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.
Still good law. The Bombay High Court has upheld this order. In CIT v Manali Investment, reported at 219 Taxman 113 / [2013] 39 taxmann.com 4 (Bom), the question framed was 'whether ... the Tribunal was correct in holding that the assessee is entitled to set-off under Section 74', and the Court upheld the Tribunal, holding that 'the legal fiction created by the statute is to deem the capital gain as short term capital gain and not to deem the asset as short term capital asset'. The judgment is not carried on indiankanoon — a citedby: search on the Tribunal order returns nothing and a doctypes:highcourts search for the case name returns nothing — but the Panaji Bench in an order of 18 October 2017 lists 'CIT Vs. Manali Investment 219 Taxman 113 (Bombay)' among the decisions in the assessee's favour, and the High Court holding is set out in a contemporaneous commentary. The Panaji order itself is NOT an application: Manali appears there only in counsel's list and the appeal was decided on the ground that the rate issue was debatable and so outside s.154. Nothing contrary was found. 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 read begins at paragraph 2, a condonation of delay, and runs to paragraph 15, the disposal; paragraph 1 has not been read and nothing is asserted about it. Paragraph 12 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 from paragraph 14, which is the Tribunal speaking. Two spellings in the order are inconsistent: the assets are called 'Meters and transformers' in most paragraphs and 'Motors and transformers' in paragraph 11. Two orders of the same date, 13 April 2011, appear under the similar names 'Manali Investments' and 'Manali Investment & Finance Pvt. Ltd.'; only the first has been read, and its header shows the appellant as M/s. Manali Investments in ITA No. 6646/Mum/2008 for assessment year 2005-06. Anyone citing the case should make sure he has the right one of the two. On the strength of the decision: it is a Tribunal order, but the proposition it applies comes from the Bombay High Court in ACE Builders, which the Bench treated as binding and as squarely covering the case. The authority to cite is therefore the High Court decision, with this order as the application. The distinction doing the work is between the deeming in s.50, which makes the gain a gain arising from the transfer of a short-term capital asset for the purposes of computation, and the character of the asset itself, which is fixed by s.2(42A) and carried through s.2(29A) and s.2(29B). Nothing in s.50 or s.50(2) turns a long-held asset into a short-term capital asset within s.2(42B). Two things the order does not decide. It does not decide the position of an assessee who has claimed indexation or a substituted cost under ss.48 and 49 on the same gain; the Bench was careful to record that this assessee had not, and the argument is weaker for one who has. And it does not decide whether s.50 applies at all to the asset in question, which is the anterior question and turns on whether depreciation has in fact been allowed. Both limbs of s.74, sub-sections (1) and (2), come into play only once those two points are past, and the brought-forward loss itself has to have been determined and carried forward in the earlier year's assessment before any of this matters. 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).
TaxSphere, “Manali Investments v Assistant Commissioner of Income-tax”, https://taxnotice.vittsphere.com/caselaw/case/manali-investments-a-section-50-gain-on-a-long-held-asset-is-still-long-term-for-section-74/ (validity last checked 2026-09-08)
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