Case: Nectar Beverages Pvt. Ltd Vs. Deputy Commnr. Of Income Tax

41(1) was to be accepted then it was not necessary for Parliament to enact Section 41(2) in the first instance. In that event, Section 41(1) alone would have sufficed. In our view, Section 41(1), Section 41(2), Section 41(3) and Section 41(4) operated in different spheres. One more aspect needs to be highlighted. Each of the sub-sections to Section 41 deal with different and distinct circumstances. For example, Section 41(1) deals with recoupment of trading liability. Section 41(2) dealt with the balancing charge. Section 41(3) specifically deals with balancing charge in respect of assets relating to scientific research whereas Section 41(4) deals with recovery of bad debts earlier allowed. Therefore, each of the sub-sections deal with different and distinct topics and one cannot read recoupment under one sub-section into another. 9. The entire controversy, therefore, stands resolved if one understands the meaning of "balancing charge". Where any allowance or deduction had earlier been made in respect of any loss, expenditure or trading liability and subsequently the assessee has obtained or realized any amount towards such loss, expenditure or trading liability, Section 41(1) deems such realization/recoupment as assessees income for the year in which it is realized. Section 41(2) as it stood at the material time stated that if in respect of any plant and machinery, any depreciation had been allowed and subsequently such plant and machinery was sold, discarded or destroyed, the assessee might get some value either as a result of sale or insurance or from salvage or compensation thereabout. The necessity to keep Section 41(2) as a provision in addition to Section 41(1) arose from the fact that, in its very nature, depreciation is neither a loss, nor an expenditure, nor a trading liability, referred to in Section 41(1). The depreciation recovered on sale of the capital asset was includible in the total income as balancing charge only under Section 41(2). That concept was foreign to the scheme of Section 41(1). The balancing charge under Section 41(2) arose only where any depreciable asset (building, machinery, plant or furniture) was sold. In fact, when the concept of "block of assets" stood introduced w.e.f. 1.4.1988, Section 41(2) stood deleted. However, even after 1.4.1988, the proviso to Section 32(1)(ii) continued till 1.4.1996 when by the Finance (No. 2) Act, 1995 the bottles and crates even below Rs. 5,000/- came within the "block of assets" as defined under Section 2(11) of the 1961 Act. As stated, this judgment is confined to depreciable assets costing less than Rs. 5,000/- which did not enter the block of assets during the assessment years in question (when Section 41(2) stood deleted). Effect of introducing Finance (No. 2) Act, 1995 w.e.f. 1.4.1996: 10. At the outset, it may be noted that, by the above Finance Act, the first proviso to Section 32(1)(ii) stood deleted w.e.f. 1.4.1996. Consequently, bottles, crates and cylinders whose individual cost did not exceed Rs. 5,000/- also came to be included in the block of assets. 11. Before us, in this batch of civil appeals, we have four Civil Appeals (Civil Appeals arising out of S.L.P. (C) Nos. 8002/09 and 3064/09, Civil Appeal Nos. 356-357/06 and 5858/06) which fall in the period after 1.4.1996. The Lead Matter in this category is M/s Goa Bottling Company Pvt. Ltd. v. Asstt. Commissioner of Income Tax (Civil Appeal Nos. 356-357/06 ). That lead matter is for assessment year 1998-99. M/s Goa Bottling Company Pvt. Ltd. is a company registered under the Companies Act, 1956 and is in the business of manufacture and sale of soft drinks. For the purposes of its business, it bought bottles and crates whose cost per unit did not exceed Rs. 5,000/-. During the year ending 31.3.1998, the company received a sum of Rs. 6,89,91,901 on sale of scrap bottles and crates. The sale proceeds were segregated in two parts:(a) in respect of bottles and crates purchased prior to 31.3.1995; and(b) those purchased after 1.4.1995.In the Return of income filed, the sale proceeds relating to bottles and crates purchased after 1.4.1995 were taken into consideration for the purpose of computation of short term capital gains under Section 50 whereas the sale proceeds relating to bottles and crates purchased prior to 31.3.1995 was not offered for short term capital gains on the ground that the assets stood depreciated at 100% under the proviso to Section 32(1)(ii) and hence did not form part of the block of assets.12. For reasons given hereinabove, we