Adoption of deemed sale consideration in violation of section 50C(2) unjustified

DCIT Vs Goverdhan Prasad Singhal (ITAT Jaipur)

AO failed to follow the procedure as prescribed under section 50C(2), held that the CIT(A) was not justified in confirming the action of the AO in adopting deemed sale consideration in violation of section 50C(2) of the Act. Actual sale consideration adopted for LTCG

Facts-

The main contention of the assessee is that sale consideration adopted at Rs.11,19,00,441/- as per stamp duty valuation as against fair consideration Rs. 8,81,00,000 which exceeded the fair market value of property as per valuation reported is unjustified.

Conclusion-

As per the judgement of ITAT in the case of Smt. Sharda Devi Alwar Vs ITO it is observed that if objection is made by the assessee for value taken, AO should have adopted provision of section 50C(2). In the present case, it is noted that AO neither discussed the contentions of the assessee for taking actual consideration as fair market value of the property sold nor referred the matter to the DVO as was required U/s 50C(2). The AO and the CIT(A) have also not found or alleged that the assessee received any excess amount over the sale consideration mentioned in the deeds. In the light of these facts and particularly on the failure of the AO to follow the course as prescribed under section 50C(2) and respectfully following various decisions discussed above, we hold that the CIT(A) was not justified in confirming the action of the AO in adopting deemed sale consideration in violation of section 50C(2) of the Act.

Held that it is the failure of the AO to follow the procedure as prescribed under section 50C (2) in particular, and therefore, the CIT(A) action in confirming such order is held unjustified and against law by sustaining stamp duty value of property Rs 11,19,40,441/- as deemed sale consideration u/s 50C against actual sale consideration and fair market value Rs 8,81,00,000/-. Accordingly, the AO is directed to adopt the value of sale consideration at Rs 8,81,00,000/- of the subject property for the purpose of computation of Long Term Capital Gains.

FULL TEXT OF THE ORDER OF ITAT JAIPUR

These appeals are the cross appeals filed against the order of the ld. CIT(A) dated 21-12-2021, National Faceless Appeal Centre, Delhi[hereinafter referred to as (NFAC)] for the assessment year 2017-18.

2. In ITA 64/JP/2022,the grounds of appeal raised by the department are as under:-

1. Whether on the facts and circumstances of the case and in law the ld. CIT(A) was justified in allowing deduction to the assessee u/s 54F of the I.T. Act, 1961 though the assessee had more than one house property.

2. Whether on the facts and circumstances of the case and in law the ld. CIT(A) was justified in allowing relief to the assessee by considering lesser value u/s 50C of the I.T. Act, 1961 of the property sold as taken by the assessee himself.

3. The assessee in ITA 72/JP/2022 has raised the following grounds of appeal:

1. That on the facts and circumstances of the case and in law, the ld. CIT(A) grossly erred in sustaining the stamp duty value o f the property at Rs.11,19,40,441/- as deemed consideration u/s 50C of the I.T. Act as against the actual sale consideration o f Rs.8,81,00,000/- coincides with the fair market value of property prevailing on the date of transfer of property. The ld. CIT(A) ignored the fact that the objection raised by the appellant during the assessment proceedings giving full particulars of the fair market value of the property.

2. That on the facts and circumstances of the case and in law, the ld. CIT(A) grossly erred in sustaining gain from sale of building of discontinued business treated as short term capital gain in terms of Section 50 without considering the fact that WDV was on date o f discontinue of business, the buildings of discontinued business as kept investment for period more than 3 years and since then no depreciation claimed on that building.

3. That on the facts and circumstances of the case and in law the ld. CIT(A) grossly erred in directing to computing notional rent an old unusuable house on ratio laid down in the case of M/s. AnsalHousing Finance and Leasing Ltd. by the Hon’ ble High Court of Delhi ignoring the fact that the Hon’ble Court applied rent a l income has to be computed on the unsold constructed flats accounted as stock-in-trade which are unusable condition but in case of appellant, the house purchases was in damaged condition and not fit to use and kept only for trading purposes.

4. Apropos Ground No. 2of the department and Ground No. 1 of the assessee pertain to the common issue of adoption of value as deemed consideration u/s 50C of the I.T. Act as against the actual sale consideration of the impugned property Under Section 50C of the Act. The facts as emerges from the order of the ld. CIT(A) are as under:-

6.1

Ground No. 1: In this ground, appellant has contended that the sale consideration adopted at Rs.11,19,40,441/ – as per stamp duty valuation as against actual fair consideration Rs.8,81,00,000/ – which exceeded the fair market value of property as per valuation report submitted by the appellant is unjustified and against the law.

6.1.1. The Assessing Officer in Para 3.13 discussed the provisions of Section 50 Cas introduced by the Finance Act, 2002 with effect from 1st April 2003 and the proviso inserted to sub-section 1 of Section 50C by the Finance Act, 2016 effect from 1st April 2017 with reference to section45(1) and section 48.

In the case on hand. appellant has shown full value of consideration of the property received on transfer of capital asset, viz., land and buildings at Rs. 8,81,00,000/ – whereas the Stamp Valuation Authority has fixed the value of the property-. The Assessing Officer commented that capital gain upon transfer of capital asset is to be charged as per provisions of section 45 of the Act, which shall be deemed to be the income of the assessee for the previous year in which the transfer took place. Section 48 of the Act provides the mode of computation of capital gain. It is at the stage of computation that section 50C of the Act comes into action. Having discussed the provisions of sections 50C, 45, & 48 of the Income Tax Act, 1961, the Assessing Officer stated that the stamp valuation assessment by stamp duty officer of the state government would be deemed to be the sale consideration of capital asset, replacing the declared sale consideration, if it happens to be less than Stamp Duty valuation. For charging capital gain in view of Section 45, to be computed as provided in Section 48, this deemed consideration would be applied. As per Para 3.11 of the assessment order, since assessee has not furnished separate consideration received from the sale of land and building, the Assessing Officer requisitioned the Sub-Registrar, Jhanwar, Jodhpur to furnish the details of the DLC value of the land and building separately taken by him for charging the stamp duty on sale of property under reference. In response, the Sub-Registrar, Jhanwar, Jodhpur vide his office letter No. 298 dated 23.12.2019, informed that out of full value of the property at Rs.11,19,40,441/-,the value of land is Rs.9,90,99,000/- and that of buildings is Rs.1,28,41,441/-. Accordingly, value of consideration of the land for the purpose of computation of capital gain is taken at Rs.9,90,99,000/-in accordance with the provisions of section 50C(1) the Income Tax Act, instead of Rs.6,55,07,063/-taken by the assessee in his income tax return for computation of capital gain. After deducting transfer expenses of Rs.6,62,496/-and in dexed cost of acquisition of Rs. 1,78,41,644/-,net long-term capital gainis arrived at Rs. 8,05,94,860/-.

