COMMISSIONER OF INCOME TAX, BILASPUR V. INCOME TAX APP.TRIBUNAL,JABALPUR and ANR

TAXC/10/2006

AI Insights

The case revolves around the legal question of whether carried forward unabsorbed depreciation can be set off against short-term capital gains arising from the sale of depreciable assets. The Assessee, M/s Jyoti Straw Products Private Limited, had sold its business and claimed a set off of unabsorbed depreciation against the capital gains from this sale, which was initially allowed by the Tribunal but later contested by the Income Tax Department. The High Court examined the provisions of the Income Tax Act, particularly sections 32(2)(iii) and 41(2), and the applicability of these sections to the facts of the case.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 760304 (HC-CHHATTISGARH)
• Appeal Type: Others
• Pronouncement Date: 09-05-2013
• Assessment Year: misc
• Other Referred Cases: JK Chemicals Limited Vs ACIT, Commissioner of Income Tax vs RPIL Signalling Systems Limited, Commissioner of Income Tax vs S & S Power Switchgear Limited, Commissioner of Income Tax vs Pioneer Asia Packing (P) Limited, Digital Electronics Limited Vs Additional Commissioner of Income Tax, Deputy Commissioner of Income Tax vs Times Guaranty Limited
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: G N PUROHIT; ABHISHEK OSWAL
• Assessee Lawyers: ANAND DADARIYA
• Keywords: Income tax appellate tribunal; Re-assessment proceedings; Short Term Capital Gains; Unabsorbed depreciation; Sale of depreciable assets
• Section: 147; 148; 143(3); 143(1); 271(1)(c); 260A; 41(2); 50; 32(1)(ii); 32(1)(i); 32(2)(iii)

Judgement Text

"^• HIGH COURT OF CHHATTISGARH ATBILASPUR CORAM: HON'BLE SHRI YATINDRA SINGH, C.J. HON'BLE SHRI PRITINKER DIWAKER, J. Appellant Respondents Tax Case No.10 of 2006 Commissioner of Income Tax, Bilaspur VERSUS Income Tax Appellate Tribunal, Jabalpjur and another JUDGEMENT FOR CONSIDERATION t*fc& Sd/- CbieiJustice HON'BLE SHRI PRITINKER DIWAKER. J. _^ OW.U- Sd/- Pritinker Diwaker Judge POST FOR PRONOUNCEMENT OF THE JUDGEMENTij? /05/2013 Sd/- CHIEF JUSTICE /05/2013 ? AFR HIGH COURT OF CHHATTISGARH AT BILASPUR CORAM: HON'BLE SHRI YATINDRA SINGH, C.J. HON'BLE SHRI PRITINKER DIWAKER, J. Appellant Respondents Tax Case No.10 of 2006 Commissioner of Income Tax, Bilaspur (CG) VERSUS Income Tax Appellate Tribunal, Jabalpur and another Appeal under Section 260A of the Income Tax Act Appearance: Shri Anand Dadariya, counsel for the Appellant. Shri GN Purohit, Senior Advocate with Shri Abhishek Oswal, counsel for Respondent-2. JUDGEMENT (09th May, 2013) (Delivered by Hon'ble Yatindra Singh, CJ) 1. The main point involved in this case is: 'Whether the carried forward unabsorbed depreciation can be set off against the short-term capital gains arising out of sale of depreciable assets or not.' It arises in this appeal by the Income Tax Department (the Department), under section 260A of the Income Tax Act, 1961 (the Act), against the order of the Income Tax Appellate Tribunal, Lucknow Bench, Camp at Jabalpur (the Tribunal) dated 19.04.2006. By the impugned judgement, the Tribunal allowed the appeal of M/s Jyoti Straw Products Private Limited, Raigarh (the Assessee) in respect of the Assessment Year (AY) 1999-2000. THE FACTS 2. The Assessee manufactured Straw Boards and carried on business up to 30.09.1998. It sold its plant, machinery, and business to M/s ARDEE Board Private Limited on 01.10.1998, ,y-y ^.-s^. ^ -^: ^'-^^v i ^^s^-'\"^^ '%. '!te%f ^•^s^ s '<»:- ( ^ 3. The Assessee filed its return on 31.03.2000 for AY 1999-2000 showing nil income. In the retum, it was mentioned that: • There was short-term capital gain arising out of sale of depreciable assets of ^24,49,607/-, long-term capital loss of ^3,18,408/-, business loss of ^5,56,356/- and the resultant income was ^15,73,843/-; • The unabsorbed depreciation of ^9,92,669/- for the AY 1990-91 and unabsorbed depreciation of ^5,81,174/- (out of s?8,48,406/-) for the AY 1991-92, was being set off with the resultant income to make it nil. 4. The return of the Assessee was processed under section 143(1) of the Act. However, the Assessing Officer (the AO) started re-assessment proceedings under section 147 of the Act and a notice under section 148 of the Act was issued to the Assessee on 06.02.2004. 