TaxTMI 
TaxTMI 
2016 (1) TMI 375
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....f the business transferred by the Assessee by way of a slump sale. The Assessee transferred its entire business by way of a slump sale to M/s Dharampal Satyapal Ltd. on 12th February, 2001 (during the previous year relevant to the AY 2001-02) at a net consideration of Rs. 2.75 crores. The Assessee had established the said business in the preceding financial year i.e. 1999-2000, and had commenced commercial production in March 2000. Admittedly, the Assessee had not claimed any depreciation on its assets for the previous year ended 31st March, 2000. Accordingly, the block of assets was reflected by the Assessee in its books of accounts at the actual cost of acquisition. The Assessee had also capitalised the indirect expenditure incurred prior to the commencement of commercial production and the same was included in the cost of plant and machinery. The Assessee computed the capital gains arising under Section 50B of the Act by calculating the net worth of the business undertaking on the basis of the cost of assets as on 31st March, 2000 without accounting for any depreciation, as none had been claimed. 3. The Assessing Officer (hereafter 'AO') did not accept the capitalisation of i....
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....el for the Revenue contended that the concept of block of assets was introduced in the Act with effect from 1st April, 1988. Accordingly, Section 43(6)(c) was introduced to define 'the written down value in case of any of the block of assets'. Corresponding amendment was also made to Section 50 of the Act to provide for special provisions for computation of capital gains in case of depreciable assets. He further referred to the CBDT Circular No. 469 dated 23rd September, 1986 and drew the attention of this Court to the illustrations explaining the working of the concept of 'block of assets' provided therein. He argued that prior to 1st April, 2000 the provisions of Section 50 and Section 43 were inadequate for the computation of capital gains in the case of a slump sale as it was not possible to determine the cost of acquisition in case of sale of an undertaking or business on a slump sale basis. To address this issue, Section 2(42C) and Section 50B of the Act were introduced w.e.f. 1st April, 2000. Correspondingly, Clause C was also introduced to provide for the computation of written down value of the block of assets in case of a slump sale. He contended that Section 50B ....
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....he decision in the case of Mahendra Mills (supra) and observed that the depreciation is a privilege given to an Assessee and it cannot be turned into a disadvantage. Mr Vohra next referred to the decisions of this Court in CIT v. Ansal Properties & Infrastructure Ltd.: (2012) 207 Taxmann 61 (Delhi); CIT v. Oswal Agro Mills Ltd.: (2012) 341 ITR 467 (Delhi); and CIT v. Eastman Industries Ltd.: (2008) 174 Taxmann 344 (Delhi) to illustrate the manner in which capital gains are to be computed in case of depreciable assets. Reasoning and conclusion 10. In order to address the controversy, it would be essential to consider the statutory scheme relating to a block of assets. 11. The Taxation Laws (Amendment & Miscellaneous Provisions) Act, 1986 introduced significant changes with regard to the depreciation allowance; the concept of block of assets was introduced. Section 2(11) as enacted by the said Act defined 'block of assets' as under:- "(11) "block of assets" means a group of assets falling within a class of assets, being building, machinery, plant or furniture, in respect of which the same percentage of depreciation is prescribed;" Section 2(11) was, there....
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....nsideration received for transfer of any assets during the previous year exceeds (i) the expenditure incurred wholly or exclusively in connection with such transfer; (ii) the written down value of the block of assets at the beginning of the previous year; and (iii) the actual cost of any assets falling within the block of assets acquired during the previous year, the excess would be deemed to be capital gains arising from transfer of short term capital assets. Section 50(2) provides that where the block of assets ceases to exist for the reason that the entire block of assets is transferred, then the written down value of the block of assets at the end of the previous year as increased by the actual cost of an assets falling within the block of assets acquired during the year would be the cost of acquisition of the depreciable assets and any amount received or accruing as a result of transfer of the assets constituting the block of assets would be taxed as short term capital gains. 14. Insofar as depreciation is concerned, the same is provided on the block of assets, that is, the written down value at the beginning of the AY as increased by the cost of assets acquired during the ....
