1998 (12) TMI 40 - HC - Income Tax

Summary

Issues:
1. Interpretation of Section 50 regarding deduction of depreciation for computing capital gains.
2. Application of fair market value as cost of acquisition under Section 50(2).
3. Relevance of depreciation allowed to the deceased in determining cost of acquisition.

Issue 1: Interpretation of Section 50 regarding deduction of depreciation for computing capital gains.

The judgment discusses the application of Section 50 in cases where an assessee has obtained a deduction on account of depreciation for a capital asset. Section 50 deals with the computation of capital gains and provides modifications when depreciation has been allowed. It clarifies that the deduction of depreciation allowed to the assessee after a specific date is relevant for determining the cost of acquisition. The section emphasizes that only permissible deductions are allowed, and the cost of acquisition should be adjusted accordingly. The judgment highlights that the provision aims to prevent double taxation by considering the depreciation already accounted for in the business or profession of the assessee.

Issue 2: Application of fair market value as cost of acquisition under Section 50(2).

The judgment delves into the scenario where an assessee opts to consider the fair market value of an asset as of January 1, 1954, as the cost of acquisition under Section 50(2). It explains that in such cases, the fair market value is to be reduced by any depreciation allowed to the assessee after the specified date. The court emphasizes that the cost of acquisition, as adjusted under this provision, plays a crucial role in determining the capital gains arising from the transfer of the asset. The judgment underscores the significance of following the procedure outlined in Section 50(2) and other relevant provisions of the Income Tax Act for accurate computation of capital gains.

Issue 3: Relevance of depreciation allowed to the deceased in determining cost of acquisition.

The judgment addresses the contention regarding the deduction of depreciation allowed to the deceased individual in calculating the cost of acquisition for capital gains purposes. It clarifies that the depreciation allowed to the deceased cannot be considered for reducing the cost of acquisition in cases where the successor exercises the option to adopt the fair market value as of January 1, 1954. The court emphasizes that the computation must adhere to the provisions of Section 50(2) and other applicable sections of the Act. Ultimately, the judgment rules in favor of the assessee, stating that the deduction of depreciation allowed to the deceased is not permissible for determining the cost of acquisition in cases where the fair market value option has been exercised.

In conclusion, the judgment provides a detailed analysis of the interpretation and application of Section 50 in the context of computing capital gains, particularly concerning the deduction of depreciation and the use of fair market value as the cost of acquisition. It clarifies the relevance of these factors in determining the tax liability of the assessee and emphasizes adherence to the statutory provisions for accurate computation of capital gains.