Whether when assessee has not claimed any depreciation on one set of plant and machinery not in use, same can still be treated as part of block of assets, and thus, can be assessed u/s 50 for capital gains arising on transfer - NO: HC

THE issue before the Bench is - Whether when assessee has not claimed any depreciation on one set of plant and machinery not in use, the same can still be treated as part of 'block of assets', and thus, can be assessed u/s 50 for capital gains arising on transfer. NO is the HC's answer.

Facts of the case

The

assessee-respondent filed return declaring nil income in respect of the assessment year 2006-07. The case was subsequently taken up for scrutiny. The assessment was completed under Section 143(3) of the Act at an income of Rs. 3,58,610/-, inter alia, making disallowance of appreciation at Rs. 4,04,340/- because unit belonging to the assessee-respondent was out of production from the period commencing March, 1998 and further adjusting brought forward depreciation losses against the capital gain on the sale of plant and machinery, which was effected in the financial year 2005-06. The assessee-respondent filed an application under Section 154 of the Act seeking rectification of order with a request to the Assessing Officer to allow the benefit of cost inflation index by pleading that the plant and machinery (not in use) had always been shown as a separate item and no depreciation on the aforesaid item was ever claimed. It was requested that the provision of Section 50 of the Act would not be attracted because it covered only depreciable assets if it was to fall under short term capital assets. The basic feature of the aforesaid provision was that the depreciation on such assets had already been claimed by the assessee-respondent. It was only on the sale of such assets, the gain arising on the said sale of assets minus the WDV of the asset was considered as short term capital gain in the hands of the assessee-respondent as per provisions of Section 50 of the Act. The assessee-respondent claimed that since no depreciation at any stage was claimed, Section 50 of the Act would not apply and the assets (not in use) acquired by the assessee-respondent would be assessable as long term capital gain according to the definition given in Section 2(29-B) of the Act. However, the Assessing Officer dismissed the rectification application.

On appeal, the CIT(A) held that Section 50 of the Act would apply on the profits gain on the sale of the plant and machinery (not in use) and the Assessing Officer had rightly assessed the gain as short term capital gain.

On Appeal having heard the parties, the HC held that,

++ the assessee for all the earlier years, had reflected in its list of fixed assets plant and machinery under two separate heads, namely, plant and machinery on which depreciation has been claimed in the year prior to the F.Y 1996-97; another asset was created capitalized as plant and machinery (not in use) for F.Y 1997-98 and no depreciation was ever claimed on the addition of plant and machinery totaling Rs. 1.23 Crores. There was no dispute that the assessee had those assets for a period of more than 36 months, which is long term capital asset as defined u/s 2(28A) and the capital gain arising on transfer is required to be assessed as long term capital gain as per the definition given in Section 2(29B). The aforesaid provision has overriding effect contained in Section 2(42A). Therefore, the plant and machinery (not in use) could not be merged with the other head titled as plant and machinery;

++ once the Tribunal has recorded a categorical finding of fact that the plant and machinery, which is covered by Section 50, would be a depreciable asset and not the one on which no depreciation was ever claimed then such assets which are not depreciable, could not ever be assessed u/s 50;

++ the counsel for the appellant could not successfully argue that any question of law would arise because all the questions as claimed by the Revenue are based on presumption that plant and machinery (not in use) would be covered by the expression 'block of assets' even if no depreciation has ever been claimed. Once the Tribunal has recorded a categorical finding of fact that the plant and machinery, which is covered by Section 50 of the Act, would be a depreciable asset and not the one on which no depreciation was ever claimed then such assets which are not depreciable, could not ever be assessed under Section 50 of the Act. The appeal does not raise any question of law much less a substantive question of law and therefore, the same does not warrant admission.