gains and How Tax Law Is Read matters.
This is the most litigated application of the long-term-against-long-term rule in s.74(1)(b), and the answer turns on a distinction that is easy to state and easy to lose: s.50 deems the GAIN to be a gain arising from the transfer of a short-term capital asset; it does not deem the ASSET to be a short-term capital asset. The Bombay High Court said so in terms in CIT v. ACE Builders Pvt. Ltd., which the Tribunal treated as binding and squarely covering the case, and which is why the same argument also carries the s.54E exemption, and is applied in practice to s.54EC. The practical payoff is arithmetical: where a block ceases to exist and the whole sale consideration becomes the gain because the opening written down value is nil, the entire amount may be sheltered by a brought-forward long-term loss that the department would otherwise strand. Note two limits the Tribunal itself observed. First, the assessee had computed the gain strictly under s.50 and had not claimed any artificial cost of acquisition or indexation under ss.48 and 49 — the Tribunal made a point of that, and the argument is much weaker for an assessee who has tried to take the benefits of both routes. Second, the Bench distinguished CIT v. Citibank N.A., which concerns the first stage — whether s.50 applies at all to an asset such as land that is not depreciable — and does not touch the second stage of what character the computed gain carries.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The assessee, engaged in the business of investment and finance, sold depreciable capital assets — meters and transformers — during Assessment Year 2005-06 for Rs 1,45,99,988. The assets had been purchased in earlier years for Rs 8,75,99,928 and one hundred per cent depreciation had been claimed on them in the respective years of purchase, so that the opening written down value of the block was nil. No new asset was acquired within the block during the year and all the assets in the block were sold, so the block ceased to exist and the computation fell under s.50(2). The assessee returned the resulting Rs 145.99 lakhs as long-term capital gain and set it off against a brought-forward loss from long-term capital assets, relying on CIT v. ACE Builders Pvt. Ltd. The Assessing Officer held that s.50 applied and deemed the gain to be short-term capital gain, and on that footing refused the set-off. The Commissioner (Appeals) upheld him. It was not disputed by any authority below that the assets had been held for at least three years before sale, nor was the computation of the gain at Rs 145.99 lakhs in dispute.
The appeal was allowed (para 15). The Tribunal overturned the order under appeal and held that the assessee is entitled to set off the gain against the brought-forward loss from long-term capital assets in terms of s.74 (para 14). Section 50 contains a special provision for the computation of capital gains in the case of depreciable assets, and the deeming provision it contains must be restricted to the purpose for which it is enacted; once the computation is over, the operation of s.50 stops and the amount so computed must be dealt with in accordance with the relevant provisions (paras 8 and 14). An asset held for more than three years being a long-term capital asset, the gain retains the character of long-term capital gain for all other provisions notwithstanding that it has been computed under s.50 by deeming it short-term (paras 13 and 14).
The Tribunal set out s.50(2), under which, where a block ceases to exist because all the assets in it are transferred, the cost of acquisition is the opening written down value increased by the actual cost of assets acquired during the year and the resulting income is deemed to be capital gains arising from the transfer of short-term capital assets (paras 5 and 6). It then applied the general principle that a deeming provision cannot be extended beyond the purpose for which it is enacted, citing CIT v. Amarchand N. Shroff (1963) 48 ITR 59 (SC) and CIT v. Mother India Refrigeration Industries P. Ltd. (1985) 155 ITR 711 (SC) for the proposition that legal fictions are created for definite purposes and must be limited to those purposes (para 7). Since s.50 carries the marginal note 'Special provision for computation of capital gains in case of depreciable assets', its prescription extends only up to the computation of capital gains; once the gain is determined, the function of the provision comes to an end (para 8). Turning to the definitions, the Tribunal noted that s.2(42B) defines short-term capital gain as gain arising from the transfer of a short-term capital asset, s.2(29A) defines a long-term capital asset as one which is not a short-term capital asset, and s.2(29B) defines long-term capital gain accordingly, so that the character of the gain follows the character of the asset (para 10). Section 74(1)(b) permits a brought-forward loss relating to a long-term capital asset to be set off only against capital gains in respect of any other capital asset not being a short-term capital asset, so the whole controversy was the character of the Rs 145.99 lakhs (paras 11 and 12). On that the Bench held itself bound by CIT v. ACE Builders Pvt. Ltd., in which the Bombay High Court held that the restriction in s.50 is limited to the computation of capital gains and not to the exemption provisions, and that the legal fiction deems the capital gain to be short-term and not the asset to be a short-term capital asset (paras 12 and 13). CIT v. Citibank N.A. (2003) 261 ITR 570 (Bom.), relied on by the Departmental Representative, was held to be confined to the first stage — whether s.50 applies to a given asset — and not to touch the second stage (para 14).
