S. 45 (3) applies when a capital asset is introduced into a firm as capital contribution. This provision applies also when stock-in-trade is introduced into a firm because the transaction is on the capital account and stock-in-trade does not retain its character as stock-in-trade at the point of time of introduction. This is also shown by the fact that the assessee revalued the stock-in-trade to its market value prior to the introduction into the firm. Consequently, the gains on such transfer is taxable u/s 45(3).

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