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

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

                              JULY 30, 1997
                                                                                B
              (S.C. AGRAWAL AND D.P. WADHWA, JJ.]

      Income Tax Act, 1961.

      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', 'cost of
acquisition'-Meaning of in the context of Income Tax Act, 1961.
                                                                                F
      Appellant·assessee during the assessment year 1971·72 accounting
year being 1970-71, sold its properties situated at Calicut and Mangalore
on which it had already claimed depreciation. Assessee sold its Calicut
Factory for Rs. 20,000, the original value of which was Rs. 10,000, and in
computing the capital gains the assessee showed a capital loss of Rs. 78 G
on the sale of the property. Calcutta property, the original adjusted cost
of which came to Rs. 76,680, was sold by the assessee for Rs. 2,25,000 and
the assessee showed capital gain at Rs. 44,713 on the sale. In both the
transactions, assessee revalued the property as on January 1, 1954.

      The stand taken by the assessee was that it had the option under H
                                  179
      180                   SUPREME COURT REPORTS (1997] SUPP. 3 S.C.R.

' A Section 55 (2)(i) of the Income Tax Act either to adopt the written down
    value of the building or the value of the building as on January 1, 1954 and
    it had chosen the latter. The Income Tax Officer, however, took the view
    that the assessee did not have the right to substitute the value as on
    January 1, 1954 because the assets were depreciable assets to which Section
  B 50(1) applied which was a special provision in respect of depreciable assets
    and the provision as contained in Section 55(2) (i) allowing option which
    was a general provision was not applicable in the case of depreciable
    assets. The Income Tax Officer, therefore, substituted the original value
    and arrived at a capital gain of Rs. 9021 in the case of Calicut property
  C and Rs. 1,46,320 in the case of Mangalore building. Appeal filed by the
    assessee before the Appellate Assistant Commissioner was dismissed on
    the ground that the assessee did not have the right to substitute the value
    as on January 1, 1954 in respect of depreciable assets. Assessee's Appeal
    before the Income Tax Appellate Tribunal was also dismissed but at the
    instance of the assessee the Appellate Tribunal referred the question,
  D whether on facts of the case the assessee did not have the right of sub-
    stituting the market. value as on 1/1/54 in respect of depreciable assets, for
    the decision of the High Court. High Court agreed with the view of the
    Appellate Tribunal and decided the question in favour of the respondent-
    Revenue. It held that though Section 55(2) gave an option to an assessee
  E to choose one of the two values as the cost of acquisition for the purpose
     of Section 48, but in a case to which Section 50 ap11lied, Section 48 had to
    be read subject to the modification and, consequently, the option would
    not to be available and that the cost of acquisition would have to be taken
     in such a case as the written down value as defined in clause (6) of the
  F Section 43. On Certificate being granted by the High Court under Section
    261 of the Act, the present appeals have come before this Court.

             Partly dismissing the appeal, the Court


  G          HELD : 1. The Appellate Tribunal was not right in law in deleting
       Rs. 1,260-towards house rent under Section 40(a) (v) of the Income Tax
       Act, 1961. [184-B; DJ


             Commissioner of Income Tax, Bombay and Ors. v. Mafatlal Gangabhai
  H    & Co. (P) Ltd. and Ors., [1996) 7 SCC 569, relied on.
                    COMMONWEALTHlRUSTLTD. v. C.I.T.                           181

          2. Under Section 48 of the Income Tax Act, 1961, to compute the            A
    income chargeable under the head "Capital gains", the value consideratioµ
    received on transfer of the capital asset is to be deducted by the expendi-
    ture incurred on the transfer and the cost of acquisition of the capital asset


-   and the cost of any improvement thereon. The expenditure that might have
    been incurred on the transfer of capital asset and the cost of any improve-
    ment thereon are not the subject of any controversy in the case. [191-D-E]
                                                                                     B


           3. Section 50 states, in so far it is relevant, that when depreciation has
    been obtained on the capital asset, the provision of Section 48 is subject to
    the modification that "the written d~wn value, as defined in clause (6) of C
    Section 43 of the asset, as adjusted, shall be taken as the cost of acquisition
    of the asset". It is the expression "as adjusted" of which meaning has been
    given in Section 55(1)(a) and it is to be applied while considering the
    applicability of Section 50(1). Under Section 55(1)(a) the expression "ad-
    justed" in relation to written down value or fair market value, means
    diminished by any loss deducted or increased by any profit assessed under D
    the provisions of clause (iii) of sub-section (1) of Section 32 or sub-section
     (2) of Section 41, as the case may be, and in cases to which clause (2) of
    Section 50 applies the computation for this purpose being made with ref-
    erence to the period commencing from the 1st day of January, 1954. Sig-
    nificantly the words "as adjusted" have been used in order to avoid the
    possibility of there being a double tax where the question of any terminal E
    (balancing) allowance under Section 32 or balancing charge under Section
    41 is involved. Therefore in its application of the expressions "as adjusted"
    the written down value as ascertained according to sub-section (6) of Sec-
    tion 43 shall be adjusted with either subtraction of the terminal (balancing)
    allowance or with addition of the amount of balancing charge, if any, F
    allowed out of or taken into the business income. Where the capital asset
    is sold for less than the written down value the difference or deficiency
    between the sale price and the written down value is allowed as a deduction
    in computation of the business profits Section 32(i) (iii) which is termed as
    "balancing (or terminal) allowance" and where the asset is sold for more
    than the written down value, the sale price being less than the cost, the G
    excess realised over the written down value is charged as business profits
    (Section 41(2)) and is termed as "balancing charge". (197-E-H; 198-A-C]

          4. In commercial parlance computation of capital gain would mean
    the actual gain measured by the difference between the sale price and the        H
    182                   SUPREME COURT REPORTS (1997] SUPP. 3 S.C.R.

