COMMISSIONER OF INCOME TAX vs MINI ADIE CONTRACTOR

RAJESH BALIA, J.

The Tribunal, Ahmedabad Bench ''A'', has referred a question of law arising out of its order in ITA No. 656/Ahd/1982 relating to asst. yr. 1977-

78, dt. 27th June, 1983. The question reads as under :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the depreciation allowed

to the deceased Aide Contractor from whom the assessee had inherited the asset should not be taken into account and adjusted from the value of

1st Jan., 1954, for the purpose of computation of cost of asset for taking capital gain ?

The facts and circumstances of the case in which the question has arisen are that Late Shri Adie Contractor was the owner of a cinema theatre

which he acquired prior to 1st Jan., 1954. He died on 16th Jan., 1972. The respondent-assessee, along with two others, inherited the cinema

theatre. The asset was sold during the previous year relevant to the asst. yr. 1977-78. The assessee opted to take the fair market value of asset as

on 1st Jan., 1954 as its cost of acquisition under s. 55(2), r/w s. 49, r/w s. 50(2) of the IT Act, 1961. The assessee computed the cost of

acquisition to be the fair market value as on 1st Jan., 1954, as reduced by depreciation allowed to the assessee since the asset became vested in

him on the death of previous owner and on that balance capital gains were computed. The ITO did not accept the computation of the cost of

acquisition made by the assessee but from the fair market value as on Ist Jan., 1954, deducted depreciation allowed on such assets after 1st Jan.,

1954, to late Shri Adie Contractor in addition to the depreciation which has been allowed to assessee after he acquired the asset by way of

succession. The view taken by the ITO was confirmed by the AAC. The Tribunal on further appeal, however, accepted the assessee''s contention

and allowed the claim of the assessee as to the computation of the cost of acquisition for the purposes of computing capital gains for the

assessment year in question. In the aforesaid circumstances, the question has been referred to us to consider what was the amount of depreciation

that is to be allowed in reaching the cost of acquisition of the asset in question.

Sec. 45 provides that ""any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise

provided in other provisions, bb chargeable to Income Tax under the head ''Capital gains'' as income of the previous year in which the transfer

took place."" Sec. 46 deals with a situation arising in the case of distribution of assets to the shareholders on liquidation of a company. Sec. 47

enumerates certain transactions which are not subjected to change of capital gains. Sec. 48 prescribes mode of computation of capital gain arising

on transfer of a capital asset. It in turn envisages that from the full value of the consideration received or receivable as a result of transfer of the

capital asset there shall be deducted expenditure incurred wholly and exclusively in connection with such transfer and the cost of acquisition of

capital asset and the cost of any improvement thereto. Thus, cost of acquisition becomes the principal factor in computing capital gains arising on

transfer of a capital asset. Sec. 49 provides for a situation where the assessee himself might not have incurred the cost of acquisition of the capital

asset in relation to which capital gains is to be computed. In such event, the cost of acquisition of the asset is to be deemed to be the cost for which

the last of previous owner of the property acquired it who has acquired it by mode of acquisition other than referred to in s. 49(1) as increased by

cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be. Sec. 50 deviates from s. 48

and s. 49 in dealing with capital assets in respect of which a deduction on account of depreciation has been obtained by the assessee in any

previous year either under the Act of 1961 or under the Indian IT Act, 1922.

For better appreciation of the controversy before us, s. 50 is reproduced hereinbelow :

''Notwithstanding anything contained in cl. (42A) of s. 2, where the capital asset is an asset forming part of a block of assets in respect of which

depreciation has been allowed under this Act or under the Indian IT Act, 1922 (11 of 1922), the provisions of ss. 48 and 49 shall be subject to

the following modifications :

(1) where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such

consideration received or accruing as a result of the transfer of any other capital asset falling within the block of the 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,

such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets;

(2) where any block of assets ceases to exist as such, for the reason that all the assets in that block are transferred during the previous year, the

cost of acquisition of the block of assets shall 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 that 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 the transfer of short-term capital assets.

A perusal of s. 50 as such reveals that firstly, it applies to the case of an assessee, transferor of the capital asset, who has obtained deduction on

account of depreciation in respect of such asset in any previous year. If an assessee himself has not obtained any deduction on account of

depreciation after his acquisition, s. 50 would not be applicable. The second thing which stands out is that ordinarily where an assessee has claimed

a deduction on account of depreciation in respect of such capital asset for the purposes of ss. 48 and 49, that is to say, to determine the cost of

acquisition which is to be reduced from full value of consideration to arrive at sum chargeable to capital gains instead of cost at which the asset was

acquired, written down value as defined in cl. (6) of s. 43 of the asset is to be taken as cost of acquisition of the asset. The written down value is

further qualified with the expression ''as adjusted'', that is to say, certain adjustments are to be made in the written down value to arrive at the

amount of cost of acquisition that is to be deducted from full value of consideration.

