AFR

HIGH COURT OF CHHATTISGARH AT BILASPUR-------------------------------------------------------------------------------------------------CORAM: HON’BLE SHRI YATINDRA SINGH, C.J.

HON’BLE SHRI PRITINKER DIWAKER, J.-------------------------------------------------------------------------------------------------

Tax Case No.10 of 2006Appellan t Commissioner of Income Tax, Bilaspur

(CG)VERSUS

Respondent s Income Tax Appellate Tribunal, Jabalpurand another

Appeal under Section 260A of the Income Tax Act-------------------------------------------------------------------------------------------------Appearance: Shri Anand Dadariya, counsel for the Appellant.

Shri GN Purohit, Senior Advocate with Shri Abhishek Oswal, counsel for Respondent-2.

-------------------------------------------------------------------------------------------------

JUDGEMENT

(09th May, 2013)

(Delivered by Hon'ble Yatindra Singh, CJ)

1. The main point involved in this case is:

'Whether the carried forward unabsorbed depreciation

can be set off against the short-term capital gains

arising out of sale of depreciable assets or not.'

It arises in this appeal by the Income Tax Department (the Department),

under section 260A of the Income Tax Act, 1961 (the Act), against the

order of the Income Tax Appellate Tribunal, Lucknow Bench, Camp at

Jabalpur (the Tribunal) dated 19.04.2006. By the impugned judgement,

the Tribunal allowed the appeal of M/s Jyoti Straw Products Private

Limited, Raigarh (the Assessee) in respect of the Assessment Year (AY)

1999-2000.

THE FACTS

2. The Assessee manufactured Straw Boards and carried on business up

to 30.09.1998. It sold its plant, machinery, and business to M/s ARDEE

Board Private Limited on 01.10.1998.

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3. The Assessee filed its return on 31.03.2000 for AY 1999-2000

showing nil income. In the return, it was mentioned that:

• There was short-term capital gain arising out of sale of depreciable

assets of ₹24,49,607/-, long-term capital loss of ₹3,18,408/-,

business loss of ₹5,56,356/- and the resultant income was

₹15,73,843/-;

• The unabsorbed depreciation of ₹9,92,669/- for the AY 1990-91

and unabsorbed depreciation of ₹5,81,174/- (out of ₹8,48,406/-)

for the AY 1991-92, was being set off with the resultant income to

make it nil.

4. The return of the Assessee was processed under section 143(1) of

the Act. However, the Assessing Officer (the AO) started re-assessment

proceedings under section 147 of the Act and a notice under section 148

of the Act was issued to the Assessee on 06.02.2004.

5. The AO by his order dated 03.03.2005 disallowed the carried forward

unabsorbed depreciation. He held that:

• Under first proviso to section 32(2)(iii) of the Act, the business

was required to be carried on for the entire year to set off the

carried forward unabsorbed depreciation; and

• As business was not carried on for the entire previous year, the

set off claimed by the Assessee was negated.

6. The AO held the income of the Assessee to be ₹15,73,843/- under

section 143(3) read with section 147 of the Act. On this amount, interest

under sections 234A to 234C of the Act was charged and notice for

imposition of penalty was also issued under section 271(1)(c) of the Act

for concealment of the income.

7. The Assessee filed an appeal against the aforesaid order. It was

dismissed by the Commissioner of Income Tax (Appeals) (the CIT-A) on

26.09.2005 on the following two grounds namely,

• Firstly, the business was not carried for the entire year; and

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• Secondly, carried forward unabsorbed depreciation could not be

set off against the short-term capital gains on sale of depreciable

assets.

8. The Assessee filed the second appeal before the Tribunal. It was

allowed on 19.04.2006. The Tribunal held that:

• Under the first proviso to section 32(2)(iii), the condition was to

carry on business in the previous year. It was not necessary that

business should be carried on for the entire year;

• The short-term capital gain/ loss on sale of depreciable assets

was to be dealt with under the head of 'profit and gains of

business or profession' in view of the decision in JK Chemicals

Limited Vs ACIT (ITA 8618/Bombay/89) given by the Bombay

Bench of the Tribunal; and

• The unabsorbed depreciation could be set off against the short-

term capital gains on sale of depreciable assets.

Hence, the present appeal by the Department.

POINTS FOR DETERMINATION

9. We have heard counsel for the parties. This appeal was admitted on

02.02.2010 on the following substantial questions of law:

• 'Whether on the facts and in the circumstances of the case, the

Tribunal was justified in holding that the short-term capital gains

arising on sale of plant & machinery and other assets has to be

assessed under the head “business income” and not under the

head “capital gains”?

• Whether on the facts and in the circumstances of the case, the

Tribunal was justified in allowing the claim of set-off of unabsorbed

depreciation allowance of earlier years against the short-term

capital gains of the current year by omitting to take cognizance of

the provisions of Section 32 (2) (iii) (a) which stipulates such set-

off only against profits and gains, if any, of any business of

profession carried on by the assessee?'

