Sharing insights. News Alert 17 May, Provisions of section 50C applicable even in respect of depreciable assets being land and/or building

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1 Sharing insights News Alert 17 May, 2011 Provisions of section 50C applicable even in respect of depreciable assets being land and/or building In brief In a recent decision, in the matter of the United Marine Academy (the assessee ) 1, the Special Bench of the Mumbai Income-tax Appellate Tribunal (the Tribunal ) has held that the provisions of section 50C of the Income-tax Act, 1961 (the Act ) would be applicable even for transfer of depreciable capital assets covered by section 50 of the Act. Rejecting the assessee s contentions, the Special Bench of the Tribunal held that capital gains arising from the sale of office buildings would have 1 ITO v. United Marine Academy [2011-TIOL-266-ITAT-MUM-SB] to be computed by adopting the stamp duty valuation, as it was higher than the sale consideration. Facts The assessee is a partnership firm engaged in the business of running a Marine Training Institute. During the financial year relevant to the assessment year , the assessee sold office buildings earlier used for its business purposes, for a consideration of INR lakhs. Since the written down value of the buildings after claiming depreciation for earlier years was the same as the sale consideration, 1

2 no short term capital gains was offered to tax under the provisions of section 50 of the Act. The Assessing Officer ( AO ), in the course of assessment proceedings, noticed that the value of the property according to the stamp duty valuation was INR lakhs. Furthermore, the AO was also of the view that one of the office buildings which had a written down value of INR lakhs was not sold by the assessee. Based upon the view that the provisions of section 50C of the Act operate simultaneously with that of section 50 of the Act, the AO treated the difference between the sale consideration of INR lakhs [as per stamp duty valuation (excluding office no. 101)] and the cost of acquisition at INR lakhs as short term capital gains. The Commissioner of Income-tax (Appeals) ( CIT(A) ), however, deleted the addition made by the AO on account of short term capital gains on the grounds that the provisions of sections 50 and 50C of the Act are mutually exclusive provisions and apply for specific purposes. The provisions of section 50C of the Act do not override the provisions of section 50 of the Act, which pertain to taxing capital gains arising from the transfer of depreciable assets. Accordingly, the CIT(A) directed the AO to apply the provisions of section 50 of the Act to the assessment of capital gains. Revenue preferred an appeal before the Tribunal and a Special Bench was formed to decide the issue, as there have been different/contrary views expressed on this issue. Issue For the purposes of computing capital gains under section 50 of the Act, in the case of the transfer of depreciable assets, which includes office buildings, is the stamp duty valuation to be taken as the full value of the consideration according to the special provisions contained in section 50C of the Act? Assessee s contentions The assessee contended that the provisions of section 50C of the Act cannot be applied to assess capital gains for depreciable assets for the following reasons: Since sections 50 and 50C of the Act operate in different fields and both create a deeming fiction, the provisions of section 50C of the Act cannot be extended and applied to cases which are covered by section 50 of the Act. Section 50C of the Act is applicable when the capital assets being transferred are land and buildings, whereas section 50 of the Act deals with capital assets forming part of a block of assets. As a result, there is a difference in the manner of computation of capital gains under the two sections Section 50 of the Act is a special provision creating a deeming fiction to treat capital gains arising even from the transfer of a long term capital asset as short term capital gains, whereas section 50C of the Act creates another deeming fiction which is applicable only for that purpose. A fiction cannot be made to apply over another fiction; the assessee relied on various judicial decisions to prove this point. Taking a cue from the AO s contention that the entire block was not sold, the assessee alternatively contended that when the stamp duty value is considered as the sale value, then, according to a the decision of Mumbai Tribunal 2, the provisions of section 50 of the Act will not be applicable since the meaning of 2 ACIT v. Roger Pereira Communications (P.) Ltd. [2009] 34 SOT 64 (Mum) 2

