Section 50 will not be applicable in case of the transfer of a Capital Asset, if no depreciation allowed as it was put to use.

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Section 50 will not be applicable in case of the transfer of a Capital Asset, if no depreciation allowed as it was put to use.

Santosh Structural & Alloys Ltd.,vs Assessee on 30 September, 2010

Both the appeals by the assessee are against the separate orders of the Commissioner of Income-tax (A), both dated 30.9.2010, one against the order passed u/s 143(3) and the other against the order passed u/s 154 of the Income Tax Act 1961 relating to the assessment year 2006-07. .

  The assessee in I.T.A. No. 1397/Chd/2010 has raised following grounds of appeal :

“1. That the Ld.CIT (A) has wrongly and arbitrarily treated the appeal as non-est although the application for condonation of delay was filed alongwith appeal.

  1. That the Ld.CIT (A) has not given any finding on the application for condonation of delay.
  2. That the Ld.CIT (A) has wrongly dismissed the appeal without giving any findings on the grounds of appeal of the appellant.”
  3. The assessee inI.T.A.No. 1398/Chd/2010 has raised following grounds of appeal :

“1. That the Ld. CIT (Appeals) has wrongly and arbitrarily dismissed the appeal of the appellant which is illegal and against the facts of the case.

  1. That the Ld. CIT (Appeals) has wrongly held that the A.O. has rightly disallowed the claim of the appellant that the mistake is covered for rectification u/s 154. It is a legal mistake and is rectifiable u/s 154.
  2. That Ld. CIT (Appeals) on merits has wrongly held that the assets sold is part of block of assets, whereas this Plant and Machinery was kept separate and was not installed and was never put to use and as such no depreciation was ever claimed or allowed. In the depreciation chart it was clearly mentioned that “not put to use” thus the Ld. CIT (Appeals) has wrongly held that it was part of depreciation assets.
  3. That assets sold never lost its identity as through out it was kept separate from the depreciable assets.
  4. Ld. CIT (Appeals) has wrongly held that section 50 is applicable whereas section 50 is only applicable where the depreciation on the asset has been allowed.
  5. That the order of the Ld. CIT (Appeals) is liable to be cancelled and the Ld.A.O. be directed to allow the indexation being long term asset.”
  6. Both the appeals relating to the same assessee on same issues, were heard together and are being disposed off by this consolidated order for the sake of convenience.
  7. The brief facts of the case are that the assessee had filed the return of income declaring nil income on 30.11.2006. During the course of assessment proceedings the Assessing Officer noted that the said unit was out of production since March, 1998. The claim of the assessee in respect of depreciation on plant & machinery amounting to Rs.4,04,340/- was disallowed by the Assessing Officer as the machinery was not put to use for the business purposes and as no production was carried out. Further, the assessee had shown income of Rs.1,10,18,360/- from sale of plant & machinery. The assessee has sold the plant & machinery for a total consideration of Rs.2,33,25,415/- the value of which was shown in the depreciation chart at Rs.1,23,07,055/-. The said profit on sale of plant & machinery was adjusted against brought forward business losses. The Assessing Officer show caused the assessee as to how the said income is to be adjusted against the brought forward business losses in view of the provisions of section 72(1) of the Act. In reply the assessee admitted that capital gain during the year was inadvertently adjusted against the brought forward business losses. Further submission was made that the same may be adjusted against the brought forward depreciation amounting to Rs.1,49,54,585/-. The assessee furnished the details of brought forward depreciation totalling Rs.1,07,86,719/-. The Assessing Officer assessing the profit on sale of assets as business income, allowed the benefit of brought forward depreciation loss and computed the income at Rs.3,51,608/-. The assessee filed a rectification application dated 27.1.2009 in which he claimed that the income under the head capital gains requires rectification i.e. as the plant & machinery acquired by the assessee in two F.Y i.e 1997-98 &1998-99 was never put to use by the assessee, the cost of plant & machinery is required to be indexed before arriving at the figure of capital gains. The computation of capital gains is incorporated at page 2 of the order passed under section 154 of the Act dated 2.6.2009. The Assessing Officer noted the assessee not to have made any claim in its return of income or during the course of assessment proceedings in respect of the cost inflation index of the plant & machinery sold by it. The assessee had shown income from business and profession. In the return of income and as per Schedule-G of the balance sheet the assessee had shown profit on sale of fixed assets under the head “other income”. The Assessing Officer was of the view that the provisions of section 50 of the Act are to be applied on transfer of assets within block of assets in case the sale value exceeds the written down value of the assets. The Assessing Officer thus held that the assessee was not entitled to the benefit of indexation of cost of the assets. The Assessing Officer further held that even otherwise the issue raised by the assessee by way of rectification could not be said to be a mistake apparent from record as the same could not be decided without detailed deliberations. The rectification application moved by the assessee under section 154 of the Act was thus dismissed.
  8. In appeal the CIT(A) vide para 4.5 confirmed the order of the Assessing Officer that there was no error apparent from record of the proceedings and the claim of the assessee was an after-though attempt to claim the benefit of cost of indexation and treating the same as long term capital gain. The CIT(A) vide para 4.6 held as under :