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However, the main question is as we have indicated in our opening

paragraph.

10. On the basis of the aforesaid questions and on the arguments of the

counsel for the parties, the following points arise for determination in the

appeal:

(i) Whether the benefit of set off can be availed under section 32(2)

(iii) of the Act, even if the business was not carried on for the

entire year;

(ii) Whether the carried forward unabsorbed depreciation can be set

off only against the profits and gains of any business or profession

carried on by the Assessee or against income under any other

head;

(iii) Whether the short-term capital gain on the sale of depreciable

assets is an income under the head of 'profits and gains of any

business or profession' or not;

1st POINT: NOT NECESSARY TO CARRY ON BUSINESS FOR

ENTIRE YEAR

11. The counsel for the Department submitted that:

• In view of first proviso to section 32(2)(iii), the carried forward

unabsorbed depreciation could be set off only if business was

carried on for the entire previous year;

• In this case, business was not carried on for the entire year;

• The Assessee was not entitled to set off its carried forward

unabsorbed depreciation.

12. In the relevant assessment year 1999-2000, the first proviso to

section 32(2)(iii) of the Act was as follows:

'...

Provided that the business or profession for which the allowance

was originally computed continued to be carried on by him in the

previous year relevant for that assessment year.

...'

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It was later on deleted by the Finance Act of 2000 with effect from

01.04.2001.

13. The provision mandates that business or profession for which the

allowance was originally computed should be continued by the Assessee

in the previous year. It nowhere mandates that business should continue

for the entire year. In the present case, the Assessee did continue

business up to 30.09.1998.

14. The counsel for the Department would like us to read the words

'continued to be carried on by him in the previous year' as 'continued

to be carried on by him for the entire previous year'. He wishes us to

read the word 'entire', which is not there.

15. If the intention of the legislature was, as was submitted by the

counsel for the Department then, there was no difficulty in using the word

in the 'entire previous year' in place of just 'previous year'. The

legislature by not using the word 'entire' clearly showed its intention that it

was not necessary that the business should be carried on for the entire

year.

16. It is settled law that 'the intention of the Legislature is primarily to be

gathered from the language used, which means that attention should be

paid to what has been said as also to what has not been said.1 As a

consequence a construction which requires for its support addition or

substitution of words or which results in rejection of words as

1Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. v. Custodian of Vested Forests, AIR1990 SC 1747 = 1990 (2) JT 130 = 1990 Supp SCC 785; Mohammad Alikhanv. Commissioner of Wealth Tax, AIR 1997 SC 1165 :=1997 (3) SCC 511;Institute of Chartered Accountants of India v. Price Waterhouse, AIR 1998 SC74 = (1997) 6 SCC 312; Dental Council of India v. Hari Prakash, AIR 2001 SC3303 = (2001) 8 SCC 61; JP Bansal v. State of Rajasthan, AIR 2003 SC 1405 =2003 AIR SCW 1848 = (2003) 5 SCC 134; Dental Council of India v. HariPrashad, AIR 2001 SC 3303 = (2001) 8 SCC 61; Illachi Devi v. Jain SocietyProtection of Orphans , (2003) 8 SCC 413; State of Jharkhand v. Govind Singh,AIR 2005 SC 294; Commissioner of Income Tax, Kerala v. Tata Agencies,(2007) 6 SCC 429; Nagar Palika Nigam v. Krishi Upaj Mandi Samiti, AIR 2009SC 187 = (2008) 12 SCC 364.

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meaningless has to be avoided2 (see 'Principles of Statutory

Interpretation' by Justice GP Singh, 12th edition, page 64).

17. In our opinion,

• An assessee is entitled to claim set off even if business was

carried on for the part of the year;

• The proviso does not prevent the Assessee from taking advantage

of section 32(2)(iii), if the other conditions are satisfied.

2nd POINT: ONLY AGAINST PROFIT AND GAINS OF BUSINESS OR

PROFESSION

18. Chapter IV of the Act is titled 'Computation of total income'. It

provides how income of an Assessee for purposes of the Act is to be

computed. Section 14 is in this chapter. It is titled 'Heads of Income'. It

provides different heads under which total income is to be computed.

19. Section 14 provides five kinds of heads namely, 'A.—Salaries',

'C.—Income from house property', 'D.—Profits and gains of business or,

profession', 'E.—Capital gains' and 'F.—Income from other sources'.

Initially, the Act provided one more head, namely, 'B.—Interest on

securities' but it was later deleted by Finance Act, 1988 wef 01.04.1989.

20. Chapter IV is further subdivided into different sub-chapters 'A', 'C',

'D', 'E' and 'F'. Each sub-chapter provides different sources of income

under a head.

