2009 (7) TMI 5 - SC - Income Tax

Head of Income Balancing Charge - Sale of assets on which 100% depreciation claimed - Cost of assets less than Rs. 5000 bottles and crates purchased prior to 31.3.1995 did not form part of the block of assets, hence, profits on sale of such assets were not taxable as a balancing charge, neither under Section 41(1) nor under Section 50. In respect of bottles and crates purchased after 1.4.1995, on account of deletion of proviso to Section 31(1)(ii) (vide Finance Act, 1995) such bottles and crates formed part of block of assets and consequently such assets purchased after 1.4.1995, in this case, became exigible to capital gains tax under Section 50 However matter remitted to AO for small issue to find out whether earmarking profits from sale of assets as miscellaneous income has resulted in the understatement of net profits at the pre-Section 28 stage and taxable profits at post-Section 28 stage. In all other cases, sale proceeds have been earmarked as profits on sale of assets and in those cases, therefore, there is no question of verification by the A.O.

Summary

Issues Involved:
1. Applicability of the concept of "balancing charge" from Section 41(2) to Section 41(1) of the Income Tax Act, 1961.
2. Taxability of the sale proceeds of 100% depreciated assets under Section 41(1).
3. Effect of the deletion of Section 41(2) and the introduction of the "block of assets" concept after 1.4.1996.
4. Specific treatment of sale proceeds from bottles and crates purchased before and after 1.4.1995.

Detailed Analysis:

Issue 1: Applicability of the Concept of "Balancing Charge" from Section 41(2) to Section 41(1)
The primary question was whether the concept of "balancing charge" from Section 41(2) could be read into Section 41(1) of the Income Tax Act, 1961. The court noted that Section 41(2) specifically dealt with the balancing charge on the sale of depreciable assets, which was chargeable as income. This section was deleted effective from the assessment year 1988-89. The Department argued that the recoupment of depreciation constituted "expenditure" under Section 41(1) and thus was taxable. However, the court found no merit in this argument, stating that if balancing charge under Section 41(2) could be read into Section 41(1), there would have been no need for Section 41(2) initially. Each subsection of Section 41 deals with different circumstances and cannot be interchanged.

Issue 2: Taxability of the Sale Proceeds of 100% Depreciated Assets under Section 41(1)
The Department sought to tax the sale proceeds of 100% depreciated and written-off assets as business income under Section 41(1). The assessee argued that the word "expenditure" in Section 41(1) did not include depreciation. The court agreed with the assessee, stating that depreciation is neither a loss, nor an expenditure, nor a trading liability referred to in Section 41(1). Thus, the sale proceeds of fully depreciated assets were not taxable under Section 41(1).

Issue 3: Effect of the Deletion of Section 41(2) and the Introduction of the "Block of Assets" Concept After 1.4.1996
The court noted that with the introduction of the "block of assets" concept from 1.4.1988, Section 41(2) was deleted. However, the proviso to Section 32(1)(ii) continued until 1.4.1996 when bottles and crates costing less than Rs. 5,000/- were included in the block of assets. For assessment years after 1.4.1996, these assets were considered part of the block of assets and were subject to capital gains tax under Section 50.

Issue 4: Specific Treatment of Sale Proceeds from Bottles and Crates Purchased Before and After 1.4.1995
The court differentiated between bottles and crates purchased before and after 1.4.1995. For assets purchased before 31.3.1995, which did not form part of the block of assets, profits on their sale were not taxable under Section 41(1) or Section 50. For assets purchased after 1.4.1995, they were included in the block of assets and thus subject to capital gains tax under Section 50.

Specific Cases and Remand
The court remitted the case of Nectar Beverages Pvt. Ltd. to the Assessing Officer (A.O.) to verify if the sale proceeds earmarked as "miscellaneous income" resulted in the understatement of net profits. For other cases, where sale proceeds were earmarked as "profits on sale of assets," no further verification was required.

Conclusion
The court concluded that the concept of "balancing charge" under Section 41(2) cannot be read into Section 41(1). The sale proceeds of fully depreciated assets are not taxable under Section 41(1). The introduction of the "block of assets" concept changed the taxability of such assets post-1.4.1996. The court allowed the civil appeals filed by the assessees with no order as to costs.