This Special Bench has been constituted under section 255(3) of the Income Tax Act, 1961 by the Honble President, Income Tax Appellate Tribunal to decide the following questions arising out of the cross appeals by the assessee and the revenue in the abovementioned appeals : "Question No. 1 : Whether in the facts and circumstances of the case, the bottles costing less than Rs. 5,000 constitute part of block of assets as contemplated under section 2(11) of the Income Tax Act, 1961 and thereby attracting the provisions of section 50 of the Act Question No. 2: Whether in the facts and circumstances of the case, if the answer to question No. 1 is in the negative, the sale proceeds realised by the assessee from the sale of old bottles are revenue receipts or capital in nature Let us first deal with question No. 1, which reads as under "Whether in the facts and circumstances of the case, the bottles costing less than Rs. 5,000 constitute part of block of assets as contemplated under section 2(11) of the Income Tax Act, 1961 and thereby attracting the provisions of section 50 of the Act ?" At the outset, the relevant facts having bearing on this issue may be set out. The assessee-company is a bottling company and is bottling products of Parle under the brand names of Thumsup, Limca, etc. The assessing officer, while framing the assessment under section 143(3) of the Act, noticed from the schedule of fixed assets as at 31-3-1991 (Annexure A)that under the head "Plant and machinery" costing below Rs. 5,000, balance as at 31-3-1989 was shown at Rs. 1,06,05,250 and that additions during the year had been shown at Rs. 88,86,690 and deduction during the year shown at Rs. 7,82,388. It was noticed that the assessee had claimed depreciation of Rs. 81,04,302 (i.e., additions during the year of Rs. 88,86,690 minus deduction during the year Rs. 7,82,388 (Sale proceeds) = Rs. 81,04,302) which was 100% of the net cost of additions during the year. It was further noticed that the assessee had filed revised return dated 1-2-1991 and had claimed depreciation of Rs. 88,86,690, ie., cost of acquisitions, cost of which was below Rs. 5,000 and had not deducted Rs. 7,82,388, which was sales proceeds realised as shown in the original return. The assessees counsel, during the assessment proceedings, contended that the bottles had been allowed as 100% write off under section 32 and during the year, a sum of Rs. 7,82,388 had been realised on sale of scrap of bottles and that the said amount was not to be added to the income of the assessee-company and the assessee will be entitled for depreciation to the extent of 100% on the bottles added during the year of Rs. 88,86,690. For this reason, a revised return has been filed. The capital gain arising on sale of depreciable asset is chargeable under section 50. For application of section 50, the existence of a block of asset is an essential condition. As 100% depreciation has been granted on the bottles under section 32, no block of assets exists at the year end and hence section 50 is not applicable. It was also pleaded that the question of taxability under section 28 also did not arise. However, the assessing officer did not accept the contentions of the assessee.
He was of the view that section 28(1) squarely covers the case of the assessee but in view of the specific provisions of section 50 these receipts were to be taxed as short-term capital gains and not as business income. As regards the contentions of assessees counsel regarding the non-applicability of section 50 of the Act, the assessing officer was of the following view (page 4 of assessment order) :-- "The word prescribed is not only to be understood by rule 5 of the Income Tax Rules but also what has been prescribed in the Act itself, i.e., section 32(1)(ii) - proviso 1. The proviso says that where the actual cost of any machinery or plant does not exceed Rs. 5,000, the actual cost thereof shall be allowed as deduction. The undersigned understands that the definition of block of assets therefore covers those assets also for which 100% depreciation is allowed on the actual cost as prescribed in the said proviso to section 32(1)(ii). Therefore, the argument of the assessee that there cannot be application of section 50, in the absence of existence of block of assets, is not found correct. I, therefore, consider such machinery and plant as block of assets under section 2(11) read with section 32(1)(ii) proviso one. For the further application of section 50, there ought to be W.D.V. of the block of asset at the beginning of the previous year. Section 43 deals with the definition of certain terms relevant to income from profits and gains of business or profession; the relevant extracts from which are reproduced below: Section 43 :- In sections 28 to 41 and in this section, unless the context otherwise requires: (ii) in respect of any previous year relevant to the assessment year commencing on or after the 1-4-1989, the written down value of that block of assets in the immediately preceding previous year as reduced by the depreciation actually allowed in respect of that block of assets in relation to the said preceding previous year and as further adjusted by the increase or the reduction referred to in item (i).
