No Depreciation Claimed on Business Asset ? No Application of Sec. 50 Then !

Under Income Tax Act , sale of a business asset on which depreciation is claimed is affected by the provision of section 50 of the I.T.Act that provides that the gain if any shall be treated as short term capital gains. In other words, if plant or machinery or buildings or any other capital asset which was used by the person for business purpose and later disposed off for a consideration , in that case the computation of gains will be in accordance with provision under section  50 . The question however is  “Whether the provision u/s 50 apply of a person does not claim depreciation under Income Tax Act  , even if such a capital asset is part of block of asset ? . This post clears the air and concludes that there will be no application of provision u/s 50 if no depreciation was claimed ever on the asset.

Let us Start with Section 50 ?

Section 50 provides as under :

Special provision for computation of capital gains in case of depreciable assets.

50. Notwithstanding anything contained in clause (42A) of section 2, where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act or under the Indian Income-tax Act, 1922 (11 of 1922), the provisions of sections 48 and 49 shall be subject to the following modifications :—

(1) where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of the assets during the previous year, exceeds the aggregate of the following amounts, namely :—

(i) expenditure incurred wholly and exclusively in connection with such transfer or transfers;

(ii) the written down value of the block of assets at the beginning of the previous year; and

(iii) the actual cost of any asset falling within the block of assets acquired during the previous year,

such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets;

(2) where any block of assets ceases to exist as such, for the reason that all the assets in that block are transferred during the previous year, the cost of acquisition of the block of assets shall be the written down value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short-term capital assets.

 

From the aforesaid provision it is clear that in order to treat capital gain arising from the transfer of capital asset in the circumstances mentioned in the section as short-term capital gain, it is necessary that the conditions mentioned in section 50 be fulfilled viz.,

(i) the capital asset should be an asset forming part of block of assets, and

(ii) depreciation should have been allowed on it under the Act.

It is only on the fulfillment of these twin conditions that the prescription of section 50 gets activated. So , the provision u/s 50 clearly debars any capital asset on which depreciation was not allowed or claimed. As with all issues , this issue “whether the provision u/s 50 is applicable to sale of an asset on which no depreciation was claimed?”  by the assesse has been judicially examined in a number of judicial fora and fortunately the decision of Tribunal and High Court are in favour of the assesse. Here are four such decisions:

In case before Delhi High Court in CIT-IV vs I.K International Pvt Ltd [2012] 20 taxmann.com 197 (Delhi), facts were that the assessee sold a property and showed the capital gain arising from sale of land was taxable as long-term capital gain. He further claimed the exemption u/s54EC
The Assessing Officer opined that the provisions of section 50(2) were applicable since the land, building and other assets were part of the block of assets on which depreciation was allowable and, therefore, the capital gains could only be treated as short-term capital gains as provided in the aforesaid section.
Both CIT(A) and ITAT , however , did not agree with the assessing officer.
The High Court in paragraph 14 has clearly held as under :

14. A combined reading of Section 2(11), Section 32(1) and Section 50(2) of the Act shows that (i) a block of assets is one in respect of which the same percentage of depreciation is prescribed in respect of the assets falling in the same class; (ii) no depreciation is allowable in respect of land as it is not specifically mentioned as an asset eligible for depreciation either in Section 2(11) or in Section 32(1) and (iii) the provisions of Section 50 are applicable only when the asset transferred forms part of a block of assets and in addition it was also allowed depreciation under the Act.

The title to section 50 itself will suggest that it will not have any application in the cases where the asset is not depreciable .The block of asset has been defined in section 2(11) and means a group of assets falling within a class of assets in respect of which the same percentage of depreciable is prescribed. It can be seen from the Old Appendix I which is applicable from assessment years 1988-89 to 2002-03 and which prescribed the depreciable rates, land is not mentioned in the assets entitled for depreciable . Therefore, section 50 has no application at all on the land because it is not a depreciable asset. Therefore, we find no justification in the order of ITO and CIT(A) to the extent it has been held that any part of sale consideration relating to land can be taxed as short term capital gain under section 50 of the Act. We hold that no part of the sale price relating to land can be taxed under section 50 so as to enable the department to assess the gain arising there from as short term capital gain under section 50. Therefore, the appeal filed by the revenue to that extent is dismissed

 

. In Divinde Construction Co vs ACIT 138 TTJ 72 , the facts in brief was that the assessee , a civil engineering contracting firm was sold a premise which was used for purpose of business. The gain on sale of the flat was offered to tax as long-term capital gain.

