1973 (12) TMI 24 - HC - Income Tax

Summary

Issues:
1. Whether the profit on the transfer of assets to a subsidiary company is assessable under section 41(2) of the Income-tax Act?
2. Whether section 47(iv) applies to exempt the profit from being assessed under section 41(2)?
3. Interpretation of sections 32, 41(2), 43(6), 47(iv), 48, and 50 in the context of determining the tax treatment of the profit on the transfer of assets.

Analysis:
The case involved the transfer of a building by an assessee company to its fully owned subsidiary company. The issue was whether the profit on this transfer, exceeding the written down value but not the actual cost, should be assessed under section 41(2) of the Income-tax Act. The Appellate Tribunal held that section 47(iv) applied, exempting the profit from assessment under section 41(2. The Revenue argued that section 41(2) should not be restricted by section 47(iv) and that the profit should be assessed as revenue income. The assessee contended that section 41(2) must be read subject to section 47(iv) and that the profit should not be assessed under section 41(2 due to the application of section 47(iv).

The court analyzed the provisions of sections 32, 41(2), 43(6), 47(iv), 48, and 50 to determine the tax treatment of the profit. Section 32 allows for depreciation deductions, while section 41(2) levies a balancing charge when the receipt exceeds the written down value. Section 47(iv) deals with exemptions for capital gains, and section 50 determines the cost of acquisition for depreciable assets. The court provided an illustration to explain the computation of profit under different scenarios based on the actual cost, depreciation allowed, and sale price of the asset.

The court emphasized that section 47(iv) applies only to transactions involving capital gains and does not exempt profits where no capital gain is involved. The court rejected the argument that section 34(2)(i) provided relief to the transferor, stating that the transferor should be assessed under section 41(2) despite the allowances considered in the assessment of the transferee. The court held that the profit on the transfer of assets to the subsidiary company should be assessed under section 41(2), not exempted under section 47(iv), and ruled in favor of the revenue.

In conclusion, the court clarified the interaction of various sections of the Income-tax Act in determining the tax treatment of profits on asset transfers, emphasizing that section 41(2) should not be restricted by section 47(iv) in certain scenarios. The decision highlighted the importance of accurately applying the provisions of the Act to determine the tax liability in such transactions.