2 Shyam Kishori Devi v. Patna Municipal Corporation, AIR 1966 SC 1678 =1966 (3) SCR 466; Management, Shahdara (Delhi) Saharanpur Light Rly. Co.Ltd. v. SS Rly. Workers Union, AIR 1969 SC 513 = (1969) 2 SCR 131; S.Narayanaswami v. G. Panneerselvam, AIR 1972 SC 2284 = (1972) 3 SCC 717;Union of India v. Sankalchand, AIR 1977 SC 2328 = (1977) 4 SCC 193; ARAntuley v. Ramdas Srinivas Nayak, AIR 1984 SC 718 = (1984) 2 SCC 500;Mohammad Alikhan v. Commissioner of Wealth Tax, AIR 1997 SC 1165 =1997 (3) SCC 511; Institute of Chartered Accountants of India v. PriceWaterhouse, AIR 1998 SC 74 = (1997) 6 SCC 312; State of Maharashtra v.Nanded Prabhani Operator Sangh, AIR 2000 SC 725 = (2000) 2 SCC 69;Grasim Industries Ltd. Collector of Customs, AIR 2002 SC1706 := (2002) 4 SCC297; JP Bansal v. State of Rajasthan, AIR 2003 SC 1405= 2003 AIR SCW 1848= (2003) 5 SCC 134; State of Jharkhand v. Govind Singh, AIR 2005 SC 294 .

7

21. In calculating the income under a head, certain deductions can also

be made. These deductions are provided in that particular head itself.

Normally, loss under one head can be set off only against the profit in

that head, unless it is so provided under any provision of the Act.

22. Sub-chapter D of chapter IV is titled 'D.—Profits and gains of

business or profession'. Section 32 is in this sub-chapter. It is titled

'Depreciation' and provides deductions on account of depreciation.

23. Under the Act, income is taxed regardless diminishing value of the

assets except, allowance, in form of depreciation for some assets.

Generally, depreciation represents the diminution in value of a capital

asset, when applied to the purpose of making profit or gain and it is a

legitimate deduction in determining the true profits (see below for

citations)3.

24. In the relevant AY, sub-section (1) of section 32 {Section 32(1)}

provided how depreciation was to be calculated for different assets and

its set off against profits and gains of that business.

25. Sub-section 2 of section 32 {Section 32(2)} (see Appendix-1)

explained the words 'unabsorbed depreciation'. It was that part of

allowance under clause (ii) of sub-section (1) of section 32 {section 32(1)

(ii)} {see Endnote-1 for clarification on section 32(1)(ii)} that could not be

given full effect to in any previous year owing to there being no profits or

gains in that previous year or it being less than the allowance.

26. Section 32(2)(i)(ii) provided setting of current unabsorbed

depreciation. Section 32(2)(i) provided that it could be set off against

3 Bandiani Vs CIT 105 ITR 642, 647-49(SC); CIT Vs Gujrat SWC 104 ITR 1;Nippon Vs CIT 116 ITR 231 ; CIT Vs Bombay STC 118 ITR 399 ; Vegetable oilMfg Vs CIT 147 ITR 544; CIT Vs Raipur Pallottine 180 ITR 579; CIT Vs VazirSultan 184 ITR 64, CIT Vs Anand 244 ITR 192 (SC); CIT Vs Indin Jute MillAssn. 134 ITR 68; Indian Leaf Tobacco Vs CIT 137 ITR 827 ); CIT Vs Societyof Sisters of St. Anne 146 ITR 28 .

8

profits and gains, if any, of any business or profession carried on by the

assessee and in case it could not be done then it could be set off from

the income of the Assessee under any other head under section 32(2)(ii)

of the Act. The unabsorbed depreciation allowance that could not be so

set off, was to be carried forward for the next eight years under section

32(2)(iii)(b).

27. Section 32(2)(iii) provided setting off of carried forward unabsorbed

depreciation allowance but a reading of section 32(2)(iii) in contrast to

section 32(2)(i) and (ii) indicates that it could be set off only against the

profits and gains of any business or profession.

28. The counsel for the Assessee submitted that under section 32(2)(iii)

of the Act carried forward unabsorbed depreciation allowance could be

set off, not only against the profits and gains of any business or

profession of the Assessee, but also against the income from any other

head.