6.1.2 During the appellate proceedings, appellant uploaded written submission on various dates submitted before the Assessing Officer during assessment proceedings wherein, one of the issues disputed by the appellant is adopting the value fixed by the Stamp Duty Valuation Officer as the sale consideration of the impugned property as per Section 50C(1) instead of sale consideration stated to have been received by the appellant, for the urpose of computing capital gains. It is stated herein and reiterated during the appellant proceedings that the value adopted by Stamp Duty Valuation Authority exceeds the fair market value of the property as on date of transfer in support of which appellant submitted valuation report of fair market value by a registered valuer. Appellant submitted that the sold land situated in Industrial Park, Bornada Industrial Area is adjacent to the boundary wall of Agro Food Park, Boranada and share common boundary wall but the land in Agro Food park has been valued by the Stamp Valuation Authority at Rs.2,500/- per square meter whereas appellant’s land has been valued at Rs.7000/- per square meter. It is apparent that the stamp duty authority has taken different DLC rate for virtually the same part and parcel of land without any reasonable basis. Further, it is stated that the buyer of the impugned property contested hat stamp duty assessed by the Stamp Duty Valuation Authority was excessive and a legal notice w was served to the stamp duty authority to refund excess stamp duty charged. The appellant also contended that the Assessing Officer adopted deemed value for land at Rs.9,90,99,000/ – and for building at Rs.2,18,50,441/- totaling to Rs.12,09,49,441/-which is higher than the stamp duty value of Rs.11,19,40,441/ consideration of objection raised by appellant and without referring to DVO as laid down in Section 50C(2). The appellant desired to make correction in the ground of appeal by replacing the figure of Rs.11,1 9,40,441/- originally written in Form-35 due to clerical mistake with Rs.12,09,49,441/-,being the total value of the property adopted by the Assessing Officer in the assessment made u/s.143(3).Based on the above submission and placing reliance on several judicial precedents cited in his written submission, appellant submitted to direct the Assessing Officer to accept the actual sale consideration which coincides with fair market value for the purpose of computing capital gain.

6.1.3 I have carefully perused the submission of the appellant with reference to the facts manating from the assessment order. The appellant is aggrieved that the stamp duty value has been adopted by the Assessing Officer as sale consideration of the property for the purpose of computing capital gains. In this regard appellant has contended that (i) the actual sale consideration of Rs.8,81,00,000/-coincides with the fair market value prevailing on the date of transfer of the property, (ii) the rate of Rs.7000/- per square Meter adopted by the Stamp Duty Valuation Authorities for the said land of the appellant is very much on the higher side when compared to the rate of Rs.2,500/- of the land in Argo Food park which is adjacent to that of the appellant’s land and shares a common boundary and (iii) despite objection raised by the appellant on adopting the stamp duty value, Assessing Officer has not referred the matter to the DVO as required u/s.50C(2). In support of his contention, appellant placed reliance on the ratio laid down by judicial authorities in several case laws. I have carefully perused the case laws and I find the facts of the case apparently dictates invoking the provisions of Section50 Case the value of the impugned property fixed by the Stamp Valuation Authority is higher than the sale consideration for which appellant has sold the impugned property. As per the provisions of Section 50C, if the sale consideration declared by the assessee (seller) is less than the stamp duty value, then the stamp duty value shall become deemed sale consideration for the purpose of calculating capital gain tax. Therefore, in the first place, the Assessing Officer is obligated to adopt the stamp duty value as the deemed sale consideration for calculating capital gain. However, the objection raised by the appellant during the assessment proceedings in response to the proposal put forth by the AO should have been considered and the Assessing Officer should have referred the matter to the District Valuation Officer (DVO) which has not been done. Having stated as above, I find there is an inhibiting factor for the Assessing Officer to refer to the DVO, since in this case against the stamp duty value fixed by the Stamp Valuation Authority, the buyer has contested before the Stamp Valuation Authority to refund the excess stamp duty collected. In the event of pendency of an appeal under the Stamp Act, filed before the Stamp Duty Valuation Authority, making reference to the DVO on the same issue -is legally unviable.

6.1.4

Nevertheless, before this Office during the appellate proceedings, the appellant has not  made any submission regarding the outcome of the appeal filed before the Stamp Valuation Authority by the buy­er of the impugned property. In the given facts and circumstances, considering the entire facts discussed above, I am inclined to uphold heaction of the Assessing Officer in invoking the provision to Section 50C, there by adopting the Stamp Duty value as sale consideration of the impugned property for computing capital gains u/s.48. Having held as above, I must point out here, that the Assessing Officer has adopted the stamp duty value of Rs.9,90,99,000/- for the land but for the buildings the Assessing Officer chose to adopt the value at Rs.2,18,50,441/- stated by the appellant in its submission during the assessment proceedings because it is higher than the value of Rs.1,28,41,441/- fixed for the buildings by the Stamp Valuation Authority. In this respect, the appellant is right in contending that the Assessing Officer’s adaptation of deemed value for land at Rs.9,90,99,000/- and for building at Rs. 2,18,50,441/- totals to Rs. 12,09,49,441/-which is higher than the stamp duty value of the impugned property, land and building ofRs.11,19,40,441/-. The Assessing Officer cannot apply double standard in adopting the stamp duty value for land alone and not for the buildings when the Stamp Valuation Authority has specifically fixed the value for buildings at Rs.1,28,41,441/-.Therefore, the AO is directed to adopt the stamp duty value of Rs.1,28,41,441/-as the value/sale consideration for the buildings as well. Except as above,  in the absence of any documentary proof that the dispute raised by the buyer before the Stamp Valuation Authority has been decided in favour of the buyer thereby lowering the stamp duty value, I sustained the stamp duty value of the property at Rs.11,19,40,441/ as deemed consideration of the impugned property inconformity with the provisions of Section 50C and direct the Assessing Officer to take the value of land at Rs.9,90,99,000/- as deemed sale consideration of land for computing long-term capital gain. Accordingly, ground of appeal No.1 is dismissed subject to the above direction.

