Brief of the Case
Delhi High Court held In the case of CIT vs. Dharampal Satyapal that as per section 50B, 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 of the assessment year commencing on or after 1st day of April, 1988 would have no relevance while determining the written down value of the block of assets because the provisions to compute the net worth of an undertaking are not dependent or contingent on the depreciation actually allowed. Hence, in the given case, even assessee has not claimed any depreciation in actual, the same will be considered while calculating net worth for the purpose of calculating capital gain under slump sale.
Facts of the Case
The controversy involved in the present appeal relates to the computation of the net worth of 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 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 capitalized 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 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.
The AO did not accept the capitalization of indirect expenses and reduced the same from the cost of assets. The AO was also of the view that for the purposes of calculating the net worth of the undertaking, depreciation allowable under sub-item (C) of item (i) of sub-clause (c) of clause (6) of Section 43. for the AY 2000-01 would have to be deducted even though no such depreciation had been claimed by the Assessee or allowed by the AO. Accordingly, the AO calculated short term capital gains arising out of the slump sale under Section 50B at Rs.2,26,89,866/-.
Contention of the Assessee
The ld counsel for the assessee supported the decision of the ITAT. He further referred to the decision of the Supreme Court in Madeva Upendra Sinai v. Union of India: (1975) 98 ITR 209 (SC) in support of its contention that the written down value of the assets would be the actual cost of the assets as reduced by the depreciation actually allowed. He further referred to the decision of the Supreme Court in CIT v. Mahendra Mills: (2000) 243 ITR 56 (SC) and contended that depreciation was an allowance available to the Assessee and it was not necessary for the Assessee to avail of the same. He also relied to the recent decision of the Supreme Court in Seshasayee Paper & Boards Ltd. v. Deputy Commissioner of Income Tax: (2015) 374 ITR 619 (SC) in which the Supreme Court had noted the decision in the case of Mahendra Mills 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.
Contention of the Revenue
The ld counsel 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 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 provided for calculation of the cost of acquisition in case of slump sale and Explanation 2 to Section 50B referred to Clause C only for the purposes of providing the method for determining the written down value of depreciable assets. He contended that the method provided covered both the cases where the entire block of assets was transferred as well as where only some of the assets falling within the block were transferred.
He also referred to the decision of ITAT Mumbai in DCIT v. Warner Lambert: (2012) 143 TTJ 571 (Mum.). He also disputed the contention advanced on behalf of the Assessee that even if the depreciation was allowed in AY 2000-01, the same would have been carried forward as unabsorbed depreciation and set off against short term capital gains arising on a slump sale of the undertaking. He submitted that the Assessee would have to first establish that it was entitled to a depreciation allowance under Section 32 and it is possible that the conditions for grant of depreciation allowance would not be satisfied.
Held by CIT (A)
The CIT (A) concurred with the AO and held that the language of Section 43(6)(c)(i)(C)(b) used the words “would have been allowable” and this indicated the intention of the legislature to determine the capital gains for the purposes of Section 50B by computing depreciation as allowable to the Assessee and not as was, in fact, allowed.
Held by ITAT
The ITAT held that since the entire assets were transferred, the written down value of the assets would be the written down value of assets in the preceding year as reduced by the depreciation actually allowed. The ITAT held that the reliance placed by the Revenue on the provisions of sub clause (b) of Clause C was misplaced as the same would be applicable to compute the written down value of the block of assets remaining with the Assessee in a case where part of the assets falling within the block were transferred by way of a slump sale. According to the ITAT, sub-clause (b) of Clause C would have no application where the entire block of assets was transferred as a part of a slump sale of the business of an Assessee.
Held by High Court
High Court held that the ITAT had accepted the Assessee’s contention that in case the entire block of assets was sold, the written down value of the block of assets as existing must be taken at the aggregate value of the total assets. We are unable to concur with the said view. First and foremost, for the reason that there is no provision which mandates adopting this method of computation, the machinery provisions provided in Section 50B exhaustively provide for determining the cost of acquisition of the undertaking or division sold by way of a slump sale. If one examines the three clauses of Explanation 2 to Section 50B the same exhaust all categories of assets. Insofar as depreciable asset is concerned, clause (a) provides an extensive mechanism to compute its value. The working of clause (a) also does not yield results which are absurd or unreasonable so as to warrant looking for other aids to statutory interpretation for ascertaining the true legislative intent. In the circumstances, the language of clause (a) of explanation 2 to Section 50B must be given its plain and literal meaning. It could hardly be disputed that the plain language of sub-clause (b) of Clause C contemplates reduction from the actual cost of assets of the depreciation “that would have been allowable to the Assessee for any assessment year commencing on or after 1st day of April, 1988 as if the asset was the only 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”.
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. Thus, the Assessee’s contention that depreciation actually allowed on assessment must be reduced from the cost of assets so as to arrive at the written down value cannot be accepted. In a given case, the block of assets would also stand reduced by the sale proceeds of any assets sold earlier and, thus, there would be no co-relation between the depreciation allowed and the original cost of the asset constituting the block of assets.
Before concluding it is necessary to also consider contention of ld counsel of the assessee that the depreciation for the year ended 31st March, 2000 would have remained unabsorbed and, therefore, would have been carried forward to the next year. The unabsorbed depreciation would then be available for setting off against capital gains from the sale of business. He submitted that in this view the Assessee is not liable to pay so much of the tax as attributable to reduction in the value of the block of assets on account of depreciation for the year ended 31st March, 2000. The ld counsel of the revenue countered the aforesaid argument by contending that the question whether the depreciation would have been allowed to the Assessee for the year ended 31st March, 2000 would be contingent on various factors such as the use of the assets and thus, it cannot be presumed that the depreciation on the block of assets would have been allowed to the Assessee for the year ended 31st March, 2000.
High Court further held that it is perhaps right that had the Assessee claimed the depreciation on the block of assets for the year ended 31st March, 2000, it could have carried forward the same for setting it off against the short term capital gains arising out of the sale of the business. However, the fact is that the Assessee had not claimed the depreciation for the year ended 31st March, 2000 and as rightly pointed out, deduction on allowance of depreciation is available to an Assessee at its option and the Assessee cannot be compelled to claim the same. Since, in the facts of the present case, whether wittingly or unwittingly, the Assessee has not claimed the depreciation for the year ended 31st March, 2000, it is unable to mitigate its tax liability. Whilst, we may sympathise with the Assessee, it is not possible to grant any relief to the Assessee. We are unable to accept the interpretation of Clause (a) of Explanation 2 to Section 50B as canvassed on behalf of the Assessee.
Accordingly appeals of the revenue allowed.