V. Ramaswami, J.
1. The assessee company transferred during the previous year relevant to the assessment year 1963-64 one of its buildings valued at Rs. 38,661 to an Indian company, M/s. Stanes Tyre and Rubber Products Limited, which was a fully owned subsidiary company of the assessee. On this building the assessee had been given initial depreciation in the sum of Rs. 6,098. The Income-tax Officer brought to charge this sum of Rs. 6,098 on the ground that 'this initial depreciation forms profit in the sale of assets to the company'. The Income-tax Officer presumably proceeded to include this amount to a charge under Section 41(2) of the Income-tax Act, 1961 (hereinafter called the Act). The Appellate Assistant Commissioner directed deletion of this amount in the view that Section 47(iv) of the Act is applicable, the transfer being to a new Indiancompany which is a fully owned subsidiary company of the assessee. The Tribunal after holding that Section 47(iv) is applicable to the case, considered that the assessee is entitled to the relief in view of the Explanation to Clause (i) of Sub-section (2) of Section 34. At the instance of the Commissioner of Income-tax, the following question has been referred:
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the profit of Rs. 6,098 on account of transfer of assets to the subsidiary company is not assessable under Section 41(2) of the Act ?'
2. The learned counsel for the revenue submitted that a fiction has been created under Section 41(2) treating so much of the excess of the sale value over the written down value as does not exceed the difference between the actual cost and the written down value as a revenue income of the business and that, therefore, Section 47(iv), which is relevant only for the purpose of ascertaining capital gains, if any, is not applicable. The learned counsel for the assessee, on the other hand, contended that Section 41(2) has to be read subject to the provisions of Section 47(iv) and there is nothing wrong in thus restricting the operation of Section 41(2). He referred in this connection to Section 34(2)(i) of the Act, which dealt with the aggregation of deductions in respect of depreciation made under Section 32(1) as supporting his argument. He wanted to reach the same conclusion by another reasoning based on Section 50. According to the learned counsel for the assessee, Section 50 is the main section dealing with computation of cost of acquisition of a depreciable capital asset in respect of which a deduction on account of depreciation has been obtained by the assessee in any previous year. After applying the provisions of Section 50 and determining the cost of acquisition the head of income under which the difference between the amount for which the asset was sold and the cost of acquisition is to be included has to be determined. Since under Section 48 the income chargeable under the head 'capital ain ' shall be computed by deducting from the full value of the consideration the cost of acquisition of the asset as provided in Section 50, the entire difference between the sale value and the written down value will represent the capital gain. But as the transaction is one coming under Section 47(iv) this capital gain cannot be included in the assessment. In reply to this part of the argument, the learned counsel for the revenue submitted that the deductions for depreciation are made as one of the allowances permitted in determining the profits and gains of business, and, therefore, the balancing charge is to be dealt with only under the head of 'Profits and gains of business' and not under 'Capital gain'.
3. In the present case, the amount for which the building was transferred to the subsidiary company did not exceed the actual cost but exceeded thewritten down value. The revenue sought to bring the difference between the sale price and the written down value to charge as revenue income under Section 41(2). If the transfer by the assessee had been to a person not coming under Section 47(iv) there could be no doubt that the amount would have been includible as income of the business under Section 41(2). In fact, the learned counsel for the assessee did not dispute that the amount Would be chargeable under Section 41(2) alone but for the application of Section 47(iv). Section 32 deals with deduction in respect of depreciation of building or plant or furniture owned by the assessee. Section 32(1)(iii) in particular deals with the deduction normally referred to as balancing allowance. In cases where the depreciable asset is sold and the amount for which it was transferred was less than the written down value and the deficiency if actually written off in the books of the assessee, the deficiency is allowable as a deduction in computing the income under the head 'Profits and gains of business'. On the other hand, Section 41(2) levies a balancing charge when the receipt exceeds the written down value. 'Actual cost' is defined in Section 43(1) as meaning the actual cost of the asset to the assessee subject to certain other adjustments with reference to particular assets. 'Written down value' is defined in Section 43(6) as meaning in the case of assets acquired in the previous year the actual cost to the assessee and in the case of assets acquired before the previous year the actual cost less all depreciation actually allowed to him under the provisions of the Act or under the earlier enactments. The word 'depr-ciation' in this provision would include all the deductions including init(sic) depreciation allowed under Section 32(1)(iv) or (v). Therefore, for finding out the difference between the actual cost and the written down value for charging it to tax under Section 41(2), the written down value must have been ascertained with reference to Section 43(6) by deducting all depreciation actually allowed from the actual cost. But for the computation of capital gain the, value of the 'cost of acquisition' will have to be deducted from the full value of the consideration received. Section 50 deals with determination of 'cost of acquisition' for a depreciable capital asset. Under Sub-section (1) of Section 50, the written down value as defined in Sub-section (6) of Section 43 and the asset as adjusted shall be taken as the cost of acquisition of the asset. The word 'adjusted' for the purpose of Section 50 is defined in Section 55(1) as meaning the written down value diminished by any loss deducted or increased by any profit assessed under the provisions of Clause (iii) of Sub-section (1) of Section 32 or Sub-section (2) of Section 41, as the case may be. A reading of Sections 41(2) and 50 shows that the balancing charge and the capital gain could not overlap. It is only the amount which is in excess of the balancing charge that would be attracted to capital gain under Section 50.
