Capital gains on court-directed sale treated as taxable transfer; depreciation set-off denied under the proviso

An Appellate Assistant Commissioner's enhancement of capital gains was treated as a re-adjustment of an existing assessment, so the jurisdictional challenge failed. A court-appointed commissioner's sale of partnership assets was regarded as a transfer for capital gains purposes, while the third proviso was confined to distribution of capital assets in specie and did not extend to sale proceeds. The proviso dealing with depreciation adjustments applied only where an actual adjustment had been made in the income-tax assessment, so the assessee could not reduce the capital gain by depreciation already reflected in the statutory scheme. The full capital gain was therefore taxable.

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Issues: (i) Whether the Appellate Assistant Commissioner could enhance the assessment under the head of capital gains; (ii) Whether the entire capital gain arising from sale of partnership assets was taxable or exempt under the third proviso to section 12B(1) and the proviso to section 12B(2).

Issue (i): Whether the Appellate Assistant Commissioner could enhance the assessment under the head of capital gains.

Analysis: The enhancement was treated not as a fresh assumption of jurisdiction but as a re-adjustment of the assessment already made. The challenge to jurisdiction therefore did not survive.

Conclusion: The enhancement was valid and the issue was decided against the assessee.

Issue (ii): Whether the entire capital gain arising from sale of partnership assets was taxable or exempt under the third proviso to section 12B(1) and the proviso to section 12B(2).

Analysis: A sale by a court-appointed commissioner was held to be a transfer for purposes of section 12B(1), and the third proviso was confined to distribution of capital assets in specie, not distribution of sale proceeds. On computation, the proviso to section 12B(2) was construed to refer only to actual adjustments made in an assessment under section 10(2)(vii). Since no such adjustment had been made, the assessee could not reduce the capital gain by the depreciation component. This avoided reopening an item that had not been subjected to income-tax assessment and prevented the statutory scheme from being distorted.

Conclusion: The full capital gain was taxable and the issue was decided against the assessee.

Final Conclusion: The reference was answered wholly against the assessee, and the revenue's computation of capital gains was sustained.

Ratio Decidendi: The proviso to section 12B(2) applies only to depreciation adjustments actually made in the income-tax assessment under section 10(2)(vii), and a court-directed sale of capital assets constitutes a transfer for capital gains purposes under section 12B(1).

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