1998 (11) TMI 119 - HC - Income Tax

Summary

Issues:
1. Valuation of assets for calculating depreciation.
2. Treatment of profit on sale of flats for calculating business income.
3. Classification of surplus on sale of showrooms as capital gains or business profits.
4. Determination of showrooms as part of stock-in-trade.

Issue 1: Valuation of assets for calculating depreciation
The case involved a partnership firm engaged in constructing a commercial building. The dispute arose regarding the valuation of assets for calculating depreciation for assessment years 1982-83 to 1986-87. The Revenue sought a mandamus for the Tribunal to refer questions to the High Court regarding the correct valuation of assets on the date of dissolution of the old firm. The Tribunal had directed to consider the value of assets on the date of dissolution for depreciation calculation. The Assessing Officer argued that the valuation at dissolution was merely an adjustment entry. The Commissioner of Income-tax (Appeals) held that the value in the existing firm's books should be considered. The Tribunal treated the surplus on the sale of showrooms as capital gains, leading to the Revenue's appeal for reference under section 256(1) of the Act, which was rejected.

Issue 2: Treatment of profit on sale of flats for calculating business income
The controversy extended to the treatment of profit on the sale of flats. The Assessing Officer considered the showrooms sold as stock-in-trade and used the written down value from the old firm's books to calculate business income. The Commissioner of Income-tax (Appeals) disagreed, stating that the value in the existing firm's books should be used. The Tribunal ultimately classified the surplus on the sale of showrooms as capital gains, contrary to the Revenue's contention of it being business income.

Issue 3: Classification of surplus on sale of showrooms
The core issue was whether the surplus on the sale of showrooms should be classified as capital gains or business profits for the assessment year 1982-83. The Tribunal's decision to treat it as capital gains sparked the Revenue's pursuit for reference to the High Court, which was initially rejected. The disagreement stemmed from the Assessing Officer's view that the showrooms were part of the stock-in-trade, while the Commissioner of Income-tax (Appeals) and the Tribunal differed in their classification.

Issue 4: Determination of showrooms as part of stock-in-trade
The final issue revolved around whether the showrooms sold were considered part of the stock-in-trade for the assessment year 1982-83. The Assessing Officer's stance was that the showrooms constituted stock-in-trade, leading to the use of written down value from the old firm's books for business income calculation. The subsequent appeals and Tribunal's decision altered the classification to capital gains, prompting the Revenue's plea for reference to the High Court, which was eventually allowed.