1995 (2) TMI 26 - HC - Income Tax

Capital Gains, Computation Of Capital, Computing Cost, Cost Of Acquisition, Fair Market Value, Income Tax Act, Set On

Issues Involved
1. Validity of reopening the assessment under section 147(b) of the Income-tax Act.
2. Entitlement to substitute the fair market value as of January 1, 1954, in respect of depreciable assets for computing capital gains.

Issue-wise Detailed Analysis

1. Validity of Reopening the Assessment under Section 147(b)
The first question addressed was "whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the reopening of the assessment under section 147(b) of the Income-tax Act was valid." The court referred to the Supreme Court's judgment in Indian and Eastern Newspaper Society v. CIT [1979] 119 ITR 996, emphasizing that an audit report pointing out a mistake in law does not furnish necessary information for reopening an assessment. The court stated: "We do not have necessary materials on the record to know whether the audit report which has furnished the basis for the reopening of the assessment mentions any omission in respect of any income in the return of the assessee or otherwise discloses some factual information that fulfilled the requirement of section 147(b) of the Income-tax Act, 1961." Consequently, the Tribunal was directed to rehear the matter and decide afresh in accordance with law.

2. Entitlement to Substitute the Fair Market Value as of January 1, 1954
The second question was "whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was not entitled to substitute the fair market value as on January 1, 1954, in respect of the assets on which depreciation has been allowed under the provisions of the Income-tax Act in the computation of the capital gains on the sale of those assets." The court noted that the assessee, a company incorporated in the UK, had filed appeals concerning the computation of capital gains, which were ultimately dismissed by the Tribunal.

The Tribunal's stance was based on Section 50(1) of the Income-tax Act, which specifies that the written down value (WDV) should be taken as the cost of acquisition for depreciable assets. The Tribunal's decision was supported by the Gujarat High Court in Rajnagar Vaktapur Ginning, Pressing and Manufacturing Co. Ltd. v. CIT [1975] 99 ITR 264 and the Allahabad High Court in CIT v. Upper Doab Sugar Mills [1979] 116 ITR 240.

The court elaborated on the statutory provisions, noting that Section 50 modifies Sections 48 and 49 by stating that the WDV, as defined in Section 43(6), should be taken as the cost of acquisition. The court also discussed the conflicting views of various High Courts, including the Full Bench judgments of the Kerala High Court in CIT v. Commonwealth Trust Ltd. [1982] 135 ITR 19 and the Bombay High Court in Goculdas Dossa and Co. v. J. P. Shah [1995] 211 ITR 706.

The Kerala High Court held that Section 50(1) overrides the option under Section 55(2) to adopt the fair market value as of January 1, 1954, while the Bombay High Court opined that Section 50(2) allows for this option. The court noted: "We have no manner of doubt that both the Kerala High Court and the Bombay High Court have the same perception and have read section 50(1) as well as section 50(2) of the Act in almost the same manner."

However, the court found that material facts were not available to determine whether Section 50 was applicable to the assessee's case and whether the option under Section 55(2) could be granted. Therefore, the case was remitted to the Tribunal for a fresh hearing and decision in accordance with the law.

Conclusion
The court directed the Tribunal to rehear the matter regarding the validity of reopening the assessment under Section 147(b) and to decide afresh on the issue of substituting the fair market value as of January 1, 1954, for depreciable assets in computing capital gains. The case was remitted for a fresh hearing and disposal in accordance with the law, with no costs awarded.

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