This amount would also retain the character of long term capital gain for all other provisions and consequently qualify for set off against the brought forward loss from the long term capital assets.
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Handle my notice → Ask a CA on WhatsAppNo. The Mumbai Tribunal held that s.50 is a computation provision and a deeming provision, and that the fiction cannot be carried beyond the purpose for which it was enacted: once the capital gain on the depreciable asset has been computed under s.50, the operation of that section is spent and the gain must be dealt with under the other provisions of the Act. The asset having been held for more than thirty-six months, the gain retains the character of long-term capital gain for all other provisions and qualifies for set-off against the brought-forward long-term capital loss under s.74. This was decided by the ITAT (Shri R.S. Syal, Accountant Member, and Smt. Asha Vijayaraghavan, Judicial Member) and bears on section 74, section 74(1), section 74(2), section 50, section 50(2), section 48, section 49, section 2(42A), section 2(42B), section 2(29A), section 2(29B) of the Income Tax Act 1961. It is reported as ITA No. 6646/Mum/2008 (ITAT Mumbai, 'B' Bench); Assessment Year 2005-06. This is the most litigated application of the long-term-against-long-term rule in s.74(1)(b), and the answer turns on a distinction that is easy to state and easy to lose: s.50 deems the GAIN to be a gain arising from the transfer of a short-term capital asset; it does not deem the ASSET to be a short-term capital asset. The Bombay High Court said so in terms in CIT v. ACE Builders Pvt. Ltd., which the Tribunal treated as binding and squarely covering the case, and which is why the same argument also carries the s.54E exemption, and is applied in practice to s.54EC. The practical payoff is arithmetical: where a block ceases to exist and the whole sale consideration becomes the gain because the opening written down value is nil, the entire amount may be sheltered by a brought-forward long-term loss that the department would otherwise strand. Note two limits the Tribunal itself observed. First, the assessee had computed the gain strictly under s.50 and had not claimed any artificial cost of acquisition or indexation under ss.48 and 49 — the Tribunal made a point of that, and the argument is much weaker for an assessee who has tried to take the benefits of both routes. Second, the Bench distinguished CIT v. Citibank N.A., which concerns the first stage — whether s.50 applies at all to an asset such as land that is not depreciable — and does not touch the second stage of what character the computed gain carries. If it applies to you, the first step is this: Establish the holding period of the asset independently of the block: the Tribunal recorded as undisputed that the assets had been held for at least three years before sale, and the whole argument rests on that fact.
The assessee, engaged in the business of investment and finance, sold depreciable capital assets — meters and transformers — during Assessment Year 2005-06 for Rs 1,45,99,988. The assets had been purchased in earlier years for Rs 8,75,99,928 and one hundred per cent depreciation had been claimed on them in the respective years of purchase, so that the opening written down value of the block was nil. No new asset was acquired within the block during the year and all the assets in the block were sold, so the block ceased to exist and the computation fell under s.50(2). The assessee returned the resulting Rs 145.99 lakhs as long-term capital gain and set it off against a brought-forward loss from long-term capital assets, relying on CIT v. ACE Builders Pvt. Ltd. The Assessing Officer held that s.50 applied and deemed the gain to be short-term capital gain, and on that footing refused the set-off. The Commissioner (Appeals) upheld him. It was not disputed by any authority below that the assets had been held for at least three years before sale, nor was the computation of the gain at Rs 145.99 lakhs in dispute. The matter was decided on 2011-04-13 by the ITAT (Shri R.S. Syal, Accountant Member, and Smt. Asha Vijayaraghavan, Judicial Member). On those facts the ITAT held as follows. The appeal was allowed (para 15). The Tribunal overturned the order under appeal and held that the assessee is entitled to set off the gain against the brought-forward loss from long-term capital assets in terms of s.74 (para 14). Section 50 contains a special provision for the computation of capital gains in the case of depreciable assets, and the deeming provision it contains must be restricted to the purpose for which it is enacted; once the computation is over, the operation of s.50 stops and the amount so computed must be dealt with in accordance with the relevant provisions (paras 8 and 14). An asset held for more than three years being a long-term capital asset, the gain retains the character of long-term capital gain for all other provisions notwithstanding that it has been computed under s.50 by deeming it short-term (paras 13 and 14).
