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<h1>Revision under Section 263 set aside; assessment restored where mutual concern surplus non-taxable and Explanation 2 misapplied</h1> <h3>Computer Media Dealers Association Versus CIT (Exemption), Mumbai</h3> Computer Media Dealers Association Versus CIT (Exemption), Mumbai - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether the provisions of section 50 apply to the sale of the office premises in the absence of any claim of depreciation and where the asset was not part of a block of assets. 2. Whether the Assessing Officer was obliged to inquire into applicability of section 50 when (a) there was no record of depreciation having been allowed earlier and (b) the Assessing Officer had not treated the assessee's receipts as business income. 3. Whether the revisional exercise under section 263 (by the Commissioner of Income-tax (Exemptions)) setting aside the assessment order passed by the Assessing Officer was sustainable where the revision was predicated on the CIT(E)'s presumption that depreciation had been claimed earlier. 4. (Raised but not adjudicated as unnecessary) Validity of invoking section 263 in respect of actions of an Assessment Unit, and whether an order giving effect to an earlier direction under section 263 can itself be subjected to a fresh section 263 action. ISSUE 1 - Applicability of Section 50 to the sale of the office premises Legal framework: Section 50 is a special provision for computation of capital gains where the capital asset forms part of a block of assets in respect of which depreciation has been allowed; it deems excess of consideration over written down value and related items to be short-term capital gains in specified circumstances. Interpretation and reasoning: The Court construed section 50 strictly: two preconditions must coexist - (i) the asset must be a depreciable asset; and (ii) it must form part of a block of assets for which depreciation has been allowed. Only upon satisfaction of those conditions does the special deeming machinery operate to treat receipts as short-term capital gains. Precedent treatment: No earlier decisions were relied upon or distinguished in the text; the conclusion follows from plain statutory language. Ratio vs. Obiter: Ratio - Section 50 is inapplicable where there is no finding/record that depreciation was ever claimed or allowed and where the asset is not part of any block of assets. Conclusion: Section 50 did not apply to the sale of the office premises because the assessee had never claimed depreciation and the asset was not part of any block of assets; therefore the special short-term capital gains computation under section 50 could not be invoked. ISSUE 2 - Obligation of the Assessing Officer to inquire into applicability of Section 50 Legal framework: The Assessing Officer's duties in framing assessment include making inquiries relevant to the taxability of claimed items, but such inquiries are directed by facts placed before the AO and by the statutory requirements of the heads of income and special provisions like section 50. Interpretation and reasoning: Where the record before the AO shows no claim or allowance of depreciation and the AO has not treated the entity's receipts as business income, there is no factual basis requiring the AO to invoke section 50 or to initiate inquiry under that provision. A revisional authority cannot fault the AO for not investigating a statutory provision that is not factually attracted. Precedent treatment: None cited; the approach follows logical application of statutory prerequisites to the facts. Ratio vs. Obiter: Ratio - An AO is not obligated to examine section 50 in absence of any finding or record that the asset was depreciable/part of a block and depreciation was claimed/allowed. Conclusion: The Assessing Officer acted reasonably in giving effect to the earlier direction without conducting an inquiry into section 50 because the factual matrix did not trigger that provision. ISSUE 3 - Sustainability of revision under Section 263 premised on presumption of prior depreciation Legal framework: Section 263 empowers the Commissioner to revise an assessment order if it is erroneous or prejudicial to the interests of the Revenue; such jurisdiction, however, must be exercised on correct facts and law and not on unverified assumptions. Interpretation and reasoning: The revisional order by the CIT(E) proceeded on a presumption that depreciation had been claimed/allowed in earlier years without verifying the assessment record. Revision under section 263 cannot be founded on such unverified assumptions. Where the AO had neither treated the assessee's receipts as business income nor allowed depreciation, the basis for invoking section 50 (and thereby holding the AO's order erroneous) was absent. Precedent treatment: No authority was cited to alter the principle that jurisdiction under section 263 must rest on a proper factual and legal foundation; the Court relied on record scrutiny and statutory construction. Ratio vs. Obiter: Ratio - A revisional order under section 263 is unsustainable if it is predicated on factual presumptions not substantiated by the assessment record; the revisional authority must verify facts before concluding an assessment is erroneous and prejudicial. Conclusion: The revisional order setting aside the AO's assessment for failure to consider section 50 was not sustainable because it rested on an unverified presumption that depreciation had been claimed/allowed. Consequently, the impugned revision was set aside and the assessment order restored. ISSUE 4 - Jurisdictional questions regarding section 263 and Assessment Unit actions (raised but not decided) Legal framework and contentions: Questions were raised whether section 263 can be invoked against an order passed by an Assessment Unit and whether an order giving effect to an earlier section 263 direction can itself be the subject of section 263 revision. Court's treatment: These jurisdictional grounds were noted but held to be academic in consequence of the primary determination that the revisional order was unsustainable on factual grounds. The Court did not adjudicate these jurisdictional issues. Ratio vs. Obiter: Obiter - No judicial determination was made on the scope of section 263 as against orders of an Assessment Unit or on the permissibility of revising an order that merely gives effect to a prior section 263 direction. Conclusion: Jurisdictional challenges to section 263 were left undecided as academic in view of the substantive finding on section 50 and the factual basis for revision. Ancillary points and final outcome The Court accepted that the assessee operated as a mutual concern and reiterated that surplus within the ambit of mutuality is ordinarily non-taxable, subject to any income arising outside mutual activities. Because there was no finding by the AO to treat such receipts as business income, and no claim/allowance of depreciation, the special provision (section 50) could not be lawfully invoked. The revisional order under section 263 was therefore set aside and the AO's assessment order restored.