1978 (1) TMI 35 - HC - Income Tax

Acquisition Of Capital Asset Capital Gains Cost Of Acquisition Fair Market Value Written Down Value

Summary

Issues:
1. Interpretation of provisions of s. 50(2) and s. 55(2)(ii) of the Income Tax Act, 1961 for computing capital gains.

Analysis:
The case involved the Upper Doab Sugar Mills Ltd., a public limited company engaged in the business of sugar manufacturing and sales. The primary issue revolved around the assessment year 1964-65, where the company had sold machinery and received insurance claim settlement for lost machinery. The Income Tax Officer (ITO) contended that these receipts resulted in profit under s. 41(2) and capital gains, which the assessee disputed. The Appellate Assistant Commissioner (AAC) accepted the assessee's plea, invoking s. 50(2) and s. 55(2)(ii) to compute capital gains based on fair market value as of January 1, 1954. The Income Tax Appellate Tribunal upheld the AAC's decision, prompting the department to appeal to the High Court.

The crux of the matter was the computation of the cost of acquisition of capital assets, specifically depreciable assets, under the Income Tax Act. The assessee argued for the option to consider fair market value as the cost of acquisition under s. 55(2)(i), while the revenue asserted the applicability of s. 50(1) as a special provision for depreciable assets, excluding s. 55(2)(i). Section 50 provided modifications to the cost of acquisition for depreciable assets, emphasizing the written down value as the cost. The High Court analyzed the interplay between s. 50 and s. 55(2), emphasizing that s. 50 being a special provision for depreciable assets would prevail over s. 55(2), which was a general definition section.

The Court highlighted that s. 50's mandatory nature and specific modifications to ss. 48 and 49 indicated its precedence over s. 55(2). The judgment referenced the Gujarat High Court's decision in a similar case, reinforcing that original owners of depreciable assets fall under s. 50(1) and cannot opt for fair market value as cost of acquisition. The Court emphasized the need to adhere strictly to the language of the taxing statute without room for interpretation or equity considerations. Ultimately, the Court ruled in favor of the department, holding that s. 50 governed the computation of capital gains for depreciable assets, rejecting the application of s. 55(2) in this context.