AMIT BAJAJ ADVOCATE

JUDGMENT  


C. N. Ramachandran Nair J.-

This is an appeal filed by the Revenue challenging the orders of the Income-tax Appellate Tribunal cancelling the short-term capital gains assessment on profit arising to the respondent-assessee on the sale of a building on which depreciation was allowed for several years by declaring that such profit is chargeable to tax as long-term capital gains because no depreciation was claimed or allowed for two years prior to the previous year in which the building was sold. We have heard senior standing counsel appearing for the Revenue and Sri P. Balakrishnan, counsel appearing for the respondent-assessee.

The facts leading to the controversy are the following. The respondent-assessee is a firm which was engaged in business with the principal place of business at Kochi and a branch at Mumbai. The assessee purchased a flat at a cost of Rs. 95,000 in Mumbai for business purposes in the financial year ending on March 31, 1974. Since purchase of the flat, it was used as branch office of the assessee at Mumbai and on the capitalised cost of the building at Rs. 95,000 the assessee claimed depreciation and the same was allowed until the assessment year 1995-96. The written down value of the flat as on March 31, 1995 was Rs. 37,175.80. However, the assessee discontinued claiming depreciation for the flat for the assessment years 1996-97 and 1997-98. The flat was sold during the year 1997-98, that is in the previous year relevant for the assessment year 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. The Assessing Officer however held that profit arising on transfer of depreciable asset is assessable as short-term capital gains under section 50 of the Income-tax Act. 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 Assessing Officer was that it stopped using the flat for business purposes after the assessment year 1995-96 and thereafter the flat was treated as investment and was so shown in the balance-sheet. The Assessing Officer did not accept the assessee's contention that the flat at Mumbai was discontinued to be used for business purposes in the two years following the assessment year 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 Commissioner of Income-tax (Appeals), also concurred with the Assessing Officer and held that the building being depreciable asset and was being used for business purposes, sale of the same attracts tax on short-term capital gains under section 50 of the Act. On second appeal filed by the assessee, the Tribunal solely relying on the entry in the balance-sheet of the assessee wherein the flat of the assessee at Mumbai was shown as investment, held that since the item was purchased in 1974, sale of the flat is assessable as long-term capital gains. It is against this order of the Tribunal that the Revenue has filed this appeal.

Senior counsel appearing for the Revenue contended that the Tribunal's findings are factually and legally incorrect. Before proceeding to decide the case on the merits, we feel the factual controversy as to whether after using the building for business purposes and after claiming depreciation for 21 years, the assessee deliberately did not claim depreciation for two succeeding years, 1996-97 and 1997-98, but simultaneously used the building for business purposes, need not be decided because in our view supported by reasons stated hereinbelow, 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 operation of sections 50, 50A and 50B of the Act. We therefore proceed to decide the matter by assuming that the assessee after claiming depreciation for the flat which was used as a branch office at Mumbai from 1974 onwards and in respect of which depreciation was claimed and allowed until the assessment year 1995-96, sold it in the previous year relevant to the assessment year 1998-99 without using it for business purposes for two years preceding the year of sale and in respect of which depreciation was neither claimed nor allowed for those two years. Since the controversy is on the scope of sections 50 and 50A we extract hereunder the said sections for easy reference :

"50. Special provision for computation of capital gains in case of depreciable assets.-Notwithstanding anything contained in clause (42A) of section 2, where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act or under the Indian Income-tax Act, 1922 (11 of 1922), the provisions of sections 48 and 49 shall be subject to the following modifications :-

(1) where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of the assets during the previous year, exceeds the aggregate of the following amounts, namely :-

(i) expenditure incurred wholly and exclusively in connection with such transfer or transfers ;

(ii) the written down value of the block of assets at the beginning of the previous year ; and

(iii) the actual cost of any asset falling within the block of assets acquired during the previous year ;such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets ;

(2) where any block of assets ceases to exist as such, for the reason that all the assets in that block are transferred during the previous year, the cost of acquisition of the block of assets shall be the written down value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short-term capital assets."

"50A. Special provision for cost of acquisition in case of depreciable asset.-Where the capital asset is an asset in respect of which a deduction on account of depreciation under clause (i) of sub-section (1) of section 32 has been obtained by the assessee in any previous year, the provisions of sections 48 and 49 shall apply subject to the modification that the written down value, as defined in clause (6) of section 43, of the asset, as adjusted, shall be taken as the cost of acquisition of the asset."

While the contention of the Revenue is that the asset in respect of which depreciation has been claimed when sold should always be assessed as short-term capital gains, the contention of the assessee is that unless the asset sold forms part of the block asset in the previous year in which sale took place, it cannot be assessed to short-term capital gains under section 50 of the Act. 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 the 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 a block of assets within the meaning section 2(11) of the Act 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 in our view is meaningless and is only 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 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. 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 by restoring the assessment on the profit on sale of the building as short-term capital gains, confirmed in first appeal.