M.raghavan v. Assistant Commissioner Of Income Tax, City Circle V (1), Chennai-600 006

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 10/12/2003 CORAM THE HONOURABLE MR.JUSTICE R.JAYASIMHA BABUANDTHE HONOURABLE MR.JUSTICE S.R.SINGHARAVELU T.C.No.350 of 2001 M.Raghavan .. Appellant -Vs- Assistant Commissioner of Income Tax,City Circle V (1),Chennai-600 006. .. Respondent Tax Case (Appeal) against the order dated 16-5-2001 inI.T.A.No.447/Mds/97 (Assessment Year 1994-95) on the file of the Income TaxAppellate Tribunal, Madras Bench 'A'. !For appellant : Mr.M.S.Subramanian ^For respondent: Mr.J.Narayanasamy, Jr. Standing Counsel for I.T. :JUDGMENT (Judgment of the Court was delivered by R.Jayasimha Babu,J.)The assessment year is 1994-95.2. The assessee who is a senior advocate, sold 371 volumes of books,all of which except 14 volumes, had been purchased between 1984 and 1988 andthe remaining 14 between 1988 and 1993, for a sum of Rs.1,2 5,000/-. Out ofthat, a sum of Rs.15,500/- was paid as commission to the bookseller.3. The assessee claimed that the balance of Rs.1,09,500/- was notliable to be taxed, as that amount was the sale proceeds of capital assets andthat amount was less than the indexed cost of acquisition of those capitalassets.4. That claim was uniformly rejected by the assessing officer,appellate authority, as also by the Tribunal, by placing reliance on Section50 of the Income Tax Act.5. It is not in dispute that the books sold by the assessee arecapital assets, in respect of which depreciation had been allowed underSection 32(1) of the Act. The extent of the depreciation was the whole of theactual cost of the books, as the value of each book did not exceed Rs.5,000/-.First proviso to Section 32(1) as it stood between 1.4.1984 and 1.4.1996,during which period the assessee had purchased these books, reads as under: " ... Provided that where the actual cost of any machinery or plant does not exceedfive thousand rupees, the actual cost thereof shall be allowed as a deductionin respect of the previous year in which such machinery or plant is first putto use by the assessee for the purposes of his business or profession." 6. What the assessee receives by reason of the value of the asset being less than Rs.5,000/-, is depreciation which is allowed at a rate whichis equal to the full cost of the asset that is acquired. 7. Section 50 of the Act which was introduced with effect from 1.4.1988, is titled "Special provision for computation of capital gains incase of depreciable assets". The opening part of Section 50 reads thus:"Notwithstanding anything contained in clause (42-A) of Section 2, where thecapital asset is an asset forming part of a block of assets in respect ofwhich depreciation has been allowed under this Act or under the IndianIncome-tax Act, 1922 (11 of 22), the provisions of Sections 48 and 49 shall besubject to the following modifications:- .... " It is not necessary to refer to sub-section (1) thereunder, as that admittedlydoes not apply to the facts of the assessee's case. Subsection (2) however isrelevant and material. That sub-section (2) reads as under:- " ... where any block of assets ceases to exist as such, for the reason thatall the assets in that block are transferred during the previous year, thecost of acquisition of the block of assets shall be the written down value ofthe block of assets at the beginning of the previous year, as increased by theactual cost of any asset falling within that block of the assets, acquired bythe assessee during the previous year and the income received or accruing as aresult of such transfer or transfers shall be deemed to be the capital gainsarising from the transfer of short term capital assets." 8. Clause (42-A) of Section 2 defines "short term capital asset" as " ... where any block of assets ceases to exist as such, for the reason thatall the assets in that block are transferred during the previous year, thecost of acquisition of the block of assets shall be the written down value ofthe block of assets at the beginning of the previous year, as increased by theactual cost of any asset falling within that block of the assets, acquired bythe assessee during the previous year and the income received or accruing as aresult of such transfer or transfers shall be deemed to be the capital gainsarising from the transfer of short term capital assets." 8. Clause (42-A) of Section 2 defines "short term capital asset" as meaning a capital asset held by an assessee for not more than 36 monthsimmediately preceding the date of its transfer. That period is reduced to 12months in respect of shares or other security it held in a company which islisted in a recognised stock exchange or a unit of the Unit Trust of India ora unit of a specified Mutual Fund. 9. Sections 48 and 49 of the Act deal with the mode of computation of income chargeable under the head "capital gains", and the cost with referenceto certain modes of acquisition, respectively. 