DCIT, New Delhi V. M/s. Ansal Properties and Infrastructure Ltd, New Delhi

ITA 4659/DEL/2009

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 3674 (ITAT-DELHI)
• Duration Of Justice: 6 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-07-2010
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 29-06-2010
• Assessment Year: 1989-1990
• Appeal Filed On: 10-12-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: PRATIMA KAUSHIK
• Assessee Lawyers: H MITTER
• Keywords: Capital asset; Business income; Depreciation; Unabsorbed depreciation
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH A DELHI BEFORE SHRI RAJPAL YADAV AND SHRI K.G. BANSAL ITA NO.4659(DEL)/2009 ASSESSMENT YEAR: 1989-90 DEPUTY COMMISSIONER OF INCOME ANSAL PROPERTIES & INFRASTRUCTURE TAX, CENTRAL CIRCLE 20, VS. LTD., 115, ANSAL BHAWAN, 16, K.G. MARG, NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY : MS. PRATIMA KAUSHIK, SR. DR RESPONDENT BY: SH RI H.MITTER, C.A. ORDER PER K.G. BANSAL : AM THIS APPEAL OF THE REVENUE EMANATES FROM THE ORDER OF CIT(APPEALS)- I, NEW DELHI, PASSED ON 30.09.2009 IN APPEAL NO. 121/05-06, AND IT PERTAINS TO ASSESSMENT YEAR 1989-90. THE CORR ESPONDING ORDER OF ASSESSMENT WAS PASSED BY THE ASSISTANT COMMISSI ONER OF INCOME-TAX, CENTRAL CIRCLE 20, NEW DELHI (THE AO FOR SHORT) ON 24.05.2005 UNDER THE PROVISIONS OF SECTION 143(3) READ WITH SEC TION 254 OF THE INCOME-TAX ACT, 1961. THE REVENUE HAS TAKEN UP THREE GRO UNDS IN THE APPEAL. GROUND NO. 2 PROJECTS THE ONLY GRIEVANCE OF THE REVENUE THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CI T(A) ERRED IN DELETING THE ADDITION OF RS. 1,32,32,609/-, ASSESSED BY THE AO AS SHORT-TERM CAPITAL GAINS U/S 50 OF THE INCOME-TAX ACT, 1961, AS THE ASSESSEE-COMPANY HAD ITA NO. 4659(DEL)/2009 2 SOLD THE ENTIRE MACHINERY AND PLANT OF THE BLOCK OF DEPRECIABLE ASSETS BELONGING TO ITS PAPER DIVISION. 2. THE FACTS OF THE CASE ARE THAT ORIGINAL A SSESSMENT WAS COMPLETED IN WHICH THE SHORT-TERM CAPITAL GAIN WAS BROUGHT TO TAX ON THE GROUND THAT THE ASSESSEE HAD TRANSFERRED THE WHOLE OF MACHINERY AND PLANT OF THE PAPER DIVISION, WHICH WAS AN INDEPENDENT BUSINES S. THIS ORDER WAS CONFIRMED BY THE LD. CIT(A). HOWEVER, THE PROCE EDINGS WERE RESTORED TO THE FILE OF THE AO BY THE C BENCH OF DELHI T RIBUNAL IN ITA NO. 7646(DEL)/1992 DATED 22.10.2003. CONSEQUENTLY FRESH ASSESSMENT ORDER WAS PASSED ON 24.05.2005, ASSESSING THE TOTAL INCOME AT RS. 1,71,96,600/-. IN THIS ORDER, SHORT-TERM CAPITA L GAINS WERE ALSO INCLUDED IN THE TOTAL INCOME. AGGRIEVED BY THIS ORDER, THE ASSESSEE FILED APPEAL BEFORE THE CIT(APPEALS)-I, NEW DELHI. THIS AP PEAL WAS DISPOSED OFF ON 30.09.2009, IN WHICH THE AFORESAID ADDITION WA S DELETED. AGGRIEVED BY THIS ORDER, THE REVENUE IS IN APPEAL BEFORE US. 3. THE LD. DR REFERRED TO THE HISTORY OF THE CA SE NARRATED ABOVE BY US. THEREAFTER, SHE DREW OUR ATTENTION TOWARDS PAR AGRAPH 25 OF THE FIRST APPELLATE ORDER DATED 28.8.1992 IN APPEAL NO. 3 76/92-93, WHICH DEALS ITA NO. 4659(DEL)/2009 3 WITH THE ISSUE AT HAND. IT WAS HELD THAT THE ASSESSEE HAS MAINTAINED SEPARATE BOOKS OF ACCOUNT FOR THE PAPER UNIT. I T HAS ALSO MAINTAINED SEPARATE ACCOUNTS FOR ALL OTHER UNITS. THE PROF ITS OF DIFFERENT UNITS ARE COMPUTED AND THEREAFTER MERGED TO ARRIVE AT THE PROFITS OR GAINS OF BUSINESS OR PROFESSION. IN SUCH A SITUATION, T HE PLEA OF THE ASSESSEE THAT THE PAPER DIVISION WAS A PART OF THE OVERA LL BUSINESS OF THE ASSESSEE WAS NOT ACCEPTED. SINCE THE WHOLE OF MACHINER Y AND PLANT OF THIS UNIT HAD BEEN TRANSFERRED, IT WAS ALSO HELD THAT THE PROVISION CONTAINED IN SECTION 50 ARE APPLICABLE FOR COMPUTING SHORT-TE RM CAPITAL GAINS BY TAKING THIS DIVISION AS