ORDER
This appeal filed by the revenue is directed against the order of Commissioner (Appeals)-V, Mumbai passed on 22-1-2008 for the assessment year 2004-05.
2. The grounds of appeal of the revenue read as under—
“1. On the facts and in the circumstances of the case and in law,
the Commissioner (Appeals) has erred in directing the assessing officer to delete the addition of Rs. 6,84,000 added as short-term capital gain.
2. On the facts and in the circumstances of the case and in law; the Commissioner (Appeals) has erred in not considering the fact that the assessing officer is within his right to adopt the sale consideration as per the valuation of stamp duty authority, which is higher than the value declared by the assessee.”
3. Briefly, the facts of the case are that during the assessment proceedings, the assessing officer noted that the assessee has sold office premises bearing No. 47, 4th Floor White Hall August Kranti Marg, Mumbai-400007 or a consideration of Rs. 32,30,000 as per sale deed dated 19-7-2003 . The assessing officer obtained valuation adopted by the Stamp Duty authorities in respect of the said property. The stamp duty authorities have valued the said property at Rs. 39,14,001 for the purpose of stamp duty. The assessing officer invoked section 50C and taxed Rs, 6,84,000 (39,14,001 – 32,30,000) as short-term capital gain. The Commissioner (Appeals) directed the assessing officer to delete the addition of Rs. 6,84,000 from the short-term capital gain included in the total income observing that section 50 does not have any mention of the stamp valuation as is mentioned in section 50C of the Act
4. The learned Department Representative relied upon the order of the assessing officer and submitted that section 50C is applicable to all the provisions related to the computation of capital gain including sections 48M, 49 and 50 of the Act.
5. On the other hand, the learned Authorised Representative relied upon the order of the Commissioner (Appeals) and submitted that the assets of the office premises which were sold is part of block of assets included four premises of which opening WDV is Rs. 34,57,372 after adjustment of sale consideration of one premises sold. The WDV for remaining three premises is Rs. 2,27,372. The learned Authorised Representative submitted that three premises continued to be existing with the positive figure and was not exhausted nor has the block become negative. The learned Authorised Representative drew our attention to section 32(1)(iii) of the Act and submitted that Explanation to sub-section (1) the term ‘moneys payable’ means “moneys payable in respect of any building, machinery, plant or furniture, includes; (a) any insurance, salvage or compensation moneys payable in respect thereof; (b) where the building, machinery, plant or furniture is sold, the price for which it is sold”; even after sale of this property block of assets continued and was not exhausted. As such according to law, no capital gains arose on this transaction. Therefore neither section 50 nor section 50C would be activated on the above event. The learned Authorised Representative further submitted that sections 50 and 50C are deeming sections which have to be strictly confined to the purpose for which they have been enacted. The learned Authorised Representative further submitted that section 50 is applicable only for the purpose of section 48 and section 48 will come into operation in the case of business of assets only at the event of block of asset getting exhausted after considering the transfer or sale. The learned Authorised Representative in support of its contention, relied upon the case of Inderlok Hotel (P) Ltd. v. Income Tax Officer (2009) 27 (II) ITCL 364 (Mum-Trib) : (2009) 32 SOT 419 (Mum-Trib).
6. We have heard the learned representative of parties. The controversy is in respect of calculation of depreciation and capital gains in respect of assets on depreciation are allowed. How switch over from depreciation chapter to capital gain chapter. Depreciation is allowable as a deduction both according to accountancy principles and according to the Indian Income Tax Act. Why? Because, otherwise one would not have a true picture of the real income of the business, depreciation means: “a decrease in value of property through wear, deterioration or obsolescence: the allowance made for this in bookkeeping, accounting, etc.” (Webster’s New World Dictionary). The fundamental concept of depreciation is that is allowable to the extent of cost of the asset unless otherwise provided in the statute.