(7)(vi) In view of the above definition, for the application of section 50(1), all the essential ingredients exist in this case, which are: (i) there is block of assets; (iii) the consideration received exceeds the aggregate of the WDV of the block of assets at the beginning of the year.
7 (vii) In view of the above discussion, it is concluded that short-term capital gains have arisen incase of depreciable assets within the meaning of section 50(1). The amount of Rs. 7,82,388 is, therefore, treated as shortterm capital gains and assessed accordingly.
Thus, the assessing officer treated Rs. 7,82,388 being sale proceeds of old bottles as short-term capital gains. Aggrieved by this order of the assessing officer, the assessee moved the matter in appeal before the first appellate authority, who for the reasons recorded in the impugned order, treated the same as business income under section 28. Now, the assessee as well as the department are in appeal before us with this issue. The assessee has challenged the decision of the CIT (A) holding that taxation of sale proceeds of old bottles claimed and allowed as 100% write off under Ist proviso to section 32 in earlier years, amounting to Rs. 7,82,388 is taxable as business income under section 28 of the Income Tax Act, 1961, while the same was taxed as short-term capital gains under the provisions of section 50 and same is not taxable as business income, as sale proceeds of old bottles is of capital nature. The department is also challenging the CIT (A)s order, pleading that the assessing officer had rightly invoked the provisions of section 50 of Income Tax Act, 1961.
At the time of hearing, the learned counsel for the assessee placed on record a compilation consisting of 33 pages comprising therein the items mentioned in the index thereto and contended, to say in brief, that: "The block of assets means a group of assets falling within the class of assets, being buildings, machinery, plant or furniture in respect of which the same percentage of depreciation is prescribed." "Prescribed means prescribed by the Rules made under this Act. Rule 5 of the I.T. Rules is rule dealing with rates of depreciation, which refers to Appendix-I to this Rule, wherein various items of assets and the rates of depreciation applicable thereto are mentioned. On going through Appendix I (pages 9 to 14 of PB), it can be seen that there are various items mentioned therein which are entitled for 100% depreciation. If it was the intention of the legislature to include items costing less than Rs. 5,000 also in the Appendix I, the legislature would have provided for the same in the Appendix I itself. Since the same is not provided for in the Appendix I and it is (plant or machinery costing less than Rs. 5000) allowed as a deduction in view of the first proviso to section 32(1) of the Act, the bottles costing less than Rs. 5,000 cannot be considered to fall under "block of assets". In other words, since the cost of the bottles purchased were allowed as deduction under the first proviso to section 32(1) itself, the same did not fall under the Income Tax Rules /Appendix I It can also be seen that certain items cost of which is even less than Rs. 5,000 has been included in the Appendix I, for example: cylinders, valves and regulators and are stated to entitled for 100% depreciation as per Appendix I. Hence, it is to be construed that even if the cost of each such items is less than Rs. 5,000, Legislature intended such items to fall underVock of assetsand hence included the same in the Appendix-I If it had been the intention of the legislature to include bottles under Appendix I, it would have done specifically as done in the case of cylinders, valves and regulators. At the relevant point of time, section 32(1)(ii) read as under- In the case of any block of assets, such percentage on the written down value thereto as may be prescribed : Provided that where the actual cost of any machinery or plant does not exceed Rs. 5,000, the actual cost thereto 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 purpose of his business or profession." (page 2 of PB) The first proviso to section 32(1)(ii)(b) reads as under "Provided also that in respect of previous year relevant to the assessment year commencing on the 1-4-1991, the deduction in relation to any block of assets under this clause shall in the case of a company, be restricted to 75% of the amount calculated at the percentage, on the written down value of such assets, prescribed under this Act immediately before the commencement of Taxation Laws (Amendment) Act, 1991;" Circular No. 717, dated 14-8-1995 (pages 26 & 27 of PB) reads as under: "23.1 Withdrawal of deduction of full cost of minor items of machinery or plant.
