COMMISSIONER OF INCOME TAX HYD V. M/S HYDERABAD CONSTRUCTION CO.LTD.HYD.

RC/173/2000

AI Insights

The case revolves around the dispute concerning the allowance of depreciation on a block of assets used in the assessee's leasing business. The assessee sold old machinery and purchased new machinery during the same accounting period. The Revenue challenged the Tribunal's decision that allowed the depreciation on the new machinery from the sale proceeds of the old machinery, arguing that the leasing business should be treated as a separate unit. The Tribunal and the appellate Commissioner had previously accepted the assessee's position, leading to the Revenue's appeal to the High Court.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 680057 (HC-ANDHRA_PRADESH)
• Appeal Type: Others
• Pronouncement Date: 25-02-2014
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income-tax vs. Ansal Properties & Infrastructure Ltd., S.Muthurajan vs. Deputy Commissioner of Income-tax
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Applicant
• Court: HIGH COURT
• Keywords: Block of assets; Capital Gain; Depreciation; Leasing Business; Short Term Capital Gain
• Section: 32; 28; 50; 50(1); 50(2)

Judgement Text

"HON'BLE SRI JUSTICE G.CHANDRAIAH & HON’BLE SRI JUSTICE CHALLA KODANDA RAM R.C. No. 173 of 2000 JUDGMENT:- (per Hon’ble Sri Justice Challa Kodanda Ram) At the instance of the revenue, the following question of law arising out of the order dated 23.09.1996 of the Tribunal in I.T.A.No.1048/Hyd/93 for the assessment year 1990-91, is referred for opinion of this Court: “Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is correct in holding that deduction under Section 50 of the Act can be allowed from out of the capital gain arising from the sale of the assets during the relevant year and that the assets form part of Block of Assets in respect of which depreciation is allowable.” The short controversy involved in this case is with respect to allowing of depreciation on the block of assets purchased and used in the business of leasing which was one of the businesses of the assessee. The assessee’s main source of income for the year was the amounts earned as warehousing and handling charges apart from lease rentals along with some miscellaneous income. During the relevant accounting period, the assessee- company sold away certain old plant and machinery used for its business and received sale consideration of Rs.41.00 lakhs and provided written down value of the same in the block of assets as Rs.9,12,548/- as on 01.04.1989. The excess of sale price was treated as a short-term capital gain under Section 50(1) of the Income- Tax Act, 1961 (for short “the Act”). During the same period, the assessee also purchased some new machinery for its leasing business and its cost was deducted from the short-term capital gain arising on the sale of the machinery. The assessing officer came to the conclusion that the leasing business is a separate unit and treated the rental income derived from the leasing of the machinery as income from other sources. While doing so, he did not allow depreciation on the newly acquired block of assets from the sale profits of the old machinery. On appeal, the appellate Commissioner accepted the claim of the assessee and held that notwithstanding the fact that the assessee was carrying on business for the purpose of calculation of depreciation of the block of assets, which carry the same rate of depreciation of the block of assets, they have to be grouped together as one block of assets. The appellate Commissioner also accepted the contention of the appellant-Revenue that leasing is yet another business that is being carried on by the assessee apart from manufacturing activity which was abandoned during the relevant accounting period. The Revenue carried the matter in appeal before the Income- tax Appellate Tribunal only with respect to the dispute regarding allowing of the depreciation while it accepted the finding of the appellate Commissioner that the leasing is another business, as such, the rental income is required to be assessed as business income. The Income-tax Appellate Tribunal had affirmed the order of the appellate Commissioner. In the circumstances, the above stated question of law is referred at the instance of the Revenue. The learned Senior Counsel for the Income-tax Department contends that the Tribunal has not given any finding that both the block of assets carry the same rate of depreciation, and in that view of the matter, allowing of the depreciation of the newly purchased machinery is not in order and is impermissible. On the other hand, the learned counsel for the assessee submits that it is well settled law by various judgments that if the block of assets carry the same rate of depreciation they are required to be treated as one block of assets, and no question is raised by the Department at any point of time that there is any difference in the rates of depreciation of the newly acquired machinery and of the machinery which was already with the assessee during the accounting year. He relies on the judgment of Delhi High Court reported in Commissioner of Income-tax vs. Ansal Properties & Infrastructure Ltd.[1] We have considered the rival submissions and are in agreement with the learned counsel for the respondent- assessee that no specific question was raised at any point of time even before the Tribunal that the rates of depreciation of the newly acquired machinery and of the existing machinery of the assessee are different, as such they cannot be grouped together as block of assets for the purpose of consideration of the claim of depreciation. As a matter of fact, the first appellate authority himself had accepted the claim of the assessee and grouped them together as block of assets while considering the interplay between Sections 28, 32 and 3rd proviso to Section 50 of the Act. The learned counsel for the assessee would draw our attention to Appendix-I under Rule 5 of the Income Tax Rules, 1962 and point out that plant and machinery are grouped together under different sub-headings. In the light of the findings of fact as recorded by the Tribunal, we have no hesitation to accept the contention of the learned counsel for the assessee. While dealing with the issue, the Delhi High Court in its judgment (cited 1st supra) had referred to a similar question which was considered by the Madras High Court in S.Muthurajan vs. Deputy Commissioner of Income- tax[2] and the same may be usefully quoted hereunder: “Madras High Court in S.Muthurajan’s case had examined Section 50(2) and interpreted the same. In the said case, the assessee had separate units/divisions and one of the units was sold. Question arose whether the gain from the sale of the said unit was separately taxable as a short-term capital gains though the block of assets i.e. assets carrying/having same rate of depreciation still continued to exist and whether short-term capital gains tax was payable in such cases. The High Court rejected the contention and the stand of the Revenue and agreed with the plea of the assessee that Section 50(2) was not applicable as the block of assets i.e. assets in the same rate of depreciation continue to exist and inter alia observed. “As already pointed out, Section 50 is a special provision for computation of capital gains in the case of depreciable assets. The said provision states that where the capital assets is an asset forming part of a block of assets, then the computation of the capital gains has to be done in accordance with Section 50 of the Act. Under sub-section (2) of Section 50, where any block of assets are transferred, the cost of depreciation at the hands of the transferee shall be 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. The income thus received or accruing as a result of such transfer or transfer is deemed to be the capital gains arising from the transfer of short-term capital assets. Given the fact that block of assets is identified by the percentage of depreciation granted, on going through the various heads under the Schedule, we find that the depreciation percentage fixed is more of machinery specific rather than industry specific. Thus, on going through the various clauses in the Schedule, we find, if the asset transferred and the asset purchased fall for consideration under the self-same percentage of depreciation, then the asset qualified for being termed as falling under a block of assets. Thus, if the assets transferred from the 100 per cent export-oriented unit and the assets purchased come for the same percentage of depreciation as prescribed in the table, the assessee would be justified in seeking adjustment in the matter of working out the capital gains.” In the above view of the matter, the referred question of law is answered in favour of the assessee and against the Revenue. Accordingly, the Referred Case is disposed of. No order as to costs. As a sequel to the disposal of the Referred Case, Miscellaneous Petitions, if any pending, shall stand disposed of as infructuous. _________________ G. CHANDRAIAH, J 25.02.2014 ______________________ CHALLA KODANDA RAM,J bcj [1] [2012] 207 TAXMAN 61 (Delhi) [2] (2011) 339 ITR 301 (Mad) "