RAJAGOPALA AYYANGAR, J. - The questions referred to this Court under section 66 (1) of the Indian Income-tax Act are :
(1) Whether the modification of the assessment of capital gains from Rs. 61,140 to Rs. 81,863 by the Appellate Assistant Commissioner is valid ?
(2) Whether the capital gains of Rs. 81,863 are exempt under the third proviso to section 12B (1)
The assessee is a firm of two partners who were engaged in the business of manufacture and sale of tiles, and the present proceedings relate to the assessment of the year 1948-49, the accounting period being the year ended 12th April, 1948. One of the partners of the assessee firm died on 3rd April, 1946, and the business was stopped on 20th August, 1947. There was litigation between the son of the deceased partner and the surviving partner in the course of which a commissioner was appointed by the court to effect a sale of the assets of the partnership and the commissioner sold the properties by public auction on 24th August, 1947. Rs. 1,50,089 was the realised. The sale amount was in excess of the written down value by Rs. 81,863. The amount of depreciation which had been allowed to the assessee on the initial cost over the several years during which the assessee had been utilising these assets totalled Rs. 20,723.
Before the Income-tax officer the question debated was whether the sum of Rs. 81,863 which was the profit realised by the sale of these assets was not liable to tax as capital gain under section 12B of the Income-tax Act. The contention of the assessee however was that this profit which was undoubtedly a capital gain was exempted from charge on the ground of its falling within the third proviso to section 12B (1) which ran :
'Provided further that any transfer of capital assets by reason of the compulsory acquisition thereof under any law for the time being in force relating to the compulsory acquisition of property for public purposes or any distribution of capital assets on the total or partial partition of a Hindu undivided family, or on the dissolution of a firm or other association of persons, or on the liquidation of a company, or under a deed of gift, bequest, will or transfer on irrevocable trust shall not, for the purposes of this section, be treated as sale, exchange or transfer of the capital assets'.
The Income-tax Officer overruled this contention of the assessee but he drew a distinction between the difference between the written down value of these assets and their original cost on the one hand and the excess over this cost on the other. As regards the former which in the present case came to Rs. 20,723 he held that the assessee was liable to have this included in the amount of the assessable income for the year under section 10 (2) (vii) while as regards the other sum of Rs. 61,140 he held that it was liable to charge as a capital gain under section 12B. The assessee preferred an appeal to the Appellate Assistant Commissioner before whom he contended that the sum of Rs. 20,723 could not be included in firms income under section 10 (2) (vii) because admittedly the sale took place after the cessation of the business and there was no business carried on by the assessee during the year in which the assets were sold. On the terms of section 10 (2) (vii) this contention had to be upheld and it was so done. The Assistant Appellate Commissioner however rejected the claim of the assessee that the sale effected by the Commissioner came within the third proviso to section 12B (1) and on this ground he computed the capital gains on the entire sum of Rs. 81,863 representing the entire difference between the written down value and the sale price. On further appeal to the Tribunal, this order of the Appellate Assistant Commissioner was upheld. One of the points raised on behalf of the assessee before the Tribunal related to the power of the Appellate Assistant Commissioner to enhance the assessment under the head 'capital gains'. This contention was rejected by the Tribunal and the first question referred to us seeks to raise this points. Learned counsel for the assessee however found that what the Appellate Assistant Commissioner did was merely a re-adjustment and that therefore there could be no objection to his order on the ground of want of jurisdiction. The first question therefore is answered in the affirmative and against the assessee.