5. The AO by his order dated 03.03.2005 disallowed the carried forward unabsorbed depreciation. He held that: • Under first proviso to section 32(2)(iii) of the Act, the business was required to be carried on for the entire year to set off the carried forward unabsorbed depreciation; and • As business was not carried on for the entire previous year, the set off claimed by the Assessee was negated. 6. The AO held the income of the Assessee to be ^15,73,843/- under section 143(3) read with section 147 of the Act. On this amount, interest under sections 234A to 234C of the Act was charged and notice for imposition of penalty was also issued under section 271(1)(c) of the Act for concealment of the income. 7. The Assessee filed an appeal against the aforesaid order. It was dismissed by the Commissioner of Income Tax (Appeals) (the CIT-A) on 26.09.2005 on the following two grounds namely, • Firstly, the business was not carried for the entire year; and ^^ ^, y 'SES*'^ ''^•wsif9 ^ ^ • Secondly, carried forward unabsorbed depreciation could not be set off against the short-term capital gains on sale of depreciable assets. 8. The Assessee filed the second appeal before the Tribunal. It was allowed on 19.04.2006. The Tribunal held that: * Under the first proviso to section 32(2)(iii), the condition was to carry on business in the previous year. It was not necessary that business should be carried on for the entire year; • The short-term capital gain/ loss on sale of depreciable assets was to be dealt with under the head of 'profit and gains of business or profession' in view of the decision in JK Chemicals Limited Vs ACIT (ITA 8618/Bombay/89) given by the Bombay Bench of the Tribunal; and • The unabsorbed depreciation could be set off against the short- term capital gains on sale of depreciable assets. Hence, the present appeal by the Department. POINTS FOR DETERMINATION 9. We have heard counsel for the parties. This appeal was admitted on 02.02.2010 on the following substantial questions of law: • 'Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that the short-term capital gains arising on sale of plant & machinery and other assets has to be assessed under the head \"business income\" and not under the head \"capital gains\"? • Whether on the facts and in the circumstances of the case, the Tribunal was justified in allowing the claim of set-off of unabsorbed depreciation allowance of earlier years against the short-term capital gains of the current year by omitting to take cognizance of the provisions of Section 32 (2) (iii) (a) which stipulates such set- off only against profits and gains, if any, of any business of profession carried on by the assessee?' ,.»yite%a; ^•-^.\"^ 1 s^ ^^ ,/ '''^..SaSS^' However, the main question is as we have indicated in our opening paragraph. 10. On the basis of the aforesaid questions and on the arguments of the counsel for the parties, the following points arise for determination in the appeal: (i) Whether the benefit of set off can be availed under section 32(2) (iii) of the Act, even if the business was not carried on for the entire year; (ii) Whether the carried forward unabsorbed depreciation can be set off only against the profits and gains of any;business or profession carried on by the Assessee or against income under any other head; (iii)Whether the short-term capital gain on the sale of depreciable assets is an income under the head of 'profits and gains of any business or profession' or not; 1st POINT: NOT NECESSARY TO CARRY ON BUSINESS FOR ENTIRE YEAR 11. The counsel for the Department submitted that: • In view of first proviso to section 32(2)(iii), the carried forward unabsorbed depreciation could be set off only if business was carried on for the entire previous year; • In this case, business was not carried on for the entire year; • The Assessee was not entitled to set off its carried forward unabsorbed depreciation. 12. In the relevant assessment year 1999-2000, the first proviso to section 32(2)(iii) of the Act was as follows: Provided that the business or profession for which the allowance was originally computed continued to be carried on by him in the previous year relevanj for that assessment year. -£'*»>•&, /' ^. \"%. 1 I 1 & '^ ^ff\"'' ,.-* It was later on deleted by the Finance Act of 2000 with effect from 01.04.2001. 13. The provision mandates that business or profession for which the allowance was originally computed should be continued by the Assessee in the previous year. It nowhere mandates that business should continue for the entire year. In the present case, the Assessee did continue business up to 30.09.1998. 