--The first proviso to section 32(1)(ii) of the Income Tax Act, 1961 provided that where the actual cost of any individual item of machinery or plant did not exceed Rs. 5,000, the full cost would be allowed as depreciation in the very first year of use and the written down value of the asset thereafter is taken to be niL This proviso was introduced through the Finance Act, 1966, when the concept of "block of assets was not in existence. Thereafter, sweeping changes were made in the provisions relating to depreciation.
23.2 Further, it was seen that this provision was being misused by claiming 100% depreciation on a large number of assorted items below Rs. 5,000. This enabled the assessees to reduce their taxable profits by claiming 100% write off in the year of purchase. The Finance Act, 1995, has deleted the first proviso to section 32(1)(ii) and all items of machinery or plant, including those costing less than Rs. 5,000 will form part of "block of assets and be allowed depreciation at the specified rate in accordance with the rule 5 of the Income Tax Rules.
From the reading of the above circular, it is clear that only after amendment with effect from 1-4-1996, the items costing less than Rs. 5,000 each would fall under Appendix-I. The following extracts of budget speech incorporated in the departmental circular No. 469, dated 23-9-1986 are more relevant :- "96. As promised in the Long-term Fiscal Policy Statement, I propose to introduce a system of allowing depreciation on individual assets.
Simultaneously, I propose to rationalise the rate structure by reducing the number of rate as also by providing for depreciation at higher rates so as to ensure that more than 80% of the cost of the plant and machinery is written off in a period of 4 years or less. This will render replacement easier and help modernisation.
Apart from those items, which are eligible for 100% depreciation in their initial year itself, there are at present different rates for plant and machinery. I propose to have only two rates of depreciation at 33^1/[3]% & 50%. Plant and machinery used as antipollution devices and those using indigenous know-how are proposed to be placed in a block carrying the higher rate of depreciation of 50%. Buildings meant f or low-paid employees of industrial undertakings will be entitled to depreciation at 20% as against the general 5% for residential buildings and 10% for non-residential buildings." 6.4 The amendments relating to depreciation allowance are as follows:- (a) A "block of assets" as defined in the new clause (11) inserted in section 2 of the Income Tax Act means a group of assets falling within a class of assets being buildings, machinery, plant and furniture in respect of which the same percentage of depreciation is prescribed. The necessary amendments to the Income Tax Rules prescribing the percentage of depreciation in regard to various blocks of assets will be made accordingly which will be effective from 2-4-1987, i.e., for the assessment year 1988-89 and onwards.
It is proposed that the assets, which are eligible for 100% depreciation in the initial year itself will continue to get this benefit. In addition, there will be only two rates of depreciation presently proposed at 33^1/[3]% and 50% in respect of plant and machinery. Further, the buildings meant for low paid employees of industrial undertakings will be entitled to depreciation at 20% as against the general rate of 5% for residential buildings and 10% for non-residential buildings. In view of these accelerated rates of depreciation, the extra shift allowance being allowed to some items of plant and machinery enumerated in Appendix-I to the Income Tax Rules will cease to admissible when the new rates come into force.
(c) section 32(1)(ii) provides that depreciation will be allowed at a prescribed percentage of the written down value of the buildings, machinery, plant and furniture. The amending Act has provided that in the case of any block of assets, depreciation will be allowable at a prescribed percentage of the written down value thereof." A careful reading of the above extract of the departmental circular would show that "Prescribed" in Act does not stand to reason. Further, as already mentioned "prescribed" has been defined in the Act under section 2(33) to mean prescribed by Rules made under this Act. If the assessing officers view is accepted, the proviso Nos. 1, 3 and 4 to section 32 cannot be interpreted harmoniously. The first proviso speaks of 100% depreciation in the first year itself, whereas other provisos speak of 75% of total depreciation allowable only for assessment year 1991-92. In this connection, the headnote of the decision of the Tribunal (Jabalpur) in the case of Central India Gases (P) Ltd. v.Asstt. CIT (1998) 66 ITI) 571 (Jabl) is relied upon, which reads as under:- "The third proviso to section 32(1)(ii) is applicable in respect of the assets forming part of the block of the assets on which depreciation is allowed at such percentage on WDV. But actual cost of such plant and machinery is allowed as a deduction by virtue of first proviso. Third proviso, which restricts the deduction in respect of asset falling within a block of assets in case of its user for less than 180 days, would have no application upon the assets, which are not forming part of block. Therefore, third proviso would not be applicable in respect of plant and machinery, cost of which was below Rs. 5,000 and actual cost thereof was allowed as deduction by virtue of first proviso.