A cost or acquisition. It is the "cost of acquisition" that is required to be
  determined under the provisions of Sections 48, 49, 50 and 55. Both under
  Sections 48 and 49 cost of acquisition will have to be determined and
  adjusted as provided in Sections 50 and 55. Section 55(2) gives an option
  to both kinds of assessees, that is, those who have purchased the capital
B asset as well as those who have acquired it by any of the modes mentioned
  in Section 49 to substitute for the actual cost of acquisition the fair market
  value of the asset as on January 1, 1954. Section 55(2) will have application
  only if one of the two classes of the assessees exercises his option. Section
  55(2), however, makes it clear that the option is available only for the
  purposes of Sections 48 and 49 and it is not available for a case falling
c under Section 50. Though the provisions of Section 55(2) would be avail-
  able to every kind of capital asset whether the same has enjoyed the
  depreciation allowance or not whether in the hands of the assessee or the
  previous owner, the assessee in whose case depreciation allowance has
  been availed of before the transfer of the capital asset the meaning of "cost
D of acquisition" as stated in Sections 48 and 49 would appear to have been
  modified in the manner stated in Section 50. Thus, where the assessee has
  not availed of depreciation allowance in respect of the capital asset,
  Section 50 has no application. In this view of the matter there does not
  appear to be any conflict between the provisions of Sections 50 and 55(2).
E Section 55(2) would be applicable to all assets depreciable or non-depreci-
  able for the purposes of arriving at the cost of acquisition under Sections
  48 and 49 but Section 50 carves out a category of those capital assets which
   had been subjected to grant of depreciation allowance and section 50
   therefore provides a special method for determining the cost of acquisition ·
   in such cases. Provision of Section 55(2) is not subject to the provisions
F of Section 50. These are the provisions of Section 50(2), which only are
   subject to the provisions of Sections 55(2), 48 and 49. To sections 48 and
   49 the provision of Section 55(2) would apply as modified by those of
   Section 50. Section 50 is applicable where the assessee has obtained
   deduction on account of depreciation in respect o{ the capital asset in
G question and in that case Section 55(1) also comes into operation in view
   of the expression "adjusted" which is defined therein in clause (a) of
   Section 55(1). The expression "adjusted" is for the purposes of Sections 48,
   49 and 50. For the purposes of applying Section 55(2), Sections 48 and 49
   will have to be applied as modified by Section 50. It follows, therefore,
H where the capital asset purchased by the assessee is a depreciable or non
        COMMONWEALTHTRUSTLTD.v. C.I.T.[D.P. WADHWA,J.]                     183

  depreciable asset, the assessee will have the option for substituting for its   A
  actual cost of acquisition its fair market value as on 1-1-54 but where it is
  a depreciable asset and the assessee has enjoyed depreciable allowance his
  cost of acquisition shall have to be determined as provided in Section 50.
. [198-E-H; 199-A-F]

      5. Section 50(1) has no dependence on the provisions of Section             B
55(2). There is no mentl.on of "fair market value" in Section 50(1) and
besides that the adjustments stated there are with reference to the written
down value only which has nothing to do with the fair market value. It
appears Section 50 is in absolute terms specially providing for fixing the
cost of acquisition in the case of depreciable asset only. It is, therefore,      C
concluded thatin the present case where the capital asset is depreciable
and the assessee has availed of deduction on account of depreciation the
cost of acquisition shall have to be determined in terms of the provisions
of Section 50 read with Section 48. [199-F-G; 200-B; 199-G-H]

      R.V. Ginning, Pressing & Mfg. Co Ltd. v. C.l.T., (1975) 99 ITR 264 D
(Gujarat); CITv. Upper Doab Sugar Mills, (1979) 116 ITR 240 (Allahabad);
Prime Products Pvt. Ltd., Kanpur v. CIT, (1979) 116 ITR 473 (Allahabad);
India Jute Co. Ltd. v. CIT, (1982) 136 ITR 597 (Calcutta), approved.

        Goculdas Dossa and Co. and Ors. v. J.P. Shah and Ors., (1995) 211
 ITR 706 over-ruled.                                                              E
      CIVIL APPELLATE JURISDICTION : Civil Appeal (N.T.) No.
2978 of 1982 Etc.

     From the Judgment and Order dated 27.11.81 of the Kerala High
Court in I.T.R. No. 120 of 1978.                                                  F
        T.L. Vishwanatha Iyer, S. Prasad and S. Balakrishnan for the Appel-
!ant.

      Dr. V. Gourisankar, B.K. Prasad, S. Rajappa and C. Radhakrishna
for the Respondent.                                                   G
        The Judgment of the Court was delivered by

      D.P. WADllWA, J. These twq appeals by certificate under Section
261 of the Income Tax Act, 1961 (fo; short 'the Act') are directed against
the judgment dated November 27, 1981 of the Kerala High Court. The H
    184                  SUPREME COURT REPORTS (1997] SUPP. 3 S.C.R.

A judgment is now reported in (1982) 135 ITR 19 (F.B.). The following two
    questions were decided by the High Court :

               "l. Whether on the facts and in the circumstances of the case
                                                                             '
            the Tribunal is right in law in deleting Rs. 1,260 towards house
            rent under Section 40(a)(v) of the Income-tax Act, 1961?
B
            2. Whether on the facts and in the circumstances of the case, the
            Tribunal was justified in holding that the assessee did not have the
            right of substituting the market value as on 1.1.54 in respect of
            depreciable assets?"

C While the first question was referred at the instance of the revenue, the
    second question was at the instance of the assessee. Both the questions
    were, however, answered by the High Court in favour of the revenue and
    against the assessee.

