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TMI Blog1995 (2) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... ndian and Eastern Newspaper Society v. CIT [1979] 119 ITR 996. We have in Tax Case No. 79 of 1982 (M. A. Chidambaram v. CIT [1995] 216 ITR 175, order dated January 31, 1995) noted, : "....it is conceded at the Bar that the audit report which only will point out a mistake in law, since the auditors are not interpreters of law, their interpretation will not be furnishing the necessary information. In case, however, any omission in respect of any income is pointed out, whether it comes through the audit report or otherwise, it is obvious, the same shall furnish necessary information to satisfy the requirements of the reopening of assessment under section 147(b) of the Income-tax Act. " We do not have necessary materials on the record to know whether the audit report which has furnished the basis for the reopening of the assessment mentions any omission in respect of any income in the return of the assessee or otherwise discloses some factual information that fulfilled the requirement of section 147(b) of the Income-tax Act, 1961 (hereinafer referred to as " the Act "). It is obvious, the Tribunal, in the light of the above judgments, is required to rehear the matter and decide afr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Gujarat High Court in the case of Rajnagar Vaktapur Ginning, Pressing and Manufacturing Co. Ltd. v. CIT [1975] 99 ITR 264 and the Allahabad High Court in the case of CIT v. Upper Doab Sugar Mills [1979] 116 ITR 240. In the face of such decisions and the clear provisions of section 50(1) of the Income-tax Act, the Income-tax Officer has properly computed the capital gains and hence such computation will have to be confirmed. Besides the two judgments, that is, in the case of Rajnagar Vaktapur Ginning, Pressing and Manufacturing Co. Ltd. v. CIT [1975] 99 ITR 264 and in the case of CIT v. Upper Doab Sugar Mills [1979] 116 ITR 240 of the Gujarat High Court and the Allahabad High Court respectively, we have the advantage of perusing the judgments of the other High Courts including two Full Bench judgments, of the Kerala High Court in CIT v. Commonwealth Trust Ltd. [1982] 135 ITR 19 and the Bombay High Court in Goculdas Dossa and Co. v. J. P. Shah [1995] 211 ITR 706, and the opportunity to hear learned counsel for the assessee as well as learned counsel for the Revenue at length. We have been sufficiently induced by very learned arguments at the Bar to deliver ourselves information on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 886 (2 of 1886), was in force, the provisions of sections 48 and 49 shall be subject to the following modifications : (1) The written down value, as defined in clause (6) of section 43, of the asset, as adjusted, shall be taken as the cost of acquisition of the asset. (2) Where under any provision of section 49, read with sub-section (2) of section 55, the fair market value 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. " This special provision is made for computing the cost of acquisition in the case of depreciable assets where the capital asset is an asset in respect of which a deduction on account of depreciation has been obtained by the assessee in the previous year. The mode of computation and deductions as under section 48 and the cost of acquisition as contemplated under section 49 are varied in such a case by accepting the written down value as defined in clause (6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2) of section 32 shall be deemed to be depreciation 'actually allowed'. " Section 55 of the Act provides for the purposes of sections 48, 49 and 50, the meaning of the words "adjusted", "cost of improvement" and "Cost of acquisition". The word "adjusted" is defined, (a) in relation to written down value or fair market value to mean diminished by any loss deducted or increased by any profits 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 ; "cost of acquisition" is defined, for the purposes of sections 48 and 49, in relation to a capital asset,-- (i) where the capital asset became the property of the assessee before the 1st day of January, 1954, means the cost of acquisition of the asset to the assessee or the fair market value of the asset on the 1st day of January, 1954, at the option of the assessee ; (ii) where the capital asset became the property of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under any provision of section 49, the fair market value of the asset on the 1st day of January, 1954, is to be taken into account at the option of the assessee, then, the computation for the purpose is required to be made with reference to the period commencing from the first day of January, 1954. The definition given to the word "adjusted" read with the definition given to the word "cost of acquisition" makes it clear that where the fair market value of the asset 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 first day of January, 1954. In the case, however, of the written down value being taken as the cost of acquisition of the asset, the adjustment is permissible as contemplated 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. It is also relevant to note that instead of the written down value, the fair market value of the asset can be taken into account at the option of the assessee under any provision of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 as such but section 48 as modified by section 50. The special provision must necessarily operate in such a case so as to render the option under section 55(2) unavailable and also to equate the cost of acquisition in such a case with the written down value as defined in clause (6) of section 43. " The Bombay High Court, has, however, in Goculdas Dossa