Income Tax Appellate Tribunal - Delhi
D.S. Canpack Ltd., Noida vs Assessee on 1 October, 2004
ITA NO. 5510/DEL/2004
A.Y. 2001-02
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "E" NEW DELHI
BEFORE SHRI A.D. JAIN, JUDICIAL MEMBER
AND
SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER
I.T.A. No. 5510/Del/2004
A.Y. : 2001-02
M/s Dharampal Satyapal Ltd., vs. Dy. Commissioner of Income Tax,
A-85, 86, Sector-II, Circle 10(1),
Noida (UP) Central Revenue Building,
(PAN: AABCD1072F) New Delhi
(Appellant ) (Respondent )
Asseessee by : SH. AJAY VOHRA, ADV. & SH.
GAURAV JAIN, CA
Department by : SH. N.K. CHAND, SR. D.R.
ORDER
PER SHAMIM YAHYA: AM This appeal by the assessee is directed against the order of the Ld. Commissioner of Income Tax (Appeals) dated 01.10.2004 pertaining to assessment year 2001-02.
2. The issue raised is that Ld. Commissioner of Income Tax (Appeals) erred in confirming the computation made by the Assessing Officer of short term capital gain arising on the slump sale of undertaking. It has further been urged that Ld. Commissioner of Income Tax (Appeals) has erred in confirming the reduction of pre- construction period expenses from the cost of assets for the purpose of working of short term capital gain as per the provision of section 50B of the Income Tax Act, 1961.
1ITA NO. 5510/DEL/2004 A.Y. 2001-02
3. In this case Assessing Officer noted that during the year the assessee company has transferred its entire business by way of slump sale to M/s Dharampal Satyapal Limited on 12.2.2001 at a net consideration of ` 2,75,00,000/-. The undertaking which the assessee had transferred was held by it for less than 36 months as the assessee started its business in the last year while capitalizing its assets and starting commercial production w.e.f. March, 2000. In this background Assessing Officer held that provision of section 50B of the I.T. Act are applicable in computing short term capital gain on the slump sale of the undertaking would be applicable. Assessee also filed a revised return. On going through the working of the capital gain u/s. 50B under the revised computation, Assessing Officer observed that assessee has not computed the net worth as provided in the Explanation to Section 50B in as much as the written down value of depreciable assets comprised in the block of assets transferred in the slump sale, has not been worked out in accordance with the provisions of section 43(6)(c)(i)(C) of the Income Tax Act. Referring the said provision Assessing Officer noted that in this case the assessee capitalized its plant and machinery and other assets in the previous year ending on 31.3.2000, but did not claim for depreciation on the same in the previous year and owing to the fact that entire undertaking has been transferred before the close of the year i.e. 12.2.2001, no depreciation has been made for the year under consideration. Assessing Officer further observed that while going through the provisions of section 43(6)(c)(i)(C) read with explanation to section 50B it will be noted that to work out the WDV of the depreciable assets comprised in the block of assets in computing net worth, the provisions of section 43(6)(c)(i)(C) shall operate 2 ITA NO. 5510/DEL/2004 A.Y. 2001-02 independently in its application i.e. provisions of section 43(6)(c)(i)(C) have been borrowed for the limited purpose of working out the written down value of depreciable assets. In other words, applying the provisions, the WDV of depreciable assets shall be calculated simply by deducting from the actual cost of the assets the depreciation as actually allowed to the assessee in respect of the assessment year commencing before 1.4.1988 and for the assessment years commencing from 1.4.1988 and thereafter, the depreciation that would have been allowable to the assessee as if the asset was the only asset in the relevant block of asset, shall be considered irrespective of the fact whether the assessee has claimed the depreciation or the depreciation has otherwise not been allowed on account of any reason.
