Ita/759/2009 Of The Commissioner Of Income Tax,Kochi v. M/S.shakthi Metel Depot, Cloth Bazar Rd

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE V.K.MOHANAN WEDNESDAY, THE 6TH JANUARY 2010 / 16TH POUSHA 1931 ITA.No. 759 of 2009(E) ---------------------- ITA.846/2004 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT ----------------------------- THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADV. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S): --------------- M/S.SAKTHI METAL DEPOT, CLOTH BAZAR ROAD, COCHIN-31. ADV. SRI.P.BALAKRISHNAN (E) FOR RESPT. THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 06/01/2010, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.R. C .N. RAMACHANDRAN NAIR &V.K. MOHANAN, JJ. -------------------------------------------- -------------------------------------------- Dated this the 6th day of January, 2010 JUDGMENT Ramachandran Nair, J. This is an appeal filed by the Revenue challenging the orders ofthe Income Tax Appellate Tribunal cancelling the short term capitalgains assessment on profit arising to the respondent-assessee on thesale of a building on which depreciation was allowed for several yearsby declaring that such profit is chargeable to tax as long term capitalgains because no depreciation was claimed or allowed for two yearsprior to the previous year in which the building was sold. We haveheard senior standing counsel appearing for the revenue and Sri. P.Balakrishnan, counsel appearing for the respondent-assessee. 2. The facts leading to the controversy are the following. Therespondent-assessee is a firm which was engaged in business withprincipal place of business at Kochi and a Branch at Mumbai. Theassessee purchased a flat at a cost of Rs. 95,000/- in Mumbai for business purposes in the financial year ending on 31.3.1974. Sincepurchase of the flat, it was used as Branch Office of the assessee atMumbai and on the capitalised cost of the building at Rs. 95,000/- theassessee claimed depreciation and the same was allowed until theassessment year 1995-96. The written down value of the flat as on31.3.1995 was Rs. 37,175.80. However, the assessee discontinuedclaiming depreciation for the flat for the assessment years 1996-97 and1997-98. The flat was sold during the year 1997-98, that is in theprevious year relevant for the assessment year 1998-99 on a total saleconsideration of Rs. 71 lakhs. After deducting the expenses towardsbrokerage and legal expenses of Rs. 3,52,000/- the assessee returnedprofit of Rs. 67,34,210/- as long term capital gains. The assessingofficer however held that profit arising on transfer of depreciable assetis assessable as short term capital gains under Section 50 of the IncomeTax Act. Applying the provisions of Section 50, he assessed the profiton sale of the flat as short term capital gains. The assessee's contentionbefore the assessing officer was that it stopped using the flat forbusiness purposes after the assessment year 1995-96 and thereafter theflat was treated as investment and was so shown in the Balance Sheet.The assessing officer did not accept the assessee's contention that flat at Mumbai was discontinued to be used for business purposes in the twoyears following the assessment year 1995-96 because according to himthe assessee's attempt was only to avoid payment of tax on short termcapital gains. In the appeal filed by the assessee, the CIT (Appeals),also concurred with the assessing officer and held that the buildingbeing depreciable asset and was being used for business purposes, saleof the same attracts tax on short term capital gains under Section 50 ofthe Act. On second appeal filed by the assessee, the Tribunal solelyrelying on the entry in the Balance Sheet of the assessee wherein theflat of the assessee at Mumbai was shown as investment, held that sincethe item was purchased in 1974, sale of the flat is assessable as longterm capital gains. It is against this order of the Tribunal that therevenue has filed this appeal. 3. Senior counsel appearing for the revenue contended thatTribunal's findings are factually and legally incorrect. Beforeproceeding to decide the case on merits, we feel the factual controversyas to whether after using the building for business purposes and afterclaiming depreciation for 21 years, the assessee deliberately did notclaim depreciation for two succeeding years, 1996-97 and 1997-98,but simultaneously used the building for business purposes, need not be decided because in our view supported by reasons stated hereinbelow ,the sale of a depreciable asset in respect of which depreciation wasallowed to the assessee should always be treated as short term capitalgains by virtue of operation of Sections 50,50A and 50B of the Act.We therefore proceed to decide the matter by assuming that theassessee after claiming depreciation for the flat which was used as aBranch Office at Mumbai from 1974 onwards and in respect of whichdepreciation was claimed and allowed until the assessment year 1995-96, sold it in the previous year relevant for the assessment year 1998-99without using it for business purposes for two years preceding the yearof sale and in respect of which depreciation was neither claimed norallowed for those two years. Since the controversy is on the scope ofSections 50 and 50A we extract hereunder the said Sections for easyreference: 50. Special provision for computation of capital gains incase of depreciable assets. Notwithstanding anything contained in clause (42A)of section 2, where the capital asset is an asset forming partof a block of assets in respect of which depreciation hasbeen allowed under this Act or under the Indian Income taxAct, 1922 (11 of 1922), the provisions of sections 48 and49 shall be subject to the following modifications:-- (1) where the full value of the consideration receivedor accruing as a result of the transfer of the assettogether with the full value of such considerationreceived or accruing as a result of the transfer of anyother capital asset falling within the block of theassets during the previous year, exceeds the aggregateof the following amounts, namely:-- (i) expenditure incurred wholly and exclusivelyin connection with such transfer or transfers; (ii) the written down value of the block ofassets at the beginning of the previous year; and (iii) the actual cost of any asset falling withinthe block of assets acquired during the previousyear; (2) where any block of assets ceases to exist as such,for the reason that all the assets in that block aretransferred during the previous year, the cost ofacquisition of the block of assets shall be the writtendown value of the block of assets at the beginning ofthe previous year, as increased by the actual cost ofany asset falling within that block of assets, acquiredby the assessee during the previous year and theincome received or accruing as a result of suchtransfer or transfers shall be deemed to be the capitalgains arising from the transfer of short-term capitalassets. 