3 the terms, moneys payable and written down value will not be in consonance with the provisions of sections 43(6)(c) and 32(1)(ii) of the Act. And, further, even if the stamp duty value is to be considered as per section 50C of the Act, the written down value as per section 43(6)(c) of the Act would be positive for the purposes of computing depreciation, thus leading to a conflict between the provisions of sections 50 and 32(1)(ii) of the Act. Revenue s contentions The Revenue contended that provisions of section 50C of the Act can be applied to assess capital gains in the assessee s case for the following reasons: There is nothing in the provisions of section 50 of the Act to debar the application of the provisions of section 50C of the Act 3. The legal fiction created in section 50 of the Act (i.e., modification of the term mode of computation in relation to depreciable assets, to mean written down value ) has limited applicability 4. Section 50C of the Act was introduced after section 50 of the Act and, despite the fact that the legislature was aware of the legal fiction already created in section 50 of the Act, it did not put any bar on the applicability of section 50C of the Act to cases where section 50 of the Act is applicable. As regards the alternative contention of the assessee, the Revenue contended that this cannot now be taken up before the Tribunal when the assessee has accepted the applicability of section 50 of the Act as upheld by the CIT(A), and that the transfer of the entire block of office building had taken place during the year as shown by the assessee himself. Tribunal s Ruling The Special Bench of the Mumbai Tribunal referred to various relevant sections of the Act and allowed the revenue s appeal. It held as follows: The deeming fiction in the case of section 50 of the Act of the Act modifies the term cost of acquisition used in section 48 of the Act for the purpose of computing the capital gains arising from the transfer of depreciable assets. The deeming fiction created in section 50C of the Act modifies the term full value of the consideration received or accruing as a result of transfer of the capital asset used in section 48 of the Act for the purpose of computing the capital gains arising from the transfer of capital assets consisting of land or buildings or both. The deeming fictions under sections 50 and 50C of the Act operate in different fields. This is not a case where a supposition is sought to be imposed on another supposition of law. The fiction created in sections 50 and 50C of the Act, both have limited applications and there is nothing to prevent the application of both the legal fictions in a given case. 3 CIT v. Commonwealth Trust Ltd. [1997] 228 ITR 1 (SC) 4 CIT v. ACE Builders (P) Ltd. [2006] 281 ITR 210 (Bom) Had there been any intention to negate the applicability of provisions of section 50C of the Act to cases involving the transfer of land and buildings being depreciable assets as covered by section 50 of the Act, this could have been provided for in the provisions of section 50C of the Act, which were inserted on 1 April, 2003, when the provisions of section 50 of the Act were already present. 3

4 The Tribunal agreed with the Revenue s contention that the fictions created in sections 50 and 50C of the Act, both have limited applications and operate in different fields, and that there is nothing to prevent the application of both the legal fictions in a given case. By applying the provisions of section 50C of the Act where section 50 of the Act is applicable, there is no extension of the legal fiction created in the said provision beyond its legitimate field. is not entitled to take a stand with regard to facts inconsistent with that which it took before the revenue authorities to obtain a decision in its favour. Accordingly, the Tribunal upheld the view taken by the AO in applying the provisions of section 50C of the Act to the transfer of depreciable capital assets covered by section 50 of the Act and in computing the capital gain arising from the said transfer by adopting the stamp duty valuation. Under the provisions of section 50C of the Act, there is no distinction made between depreciable and non-depreciable assets and thus it cannot be said that this provision is not applicable in a case of transfer of depreciable assets which is covered by section 50 of the Act. The additional plea of the assessee that section 50 of the Act is not applicable because, according to the AO, the block of assets had not ceased to exist and is, therefore, eligible for depreciation under section 32 of the Act read with section 43(6) of the Act, cannot be raised now, as the CIT(A) has already decided the matter in favour of the assessee by holding that the entire block of office buildings had been sold in the year under consideration. Since the CIT(A) has made a final decision on the issue, allowing the assessee s contention and reversing the findings of the AO, the assessee cannot now dispute the applicability of section 50 of the Act on these grounds. The assessee Conclusion Even though the deeming fictions under sections 50 and 50C of the Act operate in different fields, neither of them have an overriding effect on the other and therefore, the stamp duty valuation as per section 50C of the Act is to be considered in computing the value of consideration in the transfer of depreciable assets, being land and/or building. 4

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