Case: The Commonwealth Trust Ltd., Calicut, Kerala Vs. The Commissioner Of Income Tax, Kerala Ii, Ernakulam

These two appeals by certificate under section 261 of the Income-tax Act, 1961 (for shortthe Act ), are directed against the judgment dated November 27, 1981 of the Kerala High Court. The judgment is now reported in [FB]. The following two questions were decided by the High CourtWhile the first question was referred at the instance of the Revenue, the second question was at the instance of the assessee. Both the questions were, however, answered by the High Court in favour of the Revenue and against the assesseeThe assessment year is 1971-72, the accounting year being 1970-71. The assessee, a limited company, was possessed of considerable properties at Calicut and Mangalore. It owned these properties right from 1920 onwards. The assessee had claimed depreciation for its factory buildings which had been allowed in the previous years. During the period relevant to the assessment year 1971-72, the assessee sold some of these properties on which it had already claimed depreciation. The Calicut weaving factory was sold for Rs. 20, 000, its original value being Rs. 10, 000. The assessee had incurred an additional expenditure of Rs. 979 on this property. As noted above depreciation had been allowed on the value of the property in the earlier years. In computing the capital gains, the assessee showed a capital loss of Rs. 78 on the sale of this property. This the assessee did on revaluing the property as on January 1, 1954. The assessee sold its Mangalore buildings for Rs. 2, 25, 000. Their original cost as adjusted came to Rs. 76, 680. In respect of these buildings also depreciation had been claimed and allowed in the previous years. Here again the assessee revalued the buildings as on January 1, 1954, and on that basis showed the capital gains at Rs. 44, 713. The stand taken by the assessee was that it had the option under section 55(2)(i) of the Act either to adopt the written down value of the buildings or the value of the buildings as on January 1, 1954, and it had chosen the latter. The Income-tax Officer, however, took the view that the assessee did not have the right to substitute the value as on January 1, 1954, because the assets were depreciable assets to which section 50(1) applied, which was a special provision in respect of depreciable assets and the provision as contained in section 55(2)(i) allowing an option which was a general provision was not applicable in the case of depreciable assets. The Income-tax Officer, therefore, substituted the original value and arrived at a capital gain of Rs. 9, 021 in the case of the Calicut property and Rs. 1, 46, 320 in the case of the Mangalore buildings. On appeal filed by the assessee, the Appellate Assistant Commissioner agreed with the Income-tax Officer. He was also of the view that the assessee did not have the right to substitute the value as on January 1, 1954, in respect of depreciable assets. The assessee then went to the Income-tax Appellate Tribunal and the Appellate Tribunal dismissed the appeal but at the instance of the assessee referred the aforesaid second question for the decision of the High Court. The High Court agreed with the view of the Appellate Tribunal and decided the question in the affirmative, in favour of the Revenue and against the assessee. On certificate granted by the High Court under section 261 of the Act this appeal has come before us

Reasoning:
The High Courts of Gujarat, Allahabad, Calcutta and Kerala have, however, held that this could not be so as section 50(1) being a special provision for computing the cost of acquisition in the case of depreciable assets, it would override the general provisions of section 55(2) which according to these High Courts would be applicable to cases of non-depreciable assets or depreciable assets where depreciation had not been claimed. The Bombay High Court, on the other hand, has not followed this line of reasoningIn the present case it is not disputed that it is section 48 which is applicable and not section 49. Under section 48, to compute the income chargeable under the headCapital gains , the value of consideration received on transfer of the capital asset is to be reduced by the expenditure incurred on the transfer and the cost of acquisition of the capital asset and the cost of any improvement thereto. The expenditure that might have been incurred on the transfer of the capital asset and the cost of any improvement thereto are not the subject of any controversy in the case before us. Section 49 is not applicable as the capital asset was not acquired by any of the modes mentioned in that section. Coming to section 50 it states, in so far as it is relevant, that when depreciation has been obtained on the capital asset, the provision of section 48 is subject to the modification thatthe written down value, as defined in clause (6) of section 43 of the asset, as adjusted, shall be taken as the cost of acquisition of the asset . It is the expressionof which the meaning has been given in section 55(1)(a) and it is to be applied while considering the applicability of section 50(1). Under section 55(1)(a) the expressionadjusted , in relation to written down value or fair market value, means diminished by any loss deducted or increased by any profit assessed under the provisions of clause (iii) of sub-section (1) of section 32 or sub-section (2) of section 41, as the case may be, and in cases to which clause (2) of section 50 applies the computation for this purpose being made with reference to the period commencing from the January 1, 1954. Significantly, the wordshave been used in order to avoid the possibility of there being a double tax, where the question of any terminal (balancing) allowance under section 32 or balancing charge under section 41 is involved. Therefore, in its application of the expressionsas adjusted , the written down value as ascertained according to clause (6) of section 43 shall be adjusted with either subtraction of the terminal (balancing) allowance or with addition of the amount of balancing charge, if any, allowed out of or taken into the business income. Where the capital asset is sold for less than the written down value, the difference or deficiency between the sale price and the written down value is allowed as a deduction in the computation of the business profits (section 32(1)(iii), which is termed asbalancing (or terminal) allowanceand where the asset is sold for more than the written down value, the sale price being less than the cost, the excess realised over the written down value is charged as business profits (section 41(2)) and is termed asbalancing charge . Part D of Chapter IV of the Act does not provide for the circumstance when the depreciated asset has been sold for a price which is more than the cost. This is considered under the provisions of Part E of Chapter IV dealing with capital gains and more particularly section 50 falling under Part E. While sub-section (1) of section 55 which uses the expressionsapplies for the purposes of sections 48, 49 and 50, sub-section (2) of section 55 which uses the expressionis for the purpose of sections 48 and 49In commercial parlance computation of capital gain would mean the actual gain measured by the difference between the sale price and the cost of acquisition. It is thethat is required to be determined under the provisions of sections 48, 49, 50 and 55. Both under sections 48 and 49 cost of acquisition will have to be determined and adjusted as provided in sections 50 and 55. Section 55(2) gives an option to both kinds of assessees, that is, those who have purchased the capital asset as well as those who have acquired it by any of the modes mentioned in section 49 to substitute for the actual cost of acquisition the fair market value of the asset as on January 1, 1954. Section 55(2) will have application only if one of the two classes of assessees exercises his option. Section 55(2), however, makes it clear that the option is available only for the purposes of sections 48 and 49 and it is not available for a case falling under section 50. Though the provisions of section 55(2) would be available to every kind of capital asset, whether the same has enjoyed the depreciation allowance or not, whether in the hands of the assessee or the previous owner, for the assessee in whose case depreciation allowance has been availed of before the transfer of the capital asset, the meaning ofas stated in sections 48 and 49 would appear to have been modified in the manner stated in section 50. Thus, where the assessee has not availed of depreciation allowance in respect of the capital asset, section 50 has no application. In this view of the matter, there does not appear to be any conflict between the provisions of sections 50 and 55(2). Section 55(2) would be applicable to all assets depreciable or non-depreciable for the purposes of arriving at the cost of acquisition under sections 48 and 49, but section 50 carves out a category of those capital assets which had been subjected to grant of depreciation allowance and this section 50, therefore, provides a special method for determining the cost of acquisition in such cases. The provision of section 55(2) is not subject to the provisions of section 50. These are the provisions of section 50(2), which only are subject to the provisions of sections 55(2), 48 and 49. Now, to sections 48 and 49, the provision of section 55(2) would apply as modified by those of section 50. Section 50 is applicable where the assessee has obtained deduction on account of depreciation in respect of the capital asset in question and in that case section 55(1) also comes into operation in view of the expressionwhich is defined therein in clause (a) of section 55(1). The expressionis for the purposes of sections 48, 49 and 50. For the purposes of applying section 55(2), sections 48 and 49 will have to be applied as modified by section 50. It follows, therefore, that whether the capital asset purchased by the assessee is a depreciable or non-depreciable asset, the assessee will have the option for substituting for its actual cost of acquisition its fair market value as on January 1, 1954, but where it is a depreciable asset and the assessee has enjoyed depreciable allowance, his cost of acquisition shall have to be determined as provided in section 50Viewed from this angle, section 50(1) has no dependence on the provisions of section 55(2). There is no mention ofin section 50(1) and besides that the adjustments stated there are with reference to the written down value only, which has nothing to do with the fair market value. We conclude, therefore, that in the present case where the capital asset is depreciable and the assessee has availed of deduction on account of depreciation, the cost of acquisition shall have to be determined in terms of the provisions of section 50 read with section 48. All the High Courts including the Bombay High Court are of the view that section 50(2) does not apply to any capital asset other than that which has been acquired by any of the modes mentioned in section 49. It does not apply to the case of a person who has himself purchased the asset which has enjoyed the depreciation allowance. To us it appears section 50 is in absolute terms specially providing for fixing the cost of acquisition in the case of depreciable assets only. It is difficult to accept the view of the Bombay High Court when it brings into operation article 14 of the Constitution and the judgment proceeds more on the basis of equitable considerations than the clear provision of law. The Bombay High Court has even read down and modified the provisions, which would appear to be rather unnecessary. We uphold the views of the Gujarat, Allahabad and Calcutta High Courts and of the Kerala High Court in the impugned judgment. The impugned judgment of the High Court whereby question No. 2 has been answered in favour of the Revenue is, therefore, upheld and the appeal in so far as it relates to question No. 2 is accordingly dismissed