COMMISSIONER OF INCOME TAX Vs. SAKTHI METAL DEPOT

JUDGEMENT

(1.) This is an appeal filed by the revenue challenging the orders of the Income-tax Appellate Tribunal cancelling the short-term capital gains assessment on profit arising to the respondent-assessee on the sale of a building on which depreciation was allowed for several years by declaring that such profit is chargeable to tax as long-term capital gains because no depreciation was claimed or allowed for two years prior to the previous year in which the building was sold. We have heard senior standing counsel appearing for the revenue and Sri P. Balakrishnan, counsel appearing for the respondent-assessee.

(2.) The facts leading to the controversy are the following. The respondent-assessee is a firm which was engaged in business with principal place of business at Kochi and a Branch at Mumbai. The assessee purchased a flat at a cost of Rs. 95,000 in Mumbai for business purposes in the financial year ending on 31-3-1974. Since purchase of the flat, it was used as Branch Office of the assessee at Mumbai and on the capitalised cost of the building at Rs. 95,000 the assessee claimed depreciation and the same was allowed until the assessment year 1995-96. The written down value of the flat as on 31-3-1995 was Rs. 37,175.80. However, the assessee discontinued claiming depreciation for the flat for the assessment years 1996-97 and 1997-98. The flat was sold during the year 1997-98, that is in the previous year relevant for the assessment year 1998-99 on a total sale consideration of Rs. 71 lakhs. After deducting the expenses towards brokerage and legal expenses of Rs. 3,52,000 the assessee returned profit of Rs. 67,34,210 as long-term capital gains. The Assessing Officer however held that profit arising on transfer of depreciable asset is assessable as short-term capital gains under Section 50 of the Income-tax Act. Applying the provisions of Section 50, he assessed the profit on sale of the flat as short-term capital gains. The assessee's contention before the Assessing Officer was that it stopped using the flat for business purposes after the assessment year 1995-96 and thereafter the flat was treated as investment and was so shown in the Balance Sheet. The Assessing Officer did not accept the assessee's contention that flat at Mumbai was discontinued to be used for business purposes in the two years following the assessment year 1995-96 because according to him the assessee's attempt was only to avoid payment of tax on short-term capital gains. In the appeal filed by the assessee, the CIT (Appeals), also concurred with the Assessing Officer and held that the building being depreciable asset and was being used for business purposes, sale of the same attracts tax on short-term capital gains under Section 50 of the Act. On second appeal filed by the assessee, the Tribunal solely relying on the entry in the Balance Sheet of the assessee wherein the flat of the assessee at Mumbai was shown as investment, held that since the item was purchased in 1974, sale of the flat is assessable as long-term capital gains. It is against this order of the Tribunal that the revenue has filed this appeal.

(3.) Senior counsel appearing for the revenue contended that Tribunal's findings are factually and legally incorrect. Before proceeding to decide the case on merits, we feel the factual controversy as to whether after using the building for business purposes and after claiming depreciation for 21 years, the assessee deliberately did not claim depreciation for two succeeding years, 1996-97 and 1997-98, but simultaneously used the building for business purposes, need not be decided because in our view supported by reasons stated hereinbelow, the sale of a depreciable asset in respect of which depreciation was allowed to the assessee should always be treated as short-term capital gains by virtue of operation of Sections 50, 50A and 50B of the Act. We therefore proceed to decide the matter by assuming that the assessee after claiming depreciation for the flat which was used as a Branch Office at Mumbai from 1974 onwards and in respect of which depreciation was claimed and allowed until the assessment year 1995-96, sold it in the previous year relevant for the assessment year 1998-99 without using it for business purposes for two years preceding the year of sale and in respect of which depreciation was neither claimed nor allowed for those two years. Since the controversy is on the scope of Sections 50 and 50A we extract hereunder the said sections for easy reference: