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Commissioner Of Income-Tax v. Upper Doab Sugar Mills
Court Opinion Summary — Satish Chandra, J.
Factual and Procedural Background
The assessee, The Upper Doab Sugar Mills Ltd., a public limited company engaged in manufacture and sale of sugar, disposed of machinery during the accounting period ending 30 September 1963 (assessment year 1964-1965). The assessee sold machinery for Rs. 1,21,000 and received Rs. 1,17,192 by way of insurance settlement for other machinery lost by fire. The Income-tax Officer treated these receipts as giving rise to profit under Section 41(2) and as capital gains, computing capital gains at amounts materially higher than the assessee's computation (the ITO computed capital gains at Rs. 1,23,523; the assessee computed capital gains at a little over Rs. 20,000). The ITO considered Section 50(1) applicable and rejected the assessee's claim to treat fair market value (FMV) as cost of acquisition.
On appeal, the Appellate Assistant Commissioner accepted the assessee's contention, holding that Section 50(2) read with Section 55(2)(ii) applied and directed recomputation of capital gains by adopting the FMV as on 1-1-1954 (subject to the provisions cited). The Income-tax Officer appealed to the Tribunal, which upheld the Appellate Assistant Commissioner's view and dismissed the Department's appeal.
The Department (Revenue) obtained a reference to this Court, framing the question whether, on the facts of the case, the provisions of Section 50(2) and Section 55(2)(ii) were applicable to determine the assessee's capital gains for the accounting year relevant to the assessment year 1964-1965. The machinery involved had been acquired by the assessee prior to 1-1-1954 and depreciation had been claimed in respect of those assets.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case relating to the assessment year 1964-1965, the provisions of Section 50(2) and Section 55(2)(ii) of the Income-tax Act, 1961, were applicable in determining the capital gains arising to the assessee.
- How the cost of acquisition of the depreciable capital assets in question is to be computed for the purpose of computing capital gains — specifically whether the assessee could exercise the option under Section 55(2)(i) to treat the fair market value as on 1-1-1954 as the cost of acquisition, or whether Section 50(1) (the special provision for depreciable assets) applied to exclude that option.
Arguments of the Parties
Assessee's Arguments
- The assessee contended that, because the assets became the property of the assessee before 1-1-1954, it was entitled under Section 55(2)(i) to elect to treat the fair market value of the assets as on 1-1-1954 as the cost of acquisition for computing capital gains.
- The Appellate Assistant Commissioner accepted this position and directed recomputation of capital gains on that basis, taking account of assessment history.
Revenue's Arguments
- The Revenue submitted that Section 50 is a special provision dealing with depreciable assets and therefore applies to the present facts to the exclusion of Section 55(2)(i). In particular, Section 50(1) requires that the written down value (as defined) be taken as the cost of acquisition for depreciable assets owned by the assessee, and does not permit an election to take FMV as cost for original owners.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Rajnagar Vaktapur Ginning, Pressing and Manufacturing Co. Ltd. v. Commissioner of Income-tax, (1975) 99 ITR 264 at p. 283; (1975 Tax LR 310 at p. 320 | Holds that an assessee who is the original owner of a depreciable asset and is not covered by Section 49 is governed by Section 50(1) and cannot opt to select the fair market value as on 1-1-1954 as the cost of acquisition. | The Court relied on this decision to support the conclusion that Section 50(1) governs original owners of depreciable assets and excludes the option under Section 55(2) to adopt FMV as cost; the precedent fortified the Court's construction that the special provision (Section 50) prevails. |
Court's Reasoning and Analysis
The Court analysed the relevant statutory provisions and their interplay:
- The Court began with the general charging and computation provisions: Section 45 charges capital gains on transfer of a capital asset; Section 48 prescribes computation of capital gains by deducting cost of acquisition; Section 49 deals with cost where the asset is indirectly acquired.
- Section 50 is a specific provision titled "Special provision for computing cost of acquisition in the case of depreciable assets." It contains two operative modifications to Sections 48 and 49:
- Sub-section (1): for depreciable assets owned by the assessee (original owner), the written down value (as defined in Section 43(6)) shall be taken as the cost of acquisition.
- Sub-section (2): where Section 49 (indirect acquisition) read with Section 55(2) requires taking FMV as on 1-1-1954 at the option of the assessee, Section 50(2) provides that the cost of acquisition shall, at the option of the assessee, be the FMV on that date reduced by the amount of depreciation allowed to the assessee after that date.
