TaxTMI 
TaxTMI 
1997 (7) TMI 14
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....nce of the assessee. Both the questions were, however, answered by the High Court in favour of the Revenue and against the assessee. The impugned judgment in so far as it answers the first question has been overruled by this court in CIT v. Mafatlal Gangabhai and Co. (P.) Ltd. [1996] 219 ITR 664. Accordingly, the answer to this question has to be given in favour of the assessee and against the Revenue. It is the second question on which arguments were addressed before us. While the Revenue gets support from the decisions of the High Courts of Gujarat, Allahabad and Calcutta for upholding the impugned judgment, the assessee gets support from the decision of the Bombay High Court. The Gujarat, Allahabad and Calcutta High Court decisions are reported, respectively, in Rajnagar Vaktapur Ginning, Pressing and Manufacturing Co. Ltd. v. CIT [1975] 99 ITR 264 (Guj), CIT v. Upper Doab Sugar Mills [1979] 116 ITR 240 (All) and Indian Jute Co. Ltd. v. CIT [1982] 136 ITR 597 (Cal). The Bombay High Court decision is reported in Goculdas Dossa and Co. v. J. P. Shah [1995] 211 ITR 706 [FB]. To understand the rival contentions we may briefly advert to the facts of the case. The assessme....
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....ax Appellate Tribunal and the Appellate Tribunal dismissed the appeal but at the instance of the assessee referred the aforesaid second question for the decision of the High Court. The High Court agreed with the view of the Appellate Tribunal and decided the question in the affirmative, in favour of the Revenue and against the assessee. On certificate granted by the High Court under section 261 of the Act this appeal has come before us. Before we consider the judgments of the High Courts, it will be appropriate to set out the relevant provisions of law. These would be sections 32(1)(iii), 41(2) and 43(6) in Part D and section 45, 48, 49, 50 and 55 in Part E under Chapter IV relating to computation of total income : " 32. Depreciation.---(1) In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of section 34, be allowed... (iii) in the case of any building, machinery, plant or furniture which is sold, discarded, demolished or destroyed in the previous year (other than the previous year in which it is first brought into use....
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....r plant for the purposes of clause (ii) of sub-section (1) of section 32, 'depreciation actually allowed' shall not include depreciation allowed under sub-clauses (a), (b) and (c) of clause (vi) of sub-section (2) of section 10 of the Indian Income-tax Act, 1922 (11 of 1922), where such depreciation was not deductible in determining the written down value for the purposes of the said clause (vi)... 45. Capital gains.---(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 53, 54 and 54B, be chargeable to income-tax under the head 'Capital gains', and shall be deemed to be the income of the previous year in which the transfer took place. 48. Mode of computation and deductions.---The income chargeable under the head 'Capital gains' shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :--- (i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) the cost of acquisition of the capital asset and the cost of any improvement thereto. 49.....
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....fter the said date, and as adjusted. 55. Meaning of 'adjusted', 'cost of improvement' and 'cost of acquisition'.---(1) For the purposes of sections 48, 49 and 50,--- (a) 'adjusted', in relation to written down value or fair market value, means diminished by any loss deducted or increased by any profit assessed, under the provisions of clause (iii) of sub-section (1), or clause (ii) of sub-section (1A) of section 32 or sub-section (2) or sub-section (2A) of section 41, as the case may be, the computation for this purpose being made with reference to the period commencing from the 1st day of January, 1954, in cases to which clause (2) of section 50 applies; (b) 'cost of any improvement' in relation to a capital asset,--- (i) where the capital asset became the property of the previous owner or the assessee before the 1st day of January, 1954, and the fair market value of the asset on that day is taken as the cost of acquisition at the option of the assessee, means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset on or after the said date by the previous owner or the assessee, and (ii) in any other case, means all e....
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.... such asset is derived. (3) Where the cost for which the previous owner acquired the property cannot be ascertained, the cost of acquisition to the previous owner means the fair market value on the date on which the capital asset become the property of the previous owner. " (Section 32(1A)(ii) and section 41(2A) would not be relevant for our purposes and, therefore, are not reproduced). We may now consider the judgments of the High Courts referred to during the course of arguments. In Rajnagar Vaktapur Ginning, Pressing and Manufacturing Co. Ltd. v. CIT [1975] 99 ITR 264 (Guj), the assessee-company was under liquidation. In the accounting year relevant to the assessment year 1968-69 some of the assets being building and machinery were sold. These assets were purchased before January 1, 1954. The assessee had obtained depreciation on the said assets. The assessee claimed that it should be permitted to substitute the market valuation of the machinery and building as on January 1, 1954, as the cost of acquisition for purposes of computation of capital gains. This was rejected by the Revenue authorities. The question before the High Court was whether the assessee was entitled ....