D         The impugned judgment in so far as it answers the first question has
    been overruled by this Court in Commissioner of Income Tax, Bombay
    and Others v. Mafatlal Gangabhai & Co. (P) Ltd. & Others, [1996] 7 SCC
    569. Accordingly the answer to this question has to be given in favour of
    the assessee and against the revenue.

E         It is the second question on which arguments were addressed before
    us. While the revenue gets support from the decisions of the High Courts
    of Gujarat, Allahabad and Calcutta for upholding the impugned judgment,
    the assessee gets support from the decision of the Bombay High Court.
    Gujarat, Allahabad and Calcutta decisions are reported respectively in
    Rajnagar Vaktapur Ginning, Pressing and Manufacturing Co. Ltd. v. CIT,
F (1975) 99 ITR 264, C!Tv. Upper Doab Sugar Mills, (1979) 116 ITR 240 and
    India Jute Co. Ltd. v. CIT, (1982) 136 ITR 597. Bombay decision is reported
    in Goculdas Dossa and Co. and Others v. J.P. Shah and Others, (1995) 211
    ITR 706.

G         To understand rival contentions we may briefly advert to the facts of
    the case.
                                                                                   '
                                                                                   '
         The assessment year is 1971-72, the accounting year being 1970-71.
    The assessee, a limited company, was possessed of considerable properties
    at Calicut and Mangalore. It owned these properties right from 1920
H   onwards. The assessee had claimed depreciation for its factory buildings
      COMMONWEALTII TRUST LID. v. C.I.T. [D.P. WADHWA, J.)                185

which had been allowed in the previous years. During the period relevant         A
to the assessment year 1971-72 the assessee sold some of these properties
on which it had already claimed depreciation. The Calicut Weaving Factory
was sold for Rs. 20,000, its original value being Rs. 10,000. The assessee
had incurred an additional expenditure of Rs. 979 on this property. As
noted above depreciation had been allowed on the value of the property           B
in the earlier years. In computing the capital gains the assessee showed a
capital loss of Rs. 78 on the sale of this property. This the assessee did on
revaluing the property as on January 1, 1954. The assessee sold its Man-
galore buildings for Rs. 2,25,000. Its original cost as adjusted came to Rs.
76,680. In respect of these buildings also depreciation had been claimed
and allowed in the previous years. Here again the assessee rev~ued the           C
buildings as on January 1, 1954 and on that basis showed the capital gains
at Rs. 44,713. The stand taken ·by the assessee was that it had the option
under Section 55(2)(i) of the Act either to adopt the written down value
of the building or the value of the building as on January 1, 1954 and it
had chosen the latter. The Income Tax Officer, however, took the view that       D
the assessee did not have the right to substitute the value as on January 1,
1954 because the assets were depreciable assets to which Section 50(1)
applied which was a special provision in respect of depreciable assets and
the provision as contained in Section 55(2)(i) allowing option which was a
general provision was not applicable in the case of depreciable assets. The
Income Tax Officer, therefore, substituted the original value and arrived        E
at a capital gain of Rs. 9021 in the case of Calicut property and Rs. 1,46,320
in the case of Mangalore buildings. On appeal filed by the assessee the
Appellate Assistant Commissioner agreed with the Income Tax Officer. He
was also of the view that the assessee did not have the right to substitute
the value as on January 1, 1954 in respect of depreciable assets. The            F
assessee then went to the Income Tax Appellate Tribunal and the Appel-
late Tribunal dismissed the appeal but at the instance of the assessee
referred the aforesaid second question for the decision of the High Court.
The High Court agreed with the view of the Appellate Tribunal and
decided the question in affirmative, in favour of the revenue and against
the assessee. On certificate granted by the High Court under Section 261         G
of the Act this appeal has come before us.

      Before we consider the judgments of the High Courts it will be
appropriate to set out the relevant provisions of law. These would be
Sections 32(1)(iii), 41(2) and 43(6) in Part D and Sections 45, 48, H
    186                    SUPREME COURT REPORTS (1997] SUPP. 3 S.C.R.

A 49, 50 and 55 in Part E under Chapter IV relating to computation of total
    income:

                  "32. Depreciation. • (1) in respect of depreciation of buildings,
              machinery, plant or furniture owned by the assessee and used for
              the purposes of the business or profession, the following deduc-
B             tions shall, subject to the provisions of Section 34, be allowed •

                 (iii) in the case of any building, machinery, plant or furniture
              which is sold, discarded, demolished or destroyed in the pre-
              vious year (other than the previous year in which it is first
c             brought into use), the amount by which the moneys payable in
              respect of such building, machinery, plant or furniture, together
              with the amount of scrap value, if any, fall short of the written
              down value thereof :

              41(2) Where any building, machinery, plant or furniture which is
D             owned by the assessee and which was or has been used for the
              purposes of business or profession is sold, discarded demolished
              or destroyed and the moneys payable in respect of such building,
              machinery, plant or furniture, as the case may be, together with
              the amount of scrap value, if any, exceed the written down value,
              so much of the excess as does not exceed the difference between
E
              the actual cost and the written down value shall be chargeable to
              income-tax as income of the business or profession of the previous
              year in which the moneys payable for the building, machinery, plant
              or furniture became due :

F                Provided that where the building sold, discarded, demolished
              or destroyed is a building to which Explanation 5 to Section 43
              applies, and the moneys payable in respect of such building,
              together with amount of scrap value, if any, exceed the actual cost
              as determined under the Explanation, so much of the excess as
              does not exceed the difference between the actual cost so deter-
G             mined and the written down value shall be chargeable to income-
              tax as income of the business or profession of such previous ye~r.