29. In order to support the aforesaid submission, the counsel for the

Assessee brought to our notice, the three decisions of the Madras High

Court (see below for citations)4 and decisions of the different Benches of

the Tribunal (see below for citations)5. In these cases, the speech of the

Finance Minister while passing the Finance Act-2 of 1996 (see below for

4 Commissioner of Income Tax vs RPIL Signalling Systems Limited {(2010) 328ITR 283 (Mad); and Commissioner of Income Tax vs S & S Power SwitchgearLimited {(2008) 218 CTR (Mad) 701 = (2009) 318 ITR 187 = (2008) 5 DTR289 }; and Commissioner of Income Tax vs Pioneer Asia Packing (P) Limited{(2008) 214 CTR (Mad) 202 = (2009) 310 ITR 198 = (2008) 170 Taxman 127 =(2008) 1 DTR 193

5Digital Electronics Limited Vs Additional Commissioner of Income Tax {(2011)135 TTJ (Mumbai) 419 = (2011) 49 DTR 484} and Deputy Commissioner ofIncome Tax vs Times Guaranty Limited {(2010) 131 TTJ (Mumbai) (SB) 257 =(2010) 40 SOT 14 = (2010) 41 DTR 193 = (2010) 4 ITR 210

9

the relevant part of the speech)6 was relied upon to uphold this

submission.

30. The speech does support the submission of the counsel for the

Assessee but section 32(2) is otherwise. The question is, can the

speech of the Finance Minister be taken into account, while interpreting a

clear and unambiguous section.

31. House of Lords in Pepper v. Hart {(1993)1 All ER 42} (the Pepper

case) observed:

'Reference to parliamentary material should be permitted as an

aid to the construction of legislation which is ambiguous or

obscure or the literal meaning of which leads to absurdity. Even

in such cases references in court to parliamentary material

should only be permitted where such material clearly discloses

the mischief aided at or the legislative intention lying behind the

ambiguous or obscure words. In the case of statements made

in Parliament, as at present advised, I cannot foresee that any

statement other than the statement of the minister or other

promoter of the Bill is likely to meet these criteria.'

32. Our Supreme Court considered the Pepper case in P.V. Narsimha

Rao v. State (AIR 1998 SC 2120) (the Narasimha case). The question in

this case was, whether a member of Parliament was a public servant

6The relevant part of the speech of the Finance Minister is as follows:'Clause 11 of the Bill seeks to amend s.32 of the IT Act, 1961relating to depreciation. During the course of discussion on theGeneral Budget, a number of Hon'ble members have expressedtheir apprehension that the proposed amendment limiting carryforward of unabsorbed depreciation to 8 years will adversely affectthe growth of industry. Similar apprehensions have been raised in alarger number of post-budget memoranda. I would like to allay thesefears. 'The proposed amendment is only prospective inasmuch asthe cumulative unabsorbed depreciation brought forward as on 1st

April, 1997, can still be set off against taxable business profits orincome under any other head for the asst. yr. 1997-98 and sevensubsequent assessment years. Therefore, the proposed change willhave effect only after 8 years and there is no cause for immediateconcern about its likely impact on industry.'

10

within the definition of section 2(c)(viii) of the Prevention of Corruption

Act, 1998.

33. In the Narsimha case, the Supreme Court declined to admit the

minister's speech in Parliament for finding the intention of Parliament in

enacting that section as according to the court the provision was

unambiguous and the minister's speech was also equivocal.

34. The intention of the legislature is to be seen from the use of the

words in the statute. The question is not what might be intended but

what has been said. This can be best inferred by the language of the

statute; it is the language of the statute that determines the legislative

intention (see below for citations)7 .

35. Justice Holmes once remarked8,

'I do not care what their intention was, I only want to know

what the words mean?'

And at the other time,

'We do not inquire what the legislation meant; we ask only what

the statute means.'

In one of his decisions9, he observed,

7 New Piece Goods Bazar Co. Ltd. v CIT, Bombay, AIR 1950 SC 165;Ramkrishan v State of Delhi, AIR 1956 SC 476; Kanailal Sur v. ParamnidhiSadhukhan, AIR 1957 SC 907; Ramkrishna Ram Nath v. Janpad Sabha, AIR1962 SC 1073; Controller of Estate Duty v. Kantilal Tikamlal, AIR 1976 SC 1935= 1977 SCC (Tax) 90 ; Union of India v. Sankalchand Himmatlal Sheth, AIR1977 SC 2328 = (1977) 4 SCC 193; Chief Justice of Andhra Pradesh v. LVADikshitulu, AIR 1979 SC 193 = (1979) 2 SCC 340; Om Prakash Gupta v.Digvijendrapal Gupta, AIR 1982 SC 1230 = (1982) 2 SCC 61; Babaji KondajiGarod v. Nasik Merchants Co-operative Bank Ltd. AIR 1984 SC 192 = (1984) 2SCC 50; Doypack System Pvt. Ltd. v. Union Of India, AIR 1988 SC 782 = 1988(2) SCC 299; Member Secretary, Andhra Pradesh State Board for Preventionand Control of Water Pollution v. Andhra Pradesh Rayons Ltd, AIR 1989 SC611 = 1989 (1) SCC 44; Keshavji Ravji and Co. v. Commissioner of IncomeTax, AIR 1991 SC 1806 = (1990) 2 SCC 231; Bola v. BD Sardana, AIR 1997 SC3127 = (1997) 8 SCC 522; Unique Butyle Tube Industries (P) Ltd. V UPFinancial Corporation, (2003) 2 SCC 455.