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....ver section 55(2) firstly because it expressly modifies the provisions of section 48, and, in the next place, it is a special provision for depreciable assets. Section 55, on the other hand, is only a definition section. The definition of 'cost of acquisition' given by its sub-section (2) is only for purposes of sections 48 and 49. Section 55(2) does not apply to section 50 and cannot prevail over it. In other words, the cost of acquisition of a depreciable asset is bound to be computed in accordance with section 50, even though the capital asset may also on facts be within the purview of sub-section (2) of section 55. This construction is fortified by the provisions of sub-section (2) of section 50. If the case of a depreciable asset owned by the assessee from before 1st January, 1954, were to be governed by section 55(2) then there was no occasion or need to enact sub-section (2) of section 50. Under sub-section (2) a special provision has been made for capital assets which are covered by section 49 as well as section 55(2), namely, assets indirectly acquired and which were owned by the previous owner from before 1st January, 1954. For depreciable assets, which are owned by the a....
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....provision of computing cost of acquisition of depreciable assets'. Where there is a special provision dealing with a particular provision, the special provision must prevail. " In coming to this conclusion, the Calcutta High Court followed the decisions of the Allahabad and Gujarat High Courts. The Full Bench of the Kerala High Court in the judgment in CIT v. Commonwealth Trust Ltd., [1982] 135 ITR 19, which is in appeal before us also followed the two decisions of the Allahabad High Court mentioned above. The court said that though section 55(2) gave an option to an assessee to choose one of the two values as the cost of acquisition for the purpose of section 48, in a case to which section 50 applied, section 48 had to be read subject to the modification and, consequently, the option would not be available and that the cost of acquisition would have to be taken in such a case as the written down value as defined in clause (6) of section 43. The High Court in the impugned judgment then observed as under (page 25 of 135 ITR) : " We are not impressed with the contention of the learned counsel for the assessee that since the definition of 'cost of acquisition' in section 55(2....
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....ed a demand notice under section 156 of the Act. On appeal by the assessee, the Commissioner of Income-tax (Appeals) upheld the order of the Income-tax Officer. The assessee filed a second appeal before the Appellate Tribunal but since there was a challenge to the validity of section 50, a writ petition was filed in the High Court. The High Court elaborately discussed the relevant provisions of the Act. It disagreed with the views of the other High Courts that section 50 was a special provision and would, therefore, prevail over the general provisions of section 55(2). The High Court said both the provisions operated upon different and independent areas and that section 55(2) was the only source of option while section 50(2) was not the source of option. It said section 50 specified that only sections 48 and 49 were subject to the modifications mentioned therein and that the option given in section 55(2) was not made subject to section 50. The High Court was of the view that it appeared that it was not brought to the notice of the courts that the question of the purchaser-assessee being entitled to the option or not, had to be determined only on the basis of section 50(1) read with....
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.... been claimed. The Bombay High Court, on the other hand, has not followed this line of reasoning. 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. Coming to section 50 it states, in so far as it is relevant, that when depreciation has been obtained on the capital asset, the provision of section 48 is subject to the modification that " the written down value, as defined in clause (6) of section 43 of the asset, as adjusted, shall be taken as the cost of acquisition of the asset ". It is the expression " as adjusted " of which the meanin....
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....rice 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 55(2) gives an option to both kinds of assessees, that is, those who have purchased the capital asset as well as those who have acquired it by any of the modes mentioned in section 49 to substitute for the actual cost of acquisition the fair market value of the asset as on January 1, 1954. Section 55(2) will have application only if one of the two classes of assessees exercises his option. Section 55(2), however, makes it clear that the option is available only for the purposes of sections 48 and 49 and it is not available for a case falling under section 50. Though the provisions of section 55(2) would be available to every kind of capital asset, whether the same has enjoyed the depreciation allowance or not, whether in the hands of the assessee or the previous owner, for the assessee in whose case depreciation allowance has been availed of before the transfer of the capital asset, the meaning of " ....