As regard the second question the point raised before the Tribunal, namely that based upon the sale in question coming within the third proviso to section 12B (1), was not urged before us, in view of the decision of this Court in Sri Kannan Rice Mills Ltd. v. Commissioner of Income-tax, Madras. It was there held that the third proviso applied only to cases of distribution of capital assets in specie and not to case where the distribution was of the proceeds of the assets. A similar construction of the third proviso has been adopted by the Bombay High Court in Commissioner of Income-tax, Bombay City v. James Anderson which was followed by the same Court in a recent decision in Commissioner of Income-tax, Bombay North v. Walji Damji. In view of these authorities learned counsel did not urge that the sale was exempted by the third proviso to section 12B (1). As we have indicated already this we was the only ground upon which exemption was sought to be rested before the Tribunal. If therefore counsel for the assessee were to be confined to the argument addressed to the Tribunal, the second question would have to be answered in the negative and against the assessee.
Before us however learned counsel for the assessee put forward two contention which had not been urged before the Tribunal. The first was that present case was not within the operative words of the first paragraph of section 12B (1) on the ground that the sale which undoubtedly tool place was not be the assessee and was therefore not one on the occurrence of which the charge was attracted. Learned counsel urged that the sale contemplated by section 12B (1) was a consensual one in which there was mutual assent of the assessee and the purchaser, and that as in the present case the sale was effected by a commissioner appointed by the Court, it was so to speak in invitum and therefore not within the category of sales under section 12B (1). In our opinion this contention has no merit and has to be rejected on more than one ground. In the first place, when a Court appoints represent the parties to the effect a sale, the commissioner so appointed represents the parties to the litigation and is clothed with all the powers which the parties would have. If, therefore, he effect a sale, such sale has for all legal purposes, the same effect as a sale by the parties themselves. In this connection we might note that sale involved in Commissioner of Income-tax, Bombay North v. Walji Damji, was a case of a sale of partnership assets by a receiver appointed by Court in a suit for dissolution and accounts. But apart from this aspect, section 12B (1) includes cases not merely of sales but also of transfers of capital assets. Undoubtedly there has been in this case a transfer of the assets and therefore it was certainly a transaction to which section 12B (1) was attracted. This argument is therefore repelled.
The second ground urged was that even if section 12B (1) applied and the transaction was covered by the third proviso, still the only sum which could be brought to charge as a capital gain would be the difference between the original cost and the sale price that is Rs. 61,140 and that the sum of Rs. 20,723 which was the total of the depreciation which has been allowed to the assessee could not be brought into account as part of the 'gain' by reason of the second proviso to section 12B (2). The relevant words of this provision runs thus :
'12B (2) : The amount of a capital gain shall be computed after making the following deductions from the fill value of the consideration for which the sale, exchange or transfer of the capital asset is made, namely :
(ii) the actual cost to the assessee of the capital asset, including any expenditure of a capital nature incurred and borne by him in making any additions or alternations thereto, but excluding any expenditure in respect of which any allowance is admissible under any provision of section 8, 9, 10 and 12..... Provided further that where the capital asset is an asset in respect of which the assessee has obtained depreciation allowance in any year, the actual cost of the asset to the assessee shall be its written down value, as defined in section 10, increased or diminished, as the case may be, by any adjustment made under clause (vii) of sub-section (2) of that section.'
The argument advanced for the assessee was that in the present case the written down value had to be increased or diminished by the adjustment now to be made under section 10 (2) (vii) and if these adjustments were made the capital gain which might be brought to charge would be only Rs. 61,140.
The mention in the relevant provision of the definition in section 10 renders it necessary to extract the definition of written down value in section 10 (5). The expression is there said to mean :
'(b) in the case of assets acquired before the previous year the actual cost to the assessee less all depreciation actually allowed to him under this Act or any repealed thereby or under executive orders issued when the Indian income-tax Act, 1886 (II of 1886) was in force.'
If this definition of 'written down value' were into the second proviso to section 12B (2) and the proviso and stopped with the second 'the actual cost top the assessee shall be its written down value as defined in section 10', the entirety of the difference between the written down value and the full value of the consideration for the sale, transfer or exchange would be brought to charge as a capital gain. The proviso however does not stop there and it is the words that follow as regards the adjustments to be made under section 10 (2) (vii) that have given rise to the debate before us.
