Depreciation Cannot Be Combined With Revival Of Original Cost For Indexation Benefit: ITAT Ahmedabad

The Ahmedabad Bench of the Income Tax Appellate Tribunal (ITAT) on 21 April held that a taxpayer cannot claim depreciation on an asset in earlier years and thereafter seek to revive its original cost of acquisition to claim higher indexation benefits while computing capital gains on its sale.

A Bench comprising Judicial Member Siddhartha Nautiyal and Accountant Member Narendra Prasad Sinha dismissed an appeal filed by Shree Vaidehi Impex Pvt Ltd for assessment year 2016–17 against an order of the Commissioner of Income Tax (Appeals). It held:

“The assessee's contention, if accepted, would lead to an anomalous situation where depreciation benefits are availed in earlier years and yet the original cost is revived for purpose of indexation benefits, which in our view is contrary to the intent of the Act.”

Shree Vaidehi Impex Pvt Ltd sold an immovable property which had earlier formed part of its block of depreciable business assets. The company filed its return declaring income of Rs. 99.56 lakh.

During scrutiny assessment under Section 143(3) of the Income Tax Act, the Assessing Officer found that the property formed part of a depreciable block and accordingly invoked Section 50 for computation of capital gains. The Assessing Officer treated the entire gain of Rs. 3.59 crore as short-term capital gains on that basis.

On appeal, the CIT(A) held that Section 50 creates a legal fiction limited to computation and does not alter the character of the asset as a long-term capital asset. Relying on CIT v. Ace Builders Ltd., the CIT(A) observed that the property qualified as a long-term capital asset since it had been held for more than three years after depreciation was last claimed.

However, the CIT(A) rejected the taxpayer's claim to compute indexation from the original date of acquisition and instead adopted the written down value as on 31 March 2010, being the point when depreciation was last claimed.

Upholding this approach, the Tribunal held that the taxpayer could not simultaneously retain depreciation benefits and revive the original acquisition cost for indexation purposes. It also rejected the claim towards cost of improvement after noting absence of supporting documentary evidence. It also found no infirmity in the appellate order.

Accordingly, the ITAT dismissed the appeal.