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.... (i) in respect of any previous year relevant to the assessment year commencing on the 1st day of April, 1988, the aggregate of the written down values of all the assets falling within that block of assets at the beginning of the previous year and adjusted,- (A) by the increase by the actual cost of any asset falling within that block, acquired during the previous year; (B) by the reduction of the moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the written down value as so increased; and (C) in the case of a slump sale, decrease by the actual cost of the asset falling within that block as reduced- (a) by the amount of depreciation actually allowed to him under this Act or under the corresponding provisions of the Indian Income-tax Act, 1922 (11 of 1922) in respect of any previous year relevant to the assessment year commencing before the 1st day of April, 1988; and (b) by the amount of depreciation that would have been allowab....
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....us, there is no difficulty in applying the provisions of Section 43(6)(c)(i) where a part of the assets falling within the block of assets are sold. However, if the entire block of assets is sold, then Clause C would have no application. This is first and foremost for the reason that the Assessee would not be left with the block of assets and, therefore, applying any machinery provision for computation of the block of assets does not arise. Secondly, if the provisions of Clause C were applied, then depending on whether the depreciation allowable on the assets has in fact been claimed and allowed and further depending on the effect of the rate of depreciation of any other asset forming a part of the block of asset sold earlier, the computation under Clause C may result in the written down value of the block of assets being positive where, in fact, no asset would exist in the hands of the Assessee. This is also one of the facets of the problem in the present case. Although the Assessee had sold its entire business, which includes the entire block of assets, the Assessee had not claimed any depreciation on those assets for the AY 2000-01. Thus, if the provisions of Clause C are applie....
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....no values have been assigned to the assets forming a part of the block of assets that are transferred, it would be necessary to provide for a machinery for computing the written down value of the block of assets that remains after the transfer of part of the assets. In our view, Clause C must be read only to address this situation. It is apparent that Clause C was introduced for the purpose of computing the written down value of a block of assets; clearly, no such computation would be warranted if the block of assets itself ceases to exist in the hands of the Assessee. This is also indicated by the plain language of Clause C inasmuch as the opening sentence indicates that the block of assets is to be decreased by the actual cost of asset falling within that block. Further, sub-clause (b) provides for a deeming fiction to reduce the depreciation allowable to the Assessee in respect of an asset "as if the asset was the only asset in the relevant block of assets". This deeming fiction would not be necessary if Clause C was enacted to address a situation where the entire block of assets was transferred. 20. Having examined the purpose and import of Clause C, it is next to be examine....
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....ny change in the value of assets on account of revaluation of assets shall be ignored for the purposes of computing the net worth. Explanation 2.-For computing the net worth, the aggregate value of total assets shall be,- (a) in the case of depreciable assets, the written down value of the block of assets determined in accordance with the provisions contained in sub-item (C) of item (i) of subclause (c) of clause (6) of section 43; (b) in the case of capital assets in respect of which the whole of the expenditure has been allowed or is allowable as a deduction under section 35AD, nil; and (c) in the case of other assets, the book value of such assets." 22. Section 50B was introduced by virtue of the Finance Act, 1999 w.e.f. 1st April, 2000 to provide for special provisions for computation of capital gains in the case of slump sale. Prior to the insertion of the aforesaid Section, there was much debate as to whether capital gains arising out of slump sale of an undertaking were taxable under the provisions of the Act. The principal ground for excluding capital gains on a slump sale from the charge of tax was the absence of any machiner....
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....lanation 2 was inserted for the purpose of computing the aggregate value of total assets. It is clear from a plain reading of Explanation 2 that its three clauses are exhaustive: Whereas clause (a) is concerned with the computation of depreciable assets; clause (b) provides for the value of the capital assets in respect of which the whole expenditure has been allowed as a deduction under Section 35AD of the Act; and clause (c) is a residuary clause in respect of assets which do not fall within clause (a) or clause (b) of Explanation 2. 26. In the present appeal we are concerned with the clause (a) which provides for determining the correct value of depreciable assets. 27. Plainly, the purpose of clause (a) of Explanation 2 to Section 50B of the Act is to provide a methodology to compute the written down value of the block of assets transferred by an Assessee as a part of the undertaking or division sold by way of a slump sale. The reference to Clause C is clearly not for the purposes of computing the block of assets remaining with the Assessee after the slump sale. It is apparent from the above that the intended object and scope of Clause C as used in Section 50B of the Act i....
