Short Overview  Where assessee claimed depreciation on business assets then the same will retain its character as depreciable asset and gain arising on sale thereof will be subject to tax under section 50, even if in the two years prior to sale the assessee did not use the asset as business asset.

Assessee purchased a flat for business purposes in the financial year ending on 31-3-1974. On the capitalised cost of the building assessee claimed depreciation and the same was allowed until the assessment year 1995-96. However, assessee discontinued claiming depreciation on the flat for the assessment years 1996-97 and 1997-98. The flat was sold during the year 1997-98. After deducting the expenses assessee returned profit as long-term capital gains. AO however held that profit arising on transfer of depreciable asset is assessable as short-term capital gains under section 50.

It Is held that The building which was acquired by the assessee in 1974 and in respect of which depreciation was allowed to it as a business asset for 21 years, that is upto the assessment year 1995-96, still continued to be part of the business asset and depreciable asset, no matter the non-user disentitles the assessee for depreciation for two years prior to the date of sale. How can a depreciable asset forming part of block of assets within the meaning section 2(11) of the Act cease to be part of block of assets. The description of the asset by the assessee in the Balance Sheet as an investment asset is meaningless and is only to avoid payment to tax on short-term capital gains on sale of the building. So long as the assessee continued business, the building forming part of the block of assets will retain it’s character as such, no matter one of two of the assets in one or two years not used for business purposes disentitles the assessee for depreciation for those years. Instead of selling the building, if the assessee started using the building after two years for business purposes the assessee can continue to claim depreciation based on the written down value available as on the date of ending of the previous year in which deprecation was allowed last.

Decision: Against the assessee.

IN THE SUPREME COURT OF INDIA

A.M. KHANWILKAR & SANJIV KHANNA, JJ.

Sakthi Metal Depot v. CIT

Civil Appeal No. 8605 of 2011

7 July, 2021

Appeal from the judgment and Order, dated 6-1-2010 of the Kerala High Court in I. T. A. No. 759 of 2009. The judgment of the High Court is reported as CIT v. Sakthi Metal Depot (2011) 333 ITR 492 (Ker) : 2011 TaxPub(DT) 0141 (Ker-HC).

Appellant by: Anjani Aiyagiri and R.N. Keswani, Advocates

Respondent by: N. Venkataraman, Additional Solicitor General (D.L. Chidananda, Niranjana Singh, Navanjay Mahapatra, Varun Chug, Sughosh Subramanium, Anil Katiyar and Raj Bhadur Yadav, Advocates, with him)

JUDGMENT

Heard learned counsel for the parties.

2. In our view the High Court justly over-turned the opinion recorded by the Commissioner (Appeals) II, Aayakar Bhavan North Block, Manachira, Calicut, vide Order, dated 23-6-2004 in Appeal No. I. T. A. 57/M/00-01, inter alia, on the following basis :–

“In other words, in our view, the building which was acquired by the assessee in 1974 and in respect of which depreciation was allowed to it as a business asset for 21 years, that is up to the assessment year 1995-96, still continued to be part of the business asset and depre ciable asset, no matter the non-user disentitles the assessee for depreciation for two years prior to the date of sale. We do not know-how a depreciable asset forming part of the block of assets within the meaning of section 2(11) of the Income Tax Act, 1961 can cease to be part of block of assets. The description of the asset by the assessee in the balance-sheet as an investment asset in our view is meaningless and is only to avoid payment to tax on short-term capital gains on sale of the building. So long as the assessee continued business, the building forming part of the block of assets will retain its character as such, no matter one of two of the assets in one or two years not used for business purposes disentitles the assessee for depreciation for those years. In our view instead of selling the building, if the assessee started using the building after two years for business purposes the assessee can continue to claim depreciation based on the written down value available as on the date of ending of the previous year in which depreciation was allowed last.”

3. The reasoning by the High Court in view of the facts on record commends to us.

4. The High Court has, therefore, rightly restored the findings and addition made in the assessment order. Hence, we find no merit in this appeal and it is dismissed.