- Section 55(2) defines "cost of acquisition" for purposes of Sections 48 and 49 and provides an option to take either original cost or FMV as on 1-1-1954 where the asset became the assessee's property before that date (sub-section (2)(i)), and similarly for assets indirectly acquired (sub-section (2)(ii)).
- The Court emphasised that Section 55(2) is a definitional provision expressly confined to the purposes of Sections 48 and 49 and that its definition does not, by its terms, extend to the special provisions in Section 50.
- Because Section 50 is a special provision directed specifically at depreciable assets and expressly modifies the rules in Sections 48 and 49, the Court held that Section 50 must prevail over the broader definitional provision of Section 55(2) in cases where both could be said to apply. In particular:
- For depreciable assets owned by the assessee as original owner, Section 50(1) requires taking written down value as cost of acquisition and does not permit the election to adopt FMV as cost.
- Section 50(2) has been enacted to deal with the special situation of indirectly acquired depreciable assets (i.e., those covered by Section 49 and also within Section 55(2)), and prescribes a different formula (FMV less depreciation allowed after 1-1-1954) where that specific situation arises.
- The Court observed that this construction explains the presence of Section 50(2): had Section 55(2) sufficed to govern depreciable assets generally it would have been unnecessary to enact Section 50(2). The specific confinement of Section 50(2) to Section 49 cases confirms that Section 50 is intended to be the governing provision for depreciable assets.
- The Court acknowledged that the two available constructions create anomalies (e.g., different consequences for original owners and indirectly acquiring transferees), but held that Section 50 is mandatory and must be applied as written: "There is no room for any intendment; there is no equity about a tax, and there is no presumption as to a tax." The Court therefore favored the literal and specific operation of Section 50 over any broader reading of Section 55(2).
- The Court relied on the cited Gujarat High Court decision as supportive authority for the proposition that original owners of depreciable assets not covered by Section 49 are governed by Section 50(1) and cannot opt for FMV under Section 55(2).
- On this basis the Court concluded that the Appellate Assistant Commissioner and the Tribunal were incorrect in applying Section 55(2) rather than Section 50(1) (the present case did not fall within Section 49 and therefore Section 50(2) was not applicable either).
Holding and Implications
Holding: The Court answered the referred question in the negative — holding that Section 50 (in particular Section 50(1) for original owners of depreciable assets) applies to the facts of this case and Section 55(2) does not displace Section 50. The decision was rendered in favour of the Department and against the assessee.
Implications:
- The direct effect on the parties is that the assessee, being the original owner of the depreciable machinery acquired prior to 1-1-1954, cannot elect under Section 55(2)(i) to treat the fair market value as on 1-1-1954 as the cost of acquisition; instead, the written down value must be taken as the cost of acquisition under Section 50(1). (Section 50(2) was held confined to indirectly acquired assets under Section 49 and hence not applicable to this case.)
- The Court awarded costs to the Commissioner assessed at Rs. 200/-.
- The opinion does not purport to create a novel precedent beyond construing and applying the statute and confirming the approach taken in the cited Gujarat High Court decision; the Court described Section 50 as a special, mandatory provision that prevails in cases of depreciable assets.
Answered in the negative. Costs assessed at Rs. 200/- in favour of the Commissioner.
Satish Chandra, J.:— The Upper Doab Sugar Mills Ltd., the assessee, is a public limited company. It does the business of manufacture and sale of sugar. The question referred to us relates to the assessment year 1964-1965.
2. During the accounting period relevant to this assessment year, which ended on 30th Sept., 1963, the assessee sold machinery worth Rs. 1,21,000/-. It also received Rs. 1,17,192/- in settlement of insurance claim in respect of certain other machinery lost by fire. The Income-tax Officer held that these receipts resulted in profit under Section 41(2) amounting to Rs. 1,10,302/- and in capital gains amounting to Rs. 1,23,523/-, as against the assessee's computation of the capital gains at a little over Rs. 20,000/-. The case fell within the purview of Section 50(1) of the Income-tax Act, 1961, and Section 50(2) thereof was not attracted. The claim of the assessee that it was entitled to exercise the option of treating the fair market value as cost of acquisition were rejected. The assessee went up in appeal. The Appellate Assistant Commissioner accepted the assessee's plea. He held that Section 50(2) read with Section 55(2)(ii) of the Income-tax Act, 1961, was applicable, and these sections gave an option to the assessee to compute capital gains by adopting fair market value of the assets as on 1-1-1954. He accordingly directed the Income-tax Officer to recompute the capital gains in the light of the provisions of Section 50(2) and 55(2)(ii) and also in consonance with the previous assessment history.
