2017 (10) TMI 596 - HC - Income Tax

STCG - sale of depreciable assets - Applicability of provisions of section 50 on asset sold as ceased to be used for the purpose of the business - whether asset cannot move out of the Block of Assets ? - Whether, the Tribunal was right in law in holding that an asset cannot move out of the Block of Assets , if depreciation was allowed to the asset some time in the past, even though depreciation was claimed for many years thereafter ? - Held that - The assets being gala nos.210 and 211 were purchased as industrial galas together. The assessee claimed depreciation on the galas together and written down value was also shown together. Though depreciation has been allowed in the past on gala no.210 and plant and machinery in gala no.210 was shifted to gala no.211 and no depreciation was claimed thereon subsequently, nonetheless, the depreciation on block of assets stipulated in Section 2(11) is applicable. Both the galas are of the same nature. They form one class of assets. Once the depreciation has been granted on gala no.210 and even if business operations were not carried out therefrom, merely at the convenience of the assessee, it does not cease to be a business asset. The understanding of this provision and the concept, to our mind, conforms with the consistent view taken by the Tribunal earlier, and which has been upheld by this Court. We do not see how the provisions can be construed otherwise. To our mind, the Kerala High Court in case of Commissioner of Income Tax Vs. Sakthi Metal Depot (2010 (1) TMI 659 - Kerala High Court ), with respect, has rightly understood this concept and in the backdrop of the facts which are more or less identical. Section 50 has to be understood with reference to the general scheme of assessment on sale of capital assets. The Kerala High Court referred to the fact that the assets covered by Section 50 are depreciable assets forming part of block of assets, as defined in Section 2(11) of the I.T.Act. The components of Section 50 have also been, with respect, rightly understood in that decision. The Kerala High Court on reading of these provisions took the view that once the building was acquired by the assessee and in respect of which depreciation was allowed to it as a business asset, no matter the non user dis entitles the assessee for depreciation for two years prior to the date of sale, still, this asset does not cease to be a part of block of assets. The character of such asset is not lost, according to Kerala High Court. In our view, therefore, the questions proposed by the assessee and forwarded for our opinion, have to be answered in favour of the revenue and against the assessee. Tribunal was right in law in holding that even in a case where there is evidence to prove that an industrial gala which was once used for business is not used for business for many years, the gain on sale thereof will attract the provisions of section 50 and will consequently be short term capital gain

Issues Involved:
1. Whether an asset that has ceased to be used for business purposes still forms part of the 'Block of Assets'.
2. Whether an asset can move out of the 'Block of Assets' if depreciation was allowed on it in the past.
3. Whether the gain on the sale of an industrial gala that was not used for business for many years attracts the provisions of section 50, resulting in short-term capital gain.

Issue-Wise Detailed Analysis:

Issue 1: Whether an asset that has ceased to be used for business purposes still forms part of the 'Block of Assets'.

The Tribunal held that an asset remains part of the 'Block of Assets' even if it has not been used for business purposes for many years. The assessee argued that gala no.210 was not used for business from A.Y. 1987-88 onwards, and thus, it should not form part of the 'Block of Assets'. However, the Tribunal and the High Court concluded that once an asset is included in the 'Block of Assets', it retains that status regardless of its subsequent use. The High Court emphasized that the definition of 'Block of Assets' under Section 2(11) of the I.T. Act includes all assets within a class for which the same percentage of depreciation is prescribed, and this does not change based on the asset's usage.

Issue 2: Whether an asset can move out of the 'Block of Assets' if depreciation was allowed on it in the past.

The assessee contended that gala no.210 should move out of the 'Block of Assets' because no depreciation was claimed on it after A.Y. 1986-87. The assessing officer and the Tribunal disagreed, stating that once an asset is part of the 'Block of Assets' and depreciation has been allowed, it remains within the block. The High Court upheld this view, noting that the cessation of business use does not alter the asset's classification within the 'Block of Assets'. The Court referenced the consistent view that the initial introduction of the asset into the block is what matters, and its status as part of the block continues regardless of later non-use.

Issue 3: Whether the gain on the sale of an industrial gala that was not used for business for many years attracts the provisions of section 50, resulting in short-term capital gain.

The assessee treated the gain from the sale of gala no.210 as a long-term capital gain, claiming that Section 50 was not applicable since no depreciation was claimed in the years leading up to the sale. The assessing officer and the Tribunal classified the gain as a short-term capital gain under Section 50, which the High Court affirmed. The Court reasoned that Section 50 applies to assets forming part of a 'Block of Assets' in respect of which depreciation has been allowed at any time under the I.T. Act or the Indian Income Tax Act, 1922. The Court cited the Kerala High Court's judgment in Commissioner of Income Tax Vs. Sakthi Metal Depot, which held that a depreciable asset remains part of the block even if depreciation was not claimed in the years immediately preceding the sale.

Conclusion:

The High Court answered all the questions in favor of the revenue and against the assessee. It ruled that:
1. An asset remains part of the 'Block of Assets' even if it has ceased to be used for business purposes.
2. An asset cannot move out of the 'Block of Assets' if depreciation was allowed on it in the past.
3. The gain on the sale of an industrial gala not used for business for many years attracts the provisions of Section 50, resulting in short-term capital gain.

The Court emphasized that the statutory provisions, particularly Sections 2(11), 2(42A), and 50 of the I.T. Act, support this interpretation, and the consistent view taken by various High Courts and the Tribunal aligns with this understanding.

← Previous Next →