2012 (4) TMI 374 - HC - Income Tax

Plant and machinery (not in use) acquired - Tribunal treated it as long term capital assets for the assessment year 2006-07 as it was sold in the financial year 2005-06 revenue appeal that plant and machinery (not in use) would be covered by the expression block of assets - Held that - the assessee has shown two block of assets separately i.e. one on which depreciation was claimed @ 25% and the other on which no depreciation was claimed in any of the previous years, the two assets are different from each other - the assessee having not claimed any depreciation on the same cannot be burdened with the provisions of Section 50 - in the absence of any depreciation being allowed to the assessee in any of the previous years on the said plant and machinery (not in use),the gain arising on the transfer of the said asset is to be treated as long term capital gain directed in adopting the indexed cost of acquisition in determining the income from long term capital gain on sale of plant and machinery (not in use) against revenue.

Summary

Issues:
1. Whether plant and machinery (not in use) acquired in previous financial years and sold in a subsequent financial year should be treated as long term capital assets for assessment purposes.
2. Whether the assessee had the option to maintain two separate blocks of assets for plant and machinery (put to use) and plant and machinery (not put to use).
3. Whether the plant and machinery not put to use constituted individual and separate 'block of assets' within the meaning of the Income Tax Act.
4. Whether the plant and machinery (not in use) constituted a 'Depreciable Asset' under Section 50 of the Income Tax Act.

Analysis:
1. The Revenue challenged the Tribunal's view that plant and machinery (not in use) should be treated as long term assets for assessment purposes. The Tribunal held that since no depreciation was ever claimed on these assets, they should not be considered depreciable assets under Section 50 of the Act. The Tribunal emphasized that the assets not in use were separate from those on which depreciation was claimed, and thus, the gain on their sale should be assessed as long term capital gain, allowing the benefit of indexed cost of acquisition.
2. The Tribunal's decision was based on the clear distinction made by the assessee in maintaining two separate categories of assets - one on which depreciation was claimed and another (plant and machinery not in use) on which no depreciation was ever claimed. This distinction led to the conclusion that the assets not in use were not depreciable assets and should not be subject to Section 50 of the Act, which applies to depreciable assets.
3. The Tribunal's analysis highlighted that the assessee consistently reflected the plant and machinery (not in use) separately in its fixed assets list, showing a clear intention to treat them differently from depreciable assets. The Tribunal's reasoning emphasized that the absence of any depreciation claimed on these assets exempted them from the provisions of Section 50 of the Act, resulting in the gain on their sale being assessed as long term capital gain.
4. The Tribunal's judgment underscored that the applicability of Section 50 of the Act hinges on assets forming part of a block on which depreciation has been allowed. Since no depreciation was ever claimed on the plant and machinery (not in use), they were not considered depreciable assets subject to Section 50. Therefore, the Tribunal directed the Assessing Officer to allow the claim of the assessee by adopting the indexed cost of acquisition for computing the income from long term capital gain on the sale of these assets.

Conclusion:
The Tribunal's decision to treat plant and machinery (not in use) as long term capital assets, exempt from Section 50 of the Income Tax Act due to the absence of any depreciation claimed, was upheld. The clear distinction made by the assessee in maintaining separate categories of assets played a crucial role in determining the tax treatment of the assets sold. The judgment emphasized the importance of factual findings and the interpretation of relevant provisions in assessing the tax implications of asset sales.