COMMISIONER OF INCOME TAX v. MINI ADIE CONTRACTOR — 1998 DIGILAW 852 (GUJ)

R. BALIA, J. ( 1 ) THE Income Tax Appellate Tribunal, Ahmedabad Bench a, has referred a question of law arising out of its order in I. T. A. No. 656/ahd/82 relating to A. Y. 1977-78 dated 27. 6. 1983. The question reads as under:-"whether, on the facts and in the circumstances of the case, the tribunal was right in law in coming to the conclusion that the depreciation allowed to the deceased Adie Contractor from whom the assessee had inherited the asset should not be taken into account and adjusted from the value of 1. 1. 54 for the purpose of computation of cost of asset for taking capital gain?" ( 2 ) THE facts and circumstances of the case in which the question has arisen are that late Shri Adie Contractor was the owner of a cinema theatre which he acquired prior to 1. 1. 54. He died on 16. 1. 72. The respondent assessee, along with two others, inherited the cinema theatre. The asset was sold during the previous year relevant to A. Y. 1977-78. The assessee opted to take fair market value of asset as on 1. 1. 54 as its cost of acquisition u/s 55 (2) read with sec. 49, read with sec. 50 (2) of the Income-tax Act 1961. The assessee computed the cost of acquisition to be fair market value as on 1. 1. 54 as reduced by depreciation allowed to the assessee since the asset became vested in him on the death of previous owner and on that balance capital gains were computed. The ITO did not accept the computation of the cost of acquisition made by the assessee but from the fair market value as on 1. 1. 54 deducted depreciation allowed on such assets after 1. 1. 54 to late Shri Adie Contractor in addition to the depreciation which has been allowed to assessee after he acquired the asset by way of succession. The view taken by the ITO was confirmed by the AAC. The tribunal on further appeal however accepted the assessees contention and allowed the claim of the assessee as to the computation of the cost of acquisition for the purposes of computing capital gains for the assessment year in question. The view taken by the ITO was confirmed by the AAC. The tribunal on further appeal however accepted the assessees contention and allowed the claim of the assessee as to the computation of the cost of acquisition for the purposes of computing capital gains for the assessment year in question. In the aforesaid circumstances, the question has been referred to us to consider what is the amount of depreciation that is to be allowed in reaching the cost of acquisition of the asset in question. ( 3 ) SECTION 45 provides that "any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in other provisions, be chargeable to income-tax under the head "capital gains" as income of the previous year in which the transfer took place. " Section 46 deals with situation arising in the case of distribution of assets to the shareholders on liquidation of a company. Section 47 enumerates certain transactions which are not subjected to charge of capital gains. Section 48 prescribes mode of computation of capital gain arising on transfer of a capital asset. It in turn envisages that from the full value of the consideration received or receivable as a result of transfer of the capital asset there shall be deducted expenditure incurred wholly and exclusively in connection with such transfer and the cost of acquisition of capital asset and the cost of any improvement thereto. Thus, cost of acquisition becomes the principal factor in computing capital gains arising on transfer of a capital asset. Section 49 provides for a situation where the assessee himself might not have incurred the cost of acquisition of the capital asset in relation to which capital gains is to be computed. In such event, the cost of acquisition of the asset is to be deemed to be the cost for which the last of previous owner of the property acquired it who has acquired it by mode of acquisition other than referred to in sec. 49 (1) as increased by cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be. Section 50 deviates from sec. 48 and sec. 49 (1) as increased by cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be. Section 50 deviates from sec. 48 and sec. 49 in dealing with capital assets in respect of which a deduction on account of depreciation has been obtained by the assessee in any previous year either under the Act of 1961 or under the Indian Income-tax Act, 1922. ( 4 ) FOR better appreciation of the controversy before us, sec. 50 is reproduced hereinbelow:-"notwithstanding anything contained in clause (42a) of sec. 2, 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 or under the Indian Income-tax Act, 1922, the provisions of sections 48 and 49 shall be subject to the following modifications:- (1) where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of the assets during the 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 within the block of assets acquired during the previous year,such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets; (2) where any block of assets cease to exist as such, for the reason that all the assets in that block are transferred during the previous year, the cost of acquisition of the block of assets shall be the 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 and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short-term capital assets. " ( 5 ) A perusal of sec. " ( 5 ) A perusal of sec. 50 as such reveals that firstly it applies to the case of an assessee, transferor of the capital asset, who has obtained deduction on account of depreciation in respect of such asset in any previous year. If an assessee himself has not obtained any deduction on account of depreciation after his acquisition, sec. 50 would not be applicable. The second thing which stands out is that ordinarily where an assessee has claimed a deduction on account of depreciation in respect of such capital asset for the purposes of sec. 48 and 49, that is to say, to determine the cost of acquisition which is to be reduced from full value of consideration to arrive at sum chargeable to capital gains instead of cost at which the asset was acquired written down value as defined in clause (6) of sec. 43 of the asset is to be taken as cost of acquisition of the asset. The written down value is further qualified with the expression "as adjusted", that is to say, certainadjustments are to be made in the written down value to arrive at the amount of cost of acquisition that is to be deducted from full value of consideration. ( 6 ) SUB-SEC. (2) of sec. 50 envisages where on combined reading of sec. 49 and sec. 55 (2) the assessee opts to take fair market value of an asset as on 1st day of Jan. 1954, then such fair market value of the capital asset in question is to be reduced by the amount of depreciation, if any, allowed to the assessee after the said date. The assessee here also cannot be anybody but the assessee in relation to whom the capital gains are to be computed for the purpose of levying tax under the Act of 1961. Here also the word cost of acquisition is qualified with expression as adjusted. 