MUMBAI: In a significant ruling, the Mumbai bench of the Income-tax Appellate Tribunal (ITAT) has clarified that tax benefits for investing in a residential property can be claimed even if the investment originates from the sale of a depreciated asset, such as an office unit.
Tax laws, often complex, come into sharp focus in this case. Typically, when a depreciable asset is sold, the gains are treated as ‘short-term capital gains’ under Section 50 of the Income-tax (I-T) Act, subjecting them to taxation at standard income-tax rates rather than the reduced rates applicable to long-term capital gains.
However, the I-T Act also provides a way to mitigate tax on gains from the sale of a ‘long-term capital asset’ (other than a house property) through Section 54-F. This provision allows taxpayers to offset their capital gains by investing the net proceeds in a residential property, provided they meet specific conditions, such as purchasing the property within a stipulated timeframe.
In this particular case, Ms SP Khanna sold an office unit, on which depreciation had been claimed, and reinvested the proceeds in a new residential property valued at Rs 96 lakh. She subsequently claimed the tax benefit under Section 54-F.
The ITAT noted that while Section 50 classifies gains from depreciable assets as short-term, it does not redefine the nature of the capital asset itself. Since Ms Khanna had held the office unit for over three years, the tribunal recognized it as a ‘long-term capital asset.’
The bench has now directed the Income-tax Officer to reassess Ms Khanna’s income and, if all other conditions are satisfied, to allow her tax claim.
