Commissioner Of Income Tax vs Eastman Industries Limited
2008 Latest Caselaw 1660 Del

                                         REPORTABLE
*           THE HIGH COURT OF DELHI AT NEW DELHI

                                         Judgment reserved on : 12.08.2008
%                                       Judgment delivered on : 16.09.2008

+                              ITA No. 895/2007

COMMISSIONER OF
INCOME TAX                                                        ..... Appellant

                                     -versus-

EASTMAN INDUSTRIES
LIMITED                                                        ..... Respondent

Advocates who appeared in this case:

For the Appellant              :    Ms Prem Lata Bansal
For the Respondent             :    Mr Ajay Vohra with Ms Kavita Jha

CORAM :-

HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE RAJIV SHAKDHER

1.    Whether the Reporters of local papers may
      be allowed to see the judgment ?                                 Yes

2.    To be referred to Reporters or not ?                             Yes
3.    Whether the judgment should be reported
      in the Digest ?                                                  Yes

RAJIV SHAKDHER, J

1. This is an appeal under Section 260A of the Income Tax Act,

1961 (hereinafter referred to as the Act) against a common judgment

dated 31.01.2007 passed by the Income Tax Appellate Tribunal

(hereinafter referred to as the Tribunal) passed in ITA No. 1850/

Del/2002 and ITA No. 4561/Del/2003 in respect of the same

Assessee i.e. M/s Eastman Industries Ltd in respect of the

assessment years 1998-99 and 2001-02.

2. The Revenue which is in appeal before us, has sought

consideration by this Court, of the following questions of law, which

according to the Revenue, are substantial in nature:-

"a. Whether Income Tax Appellate Tribunal was correct in allowing depreciation to the assessee @ 100% ignoring the material fact that the assets were entered in the books of accounts only after 30.09.1997?

b. Whether assessee was entitled to depreciation @ 50% or @ 100% when the assets were entered in the books of accounts only after 30.09.1997? c. Whether Income Tax Appellate Tribunal was correct in law in holding that no short-term capital gain on transfer or block of assets could be taxed in the present case?

d. Whether provisions of Section 50(2) are attracted in the present case so as to tax short-term capital gain on transfer of block of assets?"

3. In order to deal with the issues raised in the appeal, it would be

necessary for us to record certain undisputed facts. The same are as

follows:-

3.1 The assessee is in the business of export of cycle parts and

light engineering goods. The Assessee, in respect of assessment

year, 1998-99 had filed a return of income on 30.11.1998. In the

said return, the total income was declared as „nil‟ after the assessee

had adjusted the brought forward losses.

3.2 During the course of assessment, the Assessing Officer,

amongst others, raised queries with respect to the following issues:-

1st Issue

3.3 In respect of Assets purchased by the assessee from a

partnership M/s Eastman Industries, on which, the Assessee had

claimed 100% depreciation amounting to Rs 2,70,344/; the

Assessing Officer on examination of details produced before him

found that the bills pertaining to the said assets taken over from the

said partnership firm i.e., M/s Eastman Industries were entered in the

books of the assessee only after 30.09.1997. Accordingly, the

Assessing Officer was of the view that 50% of the depreciation

allowance, quantified at Rs 1,35,172/- had to be disallowed as the

assets had been owned and used by the assessee for less than 180

days.

2nd Issue

3.4 On 16.06.1997 the Assessee had sold its office premises

situate at Maker Chamber, 3, Nariman Point, Mumbai for a

consideration of Rs 2,99,76,295/-. This being so, the Assessing

Officer was of the view that the "block of assets" on which

depreciation was allowed @ 10% had ceased to exist and hence,

under the provisions of Section 50 (2) of the Act, the entire surplus

amount received by the Assessee on the sale of the aforesaid office

premises would be liable to „short term capital gains‟. Accordingly,

capital gain was calculated by the Assessing Officer by deducting

the written down value of the „block of assets‟ as on 01.04.1997

which appeared in the books at Rs 1,32,44,045/; from the sale

consideration received by the Assessee amounting to Rs

2,99,76,295/-. Thus, the capital gains was quantified at Rs

1,67,32,250/-.

4. The aforesaid issues were decided by the Assessing Officer

against the assessee. In so far as the first issue was concerned, the

Assessing Officer disallowed 50% of the depreciation allowance

claimed on the ground that the assets had been entered in the books

of account in the relevant year after 30.09.1997 and since, they were

used for less than 180 days, 50% of the amount quantified at Rs

1,35,172 was disallowed as depreciation.

