Income Tax--Current Issues

Practice Update

V.K. Subramani

BROUGHT FORWARD BUSINESS LOSS SET OFF AGAINST SHORT-TERM CAPITAL GAIN ON SALE OF DEPRECIABLE ASSETS

When an asset is used for business it is eligible for depreciation which the taxpayer would avail since it is a benefit/incentive. But where the tax counsel has doubt about the tenure of such business, he may advise voluntary non-claim of depreciation. This might prompt one to cite the legal position that allowance of depreciation is mandatory (Explanation 5 to section 32(1) w.e.f. 1-4-2002) and even when not claimed, the tax officers have to give such benefit to the taxpayers (Circular No. 3 of 1942 dated 16-1-1942). Still, voluntary non-claim is more advised for immovable properties which may remain with the assessee but its business use may or may not be required in the backdrop of uncertainty about its use/relevance for the business or profession carried on by him.

The Supreme Court in Sakthi Metal Depot v. CIT (2021) 436 ITR 1 (SC) : 2021 TaxPub(DT) 4286 (SC) has held that once depreciation is claimed, the character of the asset would be the same and non-claim of depreciation for sometime before its transfer would not change its character for availing the benefits which are otherwise available for capital assets. However, the decision in the case of CIT v. V.S. Dempo Co. Ltd. (2016) 387 ITR 354 (SC) : 2016 TaxPub(DT) 4318 (SC) would help us to treat the capital gain as long-term (if held for more than specified period) for the purpose of availing exemption under section 54EC or 54F, as the case maybe.

Yet another aspect to this tale could be that the assessee has brought forward business loss and has short-term capital gain in terms of section 50. In Digital Electronics Ltd. v. Addl. CIT 2011 TaxPub(DT) 0560 (Mum-Trib) the Tribunal held that as per section 72, the losses incurred under the head 'Profits and Gains of Business or Profession' which could not be set off against income from any other head of income, have to be carried forward to the following assessment year and are allowable for being set-off against the profits, if any, of that business or profession carried on by the assessee and assessable for that assessment year. There is no requirement of the gains being taxable under the head 'profits and gains of business or profession' and thus, as long as gains are 'of any business or profession carried on by the assessee and assessable to tax for that assessment year', the same can be set off against loss under the head profits and gains of business or profession carried forward from earlier year. Thus the gain arising on sale of the business assets is (depreciable assets) in the nature of business income, though it is taxed under the head 'Capital Gains' could be scaled down by deducting brought forward business loss.