REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL No. 5291 of 2004
Nectar Beverages Pvt. Ltd. ... Appellant(s)
versus
Deputy Commissioner of Income Tax ... Respondent(s)
With
Civil Appeal Nos. 5296/04, 5293/04, 356-357/06, 359-360/06, 361-362/06,
363-364/06, 5858/06, 108/07, Civil Appeal No. 4130/09 @ S.L.P. (C) No.
1613/08, Civil Appeal No.4131/09 @ S.L.P. (C) No. 3064/09 and Civil
Appeal No. 4132/09 @ S.L.P. (C) No. 8002/09.
JUDGMENT
S.H. KAPADIA, J.
Leave granted.
2. In this batch of Civil Appeals, pertaining to assessment years
1990-91 to 1998-99, the question which arises for determination is: whether
the concept of “balancing charge” in Section 41(2) could be read into
Section 41(1) of the Income Tax Act, 1961?
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3. In this batch of civil appeals the lead matter is the case of Nectar
Beverages Pvt. Ltd. v. Dy. CIT ( Civil Appeal No. 5291/04) in which the
facts are as follows.
4. In the Lead Matter, the assessee who is the manufacturer of soft
drinks, purchased bottles and crates, each item of which costed less than
Rs. 5,000/- and, therefore, was entitled to and allowed 100% depreciation on
the cost of the said bottles and crates, in the year in which they were
acquired, under the proviso to Section 32(1)(ii) of the Income Tax Act, 1961
(“1961 Act” for short). When bottles and crates got worn out, they were sold
by the assessee and proceeds therefrom were shown as “miscellaneous
income” in the subsequent years. If these sales had taken place in the
previous years relating to the assessment years prior to 1988-89, the same
would, without doubt, would have been included in the business income of
the assessee under Section 41(2). This was because prior to the assessment
year 1988-89, Section 41(2) inter alia provided for balancing charge which
was chargeable as income taxable under the 1961 Act. However, with effect
from assessment year 1988-89, Section 41(2), which inter alia dealt with
profit on sale of depreciable asset (balancing charge), stood deleted.
Notwithstanding such deletion, the Department sought to tax Rs. 50,850/-
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holding that the sale proceeds of the 100% depreciated and written off assets
can still be treated as the business income of the assessee under Section
41(1) of the 1961 Act.
5. Was the Department entitled to tax the aforestated sum under Section
41(1) is the question which we have to decide in these civil appeals?
6. For that purpose, we quote hereinbelow Section 32(1)(ii), which reads
as follows:
“Depreciation.
32.(1) In respect of depreciation of buildings,
machinery, plant or furniture owned by the assessee and
used for the purposes of the business or profession, the
following deductions shall, subject to the provisions of
section 34, be allowed-
(i) [Omitted];
(ii) in the case of any block of assets, such percentage
on the written down value thereof as may be
prescribed:
Provided that where the actual cost of any
machinery or plant does not exceed five thousand rupees,
the actual cost thereof shall be allowed as a deduction in
respect of the previous year in which such machinery or
plant is first put to use by the assessee for the purposes of
his business or profession:”
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We also quote hereinbelow Section 41(1), which reads as follows:
“Profits chargeable to tax.
41.(1) Where an allowance or deduction has been
made in the assessment for any year in respect of loss,
expenditure or trading liability incurred by the assessee,
and subsequently during any previous year the assessee
has obtained, whether in cash or in any other manner
whatsoever, any amount in respect of such loss or
expenditure or some benefit in respect of such trading
liability by way of remission or cessation thereof, the
amount obtained by him or the value of benefit accruing
to him, shall be deemed to be profits and gains of
business or profession and accordingly chargeable to
income-tax as the income of that previous year, whether
the business or profession in respect of which the
allowance or deduction has been made is in existence in
that year or not.
We also quote hereinbelow Section 41(2) [Omitted by the Taxation
Laws (Amendment and Miscellaneous Provisions) Act, 1986, w.e.f.
1.4.1988], which reads as follows:
41.(2) Where any building, machinery, plant or
furniture which is owned by the assessee and which was
or has been used for the purposes of business or
profession is sold, discarded, demolished or destroyed
and the moneys payable in respect of such building,
machinery, plant or furniture, as the case may be,
together with the amount of scrap value if any, exceed
the written down value, so much of the excess as does
not exceed the difference between the actual cost and the
written down value shall be chargeable to income-tax as
income of the business or profession of the previous year
in which the moneys payable for the building, machinery,
plant or furniture became due :
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Provided that where the building sold, discarded,
demolished or destroyed is a building to which
Explanation 5 to section 43 applies, and the moneys
payable in respect of such building, together with the
amount of scrap value, if any, exceed the actual cost as
determined under that Explanation, so much of the excess
as does not exceed the difference between the actual cost
so determined and the written down value shall be
chargeable to income-tax as income of the business or
profession of such previous year :
Provided further that where an asset representing
expenditure of a capital nature on scientific research
within the meaning of clause (c) of sub-section (2B) of
section 35, read with clause (4) of section 43 owned by
the assessee which was or has been used for the purposes
of business after it ceased to be used for the purpose of
scientific research related to the business is sold,
discarded, demolished or destroyed, the provisions of this
sub-section shall apply as if for the words “actual cost”,
at the first place where they occur, the words “actual cost
as increased by twenty-five per cent thereof” had been
substituted.
