Section 50 of the Income-tax Act, 1961 (the Act)

Section 50 of the Income-tax Act, 1961 (the Act) creates a deeming fiction, whereby the excess of sale consideration over the block value of depreciable assets is taxed as capital gain arising from transfer of short-term capital assets.

 

In the case of Asstt. CIT v. Santhosh Hospital [2014] 41 taxmann.com 47 (Cochin) the Cochin Tribunal while adjudicating upon taxability of capital gains on depreciable assets has passed an obiter dicta by stating that sale of depreciable assets would always be a short-term capital gain.

 

In Smita Conductors Ltd. v DCIT, The Mumbai Tribunal has however taken a different view and held that prescriptions of section 50 are to be extended only to stage of computation of capital gain and, therefore, capital gain resulting from transfer of depreciable asset which was held for more than three years would retain character of long-term capital gain for purposes of all other provisions of Act.

 

The controversy that arises is whether transfer of a depreciable capital asset which is held for more than 36 months would be treated as short term capital gains or not. Section 50 as mentioned above is a deeming fiction and every deeming fiction has to be strictly construed. Viewed from this angle, it seems that the judgement of the Cochin Tribunal is correct, however the Mumbai Tribunal in the case of Raj Babbar [2013] 29 taxmann.com 11 held that for calculating exemption under section 54F, the deeming fiction of section 50C has no effect. As a matter of fact, the underlying principle in Smita Conductors and Raj Babbar’s case is that a deeming fiction should be restricted to the purpose for which it has been enacted. That being the view of the Mumbai Tribunal, the Cochin Tribunal judgement would require reconsideration.