                  Explanation. - Where the moneys payable in respect of the
              building, macliinery, plant or furniture referred to in this sub-sec-
H             tion become due in a previous year in which the business or
    COMMONWEALTHTRUSTLID.v. C.I.T.[D.P. WADHWA,J.]                   187

     profession for the purpose of which the building, machinery, plant A
     or furniture was being used is no longer in existence, the provisions
A    of this sub-section shall apply as if the business or profession is in
     existence in that previous year."

        43(6) "written down value" means -
                                                                            B
          (a) in the case of assets, acquired in the previous year, the
          actual cost to the assessee;

          (b) in the case of assets acquired before the previous year,
          the actual costs to the assessee less all depreciation actually
          allowed to him under this Act, or under the Indian Income-
                                                                            c
          tax Act, 1922 (XI of 1922), or any Act repealed by that Act,
          or under any executive orders issued when the Indian In-
          come-tax Act, 1886 (II of 1886), was in force;

         Provided that in determining the written down value in             D
         respect of buildings, machinery or plant for the purposes of
         clause (ii) of sub-section (1) of Section 32, "depreciation
         actually allowed" shall not include depreciation allowed
         under sub-clauses (a), (b) and (c) of clause (vi) of sub-
         section (2) of section 10 of the Indian Income-tax Act, 1922
         (XI of 1922), where such depreciation was not deductible in        E
         determining the written down value for the purposes of the
         said clause (vi).

         Explanation 1..................

         Explanation 2..................                                    F

         Explanation 2A. .................

         Explanation 3...................

         "45. Capital gains. - (1) Any profits or gains arising from the G
         transfer of a capital asset effected in the previous year shall,
         save as otherwise provided in sections 53, 54 and 54B, be
         chargeable to income-tax under the head "Capital gains", and
         shall be deemed to be the income of· the previous year in
         which the transfer took place.                                   H
    188               SUPREME COURT REPORTS [1997] SUPP. 3 S.C.R.

A             48. Mode of computation and deductions. - The income
              chargeable under the head "Capital gains" shall be computed
              by deducting from the full value of the consideration received
              or accruing as a result of the transfer of the capital asset of
              following amount, namely :

B             (i) expenditure incurred wholly and exclusively in connection
              with such transfer;

              (ii) the cost of acquisition of the capital asset and the cost of
              any improvement thereto.

c             49. Cost with reference to certain modes of acquisition. (1)
              where the capital asset became the property of the assessee -

              (i) on any distribution of assets on the total or partial parti-
              tion of a Hindu undivided family;
D             (ii) under a gift or will;

              (iii) (a) by succession, inheritance or devolution, or

              (b) on any distribution of assets on the dissolution of a firm,
              body of individuals or other association of persons, or
E
              (c) on any distribution of assets on the liquidation of a
              company, or

               (d) under a transfer to     arevocable or an irrevocable trust, or
F              (e) under any such transfer as is referred to in clause (iv) or
               clause (v) or clause (vi) or Section 47,

              the cost of acquisition of the asset shall be deemed to be the
          cost for which the previous owner of the property acquired it, as
          increased by the cost of any improvement of the assets incurred
G
          or borne by the previous owner or the assessee, as the case may
          be.

          Explanation. - In this sub-section the expression "previous owner
          of the property" in relation to any capital asset owned by an
H         assessee means the last previous owner of the capital asset who
COMMONWEALTH TRUST LTD. v. C.I.T. [D.P. WADHWA, J.]                  189

  acquired it by a mode of acquisition other than that referred to in A
  clause (i) of clause (ii) or clause (iii) of this sub-section.

  (2) x                           x                         x

     50. Special provision for computing cost of acquisition in the
  case of depreciable assets. - Where the capital asset is an asset in     B
  respect of which a deduction on account of depreciation has been
  obtained by the assessee in any previous year either under this Act
  or under the Indian Income-tax Act, 1922 (XI of 1922), or any Act
  repealed by that Act, or under executive orders issued when the
  Indian Income-tax Act, 1886 (II of 1886), was in force, the              C
  provisions of Sections 48 and 49 shall be subject to the following
  modifications :

          (1) The written down value, as defined in clause (6) of
          Section 43, of the asset, as adjusted, shall be taken as the cost
          of acquisition of the asset.                                      D
          (2) Where under any provision of Section 49, read with
          sub-section (2) of Section 55, the fair market-value of the
          asset on the 1st day of January, 1954, is to be taken into
          account at the option of the assessee, then, the cost of E
          acquisition of the asset shall, at the option of the assessee, be
          the fair market-value of the asset on the said date, as reduced
          by the amount of depreciation, if any, allowed to the assessee
          after the said date, and as adjusted.

     55. Meaning of "adjusted", "cost of improvement" and "cost of         F
  acquisition". - (1) For the purposes of sections 48, 49 and 50, -

          (a) "adjusted" in relation to written down value or fair market
          value, means diminished by any loss deducted or increased
          by any profit assessed, under the provisions of clause (iii) of
          sub-section (1), or clause (ii) of sub-section (1A), of section G
          32 or sub-section (2) or sub-section (2A) of section 41, as the
          case may be, the computation for this purpose being made
          with reference to the period commencing from the 1st day of
          January, 1954, in cases to which clause (2) of section 50
          applies;                                                        H
    190                SUPREME COURT REPORTS (1997) SUPP. 3 S.C.R.