5. The ld. DR for the department relied on the order of the AO and submitted that the AO has explicitly dealt with the issue at para 3.13.5 in his order. The relevant para to this effect is as under:-

3.13.5 ……. Sub-section 1 of section 50C provides that where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or plotor both is less than the value adopted or assessed or assessable by stamp valuation authority for the purpose of stamp duty collection in respect of such transfer, the value so adopted, assessed or assessable shall for the purpose of section 48 be deemed to be the full value of consideration for transfer received or accruing as are sult of such transfer. In plain terms, the stamp valuation assessment by the stamp duty officer of the State Governme ntwould be deemed to be the sale consideration of capital asset, replacing the declared sale consideration, if it happens to be less than stamp duty valuation. For the purpose of charging capital gain in view of section 45, to be computed as provided in section 48, this deemed consideration would be applied.

6. The Ld. AR of the assessee submitted that the ld. CIT(A) grossly erred in law and on facts in sustaining the stamp duty value of the property at Rs.11,19,40,441/- as deemed consideration u/s 50C of the I.T. Act as against the actual sale consideration of Rs.8,81,00,000/- coincides with the fair market value of property prevailing on the date of transfer of property by ignoring the objection raised by the appellant during the assessment proceedings giving full particulars of the fair market value of the property. In support of arguments, the assessee has filed written submission as under:-

‘2.1.1 The ld CIT appeal unjust, wrong and against the law for sustaining stamp duty value of property Rs 111940441 as deemed sale consideration u/s 50C against actual sale consideration and fair market value Rs 88100000 without consideration of fact and fair market value as per valuation report of approved valuer submitted by the appellant as objection raised during course of assessment proceeding by ignoring the provision of section 50C(2). The ld CIT Appeal again misconception of fact by stating to be pendency of an appeal under the stamp Act filed before stamp duty authority, making reference to DVO on the same issue is legally unviable. In fact there was no any such appeal pending before such authority. The fact is that only the buyer given notice to Sub Registrar itself (Who made the stamp duty valuation) to intimate the excess stamp duty charged and no any appeal to appellate authority under the Stamp Duty Act. (PB page no 135-138). As such there is no any appeal is pending before stamp duty authority. The Ld CIT Appeal factually wrong while rejecting ground of appellant.

2.1.2 That the appellant sold the property at fair market value as on the date of transfer. However Stamp duty authority charged higher stamp duty from buyer considering excess value without looking the fact or visit of property. It is also stated that the sold land situated in Industrial Park, Bornada Industrial Area which is just adjacent to the boundary wall of Agro Food Park, Boranada and share common boundary wall. The land in Agro food park has been valued by authority at Rs 2500/- per square meter whereas this land situated just adjacent to that has been valued Rs 7000/- per square meter. It become apparent that the stamp duty authority has considered the different DLC rate for virtually the same part and parcel of land without any reasonable basis.

2.1.3 It is undisputed fact that during course of hearing, the appellant have objected and claimed that the value adopted by stamp valuation authority exceed the fair market value of the property as on date of transfer and also submitted valuation report of fair market value by registered valuer. The claim of appellant was ignored by the assessing officer only stating his disagreement with valuation report submitted in support of claim. However if the assessee had made an objection for invoking section 50C(1), the Assessing Officer has to referred to the Valuation Officer as per section 50C(2). Without doing so, the Assessing Officer had estimated the capital gains tax with taking estimated value, higher from the actual consideration or fair market value. In the various judicial decision, it is very much clear that in such case, the LD A.O.should have adopt the provision of section 50C(2) for applying deeming provision of sale consideration.

• Jurisdictional ITAT Jaipur Bench’A’Jaipur in the case of SmtSharda Devi AlwarVs ITO 1(4),Alwar Tax World may 2013, Vol49-part 5. In this case Hon bench observed that if objection made for value taken, A.O. should have adopted provision of sec 50C(2)
• ITAT Jodhpur in the case of MeghrajBaid v. ITO 2008 23 SOT 25 (Jodh.).TTJ 114, 841, [2008] 23 SOT 25 (JODH.)(URO) IT APPEAL NO. 197 (JODH.) OF 2007Hon’ble bench observed that in case the AO does not agree with the explanation of the assessee with regard to lower consideration disclosed by him then he should refer the matter to DVO for getting its market rate established as on date of the sale to arrive at the correct sale consideration. If this provision is read in the sense that if the AO is not satisfied with the explanation of the assessee then he ‘may’ or ‘may not’ send the matter for valuation to the DVO then in that case this provision would be rendered redundant. The word ‘may’ used in this sub-section signifies that in case learned AO is not satisfied with the explanation of the assessee, he ‘should’ refer the matter to the DVO for the mentioned purpose
• Arlette Rodrigues Versus Income-tax Officer, Ward 15(2) (2), MatruMandirTardeo, Mumbai 2011 (2) TMI 1284 – ITAT MUMBAI – TMI – IT APPEAL NO. 343 (MUM.) OF 2010 it held that where assessee has filed the objection before the Assessing Officer in respect of the valuation adopted for payment of the stamp duty for registration of the conveyance, the Assessing Officer should have referred the matter to the DVO as per the provisions of section 50C(2) of the Act
• ITAT , Mumbai in Ajmal Fragrances & Fashions (P.) Ltd. Vs ACIT Circle 13(1) [2009] 34 SOT 57 (MUM.) it was held that 50sub-section (2) makes it very clear that whenever assessee claims before the Assessing Officer that he has not challenged the stamp duty valuation and sale consideration is different because of valid reason, then the Assessing Officer is required to refer the matter to Valuation Officer. Without going into the interpretation of the word “may” whether it should be taken only as mandatory or not the plain logic seems to be that Assessing Officer is not expert on valuation and that is why the Legislature has mandated that if there is strong objection from the assessee’s side without challenging the stamp duty valuation, then valuation should be referred to Valuation Officer, who is an expert and who can do the correct valuation
• The same view was also held in Tribunal in MrsNandidtaKhosla [2011] 11 taxmann.com 344 (Mum.), Smt. Mini Jain, SK. Jain Distributors Versus ITO, New Delhi 2014(1) TMI 1309-ITAT DELHI, Mrs. Arlette Rodrigues Versus Income-tax Officer, Ward 15(2) (2), Matru Mandir Tardeo, Mumbai 2011 (2) TMI 1284 – ITAT MUMBAI – TMI – IT APPEAL NO. 343 (MUM.) OF 2010
• Muthuraja v. CIT [2013] 37 taxmann.com 352/[2013] 218 Taxman 73 (Mag.)(Mad.)wherein this Court had an occasion to consider a case of distress sale and held that when an objection is made by the assessee to the Assessing Officer with regard to the adoption of market value under section 50C(1), the Assessing Officer ought to have referred the valuation of the capital asset to the Valuation Officer and remitted the matter back to the Assessing Officer to work out the capital gains by invoking the provisions of section 50C(2).