AN INDEPENDENT BASIS. FOR THE SAKE OF READY REFERENCE, THIS PARAGRAPHS IS REPRODUCED BELOW:- 25. GROUNDS OF APPEAL NO. 23 RELATES TO THE DETE RMINATION OF A SUM OF RS. 1,32,32,609/- AS SHORT-TERM CAPITAL GAIN IN RESPECT OF FURNITURE AND FIXTURE, PLANT AND MACHI NERY OF THE PAPER UNIT. IN THIS REGARD THE ONLY ARGUMENT S OF THE LEARNED COUNSEL IS THAT FOR TAKING OUT THE BLOCK OF ASSETS FOR THE PURPOSE OF COMPUTATION OF CAPITAL GAINS UNDER S ECTION 50, THE ASSESSING OFFICER SHOULD HAVE GROUPED TOGETH ER ALL THE ASSETS IN A PARTICULAR BLOCK OF ASSETS IN ALL THE DIFFERENT DIVISIONS OF THE APPELLANT COMPANY AND FROM SUCH TOTAL IN A PARTICULAR BLOCK OF ASSETS THE ADDITION OF ASS ETS DURING THE YEAR SHOULD BE ADDED AND THE VALUE OF ASSETS SOLD DURING THE YEAR SHOULD BE DEDUCTED TO WORK OUT TH E SHORT-TERM CAPITAL GAINS, IF ANY. THE ARGUMENTS OF THE LD. C OUNSEL ARE THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN WO RKING OUT SHORT- TERM CAPITAL GAINS ONLY WITH REGARD TO THE BLOC K OF ASSETS AND PLANT & MACHINERY AND FURNITURE AND FIXTURE IN RESPECT OF PAPER DIVISION. IN MY OPINION, THE CONTENTION OF THE LEARNED ITA NO. 4659(DEL)/2009 4 COUNSEL IN THIS REGARD CANNOT BE ACCEPTED BECAUS E EVERY UNIT OF THE APPELLANT COMPANY IS A SEPARATE UNIT FOR W HICH FINAL ACCOUNTS ARE BEING MAINTAINED SEPARATELY AS WEL L AS PROFITS OF THE UNIT IS BEING WORKED OUT SEPARATELY. THE REFORE, WHEN THE APPELLANT COMPANY IS CLAIMING THE DEPRECIATI ON FOR EACH PARTICULAR UNIT SEPARATELY, FOR WORKING OUT THE SHORT-TERM CAPITAL GAIN, THERE IS NO JUSTIFICATION FOR ADDI NG ALL THE ASSETS IN A PARTICULAR BLOCK OF ASSETS PERTAINING TO D IFFERENT UNITS TOGETHER. THE PLEAS OF THE LD. COUNSEL IN THIS REGARD WILL BE REJECTED ALSO ON THE GROUND THAT THE ASSETS O F ONE UNIT FALLING IN A PARTICULAR BLOCK OF ASSETS MAY NO T FALL IN THE SAME BLOCK OF ASSETS IN ANOTHER UNIT BECAUSE OF DIFFERENT NATURE OF ACTIVITIES CARRIED OUT IN DIFFERENT U NITS OF THE APPELLANT COMPANY. I WILL, THEREFORE, NOT ACCE PT THE PLEA OF THE LD. COUNSEL IN THIS REGARD AND WILL CONFIRM T HE COMPUTATION OF THE SHORT-TERM CAPITAL GAINS UNDER SECTION 50 AS WORKED OUT BY THE ASSESSING OFFICER IN RESPECT OF THE PAPER DIVISION. FURTHER, THE NEXT CLAIM OF THE APPELLANT COMPAN Y IS THAT WHILE WORKING OUT THE SAID CAPITAL GAINS THE ASSESS ING OFFICER HAS FAILED TO TAKE INTO ACCOUNT THE WDV OF THE F OLLOWING ASSETS OF THE PAPER DIVISION COMPRISED IN THE 33. 33% BLOCK OF PLANT & MACHINERY-(I) VEHICLES RS. 94,756/-; (II ) AIR CONDITIONERS/COOLERS RS. 36,158/- AND RS. 1,30,91 4/- RESPECTIVELY. IN THIS REGARD THE CLAIM REGARD ING VEHICLES SHOULD NOT BE ACCEPTED AS THE VEHICLES CANNOT FORM PLANT AND MACHINERY BLOCK OF PAPER DIVISION. HOWEVER , THE ASSESSING OFFICER WILL FIND OUT WHETHER THE AIR-C ONDITIONERS AND COOLERS WERE INSTALLED IN THE FACTORY BUILDI NG OR IN THE OFFICE PREMISES. IF THEY WERE INSTALLED IN THE FACTORY BUILDING THEN THEY WILL BE INCLUDED IN THE BLOCK OF ASS ETS PERTAINING TO THE PLANT AND MACHINERY AND WILL ACCORDINGLY R EDUCE THE SHORT-TERM CAPITAL GAINS. HOWEVER, IF THEY WERE I NSTALLED AT THE OFFICE PREMISES THEN THEY WILL NOT FORM THE PART OF THE MACHINERY AND THUS WILL NOT EFFECT THE COMPUTATIO N OF THE SHORT-TERM CAPITAL GAINS. 