TMI Blog2009 (7) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... stion of verification by the A.O. - 5291 of 2004 with others - - - Dated:- 6-7-2009 - S.H. Kapadia and Aftab Alam, JJ.. CIVIL APPEAL No. 5291 of 2004 with Civil Appeal Nos. 5296/04, 5293/04, 356-357/06, 359-360/06, 361-362/06, 363-364/06, 5858/06, 108/07, Civil Appeal No. 4130/09 @ S.L.P. (C) No. 1613/08, Civil Appeal No.4131/09 @ S.L.P. (C) No. 3064/09 and Civil Appeal No. 4132/09 @ S.L.P. (C) No. 8002/09. JUDGMENT S.H. KAPADIA, J. - Leave granted. 2. In this batch of Civil Appeals, pertaining to assessment years 1990-91 to 1998-99, the question which arises for determination is: whether the concept of "balancing charge" in Section 41(2) could be read into Section 41(1) of the Income Tax Act, 1961? 3. In this batch of civil appeals the lead matter is the case of Nectar Beverages Pvt. Ltd. v. Dy. CIT ( Civil Appeal No. 5291/04) in which the facts are as follows. 4. In the Lead Matter, the assessee who is the manufacturer of soft drinks, purchased bottles and crates, each item of which costed less than Rs. 5,000/- and, therefore, was entitled to and allowed 100% depreciation on the cost of the said bottles and crates, in the year in which they were acquir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by him or the value of benefit accruing to him, shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not. We also quote hereinbelow Section 41(2) [Omitted by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, w.e.f. 1.4.1988], which reads as follows: 41.(2) Where any building, machinery, plant or furniture which is owned by the assessee and which was or has been used for the purposes of business or profession is sold, discarded, demolished or destroyed and the moneys payable in respect of such building, machinery, plant or furniture, as the case may be, together with the amount of scrap value if any, exceed the written down value, so much of the excess as does not exceed the difference between the actual cost and the written down value shall be chargeable to income-tax as income of the business or profession ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of the previous year in which such plant was put to use by the assessee for its business. In short, the W.D.V. stood reduced to nil in the year in which the item was put to use. According to the assessee, bottles and crates bought before 1.4.1995 were sold in the previous year relevant to the assessment year in question, however, on account of deletion of Section 41(2) profits on sale of such bottles and crates were not taxable under that sub-section. 8. In the light of the above arguments, we need to analyse Section 41(1) and Section 41(2). Section 41 falls under Chapter IV which deals with computation of business income. Section 41 has a Head Note which says "Profits chargeable to tax". Section 41(1) has remained unchanged, both, before 1.4.1988 and even after 1.4.1998. As stated above, Section 41(2), however, stood deleted between assessment years 1988-89 and 1998-99 for about ten years. Under Section 41(1), where any allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee, and subsequently during any previous year the assessee had obtained, such loss or expenditure in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... balancing charge". Where any allowance or deduction had earlier been made in respect of any loss, expenditure or trading liability and subsequently the assessee has obtained or realized any amount towards such loss, expenditure or trading liability, Section 41(1) deems such realization/recoupment as assessee's income for the year in which it is realized. Section 41(2) as it stood at the material time stated that if in respect of any plant and machinery, any depreciation had been allowed and subsequently such plant and machinery was sold, discarded or destroyed, the assessee might get some value either as a result of sale or insurance or from salvage or compensation thereabout. The necessity to keep Section 41(2) as a provision in addition to Section 41(1) arose from the fact that, in its very nature, depreciation is neither a loss, nor an expenditure, nor a trading liability, referred to in Section 41(1). The depreciation recovered on sale of the capital asset was includible in the total income as balancing charge only under Section 41(2). That concept was foreign to the scheme of Section 41(1). The balancing charge under Section 41(2) arose only where any depreciable asset (buildi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets. 12. For reasons given hereinabove, we are of the view that bottles and crates purchased prior to 31.3.1995 did not form part of the block of assets, hence, profits on sale of such assets were not taxable as a balancing charge, neither under Section 41(1) nor under Section 50. In respect of bottles and crates purchased after 1.4.1995, on account of deletion of proviso to Section 31(1)(ii) (vide Finance Act, 1995) such bottles and crates formed part of block of assets and consequently such assets purchased after 1.4.1995, in this case, became exigible to capital gains tax under Section 50. 13. Before concluding, it may be pointed out that, in the case of Nector Beverages Pvt. Ltd., assessee has earmarked the sale proceeds from bottles and crates as "miscellaneous income" and not as "profit on sale of assets" whereas, in the case of other assessees, including Industrial Oxygen Co. Ltd. (now known as Inox Air Products Ltd.), the said sale proceeds have been earmarked specifically under the Heading "Profits from sale of assets". To this limited extent only, we remit the case(s) of Nectar Beverages Pvt. Ltd. [Civil Appeal Nos. 5291/04, 5293/04 and 359-360/06] to the A.O ..... X X X X Extracts X X X X X X X X Extracts X X X X
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