Sections 2(29A), 2(29B), 2(42A), 2(42B), 48, 49, 50 and 74 — Brought forward long-term capital loss can be set-off against capital gain computed u/s.50 in respect of a long-term capital asset.
Facts:
The assessee, engaged in the business of finance and investments, sold meters and transformers, which were its depreciable assets, for a consideration of Rs.1,45,99,988. The gain arising on such sale was shown as long-term capital gain. The AO noticed that these meters and transformers were purchased in earlier years for a consideration of Rs.8,75,99,928 and on these 100% depreciation was claimed and allowed in the respective first year itself. The AO invoked the provisions of section 50 and regarded the gain to be short-term capital gain. The assessee, placing reliance on the decision of the Bombay High Court in the case of CIT v. Ace Builders Pvt. Ltd., (281 ITR 210) (Bom.) contended that such profit on sale of meters and transformers, which were otherwise long-term capital assets, was required to be considered as long-term capital gain for the purposes of set-off against brought forward loss arising on transfer of long-term capital assets. The AO rejected this contention of the assessee and treated the amount of Rs.145.99 lakhs as short-term capital gain on sale of assets which resulted into not allowing set-off against brought forward loss from the long-term capital assets.
Aggrieved the assessee preferred an appeal to the CIT(A) who upheld the order passed by the AO.
Aggrieved, the assessee filed an appeal to the Tribunal.
Held:
The effect of section 50 is that once depreciation has been allowed under this Act on a capital asset which forms part of a block of assets, then capital gain on the transfer of such assets shall not be computed in accordance with the provisions of sections 48 and 49, but the income so resulting shall be deemed to be the capital gains arising from the transfer of short-term capital assets in the manner provided in the latter section. Section 50 is a deeming provision and only by legal fiction income from the transfer of otherwise long-term capital assets (held for a period of more than 36 months) is treated as capital gains arising from the transfer of short-term capital assets. Such deeming provision has to be restricted only up to the point which has been covered within the provisions of section 50. The prescription of section 50 is to be extended only up to computation of capital gains. Once the amount of capital gain is determined in case of depreciable assets as per this section, ignoring the mandate of sections 48 and 49 which otherwise deal with the mode of computation of capital gains, the function of this provision shall come to an end and the capital gain so determined shall be dealt with as per the other provisions of the Act. If the assessee is otherwise eligible for any benefit under the Act which is attached to a longterm capital asset, the same shall remain intact. It cannot be denied simply for the reason that on the transfer of such a long-term capital asset, the short-term capital gain has been computed as per section 50.
There can be two stages, viz. firstly, the computation of capital gain on the transfer of otherwise longterm capital assets u/s.50 and secondly, when such capital gain has been so computed, the applicability of other provisions dealing with the short-term or long-term capital assets.
As has been held in the case of Ace Builders (supra), the view that by virtue of the operation of section 50, the capital gain so computed becomes that arising from the transfer of a short-term capital asset for all purposes is incorrect.
The effect of provision of section 74 is that the brought forward loss from long-term capital assets can be set off only against long-term capital gain within the period prescribed in s.s(2) of section 74.
In the instant case, capital gain has arisen from the transfer of an asset which was held for a period of more than three years and no long-term capital gain has entered into the computation of total income of the assessee on this transaction. 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 appeal filed by the assessee on this ground was allowed.
