ORDER
A. Kalyansundharam, A.M.
1. The assessee, a public limited company, has filed this appeal that is arising under the IT Act, 1961 (hereinafter referred to as ‘the Act’) and has raised two issues before us. The first issue relates to the working out of capital gains arising from the sale of depreciable asset that was part of a block of asset class ‘office building’, for not considering the cost of newly acquired office building as falling into the block of asset because it was not used in the previous year and consequently converting the loss into a gain. The second relates to the disallowance out of interest payments on the ground that the borrowed funds were advanced free of interest to sister concerns. We shall deal with each of the issues in the following paragraphs.
2. The first issue concerning the working of capital gains on sale of a depreciable asset, has arisen as a consequence of the sale of office premises at Mumbai for a valuable consideration of Rs. 64,39,311. The assessee, had acquired another premises at Pune for a valuable consideration of Rs. 72,16,526. The assessee had claimed that because, the sold office premises and the newly acquired premises fell into the same class of asset, namely, office building, in view of the provisions contained in s. 50 of the Act, it was entitled for adjustment of the cost of the newly acquired asset against the sale consideration of the asset that was sold for working out the capital gain on the depreciable asset ‘office building’. Accordingly, the assessee had arrived at a loss of Rs. 62,99,833 and this loss was claimed for adjustment from the income computed.
3. The Assessing Officer (hereinafter referred to as AO), had refused the claim of the appellant company on the ground that the premises was not acquired and that it was not used for the purpose of business. The AO had stated in his order of assessment that, the term ‘Block of Assets’ as defined in s. 2(11) of the Act, is for the purpose of allowing of depreciation which was subject to the satisfaction of pre-condition that the asset is used for the purposes of the business. AO also had stated that the new building could not be held to be owned by the assessee and further because, the newly acquired asset was not used for the purpose of the business, it could not be held as falling within the same class of ‘Block of Asset’, namely building. He accordingly denied the appellant company adjustment of the actual cost of acquired premises at Pune.
4. The order of AO on all counts was challenged before the Commissioner of Income-tax – Central (hereinafter referred to as the CIT(A),]. The CIT(A), had found as a fact that the assessee was the owner of the new building and that the newly acquired premises in the year and the sold premises fell within the same ‘block of assets’ namely, office building. The finding by the CIT(A) on ownership of the newly acquired building and it fell in the same class of ‘office building’ has been accepted by the Revenue, as is evident from the fact that it had not challenged it in appeal before the Tribunal. The CIT(A) had echoed the views of the AO by observing that because the office was started only on 16th Dec., 1992, the said premises was never used for the purposes of the business. The CIT(A) had laid emphasis on the provisions of s. 43(6) of the Act that described the manner of arriving at the written down value of a depreciable asset and had observed that because, the said provision was concerning the determination of profits or gains from business or profession, the adjustment of actual cost of the newly acquired premises against the sale value of office premises, is permissible only when the said asset is used in business.
5. The assessee before us, had challenged the order of CIT(A) on both counts that adjustment of the cost of newly acquired asset against the sale consideration of the office premises sold in the year is permissible only when it is used for the purpose and on converting the claim of loss into income of Rs. 62,99,833. The learned counsel for the assessee Mr. Arvind Sonde and the learned Departmental Representative Mr. Arbind Modi placed their detailed arguments with reference to the provisions contained in ss. 2(11), 32, 43(6) and 50(1) of the Act. These have been very carefully considered by us.
6. The plea of the counsel Mr. Sonde was that the Revenue is not justified in insisting that the newly acquired office premises should have been used in the previous year and only on satisfaction of that condition that the assessee would be entitled for adjustment of its cost against the sale consideration for arriving at the capital gains and that too when the said section has not provided for any such condition. He pleaded that it is only in s. 32 of the Act that the word ‘used for the purposes of the business’ is contained as a condition, on satisfaction of which the assessee could be justified in claiming deduction of depreciation from the business income. He pleaded that s. 32 of the Act states that depreciation is allowed as a deduction in the case of any block of assets, such percentage on the written down value (WDV).