“4.6. Even on merit it has been held in the case of Chabria Trust Vs. ACIT (2003) 264 ITR (AT) 12 (Bom) that even a single asset can from a block of assets within the meaning of section 2(11) of the Income Tax Act defining the concept of block of assets. In this case the appellant stating that the plant and machinery under consideration did not form part of block of assets and was shown separately in the return of income does help to settle the matter. Even accepting this plea of the appellant the is nothing on record to show that the plant and machinery in question did not constitute a single asset and form a separate block of assets. Now further, the contention of the appellant that the use of the asset is an important point for the purpose of determining depreciation and not for the application of section 50. Here, it must be understood that once the asset enters the block its identity gets submerged in the block identity and it would not be necessary or possible to infer that this particular set in the block is being used or not. It can be safely presumed that the block has been used because there is nothing on record to show the contrary. The allowability of Short Term Capital gains on the surplus over the w.d.v. cannot be avoided as long as the asset has been subjected to depreciation at any time earlier. Even the AO in his order has allowed adjustment of brought forward depreciation losses of the earlier years. Also further that the business function discontinued and the assets stated to have been lying idle does not make any difference. The result would be that section 50 would apply on the gain on the sale of this plant and machinery and has rightly been assessed as Short Term Capital Gain by the A.O.”

  1. The above said proposition was propound by the CIT(A) in appeal filed by the assessee against the order under section 154 of the Act. In the appeal filed by the assessee against the order of assessment under section 143(3) the CIT(A) observed the assessee to have filed an application for condonation of delay in filing the appeal before the CIT(A). The contention of the assessee in this regard was that the appeal could not be filed in time as the assessee was under the bonafide belief that the application for rectification under section 154 shall be allowed by the Assessing Officer.
  2. Before the CIT(A) the learned counsel for the assessee stated that the main appeal was filed against the order passed under section 154 of the Income-tax Act and the main ground was contested in the said appeal. The CIT(A) vide para 3 noted as under:

“3. In the case of hearing the Ld.Consel for the appellant has stated that the main appeal has been filed in A.No.26/IT/CIT(A)/09-10, in which the appellant has contested the order of the A.O. passed u/s 154 of the I.T.Act. He states that the main ground has already been contested in that appeal which was also fixed for hearing today. The outcome in that appeal decides the issue and if the same is in his favour, he does not press for this appeal. In such an eventuality he has requested that the same may be treated as withdrawn.”

The assessee stated that the main ground had already been contested in the appeal filed against the order under section 154 of the Act, which has been heard and the outcome in the said appeal would decide the issue and if the same is in favour of the assessee, the appeal is not pressed. The CIT(A) thus held that the issue has been adjudicated in another appeal filed by the assessee under section 154 of the Act and in case he was not satisfied with the relief in that appeal he was at liberty to seek any further redressal for the present appeal. The assessee has filed two appeals against the order passed both against the order of assessment and the order of rectification passed by the Assessing Officer.