50A. Special provision for cost of acquisition in case ofdepreciable asset. (iii) the actual cost of any asset falling withinthe block of assets acquired during the previousyear; (2) where any block of assets ceases to exist as such,for the reason that all the assets in that block aretransferred during the previous year, the cost ofacquisition of the block of assets shall be the writtendown value of the block of assets at the beginning ofthe previous year, as increased by the actual cost ofany asset falling within that block of assets, acquiredby the assessee during the previous year and theincome received or accruing as a result of suchtransfer or transfers shall be deemed to be the capitalgains arising from the transfer of short-term capitalassets. 50A. Special provision for cost of acquisition in case ofdepreciable asset. Where the capital asset is an asset in respect of whicha deduction on account of depreciation under clause (i) ofsub-section (1) of section 32 has been obtained by theassessee in any previous year, the provisions of sections 48 and 49 shall apply subject to the modification that thewritten down value, as defined in clause (6) of section 43,of the asset, as adjusted, shall be taken as the cost ofacquisition of the asset. 4. While the contention of the revenue is that the asset in respectof which depreciation has been claimed when sold should always beassessed as short term capital gains, the contention of the assessee isthat unless the asset sold forms part of the block asset in the previousyear in which sale took place, it cannot be assessed to short term capitalgains under Section 50 of the Act. In our view Section 50 has to beunderstood with reference to the general scheme of assessment on saleof capital assets. The scheme of the Act is to categorise assets betweenshort term capital assets and long term capital assets. Section 2(42A)defines short term capital asset as an asset held for not more than 36months. The non-obstante clause with which Section 50 opens makesit clear that it is an exception to the definition of short term capital assetwhich means that even though the duration of holding of an asset ismore than the period mentioned in Section 2(42A), still the assetreferred to therein will be treated as short term capital asset. No one candoubt that assets covered by Section 50 are depreciable assets formingpart of block assets as defined under Section 2(11) of the Act. Section 50 has two components, one is as to the nature of treatment of an asset,the profit on sale of which has to be assessed to capital gains. TheSection mandates that a depreciable asset in respect of whichdepreciation has been allowed when sold should be assessed to tax asshort term capital asset. The other purpose of Section 50 is to providecost of acquisition and other items of expenditure which are otherwiseallowable as deduction in the computation of capital gains and coveredby Sections 48 and 49 of the Act. Here again Section 50 provides anexception for deduction of cost of acquisition and other items ofexpenditure otherwise allowable in the computation of capital gainsunder Sections 48 and 49 of the Act. In other words, Section 50provides for assessment of a depreciable asset in respect of whichdepreciation has been allowed as short term capital gains and thedeductions available under Sections 48 and 49 should be allowedsubject to the provisions provided in sub-sections (1) and (2) of Section50. Section 50A also deals with assessment of depreciable asset thattoo as short term capital gains and it actually supplements Section 50.In our view, the purpose of Section 50A is to enable the assessee toclaim deduction of the written down value of the asset in respect ofwhich depreciation was claimed in any year as defined under Section 43(6) of the Act towards cost of acquisition within the meaning ofsections 48 and 49 of the Act. The condition for computation of shortterm capital gains in the way it is stated in Section 50A is that assesseeshould have been allowed depreciation in respect of a depreciable assetsold in any previous year which obvious means that for the purpose ofassessment of profit on the sale of a depreciable asset, the assesseeneed not have claimed depreciation continuously for the entire periodupto the date of sale of the asset. In other words, in our view, thebuilding which was acquired by the assessee in 1974 and in respect ofwhich depreciation was allowed to it as a business asset for 21 years,that is upto the assessment year 1995-96, still continued to be part ofthe business asset and depreciable asset, no matter the non-userdisentitles the assessee for depreciation for two years prior to the dateof sale. We do not know how a depreciable asset forming part of blockof assets within the meaning Section 2(11) of the Act can cease to bepart of block of assets. The description of the asset by the assessee inthe Balance Sheet as an investment asset in our view is meaninglessand is only to avoid payment of tax on short term capital gains on saleof the building. So long as the assessee continued business, thebuilding forming part of the block of assets will retain it's character as such, no matter one or two of the assets in one or two years not used forbusiness purposes disentitles the assessee for depreciation for thoseyears. In our view, instead of selling the building, if the assesseestarted using the building after two years for business purposes theassessee can continue to claim depreciation based on the written downvalue available as on the date of ending of the previous year in whichdepreciation was allowed last. We therefore allow the appeal by reversing the order of theTribunal and by restoring the assessment on the profit on sale of thebuilding as short term capital gains, confirmed in first appeal. (C.N.RAMACHANDRAN NAIR)Judge. (V.K. MOHANAN) Judge. kk