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2016 (1) TMI 375 - DELHI HIGH COURT

2016 (1) TMI 375 - DELHI HIGH COURT - [2016] 380 ITR 527 - Computation of Slump sale - ITAT held that for computing the net worth under Section 50B, Section 43(6)(c)(i)(C) is not applicable in case of slump sale of the undertaking includes the entire block of assets - whether the entire block of assets was sold, the written down value of the block of assets as existing must be taken at the aggregate value of the total assets? - Held that:- The ITAT had accepted the Assessee’s contention that in .....

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one examines the three clauses of Explanation 2 to Section 50B of the Act, the same exhaust all categories of assets. Insofar as depreciable asset 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 Sect .....

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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, 2000. In our view, Mr Vohra is perhaps right that had the Assessee claimed the depreciation on the block of assets for the year ended 31st March, 2000, .....

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Assessee has not claimed the depreciation for the year ended 31st March, 2000, it is unable to mitigate its tax liability. Whilst, we may sympathise with the Assessee, it is not possible to grant any relief to the Assessee. We are unable to accept the interpretation of Clause (a) of Explanation 2 to Section 50B as canvassed on behalf of the Assessee. - Decided in favour of revenue - ITA 1003/2011 - Dated:- 6-1-2016 - S. Muralidhar And Vibhu Bakhru, JJ. For the Appellant : Mr Raghvendra Kumar Si .....

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of Income Tax (Appeals) [hereafter CIT(A) ], was allowed. By the aforesaid order dated 1st October, 2004, the CIT(A) rejected the Assessee's appeal against an assessment order dated 30th January, 2004 in respect of the assessment year (hereafter AY ) 2001-02. 2. The controversy involved in the present appeal relates to the computation of the net worth of the business transferred by the Assessee by way of a slump sale. The Assessee transferred its entire business by way of a slump sale to M/s .....

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unts 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 Off .....

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y the Assessee or allowed by the AO. Accordingly, the AO calculated short term capital gains arising out of the slump sale under Section 50B of the Act at ₹ 2,26,89,866/-. 4. Aggrieved by the order, the Assessee preferred an appeal before the CIT(A). The CIT(A) concurred with the AO and held that the language of subclause (b) of Clause C [Section 43(6)(c)(i)(C)(b)] used the words "would have been allowable" and this indicated the intention of the legislature to determine the capi .....

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provisions of subclause (b) of Clause C was misplaced as the same would be applicable to compute the written down value of the block of assets remaining with the Assessee in a case where part of the assets falling within the block were transferred by way of a slump sale. According to the ITAT, sub-clause (b) of Clause C would have no application where the entire block of assets was transferred as a part of a slump sale of the business of an Assessee. The Revenue has impugned the aforesaid order .....

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cept of block of assets was introduced in the Act with effect from 1st April, 1988. Accordingly, Section 43(6)(c) was introduced to define 'the written down value in case of any of the block of assets'. Corresponding amendment was also made to Section 50 of the Act to provide for special provisions 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 illustra .....

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use 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 o .....

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tion 50B of the Act read with Clause C was independent of other provisions of Section 43(6)(c)(i) of the Act. 8. Mr Singh also referred to the decision of ITAT Mumbai in DCIT v. Warner Lambert: (2012) 143 TTJ 571 (Mum.). He also disputed the contention advanced on behalf of the Assessee that even if the depreciation was allowed in AY 2000-01, the same would have been carried forward as unabsorbed depreciation and set off against short term capital gains arising on a slump sale of the undertaking .....

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down value of the assets would be the actual cost of the assets as reduced by the depreciation actually allowed. He further referred to the decision of the Supreme Court in CIT v. Mahendra Mills: (2000) 243 ITR 56 (SC) and contended that depreciation was an allowance available to the Assessee and it was not necessary for the Assessee to avail of the same. He also relied to the recent decision of the Supreme Court in Seshasayee Paper & Boards Ltd. v. Deputy Commissioner of Income Tax: (2015) .....

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he 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 .....

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ings, machinery, plant or furniture; (b) intangible assets, being know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, in respect of which the same percentage of depreciation is prescribed; 12. The Taxation Laws (Amendment & Miscellaneous Provisions) Act, 1986 also amended Section 32(1) of the Act to provide that in the case of any block of assets, depreciation shall be allowed at such percentage on the written down val .....

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r would be reduced from the written down value of the block of assets as at the end of the preceding financial year. The cost of any assets purchased would be added to the written down value of the block of assets as existing at the end of the preceding financial year. Under the statutory scheme of Section 50 of the Act now introduced, capital gains would arise only in the cases where the value of block of assets was reduced to nil. And, the written down value of the block of assets could be red .....