14. The counsel for the Department would like us to read the words 'continued to be carried on by him in the previous year' as 'continued to be carried on by him for the entire previous year'. hle wishes us to read the word 'entire', which is not there. 15. If the intention of the legislature was, as was submitted by the counsel for the Department then, there was no difficulty in using the word in the 'entire previous year' in place of just 'previous year'. The legislature by not using the word 'entire' clearly showed its intention that it was notnecessary that the business should be carried on for the entire year. 16. It is settled law that 'the intention of the Legislature is primarily to be gathered from the language used, which means that attention should be paid to what has been said as also to what has not been said. As a consequence a construction which requires for its support addition or substitution of words or which results in rejection of words as 'Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. v. Custodian of Vested Forests, AIR 1990 SC 1747 = 1990 (2) JT 130 = 1990 Supp SCC 785; Mohammad Alikhan v. Commissioner of Wealth Tax, AIR 1997 SC 1165 :=1997 (3) SCC 511; Institute of Chartered Accountants of India v. Price Waterhouse, AIR 1998 SC 74 = (1997) 6 SCC 312; Dental Council of India v. Hari Prakash, AIR 2001 SC 3303 = (2001) 8 SCC 61; JP Bansal v. State of Rajasthan, AIR 2003 SC 1405 = 2003 AIR SCW 1848 = (2003) 5 SCC 134; Dental Council of India v. Hari Prashad, AIR 2001 SC 3303 = (2001) 8 SCC 61; lllachi Devi v. Jain Society Protection of Orphans , (2003) 8 SCC 413; State of Jharkhand v. Govind Singh, AIR 2005 SC 294; Commissioner of Income Tax, Kerala v. Tata Agencies, (2007) 6 SCC 429; Nagar Palika Nigam v. Krishi Upaj Mandi Samiti, AIR 2009 SC 187 = (2008) 12 SCC 364. \"— iir &—••<\"!'•*&.' -s \"^te.ag ^- meaningless has to be avoided2 (see 'Principles of Statutory Interpretation' by Justice GP Singh, 12th edition, page 64). 17. Inouropinion, • An assessee is entitled to claim set off even if business was carried on for the part of the year; • The proviso does not prevent the Assessee from taking advantage of section 32(2)(iii), if the other conditions are satisfied. 2nd POINT: ONLY AGAINST PROFIT AND GAINS OF BUSINESS OR PROFESSION 18. Chapter IV of the Act is titled 'Computation of total income'. It provides how income of an Assessee for purposes of the Act is to be computed. Section 14 is in this chapter. It is titled 'Heads of Income'. It provides different heads underwhich total income is to be computed. 19. Section 14 provides five kinds of heads namely, 'A.—Salaries', 'C.—Income from house property', 'D.—Profits and gains of business or, profession', 'E.—Capitalgains' and 'F.—Income from other sources'. Initially, the Act provided one more head, namely, 'B.—Intereston securities' but it was later deleted by Finance Act, 1988 wef 01.04.1989. 20. Chapter IV is further subdivided into different sub-chapters 'A', 'C', 'D', 'E' and 'F'. Each sub-chapter provides different sources of income under a head. 2 Shyam Kishori Devi v. Patna Municipal Corporation, AIR 1966 SC 1678 = 1966 (3) SCR 466; Management, Shahdara (Delhi) Saharanpur Light Rly. Co. Ltd. v. SS Rly. Workers Union, AIR 1969 SC 513 = (1969) 2 SCR 131; S. Narayanaswami v. G. Panneerselvam, AIR 1972 SC 2284 = (1972) 3 SCC 717; Union of India v. Sankalchand, AIR 1977 SC 2328 = (1977) 4 SCC 193; AR Antuley v. Ramdas Srinivas Nayak, AIR 1984 SC 718 = (1984) 2 SCC 500; Mohammad Alikhan v. Commissioner of Wealth Tax, AIR 1997 SC 1165 = 1997 (3) SCC 511; Institute of Chartered Accountants of India v. Price Waterhouse, AIR 1998 SC 74 = (1997) 6 SCC 312; State of Maharashtra v. Nanded Prabhani Operator Sangh, AIR 2000 SC 725 = (2000) 2 SCC 69; Grasim Industries Ltd. Collector of Customs, AIR 2002 SC1706 := (2002) 4 SCC 297; JP Bansal v. State of Rajasthan, AIR 2003 SC 1405= 2003 AIR SCW 1848 = (2003) 5 SCC 134; State gfJharkhand v. Govind Singh, AIR 2005 SC 294. (.^ ». \"8, 21. In calculating the income under a head, certain deductions can also be made. These deductions are provided in that particular head itself. Normally, loss under one head can be set off only against the profit in that head, unless it is so provided under any provision of the Act. 22. Sub-chapter D of chapter IV is titled 'D.