2010 (10) TMI 731 - AT - Income Tax

Slump sale - short term capital gain - preconstruction period expenses - Depreciation - whether depreciation for the previous year not claimed by the assessee has to be mandatorily allowed for making the computations of profits arising out of slump sales - Held that - In the absence of depreciation having been claimed and actually allowed by the Assessing Officer for assessment year 2000-01, it is not possible for the Assessing Officer to reduce notional depreciation that could have been allowable for assessment year 2000-01 to arrive at written down value of depreciable asset transferred by way of slump sale, while calculating the net worth of the undertaking. - if depreciation had been allowed in the assessment year 2000-01, the same would have been carried forward as unabsorbed depreciation and would have been set off against short term capital gains on slump sale of the undertaking. - the Assessing Officer/C.I.T.(A) erred in not accepting the computation of short term capital gains on slump sale of the undertaking and in seeking to reduce depreciation that could have been allowable for assessment year 2000-01, but had not been claimed or actually allowed in the assessment for that year. - Decided in favor of assessee. Pre-operative expenses in the previous year - do not agree with the contention of the assessee that this pre-operative expenses were otherwise includible under the head misc. expenditure and in that view such preoperative expenditure forming part of the undertaking transferred by way of slump sales were liable to be reduced as part of the net worth of the undertaking. We are of the considered opinion that the misc. expenditures cannot tantamount to any assets having any worth and hence, taking the same into account while computing capital gains u/s 50B is not tenable. But this aspect is only of academic interest as we have already held that this aspect pertaining to earlier assessment year and cannot be raked up in current assessment year - Decided in favour of assessee.

Summary

Issues Involved:
1. Computation of short-term capital gain on slump sale.
2. Reduction of pre-construction period expenses from the cost of assets for computing short-term capital gain.

Issue-wise Analysis:

1. Computation of Short-Term Capital Gain on Slump Sale:
The assessee challenged the Ld. Commissioner of Income Tax (Appeals) for confirming the computation made by the Assessing Officer (AO) of short-term capital gain arising from the slump sale of an undertaking. The AO noted that the assessee transferred its business via slump sale to M/s Dharampal Satyapal Limited for Rs. 2,75,00,000/-. The business was held for less than 36 months, making section 50B of the Income Tax Act, 1961 applicable for computing short-term capital gain. The AO observed that the assessee did not compute the net worth as per the Explanation to Section 50B, specifically the written down value (WDV) of depreciable assets per section 43(6)(c)(i)(C).

The AO argued that the WDV should be calculated by deducting the depreciation that would have been allowable, even if not claimed. The assessee contended that the WDV should be based on the depreciation actually allowed, not on a notional basis. The Tribunal agreed with the assessee, stating that the entire assets were transferred, and thus, the WDV should be the value from the preceding year reduced by the depreciation actually allowed. The Tribunal also noted that the assessee's choice not to claim depreciation in the previous year was legally permissible, referencing the Supreme Court decision in Mahindra Mills vs. C.I.T. 243 ITR 56. The Tribunal concluded that notional depreciation could not be forced for computing gains under section 50B.

2. Reduction of Pre-Construction Period Expenses:
The AO reduced pre-construction period expenses from the net worth of the undertaking, arguing that such expenses should not be capitalized as part of the cost of assets. The assessee argued that these expenses were capitalized in the previous year, which was accepted by the Department, and thus could not be reconsidered in the current year.

The Tribunal agreed with the assessee, stating that the capitalization of expenses in the previous year could not be reopened in the current year. The Tribunal held that the AO could not disallow the capitalization of pre-operative expenses already accepted in the assessment year 2000-01. However, the Tribunal did not agree with the assessee's alternative argument that such expenses should be included under miscellaneous expenditure and reduced as part of the net worth of the undertaking. The Tribunal concluded that miscellaneous expenditures do not constitute assets with any worth for computing capital gains under section 50B.

Conclusion:
The Tribunal set aside the orders of the lower authorities and decided in favor of the assessee, allowing the appeal. The judgment emphasized the proper interpretation of sections 50B and 43(6)(c)(i)(C) and upheld the assessee's method of computing short-term capital gain and capitalization of pre-operative expenses.