Introduction
Under the Indian Income-tax Act, 1961, depreciable assets such as buildings, machinery, and furniture are grouped into ‘blocks of assets’ for the purpose of claiming depreciation. When such assets are sold, the capital gains are generally computed under Section 50, which deems the gains to be of a short-term nature, regardless of the holding period. However, a recent ITAT Special Bench ruling has sparked an important debate about the applicability of concessional long-term capital gains (LTCG) tax rates to depreciable assets held for more than 36 months.
Legal Framework
Section 50 introduces a deeming fiction whereby capital gains from the sale of depreciable assets are treated as short-term capital gains (STCG), even if the asset was held for more than 36 months. This fiction is limited to the computation of capital gains and does not alter the intrinsic character of the asset as a long-term capital asset.
Recent jurisprudence, particularly the Special Bench decision in ITA No. 7544/Mum/2011, has held (by majority) that this deeming fiction does not extend to the tax rate applicable. Therefore, if a depreciable asset is held for more than 36 months, it continues to be a long-term capital asset for the purpose of applying Section 112, which provides a concessional tax rate of 20%.
Supporting Jurisprudence
The Bombay High Court in CIT v. Ace Builders (P) Ltd [2006] 281 ITR 210 (Bom) clarified that Section 50’s deeming provision is confined to computation and not to classification or tax rate. Similarly, in CIT v. Dempo Company Ltd [2016] 387 ITR 354 (SC), the Supreme Court allowed long-term loss set-off against such deemed short-term gains, reinforcing the concept that the asset retains its long-term character.
Supporting Jurisprudence
The Bombay High Court in CIT v. Ace Builders (P) Ltd [2006] 281 ITR 210 (Bom) clarified that Section 50’s deeming provision is confined to computation and not to classification or tax rate. Similarly, in CIT v. Dempo Company Ltd [2016] 387 ITR 354 (SC), the Supreme Court allowed long-term loss set-off against such deemed short-term gains, reinforcing the concept that the asset retains its long-term character.
Contrary View
However, the dissenting member of the Special Bench and some tax authorities argue that the intention behind Section 50 is to deny long-term tax benefits (like lower tax rates) for depreciable assets, especially when depreciation has already been claimed as a revenue deduction.
Example
Consider a company that purchased a commercial building in April 2019 for Rs. 1 crore and claimed depreciation on it. In May 2024, the company sells the building for Rs. 1.5 crore. Since the building was held for more than 36 months, it qualifies as a long-term capital asset. However, because depreciation was claimed, Section 50 applies, and the Rs. 50 lakh gain is treated as STCG for computation purposes.
Now, based on the ITAT ruling, the company may argue that despite Section 50’s deeming fiction, the asset is a long-term capital asset and should attract a 20% concessional tax rate under Section 112. This position, while grounded in recent jurisprudence, carries litigation risk as higher authorities may challenge its validity.
Conclusion
The ITAT Special Bench decision opens up the possibility of applying concessional LTCG tax rates to depreciable assets held long-term. Taxpayers may adopt this position with due consideration of the associated legal risks and should prepare for potential scrutiny. Professional advice and detailed documentation are essential when taking such tax positions.