3.1 SHE ALSO DREW OUR ATTENTION TO PAGE NO. 17 OF THE PAPER BOOK CONTAINING THE ORDER OF C BENCH OF DELHI TRIBU NAL, IN WHICH THE PLEAS OF ITA NO. 4659(DEL)/2009 5 THE ASSESSEE HAVE BEEN NARRATED. THEREAFTER, IT IS MENTIONED THAT PLEA NOS. 2 AND 3 AMOUNT TO TAKING ADDITIONAL GROUN DS. THEREFORE, THE MATTER WAS RESTORED TO THE FILE OF THE AO TO DECIDE THE ISSUE BY TAKING INTO CONSIDERATION THE FRESH PLEAS OF THE ASSESSEE. FOR THE SAKE OF READY REFERENCE, THE PLEAS TAKEN BY THE ASSESSEE AND NARRATED BY THE TRIBUNAL IN THAT ORDER ARE REPRODUCED BELOW:- THAT ALTHOUGH THE COMPANY OWNS ASSETS IN ITS DIFFERENT DIVISIONS, BRANCHES, PROJECTS ETC. IN SO FAR THE APPELLANT COMPANY AND THE RELEVANT PROVISIONS OF INCOME- TAX ACT ARE CONCERNED ALL THE ASSETS IN DIFFERENT DIVISIO NS, BRANCHES, SECTIONS AND PROJECTS FALLING IN THE SAME CLASS AND ENTITLED TO THE SAME RATE OF DEPRECIATION WOULD AS A GROU P FORM ONE BLOCK OF ASSETS. SECTION 2(11) DOES NOT REFER TO ANY UNIT WISE, DIVISION WISE OR BUSINESS WISE SEGREGATIO N OF THE ASSETS FALLING IN THE SAME CLASS AND ENTITLED TO THE SAME RATE OF DEPRECIATION. WITHOUT PREJUDICE TO THE ABOVE PLEA, SECTION 50 C ONTAINS SPECIAL PROVISIONS FOR COMPUTATION OF CAPITAL GAI N IN THE CASE OF DEPRECIABLE ASSETS. THIS SECTION DOES NOT R EQUIRE THE CONTINUATION OR EXISTENCE OF THE SAME BUSINESS TO WHICH THE SOLD ASSETS BELONGED. THAT WITHOUT PREJUDICE TO THE FOREGOING PLEAS, THE COST OF ADDITIONS TO PLANT AND MACHINERY MADE DURING TH E YEAR AND ENTITLED TO 33.33% RATE OF DEPRECIATION SHOULD HAVE BEEN ALLOWED AS DEDUCTION U/S 50(1)(III) IN COMPUTING THE SHORT- TERM CAPITAL GAINS ON SALE OF PLANT AND MACHINER Y. 3.2 SHE ALSO DREW OUR ATTENTION TO THE FRESH ASSESSMENT FRAMED BY THE AO, WHEREIN THE FINDINGS OF THE LD. CIT(A) IN THE FIRST APPELLATE ORDER ITA NO. 4659(DEL)/2009 6 HAVE BEEN SUMMARIZED. THESE ARE THAT (I) EACH UNIT OF THE ASSESSEE- COMPANY IS A SEPARATE UNIT FOR WHICH SEPARATE BOOKS OF ACCOUNT ARE MAINTAINED AND PROFITS ARE DRAWN, AND (II) T HE ASSETS OF ONE UNIT IN A PARTICULAR BLOCK OF ASSETS MAY NOT FALL IN THE SAME BLOCK OF ASSETS IN THE OTHER UNIT BECAUSE OF DIFFERENT NATURE OF ACTIV ITIES OF DIFFERENT UNITS. BASED UPON THESE FINDINGS OF THE LD. CIT(APPEALS ), THE AO INVOKED THE PROVISIONS CONTAINED IN SECTION 50(2) AND COMPUTE D SHORT-TERM CAPITAL GAINS. IT WAS HER CASE THAT THE AO RIGHTLY INVOKED THE PROVISION CONTAINED IN SECTION 50(2) AND BROUGHT SHORT-TE RM CAPITAL GAINS TO TAX FOR THIS YEAR. 4. IN REPLY, THE LD. COUNSEL TOOK US THROUGH V ARIOUS PROVISIONS IN THIS BEHALF. HE REFERRED TO SECTION 2(11), WHICH DEFINES THE TERM BLOCK OF ASSETS. THE PROVISION IS REPRODUCED BELOW:- (11) BLOCK OF ASSETS MEANS A GROUP OF ASSETS FALLING WITHIN A CLASS OF ASSETS COMPRISING- (A) TANGIBLE ASSETS, BEING BUILDINGS, MACHINERY , PLANT OR FURNITURE; (B) INTANGIBLE ASSETS, BEING KNOW-HOW, PATENTS, COPYRIGHTS, TRADE- MARKS, LICENCES, FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE, IN RESPECT OF WHICH THE SAME PERCENTAGE OF DEPRE CIATION IS PRESCRIBED; ITA NO. 4659(DEL)/2009 7 4.1 THEREAFTER, HE REFERRED TO THE PROVISION CONT AINED IN SECTION 14, WHICH MAKES IT OBLIGATORY TO COMPUTE INCOME UNDER DIFFERENT HEADS. THE PROVISION READS AS UNDER:- 14. SAVE AS OTHERWISE PROVIDED BY THIS ACT, A LL INCOME SHALL, FOR THE PURPOSES OF CHARGE OF INCOME-TAX AND COMPUTA TION OF TOTAL INCOME, BE CLASSIFIED UNDER THE FOLLOWING HEADS O F INCOME:- A- SALARIES. B-X X X C-INCOME FROM HOUSE PROPERTY. D-PROFITS AND GAINS OF BUSINESS OR PROFESSION. E-CAPITAL GAINS F-INCOME FROM OTHER SOURCES. 4.2 HE ALSO REFERRED TO THE PROVISION CONTAINED I N SECTION 32(2) REGARDING CARRY FORWARD OF UNABSORBED DEPRECIATI ON. UNDER THE PROVISION, SUCH DEPRECIATION BECOMES PART OF THE CURRENT DEP RECIATION. THIS PROVISION IS ALSO REPRODUCED BELOW:- (2) WHERE, IN THE ASSESSMENT OF THE ASSESSEE, FULL EFFECT CANNOT BE GIVEN TO ANY ALLOWANCE UNDER SUB-SECTI ON (1) IN ANY PREVIOUS YEAR, OWING TO THERE BEING NO PROFITS OR GAINS CHARGEABLE FOR THAT PREVIOUS YEAR, OR OWING TO THE PROFITS OR GAINS CHARGEABLE BEING LESS THAN THE ALLOWANCE , THEN, SUBJECT TO THE PROVISIONS OF SUB-SECTION (2) OF SECTION 7 2 AND SUB- SECTION (3) OF SECTION 73, THE ALLOWANCE OR THE PART OF THE ALLOWANCE TO WHICH EFFECT HAS NOT BEEN GIVEN, AS THE CASE MAY BE, SHALL BE ADDED TO THE AMOUNT OF THE ALLOWA NCE FOR DEPRECIATION FOR THE FOLLOWING PREVIOUS YEAR AN D DEEMED TO BE PART OF THAT ALLOWANCE, OR IF THERE IS NO S UCH ALLOWANCE FOR THAT PREVIOUS YEAR, BE DEEMED TO BE THE AL LOWANCE FOR ITA NO. 4659(DEL)/2009 8 THAT PREVIOUS YEAR, AND SO ON FOR THE SUCCEEDING PREVIOUS YEARS. 