Is Long Term Capital Losses adjustable with short term Capital gain arising on depreciable assets?

Well the answer to the above question would be YES!

According to a recent judgment in the case of M/s Manali Investments held that the short term capital Gain arising from transfer of depreciable assets held for more than 36 months can be set off against long term capital losses.

According to the ruling Section 50 is to be restricted upto the computation of the Capital Gain of depreciable assets.

LEGAL ISSUES

1)      If loss under the head “Capital Gain” can not be set off under the same head due to absence/inadequacy of relevant income, it can be carried forward to the following assessment year and:

a)      So far as the loss is Short Term Capital Loss, it shall be set off against Capital Gain income (whether Sort Term or Long Term)

b)      So far as the loss is Long Term Capital loss, it shall be set off against Long Term Capital Gain income.

FACTS OF THE CASE

The assessee was in the business of investment and finance. The tax department contended that since the assessee has claimed depreciation on the asset sold , their transfer would attract the provision of section 50 of the Act and as result the gain would be deemed to be short term capital gain.

The assessee during the year sold depreciable assets held more than 36months and showed it as Long Term Capital Gain and adjusted the same with brought forward Long term Capital Loss.

The assessing officer did not agree and treated the same as Short term capital Gain and did not allow the set off of Short Term Capital Gain with Long term Capital Losses.

The taxpayer relied on Bombay High Court decision in case of ACE builders (P) Ltd and appealed against the order of the Assessing Officer.

THE RULING BY THE TRIBUNAL

The Tribunal observed that section 50 was a deeming fiction and it is because of this if a Long Term Depreciable Capital asset is transferred then Short Term Capital Gains arises.

But as per the rulings by Supreme Court deeming fiction provision are to restricted to that particular computation and not more than that.

So after the computation under section 50 the function of the provision of the said section comes to an end and the capital gain so determined shall be dealt  with as per the other provisions of the Act.

The Tribunal relied on the case of Ace Builders and held that such Short Term Capital Gain can be set off with brought forward Long Term Capital Losses.

 CONCLUSION

It is a very welcome decision by the Mumbai Tribunal where the Tribunal has held that the brought forward long term capital losses can be set off against the gains arising from sale of depreciable assets held for more than 36 months even if such gains were deemed as short term capital gain under section 50.

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