Sellers Of ‘Depreciated’ Commercial Property Can Claim LTCG Tax Benefits, Rules ITAT

Homebuyers using capital gains arising from the sale of a commercial asset, on which depreciation has been claimed, could now avail of the tax benefits under Section 54F of the Income Tax Act, 1961 (I-T Act). However, the house purchase needs to be made within two years of selling the depreciating asset.

This means the capital gains coming from the sale of a depreciating asset, which was earlier considered as short-term, will now come under the long-term category.  This was recently ruled by the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) while it was hearing a certain case.

The case

One Jaya Deepak Bhavnani, a businesswoman running a manufacturing and export business, sold her manufacturing unit for Rs 1.33 crore during the financial year 2012 and claimed depreciation on the same. Later she purchased a house worth Rs 1.45 crore using this money and claimed tax benefits under the Section 54F of the I-T Act.

Under this provision, one could get an exemption on capital gains arising from the transfer of a long-term capital asset other than a house property. However, to avail of these benefits, the house property needs to be purchased within two years of the date of transfer and the seller should not own more than one residential house on the date of the transfer of the depreciating asset. 

This was in contradiction to the Section 50 of the I-T Act, under which if someone sells a capital asset forming part of block of assets (building, machinery, etc.) on which the depreciation has been allowed under the I-T Act, the income arising from such capital asset is treated as short-term capital gain. Stating the same, Bhavnani was denied tax sops from the lower tax authorities. 

However, the ITAT ruled it in her favour, stating that she could avail of tax benefits in Section 54F.