A         (b) "cost or any improvement", in relation to a capital asset-

          (i) where the capital asset became the property of the previous
          owner or the assessee before the 1st day of January, 1954, and the
          fair market value of the asset on that day is taken as the cost of
B         acquisition at the option of the assessee, means all expenditure of
          a capital nature incurred in making any additions or alterations to
          the capital assets on or after the said date by the previous owner
          or the assessee, and

          (ii) in any other case, means all expenditure of a capital nature
c         incurred in making any additions or alterations to the capital asset
          by the assessee after it became his property, and, where the capital
          asset became the property of the assessee by any of the modes
          specified in sub-section (1) of section 49, by the previous owner,

D         but does not include any expenditure which is deductible in com-
          puting the income chargeable under the head "interest on
          securities", "Income from house property", "Profits and gains of
          business or profession", or "Income from other sources", and the
          expression "improvement" shall be construed accordingly.
E
              (2) For the purposes of Sections 48 and 49, "cost of acquisition",
          in relation to a capital asset, -

          (i) where the capital asset became the property of the assessee
          before the 1st day of January, 1954, means the cost of acquisition
F         of the asset to the assessee or the fair market value of the asset
          on the 1st day of January, 1954, at the option of the assessee;

          (ii) where the capital asset became the property of the assessee by
          any of the modes specified in sub-section (i) of section 49, and the
          capital asset became the property of the previous owner before
G         the 1st day of January, 1954, means the cost of the capital asset to
          the previous owner or the fair market value of the asset on the 1st
          day of January, 1954, at the option of the assessee;

           (iii) where the capital asset became the property of the assessee
H         · on the distribution of the capital assets of a company on its
      COMMONWEALTH TRUST LTD. v. C.I.T. [D.P. WADHWA,J.]              191

        liquidation and the assessee has been assessed to income-troc under A
        the head "Capital gains" in respect of that asset under section 46,
        means the fair market value of the asset on the date of distribution;

             (iv) x            x                x

             (v) where the capital asset, being a share or a stock of a      B
             company, became the property of the assessee· on -

             (a) the consolidation and division of all or any of the share
             capital of the company into shares of larger amount than its
             existing shares,
                                                                             c
             {b) the conversion of any shares of the company into stock,

             (c) the reconversion of any stock of the company into shares,

             (d) the sub-division of any of the shares of the company into
             shares of smaller amount, or                                    D
             (e) the conversion of one kind of shares of the company into
             another kind,

             means the cost of acquisition of the asset calculated, with
             reference to the cost of acquisition of the shares, or stock    E
             from which such asset is derived.

           {3) Where the cost for which the previous owner acquired the
        property cannot be ascertained, the cost of acquisition to the
        previous owner means the fair market value on the date on which
        the capital asset become the property of the previous owner."        F
(Section 32(1-A)(ii) and Section 41(2-A) would not be relevant for our
purposes and therefore not reproduced).

       We may now consider the judgments of the High Courts referred to
during the course of arguments. In R. V. Ginning, Pressing & Mfg. Co. Ltd. G
v. C.I.T., (1975) 99 ITR 264 (Gujarat), the assessee company was under
liquidation. In the accounting year relevant to the assessment year 1968-69
som~ of the assets being building and machinery were sold. These assets
were purchased before January 1, 1954. The assessee had,.obtained
depreciation on the said assets. The assessee claimed that it should be H
    192                   SUPREME COURT REPORTS [1997) SUPP. 3 S.C.R.

A permitted to substitute the market valuation of the machinery and building
    as on January 1, 1954 as the cost of acquisition for purposes of computation
    of capital gains. This was rejected by the revenue authorities. The question
    before the High Court was whether the assessee was entitled to substitute
    the value as on January 1, 1954, as the cost of acquisition of the building
B   and machinery. The High Court answered the question in negative in
    favour of the revenue and against the assessee by holding as under :


                  "We have set out the relevant sections 48, 49 and 50. On the
              plain reading of section 50, we thin_k that it is only those assessees
              who acquired depreciable assets. in any one of the modes
c            prescribed under section 49 that have the benefit of option to select
              either the fair market value of the assets on January 1, 1954, or
            . the cost of acquisition by the previous owner. It is an admitted
              position that the applicant-company is not an assessee acquiring
              depreciable assets in any of the modes mentioned in section 49
D             and clearly, therefore, this case falls within section 50(1) and,
              therefore, in case of the applicant-company for purposes of com-
              putation of capital gains tax adjusted written down value as defined
              in clause (6) of section 43 of the Act would be the cost of
              acquisition of the assets."

E
    In CIT v. Upper Doab Sugar Mills, (1979) 116 ITR 240 (Allahabad) during
    the accounting period relevant to assessment year 1964-65 the assessee sold
    machinery. The claim of the assessee that it was entitled to exercise the
    option of treating the fair market value as cost of acquisition was rejected
F   by the ITO. In appeal, however, the Appellate Assistant Commissioner
    accepted the assessee's plea. He held that Section 50(2) read with Section
    55(2)(ii) of the Act was applicable and these sections gave an option to the
    assessee to compute capital gains by adopting fair market value of the
    assets as on January 1, 1954. The revenue went up in appeal to the
    Appellate Tribunal which upheld the view of the AAC and dismissed the
G   appeal. At the instance of the revenue the Appellate Tribunal referred the
    question to the Allahabad High Court as to whether in determining the
    capital gains arising to the assessee, provisions of Section 50(2) and
    Section 55(2)(ii) were applicable. The court answered the question in
    the negative in favour of the department and against the assessee. It
H    observed as under :
      COMMONWEALTH TRUST LID. v. C.l.T. [D.P. WADHWA, J.]                193

