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2016 (1) TMI 375

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..... set is concerned, clause (a) provides an extensive mechanism to compute its value. The working of clause (a) also does not yield results which are absurd or unreasonable so as to warrant looking for other aids to statutory interpretation for ascertaining the true legislative intent. In the circumstances, the language of clause (a) of explanation 2 to Section 50B must be given its plain and literal meaning. It could hardly be disputed that the plain language of sub-clause (b) of Clause C contemplates reduction from the actual cost of assets of the depreciation “that would have been allowable to the Assessee for any assessment year commencing on or after 1st day of April, 1988 as if the asset was the only asset in the relevant block of assets”. In view of the plain language, there is no scope to read the provisions of sub-clause (b) of Clause C to permit deduction of depreciation actually allowed and not as “would have been allowable”. There is little merit in Mr Singh’s contention as the entire basis of reducing the value of the block of assets in the current assessment year is premised on the basis that depreciation was allowable to the Assessee for the year ended 31st March, 20 .....

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..... financial year i.e. 1999-2000, and had commenced commercial production in March 2000. Admittedly, the Assessee had not claimed any depreciation on its assets for the previous year ended 31st March, 2000. Accordingly, the block of assets was reflected by the Assessee in its books of accounts at the actual cost of acquisition. The Assessee had also capitalised the indirect expenditure incurred prior to the commencement of commercial production and the same was included in the cost of plant and machinery. The Assessee computed the capital gains arising under Section 50B of the Act by calculating the net worth of the business undertaking on the basis of the cost of assets as on 31st March, 2000 without accounting for any depreciation, as none had been claimed. 3. The Assessing Officer (hereafter AO ) did not accept the capitalisation of indirect expenses and reduced the same from the cost of assets. The AO was also of the view that for the purposes of calculating the net worth of the undertaking, depreciation allowable under sub-item (C) of item (i) of sub-clause (c) of clause (6) of Section 43 of the Act (hereafter, for the sake of brevity, referred to as 'Clause C') for .....

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..... for computation of capital gains in case of depreciable assets. He further referred to the CBDT Circular No. 469 dated 23rd September, 1986 and drew the attention of this Court to the illustrations explaining the working of the concept of block of assets provided therein. He argued that prior to 1st April, 2000 the provisions of Section 50 and Section 43 were inadequate for the computation of capital gains in the case of a slump sale as it was not possible to determine the cost of acquisition in case of sale of an undertaking or business on a slump sale basis. To address this issue, Section 2(42C) and Section 50B of the Act were introduced w.e.f. 1st April, 2000. Correspondingly, Clause C was also introduced to provide for the computation of written down value of the block of assets in case of a slump sale. He contended that Section 50B of the Act provided for calculation of the cost of acquisition in case of slump sale and Explanation 2 to Section 50B of the Act referred to Clause C only for the purposes of providing the method for determining the written down value of depreciable assets. He contended that the method provided covered both the cases where the entire block of ass .....

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..... 7 (Delhi); and CIT v. Eastman Industries Ltd.: (2008) 174 Taxmann 344 (Delhi) to illustrate the manner in which capital gains are to be computed in case of depreciable assets. Reasoning and conclusion 10. In order to address the controversy, it would be essential to consider the statutory scheme relating to a block of assets. 11. The Taxation Laws (Amendment Miscellaneous Provisions) Act, 1986 introduced significant changes with regard to the depreciation allowance; the concept of block of assets was introduced. Section 2(11) as enacted by the said Act defined 'block of assets' as under:- (11) block of assets means a group of assets falling within a class of assets, being building, machinery, plant or furniture, in respect of which the same percentage of depreciation is prescribed; Section 2(11) was, thereafter, substituted by the Finance (No. 2) Act, 1998 with effect from 1st April, 1999 to read as under:- (11) block of assets means a group of assets falling within a class of assets comprising- (a) tangible assets, being buildings, machinery, plant or furniture; (b) intangible assets, being know-how, patents, copyrights, trademark .....