8From the book 'Philosophical Foundation of Language in the Law' published by Oxford University press, edited by Andrei Marmor and Scott Soames- Page 7.

9 Northern Securities Co. Vs US -193 US 197

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'[A]t times judges need for their work the training of

economists or statesmen, and must act in view of their

foresight of consequences, yet when their task is to interpret

and apply the words of a statute, their function is merely

academic to begin with—to read English intelligently ...'

36. In our opinion, the speech of a minister cannot be taken into account

to interpret a provision that is clear and unambiguous. The question,

whether it can be taken into account to interpret a provision that is

ambiguous, may be considered in an appropriate case.

37. In section 32(2) (ii), any other income is specifically mentioned, but it

is not so mentioned in section 32(2)(iii). This clearly shows the intention

of the legislature that the carried forward unabsorbed depreciation

allowance cannot be set off against income other than the income from

profits and gains of business or profession.

38. In the present case, there is no ambiguity in section 32(2)(iii) of the

Act. The speech of the Finance Minister cannot be taken into account to

interpret it. With due respects to the judges of the Madras High Court

and members of different benches of the Tribunal, we disagree with

them.

39. 'Kanga, Palkhivala and Vyas: The Law and Practice of Income Tax'

(9th Edition page 732) sums up the law of unabsorbed depreciation as

follows:

'From assessment year 1997-98, there was a drastic

amendment in the scheme of carry-forward and set-off of

unabsorbed depreciation by substitution of a new sub-

section(2) in section 32. It was put, in many respects, at par

with business loss. In comparison and contradistinction to the

12

earlier provisions, the features of the new provisions are as

under:

(i) Unlike before, there is no legal fiction to deem carried

forward unabsorbed depreciation to be part of current

depreciation;

(ii) Unabsorbed depreciation is allowed to be carried

forward for set-off for eight years succeeding the year

to which such depreciation relates, and not

indefinitely like before;

(iii) The carried forward unabsorbed depreciation can be

set-off against the profits and gains, if any, of any

business or profession carried on by the assessee

during that year, and not against other non-business

income;

(iv) The business or profession to which the unabsorbed

depreciation relates should be continued to be carried

on in the year of set-off (first proviso to s32(2) deleted

from assessment year 2001-02).'

For our discussion, the law as summarised at serial number (iii) is

relevant and states the same thing as we have held.

40. In our opinion, the carried forward unabsorbed depreciation under

section 32(2)(iii) of the Act could be set off in the relevant AY only against

any profit and gains of any business or profession carried on by the

Assessee and not against any other non-business income. However, the

question remains, whether the short-term capital gains on sale of

depreciable assets can be treated as income from profits and gains of

business or profession or not. This is being dealt with, in the third point.

3rd POINT: SHORT TERM CAPITAL GAIN IS NON-BUSINESS INCOME

41. The counsel for the Assessee has brought to our notice sub-section

(2) of section 41 {section 41(2)} (see Appendix-2) and submits that:

13

(i) Short term capital gain from sale of depreciable assets is dealt

under section 41(2) of the Act. Under this section, it is to be

treated as income from business or profession;

(ii) The Assessee is entitled to set off its carried forward unabsorbed

depreciation from short-term capital gains arising out of sale of

depreciable assets as it is treated as business income;

(iii) In any case, the purpose of putting business assets in one block

was to facilitate filing of tax return and tax computation. The legal

fiction treating them short-term capital was for this purpose only.

The legal fiction cannot be further extended.

1st & 2nd Submissions: Section 41(2) is not Applicable

42. Section 2 of the Act is titled 'Definitions'. It defines different words as

follows:

• Section 2(14) defines the words 'capital asset';

• Section 2(42A) defines the words 'short term capital asset';

• Section 2(42B) defines the words 'short term capital gain;

• Section 2(11) defines the words 'block of assets'. It includes

tangible assets like building, machinery, plant, or furniture as well

as intangible asset that includes intellectual property rights or

business rights in respect of which the same percentage of

depreciation is prescribed.

Nevertheless, section 2 of the Act neither defines the words 'depreciable

assets' nor the words 'short term capital gains arising out of the sale of

depreciable assets'.

43. Section 50 of the Act (see Appendix-3) is titled 'Special provision for

computation of capital gains in case of depreciable assets'. It explains

short time capital gains arising out of the sale of depreciable assets. It is

because of this provision that the Assessee had short term capital gains.

The question is whether this can be treated as business income or not.