10. Section 50, as the heading to that Section specifies, is a special provision for computation of capital gains in case of depreciableassets. Capital gains derived from the sale of such depreciable assets are tobe computed in the manner provided in Section 50. 11. Section 50(2) refers to block of assets. Block of assets is defined in Section 2(11). That definition as it stood from 1.4.1988 to 1.4.1999 reads thus:- "Block of assets means a group of assets falling within a class of assetscomprising -- (a) tangible assets, being buildings, machinery, plant or furniture; (b) .... in respect of which the same percentage of depreciation is prescribed." 12. In order to constitute a block of assets, the assets must formpart of a group, which fall within the same class and for the members of whichgroup, depreciation prescribed is of the same percentage. It is the books onwhich the assessee had received depreciation, which books were regarded by theassessee, as also by the Revenue, as falling within the class "plant". It isnot in dispute that the depreciation had been claimed under Section 32 inrespect of each book and that all the books that were sold belong to the samegroup, being books, all of which are within the same class "plant".13. Section 50(2) refers to the written down value of the block ofassets. Written down value is defined in Section 43(6) of the Act. Section43(6)(b) is the relevant sub-clause for the purposes of this case. Section43(6)(b) reads thus: "In the case of assets acquired before the previous year, the actual cost tothe assessee less all depreciation actually allowed to him under this Act, orunder the Indian Income-tax Act, 1922 (11 of 1922), or any Act repealed bythat Act, or under any executive orders issued under the Indian Income-taxAct, 1886 (2 of 1886) was in force: Provided that in determining the written down value in respect of thebuildings, machinery or plant for the purposes of clause (ii) of sub-section(1) of Section 32, "depreciation actually allowed" shall not includedepreciation allowed under the sub-clauses (a),(b) and ( c) of clause (vi) ofsub-section (2) of Section 10 of Indian Incometax Act, 1922 (11 of 1922),where such depreciation was not deductible in determining the written downvalue for the purposes of the said clause (vi)." 14. Thus, the written down value in case of assets acquired beforethe previous year relevant to the year of assessment, is the actual cost ofthe asset less all "depreciation actually allowed".15. Sub-clause (c) of Section 43(6) defines written down value in thecase of any block of assets. For the purpose of this case, it is sufficientto set out the opening part of sub-clause (i) thereunder, as also sub-clause(ii). 14. Thus, the written down value in case of assets acquired beforethe previous year relevant to the year of assessment, is the actual cost ofthe asset less all "depreciation actually allowed".15. Sub-clause (c) of Section 43(6) defines written down value in thecase of any block of assets. For the purpose of this case, it is sufficientto set out the opening part of sub-clause (i) thereunder, as also sub-clause(ii). Section 43(6)(c)(i): "In respect of any previous year relevant to theassessment year commencing on the 1st day of April, 1988, the aggregate of thewritten down values of all the assets falling within that block of assets atthe beginning of the previous year and adjusted ... " Section 43(6)(c)(ii): "In respect of any previous year relevant to theassessment year commencing on or after the 1st day of April, 1989 , thewritten down value of that block of assets in the immediately precedingprevious year as reduced by the depreciation actually allowed in respect ofthat block of assets in relation to the said preceding previous year and asfurther adjusted by the increase or the reduction referred to in item (i)." 16. What is significant in Section 43(6)(c) is that the written downvalue of the block of assets is stated to be the aggregate of the written downvalues in sub-clause (i), and the written down value of the block of assets inthe immediately preceding previous year in sub-clause (ii). In order toascertain the written down value referred to in sub-clause (c) of Section43(6), one has to look at the definition of the "written down value" inSection 43(6)(a) and (b). In Section 43(6)(a), in case of assets acquired inthe previous year, it is the actual cost to the assessee, and in Section43(6)(b), in case of assets acquired before the previous year, it is theactual cost to the assessee, less all "depreciation actually allowed."17. Thus, for the purpose of Section 50(2), the assets in respect ofwhich depreciation had been allowed under Section 32(1) proviso, being theamount equal to the actual cost of acquisition, that being the extent of"depreciation actually allowed", the whole of the amount received by theassessee when the assessee sold those depreciated assets, is required to betreated as a capital gain arising from the transfer of short term capitalassets. 