             "The language used makes it clear that s. 50 of the l.T. Act, A
        1961, applies to cases of depreciable assets, and that the provisions
        thereof are mandatory. It will prevail over s. 55(2) firstly because
        it expressly modifies the provisions of s. 48, and, in the next place,
        it is a special provision for depreciable assets. S. 55, on the other
        hand, is only a definition section. The definition of "cost of acquisi- .B
        tion" given by its sub-s. (2) is only for purposes of ss. 48 and 49.
        S. 55(2) does not apply to s. 50 and cannot prevail over it. In other
        wo~ds, the cost of acquisition of a depreciable asset is bound to
        be computed in accordance with s. 50, even though the capital
        asset. may also on facts be within the purview of sub-sec. (2) of C
        s. 55. This construction is fortified by the provisions of sub-s. (2)
        of s. 50. If the case of a depreciable asset owned by the assessee
        from before 1st January, 1954, were to be governed by s. 55(2)
        then there was no occasion or nee(! to enact sub-s. (2) of s. 50.
        Under sub-s. (2) a special provision has been made for capital D
        assets which are covered by s.49 as well as. s. 55(2), namely, assets
        indirectly acquired and which were owned by the previous owner
        from before 1st January, 1954. For depreciable assets, which are
        owned by the assessee as the original owner sub-s. (1) of s. 50
        applies, even though the asset may have been owned by the
        assessee from before 1st January, 1954. In such a cases. 50(1) does E
        not contemplate that the assessee can treat the fair market value
        of the asset as on 1st January, 1954, as the cost of acquisition. The
        written down value of the asset has to be taken as the cost of
        acquisition."
                                                                               F
In Prime Products Pvt. Ltd. Kanpur v. CIT, (1979) 116 ITR 473 (Allahabad),
the High Court took the same view as in Upper Doab Sugar Mills' case.

       In India Jute Co. Ltd. v. CIT, (1982) 136 ITR 597 (Calcutta), the
question before the court was whether the Appellate Tribunal was right in G
holding that for the computation of the profits under the head "Capital
gains" in respect of the depreciable assets which had become the assessee's
property before 1st January, 1954 and which were sold by it during the
previous year relevant to the assessment year 1962-63, it was not entitled
to seek the aid of Section 55(2)(i) of the Act and opt for and substitute H
    194                   SUPREME COURT REPORTS (1997] SUPP. 3 S.C.R.
                                                                              I
A their fair market value as on 1st January, 1954, as the cost of acquisition
    thereof in place of their written down value? The comt answered the
    question in the affirmative and in favour of the revenue. The court observed
    that Section 48 dealt with the general mode of the computation and
    deduction and that heading of Section 50 was significant which provides
B   for "Special provision for computing cost of acquisition in the case of
                  .          I
    depreciable assets". The court then further observed as under :

                "If a special mode is provided, then the general meaning given
            by sub-s. (2) of s. 55 could not apply. Furthermore, this well-settled
            canon of construction that the definition in a section provided in
c           a certain provision of an Act must be limited to the purposes
            indicated in that sub-section and it could not be extended by
            construction unless there is a clear implication to that effect. In
            this case, it is significant that sub-s. (2) of s. 55 does not mention
            that for the purpose of "this chapter" or "this group of sections"
D           the cost of acquisition in relation to the capital assets should be
            as indicated in the different clauses as indicated in sub-s. (2) of
            the s. 55 but limits the purposes of the different clauses only to ss.
            48 and 49 and thereby excluding the operation of "the special
            provision of computing cost of acquisition of depreciable assets".
            Where there is a special· provision dealing with a particular
E           provision, the special provision must prevail."

    In coming. to this conclusion, Calcutta High Court followed the decisions
    of the Allahabad and Gujarat High Courts.

F         The Kerala High Court (F.B.) in the judgment (1982) 135 ITR 19
    which is in the appeal before us also followed two decisions of the Al-
    lahabad High Court mentioned above. The court said that though Section
    55(2) gave an option to an assessee to choose one of the two values as the
    cost of acquisition for the purpose of Section 48, in a case to which Section
    50 applied, Section 48 had to be read subject to the modification and,
G   consequently, the option would not be available and that the cost of
    acquisition would have to be taken in such a case as the written down value
    as defined in cl. (6) of Section 43. The High Court in the impugned ,
    judgment then observed as under :

H                "We are not impressed with the contention of the learned
     COMMONWEALIB TRUST LTD. v. C.I.T. [D.P. WADHWA,J.]                   195

        counsel for the assessee that since the definition of "cost of ac-       A
        quisition" in s. 55(2) will apply for the purpose of s. 48 and this is
        a case to which s. 48 would so apply, s. 55(2) must govern despite
        s. 50 of the Act. That would be to renders. 50 inoperative. We do
        not see why we should resort to such a construction. While the
        option contemplated under s. 55(2) of the Act will be available in       B
        every case where capital gains is determined in accordance with s.
        48, that would not be the case where what is applicable is not s.
        48 as such but s. 48 as modified by s. 50. The special provision
        must necessarily operate in such a case so as to render the option
        under s.55(2) unavailable and also to equate the cost of acquisition
        in such a case with the written down value as defined in cl. (6) of      C
        s. 43."

       Full Bench of the Bombay High Court has, however, struck a dif-
ferent·note. In Goculdas Dossa and Co. and Others v. J.P. Shah and others,
(1995) 211 ITR 706, the High Court disagreed with the views of Gujarat, D
Allahabad, Kerala and Calcutta High Courts and held that the assessee
who had purchased a depreciable asset prior to January 1, 1964 (sub-
stituted for 1st January, 1954 by act 29 of 1977 with effect from. 1.4.78) was
entitled to the option of substituting the fair market value on that date as
the cost of acquisition for computing its capital gains. In the Bombay case
the assessee had purchased land. building, plant and machinery of a factory E
much prior to January 1, 1964. The assessee sold the building, land, plant
and machinery in the accounting year relevant to the assessment year
1981-82. The assessee had claimed depreciation on building and machinery
year after year. In the return of income for the relevant assessment year
while working out the long-term capital gains, the assessee substituted the F
fair market value of land, building and machinery as on January 1, 1964,
as the cost of acquisition by exercising the option under Se~tion 55(2). The
Income-tax Officer held that the assessee, in view of Section 50, did not
have that option since it had acquired the property voluntarily by purchase
and not in the circumstances mentioned in Section 49. The Income-tax
Officer further held that the written down value of the said depreciable G
assets as adjusted, along with cost of its improvement would be the correct
price for working out the capital gains and on that basis, issued a demand
notice under Section 156 of the Act. On appeal by the assessee Commis-
sioner of Income-tax (appeal) upheld the order of the Income-tax Officer.
The assessee filed a second appeal before the Appellate Tribunal but since H
    196                    SUPREME COURT REPORTS [1997) SUPP. 3 S.C.R.

