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Facts
The appellant sold a portion of property for Rs. 1,73,40,000, which was originally acquired in F.Y. 2009-10 and depreciation was claimed until F.Y. 2013-14. Subsequently, it was rented out, and no depreciation was claimed. The Assessing Officer treated the gain as short-term capital gains (STCG) under Section 50 of the Income Tax Act, as the asset was depreciable, despite the appellant claiming it as long-term capital gains (LTCG). This was upheld by the CIT(A).
Held
The Tribunal held that Section 50 of the Income Tax Act applies to depreciable assets on which depreciation has been claimed and allowed in any previous year, even if not continuously until the date of sale. The non-obstante clause in Section 50 overrides other provisions, mandating that such assets be treated as short-term capital assets upon sale. Previous ITAT decisions in the appellant's own case were distinguished based on subsequent rulings by the Kerala High Court and Supreme Court, which supported the departmental view.
Key Issues
Whether the profit on the sale of a depreciable asset, on which depreciation was claimed in earlier years but not continuously until the date of sale, should be treated as short-term capital gains under Section 50 of the Income Tax Act.
Sections Cited
50, 2(42A), 2(11), 48, 49, 50A, 43(6), 32, 112
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, Mumbai “B” Bench, Mumbai.
Before: Shri Amit Shukla (JM) & Shri Omkareshwar Chidara (AM)
O R D E R Per Omkareshwar Chidara (AM) :-
In the above cited appeal, the appellant filed a Return of Income with a loss of Rs. 97,15,433/-. The appellant company is primarily engaged into manufacturing of sheet metal components. During the concerned assessment year, the appellant company sold a portion of property “Lunkard Sky Max” as mentioned in assessment order at page No.
2. From the assessment order, it is seen that the appellant sold the immovable property for net sale consideration of Rs. 1,73,40,000/- and offered long term capital gain of Rs. 29,69,366/-. The learned Assessing Officer (AO for short) issued a show-cause notice asking the appellant as to why Long term capital gains should not be treated as short term capital gains as per section 50 of the Income Tax Act (Act for short) as the capital asset sold was a depreciable asset and depreciation was claimed and allowed to the appellant during A.Ys. 2009-10 to 2012-13 @ 10%.
2. The Ld. AR of the appellant has replied by stating that from A.Y. 2012- 13 onwards till A.Y. 2016-17 this property was rented and the income received was shown as “income from house property” and hence section 50 of the Act is not applicable to the appellant. During the A.Y. 2016-17, this property was sold by appellant company. The Ld. AO did not agree with the contention of Ld. AR of the appellant and held that it is not necessary for application of section 50 of the Act that the appellant should have claimed depreciation continuously for the entire period till the date of sale and the sale of depreciable asset attracts section 50 even if the depreciation was claimed on that asset in earlier years and hence treated the income as short term capital gains, as against the claim of long term capital gains. The short term capital gains was computed at Rs. 1,16,83,700/- as against the long term capital gains claim of appellant at Rs. 29,69,366/-.
3. Aggrieved by the order of the Ld. AO, the appellant company filed an appeal before the learned Commissioner of Income Tax (Appeals) [the Ld. CIT(A) for short], who gave 8 notices to the appellant to file objections against the order of Ld. AO. As there was no response from the appellant, the Ld. CIT(A) confirmed the addition made by the Ld. AO holding that when the property was utilised for the purpose of business and depreciation was claimed and allowed on the same, the subsequent sale attracts short term capital gains in view of the provisions of section 50 of the Act. The Ld. CIT(A) accordingly confirmed the addition of Ld. AO and dismissed the appeal of the appellant company.
4. As the appellant company did not get the relief before the Ld. CIT(A), further appeal was instituted before the ITAT. The appeal was filed before the ITAT with a delay of 214 days. An affidavit was filed stating reasons for delay in filing the appeal is that the appellant company does not know when the Ld. CIT(A) passed the order which is ex-parte. None-availability of the Ld. CIT(A) order physical copy also caused delay. Ld. AR of the appellant relied on some cases law. Perused the records and after being satisfied, the Bench has condoned the delay.
5. The appellant company filed following grounds of appeal :-
1. The learned CIT (A) erred in dismissing the assessee's appeal ex- parte without appreciating the fact that except notice dated 12/01/2023 which was responded by the assessee, no subsequent notice was received on the registered email ID bharatshah_ca@yahoo.co.in.