3.1 Assessing Officer further noted that assessee has capitalized the entire indirect expenditure incurred prior to the commercial production to cost of plant and machinery. Going through the details of expenditure incurred during preoperative period as per Schedule 5 to the balance sheet as on 31.3.2000 it is seen that administrative expenses and legal and professional expenses, have been carried forward and ultimately added to the cost of plant and machinery. Assessing Officer observed that as per accounting principles and practices, the indirect expenses unrelatable to the acquisition or installation of fixed assets are liable to the written off as miscellaneous expenditure over a period as per the policy of the company. In any case the same cannot be made part of the cost of assets. Assessing Officer observed that the assessee has incurred expenses totaling to ` 58,10,089/- on account of administrative expenses and legal and professional charges incurred during the last two years which cannot be allowed to be capitalized for working out 3 ITA NO. 5510/DEL/2004 A.Y. 2001-02 the cost of the assets for the purpose of computing the depreciation which would have been allowable for arriving at the WDV for the purpose of computing the net worth of the assessee company.
Assessing Officer further held that the entire assets comprised in the block of plant and machinery has been capitalized in the last year and commercial production started in March, 2000, the depreciation for the previous year @12.5% which comes out to be ` 1,88,37,530/- the WDV of the block of assets is worked out to be ` 13,18,62,711/- to be considered for working out the net worth of undertaking under section 50B. Thereafter, Assessing Officer made the computation.
4. Upon assessee's appeal Ld. Commissioner of Income Tax (Appeals) confirmed the Assessing Officer 's action. He also held that assessee claim for allowance of depreciation in respect of A.Y. 2001-02 also cannot be considered.
5. Against this order the assessee is in appeal before us.
6. We have heard both the counsels and perused the records. In this regard, it would be apt to refer the provisions of section 50B which reads as under:-
"50B. (1) Any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income tax as capital gains arising from the transfer of long term capital assets and shall be deemed to be the income of the previous year in which the transfer took place:-
Provided that any profits or gains arising from the transfer under the slump sale of any capital asset 4 ITA NO. 5510/DEL/2004 A.Y. 2001-02 being one or more undertakings owned and held by an assessee for not more than thirty-six months immediately preceding the date of its transfer shall be deemed to be the capital gains arising from the transfer of short-term capital assets.
(2) In relation to the capital assets being an undertaking or division transferred by way of such sale, the "net worth" of the undertaking or the division, as the case may be, shall be deemed to be the cost of acquisition and the cost of improvement for the purposes of sections 48 and 49 and no regard shall be given to the provision contained in the second proviso to section
48.
(3) Every assessee, in the case of slump sale, shall furnish in the prescribed form along with the return of income, a report of an accountant as defined in the Explanation below sub-section (2) of section 288, indicating the computation of the net worth of the undertaking or division, as the case may be, and certifying that the net worth of the undertaking or division, as the case may be, has been correctly arrived at in accordance with the provisions of this section.
Explanation 1 - For the purposes of this section, "net worth"
shall be the aggregate value of total assets of the undertaking or division as reduced by the value of 5 ITA NO. 5510/DEL/2004 A.Y. 2001-02 liabilities of such undertaking or division as appearing in its books of account:
Provided that any change in the value of assets on account of revaluation of assets shall be ignored for the purposes of computing the net worth.
Explanation 2 - For computing the net worth, the aggregate value of total assets shall be, -
(a) in the case of depreciable assets, the written down value of the block of assets determined in accordance with the provisions of contained in sub-
item (C) of item (i) of sub-clause (c) (6) of section 43; [and]
(b) in the case of other assets, the block value of such assets."
6.1 Ld. counsel of the assessee submitted that the term 'block of assets' is defined in section 2(11) of the Act, implies all assets in respect of which the same rate of depreciation is prescribed in the Appendix to the Income Tax rules, are treated as forming part of block of assets. Under section 32 of the Act, deprecation is admissible on the written down value in respect of block of assets. The written down value of any block of assets is computed in terms of Section 43(6)(c) of the Act, which reads as under:-
"43. Definitions of certain terms relevant to income from profits and gains of business or profession.6
ITA NO. 5510/DEL/2004 A.Y. 2001-02 In sections 28 to 41 and in this section, unless the context otherwise requires -
.........
(6) "written down value" means -
.......
