AI Drafter 
TaxTMI 
TaxTMI 
1956 (9) TMI 69
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....d the surviving partner in the course of which a commissioner was appointed by the court to effect a sale of the assets of the partnership and the commissioner sold the properties by public auction on 24th August, 1947. Rs. 1,50,089 was the price realised. The sale amount was in excess of the written down value by Rs. 81,863. The amount of depreciation which had been allowed to the assessee on the initial cost over the several years during which the assessee had been utilising these assets totalled Rs. 20,723. Before the Income-tax Officer the question debated was whether the sum of Rs. 81,863 which was the profit realised by the sale of these assets was not liable to tax as capital gain under section 12B of the Income-tax Act. The contention of the assessee however was that this profit which was undoubtedly a capital gain was exempted from charge on the ground of its falling within the third proviso to section 12B(1) which ran: "Provided further that any transfer of capital assets by reason of the compulsory acquisition thereof under any law for the time being in force relating to the compulsory acquisition of property for public purposes or any distribution of capital....
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....and against the assessee. As regards the second question the point raised before the Tribunal, namely that based upon the sale in question coming within the third proviso to section 12B(1), was not urged before us, in view of the decision of this Court in Sri Kannan Rice Mills Ltd. v. Commissioner of Income- tax, Madras [1954] 26 I.T.R. 351. It was there held that the third proviso applied only to cases of distribution of capital assets in specie and not to cases where the distribution was of the sale proceeds of the assets. A similar construction of the third proviso has been adopted by the Bombay High Court in Commissioner of Income-tax, Bombay City v. James Anderson [1954] 26 I.T.R. 699 which was followed by the same Court in a recent decision in Commissioner of Income-tax, Bombay North v. Walji Damji [1955] 28 I.T.R. 914. In view of these authorities learned counsel did not urge that the sale was exempted by the third proviso to section 12B(1). As we have indicated already this was the only ground upon which exemption was sought to be rested before the Tribunal. If therefore counsel for the assessee were to be confined to the arguments addressed to the Tribunal, the second q....
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....unt of a capital gain shall be computed after making the following deductions from the full value of the consideration for which the sale, exchange or transfer of the capital asset is made, namely: (ii) the actual cost to the assessee of the capital asset, including any expenditure of a capital nature incurred and borne by him in making any additions or alterations thereto, but excluding any expenditure in respect of which any allowance is admissible under any provision of sections 8, 9, 10 and 12. .........Provided further that where the capital asset is an asset in respect of which the assessee has obtained depreciation allowance in any year, the actual cost of the asset to the assessee shall be its written down value, as defined in section 10, increased or diminished, as the case may be, by any adjustment made under clause (vii) of sub-section (2) of that section." The argument advanced for the assessee was that in the present case the written down value had to be increased or diminished by the adjustments now to be made under section 10(2)(vii) and if these adjustments were made the capital gain which might be brought to charge would be only Rs. 61,140. ....
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.... concession in this matter. But if the assets on which an allowance had been granted were sold by the assessee and the sale realised a price higher than the written down value, it indicated that the allowance granted was greater than was justified by the reduction in value caused by the wear and tear etc. Revenue therefore stepped in and mopped up this excess as an item liable to inclusion in the assessable income and that is the provision in section 10(2)(vii). But for section 10(2)(vii), this excess sum would not be "income" but as it was produced by the sale of a capital asset it would be only a capital gain. Of course, where the sale realised more than the original cost, that excess also would be a capital gain. The capital gain in the latter case would be made up of two components: (1) the difference between the written down value and the original cost, and (2) that between the original cost and the price realised. Where however the difference between the written down value and the original cost has been included in an assessee's income and tax has been levied on it under section 10(2)(vii), to bring that item again in the computation of capital gain under section 12B(2) w....