The Assessing Officer however invoked the provisions of section 50 on the ground that the property was included in the block of assets , The assesse contended that the flat was neither used for the purpose of business nor any depreciation was claimed thereon. It was also contended that the assessee was carrying on its business from a rented premises and therefore, the property could not be categorized as business asset. The Assessing Officer did not accept the assessee’s contention in view of section 50 read with Explanation 5 to section 32 and computed short-term capital gain.

On appeal, the Commissioner (Appeals) upheld the order of the Assessing Officer. When the assesse field appeal before ITAT , it held in favour of assesse saying that since the depreciation on the flat was never claimed , the provision u/s 50 can not be applied . The relevant extract is given below :

The revenue rightly submitted that merely not claiming depreciation in one year was not sufficient to push a case out of the purview of section 50. It is necessary that the depreciation should have never been allowed on such capital asset. The assessee was directed to file purchase deed of the premises in 1999 and subsequent balance sheets and the details had been placed on record. It could be noticed that value of the property as appeared in the balance sheet for the assessment year under consideration at Rs. 8,91,460 continued to remain the same since its purchase in 1999. It showed that no depreciation was ever claimed or allowed on the property. In that view of the matter the provisions of section 50 could not be applied. Therefore, the impugned order on that issue was to be overturned and the long-term capital gain declared by the assessee was to be accepted as such, since no infirmity was pointed out by the Assessing Officer in the calculation shown by the assessee.

. In Dr. (Mrs) Sudha Trivedi vs ITO [2009] 31 SOT 38 (MUM.) the facts involved was that the assessee, a doctor by profession, had sold her business premises for certain consideration.. The assessee had not claimed depreciation on this building in the past.
The Assessing Officer held that even if no depreciation was allowed to the assessee in the earlier years, the mandate of the Explanation 5 to section 32(1) would be attracted since the building sold by the assessee was falling within the ‘block of asset’ and the resultant capital gain would be covered under section 50 being taxable as short-term capital gain. The Assessing Officer, therefore computed the short-term capital gain at certain amount.

On appeal, the Commissioner (Appeals) upheld the action of the Assessing Officer.
When assesse approached ITAT , it held in favour of assesse on the ground that the depreciation on the building was not claimed. The excerpt is as under :

8. The next question for our determination is that whether the provisions of section 50 apply to the building transferred by the assessee or not. This section provides that where the capital asset is an asset forming part of the block of assets in respect of which depreciation has been allowed then the provisions of sections 48 and 49 shall be subjected to the modifications as stated in clauses (1) and (2) of this section. Hence it clearly transpires that in order to be covered within the provisions of this section, not only the capital asset transferred by the assessee should be an asset forming part of the block of assets but should also be such “in respect of which depreciation has been allowed under this Act”. The twin conditions should be simultaneously satisfied so as to fall within the ambit of this section, viz., the falling of capital asset in a block of assets and the actual allowing of depreciation on such asset

The fact before Gujarat High Court in ITO vs Parikh Transport Co [2015] 55 taxmann.com 287 (Gujarat) was that
The assessee purchased an immovable property in 1969 and claimed depreciation thereon upto assessment year 1984-85. Thereafter with effect from assessment year 1985-86, he neither claimed any depreciation nor such claim was allowed by the revenue.
The assessee sold such asset during relevant assessment year and claimed that section 50 would not applicable on same because said asset was not included in block of assets as same had not been used for business with effect from assessment year 1985-86.
A,O did low the claim of assesse .
CIT(A) and ITAT however allowed the claim of the assesse.

When the Revenue agitated before Gujarat High Court , it affirmed the decision of the Tribunal as under :

The concept of block of assets has been introduced from assessment year 1988-89 onwards and since impugned property was no longer a business asset as on 1-4-1988, there was no occasion for the asset to enter the block of assets of the purposes of computing depreciation under section 32 as well as capital gain under section 50. Section 50 would not be applicable for the purpose of computation of capital gains. The property is obviously a long-term capital asset. [Para 6]

Conclusion 

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In my considered opinion, after carefully reading observation of court decisions and the provision under section 50 ,  the gain on sale of capital assets used for business purpose  will be as under :

1. charged to tax as capital gains -depending upon the nos of months of holding the assets.
2. It it is held for less than 36 months , it will be short term gains.
3. If it is held for more than 36 months , it will be long term gains.
4. Every relief or beefit available to a long term asset -like rate of tax u/s 111A, or 112 or exemption u/s 54,54F or 54EC will be available on sale of such assets .

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Readers are also advised to know that even if on sale of business asset on which depreciation is claimed , and the provision of section 50 applies to such disposal of business asset, the exemption u/s 54,or 54F or 54EC are still available if the business asset was held for more than 36 months. Please read this article 3 quick tax planning on sale of business asset