4.3 HE ALSO REFERRED TO THE PROVISION CONTAINED IN SECTION 50 REGARDING SPECIAL PROVISION FOR COMPUTATION OF CAPITAL GAIN S IN THE CASE OF DEPRECIABLE ASSETS. THIS SECTION MAKES A MO DIFICATION IN THE PROVISIONS CONTAINED IN SECTIONS 48 AND 49 AND PROVIDES FOR COMPUTATION OF CAPITAL GAINS AS UNDER:- WHERE THE FULL VALUE OF THE CONSIDERATION RECE IVED OR ACCRUING AS A RESULT OF THE TRANSFER OF THE A SSET TOGETHER WITH THE FULL VALUE OF SUCH CONSIDERATION RECEI VED OR ACCRUING AS A RESULT OF THE TRANSFER OF ANY OT HER CAPITAL ASSET FALLING WITHIN THE BLOCK OF THE ASSETS DURING TH E 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 WIT HIN THE BLOCK OF ASSETS ACQUIRED DURING THE PREVIOUS Y EAR; SUCH EXCESS SHALL BE DEEMED TO BE THE CAPITAL GAI NS ARISING FROM THE TRANSFER OF SHORT-TERM CAPITAL ASSETS; FURTHER, CLAUSE (2) OF THIS SECTION DEEMS THE C APITAL GAINS SO COMPUTED AS SHORT-TERM CAPITAL GAINS. ITA NO. 4659(DEL)/2009 9 4.4 WE ALSO DREW THE ATTENTION OF THE LEARNED CO UNSEL TOWARDS THE PROVISION CONTAINED IN SECTION 70(1) WHICH FOR OUR PURPOSE PROVIDES THAT IF COMPUTATION OF INCOME UNDER BUSINESS HEAD IS L OSS FROM A SOURCE, THE SAME CAN BE SET OFF AGAINST PROFIT OF THE BUSI NESS FROM ANOTHER SOURCE. THUS, THIS SECTION PROVIDES FOR COMPUTATION OF PROFITS OF DIFFERENT BUSINESSES SEPARATELY AND THEN CLUBBING THEM TOGETHER TO ARRIVE AT PROFIT OR LOSS FROM BUSINESS. 4.5 THE CASE OF THE LD. COUNSEL IS BASED UPON THR EE DISTINCT ARGUMENTS THAT (I) ALL ASSETS OF DIFFERENT DIVISIONS HAVING SAME RATE OF DEPRECIATION FORM ONE BLOCK OF ASSETS, (II) ALL DIVISIONS OF THE ASSESSEE FORM ONE BUSINESS BECAUSE OF UNITY OF FINANCE, MANAGEMENT AND CONTROL, AND (III) EVEN IF AFORESAID PLEAS ARE REJECTED, COMPUTA TION OF CAPITAL GAINS HAS TO BE MADE IN ACCORDANCE WITH THE PROVISION CONTAI NED IN SECTION 50(2), I.E., EVEN THE ACTUAL COST OF ANY ASSET FALLING WITHI N THE BLOCK OF ASSETS ACQUIRED DURING THE PREVIOUS YEAR IN SOME OTHER UNIT WILL HAVE TO BE TAKEN INTO ACCOUNT FOR THIS PURPOSE. 4.6 THE ASSESSEE WAS REQUIRED TO ADDUCE EVIDE NCE ABOUT UNITY OF FINANCE, MANAGEMENT AND CONTROL OF AND OVER VARIO US DIVISIONS BELONGING ITA NO. 4659(DEL)/2009 10 TO THE ASSESSEE. IT WAS SUBMITTED THAT SUCH A PLEA WAS TAKEN BEFORE THE LOWER AUTHORITIES, WHICH HAS NOT BEEN NEGATED. THER EFORE, IT CAN BE ASSUMED THAT THIS MATTER WAS DECIDED IN FAVOUR OF THE A SSESSEE. WE FIND THAT SUCH A PLEA WAS TAKEN BEFORE THE AO IN LETTER DATED 12.07.2004, PLACED IN THE PAPER BOOK ON PAGE NUMBERS 1 TO 10. HOWEVER, THE PLEA WAS MERELY A LEGAL PLEA AND NO FACT WAS BROUGHT ON RECOR D TO SUPPORT THE PLEA. IT WAS MENTIONED IN THE LETTER THAT PAPER DIVISION WAS ONLY A DIVISION OF THE BUSINESS OF THE ASSESSEE-COMPANY, WHICH WAS ENGA GED IN THE BUSINESS OF REAL ESTATE DEVELOPMENT, CONSTRUCTION CONTRACT, AND MANUFACTURE OF PAPER. THERE WAS A UNITY OF CONTROL AND MANAGEMENT AND INTER-MIXING OF THE FUNDS. CERTAIN CASE LAWS WERE RELIED UPON FOR THIS PURPOSE, WHICH WE MAY NOT CITE FOR REASONS WHICH WILL BECOME CLEAR VERY SHORTLY. THE ASSESSEE WAS REQUIRED TO SUBSTANTIATE THE AFORE SAID PLEA BY ADDUCING EVIDENCE IN THE FORM OF DIRECTORS REPORT