2010 (7) TMI 802 - AT - Income Tax

Summary

Issues Involved:

1. Deletion of addition of Rs. 1,32,32,609 assessed as short-term capital gains u/s 50 of the Income-tax Act, 1961.
2. Computation of short-term capital gains for the sale of machinery and plant of the Paper Division.
3. Interpretation of "block of assets" and its impact on the computation of capital gains.

Summary:

Issue 1: Deletion of Addition of Rs. 1,32,32,609 Assessed as Short-term Capital Gains u/s 50

The revenue's grievance was that the CIT(A) erred in deleting the addition of Rs. 1,32,32,609 assessed as short-term capital gains u/s 50 of the Income-tax Act, 1961, as the assessee-company sold the entire machinery and plant of the Paper Division. The original assessment included this amount as short-term capital gains, which was confirmed by CIT(A). However, the Tribunal restored the proceedings to the Assessing Officer, who again included this amount in the fresh assessment. The CIT(A) deleted this addition in the subsequent appeal, leading to the revenue's current appeal.

Issue 2: Computation of Short-term Capital Gains for the Sale of Machinery and Plant of the Paper Division

The revenue argued that the Paper Division was an independent business with separate books of account, and thus, the provisions of section 50 were applicable for computing short-term capital gains. The CIT(A) had earlier confirmed this view, stating that the assets of one unit should not be grouped with assets of other units for computing capital gains. The assessee contended that all assets with the same depreciation rate across different divisions should form one block of assets, and the computation should consider the actual cost of any asset acquired during the previous year.

Issue 3: Interpretation of "Block of Assets" and Its Impact on the Computation of Capital Gains

The assessee argued that section 2(11) defines "block of assets" as a group of assets with the same depreciation rate, without distinguishing between different divisions. The Tribunal noted that section 50(1) provides for the computation of capital gains by deducting the written down value of the block of assets and the actual cost of any asset acquired during the previous year. The Tribunal referred to various cases, including CIT v. Express Newspapers Ltd. and decisions of the Mumbai Benches of the Tribunal, which supported the view that the cost of new assets should be deducted even if they were not used for business in the year of sale.

Conclusion:

The Tribunal concluded that the assessee's interpretation of section 50 was correct. The sale value of the machinery and plant of the Paper Division was Rs. 2,38,65,025, while the cost of additions to other divisions was Rs. 2,19,59,261. Deducting this amount resulted in nil short-term capital gains. Thus, the capital gains on the transfer of the entire machinery and plant of the Paper Division amounted to nil and were not liable to be taxed u/s 50. The appeal was dismissed.