—Profits and gains of business or profession'. Section 32 is in this sub-chapter. It is titled 'Depreciation' and provides deductions on account of depreciation. 23. Under the Act, income is taxed regardless diminishing value of the assets except, allowance, in form of depreciation for some assets. Generally, depreciation represents the diminution in value of a capital asset, when applied to the purpose of making profit or gain and it is a legitimate deduction in determining the true profits (see below for citations)3. 24. In the relevant AY, sub-section (1) of section 32 {Section 32(1)} provided how depreciation was to be calculated for different assets and its set off against profits and gains of that business. 25. Sub-section 2 of section 32 {Section 32(2)} (see Appendix-1) explained the words 'unabsorbed depreciation'. It was that part of allowance under clause (ii) of sub-section (1) of section 32 {section 32(1) (ii)} {see Endnote-1 for clarification on section 32(1 )(ii)} that could not be given full effect to in any previous year owing to there being no profits or gains in that previous year or it being less than the allowance. 26. Section 32(2)(i)(ii) provided setting of current unabsorbed depreciation. Section 32(2)(i) provided that it could be set off against 3 Bandiani Vs CIT 105 ITR 642, 647-49(SC); CIT Vs Gujrat SWC 104 ITR 1; Nippon Vs CIT 116 ITR 231 ; CIT Vs Bombay STC 118 ITR 399 ; Vegetable oi] Mfg Vs CIT 147 ITR 544; CIT Vs Raipur Pallottine 180 ITR 579; CIT Vs Vazir Sultan 184 ITR 64, CIT Vs Anand 244 ITR 192 (SC); CIT Vs Indin Jute Mill Assn. 134 ITR 68; Indian Leaf Tobacco Vs CIT 137 ITR 827 ); CIT Vs Society of Sisters of St. Anne 146 ITR 28 . ,!/'>:SC^ -i-\"—i;a,^ j %• '^ g^ 'Y^'y \"'^s .J^T^^^' ,,'iS1\" •w 8 profits and gains, if any, of any business or profession carried on by the assessee and in case it could not be done then it could be set off from the income of the Assessee under any other head under section 32(2)(ii) of the Act. The unabsorbed depreciation allowance that could not be so set off, was to be carried forward for the next eight years under section 32(2)(iii)(b). 27. Section 32(2)(iii) provided setting off of carried forward unabsorbed depreciation allowance but a reading of section 32(2)(iii) in contrast to section 32(2)(i) and (ii) indicates that it could be set off only against the profits and gains of any business or profession. 28. The counsel for the Assessee submitted that under section 32(2)(iii) of the Act carried forward unabsorbed depreciation allowance could be set off, not only against the profits and gains of any business or profession of the Assessee, but also against the income from any other head. 29. In order to support the aforesaid submission, the counsel for the Assessee brought to our notice, the three decisions of the Madras High Court (see below for citations)4 and decisions of the different Benches of the Tribunal (see below for citations)5. In these cases, the speech of the Finance Minister while passing the Finance Act-2 of 1996 (see below for 4 Commissioner of Income Tax vs RPIL Signalling Systems Limited {(2010)328 ITR 283 (Mad); and Commissioner of Income Tax vs S & S Power Switchgear Limited {(2008) 218 CTR (Mad) 701 = (2009) 318 ITR 187 = (2008) 5 DTR 289 }; and Commissioner of Income Tax vs Pioneer Asia Packing (P) Limited {(2008) 214 CTR (Mad) 202 = (2009) 310 ITR 198 = (2008) 170 Taxman 127 = (2008)1 DTR193 5Digital Electronics Limited Vs Additional Commissioner of Income Tax {(2011) 135 TTJ (Mumbai) 419 = (2011) 49 DTR 484} and Deputy Commissioner of Income Tax vs Times Guaranty Limited {(2010) 131 TTJ (Mumbai) (SB)257 = (2010) 40 SOT 14 = (2010) 41 DTR 193 = (2010) 4 ITR 210 ^ft ^^'...... -. t^«^j the relevant part of the speech)6 was relied upon to uphold this submission. 30. The speech does support the submission of the counsel for the Assessee but section 32(2) is otherwise. The question is, can the speech of the Finance Minister be taken into account, while interpreting a clear and unambiguous section. 31. House of Lords in Pepper v. Hart {(1993)1 All ER 42} (the Pepper case) observed: 'Reference to parliamentary material should be permitted as an aid to the construction of legislation which is ambiguous or obscure or the literal meaning of which leads to absurdity. Even in such cases references in court to parliamentary material should only be permitted where such material clearly discloses the mischief aided at or the legislative intention lying behind the ambiguous or obscure words. In the case of statements made in Parliament, as at present advised, 1 cannot foresee that any statement other than the statement of the mihister or other promoter of the Bill is likely to meet these criteria.' 