Facts

The 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 1st January, 1954. The  assessee sold its Mangalore buildings for Rs. 2,25,000. Its 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 1st January, 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 building    or the value of the building as on 01.01.1954 and it had chosen the latter. The Income tax Officer (ITO), however, took the view that the assessee did not  have the right to substitute the value as on 01.01.1954 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 option which was a general provision was not applicable in the case of depreciable assets. The ITO,  therefore, substituted the original value and arrived   at a capital gain of Rs. 9021 in the case of Calicut property and Rs. 1,46,320 in     the case of Mangalore buildings. On appeal filed by the assessee the Appellate Assistant Commissioner (AAC) agreed with the ITO.  He was also of the view  that the assessee did not have the right to substitute the value as on 01.01.1954     in respect of depreciable assets. The assessee then went to the Tribunal and the 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 Tribunal  and decided the question in the affirmative, in favour of the Revenue and against the assessee. CIT v. Commonwealth Trust Ltd (1982) 135 ITR 19 (Ker) (HC) (FB). On certificate granted by the High Court under section 261 of the Act this appeal has come before us.

Issue

Whether an assessee who has acquired capital asset before 01.01.1954 otherwise than by any of the modes mentioned in s. 49 and sold it after 01.01.1954, on which it had already claimed and allowed depreciation under section 32 of the ‘Act’, is also entitled to have the quantum of taxable capital gains computed in the manner provided by cl. (i) of  sub-s. (2) of  s.  55  of  the Act ? (That is, whether an assessee in such case, has the right under section 55(2)(i) of the ‘Act’ to adopt the written down value (‘WDV’) of the building or the value of the building as on 1st January, 1954?)

Views

While the Revenue gets support from the decisions of the High Courts of Gujarat, Allahabad and Calcutta for upholding the impugned judgment, the assessee gets support from the decision of the Bombay High Court. Gujarat, Allahabad and Calcutta decisions are reported respectively in Rajnagar Vaktapur Ginning, Pressing & Mfg. Co. Ltd. v. CIT (1975) 99 ITR 264 (Guj) (HC) CIT v. Upper Doab Sugar Mills (1979) 116 ITR 240 (All)(HC) and India Jute Co. Ltd. v. CIT (1982)  136 ITR 597 (Cal)(HC), Bombay decision is reported in Goculdas Dossa & Co. & Ors. v. J. P. Shah & Ors. (1995) 211 ITR 706(FB) (Bom) (HC).

Held

Dismissing the assessee’s appeal, the court held that, 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. Further it noted that, for sections 48 and 49  the provision of section 55(2) would apply as modified by those of section 50. It     is further held that, for the purposes of applying section 55(2), sections 48 and      49 will have to be applied as modified by section 50. Finally the court inferred  after analyzing and studying the anatomy of these provisions that, where 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 01.01.1954 but where it is a depreciable asset and the assessee has enjoyed depreciation allowance, his cost of acquisition shall have to  be determined as provided in section 50. Section. 50 is in absolute termsspecially

providing for fixing the cost of acquisition in the case of depreciable asset only. Ergo, it was summed up that section 50(1) has no dependence on the provisions    of section 55(2). There is no mention of “fair market value” in 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. So the court   held that, 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 s. 50 read with section 48. So the court gave its imprimatur to views of the Gujarat, Allahabad, Calcutta High Courts and   of the Kerala High Court in the impugned judgment and disapproved the views     of Bombay High court. (AY.  1971-1972) (C.A Nos.2978/82, C.A. Nos. 2979/82   dt. 30-7-1997)

Editorial : Decision in CIT v. Commonwealth Trust Ltd. [1982] 135 ITR 19 [FB] (Ker) (HC) is affirmed. Interestingly the court in above decision, took special cognizance of subsequent amendment made in the Act and succinctly observed     in this regard that, since the relevant provisions have been amended w.e.f. 1st April, 1988, the controversy like the one raised in the present proceedings does    no longer survive which stands explained in CBDT circular number 469 dated 23.09.1986 where concept of block of assets was introduced (carrying same rate of depreciation), which has been hitherto referred by Delhi High Court in its decision   in case of CIT v. Oswal Agro Mills Limited, (2012) 341 ITR 467  (Delhi)(HC)  and CIT. v. Ansal Properties and Infrastructure Limited (2012) 207 Taxman 61 (Delhi) (HC)

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