2014 (10) TMI 963 - AT - Income Tax

Tax the capital gain as short term capital gain - whether the tax rate specified in section 112 for long term capital gain was not applicable to the capital gain computed under section 50 in respect of long term asset? - Held that - n the present case it is not in dispute that the office premises which was sold by the assessee was a part of the business asset and section 50 is applicable as assessee had claimed depreciation on the same. We are unable to accept the submission of the Ld. Counsel that in the case of Ace Builders Pvt. Ltd. (2005 (3) TMI 36 - BOMBAY High Court) the Hon ble High Court has held that even capital gain is computed in the manner prescribed u/s.50 in that case also the same is to be treated as long term capital gain. It is clear from the language used by the legislature that if the long term capital gain is computed then it will suffer the tax @20% as against the normal rate of income tax. Moreover in the Ace Builders Pvt. Ltd. (supra) their Lordships have explained that if the capital gain is computed as provided u/s.50 then the capital gains tax will be charged as if such capital gain has arisen out of short term capital asset. We have to interpret the judgement or decision as a whole and we cannot interpret in the piecemeal to understand the ratio decidendi. Counsel has also relied on the decision in the case of M/s. P.D. Kunte & Co. (Regd.) (2005 (3) TMI 36 - BOMBAY High Court). It is true that in said case the assessee had taken Ground No.2 which is analogous to the plea of the assessee. But on perusal of the said order we find that the said ground remained to be adjudicated and there is no decision on this issue. We are not therefore inclined to rely upon the decision in the case of M/s. P.D. Kunte & Co. (Regd.) (Supra). We accordingly approve the interpretation made by the Ld.CIT(A) of section 50 and section 112 and confirm the order on this issue before us. Accordingly the grounds taken by the assessee are dismissed.

Summary

Issues Involved:
1. Tax rate applicable on capital gains arising from the sale of depreciable assets.
2. Applicability of Section 112 for long-term capital gains computed under Section 50.
3. Interpretation of Sections 50, 45, 48, 49, and 112 of the Income Tax Act.
4. Validity of the Assessing Officer's and CIT(A)'s decisions.

Issue-wise Detailed Analysis:

1. Tax Rate Applicable on Capital Gains Arising from the Sale of Depreciable Assets:
The primary issue revolves around whether the capital gains arising from the sale of depreciable assets should be taxed at a concessional rate of 20% as per Section 112 or at a higher rate of 30% applicable to short-term capital gains. The assessee argued that the gains should be taxed at 20%, treating them as long-term capital gains since the asset was held for more than three years. However, the Assessing Officer and CIT(A) held that Section 50, a special provision for depreciable assets, mandates that such gains be treated as short-term capital gains and taxed accordingly.

2. Applicability of Section 112 for Long-term Capital Gains Computed Under Section 50:
The assessee contended that Section 50 only modifies the computation of capital gains but does not alter the nature of the asset from long-term to short-term. They relied on the Bombay High Court's decision in CIT Vs. ACE Builders Pvt. Ltd., which stated that Section 50 does not convert a long-term capital asset into a short-term one. However, the CIT(A) and the Tribunal emphasized that while Section 50 does not change the nature of the asset, it does mandate that the gains be taxed as if they were short-term, thereby excluding the applicability of the concessional tax rate under Section 112.

3. Interpretation of Sections 50, 45, 48, 49, and 112 of the Income Tax Act:
The Tribunal and CIT(A) interpreted these sections to conclude that Section 50, designed to prevent dual benefits of depreciation and concessional tax rates, requires capital gains from depreciable assets to be treated as short-term for tax purposes. They referred to the Supreme Court's decision in Commonwealth Trust Ltd., which upheld that capital gains on depreciable assets should be computed under Section 50 and taxed at normal short-term rates. The Tribunal also clarified that Section 112's concessional rate applies only to gains explicitly recognized as long-term, which is not the case for gains computed under Section 50.

4. Validity of the Assessing Officer's and CIT(A)'s Decisions:
The Tribunal upheld the decisions of the Assessing Officer and CIT(A), agreeing that the capital gains from the sale of the depreciable asset should be taxed at the higher rate applicable to short-term gains. They rejected the assessee's reliance on the ITAT Mumbai Bench's decision in M/s. P.D. Kunte & Co., noting that it did not provide a decisive ruling on the issue. The Tribunal emphasized that interpreting Section 50 and Section 112 harmoniously prevents rendering any statutory provision redundant or leading to unjust results.

Conclusion:
The Tribunal dismissed the assessee's appeal, confirming that the capital gains from the sale of depreciable assets, computed under Section 50, should be taxed at the higher rate applicable to short-term gains, not at the concessional rate under Section 112. This decision aligns with the legislative intent to prevent dual benefits of depreciation and concessional tax rates on the same asset.