THE COMMONWEALTH TRUST LTD. CALICUT, KERALA vs. THE COMMISSIONER OF INCOME TAX, KERALA II, ERNAKULAM

CIVIL APPEAL No. 2978/1982Supreme Court1997 INSC 58530 July 1997Bench: 2 JudgesAuthor: S.C. AGRAWAL, D.P. WADHWA COMMONWEALTH TRUST LTD. CALICUT, KERALA A22 pages
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What were the facts?

The assessee, The Commonwealth Trust Ltd., sold properties in Calicut and Mangalore during the assessment year 1971-72, having claimed depreciation on them previously. The Calicut property, originally valued at Rs. 10,000, was sold for Rs. 20,000, resulting in a claimed capital loss of Rs. 78. The Mangalore property, with an adjusted original cost of Rs. 76,680, was sold for Rs. 2,25,000, showing a capital gain of Rs. 44,713. In both instances, the assessee revalued the properties as of January 1, 1954. The assessee contended it had the option under Section 55(2)(i) to use either the written-down value or the January 1, 1954 value. The Income Tax Officer disagreed, applying Section 50(1) for depreciable assets and using the original value, leading to higher capital gains. Appeals to the Appellate Assistant Commissioner and the Income Tax Appellate Tribunal were dismissed. The High Court upheld the revenue's view, stating Section 50 modified Section 48 for depreciable assets, disallowing the January 1, 1954 valuation option.

What did the Supreme Court hold?

The Tribunal was not right in deleting Rs. 1,260 towards house rent under Section 40(a)(v). Regarding the main issue, the Court held that for depreciable capital assets on which depreciation allowance has been availed of before transfer, the cost of acquisition must be determined in terms of Section 50 read with Section 48. Section 50 modifies Section 48 by requiring the written-down value, as adjusted, to be taken as the cost of acquisition. The Court found that Section 55(2) provides an option for the fair market value as on January 1, 1954, but this option is not available for cases falling under Section 50. Section 50(1) has no dependence on Section 55(2) as it deals with written-down value, not fair market value. Therefore, the assessee cannot avail the fair market value as on January 1, 1954, when Section 50 applies. The High Court's decision that the cost of acquisition must be the written-down value was upheld. The Court noted that amendments effective from April 1, 1988, have resolved such controversies.

What were the issues?

1. Whether, in the case of depreciable capital assets sold after January 1, 1954, where depreciation has been claimed, the assessee has the right to substitute the fair market value as on January 1, 1954, as the cost of acquisition under Section 55(2)(i) of the Income Tax Act, 1961, or if Section 50, which mandates the use of written-down value, prevails. Assessee's contention: The assessee argued that Section 55(2)(i) provides an option to choose either the written-down value or the fair market value as on January 1, 1954, for computing the cost of acquisition, and it had validly exercised this option. Revenue's contention: The revenue contended that Section 50 is a special provision applicable to depreciable assets and overrides the general provision of Section 55(2)(i) when depreciation has been claimed, thus disallowing the option to use the fair market value as on January 1, 1954. The High Court's decision in favour of the revenue was based on the interpretation that Section 48 must be read subject to the modifications in Section 50 for depreciable assets.

Which sections of the Income-tax Act were involved?

Section 32(1)(iii),Section 40(a)(v),Section 41(2),Section 43(6),Section 45,Section 48,Section 49,Section 50,Section 55,Section 55(1)(a),Section 55(2),Section 55(2)(i),Section 261

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THE COMMONWEALTH TRUST LTD. CALICUT, KERALA A v. THE COMMISSIONER OF INCOME TAX, KERALA II, ERNAKULAM JULY 30, 1997 (S.C. AGRAWAL AND D.P. WADHWA, JJ.] Income Tax Act, 1961. B Sections 32(1)(iii), 41(2), 43(6), 45, 48, 49, 50 and 55-Capital C gailr-Depreciable capita/asset acquired before January, 1, 1954--Sale of said capital asset after January 1, 1954--Assessee availing depreciation allowance before the transfer of capital asset-Computation of cost of acquisition-Held, cost of acquisition shall have to be determined in tenns of the provisions of Section 50 read with Section 48-Assessee cannot avail the fair market value D of the asset as on Janumy 1, 1954-Section 50( 1) has no dependence on the provisions of Section 55(2)-If assessee not availing qepreciation allowance in respect of the capital asset, Section 50 has no application.

Section 55(2)-Applicability of-When-Held, Section 55(2) would be applicable to all assets, depreciable or non-depiciable, except to the extent E nzod~{ied in tile .::1anrtP.f as stated itt Section 50 of the Act.

Words & Phrase~'Adjusted~ 'written down value', 'balancing (or ter- minal) allowance', 'balancing charge', 'capital gain

The order continues below.

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