2012 (4) TMI 469 - HC - Income Tax

Court rules short term capital gains tax not payable under Section 50 of Income Tax Act.

The court concluded that short term capital gains tax was not payable under Section 50 of the Income Tax Act, 1961. It emphasized that the block of assets ... Treating the sale proceeds of depreciable assets as short term capital gains – ITAT held the Order to be contrary to Section 50 - Held that:- Given the fact that block of assets is identified by the percentage of depreciation granted, on going through the various heads under the Schedule, we find that the depreciation percentage fixed is more of machinery specific rather than industry specific. Thus, on going through the various clauses in the Schedule, we find, if the asset transferred and the asset purchased fall for consideration under the self-same percentage of depreciation, then the asset qualified for being termed as falling under a block of assets. Thus, if the assets transferred from the 100 per cent export- oriented unit and the assets purchased come for the same percentage of depreciation as prescribed in the table, the assessee would be justified in seeking adjustment in the matter of working out the capital gains. Whether effect of section 32 should be examined while computing short term capital gains and interpreting Section 50 - held that:- ection 32 forms part of Chapter IV-D and relates to computation of income from profession and business. It is not the case of the Revenue that the gain on transfer of the block of assets is taxable as business income. The two sections operate in their own filed and there is no conflict. In these circumstances, we do not think we should refer and rely upon Section 32 and accordingly compute and decide whether short term capital gains is payable under Chapter IV-E - in favour of the assessee Issues Involved:1. Applicability of Section 50 of the Income Tax Act, 1961 for short term capital gains on the sale of depreciable assets.2. Interpretation of 'block of assets' as defined in Section 2(11) of the Income Tax Act, 1961.3. Taxability of gains from the sale of assets forming part of a block of assets.4. Impact of separate maintenance of accounts for different units/divisions on the computation of short term capital gains.Detailed Analysis:Issue 1: Applicability of Section 50 of the Income Tax Act, 1961 for short term capital gains on the sale of depreciable assetsThe court examined whether the Income Tax Appellate Tribunal was correct in holding that short term capital gains tax is not payable under Section 50 of the Income Tax Act, 1961. The respondent-assessee had sold the entire plant and machinery of their paper division and ceased business operations in that division. The Assessing Officer initially concluded that Section 50 was not applicable as the entire division was sold, and thus, the gain was taxable as short term capital gain. However, the CIT(Appeals) and the Tribunal later held that Section 50 was applicable, emphasizing that the sale proceeds should not be treated as short term capital gains.Issue 2: Interpretation of 'block of assets' as defined in Section 2(11) of the Income Tax Act, 1961The court referred to the definition of 'block of assets' under Section 2(11), which means a group of assets in respect of which the same percentage of depreciation is prescribed. The court clarified that the definition does not distinguish between different units or types of businesses carried on by an assessee. The term 'block of assets' refers to assets carrying the same rate of depreciation, irrespective of the division or unit to which they belong.Issue 3: Taxability of gains from the sale of assets forming part of a block of assetsThe court analyzed Section 50, which deals with the computation of capital gains in the case of depreciable assets. The court noted that short term capital gains are payable if the full value of the consideration received from the transfer of assets exceeds the aggregate of expenditure incurred on the transfer, the written down value of the block of assets at the beginning of the previous year, and the actual cost of any assets acquired during the previous year. The court emphasized that the term 'block of assets' should be interpreted as assets carrying the same rate of depreciation, and short term capital gains would be payable only if there is a surplus after considering these factors.Issue 4: Impact of separate maintenance of accounts for different units/divisions on the computation of short term capital gainsThe court rejected the Assessing Officer's approach of treating each unit or division as a separate block of assets. The court highlighted that the Income Tax Rules do not require separate accounting for each unit or division but focus on the rate of depreciation. The court referred to previous judgments, including Commissioner of Income Tax vs. Eastman Industries Limited and Commissioner of Income Tax vs. Oswal Agro Mills Limited, which supported the view that the block of assets should be considered based on the rate of depreciation, not the specific unit or division.Conclusion:The court concluded that the Income Tax Appellate Tribunal was correct in holding that short term capital gains tax was not payable under Section 50 of the Income Tax Act, 1961. The court emphasized that the block of assets should be interpreted as assets carrying the same rate of depreciation, and gains from the sale of such assets should be computed accordingly. The appeals were disposed of in favor of the assessee, with no costs awarded.