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s is to be determined. Section 50(1) provides that in cases where block of assets does not physically cease to exist but the full value of consideration received for transfer of any assets during the previous year exceeds (i) the expenditure incurred wholly or exclusively in connection with such transfer; (ii) the written down value of the block of assets at the beginning of the previous year; and (iii) the actual cost of any assets falling within the block of assets acquired during the previous .....

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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 availa .....

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ss the context otherwise requires - XXX (6) written down value means- (a) XXXX XXXX XXXX (b) XXXX XXXX XXXX (c) in the case of any block of assets,- (i) in respect of any previous year relevant to the assessment year commencing on the 1st day of April, 1988, the aggregate of the written down values of all the assets falling within that block of assets at the beginning of the previous year and adjusted,- (A) by the increase by the actual cost of any asset falling within that block, acquired durin .....

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sion was sold for a lump sum consideration and no separate values were assigned to individual assets and liabilities constituting the undertaking/division. Section 50B of the Act was introduced by the Finance Act, 1999 with effect from 1st April, 2000 for the purposes of taxing gains arising on slump sales. Correspondingly, Section 2(42C) was also enacted to define slump sale and the definition of written down value under Section 43(6)(c) was also amended and Clause C was introduced in Section 4 .....

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(B) by the 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 .....

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eed 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 of assets in the immediately preceding previous year as reduced by the depreciation actually allowed in respect of that block of assets in relation to the said preceding previous year and as further adjusted by the increase or the reduction referred to in item (i). 17. In order to understand the import of Clause C .....

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d. As an illustration, an Assessee may have plant and machinery installed in three different undertakings, however, the aggregate value of all the plant and machinery would be classified as a single block of asset. In this scenario, if the Assessee sells one undertaking by way of a slump sale, the written down value of the remaining block of assets will have to be computed in the manner as provided under Clause C. Concededly, since no separate consideration for the individual asset is ascribed, .....

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e AY commencing prior to 1st April, 1988 and/or the amount of depreciation which would have been allowable for the assessment year commencing 1st day of April, 1988. Thus, there is no difficulty in applying the provisions of Section 43(6)(c)(i) where a part of the assets falling within the block of assets are sold. However, if the entire block of assets is sold, then Clause C would have no application. This is first and foremost for the reason that the Assessee would not be left with the block o .....

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g 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 ref .....

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50 of the Act enacted special provisions for computation of capital gains in the case of depreciable assets. Section 32(1) provides for depreciation in respect of the assets which are owned wholly or partly by the Assessee and used for the purposes of business or profession and such depreciation in case of block of assets is to be computed at such percentage of the written down value as may be prescribed. It is apparent from the plain reading of Section 32 that depreciation on a block of asset .....

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ting the existence of a block of assets where assets do not actually exist. 19. It is necessary to interpret the provisions of Section 43(6)(c) of the Act in the context in which the same were enacted. Clearly, the purpose of introducing Clause C in Section 43(6)(c)(i) of the Act was to address the manner in which the block of assets would be computed in case the block of assets was decreased on account of a slump sale. As is expressly clear from the definition of slump sale, that is, Section 2( .....

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nsfer of part of the assets. In our view, Clause C must be read only to address this situation. It is apparent that Clause C was introduced for the purpose of computing the 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 .....

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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. 21. At this stage, it would be necessary to refer to Section 50B of the Act which is reproduced as under:- 50B. Special .....

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assessee for not more than thirty-six months immediately preceding the date of its transfer shall be deemed to be the capital gains arising from the transfer of short-term capital assets. (2) In relation to capital assets being an undertaking or division transferred by way of such sale, the net worth of the undertaking or the division, as the case may be, shall be deemed to be the cost of acquisition and the cost of improvement for the purposes of sections 48 and 49 and no regard shall be given .....

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e with the provisions of this section. Explanation 1.-For the purposes of this section, net worth shall be the aggregate value of total assets of the undertaking or division as reduced by the value of liabilities of such undertaking or division as appearing in its books of account: Provided that any change in the value of assets on account of revaluation of assets shall be ignored for the purposes of computing the net worth. Explanation 2.-For computing the net worth, the aggregate value of tota .....

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f 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 .....

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the Act also did not contain any machinery provisions for ascertaining the cost of an undertaking sold on a slump sale basis. It is a settled law that in the absence of machinery provisions for computation of gains the charge itself would fail [see Commissioner Of Income-Tax, Bangalore V. B. C. Srinivasa Setty: (1981) 128 ITR 294 (SC)]. 23. In the circumstances, it was necessary for the Legislature to enact provisions for computation of capital gains in case of a slump sale in the event the sam .....

