Legal fiction created in Section 50 is confined to the computation of capital gains and does not alter the nature of the asset or affect eligibility for exemptions under other sections
The Special Bench of the Mumbai ITAT, recently delivered a significant ruling in the case of SKF India Ltd, clarifying the interpretation of Section 50 of the Income Tax Act, 1961- particularly concerning capital gains on depreciable assets.
What’s the core issue:
Whether capital gains under section 50 of the Act arising out of sale of a long-term capital asset is chargeable at the rate applicable to short-term capital gains or at the rate applicable to long-term capital gains under section 112 of the Act?
ITAT Ruling:
Capital gains arising out of the depreciable asset u/s 50 even though deem to be capital gain arising from transfer of a short term capital asset, that fiction has to be confined only to section 50 and it cannot convert ‘short term capital asset’ into a ‘long term capital asset’ and vice versa for the other purpose of the Act.
Reliance placed:
CIT vs. V.S. Dempo Company Ltd. (2016)74 Taxmann.com 15 (SC): The apex Court emphasized that the legal fiction created in Section 50 is confined to the computation of capital gains and does not alter the nature of the asset or affect eligibility for exemptions under other sections like 54E.
Ace Builders Pvt. Ltd. vs. ACIT (2006) 281 ITR 210 (Bom H):
Hon’ble High Court has categorically held that deeming fiction of section 50 of the Act is restricted only to section 48 & 49 for the computation of capital gains and does not extend to other provisions or exemption provisions.
Key contours:
1. Sale of depriciable assets under section 50 is eligible for long term tax rate under section 112.
2. Deeming fiction of section 50 is confined only to computation of capital gains and such deeming fiction cannot extended to other sections in the law.
3. Application of long term tax rate prescribed under 112 to depriciable assets, does not diluted the intent of the section, since the non-obstante clause was limited to computation of capital gains.
Scenarios to which this ruling can be applied (Views are personal):
1. Going forward capital gains from Sale of building can explored with special tax rate of 12.5% as prescribed under section 112 of the Act though litigative.
2. Exemption under the series of section 54s can be explored.
3. Set off of current year business loss and other short term capital loss against the gain on sale of building can be explored.
Also, whether the principles laid down in this ruling could also be applied in the scenario where sale/ redemption of unlisted bonds. any thoughts on the same readers? Happy to hear any views on the same and let’s chat on this separately.
The copy of the order is as under:
