1997 (7) TMI 14 - SC - Income Tax

Capital gains on sale of depreciable assets: can fair market value as on 1 Jan 1954 replace written down value? Appeal dismissed.

The dominant issue was whether, in computing capital gains on transfer of a depreciable capital asset for which depreciation had been allowed, the ... House rent under section 40(a)(v) - claimed depreciation for its factory buildings which had been allowed in the previous years - right of substituting the market value, in respect of the depreciable assets - cost of acquisition of the asset - HELD THAT:- In the present case it is not disputed that it is section 48 which is applicable and not section 49. Under section 48, to compute the income chargeable under the head ' Capital gains ', the value of consideration received on transfer of the capital asset is to be reduced by the expenditure incurred on the transfer and the cost of acquisition of the capital asset and the cost of any improvement thereto. The expenditure that might have been incurred on the transfer of the capital asset and the cost of any improvement thereto are not the subject of any controversy in the case before us. Section 49 is not applicable as the capital asset was not acquired by any of the modes mentioned in that section. In commercial parlance computation of capital gain would mean the actual gain measured by the difference between the sale price and the cost of acquisition. It is the ' cost of acquisition ' that is required to be determined under the provisions of sections 48, 49, 50 and 55. Both under sections 48 and 49 cost of acquisition will have to be determined and adjusted as provided in sections 50 and 55. Section 50 is applicable where the assessee has obtained deduction on account of depreciation in respect of the capital asset in question and in that case section 55(1) also comes into operation in view of the expression ' adjusted ' which is defined therein in clause (a) of section 55(1). The expression ' adjusted ' is for the purposes of sections 48, 49 and 50. For the purposes of applying section 55(2), sections 48 and 49 will have to be applied as modified by section 50. It follows, therefore, that whether the capital asset purchased by the assessee is a depreciable or non-depreciable asset, the assessee will have the option for substituting for its actual cost of acquisition its fair market value as on January 1, 1954, but where it is a depreciable asset and the assessee has enjoyed depreciable allowance, his cost of acquisition shall have to be determined as provided in section 50. Section 50(1) has no dependence on the provisions of section 55(2). There is no mention of ' fair market value ' in section 50(1) and besides that the adjustments stated there are with reference to the written down value only, which has nothing to do with the fair market value. We conclude, therefore, that in the present case where the capital asset is depreciable and the assessee has availed of deduction on account of depreciation, the cost of acquisition shall have to be determined in terms of the provisions of section 50 read with section 48. To us it appears section 50 is in absolute terms specially providing for fixing the cost of acquisition in the case of depreciable assets only. The impugned judgment of the High Court whereby question has been answered in favour of the Revenue is, therefore, upheld and the appeal in so far as it relates to question is accordingly dismissed. We may also note that since the relevant provisions have been amended with effect from April 1, 1988, a controversy like the one raised in the present proceedings does no longer survive. 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.