6.1 The assessee heavily relied upon Explanation to clause (iii) of sub-section (1) of section 32 which provides that “moneys payable” in respect of any building, machinery, plant or furniture includes (a) any insurance, salvage or compensation moneys payable in respect thereof; (b) where the building, machinery, plant or furniture is sold, the price for which it is sold, this explanation is required to read with the section 32 of the Act which provides deduction and in case of any building, machinery, plant or furniture in respect of which depreciation is claimed and allowed under clause and which is sold, discarded, demolished or destroyed the amount by which the moneys payable in respect of such building, machinery, plant or furniture, together with the amount of scrap value, if any, fall short of the written down value thereof, to that extend deduction of depreciation will be allowed. Section 32(1)(iii) is in respect of terminal depreciation. Terminal depreciation mean the deficit arising on the transfer of the asset by way of sale, demolition, destroyment and discardation- such allowance is granted to make up the deficiency arising on sale etc. of the asset. For example written down value of such assets was Rs. 1000 and moneys payable as defined above is only Rs. 800. In this case deduction to the extend of Rs. 200 will be allowed as depreciation under section 32. Theoretically when any depreciable asset is sold etc., then the amount received as a result thereof plus the depreciation allowed on such asset till the date of sale, shall be equal to the actual cost of the assessee. But if it does not happen then the statute provides therefor by special provisions. One of such provision is contend in section 32(1)(iii) of the Act. On carefull reading of section 32(1)(iii) of the Act we noticed that this allowance is restricted to power companies that to too in respect of building, plant, machinery and furniture. If we see the old provisions of the Act in respect of balancing charge and capital gain we find that section 41(2) was in statute which has been omitted by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 with effect from 1-4-1988. It was provided in that sub-section (2) of section 41 that where any building, machinery, plant or furniture which is owned by the assessee and which was or has been used for the purposes of business or profession is sold, discarded, demolished or destroyed and the moneys payable in respect of such building, machinery, plant or furniture, as the case may be, together with the amount of scrap value, if any, exceed the written down value, so much or the excess as does not exceed the difference between the actual cost and written down value shall be chargeable to income-tax as income of business or profession of the previous year in which the moneys payable for the building, machinery, plant or furniture become due. Up to the cost of asset section 32 and section 41(2) were taken care. On sale of an asset consideration beyond cost of the asset was taken care by the provisions of capital gains. A new scheme of depreciation allowance under which depreciation is to be allowed in respect of block of assets instead of allowing depreciation on individual assets has been introduced by the Taxation (Laws Amendments and Miscellaneous Provisions) Act, 1986 with effect from 1-4-1988.
6.2 Section 32 of the Act is in respect of deduction to be allowed while computing total income. According to clause (1) of section 32 of the Act following deductions shall be allowed as depreciation of (i) buildings, machinery, plant or furniture, being tangible assets; (ii) know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after 1-4-1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession.
“(i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed;
(ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed :—
Provisos to this clause provided that no deduction shall be allowed under this clause in respect of certain assets. Certain explanations were given in respect application of the section.
The clause (iii) of sub-section (1) of section 32 reads as under :—
(iii) in the case of any building, machinery, plant or furniture in respect of which depreciation is claimed and allowed under clause (i) and which is sold, discarded, demolished or destroyed in the previous year (other than the previous year in which it is first brought into use), the amount by which the moneys payable in respect of such building, machinery, plant or furniture, together with the amount of scrap value, if any, fall short of the written down value thereof :
Provided that such deficiency is actually written off in the books of the assessee.
Explanation.—For the purposes of this clause,—
(1) “moneys payable” in respect of any building, machinery, plant or furniture includes—
(a) any insurance, salvage or compensation moneys payable in respect thereof;
(b) where the building, machinery, plant or furniture is sold, the price for which it is sold,
so, however….
(2) ‘sold’ includes a transfer….”
6.3 Section 50 as is operative from assessment year 1988-89 is to be read along with section 2(11) which defines ‘block of assets’ and section 32, section 34, section 41 and section 43 which pertain to depreciation on ‘block of assets’, terminal allowance, balancing charge, written down value, etc.
6.4 Section 32 and section 34 dealing with depreciation were radically amended by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 with effect from 1-4-1988. In place of depreciation on individual item of depreciable asset, concept of grant of depreciation on ‘block of assets’ was introduced by said amendments. “Block of assets” was defined in section 2(11) as a group of assets falling within a class of assets, viz., buildings, machinery, plant or furniture in respect of which the same percentage of depreciation is prescribed. Section 41(2) dealing with balancing charge which was taxable as business income was omitted and provision regarding terminal allowance was amended. Written down value in respect of ‘block of assets’ was defined in section 43(6)(c). In consequence of these amendments in the provisions relating to depreciation, it became necessary to make new provision regarding computation of capital gains in respect of depreciable assets. Hence the present section 50 was substituted with effect from 1-4-1988 by the said Amendment Act in place of section 50 as originally enacted and amended from time to time.