(c) in the case of any block of assets, -
(i) in respect of any previous year relevant to the assessment year commencing on the 1st day of April, 1988, the aggregate of the written down values of all the assets falling within that block of assets at the beginning of the previous year and adjusted, -
(A) by the increase by the actual cost of any asset falling within that block, acquired during the previous year;
(B) by the reduction of the moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the written down value as so increased; and (C) in the case of a slump sale, decrease by the actual cost of the asset falling within that block as reduced--
(a) by the amount of depreciation actually allowed to him under this Act or under the corresponding provisions of the Indian Income Tax Act, 1922 in respect of any previous 7 ITA NO. 5510/DEL/2004 A.Y. 2001-02 year relevant to the assessment year commencing before the 1st day of April, 1988; and
(b) by the amount of depreciation that would have been allowable to the assessee for any assessment year commencing on or after the 1st day of April, 1988 as if the asset was the only asset in the relevant block of assets, so, however, that the amount of such decrease does not exceed the written down value;
(ii) in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1989, the written down value of that block of assets in the immediately preceding previous year as reduced by the depreciation actually allowed in respect of that block of assets in relation to the said preceding previous year and as further adjusted by the increase or the reduction referred to in item (i).
.........."
6.2 Further submissions of Ld. counsel of the assessee read as under:-
As per the said definition, the written down value of any block of assets (for the previous year) is arrived at by making the following adjustments:
i) Reducing from the written down value of that block of assets for the immediately preceding year, the 8 ITA NO. 5510/DEL/2004 A.Y. 2001-02 depreciation actually allowed in respect of that block for that previous year.
ii) Increase by the actual cost of any asset falling within that block acquired during the relevant previous year.
iii) Reduction of the amount of sale price received against sale of any asset falling within that block during the previous year; and
iv) In case some of the assets in that block are sold/ transferred by way of slump sale, the depreciation that would have been allowable if the assets transferred by way of slump sale were the only assets forming part of that block.
The working of the block concept of depreciation is explained by the CBDT vide Circular No. 469, dated 23.9.1986: 162 ITR (St.) 21, issued while explaining the amendments made by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986. The relevant portion of the aforesaid Circular is annexed hereto as Annexure 1.
Once the assets form part of the block, the individual assets lose their identity and depreciation is allowed with reference to the written down value of the relevant block of assets. Even where an individual asset forming part of the block may not have worked or may have been sold, depreciation may still be admissible with reference to the written down value of such assets embedded in the block.
It is important to note that provisions of section 43(6)(c)(C)(b) of the Act come into operation to determine 9 ITA NO. 5510/DEL/2004 A.Y. 2001-02 the written down value of the remaining block of assets where part of the assets falling in the block are transferred by way of slump sale during the relevant previous year. Since part of the assets are transferred by way of slump sale, it is necessary to isolate the written down value of the assets transferred and for that purpose the said section enacts a deeming fiction by requiring the assessee to recalculate the depreciation that would have been allowable on such assets, by further assuming that such assets (which are transferred) were the only assets forming part of the relevant block of assets.
The fiction enacted in section 43(6)(c)(C)(b) of the Act is for a limited purpose, viz., calculating the written down value of the remaining assets in order to give effect to the slump sale. The deeming fiction in section 43(6)(c)(C)(b) of the Act would trigger only where the block has more assets than those which are transferred by way of slump sale. Otherwise, the words "as if the asset was the only asset in the relevant block of assets" would be rendered superfluous. In other words, the said section has no application where the entire assets forming part of the block are sold by way of slump sale.
Where the entire assets forming part of the block are transferred by way of slump sale, the written down value of the block of assets, which are transferred in entirety, is to be computed by reducing the depreciation actually allowed in terms of section 43(6)(c)(C)(b)ii) of the Act. The 10 ITA NO. 5510/DEL/2004 A.Y. 2001-02 Supreme Court in the case of Madeva Upendra Sinai vs. UOI and Others : 98 ITR 209 held by majority that the WDV of an asset has to be computed on the basis of depreciation actually allowed to an assessee and cannot be stretched to an allowance on a notional basis.