  1. I have heard the rival contentions and perused the record. The appeal inI.T.A.No. 1397/Chd/2010 is against the order of the CIT(A) passed against the order passed by the Assessing Officer under section143(3) of the Act. The appeal in I.T.A.No. 1398/Chd/2010 is against the order passed by the CIT(A) in turn against the order passed under section 154 of the Act.
  2. In the facts of the present case the assessee had shown the profits on sale of assets as part of its income, against which it had claimed set off of brought forward business loss. However, during the course of assessment proceedings the said income was claimed to be set off against the brought forward depreciation loss. The Assessing Officer accepting the plea of the assessee computed the income and after setting off the brought forward depreciation loss, the income was assessed at Rs.3,51,608/-. The assessee thereafter moved an application for rectificationunder section 154 of the Income-tax Act in which it is claimed that the income under the head capital gains required rectification i.e. the assessee was entitled to deduction on account of indexed cost of acquisition out of the sale consideration and the capital gains computation was reworked and income was adjusted against the brought forward depreciation losses. The calculation filed by the assessee is incorporated at pages 2 and 3 of the order passed by the Assessing Officer under section154 of the Act dated 2.6.2009. After the aforesaid adjustment against the brought forward depreciation losses, the net income was computed at nil. The contention of the assessee was rejected by the Assessing Officer as the assessee had neither in the return of income, nor during the course of assessment proceedings made any claim for application of cost inflation index to the cost of plant and machinery. The said claim of the assessee was rejected by the assessing officer holding the transaction to be transfer of short term capital assets, against which the assessee was not entitled to the benefit of cost indexation. The Assessing Officer also held that the issue raised by the assessee could not be said to be a mistake apparent from record and hence, could not be rectified under section 154 of the Act. The assessee filed an appeal before the CIT(A) against the order of the Assessing Officer passed under section 143(3) of the Act and another appeal against the order passed under section 154 of the Act. The CIT(A) in the quantum appeal noted the assessee to have filed the appeal against the order passed under section 143(3) of the Act belatedly and the same was intimated to the assessee. In response thereof, an application for condonation of delay was moved before the CIT(A) stating the reason for the late filing of appeal; that the assessee was under the bonafide belief that application moved by it for rectification under section 154 of the Act shall be allowed by the Assessing Officer and once the same was rejected, the present appeal in addition to the appeal filed against the order under section 154 of the Act was filed. The CIT(A) vide para 3.1 observed as under :

“3.1 The merits of the appellant’s case have been discussed by me in the main appeal No.26/IT/CIT(A)/PTA/09-10 for the A/.Y.2006-07 and issue has been adjudicated there. In case he is not satisfied with relief in that appeal he is at liberty to seek any further redressal for this appeal”