44. Section 41 is titled 'Profits chargeable to tax' and is under sub-

chapter 'D—Profits and gains of business or profession' of Chapter-IV of

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the Act. Sub-section (2) of section 41 {section 41(2)} of the Act provides

that in some cases of sale of buildings, machinery, plant or furniture, if

the money payable exceeds the written down value of those assets, then

it would be treated as income of the business of the previous year.

45. In case, section 41(2) is applicable to the Assessee, then the short-

term capital gains in this case would be business income from which

carried forward unabsorbed depreciation could be set off. But the

question is, does it apply in the present case ?

46. Sub-clauses (a) and (b) of section 41(2) lay down necessary

conditions of its application. Section 41(2)(b) provides that it applies to

the sale of that building, machinery, plant or furniture, in respect of which,

depreciation is claimed under clause (i) of sub-section (1) of section 32

{section 32(1)(i)} of the Act. But did the Assessee claim depreciation

under section 32(1)(i) of the Act?

47. Section 41(2) was substituted in the Act by Finance Act 2

of 1998 with effect from 01.04.1998. At that time, section 32(1)(i) (see

Appendix-4) related to depreciation claimed by an undertaking engaged

in generation or generation and distribution of power (for clarification

please see Endnote-1), that is to say, section 41(2) is confined to the

assets of an undertaking engaged in generation or generation and

distribution of power.

48. The Assessee was not engaged in generation or generation and

distribution of power. It was manufacturing straw boards. In the present

case, depreciation was not claimed under section 32(1)(i) of Act, but it

was claimed under section 32(1)(ii) of the Act. Section 32(1)(i) as well as

section 41(2) of the Act is not applicable here.

3rd Submissions: Full effect is to be given to Legal Fiction

49. Concept of 'block of asset' was introduced by the Taxation Laws

(Amendment & Miscellaneous Provisions) Amendments Act 1986 wef

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01.04.1988. It broadly included tangible assets. It was amended by

Finance (number 2) Act, 1998 wef 01.04.1999 to include intangible

assets as well. This concept was basically introduced to simplify the

return filing and tax computations.

50. Section 50 of the Act creates legal fiction. It deems certain income to

be short-term capital gains. Should it be limited only for the purpose of

filing of tax return and computation of income or should we give full effect

to it.

51. Lord Asquith in 'In East End Dwelling Co. Ltd. v. Finsbury Borough

Council (1951) 2 All ER 587 (the Finsbury case) explained:

'If you are bidden to treat an imaginary state of affairs as

real, you must surely, unless prohibited from doing so,

also imagine as real the consequence and incidents

which, if the putative state of affairs had in fact existed,

must inevitably have flowed from or accompanied it—.

The statute states that you must imagine a certain state

of affairs; it does not say that having done so, you must

cause or permit your imagination to boggle when it

comes to the inevitable corollaries of that state of affairs.'

52. The aforesaid dictum of Lord Asquith has become statement of law

on legal fiction. It is referred and approved in almost every case (see

below)10 decided so far.

10 State of Bombay v. Pandurang Vinayak, AIR 1953 SC 244; CIT, Delhi v. S.Teja Singh, AIR 1959 SC 352; Rajendraswami v. Commissioner of HinduReligious and Charitable Endowments, Hyderabad, AIR 1965 SC 502; Shatrunjit(Raja) v. Mohammad Azmat Azim Khan, AIR 1971 SC 1474 = 1971 (2) SCC200; Daya Singh v. Dhan Kaur, AIR 1974 SC 665 = (1974) 1 SCC 700;Boucher Pierre Andre v. Superintendent, Central Jail, Tihar AIR 1975 SC 164 =(1975) 1 SCC 192 = (1975) SCC (Cri) 70; Sundar Dass v. Ram Parkash, AIR1977 SC 1201 = (1977) 2 SCC 662; Gurupad Khandappa Magdum v. HirabaiKhandappa, AIR 1978 SC 1239 = (1978) 3 SCC 383; State of Andhra Pradeshv. Vallabhapuram Ravi (1984) 4 SCC 410 = AIR 1985 SC 870; American HomeProducts Corporation v. Mac Laboratories, AIR 1986 SC 137 = (1986) 1 SCC465; S. Appukuttam v. Thundiyal Janaki Amma, AIR 1988 SC 587 = (1988) 2SCC 372; Maganlal v. Jaiswal Industries, AIR 1989 SC 2113 = (1989) 4 SCC344; Orient Paper and Industries Ltd. v. State of Orissa, AIR 191 SC 672 = 1991

16

53. Section 50 of the Act creates a legal fiction by which under certain

circumstances, transfer of depreciable assets is to be treated as the

short-term capital gains. In case, it is to be treated as the short-term

capital gain, then legal effect has to be given to it as short-term capital

gain and it is to be treated as income under the head 'E- Capital gains'. It

cannot be treated as income under head 'D- Profits and gains of business

or profession'.

