Income Tax Appellate Tribunal - Mumbai
Chhabria Trust vs Assistant Commissioner Of Income Tax on 8 May, 2003
Equivalent citations: [2003]87ITD181(MUM), (2003)80TTJ(MUM)861
ORDER
G.D. Agrawal, AM.
1. This appeal by the assesses is directed against the order of CIT(A)-IX, Bombay, dt. 21st Aug., 1991.
2. The Hon'ble President, Tribunal, vide U.O. No. 12/Jd/AT/2000, dt.14th Sept., 2000, referred the appeal for the consideration of the Special Bench.
3. In this appeal, the assessee has raised following grounds of appeal :
"1. The leamed CIT(A) erred in confirming the gain on transfer of premises as short-term capital gain.
2. He failed to appreciate the facts that the factory premises which was transferred during the year which is not used as business assets from asst. yr. 1986-87 onwards.
3. He failed to appreciate the facts that neither the depreciation has been claimed nor the depreciation has been allowed from asst. yr. 1986-87 onwards.
4. He failed to appreciate the facts that the asset under review never entered the stock of assets as defined under Section 2(11) of the IT Act 1961."
4. Shri V.H. Patil, the learned counsel for the assessee, neatly identified the following two issues emanating out of the aforesaid four grounds, to which the learned Departmental Representative also agreed :
(i) Whether the single asset can itself form a block of assets within the meaning of "block of assets" as per Section 2(11) of the IT Act, 1961 ?
(ii) Whether, on the facts and in the circumstances of the case, the provisions of Section 50 are applicable in respect of premises sold by the assessee during the previous year relevant to asst. yr. 1988-89 when the assessee has ceased to carry on the business from asst yr. 1985-86 ?
5. We shall first take up issue No. 1, i.e., whether the single asset can itself form a block of assets within the meaning of "block of assets" as per Section 2(11) of the IT Act, 1961. The facts of the case are that prior to asst, yr. 1985-86, the assessee-trust was carrying on business of manufacturing of Fiat car accessories. From asst. yr. 1985-86, the assessee-trust ceased to carry on its business but dontinued to remain in possession of the assets. One of the assets owned by the trust was a factory building acquired by it in 1978. After the closure of the business from asst. yr. 1985-86, the trust continued to exploit the asset by letting it out and the income therefrom was shown under the head "income from other sources". During the year under appeal, the assessee sold the said premises and declared the income of Rs. 2,24,751 arising therefrom as long-term capital gains. The AO was, however, of the view that since assessee had claimed depreciation on the said asset in the earlier years, the transaction was hit by Section 50 of the Act and the profit arising out of the sale of the premises was accordingly taxed as short-term capital gains. The learned CIT(A) upheld the order of the AO. Hence, this appeal by the assessee.
6. At the time of hearing before us, it is submitted by the learned counsel that upto asst. yr. 1987-88, depreciation was being worked out on each asset separately. The concept of block of assets came into operation from asst. yr. 1988-89. The term "block of assets" is defined in Section 2(11) of the IT Act. As per the definition as it existed at the relevant time, the "block of assets" means "a group of assets falling within a class of assets, being building, machinery, plant or furniture in respect of which the same percentage of depreciation is prescribed." It is contended by the learned counsel that the words used in the above definition is "group of assets" and not the asset or assets. The use of plural words clearly proves that single asset is out of the purview of block of assets otherwise the legislature could have used the word asset or assets.
6.1. On the above submission of the learned counsel, it was asked by the Bench that if the single asset is out of the purview of the block of assets, the assessee owning single asset and using it for the purpose of business would not be entitled to depreciation at all, because Section 32 provides for allowing the depreciation on block of assets. The above interpretation would lead to absurd result. It can never be the intention of the legislature not to allow the depreciation to an assessee if he is owning single asset and using it for the purpose of business. When the above question was posed to the learned counsel, he was fair enough to concede that even the single asset would form part of the block of assets. In view of above, we hold that the single asset can itself form a block of asset within the meaning of Section 2(11) of the IT Act, 1961.