29. 12. 1998 - ( 7 ) THUS, on the plain reading of sec. 50 which governs the determination of cost of acquisition in the case of asset which has been subjected to deduction on account of depreciation, only permissible deduction under sub-sec. (2) from the fair market value as on 1. 1. 54 is allowed to the assessee after 1. 1. 54. It cannot be stretched to reduce the fair market value adopted for the purposes of sub-sec. (2) from the fair market value as on 1. 1. 54 is allowed to the assessee after 1. 1. 54. It cannot be stretched to reduce the fair market value adopted for the purposes of sub-sec. (2) of sec. 50 to be reduced by any further sum of depreciation allowed to somebody other than the assessee. The expression used in sub-sec. (2) of sec. 50 is not "depreciation if any allowed on the asset after the said date" but the expression is "depreciation if any allowed to the assessee after the said date". The effect of exercise of option to adopt fair market value of the asset as of 1. 1. 54 under sub-sec. . (2) of sec. 50 is that in place of written down value as on the date of transfer fair market value as on 1. 1. 54 is substituted. While for the purpose of sub-sec. (1) written down value is to be taken as defined in clause 6 of sec. 43, sub-sec. (2) does not refer to written down value as defined in clause (6) of sec. 43 or fair market value as reduced by depreciation in accordance with clause (6) of sec. 43 either. ( 8 ) IT was urged by learned counsel for the revenue that the word "as adjusted" in sub-sec. (2) must have some meaning. If the interpretation put by the assessee is accepted, the expression would be rendered otiose. This contention also does not merit serious consideration. The expression as adjusted used in clause (1) as well as clause (2) of sec. 50, has been defined in sec. 55 (1) (a) which reads as under:-"adjusted", in relation to written own value of fair market value, means diminished by any loss deducted or increased by any profit assessed, under the provisions of clause (iii) of sub-section (1) or clause (ii) of sub-section (1a) of section 32 or sub-section (2) or sub-section (2a) of section 41, as the case may be, the computation for this purpose being made with reference to the period commencing from the 1st day of January 1954, in cases to which clause (2) of section 50 applies. "whenever realisaton is made of a business asset which has been subjected to depreciation, if such realisation is less than what its written down value has been, the same is allowed as deduction in computing profit and loss of business or profession of the year in which such realisation takes place or the asset is destroyed or put out of use. On the other hand, if realisation of such asset is more than the written down value, the difference between the cost of acquisition and written down value is brought to the tax as income from business or profession which is, in common parlance, known as balancing charge. As amount referable as balancing charge is subjected to tax under the head income from business or profession, the same is not subjected to tax a second time as capital gains by adjusting the cost of acquisition in relation to such depreciated asset by increasing the written down value or the amount determined as cost of acquisition by reducing the fair market value as on 1. 1. 54 with the amount of depreciation allowed to the assessee after 1. 1. 54 and such increased value is the cost of acquisition as adjusted for the purposes of sub-sec. (1) or sub-sec. (2) of sec. 50. This also does not refer to depreciation allowed to the previous owner before the asset became the property of the assessee in relation to whom capital gains is computed. In effect, inthe case of transfer of a depreciable asset, an assessee who has availed deduction on account of depreciation to the extent realisation above written down value upto amount of depreciation availed is subjected to tax as income from profit and gains, and any realisation beyond it is subjected to tax as capital gain. However, in case such excess is not received by anyone who has not availed that depreciation, he does not receive any balancing charge but receives excess over cost of acquisition as capital receipt liable to capital gains. ( 9 ) PROVISIONS under section 41 (2) make it clear that for the purpose of computing capital gains, the cost of acquisition is to be reduced by actual depreciation availed by the assessee and is to be increased by balancing charge, if any, to which he can be subjected to, u/s 41 (1) and (2 ). ( 9 ) PROVISIONS under section 41 (2) make it clear that for the purpose of computing capital gains, the cost of acquisition is to be reduced by actual depreciation availed by the assessee and is to be increased by balancing charge, if any, to which he can be subjected to, u/s 41 (1) and (2 ). We are here not concerned with the question of increasing the cost of acquisition by adding balancing charge, if any, payable by the assessee as that question was neither raised nor decided by the tribunal at any stage. Even otherwise, if that is to be accepted, then it would further increase the cost of acquisition for the purpose of computing capital gains by the said sum resulting in deduction of capital gains to that extent which is not the case of revenue either. ( 10 ) AS a result of the aforesaid discussion, we are of the opinion that the deduction of depreciation allowed to the deceased is not permissible for the purpose of reducing the cost of acquisition of capital asset for the purpose of computing capital gains in case capital gains arising in the hands of successor of transfer of capital asset in case it falls within the provisions of sub-sec. (2) of sec. 50 and an option to adopt fair market value as on 1. 1. 54 as its cost of acquisition in place of written down value has been exercised by the assessee. The computation thereafter must follow the procedure provided in sec. 50 (2) and other provisions of the Act. ( 11 ) AS a result, we answer the question referred to us in affirmative, that is to say, in favour of the assessee and against the revenue. There shall be no order as to costs. .