Explanation: Where the moneys payable in respect of
the building, machinery, plant or furniture referred to in
this sub-section become due in a previous year in which
the business or profession for the purpose of which the
building, machinery, plant or furniture was being used is
no longer in existence, the provisions of this sub-section
shall apply as if the business or profession is in existence
in that previous year.”
7. According to the Department, depreciation stood allowed in the earlier
years when the said bottles and crates were bought; that such depreciation
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constituted “expenditure” under Section 41(1) and, therefore, when the
assessee sold such bottles and crates as an asset there was recoupment of
that expenditure which recoupment was taxable as deemed income under
Section 41(1). On the other hand, the case of the assessee before us was that
the word “expenditure” in Section 41(1) did not include depreciation.
According to the assessee, each bottle and crate constituted 100%
depreciable asset and since each bottle and crate costed less than Rs. 5,000/-
the actual cost stood allowed as 100% deduction in respect of the previous
year in which such plant was put to use by the assessee for its business. In
short, the W.D.V. stood reduced to nil in the year in which the item was put
to use. According to the assessee, bottles and crates bought before 1.4.1995
were sold in the previous year relevant to the assessment year in question,
however, on account of deletion of Section 41(2) profits on sale of such
bottles and crates were not taxable under that sub-section.
8. In the light of the above arguments, we need to analyse Section 41(1)
and Section 41(2). Section 41 falls under Chapter IV which deals with
computation of business income. Section 41 has a Head Note which says
“Profits chargeable to tax”. Section 41(1) has remained unchanged, both,
before 1.4.1988 and even after 1.4.1998. As stated above, Section 41(2),
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however, stood deleted between assessment years 1988-89 and 1998-99 for
about ten years. Under Section 41(1), where any allowance or deduction has
been made in the assessment for any year in respect of loss, expenditure or
trading liability incurred by the assessee, and subsequently during any
previous year the assessee had obtained, such loss or expenditure in respect
of such trading liability by way of remission or cessation thereof, the amount
obtained by him, shall be deemed to be income of that previous year in
which the recoupment takes place. According to the Department,
notwithstanding, the deletion of Section 41(2), since the assessee had
obtained the benefit of depreciation in the earlier years as allowance or
deduction in respect of expenditure incurred by it when it bought bottles and
crates, on recoupment in the assessment years in question, such recoupment
was liable to be taxed as deemed income under Section 41(1). We do not
find merit in the argument of the Department. Prior to 1.4.1988, Section
41(1) and Section 41(2), both, existed on the statute book. Section 41(2)
specifically brought to tax the balancing charge as a deemed income under
the 1961 Act. It stated that where any plant owned by the assessee and used
for business purposes was sold, discarded or destroyed and the moneys
payable in respect of such plant exceeded the written down value, then, so
much of the surplus which did not exceed the difference between the actual
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and the written down value was made chargeable to tax as business income
of the previous year in which moneys payable for the plant became due. In
other words, as stated above, Section 41(2) made the balancing charge
taxable as business income. In our view, if the argument of the Department
herein of reading the balancing charge under Section 41(2) into Section
41(1) was to be accepted then it was not necessary for Parliament to enact
Section 41(2) in the first instance. In that event, Section 41(1) alone would
have sufficed. In our view, Section 41(1), Section 41(2), Section 41(3) and
Section 41(4) operated in different spheres. One more aspect needs to be
highlighted. Each of the sub-sections to Section 41 deal with different and
distinct circumstances. For example, Section 41(1) deals with recoupment of
trading liability. Section 41(2) dealt with the balancing charge. Section 41(3)
specifically deals with balancing charge in respect of assets relating to
scientific research whereas Section 41(4) deals with recovery of bad debts
earlier allowed. Therefore, each of the sub-sections deal with different and
distinct topics and one cannot read recoupment under one sub-section into
another.
