Sale of Depreciable asset though charged as Short Term Capital Gain but the same can be set off against any other Long Term Capital Loss- [Komac Investment & Finance (P) Ltd V/s ITO- ITAT, Mumbai]

Brief Background
-Assessee sold office premise on which depreciation was claimed every year
-Gain Rs.53,16,397/- arising therefrom charged as Short Term Capital Gain by virtue of Provisions of
  S.50(2)
-Office premise was held for more than 36 months
- Other items in the return being
    [a] Business Loss Rs.11,46,422
    [b] Unabsorbed Depreciation Rs.25,39,085/-
    [c] Brought forward Long Term Capital Loss of Rs.47,13,107
-Assessee claimed set off of all of the above against Short term Capital Gain of Rs.53,16,397/-
-Assessing Officer disallowed the claim of set off of Long Term Capital Loss against STCG above, applying provisions of S.74(1)(b)
-Assessee filed First appeal to CIT (A)
-CIT (A) confirmed the action of Assessing officer thereby disallowing  the claim of set-off
-Assessee filed 2nd Appeal to ITAT (Mumbai)

Provision of Section 74(1)(b)
74(1) Where in respect of any assessment year, the net result of the computation under the head of "Capital Gain" is a loss to the assessee, the whole loss shall, subject to other provisions of this chapter, be carried forward to the following year, and-
(a) ....................
(b) insofar as such loss relates to a long term capital asset, it shall be set off against, income, if any, under the head "Capital Gain" assessable for that assessment year in respect of ANY OTHER CAPITAL ASSET NOT BEING SHORT TERM CAPITAL ASSET.''

Case law referred: ACE Builders (P) Ltd of Jurisdictional Bombay High Court

Held by ITAT as under:

11. We find the Hon'ble Bombay High Court in the case of ACE Builders (P.) Ltd. (supra) at pages 219 and 220 has held as under :

"It is true that section 50 is enacted with the object of denying multiple benefits to the owners of depreciable assets. However, that restriction is limited to the computation of capital gains and not to the exemption provisions. In other words, where the long-term capital asset has availed of depreciation, then the capital gain has to be computed in the manner prescribed under section 50 and the capital gains tax will be charged as if such capital gain has arisen out of a short-term capital asset but if such capital gain is invested in the manner prescribed in section 54E, then the capital gain shall not be charged under section 45 of the Income-tax Act. To put it simply, the benefit of section 54E will be available to the assessee irrespective of the fact that the computation of capital gains is done either under sections 48 and 49 or under section 50. The contention of the Revenue that by amendment to section 50 the long-term capital asset has been converted into a short-term capital asset is also without any merit. As stated hereinabove, the legal fiction created by the statute is to deem the capital gain as short-term capital gain and not to deem the asset as short-term capital asset. Therefore, it cannot be said that section 50 converts a long-term capital asset into a short-term capital asset."

12. From the above it is clear that although the gain is short term capital gain due to the fiction created by provisions of section 50(2), the asset remained as "long term capital asset". Therefore, in view of the ratio laid down by the Jurisdictional High Court, the brought forward long term capital loss can be set off against the capital gain on account of transfer of the depreciable asset which has been held by the assessee for more than 36 months thereby making the asset a long term capital asset . In this view of the matter, we hold that under section 74(1)(b) the assessee is entitled to the claim of set off of long term capital loss against the income arising from the sale of office premises, the gain of which is short term due to the deeming provision but the asset is long term. The ground raised by the assessee is accordingly allowed.

13. In the result, the appeal filed by the assessee is allowed in favor of Assessee.