Section 50 Is a Computation Fiction Only: ITAT Mumbai Upholds Set-Off of Long-Term Capital Losses Against Deemed Short-Term Capital Gains

Background and Context

A significant ruling has emerged from the Mumbai Income Tax Appellate Tribunal in the matter of ACIT vs. Reliance Infrastructure Limited, clarifying one of the more nuanced questions under the Income Tax Act, 1961 — specifically, the scope and reach of the deeming fiction embedded in Section 50 and its interaction with the set-off provisions under Section 74.

The Tribunal, while dismissing the Revenue's appeal, held that Section 50 operates exclusively within the domain of computation of capital gains and does not have the effect of converting a long-term capital asset into a short-term capital asset. As a natural corollary, long-term capital losses — whether of the current year or brought forward from earlier years — remain eligible for set-off against gains computed under Section 50, notwithstanding that such gains are deemed to be short-term capital gains for computational purposes.

This ruling carries significant practical implications for assessees holding depreciable assets that qualify as long-term capital assets, and who simultaneously have long-term capital losses available for set-off.

Facts of the Case

Reliance Infrastructure Limited filed its original return of income on 11.03.2022, disclosing a business loss of Rs. 1,249.98 crores for Assessment Year 2021-22. During the relevant previous year, the assessee had transferred a depreciable capital asset and computed the resulting capital gains under Section 50 at Rs. 752.34 crores. Alongside, the assessee had incurred long-term capital losses of Rs. 257.25 crores and disclosed income from other sources of Rs. 65.40 crores. The aggregate of all these components resulted in a gross total loss of Rs. 432.22 crores.

A revised return was subsequently filed on 30.03.2022, revising the business loss to Rs. 1,239.19 crores, while the gain under Section 50 and long-term capital losses remained unchanged. The revised return accordingly disclosed a gross total loss of Rs. 421.43 crores.

Processing Under Section 143(1)

When the revised return was processed under Section 143(1) vide intimation dated 22.09.2022, an adjustment of Rs. 445.00 crores was made under Section 41 on account of cessation of liability. This adjustment had the effect of converting the returned loss into positive income, resulting in total income being determined at Rs. 23.56 crores. The assessee challenged this adjustment before the first appellate authority.

Scrutiny Assessment Under Section 143(3)

While the appeal was pending, the case was taken up for scrutiny and assessment under Section 143(3) was completed on 30.12.2022. In the scrutiny assessment, the Assessing Officer proceeded on the income determined under Section 143(1) and further added Rs. 1,009.50 crores on account of principal loan written off and Rs. 51.75 crores on account of foreign exchange loss, bringing the assessed total income to Rs. 1,084.82 crores.

Rectification Proceedings Under Section 154

The assessee filed a rectification application under Section 154 pointing out various computational errors in the assessment order. In the interim, the CIT(A) decided the appeal against the Section 143(1) adjustment in favour of the assessee, deleting the Rs. 445.00 crore addition under Section 41. An order giving effect was passed on 16.03.2023, largely restoring the computation to the returned position.