3. The Income-tax Officer went up in appeal to the Tribunal, which upheld the viewpoint of the Appellate Assistant Commissioner and dismissed the appeal.
4. At the instance of the Department the Tribunal has referred the following question of law for the opinion of this Court:—
“Whether on the facts and in the circumstances of the case ill determining the capital gains arising to the assessee in the accounting year relevant to the assessment year 1964-1965, provisions of Section 50(2) and Section 55(2)(ii) were applicable”.
5. On facts admitted, the position appears to be that the machinery which was sold or lost by fire was acquired by the assessee company prior to 1-1-1954. The assessee company had obtained depreciation allowance in respect of these assets.
6. In substance, the controversy before us is as to how the cost of acquisition of these capital assets is to be computed. The assessee claimed that it was entitled to exercise the option having the fair market value of the assets as on 1st Jan., 1954, treated as the cost of acquisition in view of Section 55(2)(i). The Revenue, on the other hand, submits that S. 50(1) is a special provision. It applies to the facts of the present case to the exclusion of S. 55(2)(i).
7. Under S. 45 of the Act any profits or gains arising from the transfer of a capital asset are chargeable to income-tax under the head “Capital Gains,” which is under Section 48 computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset, inter alia, the cost of acquisition of the capital asset. Section 49 provides for computing the cost of acquisition of an asset indirectly acquired by the assessee. Section 50 is headed “Special provision for computing cost of acquisition in the case of depreciable assets.” In the case of a depreciable asset the provisions of Sections 48 and 49 are to be subject to the following modifications:—
“(1) The written down value, as defined in clause (6) of Section 43, of the asset, as adjusted, shall be taken as the cost of acquisition of the asset.
(2) Where under any provision of Section 49, read with sub-section (2) of Section 55, the fair market value of the asset on the 1st day of Jan., 1954, is to be taken into account at the option of the assessee, then, the cost of acquisition of the asset shall, at the option of the assessee, be the fair market value of the asset on the said date, as reduced by the amount of depreciation if any, allowed to the assessee, after the said date, and as adjusted.”
8. Section 50 modifies the provisions of sections 48 and 49 in these two respects.
9. Section 55 is entitled “Meaning of ‘adjusted, cost of improvement and cost of acquisition’.” Sub-section (1) defines the terms “adjusted” and “cost of any improvement”. This meaning is given for the purposes of Sections 48, 49 and 50. Sub-section (2) provides—
“(2) For the purposes of Sections 48 and 49 ‘cost of acquisition’ in relation to a capital asset,—
(i) where the capital asset became the property of the assessee before the 1st day of January, 1954, means the cost of acquisition of the asset to the assessee or the fair market value of the asset on the 1st day of January, 1954, at the option of the assessee;
(ii) where the capital asset became the property of the assessee by any of the modes specified in sub-section (1) of Section 49, and the capital asset became the property of the previous owner before the 1st day of January, 1954, means the cost of the capital asset to the previous owner or the fair market value of the asset on the 1st day of January, 1954, at the option of the assessee;
(iii)…………”
10. It is noticeable that sub-section (2) defines the cost of acquisition for purposes of sections 48 and 49 only. This definition does not extend to the provisions of Section 50. Under this provision an assessee is entitled to exercise the option of treating the fair market value of the asset on 1st day of January, 1954, to be the cost of acquisition. This is so both for the original owner as well as the assessee who may have acquired the capital asset indirectly, that is by any of the modes specified in Section 49. Section 55(2) treats the original owner as well as the transferee owner on an equal footing. In view of this provision the assessee becomes entitled to treat the fair market value as the cost of acquisition for purposes of Section 48, irrespective of the nature of the capital asset. Section 55(2) is a general provision in relation to a capital asset which was owned by the assessee from before the 1st day of January, 1954. It makes no distinction between the case of an assessee who continues to be the original owner and an assessee who acquires the asset indirectly.
