TMI Blog2011 (2) TMI 1433X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness or depreciable asset and if the asset had been acquired beyond the period of thirty six months from the date of sale, it would be a case of long term capital gains. In our humble understanding, the ratio of the order appears to be that the asset had ceased to be a business asset and had become an investment. The moment the assessee stopped claiming depreciation in respect of the flat and even let out the same for rent; it ceased to be a business asset. In the present case there is also no dispute that the flat under consideration was held for a period of more than thirty six months and therefore a long term capital asset. Accordingly the capital gains is directed to be assessed as long term capital gains after allowing the benefit of cost indexation as claimed by the assessee - Decision in favour of Assessee Applicability of Section 112 - In our view the capital gains are long term capital gains, the assessee s contention regarding application of Section 112 is correct. However, since the entire capital gains will then be exempt under section 54EC. Computation of Minimum Alternative Tax u/s 115JB - CIT(A) confirmed the action of AO in not reducing the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set and, therefore, the profit on the sale thereof has to be computed as short term capital gains and without the benefit of cost indexation. The assessee, however, submitted by placing reliance on the judgment of the Hon ble Bombay High Court in the case of CIT vs. Ace Builders P. Ltd. (2006) 281 ITR 210 (Bom), that the indexation benefit should be granted even in respect of depreciable asset. The Assessing Officer sought to distinguish the judgment on the ground that it was concerned only with the allowability of the exemption under section 54E and not with the allowability of the cost indexation benefit. He therefore held that the aforesaid judgment was not applicable to the assessee s case and further went on to point out that in the cited case the cost indexation benefit was denied to the assessee and the capital gains were computed under section 50 of the Act. 3. The assessee thereupon pointed out to the Assessing Officer that it did not claim depreciation on the flat for the past several years. The last year in which depreciation had been claimed was the assessment year 1991-92. In the assessment years 1992-93 and 1993-94, the assessee claimed depreciation only in the boo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l gains under section 50 of the Act. 5. The assessee carried the matter in appeal before the CIT(A). He noted that the mere fact that the assessee did not claim depreciation after claiming the same for two years does not alter the nature of the asset which continued to be a business asset, particularly in the absence of anything to suggest that the assessee had taken a conscious decision to treat the flat as investment. He noted that in the Balance Sheet the flat was described as fixed asset and not as investment . The CIT(A) also considered it to be of no effect that the income arising from letting out the flat in some of the years was offered under the head Income from house property . According to him the income ought to have been assessed as business income since the flat continued to be a business asset. According to him, a mistake committed by the assessee as well as the Assessing Officer cannot produce the result that the nature of the property was changed from business asset to investment. The CIT(A) therefore held that the flat formed part of the block of assets and the sale thereof gave rise only to short term capital gains by virtue of section 50 of the Act. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... availed of depreciation, then the capital gain has to be computed in the manner prescribed by section 50 and the capital gains tax will be charged as if such capital gains had arisen out of the transfer of a short term capital asset. If by legal fiction the long term capital gains is to be treated as short term capital gains, then under section 50 there is no scope for allowing the benefit of cost indexation. The judgment of the Hon ble Bombay High Court was not concerned with the benefit of cost indexation and the question whether even where the capital gains is to be treated as short term capital gains under section 50, the assessee would be eligible for the cost indexation. In fact the observations of the Hon ble High Court at pages 219 220 of the report do show that the decision is confined to the relationship between section 50 and section 54E of the Act. At page 218, the question was posed as to whether the deeming fiction created under section 50 is restricted to section 50 only or is it applicable to section 54E of the Act as well? We accordingly hold that the assessee cannot rely on the judgment of the Hon ble Bombay High Court in the case of Ace Builders P. Ltd. (supra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urpose of the business. From the assessment year 1994-95 up to the assessment year 2004-05, the flat was classified in the Balance Sheet as a fixed asset and shown at cost less depreciation. These facts are recorded in paragraph 8 of the assessment order. In the assessment years 2000-01 and 2001-02, the flat had been let out and the rental income was shown under the head Income from house property . It would thus appear that after the assessment year 1993-94 no depreciation was provided even in the books of account and no depreciation had been claimed or allowed in the return or in the assessments. In this factual situation the order of the Cochin Bench of the Tribunal cited supra is applicable, in which it was held that if no depreciation had been claimed or allowed in respect of the asset, even though for an earlier period depreciation was claimed and allowed, from the year in which the depreciation claimed was discontinued, the asset would cease to be a business or depreciable asset and if the asset had been acquired beyond the period of thirty six months from the date of sale, it would be a case of long term capital gains. In our humble understanding, the ratio of the order ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for rent; it ceased to be a business asset. Accordingly the order of the Cochin Bench in Sakthi Metal Depot (supra) applies in favour of the assessee. 9. Our view is also fortified by another order of the Mumbai Bench of the Tribunal dated 31.01.2007 in the case of M/s Glaxo Laboratories (I) Ltd. for the assessment years 1989-90 to 1991-92. Though in this case the controversy was different, the Tribunal has noticed and observed that when certain flats which were earlier used for business purpose ceased to be so used and were let out for rent, the character of the asset had altered or changed and therefore no depreciation would be allowable on those flats. The fact to be noticed in this order is that the assessee had claimed depreciation on the flats for an earlier period and thereafter the flats were let out for rent, but still the assessee claimed depreciation against the rental income. The basis of the claim was that the flats continued to remain in the block of assets. The claim was disallowed by the Tribunal on the ground that since the user of the flats was changed, the character of the assets also underwent a change and they can no longer be considered as business assets. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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