OF THE PERIOD WHEN THE PAPER UNIT WAS SET UP. THE LD. COUNSEL PLEADED HIS INABIL ITY TO DO SO AS THE MATTER WAS OLD. IN VIEW THEREOF, PLEA NUMBERS 1 AND 2, MENTIONED ABOVE, WERE DROPPED. THUS, THE CASE OF THE ASSESSEE NOW SOLELY RESTS UPON INTERPRETATION OF THE PROVISION CONTAINED IN SEC TION 50. ITA NO. 4659(DEL)/2009 11 4.7 IN ORDER TO SUPPORT HIS CASE, RELIANCE WAS PLACED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. EXPRESS NEWSPAPER LTD. (1964) 53 ITR 250, AND TWO DECISIONS OF MU MBAI BENCHES OF THE TRIBUNAL IN THE CASE OF ARTIC VS. ASSISTANT COMM ISSIONER OF INCOME-TAX (1999) 68 ITD 452, AND OCEANIC INVESTMENT LTD . VS. ACIT (1997) 57 TTJ 549. OUR ATTENTION WAS ALSO DRAWN TOWARDS PAGE NUMBER 12 OF THE IMPUGNED ORDER, IN WHICH IT IS MENTIONED THAT THE SALE VALUE OF THE MACHINERY AND PLANT OF THE PAPER DIVISION IS R S. 2,38,65,025/-, WHICH IS MARGINALLY IN EXCESS OF THE COST OF ADDITION OF M ACHINERY AND PLANT AND OTHER DIVISIONS, HAVING THE SAME RATE OF DEPREC IATION, OF THE VALUE OF RS. 2,19,59,261/-. ON THE BASIS OF AFORESAID FACTS AND THE DECISIONS, IT WAS ARGUED THAT THE COMPUTATION OF SHORT-TERM CAPITAL GAIN WOULD RESULT IN NIL FIGURE U/S 50. 5. IN THE REJOINDER, THE CASE OF THE LD. DR WAS THAT IF THE AFORESAID INTERPRETATION OF THE ASSESSEE IS ACCEPTED, THE PURPOSE OF SECTION 50 WILL BE DEFEATED. 6. WE HAVE CONSIDERED THE FACTS OF THE CASE AND RIVAL SUBMISSIONS. WE MAY DEAL WITH VARIOUS DEFINITIONS, REFERRED T O ABOVE. SECTION 2(11) ITA NO. 4659(DEL)/2009 12 DEFINES THE BLOCK OF ASSETS TO MEAN A GROUP OF ASSETS IN RESPECT OF WHICH SAME PERCENTAGE OF DEPRECIATION IS PRESCRI BED. THIS DEFINITION DOES NOT MAKE A DISTINCTION BETWEEN THE BLOCK OF ASSETS OF ONE DIVISION AND BLOCK OF ASSETS OF ANOTHER DIVISION EVEN IF THEY CONSTITUTE SEPARATE BUSINESSES. SECTION 14 ENJOINS UPON THE AO TO C OMPUTE THE INCOME OF THE ASSESSEE UNDER FIVE DISTINCT HEADS. THE P ROVISIONS FOR COMPUTING INCOME UNDER THESE HEADS ARE DIFFERENT AND INCO ME UNDER A PARTICULAR HEAD HAS TO BE COMPUTED IN ACCORDANCE WITH PR OVISION PRESCRIBED IN THIS BEHALF. THUS, THE PROVISION APPLICABLE TO ONE HEAD MAY NOT BE APPLICABLE TO ANOTHER HEAD UNLESS SPECIFICALLY SO PROVIDED. THUS, CAPITAL GAINS HAVE TO BE COMPUTED IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN CHAPTER IV-E AND NOT IN ACCORDANCE WITH PROVISIONS CONT AINED IN CHAPTER IV-D, REGARDING COMPUTATION OF BUSINESS INCOME. SECTION 32(1) PROVIDES FOR DEDUCTION OF DEPRECIATION IN RESPECT OF ANY BL OCK OF ASSETS ON SUCH PERCENTAGE AS MAY BE PRESCRIBED PROVIDED THE SAME IS OWNED, WHOLLY OR PARTLY, BY THE ASSESSEE AND USED FOR THE PURPO SES OF THE BUSINESS. THE WORDS THE BUSINESS REFERS TO THE BUSINESS IN WHICH SUCH BLOCK OF ASSETS IS USED. THEREFORE, THIS PROVISION MAKES A DISTINCTION BETWEEN BLOCK OF ASSETS OF ONE BUSINESS FROM BLOCK OF ASSETS OF ANOTHER BUSINESS CARRIED ON BY THE ASSESSEE. SUB-SECTION (2) OF THIS SECTION PROVIDES FOR ITA NO. 4659(DEL)/2009 13 ADDING THE AMOUNT OF UNABSORBED DEPRECIATION TO TH E CURRENT YEARS DEPRECIATION WHERE FULL EFFECT CANNOT BE GIVEN T O DEDUCTION UNDER SUB- SECTION (1) IN ANY PREVIOUS YEAR, OWING TO THERE B EING NO PROFITS OR GAINS OR OWING TO PROFITS OR GAINS BEING LESS THAN THE A LLOWANCE. THUS, IN SUCH A SITUATION THE UNABSORBED PART OF THE ALLOWANCE I S DEEMED TO BE THE ALLOWANCE FOR THE IMMEDIATELY SUCCEEDING PREVIOU S YEAR AND SO ON. SINCE THIS SECTION IS A PART OF SECTION 32, IT DOES APPEAR TO US THAT THE PROFITS OR GAINS REFERRED THEREIN MEAN THE PROFITS AND GAINS OF THE BUSINESS. SECTION 50 PROVIDES FOR COMPUTATION O F CAPITAL GAINS IN RESPECT OF DEPRECIABLE ASSETS AND SUB-SECTION (1) THEREOF ALSO PROVIDES