A there was a challenge to the validity of Section 50 writ petition was filed in
    the High Court. The High Court elaborately discussed the relevant
    provisions of the Act. It disagreed with the views of the other High Courts
    that Section 50 was a special provision and would, therefore, prevail over
    the general provisions of Section 55(2). The High Court said both the
B   provisions operated upon different and independent areas and that Section
    55(2) was the only source of option while Section 50(2) was not the source
    of option. It said Section 50 specified that only Sections 48 and 49. were
    subject to the modifications mentioned therein and that the option given
    in Section 55(2) was not made subject to Section 50. The High Court was
    of the view· that it appeared that it was not brought to the notice of courts
C   that the question of the purchaser-assessee being entitled to the option
    or not had to be determined only on the basis of Section 50(1) read with
    Sections 48 and 55(2) and not Section 50(2) of the Act. It went as to
    add:


D                 "No doubt, the assessee purchasing a depreciable asset and an
             assessee acquiring it otherwise can be said to belong to different
             classes but we are unable to see what that classification has to do
             with the object sought to be achieved by the provision, viz., to
             prevent the assessment of illusory capital gain on account of
             inflationary conditions and decreasing value of money. Et would
E            make no difference whether the capital asset which gave rise to
             the capital gain has been acquired by the assessee either by
             purchase or by gift. The classification between th~. depreciable and
             non-depreciable assets and between these two classes of assessees
             have no nexus to the object of enactment. Contrary interpretation
F            has the potentiality of making section 50 irrational and, therefore,
             violative of article 14 of the Constitution. It is settled legal position
             that, there has to be an attempt to save a piece of legislation, if
             possible, by reading it down so as to make it constitutional. No
             doubt, wordings employed in section 50(2) are clumsy. One way
             of reading it, is to disregard the reference to section 49 because
G            the right to substitute the fair market value as the cost of acquisi-
             tion springs from section 55(2) and not section 49. Such exercise
              of reading down and modifying the provisions has been undertaken
              in some cases like Manubhai A. Sheth v. N.D. Nirgudkar, (1981)
              128 ITR 87 (Born) and A. Sanyasi Rao v. Government of Andhra
H            Pradesh, (1989) 178 ITR 31 (AP). It seems necessary to do so in
      COMMONWEALTII 1RUST LTD. v. C.I.T. (D.P. WADHWA, J.]              197

        this case also."                                                      A

       The basic question that involves in the present case is if an assessee,
who has acquired capital asset before January 1, 1954 otherwise than by
any of the modes mentioned in Section 49 and.sold it after January 1, 1954
is also entitled to have the quantum of taxable capital gains computed in B
the manner provided by clause (i) of sub-section (2) of Section 55 of the
Act? High Courts of Gujarat, Allahabad, Calcutta and Kerala have, how-
ever held that this could not be so as Section 50(1) being a special provision
for computing cost of acquisition in the case of depreciable assets it would
override the general provisions of Section 55(2) which according to these
High Courts would be applicable to the cases of non-depreciable assets or C
depreciable assets where depreciation had not been claimed. Bombay High
Court on the other hand has not followed this line of reasoni11g.

        In the present case it is not disputed that it is Section 48 which is
 applicable and not Section 49. Under Section 48 to compute the income . D
 chargeable under the head "Capital gains", the value consideration received
 on transfer of the capital asset is to be deducted by the expenditure
incurred on the transfer and the cost of acquisition of the capital asset and
 the cost of any improvement thereon. The expenditure that might have
been incurred on the transfer of capital asset and the cost of any improve- E
 ment thereon are not the subject of any controversy in the case before us.
 Section 49 is not applicable as the capital asset was not acquired by any of
 the modes mentioned in that section. Coming to Section 50 it states, in so
far as it relevant, that when depreciation has been obtained on the capital
·asset, the provision of Section 48 is subject to the modification that "the
written down value, as defined in clause (6) of Section 43 of the asset, as F
 adjusted, shall be taken as the cost of acquisition of the asset". It is the
expression "as adjusted" of which meaning has been given in Sections
55(1)(a) and it is to be applied while considering the applicability of
Section 50(1). Under section 55(1)(a) the expression "adjusted" in relation
to written down value or fair market value, means diminished by any loss
deducted or increased by any profit assessed under the provisions of clause G
 (iii) of sub-section (1) of Section 32 or sub-section (2) of Section 41, as the
case may be, and in cases to which clause (2) of section 50 applies the
computation for this purpose heing made with. reference to the period
commencing from the 1st day of January, 1954. Significantly the words "as
adjusted" have been used in order to avoid the possibility of there being a H
    198                   SUPREME COURT REPORTS (1997] SUPP. 3 S.C.R.

