2008 (9) TMI 17 - HC - Income Tax

AO disallowed 50% of the depreciation allowance on the ground that the assets had been entered in accounts after 30.09.1997 as per challan & confirmation certificates, assets were transferred to the assessee on 1.4.1997 - fact of the entry of the transaction in accounts is not relevant hence 100% depreciation is allowable if assets were available in the block of assets at the end of the previous year, Section 50 (2) will not be applicable no capital gains - revenue appeal dismissed

Issues Involved:
1. Whether the Income Tax Appellate Tribunal was correct in allowing 100% depreciation to the assessee despite the assets being entered in the books of accounts only after 30.09.1997.
2. Whether the assessee was entitled to depreciation at 50% or 100% when the assets were entered in the books of accounts only after 30.09.1997.
3. Whether the Income Tax Appellate Tribunal was correct in law in holding that no short-term capital gain on the transfer of a block of assets could be taxed in the present case.
4. Whether the provisions of Section 50(2) are attracted in the present case to tax short-term capital gain on the transfer of a block of assets.

Issue-wise Detailed Analysis:

1. Allowing 100% Depreciation:
The Assessing Officer disallowed 50% of the depreciation allowance claimed by the assessee on the grounds that the assets were entered in the books of account after 30.09.1997 and were used for less than 180 days. However, the CIT and the Tribunal found that the assets had been transferred on 01.04.1997, as evidenced by a challan. They concluded that the assets were indeed used during the relevant previous year, thus entitling the assessee to 100% depreciation. The High Court concurred with this view, noting that the Assessing Officer had overlooked crucial evidence and that this finding of fact did not warrant interference.

2. Entitlement to Depreciation Rate:
The second issue is closely related to the first. The Revenue contended that the assets were entered in the books after 30.09.1997, thus qualifying for only 50% depreciation. However, the CIT and the Tribunal held that the date of entry in the books was not as crucial as the actual use of the assets before 30.09.1997. Since the assets were used before this date, the assessee was entitled to 100% depreciation. The High Court upheld this finding.

3. Short-term Capital Gain on Transfer of Block of Assets:
The Assessing Officer calculated short-term capital gain based on the sale of office premises, asserting that the block of assets ceased to exist upon the sale. The CIT and the Tribunal disagreed, noting that the assessee had acquired new properties within the same financial year, thus maintaining the block of assets. The High Court emphasized that Section 50(2) applies only if all assets in the block are transferred during the previous year, which was not the case here since the block of assets continued to exist at the end of the year.

4. Applicability of Section 50(2):
The Revenue argued that if at any point in the previous year a class of assets ceases to exist, Section 50(2) should apply. However, the High Court clarified that Section 50(2) is triggered only when all assets in the block are transferred during the entire financial year. The Court noted that the block of assets must be assessed at the end of the financial year, not at any interim point. Since the block of assets existed at the end of the year, Section 50(2) was not applicable.

Conclusion:
The High Court dismissed the appeal, agreeing with the Tribunal and the CIT on both issues. The Court held that the assessee was entitled to 100% depreciation and that no short-term capital gain could be taxed under Section 50(2) since the block of assets did not cease to exist during the previous year. The Court found no substantial question of law warranting interference.

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