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TMI Blog1997 (7) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee did not have the right of substituting the market value as on January 1, 1954, in respect of the depreciable assets ? " While the first question was referred at the instance of the Revenue, the second question was at the instance of the assessee. Both the questions were, however, answered by the High Court in favour of the Revenue and against the assessee. The impugned judgment in so far as it answers the first question has been overruled by this court in CIT v. Mafatlal Gangabhai and Co. (P.) Ltd. [1996] 219 ITR 664. Accordingly, the answer to this question has to be given in favour of the assessee and against the Revenue. It is the second question on which arguments were addressed before us. While the Revenue gets support from the decisions of the High Courts of Gujarat, Allahabad and Calcutta for upholding the impugned judgment, the assessee gets support from the decision of the Bombay High Court. The Gujarat, Allahabad and Calcutta High Court decisions are reported, respectively, in Rajnagar Vaktapur Ginning, Pressing and Manufacturing Co. Ltd. v. CIT [1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 1,46,320 in the case of the Mangalore buildings. On appeal filed by the assessee, the Appellate Assistant Commissioner agreed with the Income-tax Officer. He was also of the view that the assessee did not have the right to substitute the value as on January 1, 1954, in respect of depreciable assets. The assessee then went to the Income-tax Appellate Tribunal and the Appellate Tribunal dismissed the appeal but at the instance of the assessee referred the aforesaid second question for the decision of the High Court. The High Court agreed with the view of the Appellate Tribunal and decided the question in the affirmative, in favour of the Revenue and against the assessee. On certificate granted by the High Court under section 261 of the Act this appeal has come before us. Before we consider the judgments of the High Courts, it will be appropriate to set out the relevant provisions of law. These would be sections 32(1)(iii), 41(2) and 43(6) in Part D and section 45, 48, 49, 50 and 55 in Part E under Chapter IV relating to computation of total income : " 32. Depreciation.---(1) In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll depreciation actually allowed to him under this Act, or under the Indian Income-tax Act, 1922 (11 of 1922), or any Act repealed by that Act, or under any executive orders issued when the Indian Income-tax Act, 1886 (2 of 1886), was in force : Provided that in determining the written down value in respect of buildings, machinery or plant for the purposes of clause (ii) of sub-section (1) of section 32, 'depreciation actually allowed' shall not include depreciation allowed under sub-clauses (a), (b) and (c) of clause (vi) of sub-section (2) of section 10 of the Indian Income-tax Act, 1922 (11 of 1922), where such depreciation was not deductible in determining the written down value for the purposes of the said clause (vi)... 45. Capital gains.---(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 53, 54 and 54B, be chargeable to income-tax under the head 'Capital gains', and shall be deemed to be the income of the previous year in which the transfer took place. 48. Mode of computation and deductions.---The income chargeable under the head 'Capital gains' shall be computed by deducti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue of the asset on the 1st day of January, 1954, is to be taken into account at the option of the assessee, then, the cost of acquisition of the asset shall, at the option of the assessee, be the fair market value of the asset on the said date, as reduced by the amount of depreciation, if any, allowed to the assessee after the said date, and as adjusted. 55. Meaning of 'adjusted', 'cost of improvement' and 'cost of acquisition'.---(1) For the purposes of sections 48, 49 and 50,--- (a) 'adjusted', in relation to written down value or fair market value, means diminished by any loss deducted or increased by any profit assessed, under the provisions of clause (iii) of sub-section (1), or clause (ii) of sub-section (1A) of section 32 or sub-section (2) or sub-section (2A) of section 41, as the case may be, the computation for this purpose being made with reference to the period commencing from the 1st day of January, 1954, in cases to which clause (2) of section 50 applies; (b) 'cost of any improvement' in relation to a capital asset,--- (i) where the capital asset became the property of the previous owner or the assessee before the 1st day of January, 1954, and the fair market ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (d) the sub-division of any of the shares of the company into shares of smaller amount, or (e) the conversion of one kind of shares of the company into another kind, means the cost of acquisition of the asset calculated, with reference to the cost of acquisition of the shares, or stock from which such asset is derived. (3) Where the cost for which the previous owner acquired the property cannot be ascertained, the cost of acquisition to the previous owner means the fair market value on the date on which the capital asset become the property of the previous owner. " (Section 32(1A)(ii) and section 41(2A) would not be relevant for our purposes and, therefore, are not reproduced). We may now consider the judgments of the High Courts referred to during the course of arguments. In Rajnagar Vaktapur Ginning, Pressing and Manufacturing Co. Ltd. v. CIT [1975] 99 ITR 264 (Guj), the assessee-company was under liquidation. In the accounting year relevant to the assessment year 1968-69 some of the assets being building and machinery were sold. These assets were purchased before January 1, 1954. The assessee had obtained depreciation on the said assets. The assessee claimed that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wered the question in the negative, in favour of the Department and against the assessee. It observed as under : " The language used makes it clear that section 50 of the Income-tax Act, 1961, applies to cases of depreciable assets, and that the provisions thereof are mandatory. It will prevail over section 55(2) firstly because it expressly modifies the provisions of section 48, and, in the next place, it is a special provision for depreciable assets. Section 55, on the other hand, is only a definition section. The definition of 'cost of acquisition' given by its sub-section (2) is only for purposes of sections 48 and 49. Section 55(2) does not apply to section 50 and cannot prevail over it. In other words, the cost of acquisition of a depreciable