As submitted above, applying higher value even after objection of assesse on basis of valuation report of registered value, without adopting 50C(2) is wrong, unjust and erred in law therefore you are requested to kindly direct assessing officer to accept the actual sale consideration which coincides with fair market value for purpose of computing capital gain.

6.1 The ld.AR in objection to the ground No. 2 of the Department filed a written submission in support of his contentions as under:-

2.2.1 The ground of department stating allowing relief to assessee by considering lesser value u/s 50C of the I.T. Act 1961 sold as taken by the assessee without any base and against the fact.

2.2.2 Without prejudice to our ground against applying 50C at para2.1 above, it is submitted that the while applying deeming provision, the ld A.O adopted value for land at stamp duty value i.e. 99090000 and for building higher than the stamp duty value i.e. 21850441/- as against stamp duty value Rs 12841441/- of the impugned property. Thus the Assessing officer applied double standard in adopting the stamp duty value for land alone and not for building when the stamp duty valuation officer fixed the value of building Rs 12841441.The ld A.O is in misconception of fact for declared value of building by appellant in his order. The appellant only submitted the estimated bi-frication of consolidated stamp duty value which is for computing capital gain separately of land and building at stamp duty value as suggested by ld AO is a clerical work not the declared market value. Also there was no separate consideration of land or building decided in transaction but the stamp duty valuation authority specifically fixed the value of land and building.

Considering the fact, the ld CIT Appeal rightly directed assessing office to adopt the stamp duty value for building of Rs 12841441 for computing capital gain on building. Your honor is requested to dismiss the ground of department.

7. We have heard both the parties and perused the materials available on record, written submission and orders of the authorities below. We find that the ld. CIT(A) has confirmed the finding of the AO in invoking the provision of Section 50C of the Act, in adopting the Stamp Duty value as sale consideration of the impugned property for computing capital gains u/s.48. However, the CIT(A) has ignored the fact regarding the objection raised by the appellant during the assessment proceedings giving full particulars of the fair market value of the property which was required to be dealt with as per provisions of section 50C(2) of the Act by the AO. The ld. CIT(A) noted that that the Assessing Officer has adopted the stamp duty value of Rs.9,90,99,000/- for the land but for the buildings the Assessing Officer chose to adopt the value at Rs.2,18,50,441/- stated by the appellant in its submission during the assessment proceedings because it is higher than the stamp duty value of Rs.1,28,41,441/- fixed for the buildings by the Stamp Valuation Authority. In this respect, the appellant is right in contending that the Assessing Officer’s (In short “the AO”) adaptation of deemed value for land at Rs.9,90,99,000/-and for building at Rs.2,18,50,441/- totals to Rs.12,09,49,441/-which is higher than the stamp duty value of the impugned property, land and building ofRs.11,19,40,441/-. In our view, the Assessing Officer cannot apply double standard that in adopting the stamp duty value for land alone and not adopting for the buildings when the Stamp Valuation Authority has specifically fixed the value for buildings at Rs.1,28,41,441/-.Therefore, the ld. CIT(A)directed the AO to adopt the stamp duty value of Rs.1,28,41,441/-as the value/sale consideration for the buildings as well. Except as above, in the absence of any documentary proof that the dispute raised by the buyer before the Stamp Valuation Authority has been decided in favour of the buyer thereby lowering the stamp duty value, the ld. CIT(A) sustained the stamp duty value of the property at Rs.11,19,40,441/- as deemed consideration of the impugned property inconformity with the provisions of Section 50C and direct the Assessing Officer to take the value of land at Rs.9,90,99,000/- as deemed sale consideration of land for computing long-term capital gain.

8. It is undisputed fact that during course of hearing, the appellant has objected to the proposed action of substituting the circle valuation as against real consideration and claimed that the value adopted by stamp valuation authority exceed the fair market value of the property valued by registered valuer as on date of transfer. It is seen that the claim of appellant was ignored by the assessing officer only stating that he is in disagreement with valuation report submitted in support of claim. In our view, if the assessee had made an objection for invoking section 50C(1), the Assessing Officer ought to have either referred the matter to the Valuation Officer as per section 50C(2) to ascertain fair Market value. Without doing so, the Assessing Officer had estimated the capital gains tax with taking estimated value, higher from the actual consideration or fair market value. In the various judicial decision, it is very much clear that in such case, the LD A.O. should have adopt the provision of section 50C(2) for applying deeming provision of sale consideration.

9. There, is no dispute that the submissions as referred above raising objection for substituting the value of immovable property on circle rate as per stamp duty authority against real consideration were filed before the Ld. AO during the course of assessment proceedings. Thus, as a matter of fact detailed reasons alongwith sufficient evidences were filed before the Ld. AO to demonstrate that these were old and unmaintained house property, in bad condition not fit for living being sold as per market rates. Thus, according to the submission of the assessee the property has market price much less the price notified by the Government for payment of Stamp duty.