The Finance Act, 1995 has since deleted the first proviso and by virtue thereof all items of plant and machinery cost less than Rs. 5,000 will also form part of block of assets. Therefore, prior to the omission when first was on statute book, the plant and machinery, the actual cost of which was below Rs. 5,000 and which was put to use during the year under consideration, actual cost thereof should be allowed as a deduction whether or not the asset was used for more than 180 days. Further, the assessee had given the complete datewise details of purchase of cylinders. The assessing, officer had himself accepted the user of the all the cylinders for the purpose of business. He had disallowed 50% depreciation because cylinders were used for less than 180 days. In view of the legal position and the facts, the assessee was entitled to 100% depreciation on the gas cylinders purchased and used during the year under consideration." Also the headnote, which reads as under, in the case of Dy. CIT v.Goyal Gases Ltd. (2000) 112 Taxman 39 (Del) (Mag.) (pages 21 & 22 of PB) is more relevant--- "As regards the issue regarding the restriction of depreciation to 50% on cylinders used for less than 180 days, as per provision of section 32(1)(ii), in the case of any block of assets depreciation is allowed at such percentage of the written down value as is prescribed. From the provisions, it is quite evident that the plant and machinery with actual cost thereof being less than, Rs. 5,000 does not form part of block of assets and by virtue of the first proviso to section 32(1)(ii), the actual cost of such plant and machinery is itself allowed as a deduction. The third proviso to section 32(1)(ii) which restricts deduction in respect of assets falling with a block of assets in case of its user for less than 180 days would, therefore, have no application in the instant case.
In this view of the matter, it was to be held that there was no infirmity in the order of CIT (A).
As regards, the depreciation allowable on bottles, it would be seen that nowhere the CIT (A)had directed the assessing officer to allow depreciation at the rate of 25% on bottles. The departments ground was, thus, misconceived. In any case, the finding recorded by the CIT (A) for granting 100% depreciation on the cost of each bottle and not to apply the third proviso to section 32(1)(ii) was based upon various judicial decisions referred to by him and, therefore, the objection of the department was to be rejected." In assessees own case, in ITA No. 6838/Mum/96 by order dated 3-3-2003, on similar facts and circumstances, the revenues appeal was dismissed.
In the case of Ulka Advertising (P) Ltd. v. Dy. CIT (IT Appeal No. 2389 (Bom) of 1994, dated 8-8-2002), the Tribunal has not attempted reconciliation of the provisos (1), (3) & (4) of section 32(1)(ii).
Further, the definition under section 2(33) of the Act for "prescribed" should not be applied as if there was different intention for the legislature.
For the preposition that the words used in the statute to be given meaning assigned in the statute, the decision of Honble Allahabad High Court in the case of CIT v. J.K Cotton & Wvg. Mills Co. Ltd. (1987) 164 ITR 18 is relied upon.
For the proposition that the definition given in the section should not be interpreted in a manner which is inconsistent with the use therein, the decision of Honble Gujarat High Court in the case of Smt.
Sanatkumar Jayantilalv. CIT (1995) 211 ITR 755 (Guj.) is relied upon.
For the proposiion that the definition of expression should prevail for all the provisions in the Act unless the context requires otherwise, the decision of Honble Andhra Pradesh High Court in the case of CIT v.Dredging Corpn. of India (1988) 174 ITR 682 (AP) is relied upon.
In a nutshell and in view of the definition of "block of assets" as per section 2 (11) read with the definition of word "prescribed" as per section 2(33) of the Act as elaborately explained above, the sale proceeds of the bottles on which 100% write off had been allowed in the year of purchases itself, cannot fall under the purview of section 50 of the Act.