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..... year, the excess would be deemed to be capital gains arising from transfer of short term capital assets. Section 50(2) provides that where the block of assets ceases to exist for the reason that the entire block of assets is transferred, then the written down value of the block of assets at the end of the previous year as increased by the actual cost of an assets falling within the block of assets acquired during the year would be the cost of acquisition of the depreciable assets and any amount received or accruing as a result of transfer of the assets constituting the block of assets would be taxed as short term capital gains. 14. Insofar as depreciation is concerned, the same is provided on the block of assets, that is, the written down value at the beginning of the AY as increased by the cost of assets acquired during the year and as reduced by the sale proceeds of any assets being a part of the block of assets sold or transferred during the year. Thus, depreciation would be available to an assessee only as long as the written down value of the block of assets remained positive. 15. By virtue of the Taxation Laws (Amendment Miscellaneous Provisions) Act, 1986, the defini .....

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..... e reduction of the moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the written down value as so increased; and (C) in the case of a slump sale, decrease by the actual cost of the asset falling within that block as reduced- (a) by the amount of depreciation actually allowed to him under this Act or under the corresponding provisions of the Indian Income-tax Act, 1922 (11 of 1922) in respect of any previous year relevant to the assessment year commencing before the 1st day of April, 1988; and (b) by the amount of depreciation that would have been allowable to the assessee for any assessment year commencing on or after the 1st day of April, 1988 as if the asset was the only asset in the relevant block of assets, so, however, that the amount of such decrease does not exceed the written down value; (ii) in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1989, the written down value of that block .....

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..... e block of assets does not arise. Secondly, if the provisions of Clause C were applied, then depending on whether the depreciation allowable on the assets has in fact been claimed and allowed and further depending on the effect of the rate of depreciation of any other asset forming a part of the block of asset sold earlier, the computation under Clause C may result in the written down value of the block of assets being positive where, in fact, no asset would exist in the hands of the Assessee. This is also one of the facets of the problem in the present case. Although the Assessee had sold its entire business, which includes the entire block of assets, the Assessee had not claimed any depreciation on those assets for the AY 2000-01. Thus, if the provisions of Clause C are applied to determine the written down value of the block of assets in the hands of the Assessee, the same would result in the Assessee reflecting the block of assets at a value equal to the depreciation allowable on those assets for the AY 2000-01; however, in fact, the Assessee would have no assets at all. 18. It is difficult to accept that the provisions of Section 43(6)(c) can be read in a manner which provi .....

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..... written down value of a block of assets; clearly, no such computation would be warranted if the block of assets itself ceases to exist in the hands of the Assessee. This is also indicated by the plain language of Clause C inasmuch as the opening sentence indicates that the block of assets is to be decreased by the actual cost of asset falling within that block. Further, sub-clause (b) provides for a deeming fiction to reduce the depreciation allowable to the Assessee in respect of an asset as if the asset was the only asset in the relevant block of assets . This deeming fiction would not be necessary if Clause C was enacted to address a situation where the entire block of assets was transferred. 20. Having examined the purpose and import of Clause C, it is next to be examined whether the reference to the said Clause in Explanation 2 to Section 50B of the Act has a different implication. It has been contended on behalf of the Revenue that the said Clause has been referred to in Explanation 2 to Section 50B of the Act only for the purpose of incorporating a method of computation of the written down value of the block of assets of an undertaking/division sold on slump sale basis. .....

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..... (6) of section 43; (b) in the case of capital assets in respect of which the whole of the expenditure has been allowed or is allowable as a deduction under section 35AD, nil; and (c) in the case of other assets, the book value of such assets. 22. Section 50B was introduced by virtue of the Finance Act, 1999 w.e.f. 1st April, 2000 to provide for special provisions for computation of capital gains in the case of slump sale. Prior to the insertion of the aforesaid Section, there was much debate as to whether capital gains arising out of slump sale of an undertaking were taxable under the provisions of the Act. The principal ground for excluding capital gains on a slump sale from the charge of tax was the absence of any machinery provisions for computing the cost of acquisition of the undertaking as in a slump sale only the lump sum consideration is fixed without assigning any values to separate assets constituting the undertaking. The machinery provisions for computation of capital gains under Section 48 of the Act require that for the purpose of computing the capital gains, the cost of acquisition of the assets be deducted from the consideration received. This prov .....