asset is bound to be computed in accordance with section 50, even though the capital asset may also on facts be within the purview of sub-section (2) of section 55. This construction is fortified by the provisions of sub-section (2) of section 50. If the case of a depreciable asset owned by the assessee from before 1st January, 1954, were to be governed by section 55(2) then there was no occasion or need to enact sub-section (2) of sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up of sections' the cost of acquisition in relation to the capital assets should be as indicated in the different clauses as indicated in sub-section (2) of section 55 but limits the purposes of the different clauses only to sections 48 and 49 and thereby excluding the operation of 'the special provision of computing cost of acquisition of depreciable assets'. Where there is a special provision dealing with a particular provision, the special provision must prevail. " In coming to this conclusion, the Calcutta High Court followed the decisions of the Allahabad and Gujarat High Courts. The Full Bench of the Kerala High Court in the judgment in CIT v. Commonwealth Trust Ltd., [1982] 135 ITR 19, which is in appeal before us also followed the two decisions of the Allahabad High Court mentioned above. The court said that though section 55(2) gave an option to an assessee to choose one of the two values as the cost of acquisition for the purpose of section 48, in a case to which section 50 applied, section 48 had to be read subject to the modification and, consequently, the option would not be available and that the cost of acquisition would have to be taken in such a case as the wri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rchase and not in the circumstances mentioned in section 49. The Income-tax Officer further held that the written down value of the said depreciable assets as adjusted, along with the cost of its improvement would be the correct price for working out the capital gains and on that basis, issued a demand notice under section 156 of the Act. On appeal by the assessee, the Commissioner of Income-tax (Appeals) upheld the order of the Income-tax Officer. The assessee filed a second appeal before the Appellate Tribunal but since there was a challenge to the validity of section 50, a writ petition was filed in the High Court. The High Court elaborately discussed the relevant provisions of the Act. It disagreed with the views of the other High Courts that section 50 was a special provision and would, therefore, prevail over the general provisions of section 55(2). The High Court said both the provisions operated upon different and independent areas and that section 55(2) was the only source of option while section 50(2) was not the source of option. It said section 50 specified that only sections 48 and 49 were subject to the modifications mentioned therein and that the option given in sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... special provision for computing the cost of acquisition in the case of depreciable assets, it would override the general provisions of section 55(2) which according to these High Courts would be applicable to cases of non-depreciable assets or depreciable assets where depreciation had not been claimed. The Bombay High Court, on the other hand, has not followed this line of reasoning. In the present case it is not disputed that it is section 48 which is applicable and not section 49. Under section 48, to compute the income chargeable under the head " Capital gains ", the value of consideration received on transfer of the capital asset is to be reduced by the expenditure incurred on the transfer and the cost of acquisition of the capital asset and the cost of any improvement thereto. The expenditure that might have been incurred on the transfer of the capital asset and the cost of any improvement thereto are not the subject of any controversy in the case before us. Section 49 is not applicable as the capital asset was not acquired by any of the modes mentioned in that section. Coming to section 50 it states, in so far as it is relevant, that when depreciation has been obtained on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purposes of sections 48, 49 and 50, sub-section (2) of section 55 which uses the expression " cost of acquisition " is for the purpose of sections 48 and 49. In commercial parlance computation of capital gain would mean the actual gain measured by the difference between the sale price and the cost of acquisition. It is the " cost of acquisition " that is required to be determined under the provisions of sections 48, 49, 50 and 55. Both under sections 48 and 49 cost of acquisition will have to be determined and adjusted as provided in sections 50 and 55. Section 55(2) gives an option to both kinds of assessees, that is, those who have purchased the capital asset as well as those who have acquired it by any of the modes mentioned in section 49 to substitute for the actual cost of acquisition the fair market value of the asset as on January 1, 1954. Section 55(2) will have application only if one of the two classes of assessees exercises his option. Section 55(2), however, makes it clear that the option is available only for the purposes of sections 48 and 49 and it is not available for a case falling under section 50. Though the provisions of section 55(2) would be available t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 50(1) and besides that the adjustments stated there are with reference to the written down value only, which has nothing to do with the fair market value. We conclude, therefore, that in the present case where the capital asset is depreciable and the assessee has availed of deduction on account of depreciation, the cost of acquisition shall have to be determined in terms of the provisions of section 50 read with section 48. All the High Courts including the Bombay High Court are of the view that section 50(2) does not apply to any capital asset other than that which has been acquired by any of the modes mentioned in section 49. It does not apply to the case of a person who has himself purchased the asset which has enjoyed the depreciation allowance. To us it appears section 50 is in absolute terms specially providing for fixing the cost of acquisition in the case of depreciable assets only. It is difficult to accept the view of the Bombay High Court when it brings into operation article 14 of the Constitution and the judgment proceeds more on the basis of equitable considerations than the clear provision of law. The Bombay High Court has even read down and modified the prov ..... X X X X Extracts X X X X X X X X Extracts X X X X
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