5. On the contrary, the learned Departmental Representative, contended to say in brief, that: - the word "prescribed" is not only to be understood by rule 5 of Income Tax Rules but also what has been prescribed in the Act itself ie. Section 32(1)(ii) - proviso one. The proviso says that where actual cost of any machinery or plant does not exceed Rs. 5,000, the actual cost thereof should be allowed as deduction in the year in which such plant is first put to use by the assessee. The definition of "block of assets", therefore, covers those assets also for which 100% depreciation is allowed on the actual cost as prescribed in the said proviso to section 32(1)(ii). Therefore, the argument of the assessees counsel that there cannot be application of section 50 in the absence of existence of block of assets is not correct. For application of section 50(1), the essential ingredients are: (1) there should be a block of assets; (2) there should be written down value; and (3) the consideration received should exceed the written down value of the block of assets at the beginning of the year.
In this case on hand, as already pleaded, even though depreciation had been allowed under the proviso to section 32(1)(ii), the items on which 100% depreciation had been allowed would form block of assets. The written down value in this case on hand, is nil since the entire cost had been allowed as depreciation in the first year of usage itself.
Thus, the sale consideration is in excess of the written down value ie., "nil" and hence, the entire sale consideration should be treated as short-term capital gains as per section 50 of the Act. Further, section 2 of the Act begins with the phrase "In this Act. unless the context otherwise requires". Therefore, what has been mentioned in the sub-sections to section 2 including sub-section (33), is to be given the meaning of the words or phrases mentioned in the respective sub-sections as it is, unless the context otherwise requires. In other words, if the context requires otherwise, the definition given in the sub-sections to section 2 may be given a different meaning. In this case on hand, this exception to the general rules is to be noticed and kept in mind while giving effect to the sub-sections (11) & (33) of section 2. Therefore, it is not that only if the rates of depreciation are prescribed in the relevant schedule to rule 5 of the Income Tax Rules that the assets falling under sub-clauses therein would be considered as block of assets but even if the rate is prescribed in section itself, such assets falling under such class of assets mentioned in the proviso to section 32(1)(ii) would also form block of assets. The Honble Madras High Court in the case of M Raghavan v.Asstt. CIT (2004) 266 ITR 145 (Mad) had an occasion to deal with similar issue in the case of books on which 100% depreciation had been allowed under section 32(1)(ii) and in that case, the Honble Madras High Court had held that the whole amount received by sale of such assets (books) was to be treated as capital gain arising from transfer of short-term capital asset. The ratio laid down by Honble Madras High Court would apply exactly to the facts of the present case also. The Mumbai Special Bench, in the case of Chhabria Trust v. Asstt. CIT (2003) 87 ITD 181 (Mum) had held that as per section 50 also, it is not necessary that the depreciation is to be allowed for the year under consideration and it is enough that if the depreciation was allowed in any of the earlier years under the Income Tax Act, 1961. The Tribunal in the case of Ulka Advertising (P) Ltd. (supra) in its order dated 8-8-2002, had held that the definition given in section 2 of the Act starts with the words "In this Act unless context otherwise requires" and looking to this aspect it may not be said that there was intention of statute to ignore substantive provisions of law contained in the Act itself. It was further held in that case that as the rate of depreciation was prescribed in the substantive provisions of the Act itself, the word "prescribed" appearing in the definition of "block of assets" in section 2(11) cannot be construed only the meaning the rate of depreciation as prescribed under the rule only and to ignore rate prescribed in the substantive provisions of the Act. Thus, in that case, where written down value on gas cylinders was nilat the beginning of the year, it was held that all the necessary conditions as laid down in section 50(1) were existing to bring the sale proceeds of such cylinders as assessable under section 50(1).
6. We have heard the rival submissions and considered the facts and materials on record including the case laws relied upon by the parties before us. There is no doubt about the fact that the assessee had availed the benefit of 100% deduction in respect of the bottles in the year of purchase itself, as the cost of each bottle is less Rs. 5,000.
