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Long term capital gain or business income

Sirish (Article Assistant) (53 Points)

30 January 2016

A partnership firm constructed a Building in the year 2003 and charged the depreciation for two years as Business Asset, thereafter the building was given on Rent and no depreciation is being charged. Now, the firm want to sell it out. Whether profit on Sale of Building shall be a Long Term Capital gain since it is the Capital Asset and the firm is not doing any business or it shall be a business income since firm already charged depreciation in initial years?

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6 Replies

CA Hariprasad Nayak (Chartered Accountant) (221 Points)
Replied 30 January 2016

Hi Sirish,

The asset in question is a depreciable asset, presuming that this building is the only asset in the Block and the block ceased to exist on sale of this asset, any gain arising out of sale of depreciable asset needs to be taken as Short term capital gain in view of Section 50 of the Act irrespective of period of holding the asset.

Hope the above clarifies.

Regards,

CA Hariparasad Nayak

Sirish (Article Assistant) (53 Points)
Replied 01 February 2016

Sir, there is more to the business. The firm since did not carry out the business they rent it out and show as Rental Income under House Property. Now, since it is Capital Asset for the firm should not the profit be taxable as LTCG not as business income because the firm was not carrying out any real estate business. ?

CA Hariprasad Nayak (Chartered Accountant) (221 Points)
Replied 09 February 2016

Hi Sirish,

Gain on sale of building can never be business income unless, as rightly pointed out by you, it forms part of stock in trade of the business. Building, whether connected with business or not is termed as 'Capital Asset' u/s 2(14) of the Act and hence any gain on sale of the same is to be taxable as Capital Gain.

Since you mentioned it is no longer a depreciable asset, the period of holding has to be considered to determine the nature of capital gain- whether Long-term or Short Term.

Regards,

CA Hariprasad Nayak

Ruchi (CA) (1410 Points)
Replied 09 February 2016

In my view, the profit on sale of building will be charged as STCG because it is a depreciable asset whether the firm has been claiming depreciation or not. The period of holding of asset is also not important because depreciable assets when sold will give rise to STCG or STCL ( if block ceases to exist..etc..).

The asset is a capital asset but a depreciable asset also. It does not ceases to be a depreciable asset if the firm is not claiming it.

It would have been business income only if it was held as stock-in -trade , as already mentioned.

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(Guest)

As per section 50 it would be deemed taxable as Short Term Capital Gains.

Section 43 stipulates that even if depreciation has not been claimed it would be deemed to have been provided. Irrespective of the fact whether rental income has been offered to tax as Income from House Property or Business Income.

However, this deeming fiction does not prohibit claim of exemption u/s 54EC from the capital gains computed above. The asset would be a Long Term Capital Asset.

It would not be taxable as business income unless held as stock in trade.

CA Prateek Jain

New Delhi

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