6.5 The purpose of enactment of section 50 is driven home by a reference to the Finance Minister’s Budget Speech for the year 1986-87. The relevant part is extracted hereinbelow :—
“As promised in the Long Term Fiscal Policy Statement, I propose to introduce a system of allowing depreciation in respect of block of assets instead of the present system of depreciation on individual assets. Simultaneously, I propose to rationalize the rate structure by reducing the number of rates as also for providing the depreciation at higher rates so as to ensure more than 80 per cent of the cost of plant and machinery is written off in a period of 4 years or less. This will render replacement easier and help modernization. Apart from those items which are eligible for 100 per cent depreciation in initial year itself, there are at present different rates for plant and machinery. I propose to have only two rates of depreciation at 331/3 per cent and 50 per cent. Plant and machinery used in anti-pollution devices and those using indigenous know-how are proposed to be replaced in a block carrying the higher rate of depreciation of 50 per cent. Building meant for low-paid employees of industrial undertakings will be entitled depreciation at 20 per cent as against the general rate of 5 per cent for residential buildings and 10 per cent for non-residential buildings.”
6.6 Pursuant to the above announcement, amendments have been made to sections 2,32A, 34,35,38,41,43,50,55,57,59 and 155 of the Income-tax Act. As mentioned by the Economic Administration Reforms Commission (Report No. 12, para 20), the existing system in this regard requires the calculation of depreciation in respect of each capital asset separately and not in respect of ‘block of assets’. This requires elaborate book-keeping and the process of checking by the assessing officer is time consuming. The greater differentiation in rates, according to the date of purchase, the type of asset, the intensity of use, etc., the more disaggregate has to be the record keeping. Moreover, the practice of granting the terminal allowance as per section 32(1)(iii) or taxing the balancing charge as per section 41(2) of the Income Tax Act necessitate the keeping of records of depreciation already availed of by each asset eligible for depreciation. In order to simplify the existing cumbersome provisions, the Amending Act has introduced a system of allowing depreciation on block of assets. This will mean the calculation of lump sum amount of depreciation for the entire block of depreciable assets in each of the four classes of assets, namely, buildings, machinery, plant and furniture.
6.7 Under the new system; the written down value of any block of assets may be reduced to nil for any of the following reasons :—
“(A) The moneys receivable by the assessee in regard to the assets sold or otherwise transferred during the previous year together with the amount of scrap value may exceed the written down value at the beginning of the year as increased by the actual cost of any new asset acquired, or
(B) All the assets in the relevant block may be transferred during the year. Section 50 of the Income Tax Act prescribing the manner in which the cost of acquisition in the case of depreciable assets may be computed for the purposes of determining the capital gains has been substituted by new provisions by the Amending Act to take care of both the above situations. The particulars of these provisions, overriding section 2(42A) of the Income Tax Act, are as under :—
(A) The newly substituted section 50(1) provides that in a case where any block of assets does not cease to exist but the full value of the consideration received or accruing as a result of the transfer of the depreciable assets by the assessee during the previous year exceeds the aggregate of the following amounts, namely :—
(i) Expenditure incurred wholly or exclusively in connection with such transfer or transfers;
(ii) The written down value of the block of assets at the beginning of the previous year; and
(iii) The actual cost of any asset falling within the block of assets acquired during the previous year.
Such excess shall be deemed to be short-term capital gains.
(B) The newly substituted section 50(2) of the Income Tax Act deals with the cases where any block of assets ceases to exist for the reason that all the assets in that block are transferred during the previous year. In such a case, the cost of acquisition of the block of assets shall be the written down value of the block at the beginning of the previous year as increased by the actual cost of any asset falling within that block acquired by the assessee during the previous year. The income from such transfer or transfers shall be deemed to be short-term capital gains.”
6.8 The section creates a deeming fiction. It cannot be extended beyond the purpose for which it has been enacted. The section is a special provision, which provides for bringing to tax by way of short-term capital gains depreciable assets which are transferred during the previous year as against those provided in section 2(42A).