11. We have seen that Section 50 specifically modifies the provisions of Section 48 in respect of computing the cost of acquisition. This modification is in relation to depreciable assets. Section 50 is headed as “Special provision for computing cost of acquisition in the case of depreciable assets.” Section 50 being a special provision, will apply to depreciable assets both in respect, of Ss. 48 and 49. Sub-sec. (2) of Sec. 50 confines itself to cases covered by Section 49, namely, to capital assets indirectly acquired by the assessee. For depreciable assets, which are owned by the assessee as the original owner, sub-section (1) applies, even though the assets may have been owned by the assessee from before 1st January, 1954. Sub-section (1) does not contemplate that the assessee can treat the fair market value as the cost of acquisition. In cases covered by it the written down value is to be taken as the cost of acquisition.
12. In our opinion the Revenue is right when it contends that Section 50, being a special provision for depreciable assets, will prevail over Section 55(2), firstly, because it expressly modified the provisions of section 48, and, in the next place, it is a special provision for depreciable assets. Section 55, on the other hand, is only a definition section. The definition of “cost of acquisition” given by its sub-section (2) is only for purposes of sections 48 and 49. This definition does not extend to the special provisions for computing the cost of acquisition in the case of depreciable assets under section 50. Since section 55(2) does not apply to section 50, it cannot prevail over it. In other words, the cost of acquisition of a depreciable asset is bound to be computed in accordance with section 50, even though the capital asset may also, on facts, be within the purview of sub-section (2) of Section 55. If a capital asset became the property of the assessee before the 1st day of January, 1954, and if such asset is a depreciable asset, then Section 50 will apply to it to the exclusion of Section 55(2).
13. This construction is fortified by the provisions of sub-section (2) of Section 50. If the case of a depreciable asset owned by the assessee from before 1st day of January, 1954, was to be governed by Section 55(2), then there was no occasion or need to enact sub-section (2) of Section 50. But we find that under sub-section (2) a special provision has been made for capital assets which are covered by Section 49 as well as S. 55(2), namely, assets indirectly acquired and which were owned by the previous owner from before 1st January, 1954. In such case the fair market value is to be reduced by the amount of depreciation allowed to the assessee after 1st January, 1954.
14. The Legislature specifically confined the operation of sub-section (2) to indirectly acquired capital assets, to which Section 49 is applicable.
15. The position, therefore, is that an assessee who, continues to be the original owner of a depreciable asset acquired from before 1st January, 1954, cannot exercise the option of treating the fair market value as the cost of acquisition, while an assessee who has indirectly acquired a similar asset can do so. This anomaly is undoubtedly there. On the other hand, the construction that appealed owner of the capital asset governed by Section 55(2)(i) is also entitled to the option of treating the fair market value as on 1st January, 1954, as the cost of acquisition also creates an anomalous position. The original owner is entitled to treat the fair market value as the cost of acquisition but without it being reduced by the amount of depreciation allowed after 1st January, 1954, while in the case of an assessee who had indirectly acquired the capital asset the fair market value is to be reduced by that amount under sub-section (2) of Section 50. Hence both the constructions will have some sort of an anomaly.
16. Section 50 is mandatory. Under it the provisions of Sections 48 and 49 shall be subject to the modifications mentioned in sub-sections (1) and (2), whereas Section 55(2) does not apply to cases governed by Section 50. Section 50 is hence a special provision, which will prevail over sub-section (ii) of Section 55(2) in relation to a capital asset which may be within the ambit of both the provisions.
17. This view finds support in the decision of the Gujarat High Court in Rajnagar Vaktapur Ginning, Pressing and Manufacturing Co. Ltd. v. Commissioner of Income-tax, ((1975) 99 ITR 264 at p. 283) : (1975 Tax LR 310 at p. 320). It was held there that an assessee who is the original owner of a depreciable asset and is not covered by Section 49 is governed by Section 50(1) and cannot opt to select the fair market value of the asset on 1st January, 1954, as the cost of acquisition.
18. It is well-settled that in a taxing statute one has to look at what is clearly said. There is no room for any intendment; there is no equity about a tax, and there is no presumption as to a tax. Nothing is to be read in, and nothing is to be implied. Looking fairly at the language used, the conclusion is inevitable and irresistible, that Section 50 prevails in cases of depreciable assets.
19. We are hence unable to agree with the Appellate Assistant Commissioner or with the Tribunal that Section 55(2) was applicable and not Section 50(i). We have not been able to understand how have these authorities applied Section 50(2) to the instant case. That provision is confined to cases covered by Section 49. The present is not a case which falls within the purview of Section 49 at all.
20. We, therefore, answer the question referred to us in the negative, in favour of the Department and against the assessee. The Commissioner would be entitled to costs, which are assessed at Rs. 200/-.
21. Answered in the negative.
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