2011 (8) TMI 360 - HC - Income Tax

100% export undertaking - Computation of Capital gain in the case of depreciable assets sub section 2 of Section 50 - whether on the expiry of the period mentioned under Section 10B, the block of assets viz., plant and machineries, of the industry, are available for working out the relief under Section 50(2) - Held that - So long as the assets are found to fall under the same depreciation, they fit in into the concept of block of assets for the purpose of Section 50(2) of the Act - On the mere score that the assessee was once 100% export undertaking, the assessee could not be denied of the benefit otherwise available to the assessee on the block of assets on the expiry of tax holiday period for the purpose of the working of capital gains under Section 50(2) - Decided in favour of assessee.

Summary

Issues Involved:
1. Scope of Section 50 of the Income Tax Act for computing capital gains.
2. Consideration of total additions made during the accounting year relevant for computing capital gains under Section 50.
3. Application of Section 50(2) without proper consideration.

Issue-wise Analysis:

1. Scope of Section 50 of the Income Tax Act for Computing Capital Gains:
The primary question is whether the Tribunal erred in disregarding the scope of Section 50 of the Income Tax Act while computing capital gains. The assessee, engaged in various businesses including an export-oriented unit (EOU) under the name 'GTP Granites', transferred this unit to a closely held company. The Assessing Officer (AO) treated the difference in asset values as short-term capital gains. The Commissioner of Income Tax (Appeals) (CIT(A)) disagreed, asserting that the business should be treated as a composite entity for depreciation purposes, thus negating the AO's short-term capital gains assessment. The Tribunal, however, upheld the AO's view, leading to the assessee's appeal to the High Court.

2. Consideration of Total Additions Made During the Accounting Year:
The assessee argued that the total additions made during the accounting year should be considered when computing capital gains under Section 50. The CIT(A) supported this view, stating that the adjustments due to transfers and additions during the year should be accounted for, which would negate the short-term capital gains assessment. The Tribunal, on the other hand, maintained that the surplus resulting from the transfer of assets should be assessed as short-term capital gains under Section 50(2).

3. Application of Section 50(2) Without Proper Consideration:
The assessee contended that the Tribunal failed to properly apply Section 50(2) by not considering the depreciation value of the block of assets. The High Court examined the definition of 'block of assets' under Section 2(11) and the computation method under Section 50(2), which involves considering the written down value (WDV) of the block of assets at the beginning of the previous year, increased by the cost of assets acquired during the year. The High Court noted that the assets transferred and purchased carried the same depreciation rate, thus forming a 'block of assets'. The assessee's claim that the depreciation value should be considered was deemed justified.

Judgment Analysis:
The High Court found that the Tribunal's view was incorrect. The Court emphasized that Section 50 is a special provision for computing capital gains on depreciable assets. The Court noted that the EOU's assets, upon expiry of the tax holiday under Section 10B, should be treated as part of the block of assets for the assessee's overall business. The Court highlighted that the depreciation rates are machinery-specific rather than industry-specific, supporting the assessee's claim for adjustment in capital gains computation. The Court concluded that the assets transferred from the EOU and the assets purchased during the year should be considered under the same block of assets, allowing the assessee's appeal and restoring the CIT(A)'s order.

Conclusion:
The High Court set aside the Tribunal's order, allowing the Tax Case Appeal and reinstating the CIT(A)'s decision. The Court ruled that the assets of the EOU, upon the expiry of the tax holiday, should be included in the block of assets for computing capital gains under Section 50(2), thereby supporting the assessee's position.