2. The assessee submits that it has a good case on merits therefore the CIT(A) erred in dismissing the appeal exparte without assigning any reasons on merits, therefore an opportunity may be provided to the assessee.
3. The Id CIT(A) erred in confirming the order of Assessing officer treating profit on sale of unit no 108 of Lunkad Sky Max property Pune as STCG u/s. 50 of the Act. 4. The Hon. ITAT, Mumbai in the assessee's own case for the A.Y. 2014-15 vide order dated 19/4/2021 has ruled that the said capital gain should be treated as long term capital gain and not short term.”
6. The Ld. AR of the appellant argued at length by saying that once the asset is let out and then sold, provisions of section 50 are not applicable held by Ld. AO and argued that in the impugned case, only long term capital gain is to be levied as claimed by appellant company. The Ld. AR of the appellant filed a paper book on 28.5.2024 and also a fact sheet as a synopsis which is reproduced below :- “1. The Assessee company was engaged in the business of manufacture of sheet metal components for Central Air Conditioning and Ventilation system. 2. It has e-filed the return of income for the A.Y.2016-17 on 16.10.2016 which was subsequently revised on 15.01.2018 declaring total loss of Rs.97,15,433/- (Pg. no. 1-6 & 61).
3. During the course of assessment proceedings the audited Profit & Loss A/c, Balance Sheet and Tax Audit Report were submitted {Pg. no. 9 - 60).
4. The appellant had acquired property known as Lunkard Sky Max of 17 units during the F.Y.2009-lo) The depreciation @ 10% was claimed
and allowed for the A.Ys. 2010-11, 2011-12, 2012-13 and 2013-14 for unit no.108. From the F.Y. 2013-14 unit no 108 was given on rent and accordingly rental income was shown as Income from House Property and no depreciation was claimed thereon.
The appellant had sold unit 108 situated during the relevant year, for Rs. 1,73,40,000/-. As the property was held for more than three years, rental income being declared under Income from House Property and no depreciation being claimed from that year thereon the gain arisen out of sale proceeds after indexation has been rightly declared as LTCG. The statement showing working of WDV of unit no.108 from the year of acquisition till the date of sale is enclosed herewith.
The A.O treated the Long Term Capital Gain as Short Term Capital Gain as per provision of section 50 of the Act for the reason that capital asset sold out is a depreciable asset and assessee has claimed depreciation thereon. The AO in pg 3 of assessment order worked out the STCG at Rs. 1,16,83,7007- on individual asset.
Assessee received physical notice dt 27/5/2019 by CIT{A) -17.
8. Assessee sought adjournment vide letter dt 30/5/2019 and subsequently filed written submission.
The assessee contended that once the property is let out it loses its character as a business asset and no depreciation is allowable on it.
Also in view of the ITAT order in assessee's own case for AY 2014-15 bearing dt: 19/4/2021 whereby it was held that the moment the assessee stopped claiming depreciation in respect of the property and let out the same for rent, it ceases to be a business asset and thus the profit on sale of property to be considered as LTCG after indexation cost and the provisions of S.112 of the Act, should be applied”.
7. The Ld. AR of the appellant company has also relied on cases of ITO Vs. Zeon Life Sciences Ltd. (59 taxman.com 299) (Trib) for the proposition that once an asset forms part of any block of assets, such asset loses its independent WDV and the Ld. AO cannot arrive at WDV for individual asset while disallowing depreciation. The Ld. AR of the appellant relied on Kemwell (P) Ltd. Vs. DCIT (139 taxmann.com 544) (Bang Trib) for the proposition that value of block of asset under the class of asset “Building” is more than the sale value of building, it is held that the appellant is correct in reducing the sale value of building from value of block of assets under section 32 of the Act and short term capital gains will not arise. The third case relied on by Ld. AR of the appellant is Makino India (P) Ltd. Vs. ACIT (86 taxman.com 139)(Bang Trib), wherein it was held that section 50(1) arises on sale of depreciable asset if full value of consideration received is more than the cost of acquisition of asset and only when the entire block of assets of that particular asset ceases to exist.
But, during the hearing proceedings, the Ld. AR of the appellant laid emphasis on the decision his own case for A.Y. 2014-15 bearing dated 19.4.2021 where Hon'ble Mumbai Tribunal held similar transaction as long term capital gains in similar circumstances.