are of the view that bottles and crates purchased prior to 31.3.1995 did not form part of the block of assets, hence, profits on sale of such assets were not taxable as a balancing charge, neither under Section 41(1) nor under Section 50. In respect of bottles and crates purchased after 1.4.1995, on account of deletion of proviso to Section 31(1)(ii) (vide Finance Act, 1995) such bottles and crates formed part of block of assets and consequently such assets purchased after 1.4.1995, in this case, became exigible to capital gains tax under Section 50.13. Before concluding, it may be pointed out that, in the case of Nector Beverages Pvt. Ltd., assessee has earmarked the sale proceeds from bottles and crates as "miscellaneous income" and not as "profit on sale of assets" whereas, in the case of other assessees, including Industrial Oxygen Co. Ltd. (now known as Inox Air Products Ltd.), the said sale proceeds have been earmarked specifically under the Heading "Profits from sale of assets". To this limited extent only, we remit the case(s) of Nectar Beverages Pvt. Ltd. [Civil Appeal Nos. 5291/04, 5293/04 and 359-360/06] to the A.O. to go through the computation submitted by Nectar Beverages Pvt. Ltd. and find out whether earmarking "profits from sale of assets" as "miscellaneous income" has resulted in the understatement of net profits at the pre-Section 28 stage and taxable profits at post-Section 28 stage. In all other cases, sale proceeds have been earmarked as "profits on sale of assets" and in those cases, therefore, there is no question of verification by the A.O..

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]11. Before us, in this batch of civil appeals, we have four Civil Appeals (Civil Appeals arising out of S.L.P. (C) Nos. 8002/09 and 3064/09, Civil Appeal Nos.and 5858/06) which fall in the period after 1.4.1996. The Lead Matter in this category is M/s Goa Bottling Company Pvt. Ltd. v. Asstt. Commissioner of Income Tax (Civil Appeal Nos.). That lead matter is for assessment yearM/s Goa Bottling Company Pvt. Ltd. is a company registered under the Companies Act, 1956 and is in the business of manufacture and sale of soft drinks. For the purposes of its business, it bought bottles and crates whose cost per unit did not exceed Rs.During the year ending 31.3.1998, the company received a sum of Rs. 6,89,91,901 on sale of scrap bottles and crates. The sale proceeds were segregated in two parts:(a) in respect of bottles and crates purchased prior to 31.3.1995; and(b) those purchased after 1.4.1995.In the Return of income filed, the sale proceeds relating to bottles and crates purchased after 1.4.1995 were taken into consideration for the purpose of computation of short term capital gains under Section 50 whereas the sale proceeds relating to bottles and crates purchased prior to 31.3.1995 was not offered for short term capital gains on the ground that the assets stood depreciated at 100% under the proviso to Section 32(1)(ii) and hence did not form part of the block of assets.12. For reasons given hereinabove, we are of the view that bottles and crates purchased prior to 31.3.1995 did not form part of the block of assets, hence, profits on sale of such assets were not taxable as a balancing charge, neither under Section 41(1) nor under Section 50. In respect of bottles and crates purchased after 1.4.1995, on account of deletion of proviso to Section 31(1)(ii) (vide Finance Act, 1995) such bottles and crates formed part of block of assets and consequently such assets purchased after 1.4.1995, in this case, became exigible to capital gains tax under Section 50.13. Before concluding, it may be pointed out that, in the case of Nector Beverages Pvt. Ltd., assessee has earmarked the sale proceeds from bottles and crates as "miscellaneous income" and not as "profit on sale of assets" whereas, in the case of other assessees, including Industrial Oxygen Co. Ltd. (now known as Inox Air Products Ltd.), the said sale proceeds have been earmarked specifically under the Heading "Profits from sale of assets". To this limited extent only, we remit the case(s) of Nectar Beverages Pvt. Ltd. [Civil Appeal Nos. 5291/04, 5293/04 andto the A.O. to go through the computation submitted by Nectar Beverages Pvt. Ltd. and find out whether earmarking "profits from sale of assets" as "miscellaneous income" has resulted in the understatement of net profits at the28 stage and taxable profits at28 stage. In all other cases, sale proceeds have been earmarked as "profits on sale of assets" and in those cases, therefore, there is no question of verification by the A.O..