The general principle is that a capital asset(s) held for a period of less than three years is classified as a ‘short term capital asset’ and a capital asset(s) held for more than three years is treated as a ‘long term capital asset’. The exception to this principle is contained in Section 50 of the Income-tax Act, 1961 (‘IT Act’), which prescribes a different treatment in respect of depreciable assets and deems gains arising on transfer of a depreciable asset as short term capital gains, even in cases where the asset is held by the taxpayer for more than three years.

The applicability and scope of this deeming fiction contained in Section 50 of the IT Act has been a burning issue with the taxpayers contending limited applicability of the deeming fiction restricted to the method of computation of capital gains. Their argument is that Section 50 does not obliterate the distinction between short term and long term capital gains.

The divergent rulings given by Courts have only added fuel to fire and compounded the controversy. On one hand, the Bombay High Court^[1] has averred that the legal fiction cast by Section 50 is restricted only to the computation of capital gains and cannot be extended beyond that, since it is well settled position that the fiction created by the Legislature has to be confined to the purpose for which it was created. Accordingly, gains arising on transfer of a depreciable asset held for more than three years were held to be chargeable to tax as long term capital gains.

The Kerala High Court^[2], on the other hand, held that the non-obstante clause in Section 50 of the IT Act, carves an exception to the definition of short term capital asset, which means that even though the duration of holding of an asset is more than the period mentioned in Section 2(42A) of the IT Act, still the asset referred to therein will be treated as short term capital asset and, consequently, gains arising from transfer thereof will be taxed as short term capital gains.

It may be interesting to note that both the decisions stand affirmed by the Apex Court. The view propounded by the Bombay High Court was upheld in the case of V.S. Dempo Company Ltd.^[3] in 2016 and the ruling given by the Kerala High Court was affirmed in the year 2021. However, whilst affirming the decision rendered by Kerala High Court, the Apex Court did not consider its earlier decision rendered in the case of V.S. Dempo (supra).

The preceding paras clearly establish that there is no thumb rule as far as taxability of capital gains in respect of depreciable assets is concerned. The taxpayers should, therefore, exercise utmost caution and any position against the palpable mandate of the section, should only be adopted after obtaining requisite legal advice.

[1] CIT vs. Ace Builders (P) Ltd., (2005) 144 taxman 855 (Bombay High Court).

[2] CIT vs. Sakthi Metal Depot, (2011) 333 ITR 492 (Kerala High Court) as affirmed in Sakthi Metal Depot vs. CIT, (2021) 282 Taxman 384 (Supreme Court).

[3] CIT vs. V.S. Dempo Company Ltd., (2016) 387 ITR 354 (Supreme Court).