REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL No. 5291 of 2004

Nectar Beverages Pvt. Ltd. … Appellant(s)

          versus

Deputy Commissioner of Income Tax … Respondent(s)

With

Civil Appeal Nos. 5296/04, 5293/04, 356-357/06, 359-360/06, 361-362/06,  363-364/06, 5858/06, 108/07, Civil Appeal No. 4130/09 @ S.L.P. (C) No.  1613/08,  Civil  Appeal  No.4131/09  @ S.L.P.  (C)  No.  3064/09  and  Civil  Appeal No. 4132/09 @ S.L.P. (C) No. 8002/09.

J U D G M E N T

S.H. KAPADIA, J.

Leave granted.

2. In  this  batch  of  Civil  Appeals,  pertaining  to  assessment  years  

1990-91 to 1998-99, the question which arises for determination is: whether  

the  concept  of  “balancing  charge”  in  Section  41(2)  could  be  read  into  

Section 41(1) of the Income Tax Act, 1961?

3. In this  batch of  civil  appeals  the lead matter  is  the case of  Nectar  

Beverages Pvt. Ltd.  v.  Dy. CIT ( Civil Appeal No. 5291/04) in which the  

facts are as follows.

4. In  the  Lead  Matter,  the  assessee  who  is  the  manufacturer  of  soft  

drinks, purchased bottles and crates,  each item of which costed less than  

Rs. 5,000/- and, therefore, was entitled to and allowed 100% depreciation on  

the  cost  of  the  said  bottles  and  crates,  in  the  year  in  which  they  were  

acquired, under the proviso to Section 32(1)(ii) of the Income Tax Act, 1961  

(“1961 Act” for short). When bottles and crates got worn out, they were sold  

by  the  assessee  and  proceeds  therefrom  were  shown  as  “miscellaneous  

income”  in  the  subsequent  years.  If  these  sales  had  taken  place  in  the  

previous years relating to the assessment years prior to 1988-89, the same  

would, without doubt, would  have been included in the business income of  

the assessee under Section 41(2). This was because prior to the assessment  

year 1988-89, Section 41(2) inter alia provided for balancing charge which  

was chargeable as income taxable under the 1961 Act. However, with effect  

from assessment  year 1988-89,  Section 41(2),  which inter  alia  dealt  with  

profit  on  sale  of  depreciable  asset  (balancing  charge),  stood  deleted.  

Notwithstanding such deletion, the Department sought to tax Rs. 50,850/-  

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holding that the sale proceeds of the 100% depreciated and written off assets  

can still  be treated as  the business income of the assessee  under Section  

41(1) of the 1961 Act.

5. Was the Department entitled to tax the aforestated sum under Section  

41(1) is the question which we have to decide in these civil appeals?

6. For that purpose, we quote hereinbelow Section 32(1)(ii), which reads  

as follows:

“Depreciation.

32.(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 deductions shall,  subject  to the provisions of  section 34, be allowed-

(i) [Omitted];

(ii) in the case of any block of assets, such percentage  on  the  written  down  value  thereof  as  may  be  prescribed:

Provided that  where  the  actual  cost  of  any  machinery or plant does not exceed five thousand rupees,  the actual cost thereof 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 purposes of  his business or profession:”

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We also quote hereinbelow Section 41(1), which reads as follows:

“Profits chargeable to tax.

41.(1)  Where an allowance or deduction has been  made in the assessment for any year in respect of loss,  expenditure or trading liability incurred by the assessee,  and subsequently during any previous year the assessee  has  obtained,  whether  in  cash  or  in  any  other  manner  whatsoever,  any  amount  in  respect  of  such  loss  or  expenditure  or  some benefit  in  respect  of  such trading  liability  by  way  of  remission  or  cessation  thereof,  the  amount obtained by him or the value of benefit accruing  to  him,  shall  be  deemed  to  be  profits  and  gains  of  business  or  profession  and  accordingly  chargeable  to  income-tax as the income of that previous year, whether  the  business  or  profession  in  respect  of  which  the  allowance or deduction has been made is in existence in  that year or not.

We also quote hereinbelow Section 41(2) [Omitted by the Taxation  

Laws  (Amendment  and  Miscellaneous  Provisions)  Act,  1986,  w.e.f.  

1.4.1988], which reads as follows:

41.(2)  Where  any  building,  machinery,  plant  or  furniture which is 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 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 :

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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  the  amount of scrap value, if any, exceed the actual cost as  determined under that Explanation, so much of the excess  as does not exceed the difference between the actual cost  so  determined  and  the  written  down  value  shall  be  chargeable to income-tax as income of the business or  profession of such previous year :

Provided  further that  where  an  asset  representing  expenditure  of  a  capital  nature  on  scientific  research  within the meaning of clause (c) of sub-section (2B) of  section 35, read with clause (4) of section 43 owned by  the assessee which was or has been used for the purposes  of business after it ceased to be used for the purpose of  scientific  research  related  to  the  business  is  sold,  discarded, demolished or destroyed, the provisions of this  sub-section shall apply as if for the words “actual cost”,  at the first place where they occur, the words “actual cost  as increased by twenty-five per cent thereof” had been  substituted.