18. Learned counsel for the assessee submitted that the reference ofwritten down value in Section 50(2), as also the reference to " depreciableassets" and the title to Section 50, would indicate that even at the time ofsale, the asset must be one which was continuing to suffer depreciation, andin respect of which the written down value after allowing depreciation at aspecified percentage, was ascertainable, and that this provision would have noapplication to assets for which depreciation had been allowed under Section32(1) proviso, having regard to the value of those assets being less than theamount specified in that proviso, the amount of depreciation so allowed beingthe full value of the cost of acquisition. It was also his submission thatthe reference to depreciation being at the same rate for the group of assetsfalling within the same class in the definition of " block of assets" wouldalso indicate that it is only assets which are depreciated at a rate which isless than 100% that can be taken note of for the purpose of Section 50 of theAct. 19. Having regard to the relevant provisions of the Act which we haveset out earlier and the effect of the same which also have been set out, we donot find it possible to accept the submissions so made for theappellant/assessee. 19. Having regard to the relevant provisions of the Act which we haveset out earlier and the effect of the same which also have been set out, we donot find it possible to accept the submissions so made for theappellant/assessee. 20. The assessee does not dispute the fact that the books are "plant" and that depreciation claimed has been actually allowed on that basis.Plant is a depreciable asset for which, rates of depreciation have beenprescribed in the Depreciation Table in Appendix�I of the Income Tax Ruleswith reference to different items falling within the class of "plant". Thefact that the assessee had the benefit of depreciating his asset in full inthe year of acquisition itself, does not render the benefit received by theassessee something other than depreciation. The asset that the assesseeacquired was depreciable asset. The assessee, as also the Revenue, regardedeach book as to constituting a separate "plant" and the actual cost ofacquisition had been allowed as depreciation, as the value of each book wasless than Rs.5,000/-. The assessee thus had actually received the benefit of depreciation under Section 43(6)(b). The written down value of the asset isthe cost of acquisition less the quantum of depreciation actually allowed.100% of the cost having been allowed as depreciation, the written down valueof the asset of which the assessee had acquired, became 'nil'. The amountthat was realised by the assessee when he later sold those depreciated assets,was the amount from which the written down value of the asset that was soldwas to be deducted, was "nil". The whole of the amount received by theassessee from that sale was therefore was required to be treated as and hasrightly been treated as capital gain arising from the transfer of short termcapital asset. 21. The assessee's claim that he should have the right to indexingthe cost of acquisition by invoking Sections 48 and 49, is untenable. Theassets sold by the assessee being depreciable assets, what is provided inSections 48 and 49 is subject to the modifications set out in Section 50 andtherefore, the assessee is not entitled to any indexing. 22. It would appear that the object of introducing Section 50 in order to provide different method of computation of capital gain fordepreciable assets, was to dis-entitle the owners of such depreciable assetsfrom claiming the benefit of indexing, as if indexing were to be applied,there would be no capital gain available in most cases, for being brought totaxation. The value of depreciable asset in most cases comes down over aperiod of time, although there are cases where the sale value of a depreciatedasset exceeds the cost of acquisition. The result of allowing indexing, if itwere to be allowed, is to regard the cost of acquisition as being very muchhigher than what it actually is, to the assessee. If such boosted cost ofacquisition is required to be deducted from the amount realised on sale, inmost cases, it would result in a negative figure, resulting in the assesseebeing enabled to claim a capital loss. Clearly, it could not have been thelegislative intent to confer such multiple benefits to assessees sellingdepreciable assets. 23. The appeal is therefore dismissed. The assessing officer willcomply with the directions which had been given by the Commissioner and whosedirections have been affirmed by the Tribunal, expeditiously having regard tothe fact that the assessee is an octogenarian. Index: YesInternet: Yes cs To 1. The Assistant Registrar,Income Tax Appellate Tribunal,Rajaji Bhavan,III Floor, Besant Nagar,Madras-90.(with records)(5 copies) 2. The Secretary, Central Board of Revenue,New Delhi. (3 copies) 3. The Assistant Commissionerof Income Tax,City Circle - V (1),Chennai-6. 4. The Commissioner of Income Tax,(Appeals) IV,Chennai. 5. The Commissioner of Income Tax,Tamil Nadu IV,Chennai.