IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE T.R.RAMACHANDRAN NAIR WEDNESDAY, THE 20TH FEBRUARY 2008 / 1ST PHALGUNA 1929 ITA.No. 108 of 2000() --------------------- ITA.96/COCH./1996 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/ASSESSEE: ----------------- M/S.CRESCENT ICE AND COLD STORAGE, BEACH ROAD, PONNANI-679 583, MALAPPURAM DISTRICT, REP. BY ITS PARTNER, SRI.P.H.SYED MOHAMMED ASHRAFF. BY ADV. SRI.C.KOCHUNNY NAIR SRI.S.VINODKUMAR RESPONDENTS: ------------- THE COMMISSIONER OF INCOME-TAX, TRIVANDRUM. BY ADV. SRI.P.K.R.MENON(SR.),SR.COUNSEL FOR IT SRI.GEORGE K. GEORGE, SC FOR IT THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 20/02/2008, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.R. C.N.RAMACHANDRAN NAIR & T.R.RAMACHANDRAN NAIR, JJ. .................................................................... I.T.Appeal No.108 of 2000 .................................................................... Dated this the 20th day of February, 2008. JUDGMENT C.N.Ramachandran Nair, J. This is an appeal filed by the assessee against the order of the Tribunal upholding the order issued by the Commissioner under Section 263 of the Income Tax Act for the assessment year 1992-93. Assessee, a partnership firm was running two ice plants located at different places with a distance of one kilometer between them. During the accounting year relevant for the assessment year the assessee sold one ice plant by name M/s.Master Ice Plant for a total consideration of Rs.4,40,000/-. In the income tax return filed for the assessment year, assessee returned the capital gains of Rs.1,00,600/- for the sale of Ice Plant comprising of land, building, machinery etc. In the computation of capital gains, the assessee reckoned the written down value of the entire balance block of assets which includes assets of the retained Ice Plant i.e M/s.Crescent Ice Plant. Even though the Assessing Officer completed the assessment accepting capital gains returned, the Commissioner of Income Tax issued orders under Section 263 2 of the Income Tax Act holding that written down value of the other Ice Plant which was retained by the assessee could not be deducted from sale consideration to arrive at the capital gains assessment for sale of one Ice Plant by the assessee. In the appeal filed by the assessee, Tribunal concurred with the view of the Commissioner on the ground that assessee had maintained separate profit and loss accounts for the two separate Ice Plants. Since both the units were distinct and separate units and assessee was maintaining separate profit and loss accounts for the two units, the Tribunal held that the assessee was not entitled to set off written down value of the assets of the retained unit in the computation of capital gains on the sale of one unit. It is against this order of the Tribunal that the assessee has filed this appeal. 2. We have heard counsel appearing for the assessee and Standing Counsel appearing for the respondent. While the assessee contended that it is entitled to set off of value of all the assets in the "block of assets" while computing capital gains on sale of assets, Standing Counsel submitted that capital gains has to be computed with reference to written down value of assets in each of the industrial units. We are unable to agree with the findings of the Tribunal and the argument of the department in support thereof for the following reasons. "Block of assets" defined under Section 3 2(11) of the Income Tax Act reads as follows: "Block of assets" means a group of assets falling within a class of assets comprising-- (a) tangible assets, being buildings, machinery, plant or furniture; (b) intangible assets, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, in respect of which the same percentage of depreciation is prescribed." The provisions pertaining to computation of capital gains of depreciable assets contained in Section 50 of the Income Tax Act reads as follows: "Notwithstanding anything contained in clause (42A) of section 2, where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act or under the Indian Income tax Act, 1922(11 of 1922), the provisions of sections 48 and 49 shall be subject to the following modifications:- (1) where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of the assets during the previous year, exceeds the aggregate 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, 4 such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets; (2) where any block of assets ceases to exist as such, for the reason that all the assets in that block are transferred during the previous year, the cost of acquisition of the block of assets shall be the written down value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short-term capital assets." From the definition clause it is clear that all assets for which same rate of depreciation is provided, fall within the definition "block of assets". What is provided under Section 50(1) is that for computation of capital gains on the sale of any asset or assets in the block of assets, the written down value of the remaining assets in the same block of assets has to be reduced from the sale price. Of course besides this, deductions of expenditure incurred for transfer and actual cost of assets falling under the same block accrued in the previous year are also permissible. It is clear from these provisions that capital gain on sale of a depreciable asset is to be computed not with reference to every industrial unit owned by the assessee, but with reference to assets falling within a block of assets. Computation of capital gains on depreciable asset under the above provision is not affected even if assessee maintains separate profit and loss account for each unit. But what is 5 relevant is whether assets the written down value of which is claimed as deduction in the computation of capital gains on sale of any asset or assets by the assessee come within the same block of assets. In this case there is no dispute that the two Ice Plants come within the same block of assets and so much so, in the computation of capital gains on the sale of assets of one Ice Plant, the written down value of assets of the other Ice Plant can be deducted. 3. The next aspect of the matter is whether sub-section (2) of Section 50 authorises modification. Original assessment is completed in this case under Section 143(3) of the Act on the basis that assessee has sold one Ice Plant with land, building and machinery. It is clear from sub-section(2) of Section 50 that sale of assets visualised therein is not sale of any industrial unit but sale of any block of assets. In this case since assessee has sold one Ice Plant but retained the other, the block of asset does not cease to exist but only part of the asset from the same has ceased to exist. Therefore, in our view, sub-section (2) of Section 50 has no application at all in this case. We, therefore, hold that the original assessment completed accepting claim of computation of capital gains of the assessee as stated above is correct and the Commissioner was not justified in ordering revision of assessment under Section 263 of the Income Tax Act and the Tribunal's order confirming the 6 same is also incorrect. We, therefore, uphold the assessment reversing the order of the Tribunal and that of the Commissioner of Income Tax issued under Section 263 and restore the original assessment. C.N.RAMACHANDRAN NAIR Judge T.R.RAMACHANDRAN NAIR Judge pms