2025 (11) TMI 1849 - AT - Income Tax

Sale of car in depreciation block under Sections 32, 43(6)(c) and Rule 5 not separately taxable

ITAT Ahmedabad held that once a motor car forms part of a depreciable 'block of assets' under Section 32 read with Section 43(6)(c) and Rule 5, its ... Addition being profit on sale of assets (vehicle) - assessee had sold a motor car forming part of the block of “Motor Cars” (15 percent) - sale consideration of Rs. 5,60,000/- was duly reduced from the gross block (WDV) while computing depreciation in accordance with section 43(6)(c) - double deduction - HELD THAT:- Under the statutory framework contained in Section 32 read with Section 43(6)(c) and Rule 5 of the Income Tax Rules, the concept of “block of assets” governs depreciation and taxation of gains arising from sale of depreciable assets. Once an asset forms part of a block, the individual identity of the asset is lost. The sale of an individual asset does not give rise to a separate taxable profit. The only adjustment mandated under the Act is the reduction of the “moneys payable”, together with any scrap value, from the opening written down value or additions to the block. The depreciation is thereafter computed on the balance written down value. In the present case, the sale consideration of Rs. 5,60,000 has already been reduced from the gross block while computing depreciation in the ITR schedule. This reduction represents the full and final statutory adjustment on account of the sale. Bringing the book profit of Rs. 4,83,894 to tax separately results in taxing the assessee twice: once through reduction of the block and again by treating the accounting profit as taxable income. This is contrary to the statutory scheme governing depreciable assets. AO has not shown any statutory provision under which the accounting profit on sale of an asset forming part of a block can be brought to tax separately. The addition merely relies on the fact that the profit was credited in the Profit and Loss account, overlooking the computation mechanism prescribed in Section 32 and Section 43(6)(c). CIT(A) has also not recorded any finding to demonstrate how the addition aligns with the block-of-asset principles. Once the sale consideration has been duly reduced from the block, the profit or loss recorded in the books loses relevance for the purpose of computation under the Act. The assessee has correctly excluded the book profit in the computation of income. The Assessing Officer was not justified in adding back the same, nor was the learned CIT(A) justified in confirming the addition. Decided in favour of assessee. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether accounting profit of Rs. 4,83,894 arising on sale of a motor car forming part of a 'block of assets' is separately chargeable to tax as business income when the full sale consideration has already been reduced from the relevant block in accordance with Section 32 read with Section 43(6)(c) and Rule 5 of the Income Tax Rules. 1.2 Whether the disallowance sustained by the appellate authority on the ground that the assessee's claim regarding profit on sale of fixed asset constituted a new claim, without a revised return and without supporting records, could be sustained in light of the material on record and the statutory scheme governing block of assets. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Taxability of profit on sale of asset forming part of a block of assets Legal framework (as discussed) 2.1 The Court examined the statutory scheme under Section 32 read with Section 43(6)(c) of the Income-tax Act and Rule 5 of the Income Tax Rules, which mandates computation of depreciation and taxability with reference to a 'block of assets', and requires adjustment to the block only by reducing the 'moneys payable' (sale consideration) and scrap value, followed by allowance of depreciation on the resultant written down value. Interpretation and reasoning 2.2 It was found as an undisputed fact that the motor car sold formed part of the block of 'Motor Cars' (15%), and that the sale consideration of Rs. 5,60,000 had been duly reduced from the gross block in the depreciation schedule of the ITR as 'consideration or other realization' in accordance with Section 43(6)(c), and that depreciation was computed on the reduced written down value. 2.3 The Court noted from the ledger accounts and books of account that the accounting profit of Rs. 4,83,894 represented the difference between the net book value as per company accounts (Rs. 76,106) and the sale consideration (Rs. 5,60,000), and that this accounting profit had been credited to the Profit and Loss account but specifically reduced in the computation of income filed with the return. 2.4 The Court held that, under the 'block of assets' concept, once an asset enters the block, its individual identity is lost and sale of a single asset in that block does not give rise to an independently taxable profit or loss. The only permissible statutory adjustment is the reduction of sale consideration from the block; any separate taxation of 'profit on sale' computed from book values is inconsistent with the computation mechanism prescribed by Section 32, Section 43(6)(c) and Rule 5. 2.5 The Court observed that the Assessing Officer had not cited any specific statutory provision enabling separate taxation of the accounting profit on sale of an asset forming part of a block, and had proceeded only on the basis that such profit was credited in the Profit and Loss account, ignoring the return computation where this profit had been excluded and the block duly adjusted. 2.6 It was further held that, since the sale consideration had already been reduced from the block, subjecting the accounting profit of Rs. 4,83,894 to tax again would amount to double taxation of the same economic gain-once through reduction in the block (affecting depreciation) and again as separately taxable business income-which is contrary to the statutory scheme. Conclusions 2.7 The Court concluded that the profit or loss recorded in the books on sale of an asset forming part of a block is irrelevant for computation of taxable income once the block has been properly adjusted; the assessee had correctly excluded the book profit of Rs. 4,83,894 in the computation of income. 2.8 The addition of Rs. 4,83,894 made by the Assessing Officer on account of 'profit on sale of assets (vehicle)' and confirmed by the appellate authority was held to be unsustainable and was directed to be deleted. Issue 2: Sustainability of appellate authority's refusal of relief on ground of new claim / lack of revised return and evidence Interpretation and reasoning 2.9 The appellate authority had dismissed the assessee's claim on the basis that (i) no valid revised return was established, (ii) no revised computation, depreciation schedule, or reconciliation of written down value was produced, and (iii) the claim amounted to a new claim raised for the first time in appeal, rendering the appeal not maintainable. 2.10 The Court, after examining the paper book, noted that the ITR depreciation schedule clearly evidenced reduction of Rs. 5,60,000 from the relevant block as 'consideration or other realization', and that ledger accounts of the vehicles sold, together with the computation filed with the return, substantiated the assessee's contention that the book profit had been reduced in the tax computation and that the statutory block-of-asset mechanism was duly followed. 2.11 On that basis, the Court implicitly rejected the premise that the assessee's contention was merely a new, unsupported claim, finding instead that it was consistent with and borne out by the return as filed and the accompanying schedules and records, and that the lower appellate authority had not demonstrated how the addition could be reconciled with the block-of-asset provisions. Conclusions 2.12 The Court held that, in light of the material already forming part of the assessment record and the statutory provisions governing depreciable assets, the refusal of relief by the appellate authority on the ground of maintainability and lack of supporting evidence could not be sustained. 2.13 The Court therefore allowed the appeal and directed deletion of the addition of Rs. 4,83,894 on account of alleged profit on sale of fixed assets.