9. The Ld. DR relied on the orders of the Ld. AO and the Ld. CIT(A) where it was held that section 50 of the Act is attracted and only short term capital gains is to be levied when the property was utilised for business and the appellant company claimed depreciation in earlier years and the same was allowed.
10. Heard both sides on 13.6.2024 and perused the cases law relied on by the Ld. AR of the appellant in appellant’s own case for A.Y. 2014-15.
Subsequent to the hearing and at the time of dictating the orders, it was noticed that there is a decision of Hon'ble Kerala High Court on this issue in the case of Sakthi Metal Depot (189 Taxman 329) (Kerl) (2010) which is on this exact point and held against appellant. But, this judgment was not cited by both the parties and in the interest of justice, the matter was kept for clarification for 23.8.2024. in that clarification note, it was mentioned that the issue was decided by Hon'ble Kerala High Court as under:- “At the time of dictating the order it was noticed that assessee had claimed long term capital gain on sale of property which was part of block of asset since A.Y.2010-11. The assessee's contention has been that from A.Y.2014-15, the said property was given on rent and no depreciation was claimed and thereafter, it was sold in A.Y.2016-17.
The contention of the Id. AR was twofold, firstly, it is a long term capital gain and benefit of indexation should be given from A.Y.2010-11 or alternatively benefit of indexation should be denied till the property was in block of asset and once it was treated as investment for earning income from house property and from that period till the date of sale, benefit of indexation should be given if the property has been sold beyond three years or while calculating short term capital gain.
At the time of dictating the order, it came to our notice that Hon'ble Kerala High Court in the case of Sakthi Metal Depot reported in 189 Taxman 329 (Kerala) (2010) had decided this issue after observing as under:- 4........In our view Section 50 has to be understood with reference to the general scheme of assessment on sale of capital assets. The scheme of the Act is to categorise assets between short term capital assets and long term capital assets. Section 2(42A) defines short term capital asset as an asset held for not more than 36 months. The non-obstante clause with which Section 50 opens makes it clear that it is an exception to the definition of short term capital asset which means that even though the duration of holding of an asset is more than the period mentioned in Section 2(42A], still the asset referred to therein will be treated as short term capital asset. No one can doubt that assets covered by Section 50 are depreciable assets forming part of block assets as defined under Section 2(11) of the Act. Section 50 has two components, one is as to the nature of treatment of an asset, the profit on sale of which has to be assessed to capital gains. The Section mandates that a depreciable asset in respect of which depreciation has been allowed when sold should be assessed to tax as short term capital asset. The other purpose of Section 50 is to provide cost of acquisition and other items of expenditure which are otherwise allowable as deduction in the computation of capital gains and covered by Sections 48 and 49 of the Act. Here again Section 50 provides an exception for deduction of cost of acquisition and other items of expenditure otherwise allowable in the computation of capital gains under Sections 48 and 49 of the Act. In other words, Section 50 provides for assessment of a depreciable asset in respect of which depreciation has been allowed as short term capital gains and the deductions available under Sections 48 and 49 should be allowed subject to the provisions provided in sub-sections (1) and (2) of Section 50. Section 50A also deals with assessment of depreciable asset that too as short term capital gains and it actually supplements Section 50. In our view, the purpose of Section 50A is to enable the assessee to claim deduction of the written down value of the asset in respect of which depreciation was claimed in any year as defined under Section 43(6) of the Act towards cost of acquisition within the meaning of sections 48 and 49 of the Act. The condition for computation of short term capital gains in the way it is stated in Section 50A is that assessee should have been allowed depreciation in respect of a depreciable asset sold in any previous year which obvious means that for the purpose of assessment of profit on the sale of a depreciable asset, the assessee need not have claimed depreciation continuously for the entire period upto the date of sale of the asset. In other words, in our view, 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 upto the assessment year 1995-96, still continued to be part of the business asset and depreciable asset, no matter the non-user disentitles the assessee for depreciation for two years prior to the date of sale. We do not know how a depreciable asset forming part of block of assets within the meaning Section 2(11) of the Act can cease to be part of block of assets. The description of the asset bu the assessee in the Balance Sheet as an investment asset in our view is meaningless and is onlu to avoid payment of tax on short term capital gains on sale of the building. So long as the assessee continued business, the building forming part of the block of assets will retain it's 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. In our view, instead of selling the building, if the assessee started using the building after two years for business purposes the assessee can 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. We therefore allow the appeal by reversing the order of the Tribunal and bu restoring the assessment on the profit on sale of the building as short term capital gains, confirmed in first appeal.