Explanation:   Where the moneys payable in respect  of  the building, machinery, plant or furniture referred to in  this sub-section become due in a previous year in which  the business or profession for the purpose of which the  building, machinery, plant or furniture was being used is  no longer in existence, the provisions of this sub-section  shall apply as if the business or profession is in existence  in that previous year.”

7. According to the Department, depreciation stood allowed in the earlier  

years when the said bottles and crates were bought; that such depreciation  

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constituted  “expenditure”  under  Section  41(1)  and,  therefore,  when  the  

assessee sold such bottles and crates as an asset there was recoupment of  

that  expenditure which recoupment was taxable as  deemed income under  

Section 41(1). On the other hand, the case of the assessee before us was that  

the  word  “expenditure”  in  Section  41(1)  did  not  include  depreciation.  

According  to  the  assessee,  each  bottle  and  crate  constituted  100%  

depreciable asset and since each bottle and crate costed less than Rs. 5,000/-  

the actual cost stood allowed as 100% deduction in respect of the previous  

year in which such plant was put to use by the assessee for its business. In  

short, the W.D.V. stood reduced to nil in the year in which the item was put  

to use. According to the assessee, bottles and crates bought before 1.4.1995  

were sold in the previous year relevant to the assessment year in question,  

however,  on account of deletion of Section 41(2) profits  on sale of such  

bottles and crates were not taxable under that sub-section.

8. In the light of the above arguments, we need to analyse Section 41(1)  

and  Section  41(2).  Section  41  falls  under  Chapter  IV  which  deals  with  

computation of business income. Section 41 has a Head Note which says  

“Profits  chargeable to tax”. Section 41(1) has remained unchanged, both,  

before 1.4.1988 and even after  1.4.1998. As stated above,  Section 41(2),  

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however, stood deleted between assessment years 1988-89 and 1998-99 for  

about ten years. Under Section 41(1), where any allowance or deduction has  

been made in the assessment for any year in respect of loss, expenditure or  

trading  liability  incurred  by  the  assessee,  and  subsequently  during  any  

previous year the assessee had obtained, such loss or expenditure in respect  

of such trading liability by way of remission or cessation thereof, the amount  

obtained by him, shall  be deemed to be income of that  previous year  in  

which  the  recoupment  takes  place.  According  to  the  Department,  

notwithstanding,  the  deletion  of  Section  41(2),  since  the  assessee  had  

obtained  the  benefit  of  depreciation  in  the  earlier  years  as  allowance  or  

deduction in respect of expenditure incurred by it when it bought bottles and  

crates, on recoupment in the assessment years in question, such recoupment  

was liable to be taxed as deemed income under Section 41(1). We do not  

find merit in the argument of the Department. Prior to 1.4.1988,  Section  

41(1) and Section 41(2),  both, existed on the statute  book. Section 41(2)  

specifically brought to tax the balancing charge as a deemed income under  

the 1961 Act. It stated that where any plant owned by the assessee and used  

for  business  purposes  was  sold,  discarded  or  destroyed  and  the  moneys  

payable in respect of such plant exceeded the written down value, then, so  

much of the surplus which did not exceed the difference between the actual  

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and the written down value was made chargeable to tax as business income  

of the previous year in which moneys payable for the plant became due. In  

other  words,  as  stated  above,  Section  41(2)  made  the  balancing  charge  

taxable as business income. In our view, if the argument of the Department  

herein  of  reading  the  balancing  charge  under  Section  41(2)  into  Section  

41(1) was to be accepted then it was not necessary for Parliament to enact  

Section 41(2) in the first instance. In that event, Section 41(1) alone would  

have sufficed. In our view, Section 41(1), Section 41(2), Section 41(3) and  

Section 41(4) operated in different spheres.  One more aspect needs to be  

highlighted. Each of the sub-sections to Section 41 deal with different and  

distinct circumstances. For example, Section 41(1) deals with recoupment of  

trading liability. Section 41(2) dealt with the balancing charge. Section 41(3)  

specifically  deals  with  balancing  charge  in  respect  of  assets  relating  to  

scientific research whereas Section 41(4) deals with recovery of bad debts  

earlier allowed. Therefore, each of the sub-sections deal with different and  

distinct topics and one cannot read recoupment under one sub-section into  

another.  