It is impermissible to invoke section 43(6)(c)(C)(b) of the Act to calculate the written down value of the assets transferred by way of slump sale by taking into account the depreciation that would have been allowable. To reiterate, the fiction in section 43(6)(c)(C)(b) has been enacted for limited purpose. In case of slump sale, section 43(6)(c)(C)(b) requires the assessee to recalculate depreciation that would have been allowable (in respect of the assets transferred) as if such assets were the only assets in the relevant block of assets. Such a legal fiction was necessary to recalculate the depreciation for assets transferred by way of slump sale and reducing the same from the written down value of the block of assets, since the absence of such legal fiction, it could be possible to contend that since the individual assets have lost their identity, no depreciation was actually allowed with reference to the assets (transferred by way of slump sale) forming part of relevant block of assets. It is, therefore, necessary to interpret section 43(6)(c)(C)(b) of the Act in the context and taking into account the purpose for which the legal fiction was enacted.
11ITA NO. 5510/DEL/2004 A.Y. 2001-02 In the facts of the present case, the entire block of assets has been sold by way of slump sale. No assets remained with the assessee company subsequent to the transfer of business by way of slump sale. For that reason, the provisions of section 43(6)(c)(C)(b) have no application. In that view of depreciable assets transferred by way of slump sale by reducing depreciation that would be allowable for the assessment year 2000-01, ignoring the fact that no depreciation was claimed actually or allowed for that year.
It is also important to note that the assessee opted not to claim depreciation for assessment year 2000-01, which was legally permissible as held by the Supreme Court in the case of Mahendra Mills v. C.I.T : 243 ITR 56. In the absence of depreciation having been claimed and actually allowed by the Assessing Officer for assessment year 2000-01, it is not possible for the Assessing Officer to reduce notional depreciation that could have been allowable for assessment year 2000-01 to arrive at written down value of depreciable asset transferred by way of slump sale, while calculating the net worth of the undertaking.
It is also important to note that if depreciation had been allowed in the assessment year 2000-01, the same would have been carried forward as unabsorbed depreciation and would have been set off against short term capital gains on slump sale of the undertaking. The action of the Assessing Officer in accepting the return for assessment year 2000- 01 (without the claim of depreciation) and in notionally 12 ITA NO. 5510/DEL/2004 A.Y. 2001-02 setting off the depreciation that would have been allowable for the said assessment year, while calculating the net worth of the undertaking for purposes of computing capital gains under section 50B of the Act, in assessment year 2001-02 is, even otherwise, inequitable.
For the aforesaid reasons, the Assessing Officer /C.I.T.(A) erred in not accepting the computation of short term capital gains on slump sale of the undertaking and in seeking to reduce depreciation that could have been allowable for assessment year 2000-01, but had not been claimed or actually allowed in the assessment for that year.
6.3 As regards the capitalization of pre-operative expenses, assessee's submissions are as under:-
As regards, the adjustment made by the Assessing Officer to the computation of capital gains under section 50B by reducing the pre-operative expenses, aggregating to ` 58,10,089/- (incurred in the earlier years and capitalized to the cost of assets) from the net worth of the undertaking, it is respectfully submitted that the same was capitalized as part of the cost of assets in the assessment year 2000-01, which has been accepted by the Department. It is respectfully submitted, that the capitalization of such expenses as part of the cost of assets, which had become final in the immediately preceding assessment year could not have been raked up in the assessment proceedings for the relevant assessment year.13
ITA NO. 5510/DEL/2004 A.Y. 2001-02 In view of the above, the Assessing Officer has erred in reducing the pre-operative expenses capitalized to the costs of assets in the earlier year from the net worth of the undertaking, while computing gains under section 50B of the Act during the relevant assessment year.
That apart and without prejudice to the above even assuming that pre-operative expenses were not to be capitalized to the cost of assets, it is respectfully submitted, that such expenses would have otherwise been reflected as part of assets/miscellaneous expenses in the balance sheet of the appellant for the year ending 31st March, 2000 or as on the date of slump sale of the undertaking Section 50B of the Act provides that net worth of the undertaking includes book value of assets other than depreciable assets of such undertaking.
Since the appellant only had canpack division, the aforesaid preoperative expenses, otherwise includible under the head 'miscellaneous expenditure', were relatable to that undertaking and on slump sale thereof were liable to be transferred as part of other assets to the transferee. In view of the above, even otherwise, such pre-operative expenses, forming part of other assets of the undertaking transferred by way of slump sale, were liable to be reduced as part of the net worth of that undertaking, while computing capital gains under section 50B of the Act.