and Co.'s case [1995] 211 ITR 706 [FB] quoted in full section 50 and section 55 of the Act and stated : " Section 50 contains special provision for computing the cost of acquisition in the case of depreciable assets. It stipulates that where depreciation has been obtained in the case of a capital asset, the provisions of sections 48 and 49 stand modified. Clause (1) of section 50 states that the written down value defined in section 43(6) and 'as adjusted'(defined in section 55(1)(a)), will have to be taken into account as the cost of acquisition of the transferred asset. The above modification applies to both sections 48 and 49. Hence, the written down value of a depreciable capital asset shall be taken as the cost of acquisition under section 48 and also under section 48 read with section 49, as the case may be. This sub-secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asset on the said date as the cost of acquisition. Thus, it contains a general right in the matter of option irrespective of the type of asset which is transferred. We notice nothing in section 50(1) read with section 48(ii) which would confine the wide scope of section 55(2)(i) to the case of a non-depreciable asset where the assessee has acquired it by purchase. Therefore, in our view, the provisions of section 55(1) being applicable to sections 48, 49, 50 and 55(2) being the only source of the option, it is clear that where the depreciable asset became the property of the assessee either by purchase or under the modes specified in section 49, the assessee has the option. " Proceeding further, the Bombay High Court has commented on section 50(1) thus : " It, on one hand, provides that where an assessee has been allowed depreciation he does not claim as its cost the actual amount spent on acquiring the asset even though he has obtained depreciation in respect thereof ; and, on the other hand, it enjoins that not only the written down value as computed under section 43(6) but as adjusted in the manner provided in section 55(1)(a) is to be taken as the cost as against the actual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s acquired an asset otherwise than by purchase and in one of the modes specified in section 49 such as gift.... The fact that specific reference is made in section 50(2) to taking the cost of acquisition of the asset as the fair market value on January 1, 1964, cannot possibly lead to the conclusion that in the case of an assessee who has acquired the asset by purchase, the option conferred by section 55(2)(i) of taking the fair market value on January 1, 1964, as the cost of acquisition is taken away. It is significant to notice that section 50 enacts that only the provisions of sections 48 and 49 are subjected to the modifications contained in section 50. The option of substitution, as discussed, earlier, is conferred by section 55(2) which is not made subject to section 50 and, thus, where the option is exercised, the capital gains have to be computed as per provisions of section 48. The Bombay High Court has also said : "As discussed earlier, the object of section 50(2) seems to be to provide for deduction of the fair market value on January 1, 1964, by the amount of depreciation allowed to the donee-assessee after January 1, 1964, because as per section 55(1)(a), the fair ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermination of capital gains in regard to depreciable assets. . . . " The difference, it seems expanded on account of the Kerala High Court's view : " Hence, though section 55(2) gives 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 applies, section 48 had to be read subject to the modification and, consequently, the option would not be available. " The Bombay High Court's observations in Goculdas Dossa and Co.'s case [1995] 211 ITR 706 [FB] : " . . . . sub-section (2) of section 55 is a substantive provision of granting option. Sub-section (2) sets out the meaning of cost of acquisition in relation to all varieties of capital assets--depreciable or non-depreciable. This provision is for the purposes of sections 48 and 49 because ultimately the computation of capital gains has to be as per section 48. For example, deductibility of the cost of transfer is only under section 48. Section 50 does not contain exhaustive provisions for the computation of capital gains. Sub-section (2) only deals with capital assets which became the property of the assessee or the previous owner before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act, the assessee, who has already claimed the benefit of depreciation and whose case thus falls under section 50 of the Act, should have the liberty to claim deduction under section 48 on the basis of the fair market value of the asset on the prescribed date. This is not, as the Bombay High Court has felt, reading the option given in section 55(2) subject to section 50 but is reading section 50 as a provision modifying section 48 and thus, bringing the case of such an assessee in the group of exceptions to which section 50(1) is applied and not section 50(2) unless the acquisition is covered by section 49 of the Act. We have felt that there is some sort of excess by the Bombay High Court in calling the judgments of the Gujarat, Allahabad, Kerala and Calcutta High Courts grossly erroneous. In CIT v. Balkrishna Malhotra [1971] 81 ITR 759, the Supreme Court has pointed out that : "interpretation of a provision in a taxing statute rendered years back and accepted and acted upon by the Department should not be easily departed from. It may be that another view of the law is possible but law is not a mere mental exercise. The courts while reconsidering decisions rendered a long ..... X X X X Extracts X X X X X X X X Extracts X X X X
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