10. It is considered expedient to have a look over the deeming provisions of section 50C of the Act. The Sub-section (2) clearly mandates that where the assessee claims that the value adopted or assessed or assessable by the stamp valuation authority exceeds the fair market value of the property as on the date of transfer, the AO would refer the valuation of such property to the Valuation Officer. Hon’ble Calcutta High Court, in the case of ‘Sunil Kumar Agarwal Vs. CIT’, (2015) reported in 372 ITR 83 has clearly held that the AO, discharging quasi- judicial function, has the bounden duty to act fairly and to follow the course provided by law, which in that case, was the reference to the valuation officer. In the present case, despite assessee’s specific request and claim before the AO that stamp valuation of the property sold was not its “fair market value”, it was the bounden duty of the AO to have referred to the Valuation Officer which, for the reasons not borne on records, was not made.

11. Now, being aggrieved the revenue contends that, as the legislature vide section 50C(2) has used the term ‘may’ therefore, the intent of legislature is that reference to valuation cell is dependent upon the sweet will of the AO and it is not necessary for the AO to refer to valuation cell in all cases. This stand of the revenue is in direct conflict with the view propounded by the Hon’ble Calcutta High Court in the case of ‘Sunil Kumar Agarwal Vs CIT’, (2015) 372 ITR 83 (Calcutta) wherein examining the similar issue the Hon’ble High Court observed that:

“for the aforesaid reasons, the valuation by the departmental valuation officer contemplated under section 50C is required to avoid miscarriage o f justice. The legislature did not intend that the capital gain should be fixed merely on the basis of the valuation to be made by the District Sub-Registrar for the purpose of stamp duty. The legislature has taken care to provide adequate machinery to give a fair treatment to the citizen/taxpayer. There is no reason why the machinery provided by the legislature should not be used and the benefit thereof should be refused. Even in a case where no such prayer is made by the advocate representing the assessee, who may not have been properly instructed in law, the Assessing Officer, discharging a quasi-judicial function, has the bounden duty to act fairly and to give a fair treatment by giving him an option to follow the course provided by law. ”

12. The ITAT Jaipur Bench ’A’, Jaipur in the case of ‘Smt Sharda Devi Alwar Vs ITO 1(4)’, Alwar Tax World, May 2013, Vol 49-part 5, has observed that if objection made by the assessee for value taken, A.O. should have adopted provision of sec 50C(2).

13. In the present case, it is noted that the Assessing officer neither discussed the contentions of the assessee for taking actual consideration as fair market value of the property sold nor referred the matter to the DVO as was required U/s 50C(2) of the Act despite specific prayer made by the assessee at the first stage. The AO and the CIT(A) have also not found or alleged that the assessee received any excess amount over the sale consideration mentioned in the deeds. In the light of these facts and particularly on the failure of the AO to follow the course as prescribed under section 50C(2) and respectfully following various decisions discussed above, we hold that the CIT(A) was not justified in confirming the action of the AO in adopting deemed sale consideration in violation of section 50C(2) of the Act.

14. In the above view and legal precedents in these peculiar facts of the case, the failure of the AO to follow the procedure as prescribed under section 50C (2) in particular, and therefore, the CIT(A) action in confirming such order is held unjustified and against law by sustaining stamp duty value of property Rs 11,19,40,441/- as deemed sale consideration u/s 50C against actual sale consideration and fair market value Rs 8,81,00,000/-. Accordingly, the AO is directed to adopt the value of sale consideration at Rs 8,81,00,000/- of the subject property for the purpose of computation of Long Term Capital Gains. Thus, the ground no. 1 of appeal of the assessee is allowed and corresponding ground no 2. Of the department is dismissed.

15. Apropos Ground No. 1, the Department objected to allowability of deduction to the assessee u/s 54F of the Act. The facts as emerges from the order of the ld. CIT(A) are as under:-

‘’6.3

With regard to the contention of the Assessing Officer that appellant has ownership of more than one residential house pointing to the seven residential houses shown as stock in trade, because of which the Assessing Officer has denied deduction u/s.54F, I find that vide written submission dated 24.12.2019 appellant furnished with supporting documents, details of opening stock, purchases, expenses incurred, sale and closing stock of trading activities in properties from F.Y.2012-13 to2016-17 as per Para3.14.5 of Assessment order extracted in the foregoing Para 4.14.5.The AO has not refuted appellant’s submission that separate trading account for such property business was regularly prepared and is part of audited financial accounts. I have perused copy of trading account and audited financial statements of four years submitted to the AO for reference and verification and found that the properties are reflected therein as stock in trade. That appellant has incurred expenses and sold a few houses in the preceding years is not rebutted by the AO based on material on record. All the above depict that the said residential houses belong to the trading business in real estate as propounded by the appellant. The Inspection Report of the Inspector deployed with the Office of the Assessing Officer does not contain any material disproving the submission of the appellant. There is no finding negating the explanation that the properties shown in the trading account are basically unusable houses of about 40-50 years old and in destroyed condition not fit for habit at ionne it her for residence nor commercial unless major renovation is undertaken. That there is no electricity and water connection in the said properties till the end of previous year relevant to this assessment year in appeal is not commented upon. There is no material on record to demonstrate falsity in the submission of the appellant that despite appellant’s efforts, the houses could not be sold due to which the se properties are kept for trading as stock in trade. Therefore, in my considered opinion, the said residential houses cannot be taken as capital asset within the meaning of Section 2(14). Thus, it cannot be held that appellant owned more than coneresidionential ho use as on the date of transfer of the impugned property.

6.3.1 As a matter of fact, the AO himself has hailed the aforesaid seven properties as traded properties by computing notional rent based on the maxim laid down by the Hon’ble Delhi High Court in the case of M/s. Ansal Housing Finance & Leasing Co. Ltd., 354 ITR 180(2013). By doing so, the AO has accepted the contention of the appellant that the said residential houses are unsold properties of the trading business of the appellant. That appellant has reflected the above referred 7 residential house properties as stock-in-trade in his books of account is not disputed by the AO. Thus, the opposition of the Assessing Officer that the residential properties are not held as stock in trade but are owned by the appellant as capital assets on account of which, the claim of deduction u/s.54F is to be denied is unsound factually and legally. In the case of M/s. Ansal Housing Finance & Leasing Co. Ltd., the issue for consideration was whether the unsold constructed flats should be valued as business income or income from House Property. The Hon’ble Delhi High Court held that the levy of income tax in the case of one, holding house property is premised not whether the assesse carries on business as landlord but on the ownership. The incidence of charge is because of the fact of ownership. Hence, the said decision is in the perspective of Section 22 2.w.s.28 and not in the context of Section 54F.The fact that appellant has purchased new house property for Rs. 9,93,42,000/- within the period specified in Section 54F is not doubted by the AO. Since all the conditions stipulated in Section 54F stand fulfilled, I hold that appellant is eligible to avail deduction u/s.54F. The AO is directed to allow deduction u/s.54F in computing long term capital gain of sale consideration of land valued at Rs.9,90,99,000/-.Accordingly, ground of appeal No.2 is Allowed.”

