1997 (7) TMI 14 - SC - Income Tax

Supreme Court: Market value not interchangeable for depreciable assets in capital gains calculation

Commonwealth Trust Limited Versus Commissioner of Income-Tax

Commonwealth Trust Limited Versus Commissioner of Income-Tax - [1997] 228 ITR 1 (SC) Issues Involved:1. Deletion of Rs. 1,260 towards house rent under section 40(a)(v) of the Income-tax Act, 1961.2. Right of the assessee to substitute the market value as of January 1, 1954, for depreciable assets when computing capital gains.Detailed Analysis:Issue 1: Deletion of Rs. 1,260 towards house rent under section 40(a)(v) of the Income-tax Act, 1961The first issue pertains to whether the Tribunal was right in law in deleting Rs. 1,260 towards house rent under section 40(a)(v) of the Income-tax Act, 1961. The High Court had ruled in favor of the Revenue and against the assessee. However, this judgment was overruled by the Supreme Court in CIT v. Mafatlal Gangabhai and Co. (P.) Ltd. [1996] 219 ITR 664. Consequently, the Supreme Court answered this question in favor of the assessee and against the Revenue.Issue 2: Right of the assessee to substitute the market value as of January 1, 1954, for depreciable assets when computing capital gainsThe second issue involves whether the assessee had the right to substitute the market value as of January 1, 1954, for depreciable assets when computing capital gains. The High Court had ruled in favor of the Revenue, agreeing with the decisions of the High Courts of Gujarat, Allahabad, and Calcutta, which held that section 50(1) of the Act, being a special provision for depreciable assets, would override the general provisions of section 55(2).Relevant Facts:- The assessee, a limited company, owned properties at Calicut and Mangalore, which were sold during the assessment year 1971-72.- The properties had been depreciated in previous years.- The assessee revalued the properties as of January 1, 1954, and showed capital gains/losses based on this revaluation.- The Income-tax Officer and Appellate Assistant Commissioner rejected this approach, stating that section 50(1) applied, which did not allow for the substitution of the market value as of January 1, 1954.- The Tribunal upheld this view, and the High Court agreed, ruling in favor of the Revenue.Legal Provisions Considered:- Sections 32(1)(iii), 41(2), 43(6), 45, 48, 49, 50, and 55 of the Income-tax Act, 1961.- The key contention was whether section 50(1), a special provision for depreciable assets, would override the general provisions of section 55(2), which allows for the substitution of the market value as of January 1, 1954.High Court Judgments:- The High Courts of Gujarat, Allahabad, and Calcutta ruled that section 50(1) overrides section 55(2) for depreciable assets.- The Bombay High Court, in contrast, ruled that the assessee could substitute the fair market value as of January 1, 1954, under section 55(2), even for depreciable assets.Supreme Court's Analysis:- The Supreme Court considered the definitions and provisions under sections 32, 41, 43, 45, 48, 49, 50, and 55.- It concluded that section 50(1) is a special provision for depreciable assets and overrides the general provisions of section 55(2).- The Supreme Court upheld the views of the High Courts of Gujarat, Allahabad, and Calcutta, and disagreed with the Bombay High Court's interpretation.- The Court emphasized that section 50(1) provides a specific method for determining the cost of acquisition for depreciable assets, which does not allow for the substitution of the market value as of January 1, 1954.Conclusion:- The Supreme Court upheld the High Court's ruling in favor of the Revenue, confirming that the assessee could not substitute the market value as of January 1, 1954, for depreciable assets when computing capital gains.- The appeal related to the second question was dismissed.Final Judgment:- Civil Appeal No. 2978 of 1982 was dismissed.- Civil Appeal No. 2979 of 1982 was allowed.- There was no order as to costs.