THE MACHINERY FOR DOING SO. UNLESS ANY PROVISION CONTAI NED THEREIN IS SPECIFICALLY EXCLUDED BY ANY PROVISION CONTAINED IN CHAPTER IV-D, IT SHALL HOLD ON ITS OWN, INDEPENDENT OF THE PROVISIONS CONTAINED IN CHAPTER IV-D. THE LD. DR HAS NOT MENTIONED OF ANY PROVISION IN CHAPTER IV-D, WHICH HAS OVER-RIDING EFFECT OVER THE PROVISION CONTA INED IN SECTION 50(1). SECTION 70 CONTAINS A PROVISION FOR NETTING TH E PROFIT AND LOSS OF TWO OR MORE BUSINESSES CARRIED ON BY THE ASSESSEE IN TH E SAME YEAR. THUS, THIS PROVISION MAKES A DISTINCTION BETWEEN VARIOUS INDEPENDENT BUSINESSES. LOOKING TO THESE PROVISIONS, WE HAVE NOW TO EXAMI NE THE MODE AND METHOD OF COMPUTATION OF THE CAPITAL GAINS U/S 50 (1). THIS PROVISION HAS ITA NO. 4659(DEL)/2009 14 ALSO BEEN REPRODUCED EARLIER. IT PROVIDES FOR DEDUCTION OF THREE AMOUNTS FROM THE FULL VALUE OF CONSIDERATION RECEIVED OR ACCRUING, I.E., -(I) EXPENDITURE INCURRED IN CONNECTION WITH THE TRANS FER OF THE ASSETS, (II) WRITTEN DOWN VALUE OF THE BLOCK OF ASSETS AT T HE BEGINNING OF THE PREVIOUS YEAR, AND (III) ACTUAL COST OF ANY ASSET FALLIN G WITHIN THE BLOCK OF ASSETS ACQUIRED DURING THE PREVIOUS YEAR. IT SEEMS THAT THE THIRD DEDUCTION DOES NOT MAKE A DISTINCTION BETWEEN BLOCK OF ASSETS OF ONE UNIT WITH BLOCK OF ASSETS OF ANOTHER UNIT EVEN IF THEY ARE INDEPENDENT UNITS. 6.1 WE MAY NOW EXAMINE VARIOUS CASES RELIED UPO N BY THE LD. COUNSEL TO SUPPORT THE DEDUCTION IN RESPECT OF THE THI RD AMOUNT. IN THE CASE OF EXPRESS NEWSPAPERS LTD. (SUPRA), THE QUESTION BEFO RE THE HONBLE COURT WAS REGARDING ASSESSMENT OF SUCCESSOR IN BUSI NESS IN RESPECT OF TERMINAL CHARGE AND CAPITAL GAINS. THE FACTS OF THAT CASE ARE SOMEWHAT DISTINGUISHABLE, BUT AT PAGE 259, IT WAS MENTI ONED THAT SECTION 10(1) AND SECTION 26(2) OF THE 1922 ACT STAND ON DIFFE RENT FOOTINGS BECAUSE OF SECTION 6 OF THAT ACT REGARDING SIX HEADS OF INC OME. THE RELEVANT PORTION AT PAGES 259 AND 260 IS REPRODUCED BELOW:- A CONSPECTUS OF THE SAID SECTIONS DISCLOSES A C LEAR-CUT SCHEME. THOUGH INCOME-TAX IS ONLY ONE TAX LEV IED ON THE TOTAL INCOME, SECTION 6 ENUMERATES SIX HEADS WH EREUNDER THE ITA NO. 4659(DEL)/2009 15 INCOME OF AN ASSESSEE FALLS TO BE CHARGED. THIS COURT IN UNITED COMMERCIAL BANK LTD. V. COMMISSIONER OF INC OME-TAX LAID DOWN THAT SECTIONS 7 TO 12 ARE MUTUALLY E XCLUSIVE AND WHERE AN ITEM OF INCOME FALLS SPECIFICALLY UND ER ONE HEAD IT IS TO BE CHARGED UNDER THAT HEAD AND NO OTH ER. THE EXPRESSION INCOME, PROFITS AND GAINS IN SECTIO N6 IS A COMPOSITE CONCEPT WHICH TAKES IN ALL THE SIX H EADS OF INCOME MENTIONED THEREIN. THE FOURTH HEAD IS PROFITS A ND GAINS OF BUSINESS, PROFESSION OR VOCATION AND THE SIXTH HEAD IS CAPITAL GAINS. SECTION 10 TAXES THE PROFITS AND GAINS OF A BUSINESS, PROFESSION OR VOCATION CARRIED ON BY A N ASSESSEE; IT ALSO ENUMERATES THE DIFFERENT KINDS OF ALLOWANCES THAT CAN BE MADE IN COMPUTING THE PROFITS. UNDER SECTION 10 (1), AS WE HAVE ALREADY POINTED OUT, THE NECESSARY CONDITIO N FOR THE APPLICATION OF THE SECTION IS THAT THE ASSESSE E SHOULD HAVE CARRIED ON THE BUSINESS FOR SOME PART OF THE ACC OUNTING YEAR. SECTION 26(2) INDICATES THE MANNER OF ASSESSME NT OF THE INCOME, PROFITS AND GAINS OF ANY BUSINESS, PRO FESSION OR VOCATION. THIS SECTION DOES NOT PROVIDE FOR THE ASSESSMENT OF INCOME UNDER ANY OTHER HEAD. IT ONLY SAYS TH AT IF THERE IS A SUCCESSION TO A PERSON CARRYING ON BUSINESS DU RING N ACCOUNTING YEAR, THE PERSON SUCCEEDED AND THE PER SON SUCCEEDING CAN EACH OF THEM BE ASSESSED IN RE SPECT OF HIS ACTUAL SHARE. THE PROVISO DEALS WITH A CASE WHERE THE PERSON SUCCEEDED CANNOT BE FOUND; IN THAT EVENT , THE ASSESSMENT OF THE PROFITS OF THE YEAR IN WHICH THE SUCCESSION TOOK