16. During the course of hearing, the ld. DR relied on the order of the AO. He argued that the ld. CIT(A) was not justified in allowing deduction to the assessee u/s 54F of the I.T. Act, 1961 though the assessee had more than one house property.

17. On the other hand, the ld.AR relied on the order of the ld. CIT(A) and in support, he filed the following written submissions.

Allowing deduction u/s 54F(Ground 1 of department)

1.1 The appellant claimed exemption u/s 54F against long term capital gain for purchased new house property located at Plot no O-21-B, Ashok Marg, C-Scheme, Jaipur for total cost Rs 9,93,42,00,000 within specified time. Copy of registered deed for purchases new house submitted (PB page139-164). With regards to contention of ld A.O. that the appellant has owenership of more than one residential house, it is submitted that the ld A.O. grossly in misconception of fact in presuming property shown as stock in trade are residential house property as mentioned in para 3.14.3 of his order. The ld AO has taken this presumption that properties held as stock in trade are holding since long and purchases are not for earning profit but to accumulate house properties only. The ld A.O further alleged with own presumption stating in said para that ‘’the assesse has purchases a residential house in the year under reference and claimed the same as a residential house property as stock in trade just to claim deduction u/s 54F of the IT Act arises on sale of capital asset as discussed in foregoing para of this assessment order”. As against stated by Ld. A.O, we submit fact as under:

• • The appellant has started to deal in property business since previous year relevant to assessment year 2012-13and maintaining separate trading account for property business since it’s start being part of audited financial statement. The trading activities in properties since that period are as under:

Aseparate trading account named as trading account 2 for such property business being regularly prepared and part of audited accounts submitted. Copy of separate trading account which is part of audited accounts of all five year and next one year and detail of closing stock submitted during assessment proceeding(PB Page 167-173). As per position of trading account summarized, all properties which has been purchases for intention to trading has been shown in trading account and shown as stock in trade. The allegation that there is no single sale since long is totally against the fact. The purchases of various properties are upto period relevant to AY 2015-16 and various sale made in year relevant to AY 2012-13,2013-14 and continuing in next years. Due to recession in property market, there was no sale in year relevant to AY 2014-15,2015-16however the appellant continued to have all such properties as stock in trade as evident from trading account as part of audited financial statement submitted.

• • It has also submitted that the properties shown in above trading account are basically 40-50 years old vacant house and inhabitable &destroyed condition , not fit for any use either for residence or commercial. Even there was no electricity and water connection in said properties till the end of previous year relevant to this assessment year. These properties only kept as land value for trading as stock in trade. The fact was also verified by the ld A.O by getting visit of Inspector to all these properties as stated at last in parano 3.14.3 of assessment order and no contrary evidence observed in the order.
  • The allegation of ld. AO being property kept as stock in trade just to claim deduction u/s 54F is a presumption without considering the fact that assessee started to deal in property since 2011-12 and capital gain arises in 2016-17. The Tax liability on Capital gain & Claim of 54F exemption cannot be forecasted in 5 years advance . Hence the assumption is totally baseless and interpreted to only disallow the claim u/s 54f anyway. Further the assesse recorded in his regular books of accounts as purchases of stock in trade. The accounts of assesse were audited and property stock in trade clearly shown in separate trading account are part of audited financial statement.

1.2 The other ground taken by the ld A.O while disallowing the claim u/s 54F is that in section 54F of IT Act the word used is residential house and there is no such distinction has been made in this section between the residential house properties held as investment or stock in trade as stated in para 3.14.6 of his order against which we submit as under:

• • That restriction as per proviso to section 54F” Owns more than one residential house other than new assets on date of transfer of the original asset” refer for in context of capital assetsonly both in respect of owned and transferred. When we consider the meaning for transfer of assets for capital assets, than at same place owing house property also should be for capital assets only.
  • The Section 45 to 55 of Income Tax Act is only for Capital Gain on Capital assets hence the provision relates to capital assets. Hence in section 54F the word used for investment in residential house is to understood house kept as capital assets. Property held as stock in trade are never be treated in preview of section 45 to 55.
  • There can not be second opinion on the point that capital gain should arise out of the transfer of capital assets. Section 2(14)(a) of the Income Tax Act define capital asset as under:

“ capital asset” means—

(a) property of any kind held by an assessee, whether or not connected with his business or profession;

(b) xxxxx

but does not include—

(i) any stock-in-trade [other than the securities referred to in sub-clause (b)], consumable stores or raw materials held for the purposes of his business or profession ;

…. ”

This shows that any stock in trade by business or profession is excluded from the definition of capital asset and in these circumstances the contention of Ld A.O. is that stock in trade is also included for applicability of Section 54F of is not correct.

• • As per language of section and it’s placed with related provision for capital assets, it is clear intention of Legislature to apply for capital assets. Also it is well settled law that a provision for deduction, exemption or relief should be construed liberally and in favor of the assessee, and it should be so construed as to effectuate the object of the Legislature and not to deficit it.
  • THE HON HIGH COURT OF KARNATAKA in case of CIT Mangalore Vs Sri Gregory Mathias, ITA No 192 of 2014(PBpage 1-8)in the similar facts dismissed the appeal of revenue while framing question of against the view of ITAT’A’benchmangalore in appeal proceeding no. ITA 1434/BANG/2012 for AY 22009-10. The view of Tribunal found and mentioned in said order is as under:

“9. We have given very careful consideration to the rival Submissions. The first Thing which we notice is that the expression ‘residential house’ has not been defined in the Act. We, Therefore, have to go by the natural meaning which the term would assume in common parlance. In our view, the flats constructed by the assessee, which were the assessee’s Stock-in-trade of business carried on by the assessee , are meant for sale and cannot assume the character of ‘residential house’ owned by the assessee. There is no evidence record to show that the stock- in-trade of the assessee was treated as Residential house owned by the assessee. On the other hand, it is clear from the accounting treatment that all the seven flats were treated as stock-in-trade. The income from these flats is offered to tax under the head ‘income from house property’ because of the specific provisions of section 22 of the Act read with section 14 of the Act Such treatment of income by the assessee cannot be treated as an Act by which the assessee has considered the seven flats as residential house owned by him. We are, therefore , of the view that denial of the claim of the assesse for deduction u/s 54F of the Act is unassailable. The AO is, therefore, directed to given the deduction as claimed by the assessee. We, therefore, allow the appeal of the assessee.”

