8 Sakthi Metal Depot vs. CIT (2021) 436 ITR 1 (SC)
Capital Gains – Depreciable assets – So long as the assessee continues business, the building forming part of the block of assets would retain its character as such, no matter one or two of the assets in one or two years not used for business purposes disentitles the assessee for depreciation for those years – There is no provision whereby a depreciable asset forming part of block of assets within the meaning of section 2(11) can cease to be part of block of assets – Gains arising from transfer of such assets are to be taxed as short-term capital gains
The assessee, a partnership firm with its principal place of business at Kochi and a branch in Mumbai, had purchased a flat at a cost of Rs. 95,000 in Mumbai for business purposes in the financial year ending 31st March, 1974. Since its purchase the flat was used as the Branch Office of the assessee and on the capitalised cost of the building (Rs. 95,000) the assessee claimed depreciation and the same was allowed until the A.Y. 1995-96. The written down value of the flat as on 31st March, 1995 was Rs. 37,175.80. However, the assessee discontinued claiming depreciation for the flat for the A.Ys. 1996-97 and 1997-98. The flat was sold during the year 1997-98, that is, in the previous year relevant to the A.Y. 1998-99 on a total sale consideration of Rs. 71 lakhs. After deducting the expenses towards brokerage and legal expenses of Rs. 3,52,000, the assessee returned profit of Rs. 67,34,210 as long-term capital gains.
However, the A.O. held that profit arising on transfer of depreciable asset is assessable as short-term capital gains u/s 50. Applying the provisions of section 50, he assessed the profit on sale of the flat as short-term capital gains. The assessee’s contention before the A.O. was that it stopped using the flat for business purposes after the A.Y. 1995-96 and thereafter the flat was treated as investment and was so shown in the balance sheet. The A.O. did not accept the assessee’s contention that the flat in Mumbai was discontinued to be used for business purposes in the two years following the A.Y. 1995-96 because, according to him, the assessee’s attempt was only to avoid payment of tax on short-term capital gains.
In the appeal filed by the assessee, the CIT (Appeals), concurred with the A.O. and held that the building being a depreciable asset and being used for business purposes, sale of the same attracts tax on short-term capital gains u/s 50.
On a second appeal filed by the assessee, the Tribunal relying solely on the entry in the balance sheet of the assessee wherein the said flat was shown as investment, held that since the item was purchased in 1974, sale of the flat is assessable as long-term capital gains.
On an appeal filed by the Revenue, the High Court reversed the order of the Tribunal holding that the building which was acquired by the assessee in 1974 and in respect of which depreciation was allowed to it as a business asset for 21 years, that is, up to the A.Y. 1995-96, still continued to be part of the business asset and depreciable asset, and the non-use would only disentitle the assessee for depreciation for two years prior to the date of sale. However, there was no provision whereby a depreciable asset forming part of the block of assets within the meaning of section 2(11) can cease to be part of the block of assets. The description of the asset by the assessee in the balance sheet as an investment asset was meaningless and was only to avoid payment of tax on short-term capital gains on the sale of the building. According to the High Court, so long as the assessee continued business, the building forming part of the block of assets would retain its character as such, no matter one or two of the assets in one or two years not being used for business purposes disentitling the assessee for depreciation for those years. Further, instead of selling the building, if the assessee started using it after two years for business purposes, the assessee could continue to claim depreciation based on the written down value available as on the date of ending of the previous year in which depreciation was allowed last.
The Supreme Court dismissed the assessee’s appeal holding that the High Court had rightly restored the findings and the addition made in the assessment order.