7. With regard to the second question, it is vehemently contended by the learned counsel that the block of assets presupposes the existence of the business. The depreciation is allowable only when the assessee is carrying on the business. When there is no business at the relevant time, there is no question of claim of any depreciation and similarly no question of forming part of the block of assets. The whole concept of block of assets is relevant for the purpose of allowing depreciation. He further submitted that as per Section 2(11), "block of assets" means "group of assets in respect of which same percentage of depreciation is prescribed". That percentage of depreciation is prescribed in Rule 5 of the IT Rules. As per Rule 5, depreciation is to be calculated on WDV of such block of assets as are used for the purpose of business. Thus, unless the asset is used for the purpose of business, it does not form part of block of asset. He further submitted that the concept of block of assets came for the first time in asst. yr. 1988-89 while the assessee had ceased to carry on the business from asst. yr. 1985-86. Thus, the asset owned by the assessee never became the block of assets. In support of this contention he relied upon the decision of Tribunal, Mumbai Bench, in the case of Mrs. Rohita Subramaniam v. Dy. CIT (2002) 75 TTJ (Mumbai) 101.
8. The learned Departmental Representative, on the other hand, stated that as per the definition of block of assets in Section 2(11), the group of assets in respect of which same percentage of depreciation are prescribed would be block of assets. The emphasis is on the same percentage of depreciation. The rate of depreciation is prescribed in Appendix-I to the IT Rules. The rate of depreciation is dependent upon the type of asset i.e., the nature of the asset. The assessee will be entitled to depreciation if the asset is used. Therefore, the user of the asset is relevant to determine whether the assessee is entitled to the depreciation or not. However, the percentage of the depreciation is dependent upon the nature of the asset. He further submitted that Section 50 provides special provision for computing capital gain in case of depreciable asset. Section 50 would be applicable in respect of any asset forming part of block of assets in respect of which depreciation has been allowed under the IT Act, 1961, or under the Indian IT Act, 1922. In the case of assessee, admittedly the depreciation has been allowed on the asset under the IT Act, 1961. Therefore, Section 50 would be applicable. In support of this contention, he relied upon the following decisions:
(i) Artic v. Asstt. CIT (ITA No. 7333/M/97) [reported at (1999) 64 TTJ (Mumbai) 291--Ed.]
(ii) Master Silk Mills (P) Ltd. v. Dy. CIT (2001) 72 TTJ (Rajkot) 722 : (2001) 77 ITD 530 (Rajkot)
(iii) Oceanic Investments Ltd. v. Asstt. CIT (1997) 57 TTJ (Mumbai) 549.
9. We have carefully considered the arguments of both the sides and perused the material placed before us. Section 50 of the IT Act reads as under :
"50. Notwithstanding anything contained in Clause (42A) of Section 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 IT Act, 1922 (11 of 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 ceased 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 aasessee 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."
9.1. From the above, it is evident that Section 50 would be applicable when (i) capital asset is an asset forming part of block of assets, (ii) in respept of such asset, depreciation has been allowed under the IT Apt, 1961, or under the IT Act, 1922. When the above two conditions are satisfied, the capital gain on the sale of the asset would be calculated as per provisions, of Section 50 and not as per provisions of Sections 48 and 49. The term "block of assets" has been defined in Section 2(11) of the IT Act, which at the relevant time reads as under :
"2(11) "block of assets" means a group of assets falling within a class of assets, being building, machinery, plant or furniture, in respect of which the same percentage of depreciation is prescribed."
9.2. As per the above definition, "block of assets" means (i) group Of assets, (ii) which falls within a class of assets, being building, machinery, plant or furniture, (iii) in respect of which same percentage of depreciation is prescribed. While deciding question No. 1, we have already come to the conclusion that group of assets will include single asset also. It is not in dispute that the asset sold by the assessee falls within a class of assets viz., building. In the Annexure-I to the IT Rules, percentage for various types of buildings has been prescribed. The percentage depends upon the nature of the building. The contention of the learned counsel is that in Section 2(11) there is an implied condition of the actual user of the asset for the purpose of business during the year under consideration. After going though Section 2(11), we are unable to agree with the contention of the learned counsel In Section 2(11), there is neither any explicit not implied condition that the asset should be used for the purpose of business during the year under consideration. The user of the asset is important for the purpose of actual allowability of the depreciation, but not for determining whether the asset falls within the block of assets or not. The allowability of depreciation is relevant for the purpose of Section 50. However, as per Section 50 also, it is not necessary that the depreciation is allowed for the year under consideration. If the depreciation is allowed in any pf the year either under the IT Act, 1961, or under the IT Act, 1922, Section 50 would be applicable, Section 50 would be applicable if the depreciation is allowed on that asset even under the IT Act, 1922. The above provision clearly establishes the intention of the legislature that the user of the asset during the year under consideration is not necessary, We find that the Tribunal, Mumbai Bench, has considered the similar issue in the case of Artic (supra). While considering Section 2(11), the Tribunal held as under:
"Section 2(11) of the IT Act defines "Block of assets" as meaning a group of assets falling within a class of assets, being building, machinery, plant or furniture, in respect of which the same percentage of depreciation is prescribed. The definition does not speak of depreciation having been allowed in the assessments in respect of any asset falling within the block of assets but refers only to the depreciation rates being prescribed in the rules."