The Tribunal set out s.50(2), under which, where a block ceases to exist because all the assets in it are transferred, the cost of acquisition is the opening written down value increased by the actual cost of assets acquired during the year and the resulting income is deemed to be capital gains arising from the transfer of short-term capital assets (paras 5 and 6). It then applied the general principle that a deeming provision cannot be extended beyond the purpose for which it is enacted, citing CIT v. Amarchand N. Shroff (1963) 48 ITR 59 (SC) and CIT v. Mother India Refrigeration Industries P. Ltd. (1985) 155 ITR 711 (SC) for the proposition that legal fictions are created for definite purposes and must be limited to those purposes (para 7). Since s.50 carries the marginal note 'Special provision for computation of capital gains in case of depreciable assets', its prescription extends only up to the computation of capital gains; once the gain is determined, the function of the provision comes to an end (para 8). Turning to the definitions, the Tribunal noted that s.2(42B) defines short-term capital gain as gain arising from the transfer of a short-term capital asset, s.2(29A) defines a long-term capital asset as one which is not a short-term capital asset, and s.2(29B) defines long-term capital gain accordingly, so that the character of the gain follows the character of the asset (para 10). Section 74(1)(b) permits a brought-forward loss relating to a long-term capital asset to be set off only against capital gains in respect of any other capital asset not being a short-term capital asset, so the whole controversy was the character of the Rs 145.99 lakhs (paras 11 and 12). On that the Bench held itself bound by CIT v. ACE Builders Pvt. Ltd., in which the Bombay High Court held that the restriction in s.50 is limited to the computation of capital gains and not to the exemption provisions, and that the legal fiction deems the capital gain to be short-term and not the asset to be a short-term capital asset (paras 12 and 13). CIT v. Citibank N.A. (2003) 261 ITR 570 (Bom.), relied on by the Departmental Representative, was held to be confined to the first stage — whether s.50 applies to a given asset — and not to touch the second stage (para 14). In the words reproduced by the source cited on this page: "This amount would also retain the character of long term capital gain for all other provisions and consequently qualify for set off against the brought forward loss from the long term capital assets." The decision followed or applied CIT v. ACE Builders Pvt. Ltd. (2006) 281 ITR 210 (Bom.) — followed as binding on the Tribunal; CIT v. Amarchand N. Shroff (1963) 48 ITR 59 (SC) — applied; CIT v. Mother India Refrigeration Industries P. Ltd. (1985) 155 ITR 711 (SC) — applied; CIT v. Citibank N.A. (2003) 261 ITR 570 (Bom.) — distinguished.
