Long-Term Capital Loss Set-Off Against Section 50 Gain Allowed | ITAT

Case Details: Assistant Commissioner of Income-tax vs. Reliance Infrastructure Ltd. [2026] 187 taxmann.com 571 (Mumbai-Trib.)

Judiciary and Counsel Details

• Amit Shukla, Judicial Member & Makarand Vasant Mahadeokar, Accountant Member
• Jitendra Sanghvi for the Appellant.
• Umashankar Prasad, CIT DR for the Respondent.

Facts of the Case

The assessee transferred a depreciable capital asset and computed gain under section 50. It also reported long-term capital loss and income from other sources, resulting in a gross total loss. The assessee disclosed the gain and the availability of long-term capital losses for carryforward and set-off. However, while processing the return, an adjustment was made under section 41, converting the returned loss into positive income. The Assessing Officer (AO) further made additions to the scrutiny assessment.
The assessee filed an application under section 154 for computational mistakes. AO granted set-off of brought forward short-term capital loss and unabsorbed depreciation. However, he declined to permit the adjustment of current year’s and brought forward long-term capital losses against the gain arising from the transfer of the depreciable asset.
The aggrieved assessee filed an appeal to the CIT(A), wherein relief was granted. The aggrieved AO filed the instant appeal before the Tribunal.

ITAT Held

The Tribunal held that section 50 is essentially a special computational provision falling within the scheme for computing capital gains. The object behind the provision is to provide a special method for computing gains arising on the transfer of depreciable assets forming part of a block of assets in respect of which depreciation has been allowed over the years.
The legislative intent is to ensure that while computing capital gains on the transfer of such depreciable assets, the assessee does not derive computational benefits otherwise available in the case of ordinary long-term capital assets. Thus, section 50 modifies the normal computation provisions contained in sections 48 and 49 and creates a legal fiction whereby the resultant gain is deemed to be short-term capital gain.

However, significantly, the section nowhere provides that the underlying capital asset itself shall cease to be a long-term capital asset. The fiction is directed towards the computation of gain and not towards altering the intrinsic character of the asset. The issue stands squarely covered by the judgment of the Hon’ble Jurisdictional High Court in CIT v. Parrys (Eastern) (P.) Ltd. [2016] 66 taxmann.com 330 (Bombay), the Hon’ble High Court, after examining the scope of section 50, categorically held that the deeming fiction contained therein is restricted only to the mode of computation of capital gains under sections 48 and 49 and does not convert a long-term capital asset into a short-term capital asset. Their Lordships specifically observed that section 50 deems only the gain to be short-term capital gain for computation and does not deem the capital asset itself to be a short-term capital asset.
Consequently, wherever another provision of the Act requires examination of the nature of the asset, the actual character of the asset and not the fiction created under section 50 must govern the matter. Accordingly, the assessee was legally entitled to adjust the current year’s long-term capital losses, as well as the brought-forward long-term capital losses, against such gain.

List of Cases Reviewed

• CIT v. Parrys (Eastern) (P.) Ltd. [2016] 66 taxmann.com 330/238 Taxman 14/384 ITR 264 (Bombay) (para 11) followed

List of Cases Referred to

• CIT v. Parrys (Eastern) (P.) Ltd. [2016] 66 taxmann.com 330/238 Taxman 14/384 ITR 264 (Bombay) (para 5)
• CIT v. V.S. Dempo Company Ltd. [2016] 74 taxmann.com 15/242 Taxman 434/387 ITR 354 (SC) (para 12).