32. Our Supreme Court considered the Pepper case in P.V. Narsimha Rao v. State (AIR 1998 SC 2120) (the Narasimha case). The question in this case was, whether a member of Parliament was a public servant 6The relevant part ofthe speech ofthe Finance Minister is as follows: 'Clause 11 of the Bill seeks to amend s.32 of the IT Act, 1961 relating to depreciation. During the course of discussion on the General Budget, a number of Hon'ble members have expressed their apprehension that the proposed amendnnent limiting carry forward of unabsorbed depreciation to 8 years will adversely affect the growth of industry. Similar apprehensions have been raised in a larger number of post-budget memoranda. I would like to allay these fears. 'The proposed amendment is only prospective inasmuch as the cumulative unabsorbed depreciation brought forward as on 1s April, 1997, can still be set off against taxable business profits or income under any other head for the asst. yr. 1997-98 and seven subsequent assessment years. Therefore, the proposed change will have effect only after 8 years and there is no cause for immediate concern about its likely impact on industry.' '^~5. II.. .£ '* J 10 within the definition of section 2(c)(viii) of the Prevention of Corruption Act, 1998. '<» 33. In the Narsimha case, the Supreme Court declined to admit the minister's speech in Parliament for finding the intention of Parliament in enacting that section as according to the court the provision was unambiguous and the minister's speech was also equivocal. 34. The intention of the legislature is to be seen from the use of the words in the statute. The question is not what might be intended but what has been said. This can be best inferred by the language of the statute; it is the language of the statute that determines the legislative intention (see below for citations)7 . 35. Justice Holmes once remarked8, 'l do not care what their intention was, 1 only want to know what the words mean?' And at the other time, 'We do not inquire what the legislation meant; we ask only what the statute means.' In one of his decisions9, he observed, 7 New Piece Goods Bazar Co. Ltd. v CIT, Bombay, AIR 1950 SC 165; Ramkrishan v State of Delhi, AIR 1956 SC 476; Kanailal Sur v. Paramnidhi Sadhukhan, AIR 1957 SC 907; Ramkrishna Ram Nath v. Janpad Sabha, AIR 1962 SC 1073; Controller of Estate Duty v. Kantilal Tikamlal, AIR 1976 SC 1935 = 1977 SCC (Tax) 90 ; Union of India v. Sankalchand Himmatlal Sheth, AIR 1977 SG 2328 = (1977) 4 SCC 193; Chief Justice of Andhra Pradesh v. LVA Dikshitulu, AIR 1979 SC 193 = (1979) 2 SCC 340; Om Prakash Gupta v. Digvijendrapal Gupta, AIR 1982 SC 1230 = (1982) 2 SCC 61; Babaji Kondaji Garod v. Nasik Merchants Co-operative Bank Ltd. AIR 1984 SC 192 = (1984) 2 SCC 50; Doypack System Pvt. Ltd. v. Union Of India, AIR 1988 SC 782 = 1988 (2) SCC 299; Member Secretary, Andhra Pradesh State Board for Prevention and Control of Water Pollution v. Andhra Pradesh Rayons Ltd, AIR 1989 SC 611 = 1989 (1) SCC 44; Keshavji Ravj'i and Co. v. Commissioner of Income Tax, AIR 1991 SC 1806 = (1990) 2 SCC 231; Bola v. BD Sardana, AIR 1997 SC 3127 = (1997) 8 SCC 522; Unique Butyle Tube Industries (P) Ltd. V UP Financial Corporation, (2003) 2 SCC 455. °From the book 'Philosophical Foundation of Language in the Law' published by Oxford University press, edited by Andrei Marmor and Scott Soames- Page 7. 9 Northern Securities Co. Vs US -193 US 197 11 '[A]t times judges need for their work the training of economists or statesmen, and must act in view of their foresight of consequences, yet when their task is to interpret and apply the words of a statute, their function is merely academicto begin with—to read English intelligently...' 36. In our opinion, the speech of a minister cannot be taken into account to interpret a provision that is clear and unambiguous. The question, whether it can be taken into account to interpret a provision that is ambiguous, may be considered in an appropriate case. 37. In section 32(2) (ii), any other income is specifically mentioned, but it is not so mentioned in section 32(2)(iii). This clearly shows the intention of the legislature that the carried forward unabsorbed depreciation allowance cannot be set off against income other than the income from profits and gains of business or profession. 