PLACE UP TO THE DATE OF THE SUCCESSION AND FO R THE YEAR PRECEDING THAT YEAR SHALL BE MADE ON THE PERSON SUCCEEDING HIM. IF AN ASSESSMENT HAS ALREADY BEEN MADE IN RESPECT OF THE SAID YEARS ON THE PERSON SUCCEEDED, IT CAN BE RECOVERED FROM THE PERSON SUCCEEDING. BUT BOTH SUB-SECTI ON (2) AND THE PROVISO DEAL ONLY WITH INCOME, PROFITS AND GAINS OF THE BUSINESS, THAT IS TO SAY, FOR THE ASSESSMENT MA DE IN RESPECT OF PROFITS AND GAINS UNDER THE FOURTH HEAD OF SECT ION 6. NOW TURNING TO SECTION 12B, IT PROVIDES FOR CAPITAL GAINS. UNDER THAT SECTION THE TAX SHALL BE PAYABLE BY THE A SSESSEE UNDER THE HEAD CAPITAL GAINS IN RESPECT OF ANY PROFI TS OR GAINS ARISING FROM THE SALE OF A CAPITAL ASSET EFFECTE D DURING THE PRESCRIBED PERIOD. IT SAYS FURTHER THAT SUCH PROFITS OR GAINS SHALL BE DEEMED TO BE INCOME OF THE PREVIOUS YEA R IN WHICH ITA NO. 4659(DEL)/2009 16 THE SALE, ETC., TOOK PLACE. THIS DEEMING CL AUSE DOES NOT LIFT THE CAPITAL GAINS FROM THE SIXTH HEAD IN S ECTION 6 AND PLACE IT UNDER THE FOURTH HEAD. IT ONLY INTRO DUCES A LIMITED FICTION, NAMELY, THAT CAPITAL GAINS ACCRUED WILL BE DEEMED TO BE INCOME OF THE PREVIOUS YEAR IN WHICH THE SA LE WAS EFFECTED. THE FICTION DOES NOT MAKE THEM THE P ROFITS OR GAINS OF THE BUSINESS. IT IS WELL SETTLED THAT A LEG AL FICTION IS LIMITED TO THE PURPOSE FOR WHICH IT IS CREATED A ND SHOULD NOT BE EXTENDED BEYOND ITS LEGITIMATE FIELD. SUB-S ECTIONS (2A) AND (2B) OF SECTION 24 PROVIDE FOR THE SETTING OFF OF THE LOSS FALLING UNDER THE HEAD CAPITAL GAINS AGAINST ANY CAPITAL GAINS FALLING UNDER THE SAME HEAD. SUCH LOSS C ANNOT BE SET OFF AGAINST AN INCOME FALLING UNDER ANY DIFFEREN T HEAD. THESE THREE SECTIONS INDICATE BEYOND ANY DOUBT THAT T HE CAPITAL GAINS ARE SEPARATELY COMPUTED IN ACCORDANCE WI TH THE SAID PROVISIONS AND THEY ARE NOT TREATED AS THE PR OFITS FROM THE BUSINESS. THE PROFITS AND GAINS OF BUSINESS AN D CAPITAL GAINS ARE TWO DISTINCT CONCEPTS IN THE INCOME-TAX ACT: T HE FORMER ARISES FROM THE ACTIVITY WHICH IS CALLED BUSIN ESS AND THE LATTER ACCRUES BECAUSE CAPITAL ASSETS ARE DISPOSE D OF AT A VALUE HIGHER THAN WHAT THEY COST THE ASSESSEE. THEY ARE PLACED UNDER DIFFERENT HEADS; THEY ARE DERIVED FROM DIFFERENT SOURCES; AND THE INCOME IS COMPUTED UNDER DIFFERE NT METHODS. THE FACT THAT THE CAPITAL GAINS ARE CONNECTED W ITH THE CAPITAL ASSETS OF THE BUSINESS CANNOT MAKE THEM THE PRO FIT OF THE BUSINESS. THEY ARE ONLY DEEMED TO BE INCOME O F THE PREVIOUS YEAR AND NOT THE PROFITS OR GAINS AR ISING FROM THE BUSINESS DURING THAT YEAR. 6.2 THE FACTS IN THE CASE OF ARTIC (SUPRA) A RE THAT THE ASSESSEE WAS CARRYING ON THE BUSINESS OF RUNNING COMPUTER TRAINING CENTER AT PUNE. THIS BUSINESS WAS WOUND UP AND COMPUTERS, FURNIT URE, FIXTURES ETC. WERE SOLD. THEREAFTER, THE ASSESSEE ENTERED INTO AN AGREEMENT WITH ONE OF THE PARTNERS TO PURCHASE HER RESIDENTIAL FLAT IN NE W MUMBAI. APPLICATION ITA NO. 4659(DEL)/2009 17 WAS MADE TO THE SOCIETY FOR CONVERTING THE FLAT INTO A COMMERCIAL FLAT, WHICH WAS GRANTED. IN COMPUTATION OF SHORT-TERM CAPITAL GAINS ON SALE OF BUILDINGS AT PUNE, DEDUCTION WAS CLAIMED IN RESP ECT OF THE COST OF NEW MUMBAI COMMERCIAL FLATS. THE CASE OF THE LOWE R AUTHORITIES WAS THAT THE BUSINESS HAS NOT EVEN BEEN STARTED AT MUM BAI AND, THEREFORE, SUCH A DEDUCTION CANNOT BE ALLOWED. HOWEVER, THE HONBL E TRIBUNAL GRANTED SUCH A DEDUCTION NOTWITHSTANDING THE FACT THAT THE ASSESSEE DID NOT CARRY ON ANY BUSINESS. IT WAS HELD THAT THE ASSESSEE IS ENTITLED TO THE DEDUCTION OF THE COST OF FLAT IN NEW MUMBAI U/S 50(1)(III) IN THE COMPUTATION OF CAPITAL GAINS IN RESPECT OF THE SALE OF PUNE PR OPERTY. 