Also there is no doubt about the fact that during the year under consideration the assessee had sold old bottles on which 100% deduction had been allowed in the earlier years at a sum of Rs. 7,82,388. The only dispute is that the assessee is claiming that this amount of Rs. 7,82,388 cannot be considered as short-term capital gains under section 50 of the Act for the reason that there was no rate of depreciation prescribed for such items in the Appendix-I to rule 5 of Income Tax Rules. In our considered opinion, the rate of depreciation of such assets costing less than Rs. 5,000 each has been prescribed in the section itself and what was allowed to the assessee in the years of purchase of such items at 100% deduction was only depreciation because the same was allowed under section 32(1)(ii) of the Act. Once, the entire cost of the asset has been allowed as depreciation, the written down value left over would be niL As regards, the arguments of the assessees counsel that such items would not fall under the block of assets as defined under section 2(11) of the Act, we are unable to accept his contentions for the simple reason that, section of the Act starts with the phrase "In this Act unless context otherwise requires".
In the present facts and circumstances, we are of the view that "the context otherwise requires was to be read in interpreting the sub-sections to section 2 including sub-sections (11) and (33) in the way in which the assessing officer had read, i.e., since the rate of depreciation had been prescribed in the Act itself, the meaning of the word "prescribed" in section 2(33) of the Act is to be construed to include not only the rate prescribed in Schedule I to rule 5 of the Income Tax Rules but also the rates specified in the substantive provision of the Act itself. If it is to be read in this way, there is force in the contentions of the learned Departmental Representative that the items on which 100% depreciation had been allowed under section 32(1)(ii) of the Act would definitely fall under "block of assets" mentioned in section 2(11) of the Income Tax Act, 1961. In our considered opinion, the learned counsel for the assessee conveniently omitted to consider the phrase "In this Act unless context otherwise requires" while interpreting section 2(11) and section 2(33) of the Act. Even before the Honble Madras High Court, similar submissions made before us in this case on hand, were made as regards "block of assets" and "prescribed. The Honble Madras High Court, after considering such submissions in similar set of facts and circumstances (in that case books were sold whereas in the case on hand bottles were sold), came to the conclusion that the "assessee does not dispute the fact that the books are "plant and that depreciation claimed has been actually allowed on that basis. Plant is a depreciable asset for which, rates of depreciation have been prescribed in the depreciation table in Appendix-I of the Income Tax Rules with reference to different items falling within the class of "plant". The fact that the assessee had the benefit of depreciating his asset in full in the year of acquisition itself, does not render the benefit received by the assessee something other than depreciation. The asset that the assessee acquired was a depreciable asset. The assessee, as also the revenue, regarded each book as constituting a separate "plant" and the actual costof acquisition had been allowed, as depreciation, as the value of each book was less than Rs. 5,000. The assessee thus had actually received the benefit of depreciation under section 43(6)(b). The written down value of the asset is the cost of acquisition less the quantum of depreciation actually allowed 100% of the cost having been allowed as depreciation, the written down value of the asset, which the assessee had acquired became "nil". The amount that was realised by the assessee when he later sold those depreciated assets, was the amount from which the written down value of the asset that was sold was to be deducted, was "nil". The whole of the amount received by the assessee from that sale was therefore was required to be treated as and has rightly been treated as capital gain arising from the transfer of short- term capital asset". Since, the facts and circumstances are identical except that in this case on hand the assessee had sold bottles in place of books, in our considered view, the ratio of the decision of the Honble Madras High Court cited supra squarely applies to the facts of the case on hand. Hence, respectfully following the decision of Honble Madras High Court cited supra we are inclined to hold that the sale proceeds of old bottles amounting to Rs. 7,82,388 is taxable as short-term capital gains under section 50 of the Income Tax Act, 1961.
Accordingly, we are holding that the bottles costing less than Rs. 5,000 constitute part of block of assets as contemplated under section 2(11) of the Act and attracts the provisions of the section 50 of the Act. Thus, our answer to question No. 1 is positive/ affirmative.
Since the question No. 1 has been answered in positive, there is no need for us to deal with the question No. 2 since it is to be answered only when the answer to question No. 1 is in the negative.
Now, this will go before the Division Bench to be given effect to while deciding other issues (which were not referred to this Special Bench) in the normal course. We order accordingly.