38. In the present case, there is no ambiguity in section 32(2)(iii) of the Act. The speech of the Finance Minister cannot be taken into account to interpret it. With due respects to the judges of the Madras High Court and members of different benches of the Tribunal, we disagree with them. 39. 'Kanga, Palkhivala and Vyas: The Law andPractice of Income Tax' (9th Edition page 732) sums up the law of unabsorbed depreciation as follows: 'From assessment year 1997-98, there was a drastic amendment in the scheme of carry-forward and set-off of unabsorbed depreciatiori by substitution of a new sub- 8ection(2) in section 32. It was put, in many respects, at par with business loss. In comparison and contradistinction to the /sC^ '^ M' •'^.^'\"^^ I. ,. ~'\" 1 12 earlier provisions, the features of the new provisions are as under: (i) Unlike before, there is no legal fiction to deem carried forward unabsorbed depreciation to be part of current depreciation; (ii) Unabsorbed depreciation is allowed to be carried forward for set-off for eight years succeeding the year to which such depreciation relates, and not indefinitely like before; (iii) The carried forward unabsorbed depreciation can be set-off against the profits and gains, if any, of any business or profession carried on by the assessee during that year, and not against other non-business income; (iv) The business or profession to which the unabsorbed depreciation relates should be continued to be carried on in the year of set-off (first proviso to s32(2) deleted from assessment year 2001-02).' For our discussion, the law as summarised at serial number (iii) is relevant and states the same thing as we have held. 40. In our opinion, the carried forward unabsorbed depreciation under section 32(2)(iii) of the Act could be set off in the relevant AY only against any profit and gains of any business or profession carried on by the Assessee and not against any other non-business income. However, the question remains, whether the short-term capital gains on sale of depreciable assets can be treated as income from profits and gains of business or profession or not. This is being dealt with, in the third point. 3rd POINT: SHORTTERM CAPITALGAIN IS NON-BUSINESS INCOME 41. The counsel for the Assessee has brought to our notice sub-section (2) ofsection 41 {section 41(2)}(see Appendix-2) and submits that: ^.y^it,;^--;, y>\"-- '€ -^,.. • EJ' W:s^, g %. fe- m. (i/ ff '^s. ^W'\" .ft- t^ 13 (i) Short term capital gain from sale of depreciable assets is dealt under section 41(2) of the Act. Under this section, it is to be treated as income from business or profession; (ii) The Assessee is entitled to set off its carried forward unabsorbed depreciation from short-term capital gains arising out of sale of depreciable assets as it is treated as business income; (iii) In any case, the purpose of putting business assets in one block was to facilitate filing of tax return and tax computation. The legal fiction treating them short-term capital was for this purpose only. The legal fiction cannot be further extended. 1st & 2nd Submissions: Section 41(2) is not Applicable 42. Section 2 of the Act is titled 'Definitions'. It defines different words as follows: • Section 2(14) defines the words 'capital asset'; • Section 2(42A) defines the words 'short term capital asset'; • Section 2(42B) defines the words 'short term capital gain; • Section 2(11) defines the words 'block of assets'. It includes tangible assets like building, machinery, plant, or furniture as well as intangible asset that includes intellectual property rights or business rights in respect of which the same percentage of depreciation is prescribed. Neverthetess, section 2 of the Act neither defines the words 'depreciable assets' nor the words 'short term capital gains arising out of the sale of depreciable assets'. 43. Section 50 of the Act (see Appendix-3) is titled 'Special provision for computation of capital gains in case of depreciable assets'. It explains short time capital gains arising out of the sale of depreciable assets. It is because of this provision that the Assessee had short term capital gains. The question is whether this can be treated as business income or not. 44. Section 41 is titled 'Profits chargeable to tax' and is under sub- chapter 'D—Profits and .gains of business or profession' of Chapter-IV of y-s.. iT ;^ \"^ <. 