Section 50 — Capital gains arising on transfer of a capital asset (flat) on which depreciation was allowed for two years but thereafter the assessee stopped claiming depreciation and also gave the flat on rent is chargeable as long-term capital gains after allowing the benefit of indexation.
Facts: The assessee, a private limited company, carried on business of investment. During the previous year 2003-04 it sold a flat for Rs.1,30,00,000. This flat was purchased by the assessee in the year 1987. Depreciation on this flat was claimed up till A.Y. 1991-92. In A.Ys. 1992-93 and 1993-94 the assessee claimed depreciation only in books of accounts but not in the return of income. For A.Y. 1994-95 and all subsequent years the assessee did not provide any depreciation in respect of the flat as the same was not used as office premises during the year. The flat was classified as a fixed asset in the balance sheet and was shown at cost less depreciation.
In the return of income the profit arising on transfer of this flat was shown as long-term capital gain. The long-term capital gain was computed after taking indexation benefit and also exemption u/s.54EC. The assessee relied upon the decision of the Bombay High Court in CIT v. Ace Builders P. Ltd., (281 ITR 210) for claiming indexation benefit even in respect of a depreciable asset. The Assessing Officer held that the decision of the Bombay High Court was not applicable to the case of the assessee and since the flat was the only asset in the block, the capital gain arising on sale of flat was taken to be short-term capital gain u/s.50(1).
Aggrieved the assessee preferred an appeal to the CIT(A) who held that the nature of asset continued to be a business asset in absence of anything to suggest that the assessee had taken a conscious decision to treat the flat as an investment. He distinguished the decision of the Cochin Bench of ITAT in Sakthi Metal Depot v. ITO, (2005) 3 SOT 368 (Coch.) on the ground that in the said decision the property was specifically treated by the assessee as an investment in the books of account. He upheld the order passed by the AO.
Aggrieved by the order of the CIT(A), the assessee preferred an appeal to the Tribunal.
Held:
The judgment of the Bombay High Court in Ace Builders was not concerned with the benefit of cost indexation. The decision is confined to relationship between section 50 and section 54E of the Act. The assessee cannot rely upon this decision to contend that the cost indexation benefit should be given even in the case of computation of short-term capital gains u/s.50 of the Act.
On facts, the decision of the Cochin Bench of the Tribunal in Sakthi Metal Depot is applicable, in which it has been held that if no depreciation had been claimed or allowed in respect of the asset, even though for an earlier period depreciation was claimed and allowed, from the year in which the claim of depreciation was discontinued, the asset would cease to be a business or depreciable asset and if the asset had been acquired beyond the period of thirtysix months from the date of sale, it would be a case of long-term capital gains. The Tribunal held that the moment the assessee stopped claiming depreciation in respect of the flat and even let out the same for rent, it ceased to be a business asset. It noted that the order of the Cochin Bench of ITAT applies in favour of the assessee. The Tribunal observed that the principle of the order, dated 31-1-2007, of the Mumbai Bench of ITAT, in the case of Glaxo Laboratories (I) Ltd., though laid down in a different context, would support the assessee in the sense that it is possible for a business asset to change its character into that of a fixed asset or investment. The Tribunal directed that the capital gains be assessed as long-term capital gains after allowing the benefit of cost indexation as claimed by the assessee.
This ground was allowed. Cases referred to:
(i) CIT v. Ace Builders Pvt. Ltd., 281 ITR 210 (Bom.)
(ii) Sakthi Metal Depot v. ITO, (2005) 3 SOT 368 (Coch.) Compiler’s Note: The decision also deals with a small issue on MAT which has not been digested.