54. The result is that carried forward unabsorbed depreciation cannot be

set off with short-term capital gain. Only current unabsorbed depreciation

can be set off against the 'Profits and gains of business or profession' as

section 32(2)(ii) of the Act provides that it (current unabsorbed

depreciation) can be set off with any other income.

55. In our opinion,

• In the present case, section 41(2) is not applicable

• Short-term capital gain on sale of depreciable assets is not profits

and gains of business or profession; and

• Carried forward unabsorbed depreciation cannot be set off from

the short-term capital gains.

CONCLUSIONS

56. Our conclusions are as follows:

(a) In order to claim set off it was not necessary to carry on the

business for entire previous year. The only necessity was that it

Supp. (1) SCC 81; HC Suman v. Rehabilitation Ministry Employment Co-operative House Building Society Ltd., AIR 1991 SC 2160 = (1991) 4 SCC 485;Voltas Limited, Bombay v. Union of India, AIR 1995 SC 1881 =1995 Supp (2)SCC 498; G. Vishwanathan v. Hon'ble Speaker, Tamil Nadu LegislativeAssembly, AIR 1996 SC 1060; PEK Kalliani Amma v. K. Devi, AIR 1996 SC1963 = (1996) 4 SCC 76; State of Tamil Nadu v. Arooran Sugars Ltd. AIR1997 SC 1815; Bhavnagar University v. Palitana Sugar Mill (P) Ltd. AIR 2003SC 511 = (2003) 2 SCC 111; Commissioner of Wealth Tax v. Trustees of HEH,(2003) 5 SCC 122; Dipak Chandra Rutidas v. Chandan Kumar Sarkar AIR 2003SC 3701 = (2003) 7 SCC 66; Prafulla Kumar Das v. State of Orissa, AIR 2003SC 4506 = (2003) 9 JT 477; Ashok Leyland Ltd. v. State of Tamil Nadu AIR2004 SC 2836 = (2004) 3 SCC 1; State of West Bengal v. Sadam K. Bormal,AIR 2004 SC 3666 = (2004) 6 SCC 59; Clariant International Ltd. v. Securities& Exchange Board AIR 2004 SC 4236 = (2004) 8 SCC 524; Mohd. AkramAnsari v. Chief Election Officer (2008) 2 SCC 95.

17

should be carried on in that year. It could be only for part of the

year;

(b) The carried forward unabsorbed depreciation allowance for

depreciable assets could be set off only against the profit and

gains of business or profession and not against any other income;

(c) Short term capital gain on sale of depreciable assets is not profits

and gains of any business or profession;

(d) Carried forward unabsorbed depreciation allowance cannot be

set off from short term capital gain on sale of depreciable assets.

57. In view of our conclusions, the appeal is allowed. The order of the

Tribunal dated 19.04.2006 is set aside and that of Commissioner of

Income Tax (Appeals) dated 26.09.2005 is upheld.

CHIEF JUSTICE JUDGE

subbu

Endnote-1: In the relevant AY 1999-2000 sub-section (1) of section 32 {section32(1)} was confusing. It had two sets of sub-clauses (i) and (ii). There wasalready one set of clause (i) and (ii) in section 31(1) thereafter the second set ofclause (i) and (ii) were substituted by Finance (No.2) Act 1998 wef 01.04.1999in the main part of section 31(1). This became the first set of clause (i) and (ii).They merely bifurcated the main section 32(1) relating to assets into twodifferent categories of tangible and intangible assets. Section 32(2) of the Act was substituted by the Finance (No.2) Act 1996 wef01.04.1997. At that time, there was only one set of sub-clause (i) and (ii) thatbecame the second set of sub-clauses (i) and (ii) in the relevant AY 1999-2000.This shows that, in the relevant year, reference to section 32(1)(ii) in section32(2) of the Act means the second set of clause (ii) of section 32(1) in therelevant AY.

So is true about section 41(2)(b) of the Act. It was substituted by Finance(number-2) Act, 1998 wef 01.04.1998. At that time, similar situation was there.This shows that in the relevant year reference to section 32(1)(i) in section 41(2)(b) of the Act is to the second set of clause (i) of section 32(1) in the relevantAY.

Endnote-2: The judgement was reserved however, a part of the same underheadings, 'THE FACTS', 'POINTS FOR DETERMINATION', '1st POINT: NOTNECESSARY TO CARRY ON BUSINESS FOR ENTIRE YEAR', and '2nd

POINT: ONLY AGAINST PROFIT AND GAINS OF BUSINESS ORPROFESSION' was dictated in the open Court on the date the judgement wasreserved.

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Appendix-1Section 32(2) of the Income-Tax Act, 1961 as applicable in AY 1999-2000was as follows. It was substituted by Finance (No.2) Act 1996 wef 01.04.1997.