THE HON HIGH COURT further held in paragraph 10 as under:

“ 10.We may also add that under the heading of Capital Gains, section 45 of the Act provides that any profits or gains arising from the transfer of capital assets can be considered the gain or exclusion from the set off the gain it should be related to the capital assets. When the property was not shown as capital assets but was shown as stock-in-trade, naturally the view taken by the tribunal cannot be said to be erroneous. “

As submitted, the assessing office wrongly interpreted the property held in stock in trade as house property for purpose of disallowing claim u/s 54F. We rely on finding by ld CIT appeal at para 6.3 and 6.3.1 on fact while allowing exemption u/s 54F for investment in new house where all conditions has satisfied. Your honor is requested to dismiss the ground of department.”

18. We have heard both the parties and perused the materials available on record. It is seen that the ld. CIT(A) after going through assessment order and the details filed by the assessee has observed that the assessee has purchased new house property for Rs.9,93,42,000/- within the specified period as per provisions of Section 54F which is not under dispute. The ld. CIT(A) has held that the assessee is eligible to avail deduction u/s 54F of the Act and directed the AO to allow deduction u/s 54F of the Act, in computing long term capital gain from the sale consideration of land, valued at Rs.9,90,99,000/-. Admittedly, the AO had accepted the contention of the assessee that the said residential houses are unsold properties of the trading business of the assessee and the assessee himself has reflected the seven residential house properties as stock in trade in his books of account and thus it is not disputed by the AO that the aforesaid seven house properties were accounted for by the assessee in his books of accounts as stock in trade. Thus, in our considered opinion, the said residential houses cannot be taken as capital asset within the meaning of Section 2(14) of the Act. Accordingly, it cannot be held that the assessee owned more than one residential house as on the date of transfer of the impugned properties. It is also not disputed that the assessee had purchased new house property within specified period as per provisions of Section 54 of the Act and the conditions stipulated u/s 54F stands fulfilled by the assesse. Thus, taking into consideration, the facts, circumstances of the case and written submissions of the assessee, we feel that the ld. CIT(A) has been justified in judiciously allowing the deduction u/s 54F of the Act, to the assessee and therefore, we concur with the findings of the ld. CIT(A). Thus Ground No. 1 of the Department is dismissed.

19. In Ground No. 2, the assessee is aggrieved that the ld. CIT(A) has erred in sustaining gain from sale of building of discontinued business treated as short term capital gain in terms of Section 50 without considering the fact that WDV was on date of discontinue of business, as the buildings of discontinued business were kept as an investment for period more than 3 years and since then no depreciation was claimed on that building.

20. The facts as emerges from the assessment order of the AO are as under:-

3.7 I have gone through the submission made by the assessee but the same is not found tenable. It is noted that the assessee had claimed depreciation on the above building for the assessment years 2008-09 to 2012-13. The assessee did not claim depreciation on the building constructed on the aforemention plots from AY 2013-14. The stoppage of the claim of depreciation will not alter the nature of assets. The property underreference was a business asset and was located at industrial park meant for busin -ess activities and the assessee claimed depreciation on the basis that the written down value was also taken on all the building together into a consolidated figure. It is pertinent to mention here that once an asset has been treated as block of asset, then, irrespective of its disposal and in the manner done by the assessee, it would continue to be treated as such. Once it is treated on its initial introduction in the block as `block of asset’, then, that treatment continues and that is how the law has been understood throughout. The assessee has originally purchased above plots and constructed building on these plots and started claiming depreciation from AY 2008-09. He claimed depreciation of the cost of construction of buildings together. The claim of the assessee that he did not claim depreciation from AY2013 14 is also not alter the very nature of the assets unde rreference.

3.8 The definition of block of assets, as appearing in Section 2(11) of the IT Act was in force. For sake of clarity, provisions of section 2(11) of the IT Act are reproduced below:

(2) (11) “blockofassets” means a group of assets falling within aclass of assets comprising—

(a) Tangible assets, being buildings, machinery, plant or furniture;

(b) intangible assets, being know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature, inrespect of which the same percentage of depreciation is prescribed;

From above definition, block of assets means a group of assets falling within a class of assets comprising (a) tangible assets, being buildings, machinery, plant or furniture; and (b) intangible assets, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature. The further part of this definition indicates that these block of assets comprising as above inrespect of which same percent age of depreciation is prescribed, can be understood as block of assets. The buildings constituted one class of assets. Once the depreciation has been granted on the building under reference, but subsequently no business operations were carried on there from, that does not mean that it ceased to be a business asset. Thus, the provisions of section 50 of the IT Act are clearly applicable in the case under reference.

Section 32 of IT Act enables claiming deductions in respect of depreciation on the tangible and intangible assets owned, wholly or partly, by the assessee and used for the purpose of business or the profession. One of the aspects in respect of any block of assets is that such percentage of the written down value thereof, as may be prescribed, can be claimed.

3.9 Section 50 of the IT Act sets out special provision for computation of capital gains in case of depreciable assets. Section 50 of the IT Act reads as under:

Special provision for computation of capital gain sin case of depreciable assets.

50. Not with standing any thing contained in clause (42A)of section2, where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act or under the Indian Income-tax Act,1922 (11 of 1922), the provisions of sections 48 and 49 shall be subject to the following modifications:—

(1) where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of the assets during the previous year, exceeds the aggregate of the following amounts, namely:—

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

(ii) The written down value of the block of assets at the beginning of the previous year; and

(iii) the actual cost of any asset falling within the block of assets acquired during the previous year, such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets;

(2) where any block of assets ceases to exist as such, for the reason that all the assets in that block are transferred during the previous year, the cost of acquisition of the block of assets shall be the written down value of the block of assets at the beginning of the previous year as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short-term capital assets.