1 ^ \"i, 14 the Act. Sub-section (2) of section 41 {section 41(2)} of the Act provides that in soine cases of sale of buildings, machinery, plant or furniture, if the money payable exceeds the written down value of those assets, then it would be treated as income of the business of the previous year. 45. In case, section 41(2) is applicable to the Assessee, then the short- term capital gains in this case would be business income from which carried forward unabsorbed depreciation could be set off. But the question is, does it apply in the present case ? 46. Sub-clauses (a) and (b) of section 41(2) lay down necessary conditions of its application. Section 41(2)(b) provides that it applies to the sale of that building, machinery, plant or furniture, in respect of which, depreciation is claimed under clause (i) of sub-section (1) of section 32 {section 32(1 )(i)} of the Act. But did the Assessee claim depreciation under section 32(1 )(i) of the Act? 47. Section 41(2) was substituted in the Act by Finance Act 2 of 1998 with effect from 01.04.1998. At that time, section 32(1 )(i) (see Appendix-4) related to depreciation claimed by an undertaking engaged in generation or generation and distribution of power (for clarification please see Endnote-1), that is to say, section 41(2) is confined to the assets of an undertaking engaged in generation or generation and distribution of power. 48. The Assessee was not engaged in generation or generation and distribution of power. It was manufacturing straw boards. In the present case, depreciation was not claimed under section 32(1 )(i) of Act, but it was claimed under section 32(1 )(ii) ofthe Act. Section 32(1 )(i) as well as section 41(2) ofthe Act is not applicable here. 3rd Submissions: Full effect is to be given to Legal Fiction 49. Concept of 'block of asset' was introduced by the Taxation Laws (Amendment & Miscellanequs .Provisions) Amendments Act 1986 wef :^^.~\"%. | ^m •^ ^ -_&' •^v^-' 15 01.04.1988. It broadly included tangible assets. It was amended by Finance (number 2) Act, 1998 wef 01.04.1999 to include intangible assets as well. This concept was basically introduced to simplify the return filing and tax computations. 50. Section 50 oftheActcreates legal fiction. It deems certain income to be short-term capital gains. Should it be limited only for the purpose of filing of tax return and computation of income or should we give full effect to it. 51. Lord Asquith in 'ln East End Dwelling Co. Ltd. v. Finsbury Borough Council (1951) 2 All ER 587 (the Finsbury case) explained: 'lf you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequence and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it—. The statute states that you must imagine a certain state of affairs; it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs.' 52. The aforesaid dictum of Lord Asquith has become statement of law on legal fiction. It is referred and approved in almost every case (see below)10 decided so far. 10 State of Bombay v. Pandurang Vinayak, AIR 1953 SC244; CIT, Delhi v. S. Teja Singh, AIR 1959 SC 352; Rajendraswami v. Commissioner of Hindu Religious and Charitable Endowments, Hyderabad, AIR 1965 SC 502; Shatrunjit (Raja) v. Mohammad Azmat Azim Khan, AIR 1971 SC 1474 = 1971 (2) SCC 200; Daya Singh v. Dhan Kaur, AIR 1974 SC 665 = (1974) 1 SCC 700; Boucher Pierre Andre v. Superintendent, Central Jail, TiharAIR 1975 SC 164 = (1975) 1 SCC 192 = (1975) SCC (Cri) 70; Sundar Dass v. Ram Parkash, AIR 1977 SC 1201 = (1977) 2 SCC 662; Gurupad Khandappa Magdum v. Hirabai Khandappa, AIR 1978 SC 1239 = (1978) 3 SCC 383; State ofAndhra Pradesh v. Vallabhapuram Ravi (1984)4 SCC 410 = AIR 1985 SC 870; American Home Products Corporation v. Mac Laboratories, AIR 1986 SC 137 = (1986) 1 SCC 465; S. Appukuttam v. Thundiyal Janaki Amma, AIR 1988 SC 587 = (1988) 2 SCC 372; Maganlal v. Jaiswal Industries, AIR 1989 SC 2113 = (1989) 4 SCC 344; Orient Paper and Industries Ltd. v. State of Orissa, AIR 191 SC 672 = 1991 1 16 53. Section 50 of the Act creates a legal fiction by which under certain circumstances, transfer of depreciable assets is to be treated as the short-term capital gains. In case, it is to be treated as the short-term capital gain, then legal effect has to be given to it as short-term capital gain and it is to be treated as income under the head 'E- Capital gains'. It cannot be treated as income under head 'D- Profits and gains of business or profession'. 