1998 (2) TMI 23 - HC - Income Tax

Capital Gains, Computation Of Capital Gains, Business Expenditure, Law Applicable, Expenditure On Advertisement

Summary

Issues:
1. Computation of capital gains based on cost of acquisition.
2. Disallowance of advertisement expenditure under section 37(3A) of the Income-tax Act.

Computation of Capital Gains:
The case involved determining the cost of acquisition for calculating capital gains arising from the sale of machinery. The dispute arose as to whether the original cost in the hands of the predecessor-firm or the revalued amount in the hands of the new firm should be considered. The assets were initially acquired by partners of the assessee from a dissolved firm and later contributed to the new partnership firm. The Revenue argued for using the written down value of the asset at the time of dissolution, while the assessee claimed the original cost should be adopted. The Tribunal held that capital gains should be computed in accordance with section 48 of the Income-tax Act, rejecting both parties' claims. It was emphasized that section 50 of the Act applies only when depreciation has been claimed by "the assessee" after acquiring the asset, which was not the case here. Referring to a Calcutta High Court decision, it was established that the cost of acquisition by the new firm should be considered for computing capital gains.

Disallowance of Advertisement Expenditure:
The issue of disallowance of advertisement expenditure under section 37(3A) of the Act was also addressed. The Tribunal upheld the disallowance, which was initially made by the Commissioner. The disallowance was based on the law applicable at the commencement of the assessment year, regardless of when the expenditure was incurred. It was clarified that the law in force at the beginning of the assessment year governs such matters. Consequently, the Tribunal's decision to disallow the advertisement expenditure was deemed correct.

In conclusion, the High Court answered all questions in the affirmative, affirming the Tribunal's decisions on both issues. The judgment clarified the principles governing the computation of capital gains and the disallowance of expenditure under the Income-tax Act. The parties were directed to bear their respective costs in light of the circumstances of the case.