2015 (3) TMI 977 - AT - Income Tax

Tribunal allows cost inflation index for capital gains, permits set off of unabsorbed depreciation.

M/s. Best & Crompton Engineering Ltd. Versus Assistant Commissioner of Income Tax, Company Range-1(2), Chennai

M/s. Best & Crompton Engineering Ltd. Versus Assistant Commissioner of Income Tax, Company Range-1(2), Chennai - [2014] 30 ITR (Trib) 688 (ITAT [Chen]) Issues Involved:1. Adoption of cost inflation index for computing capital gains.2. Denial of set off of unabsorbed depreciation prior to the assessment year 1997-98.Issue-wise Detailed Analysis:1. Adoption of Cost Inflation Index for Computing Capital Gains:The first issue pertains to whether the cost inflation index should be adopted from the year of conversion of property into stock-in-trade or the year of sale. The assessee converted its property into stock-in-trade in the financial year 1994-95 and sold it in the financial year 2006-07. The assessee computed capital gains using the cost inflation index of the year of sale, i.e., financial year 2006-07. However, the Assessing Officer adopted the cost inflation index of the year of conversion (1994-95). The Commissioner of Income-tax (Appeals) upheld the Assessing Officer's decision.The counsel for the assessee argued that as per section 45 of the Income-tax Act, chargeability to capital gains arises in the assessment year of sale, irrespective of the year of conversion into stock-in-trade. The assessee contended that section 48, which determines the indexed cost of acquisition, should be applied using the cost inflation index of the year of sale to account for inflation.The Departmental representative supported the lower authorities' decision to use the cost inflation index of the year of conversion. The Tribunal, after hearing both sides, agreed with the Assessing Officer's reasoning. It concluded that the cost inflation index of the year of conversion should be applied, not the year of sale, as the asset was held as stock-in-trade in the financial year 2006-07. Thus, the ground raised by the assessee on this issue was rejected.2. Denial of Set Off of Unabsorbed Depreciation Prior to the Assessment Year 1997-98:The second issue involves the denial of set off of unabsorbed depreciation prior to the assessment year 1997-98 based on the decision of the Special Bench of the Mumbai Tribunal in the case of Deputy CIT v. Times Guaranty Ltd. The Commissioner of Income-tax (Appeals) directed the Assessing Officer to disallow unabsorbed depreciation prior to the assessment year 2002-03, following the Special Bench decision.The counsel for the assessee argued that this issue is covered in favor of the assessee by the decision of the Gujarat High Court in General Motors India P. Ltd. v. Deputy CIT, which held that unabsorbed depreciation from 1997-98 up to assessment year 2001-02 is carried forward to the assessment year 2002-03 and is available for set off against profits and gains of subsequent years without any limit.The Departmental representative supported the orders of the lower authorities. The Tribunal, upon reviewing the decisions and the Gujarat High Court's ruling, found that the issue is indeed covered in favor of the assessee. The Gujarat High Court had clarified that unabsorbed depreciation from the assessment years 1997-98 to 2001-02, carried forward to the assessment year 2002-03, should be governed by the amended provisions of section 32(2) of the Act, allowing it to be carried forward and set off without any time limit.Respecting the Gujarat High Court's decision, the Tribunal allowed this ground of appeal of the assessee.Conclusion:The appeal of the assessee was partly allowed, with the Tribunal upholding the decision to use the cost inflation index of the year of conversion for computing capital gains but allowing the set off of unabsorbed depreciation from prior years based on the Gujarat High Court's ruling. The order was pronounced in the open court on February 19, 2014, at Chennai.