  1. However, the appeal of the assessee was treated as non-est and dismissed. The CIT(A) while deciding the appeal against the order passed under section 154 of the Act vide para 4.5 held that there was no error apparent from record and the order of the Assessing Officer in this regard was upheld. However, vide para 4.6 the CIT(A) addressed the issue on the merits of the addition.
  2. The assessee in the first instance is aggrieved by the order of the CIT(A) in the quantum proceedings wherein the appeal of the assessee was treated to be non-est though an application for condonation of delay was filed alongwith the appeal. I find that the CIT(A) had failed to given any finding on the application moved by the assessee regarding the condonation of delay in filing the appeal before the CIT(A). The contention of the assessee in this regard was that after the order passed by the Assessing Officer, it had moved an application under section 154 of the Act and was under the bonafide belief that his claim vide the said application under section 154 would be allowed and consequently there would arise no occasion to file an appeal against the quantum order. However, once the claim of the assessee is rejected under section154 of the Act, the assessee filed two appeals, one against quantum order passed under section 143(3) of the Act and another against the rectification order passed under section 154 of the Act. In the totalit y of the facts and circumstances of the case I am of the view that the assessee was prevented by sufficient cause in not filing the appeal in time before the CIT(A), consequentl y the condonation application moved by the assessee merits to be allowed. The CIT(A) had adjudicated upon the issue raised on the merits of the case in the appeal against the order under section 154 of the Act. The CIT(A) after holding that the assessee was not entitled to claim the benefit of rectification under section 154 of the Act, in the facts and circumstances of the present case, however, decided the issue on merits. In the quantum order also the CIT(A) referred to the said issue decided on merits and also observed that wherein the assessee has to ask for further relief, he was at liberty to seek any further redressal. The issue regarding the merits of the addition having been adjudicated by the CIT(A) is now in further appeal before us.
  3. The assessee claims that while computing the income from capital gains the cost of acquisition of the assets had to be indexed as the assessee had purchased the said assets in the earlier years and the assessee a by the assessee is a long term capital assets, entitled to the benefit of cost inflation index of the cost of acquisition of the assets sold by the assessee. .Admittedly the assessee sold by the assessee was acquired partly in financial year 1997-98 and Partly in Financial Year 1998-99 and had been sold in the financial year 2005-06. The issue raised in connection with the computation of the gains on the sale of the said capital asset revolves around whether the asset sold by the assessee is a long term capital asset or a short term capital asset. The assessee claims that the said asset owned by it was never put to use and no depreciation was claimed on the said asset ever and was distinguished from the other plant and machinery reflected by the assessee in the list of fixed asset, on which depreciation was allowed from year to year . However, the case raised by the Assessing Officer was that the said asset is part of block of asset even if no depreciation is claimed on the said asset, the same merges with the other assets under the head Plant & Machinery o n which depreciation is claimed and hence the assessee is not entitled to any claim of indexed cost of acquisition, as the transaction stands covered by the provisions of section 50 of the Income-tax Act. Under section 50 of the Act where any asset on which depreciation has been claimed by the assessee, is sold by the assessee, the gain arising on said sale of asset minus the WDV of the asset is short term capital gain in the hands of the assessee, in view of the provisions of section 50 of the Income-tax Act.
  4. Under section 50 of the Income-tax Act the special provisions for computation of capital gains in case of depreciable assets are enshrined . It is provided under the Act that where an asset is an asset forming part of block of asset, in respect of which depreciation had been allowed under the Act or under the IndianIncome-tax Act, the provisions of sections 48 & 49 shall be subject to the modification provided i.e. where the full value of the consideration received or accruing as a result of transfer of the asset together with the full value of consideration received or accruing on account of transfer of other capital asset, falling within the block o assets during the previous  year exceeds the aggregate of the following amounts i.e. expenditure incurred in connection with such transfer plus the written down value of block of assets at the beginning of the previous and the actual cost of any assets acquired during the year falling within the block of years and excess shall be able  deemed to the capital gain arising from transfer of short term capital asset.
  5. Now coming to the facts of the present case the assessee had sold the plant and machinery for a total consideration of Rs.2.35 crores. The said machinery was acquired party in F.Y 1997-98 of the value of Rs. 43.03 Lacs and the balance in F.Y 1998-99 of the value of Rs.80.03 lacs, totalling Rs.1.23 crores. The assessee has filed o n record t h e list of assets starting from the year ending 31.03.2006.The assessee had claimed depreciation on plant and machinery having written down value of Rs.1.19 crores for the financial year 1997-98. The addition in the plant and machinery of 43.03 lacs was reflected separately under the head “plant & machinery (not in use)” on which no depreciation was claimed. I n t h e succeeding year i e . year ending 31.3.2009 the assessee had claimed depreciation @ 25% on plant a n d machinery. However tough an addition of Rs.80.03lacs was made to the plant and machinery (not in use) but no depreciation was claimed on the total machinery of Rs.1.23 crores under this head. Thereafter from year to year the assessee was claiming depreciation @25% o n t h e first head on plant and machinery in addition to the other assets owned by the assessee, on which depreciation was claimed, but no depreciation was claimed on the plant and machinery capitalized under the head plant machinery(not in use). Even Forth  A.Y 2005-06 the Value of the said plant and machinery (not in use) is reflected at Rs.1.23 crores Only in the F.Y 2005-06 said plant & machinery has been reflected to have been sold for Rs.2.33 crores, resulting in profit of Rs.1.10 crores. The above-said facts reveals that the assessee for all the earlier years had reflected in its list of fixed assets plant and machinery under two separate heads; one the plant and machinery per se on which depreciation has been claimed in the year prior to the F.Y  1996-97, another asset was created i.e.
  6. In the facts of the present case, the assessee had reflected the said asset as part of its list of assets but the block of assets on which depreciation was claimed by the assessee was plant and machinery per se. Whereas the present assets which have been transferred during the year under consideration were part of another block of assets termed as plant and machinery (not in use).
  7. In the result, the appeal of the assessee in I.T.A.No.1397/Chd/2010 is allowed and the appeal in I.T.A.No.1398/Chd/2010 is dismissed.

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