Depreciation and block-of-assets rules: use date governs depreciation, and section 50(2) applies only when the block ceases to exist.

Depreciation on assets transferred from a partnership firm depended on when the assets were put to use, not on when the accounting entry was recorded; where the evidence showed transfer and use from 01.04.1997, 100% depreciation was available and the disallowance failed. On capital gains, section 50(2) applied only if the entire block of assets was transferred during the previous year so that the block ceased to exist at year-end; a temporary nil balance during the year was insufficient. On that construction, no short-term capital gains arose where the block subsisted at the close of the year.

---

---

Issues: (i) Whether the assessee was entitled to 100% depreciation on assets transferred from a partnership firm when the entries were recorded in the books after 30.09.1997; (ii) Whether section 50(2) of the Income-tax Act, 1961 applied so as to tax short-term capital gains on transfer of a block of assets when the block still subsisted at the end of the previous year.

Issue (i): Whether the assessee was entitled to 100% depreciation on assets transferred from a partnership firm when the entries were recorded in the books after 30.09.1997.

Analysis: The evidence showed that the assets were transferred to the assessee on 01.04.1997, supported by the challan and confirmation certificates. The relevant consideration for depreciation was whether the assets were put to use before 30.09.1997, and not the date on which the transaction was entered in the books. The disallowance proceeded on an incorrect factual assumption that the assets were used for less than 180 days.

Conclusion: The assessee was entitled to 100% depreciation, and the disallowance was unsustainable.

Issue (ii): Whether section 50(2) of the Income-tax Act, 1961 applied so as to tax short-term capital gains on transfer of a block of assets when the block still subsisted at the end of the previous year.

Analysis: Section 50(2) operates only when the block of assets ceases to exist because all assets in that block are transferred during the previous year. The expression "during the previous year" was construed to mean the whole course of the relevant financial year, not a temporary nil balance at an intermediate point in time. Since the block of assets continued to exist at the end of the previous year, the deeming provision did not apply. The fiction under section 50 could not be extended beyond its limited purpose.

Conclusion: Section 50(2) was not attracted, and no short-term capital gains arose on the facts of the case.

Final Conclusion: No substantial question of law arose, and the revenue's challenge failed in entirety. The assessments as modified by the appellate authorities were left undisturbed.

Ratio Decidendi: Section 50(2) applies only where all assets in the block are transferred during the previous year so that the block ceases to exist at the end of that year; a temporary nil balance or a hiatus during the year does not trigger the deeming fiction.

---