5. As regards the second issue, even though the Assessing

Officer was informed by the assessee that during the previous year

1997-98 which ended on 31.03.1998, it had purchased two premises

- one, an office premises located at Andheri, Mumbai for Rs

75,52,982/-, and the other premises, situate at Prithvi Raj Road,

Delhi for Rs. 1,09,96,112/- and hence, at the end of the previous year

for the relevant assessment year, the „block of assets‟ within the

meaning of Section 50(2) of the Act was available as on 31.03.1998;

the Assessing Officer did not deviate from his view. The Assessing

Officer was of the opinion that the capital gain arose on 16.06.1997,

as on that date, when, the office premises at Mumbai was sold, the

„block of assets‟ ceased to exist. Based on this reasoning the

Assessing Officer made an addition on account of capital gain to the

extent of Rs 1,76,32,250/- to the assessee‟s total income.

6. Aggrieved by the aforesaid order of the Assessing Officer, the

assessee preferred an appeal bearing No. 559/01-02 in respect of

assessment year 1998-99 before the Commissioner of Income-tax

(Appeals) (hereinafter referred as the CIT). By an order dated

13.02.2002, the CIT allowed the appeal of the assessee with respect

to both the issues referred to hereinabove. The CIT with respect to

first issue held that the Assessing Officer overlooked the fact that a

challan dated 01.04.1997 had been filed by the assessee which,

clearly established the fact that the assets had been transferred from

the partnership firm i.e., M/s Eastern Industries to the assessee on

01.04.1997. The CIT also took into account the fact that the

confirmation certificates were placed on record both by the

transferor-partnership firm i.e., M/s Eastern Industries, as well as,

the transferee i.e., the assessee. The CIT was of the view that the

assessee, was entitled to 100% depreciation as, what was important,

for claiming depreciation under Section 32 of the Act was the use of

assets before 30.09.1997 and not the fact of the entry of the

transaction in the books of account. The CIT was of the view that

evidence with regard to purchase of the Assets clearly established

that the Assets had been put to use before 30.09.1997 and hence, the

Assessee was entitled to 100% depreciation at the prescribed rates as

given in the schedule.

7. In so far as the second issue is concerned, the CIT after noting

the submission made on behalf of the assessee that no liability for

capital gain arose as, during the course of previous year relevant to

the assessment year under consideration, the assessee had purchased

two more properties and hence, block of assets did not cease to exist

at the end of the year - held that the issue was covered by the

decision of Delhi Bench of the Tribunal in the case of Oswal Agro

Mills v. CIT of Special Bench : 51 ITD 447 and Sutlej Cotton Mils

v. CIT : 199 ITR 164 (Calcutta Special Bench).

8. Aggrieved by the decision of the CIT, Revenue preferred an

appeal before the Tribunal. The Tribunal by the impugned judgment

has sustained the order of the CIT. In brief, the reasons given by the

Tribunal in the impugned judgment are set out, with respect to the

first issue, in paragraph No. 4.2, and with regard to the second issue

in Paragraph Nos. 5 to 5.2.

Conclusions

9. Having considered the record of the case and the submissions

made by both the learned counsel for the Revenue, as well, as the

assessee, we are of the view that present appeal deserves to be

dismissed in limini for the following reasons:-

1st Issue

10. As regards the first issue, we concur with the view of both the

Tribunal, as well as, that of the CIT that the Assessing Officer had

overlooked a crucial piece of evidence in the form of a challan

which established, that the assets had been transferred from the

partnership firm M/s Eastman Industries to the Assessee on

01.04.1997. It was no one‟s case that the assets had not been used

during the relevant previous year. The Assessing Officer had

disallowed 50% of the depreciation on the ground that the assets

have been put to use after 30.09.1997, that is, for a period of less

than 180 days. The CIT, as well as, the Tribunal has rightly noted

that once the said evidence is taken into account, then it cannot be

said that the assets had been put to use after 30.09.1997. We concur

with the view taken by both the CIT, as well as, the Tribunal. This

is a finding of fact which does not call for interference by this Court.

2nd Issue

11. As regards the second issue, it would be important to note the

provisions of Section 2 (11) of the Act and Section 50 of the Act.

Section 2 (11) defines "block of assets". The definition of "block of

assets" has not materially changed from what it was between

1.4.1998 to 31.3.1999, to what it is, w.e.f. 1.4.1999. The definition

of „block of assets‟ between 1988 to 31.3.1999 was:-

"(11) „block of assets‟ means a group of assets falling within a class of assets, being buildings, machinery, plant or furniture, in respect of which the same percentage of depreciation is prescribed." As from 1.4.1999 the definition is extracted hereinbelow:-

(11) "Block of assets" means a group of assets falling within a class of assets comprising - [(a) tangible assets, being buildings, machinery, plant or furniture;

(b) intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any

other business or commercial rights of similar nature, in respect of which same percentage of depreciation is prescribed.