7. He pleaded that the meaning and the manner of arriving at the WDV has been provided in s. 43(6) of the Act and consequent to the addition of the term ‘block of assets’ to s. 2 of the Act, the manner of calculating the WDV of the block of assets has been added to s. 43(6) of the Act. He referred to the provisions of sub-cl. (c) of sub-s. (6) of s. 43 of the Act and submitted that it took the amount of WDV as at the beginning of the year as the starting point to which it allowed for addition of the actual cost of the asset acquired during the year and allowed reduction of the amount payable of asset sold in the year. He contended that at this point of calculation of WDV all that is required is three figures namely, the amount at the start of the year, the amount of asset acquired in the year and the sale value of the asset sold in the year. He contended at this point the said s. 43(6) of the Act being concerned with the mere calculation of WDV, it had not placed any condition ‘used for the purposes of the business’ as is found in s. 32 of the Act.
8. He referred to the provisions of s. 50(1) of the Act and submitted that this section is similarly worded as in s. 43(6) of the Act inasmuch as it had not placed the words ‘used for the purposes of the business’ anywhere in the section. He contended that like s. 43(6) of the Act, s. 50(1) is not concerned with the use of the asset for the purpose of the business because, the purpose of the section is to calculate the capital gains on sale of an asset. He placed before us the copy of the order of the Mumbai ‘D’ Bench in M/s Orient Cartons (P) Ltd. vs. Dy. CIT, ITA No. 7165/Bom/1995, for the asst. yr. 1995-96, dt. 7th June, 1996, and submitted that the Tribunal had upheld the claim of the appellant that s. 50 of the Act while working of the capital gains on sale of a depreciable asset, allowed adjustment of the cost of the new asset acquired during the year that falls within the same block of asset without any pre-condition of use of such asset for business.
9. The learned Departmental Representative, Mr. Arvind Modi, vehemently opposed the various pleas advanced by the counsel for the appellant company. He contended that it should not be lost sight of that the purpose of introducing the definition of the term ‘block of assets’ is for the solitary purpose of allowing depreciation on that basis and the pre-condition, namely, use of the block of assets for the purpose of the business is in-built into it. He pleaded strongly that classification of an asset within a block of assets is not an empty formality but, is directed towards the ultimate objective of allowing depreciation and the provisions contained in s. 43(6) of the Act is also directed towards allowing of depreciation. He strongly contended that the provisions contained in s. 50 of the Act, is an extension of the other provisions as above and non-mention of the words ‘used for the purpose of the business’ would not in anyway pare down the real intention of the provisions of the said section. He accordingly strongly supported the orders of the authorities below in not permitting adjustment of the cost of the new premises acquired in the year against the sale consideration of the office premises.
10. The issue revolves around the requirement and the conditions contained in the s. 50 of the Act. This section has been given the title that read ‘special provision for computation of capital gains in case of depreciable assets’. As the title reads, it is unmistakable that the provisions contained therein are applicable only in respect of those assets that are depreciable and not for non-depreciable assets like the land. It would be necessary to reproduce the section for testing its significance.
Sec. 50(1) – Notwithstanding anything contained in cl. (42A) of s. 2, where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act or under the Indian IT Act, 1922 (11 of 1992), the provisions of ss. 48 and 49 shall be subject to the following modifications –
(1) Where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received as a result of the transfer of any other capital asset falling within the block of assets during the previous year, exceeds the aggregate of the following amounts, namely –
(i) expenditure incurred wholly and exclusively in connection with such transfer or transfers;
(ii) the WDV of the block of assets at the beginning of the previous year; and
(iii) the actual cost of any asset falling within the block of assets acquired during the previous year,
such excess shall be deemed to be capital gains arising from the transfer of short-term capital assets.
11. The underlined words if are put together, it shall read ‘where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act where the full value of the consideration received or accruing as a result of the transfer of the asset exceeds the aggregate of the following amounts namely, the actual cost of any asset falling within the block of assets acquired during the previous year, such excess shall be deemed to be capital gains arising from the transfer of short-term capital assets’. The above distinctly indicate that the said provisions apply in case of sale of an asset that has been allowed depreciation under the Act, that is, the asset that is used for the purpose of business, if sold, the capital gains on sale of such asset shall be computed by applying the provisions of the said section. It is accordingly obvious that the requirement of the use of the asset for the purpose of the business is of the asset that is sold because, but for such usage, the asset could not have been allowed deduction of depreciation in computing the income from business.
12. One of the adjustment that is permitted by the said section from the sale proceeds of the asset, is of the WDV of the sold asset as at the beginning of the previous year. This implies that the asset that is sold during the previous year, the assessee would be entitled for the application of the said s. 50 of the Act, on the satisfaction of the condition that, it was used for business in any of the earlier assessment year, on satisfaction of which condition, it was allowed depreciation in that asset year and use or non-use for the purpose of business in the year of sale would have no effect on its qualification of applicability of the said section.
