TMI Blog1994 (4) TMI 49X X X X Extracts X X X X X X X X Extracts X X X X ..... istrict Yavatmal much prior to January 1, 1964. The building and land were sold by the assessee for Rs. 10 lakhs and the plant and machinery also for Rs. 10 lakhs by sale deeds dated October 24, 1980. The assessee had claimed depreciation on building and machinery year after year. In the return of income for the relevant assessment year while working out the long-term capital gains, the assessee substituted the fair market value of land, building and machinery as on January 1, 1964, as the cost of acquisition by exercising the option under section 55(2). Respondent No.1, Income-tax Officer, held that the assessee, in view of section 50, did not have that option since it had acquired the property voluntarily by purchase 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 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 for payment of Rs. 1,25,016. Respondent No. 2, Commissioner of Income-tax, upheld the said order. The petitioners have preferred a second appeal before t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cases governed by section 49, the cost of acquisition shall be deemed to be the cost to the previous owner. The controversies mainly centre round the provisions of sections 50 and 55. We reproduce them for ready reference : "50. Special provision for computing 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assessee in any previous year either under this Act or under the Indian Income-tax Act, 1922 (11 of 1922), or any Act repealed by that Act, or under executive orders issued when the Indian Income-tax Act, 1886 (2 of 1886), was in force, the provisions of sections 48 and 49 shall be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, 1964, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... odes specified in sub-section (1) of section 49, and the capital asset became the property of the previous owner before the 1st day of January, 1964, means the cost of the capital asset to the previous owner or the fair market value of the asset on the 1st day of January, 1964, at the option of the assessee ; (iii) where the capital asset became the property of the assessee on the distribution of the capital assets of a company on its liquidation and the assessee has been assessed to income-tax under the head 'Capital gains' in respect of that asset under section 46, means the fair market value of the asset on the date of distribution ; (iv) (Omitted by the Finance Act, 1966, with effect from April 1, 1966) ; (v) where the capital asset, being a share or a stock of a company, became the property of the assessee on (a) the consolidation and division of all or any of the share capital of the company into shares of larger amount than its existing shares, (b) the conversion of any shares of the company into stock, (c) the reconversion of any stock of the company into shares, (d) the sub-division of any of the shares of the company into shares of smaller amount, or (e) the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only source of such option is section 55(2) and this is indicated unmistakably in the very first part of section 50(2). Thus it will be seen that section 50 though a special provision is not a complete code unto itself for computing capital gains and in no way affects an assessee's option given under section 55(2). Sub-section (1) of section 55 is a definition provision and does not contain any substantive provision. However, 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 January 1, 1964, and grants the option to the assessee either to have the actual cost of acquisition of the asset or the fair mark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 254) : " . . . . the difference between the price fetched at the sale and the written down value is deemed to be the escaped profits for which the assessee is made liable to tax. As the sale price is higher than the written down value, the difference represents the excess depreciation mistakenly granted to the assessee. " It is for this reason that written down value is adjusted as per section 50, clause (1). The object of the option given in section 55(2) is to afford some protection to the assessee against assessment of illusory capital gain which is not in economical sense but is a result of inflation and decline in the rupee value. This is apparent from the fact that the initial date January 1, 1954, which was taken from the old Indian Income-tax Act, 1922, has been forwarded periodically. As inflation had been on the rise the date was changed to January 1, 1964, with effect from the assessment year 1978-79 by the Finance (No. 2) Act, 1977, and January 1, 1974, with effect from the assessment year 1987-88 by the Finance Act, 1986. At present the said date has not only been advanced to April 1, 1981, but even indexation is provided with a view to safeguarding against the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 50(2) and nullified subsequently by the adjustment prescribed under section 55(1)(a). Under the Indian Income-tax Act of 1922 all the provisions relating to capital gains were contained in section 12B. With simplification in view, those provisions are divided into separate sections 45 to 55 of the Act. Difference in the capital gains in the case of purchase and in the case of gift can be too much if calculated as suggested by the Revenue. It is a common case that under the old Act even an assessee who had himself purchased the depreciable asset would be entitled to take as its cost of acquisition the fair market value on January 1, 1954. It does not appear that the new Act intended to make such a major departure having heavy impact on the purchaser-assessee and draw distinction in the matter of option between him and the donee or successor-assessee. Notes to clauses 45 to 55 of the Bill (which were made sections 45 to 55 by the Act) only state that the clauses embodied provisions of the existing section 12B which is split up for the sake of simplicity and are logically rearranged. Some changes have been enumerated from the old Act, but they do not include the change with regard t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this view of the matter, the principle of interpretation that a special provision prevails over general cannot be pressed into service. The conclusion is thus inevitable that section 50(1) only aims at preventing the grant of double deduction. Section 50 makes sections 48 and 49 subject to the modifications in section 50 but does not make the option under section 55(2) subject to section 50. It is true that the High Courts of Gujarat, Allahabad, Kerala and Calcutta in the four decisions (supra) have taken a view which is contrary to the above. The main judgment is of the Gujarat High Court which has been followed by other High Courts, inter alia, on the ground of maintaining consistency. It seems to us and we observe this with great respect that the attention of the courts was not drawn either to the provisions of section 41(2) of the Act or the provisions of section 12B of the old Act or the Income-tax Manual, Part III. It is pertinent to notice that some of the decisions in terms recognise the anomaly, but it is sought to be explained on the theory of benefit conferred by grant of depreciation. These decisions proceed on the assumption that the grant of depreciation would have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2) is not the source of option. Section 50 specifies that only sections 48 and 49 are subject to the modifications mentioned therein. The option given in section 55(2) is not made subject to section 50. It appears that it was not brought to the notice of courts that the question of the purchaser-assessee being entitled to the option or not has to be determined only on the basis of section 50(1) read with sections 48 and 55(2) and not section 50(2). No doubt, the assessee purchasing a depreciable asset and an assessee acquiring it otherwise can be said to belong to different classes but we are unable to see what that classification has to do with the object sought to be achieved by the provision, viz., to prevent the assessment of illusory capital gain on account of inflationary conditions and decreasing value of money. It would make no difference whether the capital asset which gave rise to the capital gain has been acquired by the assessee either by purchase or by gift. The classification between the depreciable and non-depreciable assets and between these two classes of assessees have no nexus to the object of enactment. Contrary interpretation has the potentiality of making s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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