12. Sub-Section 50 (2) of the Act, which is the provision under

consideration, reads as follows:-

Section 50

SPECIAL PROVISION FOR COMPUTATION OF CAPITAL GAINS IN CASE OF DEPRECIABLE ASSETS.

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 Income-tax Act, 1922 (11 of 1922), the provisions of sections 48 and 49 shall be subject to the following modifications :-

(1) xxxxxx xxxxxx xxxxxx xxxxx xxxxx

(2) Where any block of assets ceases 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.

13. Section 50 (2) of the Act is a special provision which provides

for computation of „capital gains‟ in respect of depreciable assets.

Section 50 is a non-obstante provision which, inter alia, provides for

imposition of short-term capital gains on account of transfer of

depreciable assets forming part of "block of assets" notwithstanding

the provisions of Section 2 (42A) to which sections 48 and 49 of the

Act apply subject to the modifications contained in sub-section (1)

(i) to (ii) of Section 50 of the Act.

14. A conjoint and a plain reading of the provision of Section 2

(11) and 50 (2) of the Act would show „block of assets‟ as defined

in Section 2 (11) of the Act means nothing but a group of assets

falling in the same class in respect of which the same percentage of

the depreciation is prescribed. Section 50 (2) of the Act comes into

play only if assets of the same class „cease to exist‟ for the reason

that all assets in that block are transferred during the previous year.

14.1 The submission of the leaned counsel for the Revenue based

on the reasoning of the Assessing Officer, is that: if, at any,

particular point in time in the relevant previous year a class of assets

ceases to exist, then in terms of Section 50(2), the surplus amount

received after adjusting thereto the cost of acquisition of assets as

prescribed under the said provision shall be deemed to be the capital

gain arising from transfer of short-term capital assets.

14.2 In the present case it is not disputed that the asset which was

sold and those which were bought during the relevant previous year

were in the same group, the same class and were amenable to same

percentage of the depreciation - what is contended and very

vociferously by the Revenue is that, if there is a hiatus between the

sale of an asset and purchase of another asset, even though

temporarily, then notwithstanding the fact that, at the end of the

relevant previous year the „block of assets‟ continues to subsist,

capital gains would get attracted in terms of Section 50(2) of the Act

subject to the fulfillment of other conditions prescribed therein. In a

nutshell the Revenue contends that at no point of time during the

course of a previous year can the „block of assets‟ show a nil figure.

Because no sooner it does, according to the Revenue, the provisions

of Section 50(2) of the Act will come into play.

14.3 In our view the submissions of the Revenue will fly in the

teeth of the provision. In this light let us examine the provision both

in terms of what triggers it and, the manner in which the capital

gains are calculated.

14.4 First, the „block of assets‟ cease to exist in accordance with

sub- section (2) of Section 50 only when, „all assets in that block are

transferred „during‟ the „previous year‟. The expression „previous

year‟ is preceded by the word „during‟. It is well settled that the

intention of the legislature is best ascertained by resorting to the

plain meaning of the words used in the legislation. The Black‟s

Law Dictionary, 6th Edition gives the meaning of the word „during‟

as:- „throughout the course of ; throughout the continuance of; in the

time of; after the commencement and before the expiration of‟. The

plain meaning of the word „during‟ clearly indicates that the

provision refers to transfer of assets in the block, in a defined period

and not at any particular point in time. To ascertain what that

defined period would be, one would have to look to the definition of

„previous year‟ as obtaining in the Act. The expression „previous

year‟ has been defined in Section 2(34) of the Act which provides

that „previous year‟ means the previous year as defined in Section 3

of the Act. Section 3 of the Act, in turn, defines „previous year‟ as

follows:- „previous year‟ means the financial year immediately

preceding the assessment year. Though financial year is not defined,

the Act defines „Assessment Year‟ in Section 2(9) of the Act.

Section 2(9) defines Assessment Year to mean the period of twelve

months commencing on the 1st day of April of every year.

14.5. Thus, to our mind, it is only when the following conditions are

fulfilled does Section 50(2) get triggered in:-

i) all the assets in the block,

ii) are transferred

iii)throughout the course of or after the commencement and

before the expiration of

iv) the financial year of the assessee immediately preceding the

assessment year.