A double tax where the question of any terminal (balancing) allowance under
    Section 32 or balancing charge under Section 41 is involved. Therefore in
    its application of the expressions "as adjusted" the written down value as
    ascertained according to sub-section (6) of Section 43 shall be adjusted
    with either subtraction of the terminal (balancing) allowance or with addi-
B                                         ' if any, allowed out of or taken into
    tion of the amount of balancing charge,
    the business income. Where the capital asset is sold for less than the written
    down value the difference or deficiency between the sale price and the
    written down value is allowed as a deduction in computation of the business
    profits (Section 32( 1) (iii) which is termed as "balancing (or terminal)
    allowance" and where the asset is sold for more than the written down
C   value, the sale price being less than the cost, the excess realised over the
    written down value is charged as business profits (Section 41(2)) and is
    termed as "balancing charge". Part D of Chapter IV of the Act does not
    provide for the circumstance when the depreciated asset has been sold for
     a price which is more than the cost. This is considered under the provisions
D    of Part E of Chapter IV dealing with capital gains and more particularly
     Section 50 falling under Part E. While now sub-section (1) of Section 55
     which uses the expressions "adjusted" and "cost of improvement" applies
     for the purposes of Sections 48, 49 and 50, sub-section (2) of Section 55
     which uses the expression "cost of acquisition" is for the purpose of
     Sections 48 and 49.
E
        In commercial parlance computation of capital gain would mean the
  actual gain measured by the difference between the sale price and the cost
  of acquisition. It is the "cost of acquisition" that is required to be deter-
  mined under the provis!ons of Sections 48, 49, 50 and 55. Both under
F Sections 48 and 49 cost of acquisition will have to be determined and
  adjusted as provided in Sections 50 and 55. Section 55(2) gives an option
  to both kinds of assessees, that is, those who have purchased the capital
  asset as well as those who have acquired it by any of the modes mentioned
  in Section 49 to substitute for the actual cost of acquisition the fair market
  value of the asset as on January 1, 1954. Section 55(2) will have application
G only if one of the two clauses of the assessees exercises his option. Section
  55(2), however, makes it clear that the option is available only for the
  purposes of Sections 48 and 49 and it is not available for a case falling
  under Section 50. Though the provisions of Section 55(2) would be avail-
  able to every kind of capital asset whether the same has enjoyed the
H depreciation allowance or not whether in the hands of the assessee or the
      COMMONWEALTH TRUST LID. v. C.I.T. [D.P. WADHWA,J.)               199

previous owner, the assessee in whose case depreciation allowance has A
been availed of before the transfer of the capital asset the meaning of "cost
of acquisition" as stated in Sections 48 and 49 would appear to have .been
modified in the manner stated in Section 50. Thus, where the assessee has
not availed of depreciation allowance in respect of the capital asset Section
50 has no application. In this view of the matter there does not appear to B
be any conflict between the provisions of Sections 50 and 55(2). Section
55(2) would be applicable to all assets depreciable or non-depredable for
the purposes of arriving at the cost of acquisition under Sections 48 and
49 but Section 50 carves out a category of those capital assets which had
been subjected to grant of depreciation allowance and this section 50
therefore provides a special method for determining the cost of acquisition C
in such cases. Provision of Section 55(2) is not subject to the provisions of
Section 50. These are the provisions of Section 50(2) which only are subject
to the provisions of Sections 55(2), 48 and 49. Now to sections 48 and 49
the provision of Section 55(2) would apply as modified by those of Section
50. Section 50 is applicable where the assessee has obtained deduction on D
account of depreciation in respect of the capital asset in question and in
that case Section 55(1) also comes into operation in .view of the expression
"adjusted" which is defined therein in clause (a) of Section 55(1). The
expression "adjusted" is for the purposes of Sections 48, 49 and 50. For the
purposes of applying Section 55(2), Sections 48 and 49 will have to be
applied as modified by Section 50. It follows, therefore, where the capital E
asset purchased by the assessee is a depreciable or on depreciable asset,
the assessee will have the option for substituting for its actual cost of
acquisition its fair market value as on 1.1.54 but where it is a depreciable
asset and the assessee has enjoyed depreciable allowance his cost of
acquisition shall have to be determined as provided in Section 50.            F

      Viewed from this angle Section 50(1) has no dependence on the
provisions of Section 55(2). There is no mention of "fair market value" in
Section 50(1) and besides that the adjustments stated there are with
reference to the written down value only which has nothing to do with the
fair market value. We conclude, therefore, that in the present case where G
the capital asset is depreciable and the assessee has availed of deduction
on account of depreciation the cost of acquisition shall have to be deter-
mined in terms of the provisions of Section 50 read with Section 48. All
the High Courts including Bombay High Court are of the view that Section
50(2) does not apply to any capital asset other than that which has been H
    200                   SUPREME COURT REPORTS [1997] SUPP. 3 S.C.R.

A acquired by any of the modes mentioned in Section 49. It does not apply
    to the case of a person who has himself purchased the asset which has
    enjoyed the depreciation allowance. To us it appears Section 50 is in
    absolute terms specially providing for fixing the cost of acquisition in the
    case of depreciable asset only. It is difficult to accept the view of the
B   Bombay High Court when it brings into operation Article 14 of the Con-
    stitution and the judgment proceeds more on the basis of equitable con-
    siderations than the clear provision of law. Bombay High Court has even
    read down and modified the provisions, which would appear to be rather
    unnecessary. We uphold the views of the Gujarat, Allahabad and Calcutta
    High Courts and of the Kerala High Court in the impugned judgment. The
C   impugned judgment of the High Court whereby question No. 2 has been
    answered in favour of the revenue is, therefore, upheld and the appeal in
    so far as it relates to question No. 2 is accordingly dismissed.

          We may also note that since the relevant provisions have been
    amended with effect from April 1, 1988, the controversy of the like the one
D   raised in the present proceedings does no longer survive.

          There will be no order as to costs.

          Civil Appeal No. 2978/82 is dismissed and Civil Appeal. No. 2979/82
    allowed.
E
    A.KT.                                       C.A. No. 2978/82 dismissed and
                                                      C.A. No. 2979/82 allowed.