4. The above legal position,could be best understood by taking an illustration :
Rs.Actual cost of the asset20,000Depreciation allowed including initial depreciation under section 32 4,000Asset sold for24,000
5. In this illustration the written down value under Section 43(6) is Rs. 20,000minus Rs. 4,000=Rs. 16,000. The sale price exceeds the written downvalue to the extent of Rs. 8,000. Out of this excess, under Section 41(2) somuch of the excess as does not exceed the difference between the actual costand the written down value is chargeable to tax as revenue income. Theamount falling under Section 41(2), therefore, would be Rs. 20,000 minusRs. 16,000 = Rs. 4,000. 'Cost of acquisition' in the same illustration forthe purpose of Section 50 is the written down value plus the adjustedprofit which is equivalent to Rs. 16,000 plus Rs. 4,000 Rs. 20,000.Capital gain computed under Section 48 is the sale price minus cost ofacquisition, i.e., Rs. 24,000 minus Rs. 20,000=Rs. 4,000. Thus, out of thedifference of Rs. 8,000 between the sale price and the written down value,Rs. 4,000 would be chargeable under Section 41(2) and the balance ofRs. 4,000 under Section 45 as capital gain. If the sale was only forRs. 20,000 there would be no capital gain as the entire difference betweenthe sale price and the written down value would come within the provisions of Section 41(2) and there would not be any difference between thesale price and the cost of acquisition as determined under Section 50.
6. If the sale price is Rs. 19,000 in the said illustration, then the written down value determined under Section 43(6) would be Rs. 16,000. But the excess of the sale price over the written down value is only to the extent of Rs. 3,000. Since this excess of Rs. 3,000 does not exceed the difference between the actual cost and the written down value the entire sum of Rs. 3,000 would be chargeable under Section 41(2). The cost of acquisition as determined with reference to Section 50 would be the written down value plus adjusted profit, that is, Rs. 16,000 plus Rs. 3,000 = Rs. 19,000. The capital gain as determined under Section 48 would be sale price minus cost of acquisition as determined under Section 50, that is, Rs. 19,000 minus Rs. 19,000 = Nil.
7. In the same illustration if the sale price was Rs. 15,000 since it does not exceed the written down value, Section 41(2) would not be attracted but the difference of Rs. 1,000 between the sale price and the written down value would be deductible under Section 32(1)(iii) as a loss. In calculating the cost of acquisition under Section 50 the loss of Rs. 1,000 is deducted from the written down value of Rs. 16,000 and, therefore, thecost of acquisition will be only Rs. 15,000. The capital gain computed under Section 48 would be the sale price minus cost of acquisition, Rs. 15,000 minus Rs. 15,000 = Nil.
8. Thus it could be seen that except in cases where the sale price is in excess of the actual cost with respect to a depreciable asset there could be no capital gain under the provisions of the Act. In all cases where the asset is sold for actual cost or for less than the actual cost it would be a case for application of either Section 41(2) or Section 32(1)(iii). But for Section 50, a case where the sale is for less than the actual cost but more than the written down value will be treated as resulting in a capital loss which could be carried forward though that transaction had resulted in a profit chargeable under Section 41(2). It is in order to avoid this anomaly a special provision for computing the cost of acquisition in the case of depreciable asset is provided under Section 50. Thus, Section 50 is intended to take out a transaction relating to depreciable asset, which would otherwise fall under Section 45, from the purview of that section when the same would fall either under Section 32(1)(iii) or Section 41(2) of the Act.
9. Section 47(iv) of the Act deals with only transactions which would have but for the exemption involved a capital gain. It would not apply to a case where no capital gain is involved as that section is in the nature of a proviso or an exception for the charge under the head 'Capital gain'. In a case where the sale is for more than the actual cost attracting both a charge under Section 41(2) and a charge under Section 45, whether the provisions of Section 47(iv) would be attracted for the entire difference between the sale price and the written down value or only for so much of the excess that falls under Section 45 does not fall to be determined in this case as the sale price was not for more than the actual cost. Since the entire difference of Rs. 6,098 is assessable under Section 41(2), Section 47(iv) is not applicable.
10. We are unable to accept the contention of the learned counsel for theassessee that Section 34(2)(i), Explanation, in any way helps the assessee.Depreciation under Section 32 is calculated on such percentage of theactual cost of the asset to the assessee. In calculating the transferee'sprofits depreciation should, therefore, be determined with reference to thecost of the asset to him. This has been so held by the Privy Council andthe Supreme Court in Commissioner of Income-tax v. Buckingham & Carncatic Company Ltd. : 3ITR384(Mad) and Jogta Coal Co. Ltd. v. Commissioner of Income-tax : 36ITR521(SC) respectively. Therefore, the transferee would be entitled to insist onaggregating for the purpose of finding out the total depreciation allowed tohim only that depreciation which was in fact allowed to him. But theExplanation to Section 34(2)(i) provided that in respect of certain transfereeswho come under that Explanation, in aggregating depreciation allowances that which was allowed to the transferor should also be included. This cannot be understood or interpreted as giving any relief to the transferor or exempting him from the provisions of Section 41(2). It is no answer for the transferor to say that the allowances or deductions are taken into account in the assessment of the transferee and that, therefore, he shall not be assessed, when the transaction squarely falls under Section 41(2). The statute deals with the allowances in respect of various persons and categories of assets. It chose to provide for allowances and depreciation in respect of a subsidiary company only to the extent provided under Section 43(2), which, in our opinion, does not mean that the parent company which transferred the asset would be excluded from the clutches of Section 41(2) of the Income-tax Act, 1961.
11. For the foregoing reasons, we hold that the sum of Rs. 6,098 is includible as profit under Section 41(2). Accordingly, we answer the reference in the negative and in favour of the revenue. Revenue will be entitled to its costs. Counsel fee Rs. 250.