9. The entire controversy, therefore, stands resolved if one understands  

the meaning of “balancing charge”. Where any allowance or deduction had  

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earlier been made in respect of any loss, expenditure or trading liability and  

subsequently the assessee has obtained or realized any amount towards such  

loss,  expenditure  or  trading  liability,  Section  41(1)  deems  such  

realization/recoupment  as  assessee’s  income  for  the  year  in  which  it  is  

realized. Section 41(2) as it stood at the material time stated that if in respect  

of  any  plant  and  machinery,  any  depreciation  had  been  allowed  and  

subsequently such plant and machinery was sold, discarded or destroyed, the  

assessee might get some value either as a result of sale or insurance or from  

salvage or compensation thereabout. The necessity to keep Section 41(2) as  

a provision in addition to Section 41(1) arose from the fact that, in its very  

nature,  depreciation  is  neither  a  loss,  nor  an  expenditure,  nor  a  trading  

liability, referred to in Section 41(1). The depreciation recovered on sale of  

the capital asset was includible in the total income as balancing charge only  

under  Section 41(2).  That  concept  was  foreign to  the  scheme of  Section  

41(1).  The  balancing  charge  under  Section  41(2)  arose  only  where  any  

depreciable asset (building, machinery, plant or furniture) was sold. In fact,  

when  the  concept  of  “block  of  assets”  stood  introduced  w.e.f.  1.4.1988,  

Section 41(2) stood deleted. However, even after 1.4.1988, the proviso to  

Section 32(1)(ii) continued till 1.4.1996 when by the Finance (No. 2) Act,  

1995 the bottles and crates even below Rs. 5,000/- came within the “block of  

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assets”  as  defined  under  Section  2(11)  of  the  1961  Act.  As  stated,  this  

judgment  is  confined  to  depreciable  assets  costing  less  than  Rs.  5,000/-  

which  did  not  enter  the  block  of  assets  during  the  assessment  years  in  

question (when Section 41(2) stood deleted).

Effect of introducing  Finance (No. 2) Act, 1995  w.e.f. 1.4.1996:

10. At the outset, it may be noted that, by the above Finance Act, the first  

proviso  to  Section  32(1)(ii)  stood  deleted  w.e.f.  1.4.1996.  Consequently,  

bottles, crates and cylinders whose individual cost did not exceed Rs. 5,000/-  

also came to be included in the block of assets.

11. Before us, in this batch of civil appeals, we have four Civil Appeals  

(Civil Appeals arising out of S.L.P. (C) Nos. 8002/09 and 3064/09, Civil  

Appeal  Nos.  356-357/06  and  5858/06)  which  fall  in  the  period  after  

1.4.1996. The Lead Matter in this category is M/s Goa Bottling Company  

Pvt. Ltd.  v. Asstt. Commissioner of Income Tax (Civil Appeal Nos. 356-

357/06 ). That lead matter is for assessment year 1998-99. M/s Goa Bottling  

Company Pvt. Ltd. is a company registered under the Companies Act, 1956  

and  is  in  the  business  of  manufacture  and  sale  of  soft  drinks.  For  the  

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purposes of its business, it bought bottles and crates whose cost per unit did  

not  exceed  Rs.  5,000/-.  During  the  year  ending  31.3.1998,  the  company  

received a sum of Rs. 6,89,91,901 on sale of scrap bottles and crates. The  

sale proceeds were segregated in two parts:

(a) in respect of bottles and crates purchased prior to  31.3.1995; and

(b) those purchased after 1.4.1995.

In the Return of income filed, the sale proceeds relating to bottles and crates  

purchased  after 1.4.1995 were taken into consideration for the purpose of  

computation of short term capital gains under Section 50 whereas the sale  

proceeds relating to bottles and crates purchased prior to 31.3.1995 was not  

offered  for  short  term capital  gains  on  the  ground  that  the  assets  stood  

depreciated at 100% under the proviso to Section 32(1)(ii) and hence did not  

form part of the block of assets.

12. For reasons given hereinabove, we are of the view that bottles and  

crates purchased prior to 31.3.1995 did not form part of the block of assets,  

hence, profits on sale of such assets were not taxable as a balancing charge,  

neither under Section 41(1) nor under Section 50. In respect of bottles and  

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crates purchased after 1.4.1995, on account of deletion of proviso to Section  

31(1)(ii)  (vide Finance Act,  1995) such bottles and crates formed part  of  

block of assets and consequently such assets purchased after 1.4.1995, in  

this case, became exigible to capital gains tax under Section 50.

13. Before concluding, it may be pointed out that, in the case of Nector  

Beverages Pvt. Ltd., assessee has earmarked the sale proceeds from bottles  

and crates as “miscellaneous income” and not as “profit on sale of assets”  

whereas, in the case of other assessees, including Industrial Oxygen Co. Ltd.  

(now known as Inox Air Products Ltd.), the said sale proceeds have been  

earmarked specifically under the Heading “Profits from sale of assets”. To  

this limited extent only, we remit the case(s) of Nectar Beverages Pvt. Ltd.  

[Civil  Appeal  Nos.  5291/04,  5293/04 and 359-360/06] to the A.O. to go  

through the computation submitted by Nectar Beverages Pvt. Ltd. and find  

out  whether  earmarking  “profits  from  sale  of  assets”  as  “miscellaneous  

income” has resulted in the understatement of net profits at the pre-Section  

28 stage and taxable profits at post-Section 28 stage. In all other cases, sale  

proceeds have been earmarked as “profits on sale of assets” and in those  

cases, therefore, there is no question of verification by the A.O..

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14. Subject  to  above,  the Civil  Appeals  filed by the  assessees  succeed  

with no order as to costs.

……………………………J.                                              (S.H. Kapadia)

……….………………….J.                                             (Aftab Alam)   

New Delhi; July  6, 2009.

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