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.... of a slump sale, decrease by the actual cost of the asset falling within that block as reduced - (a) by the amount of depreciation actually allowed to him under this Act or under the corresponding provisions of the Indian Income-tax Act, 1922 (11 of 1922) in respect of any previous year relevant to the assessment year commencing before the 1st day of April, 1988; and (b) by the amount of depreciation that would have been allowable to the assessee for any assessment year commencing on or after the 1st day of April, 1988 as if the asset was the only asset in the relevant block of assets,". 30. Clause (a) of Explanation 2 to Section 50B of the Act when read as incorporating the language of Clause C indicates that the value of the net worth must be computed by decreasing from the actual cost of asset falling within the block, the depreciation actually allowed in respect of previous years relevant to the assessment year commencing before 1st day of April, 1988 and by the amount of depreciation as would have been allowable to the Assessee for any assessment year commencing on or after 1st day of April 1988. The quantum of the depreciation actually allowed to an Assessee in respect....
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....y asset in the relevant block of assets". In view of the plain language, there is no scope to read the provisions of sub-clause (b) of Clause C to permit deduction of depreciation actually allowed and not as "would have been allowable". 32. It is also important to bear in mind that with the introduction of the concept of block of assets, the direct co-relation between depreciation allowed and a separate asset constituting the block is lost. And, therefore, it is not possible to co-relate the quantum of depreciation allowed in respect of individual assets constituting a block. This is clear from the illustration as provide in CBDT Circular No.469 dated 23rd September, 1986 which is quoted below:- "Example I : Suppose a company "X" has financial year as its accounting year and has three items of plant and machinery in respect of which the prescribed percentage of depreciation for the assessment year 1987-88 is the general rate of fifteen per cent. Further that for the assessment year 1987-88, the written down value of these items of plant and machinery before allowing depreciation for that year was as follows : Rs. Item 1 1,50,000 Item 2 2,00,000 ....
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....with the vires of second Proviso to Clause 3 of Taxation Laws (Extension to Union Territories) (Removal of Difficulties) Order No. 2 of 1970 issued under clause 7 of the Taxation Laws (Extension to Union Territories) Regulation, 1963. Goa, Daman and Diu which were erstwhile Portuguese territories became a part of the Union of India from 19th December, 1961. Under the Portuguese Laws as was applicable to the assessees within the Portuguese territories prior to 1961, tax was payable on the basis of gross turnover of an assessee and, thus, the question of allowing any depreciation did not arise. After Goa, Daman & Diu became Union Territories the Central Government promulgated the Taxation Law (Extension to Union Territories) (Removal of Difficulties) Order No. 2 of 1970. The said order provided for a deeming fiction for calculating the written down value of a depreciable asset. It was provided that where the depreciation actually allowed could not be ascertained or no depreciation was actually allowed, the depreciation would be calculated at the rates as applicable under the Indian Income Tax Act, 1922 or Income Tax Act, 1961 as the case may be and such depreciation calculated would ....
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.... (supra) relied upon by the Assessee clearly explains the method of computing capital gains in respect of sale of assets forming a part of the block of assets. In that case, the Assessee had multiple divisions and had sold the entire assets of one of the divisions (Paper division). The Revenue sought to tax capital gains arising out of the sale of assets of the Paper division by deducting from the consideration written down value of the block of assets relating to that division. The ITAT held - and this Court concurred - that even though the entire assets of the paper division were sold, the block of assets did not cease to exist as the Assessee owned other undertakings which included assets for which the same rate of depreciation as that applicable to the assets sold was prescribed. In the circumstances, the Court referred to the definition of block of assets and held that the sale proceeds of the assets sold would have to be reduced from the written down value of the remaining block of assets and the sale of assets did not result in any capital gains as even after such reduction, the value of the block of assets was positive. The aforesaid decision, in fact, clearly explains the ....