9. The entire controversy, therefore, stands resolved if one understands
the meaning of “balancing charge”. Where any allowance or deduction had
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earlier been made in respect of any loss, expenditure or trading liability and
subsequently the assessee has obtained or realized any amount towards such
loss, expenditure or trading liability, Section 41(1) deems such
realization/recoupment as assessee’s income for the year in which it is
realized. Section 41(2) as it stood at the material time stated that if in respect
of any plant and machinery, any depreciation had been allowed and
subsequently such plant and machinery was sold, discarded or destroyed, the
assessee might get some value either as a result of sale or insurance or from
salvage or compensation thereabout. The necessity to keep Section 41(2) as
a provision in addition to Section 41(1) arose from the fact that, in its very
nature, depreciation is neither a loss, nor an expenditure, nor a trading
liability, referred to in Section 41(1). The depreciation recovered on sale of
the capital asset was includible in the total income as balancing charge only
under Section 41(2). That concept was foreign to the scheme of Section
41(1). The balancing charge under Section 41(2) arose only where any
depreciable asset (building, machinery, plant or furniture) was sold. In fact,
when the concept of “block of assets” stood introduced w.e.f. 1.4.1988,
Section 41(2) stood deleted. However, even after 1.4.1988, the proviso to
Section 32(1)(ii) continued till 1.4.1996 when by the Finance (No. 2) Act,
1995 the bottles and crates even below Rs. 5,000/- came within the “block of
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assets” as defined under Section 2(11) of the 1961 Act. As stated, this
judgment is confined to depreciable assets costing less than Rs. 5,000/-
which did not enter the block of assets during the assessment years in
question (when Section 41(2) stood deleted).
Effect of introducing Finance (No. 2) Act, 1995 w.e.f. 1.4.1996:
10. At the outset, it may be noted that, by the above Finance Act, the first
proviso to Section 32(1)(ii) stood deleted w.e.f. 1.4.1996. Consequently,
bottles, crates and cylinders whose individual cost did not exceed Rs. 5,000/-
also came to be included in the block of assets.
11. Before us, in this batch of civil appeals, we have four Civil Appeals
(Civil Appeals arising out of S.L.P. (C) Nos. 8002/09 and 3064/09, Civil
Appeal Nos. 356-357/06 and 5858/06) which fall in the period after
1.4.1996. The Lead Matter in this category is M/s Goa Bottling Company
Pvt. Ltd. v. Asstt. Commissioner of Income Tax (Civil Appeal Nos. 356-
357/06 ). That lead matter is for assessment year 1998-99. M/s Goa Bottling
Company Pvt. Ltd. is a company registered under the Companies Act, 1956
and is in the business of manufacture and sale of soft drinks. For the
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purposes of its business, it bought bottles and crates whose cost per unit did
not exceed Rs. 5,000/-. During the year ending 31.3.1998, the company
received a sum of Rs. 6,89,91,901 on sale of scrap bottles and crates. The
sale proceeds were segregated in two parts:
(a) in respect of bottles and crates purchased prior to
31.3.1995; and
(b) those purchased after 1.4.1995.
In the Return of income filed, the sale proceeds relating to bottles and crates
purchased after 1.4.1995 were taken into consideration for the purpose of
computation of short term capital gains under Section 50 whereas the sale
proceeds relating to bottles and crates purchased prior to 31.3.1995 was not
offered for short term capital gains on the ground that the assets stood
depreciated at 100% under the proviso to Section 32(1)(ii) and hence did not
form part of the block of assets.
12. For reasons given hereinabove, we are of the view that bottles and
crates purchased prior to 31.3.1995 did not form part of the block of assets,
hence, profits on sale of such assets were not taxable as a balancing charge,
neither under Section 41(1) nor under Section 50. In respect of bottles and
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crates purchased after 1.4.1995, on account of deletion of proviso to Section
31(1)(ii) (vide Finance Act, 1995) such bottles and crates formed part of
block of assets and consequently such assets purchased after 1.4.1995, in
this case, became exigible to capital gains tax under Section 50.
13. Before concluding, it may be pointed out that, in the case of Nector
Beverages Pvt. Ltd., assessee has earmarked the sale proceeds from bottles
and crates as “miscellaneous income” and not as “profit on sale of assets”
whereas, in the case of other assessees, including Industrial Oxygen Co. Ltd.
(now known as Inox Air Products Ltd.), the said sale proceeds have been
earmarked specifically under the Heading “Profits from sale of assets”. To
this limited extent only, we remit the case(s) of Nectar Beverages Pvt. Ltd.
[Civil Appeal Nos. 5291/04, 5293/04 and 359-360/06] to the A.O. to go
through the computation submitted by Nectar Beverages Pvt. Ltd. and find
out whether earmarking “profits from sale of assets” as “miscellaneous
income” has resulted in the understatement of net profits at the pre-Section
28 stage and taxable profits at post-Section 28 stage. In all other cases, sale
proceeds have been earmarked as “profits on sale of assets” and in those
cases, therefore, there is no question of verification by the A.O..
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14. Subject to above, the Civil Appeals filed by the assessees succeed
with no order as to costs.
……………………………J.
(S.H. Kapadia)
…………………………..J.
(Aftab Alam)
New Delhi;
July 6, 2009.