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..... se in respect of assets which do not fall within clause (a) or clause (b) of Explanation 2. 26. In the present appeal we are concerned with the clause (a) which provides for determining the correct value of depreciable assets. 27. Plainly, the purpose of clause (a) of Explanation 2 to Section 50B of the Act is to provide a methodology to compute the written down value of the block of assets transferred by an Assessee as a part of the undertaking or division sold by way of a slump sale. The reference to Clause C is clearly not for the purposes of computing the block of assets remaining with the Assessee after the slump sale. It is apparent from the above that the intended object and scope of Clause C as used in Section 50B of the Act is totally different than the purpose of the said provision when read as a part of Section 43 of the Act. In the circumstances, clause (a) of Explanation 2 to Section 50B of the Act must be read in a manner to expressly include the computation provisions of Clause C without reference to other the import of the said provisions of Section 43 of the Act. In our view, the ITAT fell into error in importing the interpretation of Clause C read as a part .....

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..... ssee for any assessment year commencing on or after the 1st day of April, 1988 as if the asset was the only asset in the relevant block of assets, . 30. Clause (a) of Explanation 2 to Section 50B of the Act when read as incorporating the language of Clause C indicates that the value of the net worth must be computed by decreasing from the actual cost of asset falling within the block, the depreciation actually allowed in respect of previous years relevant to the assessment year commencing before 1st day of April, 1988 and by the amount of depreciation as would have been allowable to the Assessee for any assessment year commencing on or after 1st day of April 1988. The quantum of the depreciation actually allowed to an Assessee in respect of the assessment year commencing on or after 1st day of April, 1988 would have no relevance while determining the written down value of the block of assets in accordance with clause (a) of Explanation 2 to Section 50B of the Act because the provisions to compute the net worth of an undertaking are not dependent or contingent on the depreciation actually allowed in respect of assessment years commencing on or after 1st April, 1988. It is also ne .....

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..... d, therefore, it is not possible to co-relate the quantum of depreciation allowed in respect of individual assets constituting a block. This is clear from the illustration as provide in CBDT Circular No.469 dated 23rd September, 1986 which is quoted below:- Example I : Suppose a company X has financial year as its accounting year and has three items of plant and machinery in respect of which the prescribed percentage of depreciation for the assessment year 1987-88 is the general rate of fifteen per cent. Further that for the assessment year 1987-88, the written down value of these items of plant and machinery before allowing depreciation for that year was as follows : Rs. Item 1 1,50,000 Item 2 2,00,000 Item 3 3,00,000 Total 6,50,000 The depreciation that will be allowable in respect of these items for the assessment year 1987-88 as also the written down value of these items at the beginning of the assessment year 1988-89 will be as follows : .....

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..... ld earlier and, thus, there would be no co-relation between the depreciation allowed and the original cost of the asset constituting the block of assets. 34. The decisions relied upon by Mr Vohra also do not assist the Assessee in any manner. In Madeva Upendra Sinai (supra), the Supreme Court was concerned with the vires of second Proviso to Clause 3 of Taxation Laws (Extension to Union Territories) (Removal of Difficulties) Order No. 2 of 1970 issued under clause 7 of the Taxation Laws (Extension to Union Territories) Regulation, 1963. Goa, Daman and Diu which were erstwhile Portuguese territories became a part of the Union of India from 19th December, 1961. Under the Portuguese Laws as was applicable to the assessees within the Portuguese territories prior to 1961, tax was payable on the basis of gross turnover of an assessee and, thus, the question of allowing any depreciation did not arise. After Goa, Daman Diu became Union Territories the Central Government promulgated the Taxation Law (Extension to Union Territories) (Removal of Difficulties) Order No. 2 of 1970. The said order provided for a deeming fiction for calculating the written down value of a depreciable asset. .....

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..... he calculation of the value of assets is not contingent on the value of the depreciation allowed to the Assessee in respect of assessment year commencing on or after 1st April, 1988. Thus, the aforesaid decision would have no relevance to the issue at hand. 36. The decision of this Court in Ansal Properties (supra) relied upon by the Assessee clearly explains the method of computing capital gains in respect of sale of assets forming a part of the block of assets. In that case, the Assessee had multiple divisions and had sold the entire assets of one of the divisions (Paper division). The Revenue sought to tax capital gains arising out of the sale of assets of the Paper division by deducting from the consideration written down value of the block of assets relating to that division. The ITAT held - and this Court concurred - that even though the entire assets of the paper division were sold, the block of assets did not cease to exist as the Assessee owned other undertakings which included assets for which the same rate of depreciation as that applicable to the assets sold was prescribed. In the circumstances, the Court referred to the definition of block of assets and held that th .....

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