(917.8 KiB, 1,305 DLs)

Even introduction of stock-in-trade as capital contribution into firm attracts s. 45(3)

The assessee was engaged in the business of real estate development. It held land as stock in trade with a book value of Rs. 4.4 crs. The said land was introduced at its market value of Rs. 11.50 crs as capital contribution into a new firm. The surplus of Rs. 6.01 crore was credited to the profit and loss account. Relying on Hind Construction 83 ITR 211 (SC), it was claimed that the surplus of Rs. 6.01 crs was not liable to tax as the introduction of an asset into a partnership was not a sale. It was also claimed that s. 45 (3) was applicable only to capital assets and not to stock-in-trade. The AO and the CIT (A) took a contrary view relying on Sunil Siddharthbhai 156 ITR 509 (SC) & McDowell 154 ITR 148 (SC). On appeal by the assessee, HELD by the majority, dismissing the appeal:

(i) In Sunil Siddharthbhai it was held that when a partner introduces his asset into a firm as capital contribution, there is a “transfer” though the gains are not chargeable to tax as the consideration is not determinable. It was clarified that this principle did not apply if the partnership was non-genuine or sham or where the transaction of transferring the personal asset to the partnership firm was a device or ruse to convert personal assets into money while evading tax on capital gains;

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(242.9 KiB, 976 DLs)

Under “block of assets” even a closed unit is eligible for depreciation

The assessee had two divisions, one at Dombivili and the other at Surat. The division at Surat was closed since two/three years. The assessee claimed depreciation on the assets of the said Surat division which was rejected by the AO and the CIT (A) on the ground that the assets were not “used” and depreciation could not be allowed. On appeal by the assessee, HELD allowing the appeal:

(i) In Gulati Saree Centre 71 ITD 73 (Chd.) (SB), it was held that even after introduction of the concept of block of assets, the identity of individual assets was not lost & the AO could restrict depreciation u/s 38(2) having regard to the user of the assets. However, s. 38 (2) applies only to a case when the asset is not exclusively used for business purposes but is used for non business purposes as well. S. 38 (2) does not apply to an asset which is neither used for business purposes nor for non business purposes but remains in the block of assets;

(ii) The concept of allowing depreciation on block of assets was introduced w.e.f. 01.04.1988 with the object of avoiding separate book keeping. A harmonious reading of the expression ‘used for the purposes of the business’, would show that it only means that the assessee has used the machinery for the purposes of the business in earlier years;

(iii) The doubt as to how deprecation can be allowed on assets which are not used for the purpose of business is answered by the legislative scheme that though the profit of that year is reduced, the WDV is reduced and the gain is taxed u/s 50 when the asset is sold and block ceases to exist;

(iv) The “use” of an individual asset can be examined only in the first year when the asset is purchased. In subsequent years the use of block of assets is to be examined. The existence of an individual asset in block of asset itself amounts to use for the purpose of business. This is supported by the proviso to s. 32 which provides half depreciation for assets acquired in the year and held for less than 180 days. Once an asset is included in the block of assets it remains there and can only be removed when it is sold, discarded etc u/s 43(6)(c)(i)(B) or used for non-business purposes u/s 38 (2) or where the entire block ceases to exist.

(v) On facts, though the entire division was closed, the assets were a part of the block of assets and depreciation was allowable thereon.