Sub-s. (2) of s. 50 envisages where on combined reading of s. 49 and s. 55(2), the assessee opts to take fair market value of an asset as on 1st

Jan., 1954, then such fair market value of the capital asset in question is to be reduced by the amount of depreciation, if any, allowed to the

assessee after the said date. The assessee here also cannot be any body but the assessee in relation to whom the capital gains are to be computed

for the purpose of levying tax under the Act of 1961. Here also the word ''cost of acquisition is qualified with expression I as adjusted''.

Thus, on the plain reading of s. 50 which governs the determination of cost of acquisition in the case of asset which has been subjected to

deduction on account of depreciation, only permissible deduction under sub-s. (2) from the fair market value as on 1st Jan., 1954, is allowed to

the assessee after 1st Jan., 1954. It cannot be stretched to reduce the fair market value adopted for the purposes of sub-s. (2) of s. 50 to be

reduced by any further sum of depreciation allowed to somebody other than the assessee. The expression used in sub-s. (2) of s. 50 is not

depreciation, if any allowed on the asset after the said ''date'' but the expression is ''depreciation if any, allowed to the assessee after the said date.''

The effect of exercise of option to adopt the fair market value of the asset as on 1st Jan., 1954 under sub-s. (2) of s. 50 is that in place of written

down value as on the date of transfer, fair market value as on 1st Jan., 1954, is substituted. While for the purpose of sub-s. (1) written down value

is to be taken as defined in cl. (6) of s. 43, sub-s. (2) does not refer to the written down value as defined in cl. (6) of s. 43 or fair market value as

reduced by depreciation in accordance with cl. (6) of s. 43 either.

It was urged by the learned counsel for the Revenue that the word ''as adjusted'' in sub-s. (2) must have some meaning. If the interpretation put

by the assessee is accepted, the expression would be rendered otiose. This contention also does not merit serious consideration. The expression

''as adjusted'' used in cl. (1) as well as cl. (2) of s. 50, has been defined in s. 55(1)(a) which reads as under :

(a) ''adjusted'', in relation to written down value of fair market value, means diminished by any loss deducted or increased by any profit assessed,

under the provisions of cl. (iii) of sub-s. (1) or cl. (ii) of sub-s. (1A) of s. 32 or sub-s. (2) or sub-s. (2X of s. 41, as the case may be, the

computation for this purpose being made with reference to the period commencing from the 1st day of April, 1974, in cases to which cl. (2) of s.

50 applies.

Whenever realisation is made of a business asset which has been subjected to depreciation, if such realisation is less than what its written down

value has been, the same is allowed as deduction in computing profit and loss of business or profession of the year in which such realisation takes

place or the asset is destroyed or put out of use. On the other hand, if realisation of such asset is more than written down value, the difference

between the cost of acquisition and the written down value is brought to tax as income from business or profession which is in corm-non parlance,

known as balancing charge. As amount referable as ''balancing charge'' is subjected to tax under the head ''Income from business or profession'',

the same is not subjected to tax a second time as capital gains by adjusting the cost of acquisition in relation to such depreciated asset by increasing

the written down value or the amount determined as cost of acquisition by reducing the fair market value as on 1st Jan., 1954 with the amount of

depreciation allowed to the assessee after 1st Jan., 1954 and such increased value is the cost of acquisition as adjusted for the purposes of sub-s.

(1) or sub-s. (2) of s. 50. This also does not refer to depreciation allowed to the previous owner before the asset became the property of the

assessee in relation to whom capital gains is computed. In effect, in the case of transfer of a depreciable asset, an assessee who has availed

deduction on account of depreciation to the extent realisation above written down value up to the amount of depreciation availed is subjected to

tax as income from profit and gains, and any realisation beyond it is subject to tax as capital gain. However, in case such excess is not (sic)

received by anyone who has not availed that depreciation, he does not receive any balancing charge but receives excess over cost of acquisition as

capital receipt liable to capital gains.

Provisions under s. 41(2) make it clear that for the purpose of computing capital gains, the cost of acquisition is to be reduced by actual

depreciation availed by the assessee and is to be increased by balancing charge, if any, to which he can be subjected to, under s. 41(1) and (2).

We are here not concerned with the question of increasing the cost of acquisition by adding balancing charge, if any, payable by the assessee as

that question was neither raised nor decided by the Tribunal at any stage. Even otherwise, if that is to be accepted, then it would further increase

the cost of acquisition for the purpose of computing capital gains by the said sum resulting in deduction of capital gains to that extent which is not

the case of Revenue either.

As a result of the aforesaid discussion, we are of the opinion that the deduction of depreciation allowed to the deceased is not permissible for

the purpose of reducing the cost of acquisition of capital asset for the purpose of computing capital gains in the case capital gains arising in the

hands of the successor on transfer of capital asset in case it falls within the provisions of sub-s. (2) of s. 50 and an option to adopt fair market value

as on 1st Jan., 1954 as its cost of acquisition in place of written down value has been exercised by the assessee. The computation thereafter must

follow the procedure provided in s. 50(2) and other provisions of the Act.

As a result, we answer the question referred to us in affirmative, that is to say, in favour of the assessee and against the Revenue. There shall be

no order as to costs.

OPEN