THE COMMISSIONER OF INCOME TAX,KOCHI vs. M/S.SHAKTHI METEL DEPOT, CLOTH BAZAR RD.

ITA/759/2009HC KeralaKLHC01025520200906 January 2010Author: HONOURABLE MR.JUSTICE V.K.MOHANAN,HONOURABLE MR.JUSTICE C.N.RAMACHANDRAN NAIR11 pages
AI SummaryAllowed

What did the High Court hold?

The High Court held that the sale of a depreciable asset in respect of which depreciation was allowed to the assessee should always be treated as short-term capital gains by virtue of the operation of Sections 50 and 50A of the Income Tax Act, 1961. The Court reasoned that the non-obstante clause in Section 50 makes it an exception to the definition of short-term capital asset, meaning even an asset held for more than 36 months will be treated as short-term if it falls under Section 50. The Court found that Section 50 mandates that a depreciable asset, on which depreciation has been allowed, should be assessed as a short-term capital asset. Section 50A supplements Section 50 by allowing the written down value as the cost of acquisition. The Court viewed the assessee's act of showing the flat as an investment and discontinuing depreciation for two years as an attempt to avoid tax on short-term capital gains. The Court held that so long as the assessee continued its business, the building forming part of the block of assets retains its character as such, irrespective of non-user for a couple of years. The appeal was allowed, reversing the ITAT's order and restoring the assessment of profit as short-term capital gains.

What were the facts?

The assessee, M/s. Sakthi Metal Depot, purchased a flat in Mumbai in FY 1973-74 for Rs. 95,000/- and used it as a branch office. Depreciation was allowed on this building until AY 1995-96. The assessee did not claim depreciation for AY 1996-97 and AY 1997-98. The flat was sold in FY 1997-98 (relevant for AY 1998-99) for Rs. 71 lakhs. After deducting expenses of Rs. 3,52,000/-, the assessee declared a profit of Rs. 67,34,210/- as long-term capital gains. The Assessing Officer treated this profit as short-term capital gains under Section 50 of the Income Tax Act, 1961. The CIT(Appeals) upheld this view. The ITAT, however, held the profit as long-term capital gains, relying on the assessee's balance sheet showing the flat as an investment. The Revenue has appealed this ITAT order.

What were the issues?

1. Whether the profit arising from the sale of a depreciable asset, on which depreciation was allowed in prior years but not for the two years preceding the sale, is assessable as short-term capital gains under Section 50 of the Income Tax Act, 1961, irrespective of whether it was used for business purposes in the immediate preceding years or shown as an investment in the balance sheet. Assessee's contentions: - The flat was treated as an investment and shown as such in the balance sheet after AY 1995-96. - Depreciation was not claimed for AY 1996-97 and AY 1997-98. - The asset was held for more than 36 months, thus qualifying for long-term capital gains treatment. Revenue's contentions: - The sale of a depreciable asset, in respect of which depreciation was allowed, should always be treated as short-term capital gains by virtue of Sections 50, 50A, and 50B of the Act. - The assessee's attempt to show the asset as investment and not claim depreciation for two years was to avoid tax on short-term capital gains.

Which sections of the Income-tax Act were involved?

Section 50,Section 50A,Section 2(42A),Section 48,Section 49,Section 43(6),Section 32(1)(i),Section 2(11)

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE V.K.MOHANAN WEDNE AY, THE 6TH JANUARY 2010 / 16TH POUSHA 1931 ITA.No. 759 of 2009(E) ---------------------- ITA.846/2004 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT ----------------------------- THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADV. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S): --------------- M/S.SAKTHI METAL DEPOT, CLOTH BAZAR ROAD, COCHIN-31. ADV. SRI.P.BALAKRISHNAN (E) FOR RESPT. THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 06/01/2010,

The order continues below.

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