Since this judgment was not cited by the parties and it came to our notice subsequently, therefore, in the interest of justice, the matter is kept for clarification for 23/08/2024.”
Finally, the case was heard on 6.9.2024 and on that day both the parties were informed about the Hon'ble Kerala High Court decision which was mentioned above. Ld. AR of the appellant and the Department were informed that this case was confirmed by Hon'ble Supreme Court also.
After hearing both sides on 6.9.2024, the case is decided against the appellant and in favour of the Department for the following reasons :-
a) It is not disputed by the appellant that the property which was sold, was utilised for the purpose of business of appellant for some period and during that period, depreciation was claimed and allowed. Subsequently, the property was rented out and then sold, so attracted section 50 of the Act and levy of short term capital gains, the asset need not be utilised for the purpose of business till the date of sale, it is enough if the property was earlier utilised for business and depreciation was claimed and allowed because the word used in section 50 is “depreciable asset”. b) The 3rd cases relied on by Ld. AR of the appellant are not applicable here and distinguishable on facts, eg., the case of Zeon Life Sciences Ltd. (supra) deals with disallowance of depreciation when a part of asset was taken out of block of assets. The case of Kemwell (P) Ltd. (supra) deals with computation of property when sale value is more than block of assets for claim of depreciation. The case of Makino India (P) Ltd. (supra) relied on by the Ld. AR of the appellant deals with when entire block of assets of a particular asset ceases to exist. In our impugned case, the facts are entirely different. The Ld. AO did not take out any asset nor computed value of asset, or WDV nor computed depreciation. The appellant company itself took out an asset and sold as an independent unit (on which depreciation was claimed earlier) and computed long term capital gains to offer long term capital gains. The Ld. AO has only converted long term capital gains on the plain reading of section 50(1) of the Act which says that in case of depreciable asset, the levy should be short term capital gain, and not long term capital gain. It is pertinent to note that the Ld. AO has not taken out any asset from “block of assets” and computed long term capital gains, but what was done by the Ld. AO is converting the claim of long term capital gains into short term capital gains. c) Section 50(1) of the Act overrides the other provisions because it starts with the non-obstante clause “notwithstanding anything contained” and hence it overrules other provisions while levying tax as short term capital gains in the circumstances mentioned therein. d) The Ld. AR of the appellant placed heavy reliance on the decision of Mumbai Tribunal in its own case for A.Y. 2014-15, mentioned supra and argued that since the facts and circumstances are similar, in this year also, the appellant is entitled to the benefit of long term capital gains. While perusing this ITAT order, it is observed that Hon'ble ITAT Mumbai upheld the contention of appellant by relying on the earlier ITAT decision of Prabodh Investments & Trading Company (ITA No. 6557/Mum/2008 and the case of Sakthi Metal Depot (3 SOT 768)(Cochin Bench of Trib. But, subsequently, Hon'ble Kerala High Court and Hon'ble Apex Court reversed the decision of Tribunal in the case of Sakthi Metal Depot (supra) and upheld the contention of Department and appellant’s appeals were dismissed. Hence, the Tribunal decisions of Prabodh Investments (supra) and Sakthi Metal Depot (supra) are no more Res Integra. Hence, the appellant’s contention of long term capital gains is to be levied is incorrect and short term capital gains was correctly applied by the Ld. AO u/s. 50(1) of the Act. The ratio and decision of Sakthi Metal Depot of Kerala was already mentioned in this ITAT order at page 5, paragraph 11. Hon'ble Supreme Court vide Civil Appeal No. 8605/2011, in the case of Sakthi Metal Depot, dismissed appellant’s appeal with “the reasoning by the Hon'ble High Court in view of the facts on record commends to us”. Hon'ble Supreme Court while reproducing the operative portion of High Court, it clearly held “as an investment asset in our view is meaningless and is only to avoid the payment of tax on short term capital gain on sale of building.(emphasis supplied). e) Hon'ble Bombay High Court in the case of Smt. Meena V. Pamnani Vs. CIT (Central) dated 29.9.2017 also held that in case of depreciable asset, only short term capital gains is to be levied. Hon'ble Bombay High Court took the cue from Kerala High Court’s decision of Sakthi Metal Depot (supra).
In view of the above factual and legal discussion, the appeal of the appellant is dismissed.
The appeal is dismissed. Order pronounced in the open court on 6th November, 2024.