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

4. In the Lead Matter, the assessee who is the manufacturer of soft drinks, purchased bottles and crates, each item of which costed less than Rs. 5,000/- and, therefore, was entitled to and allowed 100% depreciation on the cost of the said bottles and crates, in the year in which they were acquired, under the proviso to Section 32(1)(ii) of the Income Tax Act, 1961 ("1961 Act" for short). When bottles and crates got worn out, they were sold by the assessee and proceeds therefrom were shown as "miscellaneous income" in the subsequent years. If these sales had taken place in the previous years relating to the assessment years prior to 1988-89, the same would, without doubt, would have been included in the business income of the assessee under Section 41(2). This was because prior to the assessment year 1988-89, Section 41(2) inter alia provided for balancing charge which was chargeable as income taxable under the 1961 Act. However, with effect from assessment year 1988-89, Section 41(2), which inter alia dealt with profit on sale of depreciable asset (balancing charge), stood deleted. Notwithstanding such deletion, the Department sought to tax Rs. 50,850/- holding that the sale proceeds of the 100% depreciated and written off assets can still be treated as the business income of the assessee under Section 41(1) of the 1961

Court's reasoning:
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..