Capital Gains Arising Out Of Sale Of Long-Term Capital Assets Shall Be Taxable At Rate Of 20% U/S 112 Of IT Act: Mumbai ITAT Special Bench
While observing that the deeming fiction of section 50 cannot be imported u/s 112, the Mumbai ITAT in a split verdict ruled that capital gains u/s 50 of Income tax Act, arising out of sale of long-term capital assets, shall be taxable at rate of 20% u/s 112 of the Act.
Section 50 of Income tax Act is a special provision for computation of capital gains in case of depreciable assets, whereas Section 112 deals with income arising from transfer of long-term capital asset.
Relying upon the Bombay High Court ruling in CIT vs. Ace Builders Pvt Ltd, the Special Bench in its majority ruling by Amit Shukla (Judicial Member) and Vikas Awasthy (Judicial Member) observed that Section 50 was enacted with the object of denying multiple benefits to the owners of a depreciable asset, however, that restriction is limited to the computation of capital gains and not to the exemption provision.
Once jurisdictional Writ Courts has held that section 50 does not convert a 'long term capital asset' to a 'short term capital asset', then the rate of tax applicable for the transfer of a long-term capital asset must be in accordance with section 112, added the Bench.
The issue had arisen upon the assessee filing its return by offering capital gain at Rs.2,62,63,582/- as short-term capital gains u/s 50 and also paid tax on such capital gain at rate of 20% as prescribed u/s 112 plus applicable surcharge. The AO however show caused as to why rate of 30% should not be applied on such short-term capital gain. Hence, the assessee company approached the High Court seeking resolution as to whether capital gains u/s 50 arising out of sale of long-term capital asset is chargeable as per Sec 112 of the Act.
Relying upon the ratio of CIT vs Parrays (Eastren), delivered in the context of brought forward of long-term capital loss, the Majority opinion by the Judicial Members observed that the deeming fiction u/s 50 is restricted only to mode of computation of capital gains contained in sections 48 and 49 of the Income tax Act and it does not change character of capital assets.
Thus, 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 must be confined only to section 50, added the Bench.
Further, the Bench stated that capital gains arising out of the depreciable asset u/s 50 cannot convert 'short term capital asset' into a 'long term capital asset' and hence, amount of income tax calculated on such a long-term capital gain shall be the rate of 20%.
In its dissenting opinion, Om Prakash Kant (Accountant Member) observed that Sec 112(1) cannot decide whether gain or excess arising from transfer of a long-term capital asset would be chargeable as long-term capital gain or short-term capital gain.
Refusing to accept assessee's interpretation, the Accountant Member opined that if the surplus arising from transfer of depreciable asset is held for more than 36 months, and treated as 'long-term capital gain' by invoking Sec 112(1), then, Sec 50 would be rendered meaningless.
Finally, the Special Bench concluded that capital gains u/s 50 arising out of sale of long-term capital assets, shall be taxable at 20% rate u/s 112 of the Act.
Case followed:
CIT vs. Ace Builders Pvt Ltd 281 ITR 210 (Bombay)
Counsel for Appellant/ Assessee: Sailee Gujarathi
Counsel for Respondent/ Revenue: Bishwanath Das
Case Title: SKF India Limited vs Deputy CIT
Case Number: ITA No.7544/Mum/2011