Converted stock-in-trade, block depreciation and independent deductions: note explains why capital gains and recomputation adjustments were rejected.

Converted moulds sold as stock-in-trade after removal from the block of assets were treated as business receipts, and the note says the sale proceeds could not be mechanically taken as fair market value on the date of conversion for capital gains computation under section 45(2) read with section 50. Freshly acquired moulds remained in the block of assets, so depreciation on those purchases could not be disallowed on the theory that the block had become nil. The note also states that deductions under sections 80HHC and 80IB operate independently, so an adjustment made for one deduction cannot be used to reduce the other.

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Issues: (i) Whether the profit arising from conversion of moulds from fixed assets into stock-in-trade was assessable as capital gains under section 45(2) or as business income on the basis of the book value adopted by the assessee; (ii) Whether depreciation on freshly acquired moulds forming part of the block of assets could be disallowed on the premise that the block had become nil; (iii) Whether deduction under section 80IB could be reduced by setting off the disallowance made while computing deduction under section 80HHC.

Issue (i): Whether the profit arising from conversion of moulds from fixed assets into stock-in-trade was assessable as capital gains under section 45(2) or as business income on the basis of the book value adopted by the assessee.

Analysis: The converted moulds had been removed from the block of assets at book value, and what was sold during the year was the stock-in-trade, not the original fixed assets. On the facts, the export realization could not be treated as the fair market value on the date of conversion for computing short-term capital gains. The income arising from sale of the converted stock-in-trade was therefore not liable to be assessed as capital gains under section 45(2) read with section 50.

Conclusion: The issue was decided in favour of the assessee; the addition made by treating the transaction as capital gains was not sustainable.

Issue (ii): Whether depreciation on freshly acquired moulds forming part of the block of assets could be disallowed on the premise that the block had become nil.

Analysis: The assessee had made fresh purchases of moulds during the year and those assets remained part of the block of assets. Depreciation was claimed on the fresh purchases and not on the moulds converted into stock-in-trade. The premise that the block of assets had become nil was therefore incorrect.

Conclusion: The issue was decided in favour of the assessee; the disallowance of depreciation was not justified.

Issue (iii): Whether deduction under section 80IB could be reduced by setting off the disallowance made while computing deduction under section 80HHC.

Analysis: The deductions under sections 80HHC and 80IB operate independently. The profit eligible for deduction under section 80IB could not be reduced merely because a separate adjustment was made while computing deduction under section 80HHC.

Conclusion: The issue was decided in favour of the assessee; the recomputation of deduction under section 80IB on the basis adopted by the Assessing Officer was not justified.

Final Conclusion: The assessment adjustments concerning capital gains, depreciation, and computation of deduction under section 80IB were all set aside to the extent indicated, resulting in relief to the assessee.

Ratio Decidendi: Where converted capital assets are sold only after being brought into stock-in-trade, the post-conversion sale proceeds of the stock cannot be mechanically adopted as the fair market value on the date of conversion for capital gains purposes, and deductions that are statutorily independent must be computed independently.

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