For the aforesaid cumulative reasons, the aforesaid adjustment made by the Assessing Officer and sustained by the Ld. Commissioner of Income Tax (Appeals) needs to be deleted and 14 ITA NO. 5510/DEL/2004 A.Y. 2001-02 computation of capital gains under section 50B of the Act made by the appellant needs to be upheld."
6.4 The Ld. Departmental Representative on the other hand relied upon the orders of authorities below.
6.5 We have carefully considered the submissions and perused the records in light of the precedents relied upon.
6.6 The first aspect for adjudication before us is whether depreciation for the previous year not claimed by the assessee has to be mandatorily allowed for making the computations of profits arising out of slump sales. The point to be noted here is that this is a case where entire assets have been transferred by way of slump sale.
In such circumstances, we find ourselves in agreement with the assessee's contention that written down value here would mean the WDV of that block of assets in the preceding year as reduced by the depreciation actually allowed. The assessee has filed its return of income for the previous year without claiming depreciation and the production started in March, 2000. The said return has been accepted by the department.
6.7 The reliance placed by the revenue on the provisions of section 43(6)(c)(C)(b) is misplaced as the same would be applicable to determine the WDV of remaining block of assets where part of assets falling in the block are transferred by way of slump sales during the relevant previous year. This is meant to isolate the WDV of assets falling in the block which are partly transferred. We are of the considered opinion that the said sub-section has no application where the entire asset forming part of the block are sold by way of 15 ITA NO. 5510/DEL/2004 A.Y. 2001-02 slump sale. The assessee applying the option for not claiming depreciation in the previous assessment year 2000-01 was also legally permissible on the touch stone of the Hon'ble Apex Court decision in the case of Mahindra Mills vs. C.I.T. 243 ITR 56.
6.8 The alternative contention placed by the ld. counsel of the assessee that if depreciation had been allowed in 2000-01, the same would have been carry forward as unabsorbed depreciation and would have been set off against the short term capital gain on the slump sales of the undertaking, is also cogent and we find ourselves in agreement with the same.
6.9 In the background of the aforesaid discussion and precedent, we hold that the depreciation for assessment year 2000-01 cannot be forced to be notionally allowed in computing the gain under slump sales u/s 50B for the current assessment year.
6.10 As regards the issue of capitalization of pre-operative expenses in the previous year, we note that this capitalization was done in financial year ending 2000, falling part of the assessment year 2000-01. This return was accepted by the department. Now the Assessing Officer in the present assessment year is holding that this pre-operative expenses could not have been capitalized as they are not in such nature of expenses which are liable to be capitalized. Again we find ourselves in agreement with the contention that capitalization of preoperative expenses has already been done in assessment year 2000-01. The Assessing Officer cannot be allowed to reopen this issue during the relevant year while making the computation u/s 50B. Hence, we hold that capitalization of expenses already completed in the year ending 31.3.2001 cannot be raised for any disallowance 16 ITA NO. 5510/DEL/2004 A.Y. 2001-02 made by the Assessing Officer in the current assessment year 2001-
02. 6.11 In this regard, we make it clear that we do not agree with the contention of the assessee that this pre-operative expenses were otherwise includible under the head misc. expenditure and in that view such preoperative expenditure forming part of the undertaking transferred by way of slump sales were liable to be reduced as part of the net worth of the undertaking. We are of the considered opinion that the misc. expenditures cannot tantamount to any assets having any worth and hence, taking the same into account while computing capital gains u/s 50B is not tenable. But this aspect is only of academic interest as we have already held that this aspect pertaining to earlier assessment year and cannot be raked up in current assessment year.
6.12 In the result, we set aside the orders of the authorities below and decide the issue in favour of the assessee.
7. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 29/10/2010.
Sd/- Sd/-
[A.D. JAIN] [SHAMIM YAHYA]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Date 29/10/2010
SRB
Copy forwarded to: -
1. Appellant 2. Respondent 3. CIT 4. CIT (A)
5. DR, ITAT
TRUE COPY By Order,
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ITA NO. 5510/DEL/2004
A.Y. 2001-02
Deputy Registrar, ITAT, Delhi Benches
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