9.3. While dealing with Section 50, the Tribunal in the above decision in the case of Artio (supra) has referred to the legislative history and held as under :
"When Section 50 was substituted by the present section by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, w.e.f. 1st April, 1988, the Board issued a circular [Circular No. 469, dt. 23th Sept. 1986, reported in (1986) 162 ITR (St) p. 21). After referring to the budget speech of the Finance Minister wherein reference was made to the proposal to introduce a system pf allowing depreciation in respect of block of assets instead of the present system of depreciation on individual asset, at para 6.3 the Board stated as follows :
'As mentioned by the Economic Administration Reforms Commission (Report No. 12, para 20), the existing system in this regard requires the calculation of depreciation in respect of each capital asset separately and not in respect of block of assets. This requires elaborate book-keeping and the process of checking by the AO is time consuming. The greater differentiation in rates, according to the date of purchase, the type of asset, the intensity of use, etc., the more disaggregated has to be the record keeping. Moreover, the practice of granting the terminal allowance as per Section_ 32(1)(iii) or taxing the balancing charge as per Section 41(2) of the IT Act, necessitate the keeping of records of depreciation already availed of by each asset eligible for depreciation. In order to simplify the existing cumbersome provisions, the Amending Act has Introduced a system of allowing depreciation on block of assets. This will mean the calculation of lump sum amount of depreciation for the entire block of depreciable asets in each of the four classes of assets namely, building, machinery, plant and machinery (furniture).' This shows that the main object of introducing the block of assets concept was only to reduce time and effort spent in detailed record maintenance. While giving effect tp this object, there could have been no justification or warrant for prescribing a condition that the new asset, in addition to being an asset in respect of which the same rate of depreciation is prescribed as in the case of the other assets within the class, should also be used in a business carried on by the assessee. In the case of a building the new building purchased should be one in respect, of which the same rate pf depreciation, as is prescribed in respect of the other buildings, has been prescribed by the rules. If the assessee carries on a business, in that case he would also be eligible for an allowance on account of depreciation at that rate. In the case of an assessee who does not carry on a business, the result would be that he would not be entitled to any allowance on account of depreciation in respect of the asset. If at a future date he decides to commence a business, he would be entitled to the depreciation allowance in respect of the new asset, provided he satisfies the authorities that the new asset was used in that business."
10. We entirely agree with the above view expressed by the Tribunal, Mumbai Bench. In the case of Oceanic Investments Ltd. (supra) also, the Tribunal, Mumbai Bench has taken the view that for the purpose of Section 50, it is not necessary that the newly acquired asset must be used for the purpose of business during the year under consideration.
11. The learned counsel for the aesessee has heavily relied upon the decision of Tribunal, Mumbai Bench, in the case of Rohita Submmaniam (supra). However, we find that the facts were altogether different in that case. In the said case the assessee's husband late Shri Subramaniam carried on the business of printing and book binding. Subsequent to his death, a dispute arose regarding inheritance of his property. Brothers of late Subramaniam filed a petition in the High Court claiming that they would succeed to the property as per will. After three years of the litigation, the matter was settled and as per consent terms filed in the Court, appropriate orders were passed by the Hon'ble High Court whereby the estate of the deceased was divided equally amongst four legal heirs viz., his wife (the assessee) and his two minor children and his mother. Thereafter, the assessee sold the asset received in inheritance. The question was whether the profit arising from the sale of asset can be treated as short-term capital gain under Section 50. On the above stated facts, the Tribunal held Section 50 to be inapplicable on the ground that the assessee never carried on the business. The case under consideration before us is altogether different wherein the assessee admittedly carried on the business upto asst. yr. 1985-86. Therefore, the above decision of Tribunal in the case of Mrs. Rohita Subramaniam would not be applicable to the case under consideration before us. Accordingly, we hold that Section 50 would be applicable in respect of premises sold by the assessee during the previous year relevant to asst. yr. 1988-89 even though the assessee has not carried on the business from asst. yr. 1985-86.
12. In view of above, we do not find any justification to interfere with the order of the CIT(A) and hold that the AO was fully justified in assessing the profit from the sale of building as short-term capital gain under Section 50.
13. In the result, the assessee's appeal stands dismissed.