It was decided by the ITAT on 2011-04-13 and is reported as ITA No. 6646/Mum/2008 (ITAT Mumbai, 'B' Bench); Assessment Year 2005-06. Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 74, section 74(1), section 74(2), section 50, section 50(2), section 48, section 49, section 2(42A), section 2(42B), section 2(29A), section 2(29B), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeal was allowed (para 15). The Tribunal overturned the order under appeal and held that the assessee is entitled to set off the gain against the brought-forward loss from long-term capital assets in terms of s.74 (para 14). Section 50 contains a special provision for the computation of capital gains in the case of depreciable assets, and the deeming provision it contains must be restricted to the purpose for which it is enacted; once the computation is over, the operation of s.50 stops and the amount so computed must be dealt with in accordance with the relevant provisions (paras 8 and 14). An asset held for more than three years being a long-term capital asset, the gain retains the character of long-term capital gain for all other provisions notwithstanding that it has been computed under s.50 by deeming it short-term (paras 13 and 14). It arises in Capital Gains and How Tax Law Is Read matters, on section 74, section 74(1), section 74(2), section 50, section 50(2), section 48, section 49, section 2(42A), section 2(42B), section 2(29A), section 2(29B) of the Income Tax Act 1961, and was decided by Shri R.S. Syal, Accountant Member, and Smt. Asha Vijayaraghavan, Judicial Member. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Compute the gain strictly in accordance with s.50, and be able to show you did — no indexation, no substituted cost of acquisition under ss.48 or 49. Taking those benefits and then claiming long-term character invites the multiple-benefit objection s.50 was enacted to defeat. Frame the argument in two stages: stage one is the computation of the gain under s.50; stage two is the application of the other provisions, including s.74, to the amount so computed. Say in terms that s.50 is exhausted at the end of stage one. Cite CIT v. ACE Builders Pvt. Ltd. (2006) 281 ITR 210 (Bom.) for the proposition that the legal fiction deems the capital gain to be short-term and not the asset to be a short-term capital asset, and, for the general principle, CIT v. Amarchand N. Shroff and CIT v. Mother India Refrigeration Industries P. Ltd. on the confinement of legal fictions to their purpose. Where the department relies on CIT v. Citibank N.A. (2003) 261 ITR 570 (Bom.), answer that it decides only whether s.50 applies to a particular asset and not what character the resulting gain has. Check whether the block ceased to exist, since s.50(2) rather than s.50(1) then governs the computation and the whole excess over the opening written down value becomes the gain.
Validity check could not be completed. Validity check could not be completed. This is a Tribunal order of 13 April 2011 and it is understood in practice to have been carried to the Bombay High Court, but no High Court decision in this assessee's case was located on Indian Kanoon on this pass — a title search for 'Manali Investment' returned only the two Tribunal orders of 13 April 2011 and a series of unrelated Calcutta and Bombay company matters — so the affirmation is NOT established here and a later pass should look for it by appeal number. The underlying proposition rests on the Bombay High Court in CIT v. ACE Builders Pvt. Ltd., which was not independently read on this pass; the extract of that judgment relied on is the extract reproduced in this Tribunal order at paragraph 12. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The order as transcribed begins at paragraph 2 (a delay condonation) and runs to paragraph 15, the disposal; paragraph 1 was not returned by the fetch and nothing is asserted about it. Paragraph 12 of the order reproduces a long passage from CIT v. ACE Builders Pvt. Ltd.; that passage is the High Court's language and not the Tribunal's, and the key quote used here is taken from paragraph 14, which is the Tribunal speaking. Paragraph 14 was confirmed word for word on a separate docfragment pass. Two spellings in the order are inconsistent: the assets are called 'Meters and transformers' in most paragraphs and 'Motors and transformers' in paragraph 11. The Indian Kanoon listing shows two documents of the same date, 13 April 2011, under the names 'Manali Investments, Mumbai vs Assessee' and 'Manali Investment & Finance Pvt.Ltd. vs Assessee'; only the first was read, and its header shows the appellant as M/s. Manali Investments in ITA No. 6646/Mum/2008 for Assessment Year 2005-06. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was allowed (para 15). The Tribunal overturned the order under appeal and held that the assessee is entitled to set off the gain against the brought-forward loss from long-term capital assets in terms of s.74 (para 14). Section 50 contains a special provision for the computation of capital gains in the case of depreciable assets, and the deeming provision it contains must be restricted to the purpose for which it is enacted; once the computation is over, the operation of s.50 stops and the amount so computed must be dealt with in accordance with the relevant provisions (paras 8 and 14). An asset held for more than three years being a long-term capital asset, the gain retains the character of long-term capital gain for all other provisions notwithstanding that it has been computed under s.50 by deeming it short-term (paras 13 and 14).
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