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by the Finance Act, 1999 reads as under:- Explanation.-For the purposes of this section, "net worth" means the net worth as defined in clause (ga) of sub-section (1) of section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986). 25. The Finance Act, 2000 substituted the aforesaid Explanation by Explanation 1 and 2 which are quoted hereinbefore. The purpose of the Explanations was to provide a method for computing the net worth of an undertaking or a division .....

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re exhaustive: Whereas clause (a) is concerned with the computation of depreciable assets; clause (b) provides for the value of the capital assets in respect of which the whole expenditure has been allowed as a deduction under Section 35AD of the Act; and clause (c) is a residuary clause 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 depreci .....

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ed 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 of Section 43 of the .....

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into itself by reference some of the clauses of a former Act, the legal effect of that, as has often been held, is to write those sections into the new Act as if they had been actually written in it with the pen, or printed in it." - also clearly articulate the effect of incorporation by reference. This rule would also be equally applicable while interpreting the provisions of a statute which incorporates by reference other provisions of the same statute. Thus, the words of Clause C must be .....

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of the Act is for a purpose that is completely different from the purpose for which it is used as a part of Section 43 of the Act. Thus, the only method to interpret clause (a) of Explanation 2 to Section 50B of the Act would be to read into the said clause (a) the language of Clause C so incorporated. If this is done, it would be apparent that the aggregate value of the assets constituting the block of assets would in the case of a slump sale, decrease by the actual cost of the asset falling wi .....

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elevant 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 assess .....

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espect of assessment years commencing on or after 1st April, 1988. It is also necessary to bear in mind that the purport of clause (a) of Explanation 2 to Section 50B of the Act is to ascribe a value to the assets forming a part of the net worth of an undertaking sold by an Assessee. The provisions made in this regard as contained in Explanation 2 to Section 50B of the Act are exhaustive and there is no provision which mandates that the written down value of the assets sold be determined by dedu .....

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ry provisions provided in Section 50B of the Act exhaustively provide for determining the cost of acquisition of the undertaking or division sold by way of a slump sale. If one examines the three clauses of Explanation 2 to Section 50B of the Act, the same exhaust all categories of assets. Insofar as depreciable asset 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 warra .....

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s 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 . 32. It is also important to bear in mind that with the introduction of the concept of block of assets, the direct co-relation between depreciation allowed and a separate asset constituting the block is lost. And, therefore, it is not poss .....

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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 : Depreciation WDV at the beginning of the assessment y .....

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tten down value of the block of assets at the beginning of the previous year will be ₹ 5,52,500. Presuming that during the financial year 1987-88, the assessee sold item 1 for a consideration of ₹ 2,00,000 and bought a new item (item 4) falling in the same block of assets during the said financial year for a consideration of ₹ 2,50,000, the depreciation to be allowed in respect of the assessment year 1988-89 will be as follows : Rs. - Aggregate WDV of the block at the beginning .....

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o as to arrive at the written down value cannot be accepted. In a given case, the block of assets would also stand reduced by the sale proceeds of any assets sold 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 .....

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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. It was provided that where the depreciation actually allowed could not be ascertained or no depreciation was actually allowed, the deprecia .....

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ese territories prior to 19th December, 1961. The said order was sought to be challenged principally on the ground that there was no difficulty in giving effect to the Indian Income Tax Act and thus there was no ground for exercising powers under Clause 7 of the Taxation Laws - (Extension to Union Territories) Regulation, 1963. It is in the context of the aforesaid challenge that a Constitution Bench of the Supreme Court examined the concept of written down value and held that the same was to be .....

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atory on the Assessee to claim depreciation and held that the deduction on account of depreciation allowance was available to an Assessee who could claim the same at his option. This decision was also taken note of by the Supreme Court in its later decision in Seshasayee Paper & Boards Ltd. (supra). In the present case, the question whether the Assessee is obliged to claim depreciation allowance is not an issue; there is no dispute with regard to the provisions for allowing deductions on acc .....

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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 va .....

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have to be reduced from the written down value of the remaining block of assets and the sale of assets did not result in any capital gains as even after such reduction, the value of the block of assets was positive. The aforesaid decision, in fact, clearly explains the working of Section 50 of the Act and it also follows therefrom that there is no direct co-relation between the depreciation on a block of assets and the individual assets comprising the block of assets. 37. Before concluding it is .....

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