6.3 IN THE CASE OF OCEANIC INVESTMENT LTD., SIM ILAR CONCLUSION WAS ARRIVED AT. IN PARAGRAPH NUMBERS 11 AND 12, I T WAS MENTIONED THAT THE USAGE OF THE ASSET IS REQUIRED FOR THE ASSETS SOLD AND NON-USE OF THE NEW ASSET FOR THE PURPOSE OF BUSINESS IN THE YEAR OF SALE WOULD HAVE NO EFFECT ON THE APPLICABILITY OF SECTION 50. F OR THE SAKE OF READY REFERENCE, THESE PARAGRAPHS ARE REPRODUCED BELO W:- 11. THE UNDERLINED WORDS IF ARE PUT TOGETHE R, IT SHALL READ 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 WHERE THE FULL VALUE OF THE CONS IDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSF ER OF THE ASSET EXCEEDS THE AGGREGATE OF THE FOLLOWING AMOUNTS , NAMELY, ITA NO. 4659(DEL)/2009 18 THE ACTUAL COST OF ANY ASSET FALLING WITHIN THE BLOCK OF ASSETS ACQUIRED DURING THE PREVIOUS YEAR, SUC H EXCESS SHALL BE DEEMED TO BE CAPITAL GAINS ARISING FROM THE TRANSFER OF SHORT-TERM CAPITAL ASSETS. THE ABOVE DISTINCTL Y INDICATE THAT THE SAID PROVISIONS APPLY IN CASE OF SALE OF AN ASSET THAT HAS BEEN ALLOWED DEPRECIATION UNDER THE ACT, THAT IS, THE ASSET THAT IS USED FOR THE PURPOSE OF BUSINES S, IF SOLD, THE CAPITAL GAINS ON SALE OF SUCH ASSET SHALL BE COMPUTED BY APPLYING THE PROVISIONS OF THE SAID SECTION. IT IS ACCORDINGLY OBVIOUS THAT THE REQUIREMENT OF THE USE OF THE ASSET FOR THE PURPOSE OF THE BUSINESS IS OF THE ASSET THAT IS SOLD BECAUSE BUT FOR SUCH USAGE, THE ASSET COULD NOT HAVE B EEN ALLOWED DEDUCTION OF DEPRECIATION IN COMPUTING THE INCOME FROM BUSINESS. 12. ONE OF THE ADJUSTMENT THAT IS PERMITTED BY THE SAID SECTION FROM THE SALE PROCEEDS OF THE ASSET, IS OF THE WDV OF THE SOLD ASSET AS AT THE BEGINNING OF THE PREVIOUS YEAR. THIS IMPLIES THAT THE ASSET THAT IS SOLD DUR ING THE PREVIOUS YEAR, THE ASSESSEE WOULD BE ENTITLED FOR THE APPLICATION OF THE SAID S. 50 OF THE ACT, ON THE SATISFACTION OF THE CONDITION THAT IT WAS USED FOR BUSINESS IN ANY OF THE E ARLIER ASSESSMENT YEAR, ON SATISFACTION OF WHICH CONDIT ION, IT WAS ALLOWED DEPRECIATION IN THAT ASSTT. YEAR AND USE OR NON-USE FOR THE PURPOSE OF BUSINESS IN THE YEAR OF SALE WOULD HAVE NO EFFECT ON ITS QUALIFICATION OF APPLICABILITY OF T HE SAID SECTION. 6.4 ON COMBINED READING OF THESE CASES, IT BECOM ES CLEAR THAT EVEN IF NEW ASSET IS NOT USED FOR THE PURPOSE OF BUSIN ESS, ITS COST WILL HAVE TO BE DEDUCTED FROM THE FULL VALUE OF CONSIDERATION R ECEIVED OR ACCRUING ON TRANSFER OF THE BLOCK OF ASSETS, WHILE COMPUTI NG SHORT-TERM CAPITAL GAINS. ADMITTEDLY, THE ASSESSEE HAS PURCHASED ASSETS WITH SAME RATE OF DEPRECIATION IN OTHER UNITS OF THE VALUE OF RS. 2,19,59,294/-. WHEN THIS ITA NO. 4659(DEL)/2009 19 AMOUNT IS DEDUCTED UNDER THE AFORESAID CLAUSE (III), THE COMPUTATION OF SHORT-TERM CAPITAL GAINS RESULTS INTO A NIL FIGURE. THE ASSESSEE HAS OTHERWISE DEDUCTED THE SALE PROCEEDS FROM THE BLOCK OF ASSETS OF OTHER UNITS FOR THE PURPOSE OF COMPUTING DEPRECIATION FOR SUCCEEDING YEAR. THEREFORE, WE ARE OF THE VIEW THAT THE CAPITAL G AINS ON TRANSFER OF ENTIRE MACHINERY AND PLANT OF THE PAPER DIVISION AMOUNT TO NIL AND, THUS, ARE NOT LIABLE TO BE TAXED U/S 50. 6.5 BEFORE PARTING, WE MAY ADD THAT THIS INTERPR ETATION IS IN ACCORDANCE WITH THE STATUTORY LANGUAGE AND, THUS, IT CANNO T BE SAID THAT IT DEFEATS THE PURPOSE OF THE PROVISION, WHICH IN ANY CASE W AS NOT EXPLAINED TO US BY THE LD. DR. 7. IN THE RESULT, THE APPEAL IS DISMISSED. THIS ORDER WAS PRONOUNCED IN THE OPEN COURT ON 9 JULY, 2010. SD/- SD/- (RAJPAL YADAV) (K.G.BANSAL) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE OF ORDER: 9TH JULY,2010. SP SATIA ITA NO. 4659(DEL)/2009 20 COPY OF THE ORDER FORWARDED TO:- M/S ANSAL PROPERTIES, NEW DELHI. DY. CIT, CENTRAL CIRCLE -20, NEW DELHI. CIT(A) CIT THE DR, ITAT, NEW DELHI. ASSISTANT REGISTRAR.