14.6 A clearer indicator of the untenability of, the Revenue‟s

submission, is demonstrable from the latter part of the provision of

section 50(2) which provides the manner in which capital gains are

to be arrived at. In order to do so, firstly, the cost of the acquisition

of „block of assets‟ is ascertained by taking 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 the „block of

assets‟ acquired during the previous year. Then, the income received

or accruing as a result of such transfer or transfers is deemed to be

short term capital gains. A bare reading of the provision of sub-

section (2) of Section 50 of the Act would show that, the very fact

that, there is a reference to, in arriving at the cost of acquisition, to

the written down value of the „block of assets‟ at the beginning of

the previous year as increased by actual cost of assets falling within

the „block of assets‟ acquired during the previous year would show

that what is required to be seen is that whether at the end of the

previous year, the „block of assets‟ have ceased to exist or, in other

words what is to be seen is that whether „throughout the course of‟

or „after the commencement and before the expiration of the

previous year‟ (i.e., the financial year immediately preceding the

relevant assessment year) there was an asset which fell within the

„block of assets‟. In the event the block of assets i.e., a class of

asset(s) bearing same rate of depreciation exist(s) was with the

assessee at the end of the previous year, then the provision of

Section 50 (2) would not apply.

15. The purpose of enactment of Section 50 is driven home by a

reference to the Finance Minister‟s Budget speech for the year 1986-

87. The relevant part is extracted hereinbelow:-

"....... As promised in the Long Term Fiscal Policy Statement, I

propose to introduce a system of allowing depreciation in respect of

block of assets instead of the present system of depreciation on

individual assets. Simultaneously, I propose to rationalize the rate

structure by reducing the number of rates as also for providing the

depreciation at higher rates so as to ensure more than 80 per cent of

the cost of plant and machinery is written off in a period of 4 years

or less. This will render replacement easier and help modernization.

Apart from those items which are eligible for 100 per cent

depreciation in initial year itself, there are at present different rates

for plant and machinery. I propose to have only two rates of

depreciation at 33-1/3 per cent and 50 per cent. Plant and machinery

used in anti-pollution devices and those using indigenous know how

are proposed to be replaced in a block carrying the higher rate of

depreciation of 50 per cent. Building meant for low-paid employees

of industrial undertakings will be entitled depreciation at 20 per cent

as against the general rate of 5 per cent for residential buildings and

10 per cent for non-residential buildings."

Pursuant to the above announcement, amendments have been made

to Sections 2, 32 32A, 34, 35, 38, 41, 43, 50, 55, 57, 59 and 155 of

the Income Tax Act.

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 bookkeeping and the process of checking by the Assessing

Officer 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(20 of the Income Tax 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

assets in each of the four classes of assets, namely, buildings,

machinery, plant and furniture...........

Under the new system, the written down value of any block of assets

may be reduced to nil for any of the following reasons:-

(A)The moneys receivable by the assessee in regard to the assets

sold or otherwise transferred during the previous year together

with the amount of scrap value may exceed the written down

value at the beginning of the year as increased by the actual

cost of any new asset acquired, or

(B) All the assets in the relevant block may be transferred during

the year. Section 50 of the Income-tax Act prescribing the

manner in which the cost of acquisition in the case of

depreciable assets may be computed for the purposes of

determining the capital gains has been substituted by new

provisions by the Amending Act to take care of both the

above situations. The particulars of these provisions,

overriding section 2(42A) of the Income-tax Act, are as

under:-

(A) The newly substituted section 50(1) provides that in a case

where any block of assets does not cease to exist but the full

value of the consideration received or accruing as a result of

the transfer of the depreciable assets by the assessee during

the previous year exceeds the aggregate of the following

amounts, namely:-

(i) Expenditure incurred wholly or 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 short-term

capital gains.

(B) The newly substituted section 50(2) of the Income-tax Act

deals with the cases where any block of assets ceases to exist

for the reason that all the assets in that block are transferred

during the previous year. In such a case, the cost of

acquisition of the block of assets shall be the written down

value of the block at the beginning of the previous year as

increased by the actual cost of any asset falling within that

block acquired by the assessee during the previous year. The

income from such transfer or transfers shall be deemed to be

short-term capital gains.............."

16. The Section creates a deeming fiction. It cannot be extended

beyond the purpose for which it has been enacted. The section is a

special provision, which provides for bringing to tax by way of short

term capital gains depreciable assets which are transferred during the

previous year as against those provided in Section 2 (42A). As

noted by the Tribunal, as well as, the CIT that sub-section (2) of

Section 50 of the Act provides for the computation of capital gains

where „block of assets‟ ceases to exist "for the reason that all the

assets in the block are transferred in the previous year". In the instant

case, all the assets had not been transferred during the previous year

because of the fact that some assets still remained in the block at the

end of the year. This fact, as noted by the Tribunal, is not disputed.

In our view, in the circumstance, that the assets were available in the

„block of assets‟ at the end of the previous year, the provision of

Section 50 (2) will not be applicable, as held by both the Tribunal

and the CIT.

17. In the circumstance, no substantial question of law has arisen

for our consideration. The appeal is dismissed.

RAJIV SHAKDHER, J

BADAR DURREZ AHMED, J

September 16, 2008 mk