6.9 Consequent changes made in section 32 in this regards, sub-clause (c) of clause (6) of section 43 has been inserted to define the “written down value” which is as under:—
“(6) ‘written down value’ means—
(a) in the case of assets acquired in the previous year, the actual cost to the assessee;
(b) in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under this Act…
(c) in the case of any block of assets,—
(i) in respect of any previous year relevant to the assessment year commencing on 1-4-1988, the aggregate of the written down values of all the assets falling within that block of assets at the beginning of the previous year and adjusted,—
(A) by the increase by the actual cost of any asset falling within that block, acquired during the previous year; and
(B) by the reduction of the moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the written down value as so increased; and
(C) in the case of a slump sale,…”
6.10 Conditions for application of section 50: section 50 applies only when the asset involved is part of ‘block of assets’ as defined in section 2(11) and not when such assets does not form part of ‘block of assets’. The second condition for attracting section 50 is that depreciation should have been allowed either under the 1922 Act or under the 1961 Act. If these two conditions are fulfilled then provisions of section 48 and section 49 dealing with computation of capital gains are to be read subject to modifications mentioned in clauses (1) and (2) of section 50 for computing capital gains.
(a) Applicability of clause (1) – clause (1) of section 50 deals with a situation in which ‘block of assets’ does not cease to exist during the previous year in which transfer of the asset forming part of block of assets takes place. In such a situation, if the full value of consideration received or accruing as a result of the transfer of any other capital asset falling within the block of assets during the previous year exceeds the aggregate of the following amounts, namely :—
(i) expenditure incurred wholly and exclusively in connection with such transfer or transfers; (ii) the written down value of the block of assets at the beginning of the previous year; and (iii) the actual cost of any asset falling within the block of assets acquired during the previous year, then, such excess shall be deemed to be capital gains arising from the transfer of short-term capital assets.
(b) Applicability of clause (2) – clause (2) of section 50 deals with a situation wherein the block of assets ceases to exist as such, for the reason that all the assets in that block are transferred during the previous year. In that case, the cost of acquisition of block of assetsshall be the written down value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within the block of assets acquired by the assessee during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from transfer of short-term capital assets.
(c) Illustrations – The Board has explained these provisions by illustrations in Circular No. 469, dated 23-9-1986 which may be seen. Here twosimple illustrations are given.
Suppose at the commencement of a previous year the block of assets consists of three items, A, B and C their written down value at the commencement of the previous year is as follows :—
| A Rs. | 10,000 |
| B Rs. | 9,000 |
| C Rs. | 5,000 |
During the previous year assets A and B are sold for Rs. 30,000 and Rs. 8,000 and expenditure incurred in connection with transfer of these assets is Rs. 500 and Rs. 300 respectively. Assets D and E are acquired for Rs. 4,000 and Rs. 3,000 and they form part of block of assets.
Then short-term capital gains under clause (1) of section 50 shall be computed as follows :—
| Full value of consideration received on transfer | Rs. 38,000 | |
| (Rs. 30,000 + 8,000) | ||
| (i) | expenditure incurred wholly and exclusively in connection with transfers | 800 |
| (Rs. 500 + 300) | ||
| (ii) | written down value of the block of assets at the beginning of the year | 2,4000 |
| (Rs. 10,000 + 9,000 + 5,000) | ||
| (iii) | actual cost of the assets acquired during the previous year | 7,000 |
| (Rs. 4,000 + 3000) | ||
| Aggregate of (i), (ii) and (iii) | 31,800 | |
| (Rs. 800 + 24,000 + 7000) | ||
Excess – Rs. 3 8,000 less 31,800 = Rs. 6,200 to be taxed as short-term capital gains under clause (1) of section 50.
Payment of short-term capital gains under clause (1) of section 50 can be avoided by purchasing an asset worth more than Rs. 6,200 which could form part of block of assets. On such purchase being made aggregate of (i), (ii) and (iii) would exceed Rs. 38,000 and hence full value of consideration received on transfer would not exceed the aggregate of (i), (ii) and (iii) above and hence there would be no chargeable capital gains.
It is to be noted that there cannot be a loss under the head ‘Capital gains’ so long as the block of assets continues to exist.
6.11 The above discussion can be summed up as under :—
In the case of block of assets, depreciation under section 32 can be claimed on the written down value as computed under section 43(6) provided as on the last day of the previous year the following two requirements are to be fulfilled :—
(1) there must be at least one asset in the block; and
(2) there must be some value for the block on which prescribed percentage can be applied.
When any one or both the above mentioned requirements are not satisfied on transfer of any asset from the block, the provisions of section 32 cease to apply and automatically the provisions of section 50 become applicable resulting in short-term capital gains/loss.
7. In view of the above detailed discussion, we are of the view that the Commissioner (Appeals) has rightly deleted the addition of Rs. 6,84,000 on account of short-term capital gains.
8. In the result, the appeal of the revenue is dismissed.
