By Vimal Punmiya, Chartered Accountant
Querist………………………………………. M/s. PRASHANT CORPORATION
The Querist is a Partnership firm, Registered in Mumbai, The firm is involved in business of diamonds and garments and other business, Since last several years.
The Querist had their office premises in Prasad Chambers. The Firm was claiming depreciation on the said office premises, Since it was purchased. It was recorded under the block of assets headed as ‘Building/offices Premises. The said office premises was sold in the Accounting year 1992-93 for a consideration of Rs. 1,34,42,000/-.
In the same year the Querist purchased office premises for a consideration of Rs. 1,37,30,000/- and was recorded under the block of assets headed ‘Building/office Premises’. The depreciation was charged on the same as per Sec. 32 of the Income tax Act. The W.D.V. of the block, as on 31-3-1993 was Rs. 3,74357/-.
After the Assessment year 1993-94 onwards no depreciation was claimed on the block ‘ Building /Office Premises’. Now the Querist wants to dispose off a part of the office premises for a consideration of Rs. 1,00,00,000/-.
The Querist has raised the following queries and asks for the opinion regarding the undermentioned.
i) Since to depreciation on the said office premises was claimed since last several years, can the firm treat the capital gains on the sale of business premises as long term and invest in bonds?
ii) In case if the capital gains arising on sale of the office premises is trusted as short term only, can the firm invest the same in the bonds for a period of 3 years and get the exemption from the Income tax in view of the recent Tribunal decision?
iii) Can the firm invest such capital gains partly in bonds and partly in new office premises and how will it be calculated?
iv) Can the firm get any benefit for investment as required under section 54 of the Income Tax Act, 1961?
v) In case the investment in bonds are sold earlier than their maturity, how such amount be taked, in the year of sale or earning of capital gains.
vi) Any other method by which the tax liability of the firm be reduced to the minimum?
Ans. 1) Sec. 43(6) clauses (b) lays down that in case of assets acquired before the previous year, the W.D.V. means-
i) the actual cost of the asset to the assessee.
ii) All depreciation actually allowed to him under-
(a) the Income tax act, 1961.
(b) The Indian Income Tax Act, 1922.
(c) Any Act repealed by the Indian Income tax Act, 1933 and
(d) Any executive orders issued when the Indian Income Tax Act, 1886, was in force.
In that view of the matter, the W.D.V. in the case of assets acquired before the
previous year is to be determined as per the provision of section 43(6) (b).
C.f. Jose Kuruvilla V. C. AS IT , (1992) 197 ITR 13, 17 (Ker.)
In this case, no depreciation was actually claimed and allowed in the intervening years, the ‘actual cost’ of the depreciable asset is to be regarded as W.D.V. of that asset for the purpose of allowing deprecation for the relevant Asst. years.
Further, section 50 explains provisions for computation of capital gains in case of depreciable assets.
Nothing contained in clause (42A) of section 2 where the capital asset is an asset farming part of a block of assets in respect of depreciation has been allowed under this Act or under the Indian I.T. Act, 1922 (11 of 1922), the provisions of section 48 & 49 shall be subject to following modifications.
- 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 assets during the previous year, exceeds the aggregate of the following amounts, namely:-
i) expenses incurred wholly and exclusively in connection with such transfer or transfers.
ii) The W.D.V. 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; and therefore will be consideration as short term capital gains.
Ans.2) Even though, the Sec.50 provides that the gain arising on sale of a depreciable asset, whether long term or short term, is short term capital gain whereas provision of Sec. 54 to 54H provides for the exemptions for capital gains arising from the transfer of long-term capital asset. Both stand together in their respective field. The specialty attached to Sec.50 is to be restricted to only for the method of computing the capital gain and not for determining the nature of capital asset.
In such a situation the benefits should be given to the assessee and it should be left open to him to choose as to which provisions of the law he wants to invoke.
This statement is supported by various Tribunals.
- ACE Builders (P) Ltd. V. ACIT (2001) 76 ITD 389 (Mumbai). (copy enclosed).
- Goculdas Dossa & Co. V.J.P. Shah (1995) 211 ITR 706 (Bom).
- Weikfied Products Co. (I) (P) Ltd. V. Dy. CIT (2001) 71 TTJ (Pune) 518.
If on the basis of the above decisions the assessee invokes and claims deduction U/s54EC he should invest the whole or any part of the capital gain in long-term specified assets, within 6 months from the date of transfer of the asset.
Long-term specified asset means any bond redeemable after 3 years:-
i) issued on or after April 1, 2000 by the National Bank for Agriculture and Rural Development (NABARD) or by the National Highway Authority of India; or
ii) issued on or after April 1, 2001, by the Rural Electrification Corporation Ltd.
Ans. 3) The Querist would be eligible for exemption in chapter ‘Capital Gains’ only U/s 54EC. Therefore if he partly invests in new office than he cannot claim exemption U/s 54EC.
But if the assessee continues and invokes the provisions of Sec.50 and invests in new office premises then capital gains shall be calculated in the following manner.
Sale Consideration xxx
Less: a) Expenses on transfer xx
b) W.D.V. of block of assets in
the beginning of the previous year xx
c) Cost of Premises acquired during the
previous year xx
Short term capital gain xxx
And U/s. 54EC, the amount invested in the new asset i.e. the bonds or the Capital gain whichever is less shall be exempted.
In such a situation the Querist is open to choose only one of the sections and take benefits accordingly.
Ans. 4) The firm cannot get any benefit for investment as required U/s 54 of the Income tax Act, 1961, since this Sec. Is applicable only to the Individuals and HUF.
Ans. 5) If the investment made in bonds specified U/s.54EC are transferred (or concerted into money or any loan/advance is taken on the security of specified assets) within 3 years from the date of its acquisition, the amount of capital gains arising from the transfer of original asset which was not charged to tax, will be deemed to be the income by way of long term capital gains of the previous year in which specified assets are transferred, etc.
Ans. 6) As already discussed earlier above the Querist should either make investment in bonds of NABARD or bonds issued on or after April 1, 2001 by the Rural Electrification Corporation Ltd. or else must purchase new premises, more than the amount of capital gains.
Times of India has reported wrongly on the above subject. The detailed study on capital gain Tax, hence put to readers for clear picture. – Editor