- (1.) The short issue raised in the present appeal preferred by the Revenue under Section 260-A of the Income Tax Act, 1961 (For brevity 'the Act') is whether the plant and machinery (not in use) reflected for the value of Rs. 1.23 Crores acquired in the financial year 1997-98 and partly in the year 1998-99 would be treated as long term capital assets for the assessment year 2006-07, when it was sold in the financial year 2005-06. The revenue has challenged the view of the Tribunal treating the aforesaid plant and machinery as long term assets, which are held entitled to benefit of cost inflation index for computing the long term capital gain. However, the Revenue has claimed that the following questions of law would arise for determination of this Court and have pressed for admission of the appeal: 1. Whether on the facts and circumstances of the case, the Hon'ble ITAT was right in law in holding that the assessee had the option to maintain two separate blocks of assets i.e. Plant & Machinery (put to use) and the Plant and Machinery (Not put to use) when same percentage of depreciation has been prescribed for plant and machinery as per Section 2(11) of the Income Tax Act, 1961. 2. Whether on the facts and circumstances of the case, the Hon'ble ITAT was right in law in holding that the assessee had the option to maintain two separate blocks of assets which are similar in nature with same prescribed percentage of depreciation as per provisions of Section 2(11) of the Income Tax Act, 1961, on the ground that second set of assets although similar in nature were not put to use, thereby ignoring the provisions of Section 2(11) of the Act. 3. Whether on the facts and circumstances of the case, the Hon'ble ITAT was right in law in observing that the plant and machinery not put to uses constituted individual and separate 'block of assets' within the meaning of section 2(11) of the Income Tax Act, 1961 ignoring the provisions of Section 32(1)(ii) of the Income Tax Act 1961 whereby depreciation is allowed only on a 'block of assets' for all similar assets with same prescribed percentages. 4. Whether on the facts and circumstances of the case, the Hon'ble ITAT was right in law in not appreciating that the said new plant and machinery did not constitute a 'Depreciable Asset' within the meaning of Section 50 of the Income Tax Act, 1961 read with Explanation 5 to Section 32(1) of the Income Tax Act, 1961 whereby depreciation is deemed to have been allowed for such assets and it is not necessary that the depreciation is actually allowed. Before adverting to legal position, it would be necessary to set out the facts in brief. The assessee-respondent filed return on 30.11.2006 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 vide order dated 10.12.2008 (A-1) 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) has 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 covers only depreciable assets if it is to fall under short term capital assets. The basic feature of the aforesaid provision is that the depreciation on such assets had already been claimed by the assessee-respondent. It is only on the sale of such assets, the gain arising on the said sale of assets minus the WDV of the asset is 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 vide order dated 21.06.2009 (A-2).
(2.) The assessee-respondent challenged the order passed by the Assessing Officer under Section 143(3) of the Act and order passed under Section 154 of the Act before the CIT (A). CIT(A) held vide separate order dated 30.09.2010 (A-3) passed in both the appeals 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 has rightly assessed the gain as short term capital gain (A-3) (Colly.).
(3.) The assessee-respondent challenged the view taken by the CIT(A) before the Tribunal by filing two separate appeals. The Tribunal vide order dated 31.05.2011 (A-4), allowed the appeal of the assessee-respondent against the order under Section 154 of the Act (ITA No. 1397/Chd/2010), holding that the assessee-respondent was prevented by a sufficient cause in not filing the appeal within the time prescribed by the statute before the CIT(A). Accordingly, the application seeking condonation of delay was allowed by the Tribunal. On the quantum appeal (ITA No. 1398/Chd./2010), the Tribunal proceeded to hold that Section 50 of the Act did not apply and the plant and machinery (not in use) have to be regarded as long term capital gain, when they were sold because no depreciation on those assets was ever claimed by the assessee-respondent. Holding that Section 50 of the Act is a special provision for computation of capital gain in case of depreciable assets, the Tribunal has maintained that where an asset is forming part of block of asset in respect of which depreciation had been allowed under the provisions of Sections 48 and 49 of the Act have been subjected to modification. In other words, where the full value of the consideration received or accruing as a result of transfer of the asset together with the full value of consideration received or accruing on account of transfer of other capital asset falling within the block of asset during the previous year, exceeds the aggregate of the following amount i.e. the expenditure incurred in connection with such transfer plus the written down value of the block of assets at the beginning of the previous and actual of any cost of any asset acquired during the year falling within the block of years and excess is deemed to be capital gain arising from transfer of short term capital asset. However, the plant and machinery (not in use) were not depreciable assets.;