32. Depreciation(1) ...(2) Where in the assessment of the assessee full effect cannot be given to anyallowance under clause(ii) of sub-section(1) in any previous year owing to therebeing no profits or gains chargeable for that previous year or owing to the profitsor gains being less than the allowance, then, the allowance or the part ofallowance to which effect has not been given (hereinafter referred to asunabsorbed depreciation allowance), as the case may be,—

(i) shall be set off against the profits and gains, if any, of any business orprofession carried on by him and assessable for that assessment year;

(ii) if the unabsorbed depreciation allowance cannot be wholly set off underclause(i), the amount not so set off shall be set off from the incomeunder any other head, if any, assessable for that assessment year;

(iii) if the unabsorbed depreciation allowance cannot be wholly set off underclause(i) and clause(ii), the amount of allowance not so set off shall becarried forward to the following assessment year and—(a) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year;(b) if the unabsorbed depreciation allowance cannot be wholly so set off, the amount of unabsorbed depreciation allowance not so set off shall be carried forward to the following assessment year not being more than eight assessment years immediately succeeding the assessment year for whichthe aforesaid allowance was first computed:Provided that the business or profession for which the allowance was

originally computed continued to be carried on by him in the previous yearrelevant for that assessment year.

Provided that the time limit of eight assessment years specified in sub-clause(b) shall not apply in the case of a company for the assessment yearbeginning with the assessment year relevant to the previous year in which thesaid company has become a sick industrial company under sub-section(1) ofsection 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of1986) and ending with the assessment year relevant to the previous year inwhich the entire net worth of such company becomes equal to or exceeds theaccumulated losses.

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Appendix-2In the relevant year, section 41(2) of the Income-Tax Act, 1961 was as follows:

41 Profits chargeable to tax:(1) ...

41(2) Where any building, machinery, plant or furniture,—(a) which is owned by the assessee;(b) in respect of which depreciation is claimed under clause(i) of sub-

section (1) of section 32; and (c) which was or has been used for the purposes of business, is sold,

discarded, demolished or destroyed and the moneys payable in respect of such building, machinery, plant or furniture, as the case may be, together with the amount of scrap value, if any, exceeds the

written down value, so much of the excess as does not exceed the differencebetween the actual cost and the written down value shall be chargeableto income-tax as income of the business of the previous year in which themoneys payable for the building, machinery, plant or furniture became due.

Explanation.—Where the moneys payable in respect of the building,machinery, plant or furniture referred to in this sub-section become due in aprevious year in which the business for the purpose of which the building,machinery, plant or furniture was being used is no longer in existence, theprovision of this sub-section shall apply as if the business is in existence in thatprevious year.

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Appendix-3Section 50 of the Income-Tax Act, 1961

50. Special provision for computation of capital gains in case of depreciableassets

Notwithstanding anything contained in clause (42A) of section 2, wherethe capital asset is an asset forming part of a block of assets in respect of whichdepreciation has been allowed under this Act or under the Indian Income-taxAct, 1922 (11 of 1922), the provisions of sections 48 and 49 shall be subject tothe following modifications:—(1) where the full value of the consideration received or accruing as a resultof the transfer of the asset together with the full value of such considerationreceived or accruing as a result of the transfer of any other capital assetfalling within the block of the assets during the previous year, exceeds theaggregate of the following amounts, namely:—

(i) expenditure incurred wholly and exclusively in connection with such transfer or transfers.(ii) the written down value of the block of assets at the beginning of the previous year; and (iii) the actual cost of any asset falling within the block of assets acquired during the previous year,

such excess shall be deemed to be the capital gains arising from the transfer ofshort-term capital assets;(2) where any block of assets ceases to exist as such, for the reason thatall the assets in that block are transferred during the previous year, the cost ofacquisition of the block of assets shall be the written down value of the block ofassets at the beginning of the previous year, as increased by the actual cost ofany asset falling within that block of assets, acquired by the assessee during theprevious year and the income received or accruing as a result of such transferor transfers shall be deemed to be the capital gains arising from the transfer ofshort-term capital assets.

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Appendix-4The relevant part of section 32(1) of the Act as on 01.04.1998

32. Depreciation(1) In respect of depreciation of buildings, machinery, plant or furniture owned [,wholly or partly,] by the assessee and used for the purposes of the business orprofession, the following deductions shall, subject to the provisions of section34, be allowed—

(i) in the case of assets of an undertaking engaged in generation orgeneration and distribution of power, such percentage on the actual costthereof to the assessee as may be prescribed;

(ii) in the case of any block of assets, such percentage on the written downvalue thereof as may be prescribed:

...

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HEADLINES

Carried forward unabsorbed depreciation cannot be set off with

short term capital gains.