54. The result is that carried forward unabsorbed depreciation cannot be set offwith short-term capital gain. Only current unabsorbed depreciation can be set off against the 'Profits and gains of business or profession' as section 32(2)(ii) of the Act provides that it (current unabsorbed depreciation) can be set offwith any other income. 55. In our opinion, In the present case, section 41(2) is not applicable • Short-term capital gain on sale of depreciable assets is not profits and gains of business or profession; and • Carried forward unabsorbed depreciation cannot be set off from the short-term capital gains. CONCLUSIONS 56. Our conclusions are as follows: (a)ln order to claim set off it was not necessary to carry on the business for entire previous year. The only necessity was that it Supp. (1) SCC 81 ; HC Suman v. Rehabilitation Ministry Employment Co- operative House Building Society Ltd., AIR 1991 SC 2160 = (1991)4 SCC 485; Voltas Limited, Bombay v. Union of India, AIR 1995 SC 1881 =1995 Supp (2) SCC 498; G. Vishwanathan v. Hon'ble Speaker, Tamil Nadu Legislative Assembly, AIR 1996 SC 1060; PEK Kalliani Amma v. K. Devi, AIR 1996 SC 1963 = (1996) 4 SCC 76; State of Tamil Nadu v. Arooran Sugars Ltd. AIR 1997 SC 1815; Bhavnagar University v. Palitana Sugar Mill (P) Ltd. AIR 2003 SC 511 = (2003) 2 SCC 111; Commissioner of Wealth Tax v. Trustees of HEH, (2003) 5 SCC 122; Dipak Chandra Rutidas v. Chandan Kumar Sarkar AIR 2003 SC 3701 = (2003)7 SCC 66; Prafulla Kumar Das v. State of Orissa, AIR 2003 SC 4506 = (2003) 9 JT 477; Ashok Leyland Ltd. v. State of Tamil Nadu AIR 2004 SC 2836 = (2004) 3 SCC 1; State of West Bengal v. Sadam K. Bormal, AIR 2004 SC 3666 = (2004) 6 SCC 59; Clariant International Ltd. v. Securities & Exchange Board AIR 2004 SC 4236 = (2004) 8 SCC 524; Mohd. Akram Ansari v. Chief Election Officer (2008) 2 SCC 95. ^ft.K.S'l^ l«S>i\"\"-.lt. \"'%. .y.^\"\"*it \"s^ ffe .:^-1 1. 0 17 should be carried on in that year. It could be only for part of the year; (b)The carried forward unabsorbed depreciation allowance for depreciable assets could be set off only against the profit and gains of business or profession and not against any other income; (c) Short term capital gain on sale of depreciable assets is not profits and gains of any business or profession; (d) Carried forward unabsorbed depreciation allowance cannot be set offfrom short term capital gain on sale of depreciable assets. subbu 57. In view of our conclusions, the appeal is allowed. The order of the Tribunal dated 19.04.2006 is set aside and that of Commissioner of Income Tax (Appeals) dated 26.09.2005 is upheld. Sd/- Chief Justice Sd/- Pritinker Diwaker Judge Endnote-1: In the relevant AY 1999-2000 sub-section (1) of section 32 {section 32(1)} was confusing. It had two sets of sub-clauses (i) and (ii). There was already one set ofclause (i) and (ii) in section 31(1) thereafter the second set of clause (i) and (ii) were substituted by Finance (No.2) Act 1998 wef 01.04.1999 in the main part of section 31 (1). This became the first set of clause (i) and (ii). They merely bifurcated the main section 32(1) relating to assets into two different categories of tangible and intangible assets. Section 32(2) of the Act was substituted by the Finance (No.2) Act 1996 wef 01.04.1997. At that time, there was only one set of sub-clause (i) and (ii) that became the second set of sub-clauses (i) and (ii) in the relevantAY 1999-2000. This shows that, in the relevant year, reference to section 32(1 )(ii) in section 32(2) of the Act means the second set of clause (ii) of section 32(1) in the relevant AY. So is true about section 41(2)(b) of the Act. It was substituted by Finance (number-2) Act, 1998 wef 01 .04.1998. At that time, similar situation was there. This shows that in the relevant year reference to section 32(1 )(i) in section 41 (2) (b) of the Act is to the second set of clause (i) of section 32(1 ) in the relevant AY. Endnote-2: The judgement was reserved however, a part of the same under headings, 'THE FACTS', 'POINTS FOR DETERMINATION', '1\" POINT: NOT NECESSARY TO CARRY ON BUSINESS FOR ENTIRE YEAR', and •2nd POINT: ONLY AGAINST PROFIT AND GAINS OF BUSINESS OR PROFESSION' was dictated in the ppen Court on the date the judgementwas reserved. --— ' .,..^^-^&~~:.. f\" i':'K:i \"