Nectar Beverages vs. DCIT (Supreme Court)

Balancing charge is not chargeable to tax

The assessee purchased bottles and crates costing less than Rs. 5,000/- and was allowed 100% depreciation thereon u/s 32 (1) (ii). When the bottles and crates got worn out, they were sold by the assessee. The question arose whether the said sale proceeds were assessable to tax. Prior to AY 1988-89, the sale proceeds would have been assessable as a “balancing charge” u/s 41 (2). After the deletion of s. 41 (2), the department claimed that depreciation constituted “expenditure” and that the sale proceeds represented a “recoupment of that expenditure” which was chargeable as business profits u/s 41 (1). HELD, rejecting the stand of the department that:

(i) Prior to 1.4.1988, Ss. 41(1) and 41(2) both existed on the statute book. S. 41(1) deals with recoupment of trading liability while s. 41(2) deems balancing charge to be business income. Both operate in different spheres. If the argument of the department that balancing charge should be read as falling within the scope of s. 41(1) is accepted then it was not necessary for Parliament to enact S. 41(2) in the first instance. Section 41(1) alone would have sufficed.

(ii) The necessity to enact s. 41(2) in addition to s. 41(1) arose from the fact that, in its very nature, depreciation is neither a loss, nor expenditure, nor a trading liability, referred to in s. 41(1). Depreciation recovered on sale of a capital asset was includible in the total income as balancing charge only under s. 41(2). That concept was foreign to the scheme of s. 41(1).

(iii) Even after the introduction of the concept of “block of assets” w.e.f. 1.4.1988, the proviso to s. 32(1) (ii) continued till 1.4.1995. After that date, even purchases below Rs. 5,000 came within “block of assets”. Accordingly, assets purchased prior to 31.3.1995 do not form part of the block of assets and profits on sale of such assets are not taxable as a balancing charge either u/s. 41(1) or u/s 50.