2005 (1) TMI 56 - HC - Income Tax

Whether Tribunal was justified in holding that no profit be charged under section 41(2), on the sale of assets, the written down value of which was not ascertainable, instead of the written down value of the remaining block of assets be reduced by the amount of sale receipts? Held that the approach of the Tribunal was wholly illegal and unwarranted. U/S 41(2) the difference of the sale price and the written down value of the depreciable assets is to be treated as profit for the year in which the sale of depreciable assets had taken place. The value of the assets so sold is not ascertainable and is very old; the assessing authority was fully justified in treating the entire sale proceeds as profit chargeable to tax. It is upon the respondent-assessee to show by cogent material the written down value of the depreciable assets which have been sold. Having failed to do so, the Tribunal ought to have applied the provisions of section 41(2)

Summary

Issues involved:
Interpretation of section 41(2) of the Income-tax Act, 1961 regarding the treatment of profit on the sale of assets with unascertainable written down value.

Detailed Analysis:
The Income-tax Appellate Tribunal referred a question to the High Court regarding the justification of not charging profit under section 41(2) of the Income-tax Act on the sale of assets with unascertainable written down value. The case related to the assessment year 1976-77 where the respondent-assessee, a public limited company, sold old machinery and other items without being able to determine the written down value. The Assessing Officer treated the entire sale price as profit under section 41(2) based on past practices. The Commissioner of Income-tax (Appeals) limited the addition to 50% of the receipt, and the respondent appealed further to the Tribunal. The Tribunal decided to take the profit under section 41(2) as nil and reduce the written down value of the remaining assets by the sale proceeds.

The Tribunal's decision was based on a previous order and a formula to avoid undue advantage to the assessee. The Tribunal considered two alternatives: treating the whole amount as profit or reducing the written down value of remaining assets by the sale proceeds. The Tribunal chose the latter to prevent prejudice to either party. The Department challenged this approach, arguing for a strict application of section 41(2) without considering equity in tax matters. The respondent-assessee defended the Tribunal's decision, stating that since the written down value of the sold assets was unascertainable, reducing the value of fixed assets by the sale proceeds was justified.

The High Court disagreed with the Tribunal's approach, finding it illegal and unwarranted. It emphasized that under section 41(2) of the Act, the difference between sale price and written down value of depreciable assets must be treated as profit. Since the written down value of the sold assets was unascertainable and old, the assessing authority was correct in treating the entire sale proceeds as taxable profit. The Court held that it was the respondent's responsibility to provide evidence of the written down value, and failing to do so required the application of section 41(2) by the Tribunal.

In conclusion, the High Court ruled in favor of the Revenue and against the assessee, stating that the Tribunal's decision lacked statutory backing and the entire sale proceeds should be considered as profit chargeable to tax due to the unavailability of the written down value of the assets sold.