Learned counsel for the Commissioner urged that the expression 'by any adjustment made' in the concluding words of the proviso, referred to a factual adjustment effected for the purpose of bringing to charge or allowing an exemptions in regard to the computation of income under section 10 and not to a theoretical adjustment without reference to a actual assessment. Learned counsel for the assessee however contended that the words which we have underlined were not confined to cases of actual adjustment for the purpose of computation for an assessment to income-tax but that the adjustment might be made now for the purpose of affording the benefits of it in the computation of the quantum of the capital gain subject to tax. We are clearly of the opinion that the construction contended for by the learned counsel for the Department should be accepted.
In the first place the provisions contained in section 10 (2) (vi) and (vii) were devised to eliminate hardship to assessees who could not claim any depreciation in regard to wear and tear in, or obsolescence of, capital assert notwithstanding that the diminution in value or wastage arose by reason of their employment in the production of taxable income on the ground that plat etc. was not part of the circulating capital. Section 10 (2) (vi) however allowed a concession in this matter. But if the assets on which an allowance had been granted were sold by the assessee and the sale realised a price higher than the written down value, it indicated that the allowances granted was grater than was justified by the reduction in value caused by the wear and tear etc. Revenue therefore stepped in and mopped up this excess as an item liable to inclusion in the assessable income and that is the provision in section 10 (2) (vii). But for section 10 (2) (vii), this excess sum would be 'income' but as it was produced by the sale of capital asset it would be only a capital gain. Of course, where the sale realised more than the original cost, that excess also would be a capital gain. The capital gain in the latter case would be made up of two components. : (1) the difference between the written down value and the original cost, and (2) that between the original cost and the price realised. Where however the difference between the written down value and the original cost has been included in an assesss income and tax has been levied on it under section 10 (2) (vii), to bring that items again in the computation of capital gain under section 12B (2) would virtually be an imposition of a double tax on the same assessee and on the same receipt. It was to avoid this double tax that the concluding words of the second proviso to section 12B (2) have been introduced. If the purpose of these words was to eliminate double taxation, it would stand to reason that the qualification would be attracted only to cases where the sum had been brought top tax and not to cases where by reason of the limitation introduced by section 10 (2) (vii) the amounts is not charged with tax undersection 10. This reasoning would favour the construction that the expression 'made' in the consluding words of this proviso means only 'an adjustment factually made' in an assessment under section 10. The provision so read constitutes a co-ordinated scheme of taxation, the difference between the written down value and the original cost being in the event of a sale subjected to ordinary income-tax and the excess over the cost price being a capital gain subjected to tax under section 12B. This scheme would therefore require that an assessee should show that he has disgorged the difference between the written down value and the original cost before he could claim to have that deduction made, when he seeks relief under the last words of the second proviso to section 12B (2).
The question might also be approached from a slightly different point. The adjustments spoken of under section 10 (2) (vii) might either increase or diminish the written down value. In the present case no doubt it is an adjustment which if made would increase the written down value. There might be however cases in which the adjustment might lead to diminution in the written down value. To hold that the expression 'made' in the second proviso means 'capable of being made' and not factually made would lead to injustice in the case of an assessee in regard to whom the adjustment if made would lead to diminution of the written down value. If the expression 'made' is understood as 'factually made' it would mean that in such a case the amount would not be brought to charge as a capital gain unless the assessee hads the benefit of the diminution in the written down value by the same being allowed as a revenue expenditure in the computation of his income under section 10 (2). In our opinion this consideration is almost decisive in favour of the construction urged by learned counsel for the Department. As admittedly no adjustment has been made under section 10 (2) (vii) in the assessees assessment to income-tax, the assessee is not entitled to have this adjustment made in the computation of his capital gain under section 12B. The decision of the Tribunal was therefore correct and the second question is answered in the affirmative and against the assessee. As the assessee has failed he must pay the costs of the reference. Counsels fee Rs. 250.
Reference answered accordingly.