13. The other adjustment with which we are presently seized with is of actual cost of the asset that is acquired in the year and such adjustment is possible only if the purchased asset falls in the same class of block of assets of which the sold asset was a part. This adjustment clause does not contain the words ‘used for the purposes of business’ after the words ‘the actual cost of any asset falling within the block of assets acquired during the previous year’. It is evident from the title given to the section and the provisions of the section, it is concerned with arriving at the capital gains on the sale of a depreciable asset with reference to the date of sale, which date of sale may fall in the previous year of the business and not with reference to the previous year. It is well known that depreciation to an asset used for business is allowed with reference to the previous year of the business.
14. In our opinion because of the clear distinction of the date of sale and of the previous year of the business, there remains no doubt that the section intends adjustment of the cost of the newly acquired asset of the same block of assets as of the sold asset without any pre-condition of the use of the acquired asset for the purpose of business. Further because, the provision of the section has to be administered as intended, which intention could be read on consideration of the purpose for which the section stands, we have no doubt in our conclusion that the said s. 50 of the Act that is concerned with the determination of capital gains on sale of depreciable asset, and not with allowing of depreciation, the words ‘used for the purposes of business’ insisted by the Revenue as in-built are inapplicable.
15. The provisions of s. 43(6) of the Act have been so intended for arriving at the amount of WDV of the block of assets and at this point of calculation of WDV, there can never be any further condition that the asset should satisfy the conditions that are laid down in other sections of the Act as well. Therefore, because the said WDV is relevant based on which depreciation could be claimed, could not be the reason to conclude that even for the purpose of calculation of WDV, the section requires that the asset should be used for the business. Every section in the Act plays certain role in the implementation of the Act like s. 2 of the Act that gives the definition to various terms and states ‘in this Act, unless the context otherwise requires’ and its role is limited to defining various terms for the purposes of the Act that shall apply throughout the Act.
16. The definition of the term ‘block of assets’ is provided in s. 2(11) of the Act, is carried through to s. 43(6) of the Act for calculation of WDV, which is further carried through to s. 32 of the Act, for allowing of depreciation on the satisfaction of the condition of having been used for purposes of business. Though, for allowing deduction of depreciation under s. 32 of the Act, the said section takes the derived value from the s. 43(6) of the Act, s. 43(6) of the Act that is depended upon s. 2(11) of the Act but, is not depended upon s. 32 of the Act for the determination of WDV. In our view, therefore, the authorities below were unjustified in refusing to adjust the cost of newly acquired assets namely, office building against the sale consideration of the office premises by insisting upon the satisfaction of a non-existent condition that the said premises must be used for the purpose of the business. We accordingly uphold the claim of the assessee that it is entitled for adjustment of the actual cost of the newly acquired office building of Rs. 72,16,526 in computing the capital gain on the sale of depreciable asset namely, ‘office building’ and delete the addition of Rs. 62,99,833.
17. The second issue of disallowance of interest of Rs. 15,300, because the assessee had advanced Rs. 1,02,000 free of interest to certain parties, was claimed as unjustified. The plea of the counsel for the appellant company was that the lower authorities had refused to consider the fact that the assessee had capital and free reserves aggregating to Rs. 71.49 lakhs and that because the authorities having not found any nexus between amounts borrowed and the advance given, in the light of the Andhra Pradesh High Court decision in CIT vs. Gopalakrishna Murlidhar (1963) 47 ITR 469 (AP), the disallowance was unjustified. The plea of the Departmental Representative was that the authorities had justifiably disallowed the interest which is in line with the decision of Bombay High Court in Phaltan Sugar Works Ltd. vs. CIT (1994) 208 ITR 989 (Bom).
In our considered view, it is necessary to establish nexus between borrowed funds and the amount advanced, and in the absence of this finding the lower authorities were not justified in making the disallowance. Further, considering the capital and free reserves aggregating to Rs. 71.49 lakhs, we find considerable merit in the claim of the assessee and we uphold the same. The jurisdictional High Court (supra) is of no assistance to the Revenue because, it has not held that even where there is absence of nexus between borrowed funds and the amount advanced. We accordingly uphold the claim of the assessee.
18. In the result, the appeal is allowed.