As is evident, the section opens with a non obstante clause and states that notwithstanding anything contained in clause (42A) of Section 2, where the capital assetisanasset forming part of a block of assets in respect of which depreciation has been allowed under IT Act or under the Indian Income Tax Act, 1922 (11 of1922), the provisions of sections 48 and 49 shall be subject to the modifications setout in Section 50. Sections 48 and 49 provide for mode of computation of the capital gains. Section 48 deals with the mode of computation and deductions. The income chargeable undue the head capital gains shall be computed by deducting the full value of the consideration received or accruing as a result of the transfer of the capital asset. Section 49 deals with the cost with reference to certain modes of acquisition. Where the capital asset became the property of the assessee on distribution of assets of a HUF, or under gift or will or by succession/inheritance or devolution and/or on distribution of assets on liquidation of a company or under a transfer to a revocable or an irrevocable trust etc., the cost of such acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it. Both these provisions are subject to modification ssetoutin Section 50,where capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed.

3.10 From above discussion, it is concluded that the initial introduction of an asset in the books of the assessee is the material part. The expression `block of assets’ means a group of assets falling within the assets enumerated in Section 2(11)of the IT Act. That section does not make any distinction between different units or different types of businesses, which may be carried out by the assessee.

Only requirement in respect of an asset which forms part of assets is that same percentage of depreciation should be prescribed. The relevant rule has been referred above. Once the law enables claiming of depreciation on the block of assets, then, it is not possible to agree with the assessee that between AY 2013-14 to 2016-17, when building under reference was not being used by him for the purpose of business. After inclusion of the concept of block of assets with effect from 1st April 1988, assets having same rate of depreciation and nature would part of block of assets. The definition of the term `block of assets’ means a group of assets falling within the class of assets and comprising both – tangible and intangible assets, in respect of which same percentage of depreciation is prescribed. Section 32 of the IT Act which provides for claiming depreciation, enables an assessee to claim it and in the case of any block of assets, on such percentage of written down value thereof, as may be prescribed. It is also pertinent to mention here that an asset cannot move out of the block of assets once depreciation is allowed on that particular asset. In the present case, initially depreciation was claimed and allowed on the building under reference. It was only during AY2013-14 to2016-17thatnodepreciationwasclaimed or allowed, as the assets were not used for the purpose of business. Even though the assets were not used for the business of the assessee, they continued to be part of block of assets on which depreciation was allowed. Once an asset ceased to be in use for the purpose of business, it does not remain a part of block of assets’ and it was not open for the assessee to claim depreciation thereon. Once the depreciation has been granted on the building under reference and even if business operations were not carried out there from, merely at the convenience of the assessee, it does not cease to be a business asset. Thus, the building constructed upon the land under is treated as depreciable asset and any gain arises on transfer of the same will be treated as Short Term Capital Gain. Reliance is placed from the following case laws:

(i) Hon’ble Bombay High Court Decision in Smt. Meena V. Pamnani vs The CIT, CIx, Bombay on 29 September, 2017. In this case, the Hon’ble Court held that:

We do not think that we have to go into this controversy for the simple reason that the issue arose before us arises in the context of applicability of Section 50 of the I.T. Act. I f wehavefoundthatSection50wasapplicablebecauseofthedefinitionofth eterm block of assets’  and the user test not being attracted, then, nothing as held above further needs to be decided. The present case is distinct and no claim for depreciation was in issue. The question of thrusting it upon the assessee does not, therefore, arise. It is for avoiding the taxliability, arising because of the applicability of Section 50, that the assessee raised the plea of depreciation being thrust on her even though gala no. 210 was not used by her. That plea has right lybeen rejected.

31. We dispose of this reference by answering the essential questions framed for our opinion namely question nos.1 and 2, in favour of revenue and against the assessee. Therefore, question no.3 also would have to be answered on the touchstone that Section 50 of the I.T. Act was attracted and the Tribunal was right in law in the view it took. Income Tax Reference is disposed of accordingly.

(ii) Hon’ble Kerala High Court Decision in case of Commissioner of Income Tax Vs. Sakthi Metal Depot reported in (2011)-333-ITR- 492 (Ker). In this case, the Hon’ble Court held that:

“4. While the contention of the Revenue is that the asset in respect of which depreciation has been claimed when sold should always be assesse das short-term capital gains, the contention of the assessee is that unless the asset sold forms part of the block asset in the previous year in which sale took place, it cannot be assessed to short-term capital gain sunder section 50 of the Act. In our view section 50 has to be understood with reference to the general scheme of assessment on sale of capital assets. The scheme of the Act is to categorise assets between short-term capital assets and long-term capital assets. Section2(42A) defines short-term capital asset as an asset held for not more than 36 months. The non obstante clause with which section 50 opens makes it clear that it is an exception to the definition of short-term 14 of 22 ITR.96.2000 capital asset which means that even though the duration of holding of an asset is more than the period mentioned in section 2(42A), still the asset referred to therein will be treated as short-term capital asset. No one can doubt that assets covered by section 50 are depreciable assets forming part of block assets as define dunder Section 2(11) of the Act. Section 50 has two components, one is as to the nature of treatment on an asset, the profit on sale of which has to be assessed to capital gains. The section mandates that a depreciable asset in respect of which depreciation has been allowed when sold should be assessed to tax as short-term capital asset. The other purpose of section 50 is to provide cost of acquisition and other items of expenditure which are otherwise allowable as deduction in the computation o f capital gains and covered by sections48 and 49 of the Act. Here again section 50 provides an exception for deduction of cost of acquisition and other items of expenditure otherwise allowable in the computation of capital gains under sections 48 and 49 of the Act. In other words, section50 provides for assessment of a depreciable asset in respect of which depreciation has been allowed as short-term capital gains and the deductions available under sections 48 and 49 should be allowed subject to the provisions provided in sub-sections (1) and (2) o f section 50. Section50A also deals with assessment of depreciable asset that too as short term capital gains and it actually supplements section 50. In our view, the purpose of section 50A is to enable the assessee to claim deduction of the written down value of the asset in respect of which depreciation was claimed in any year as defined under section 43(6) of the Act towards cost of acquisition within the meaning of sections 48 and 49 of the Act. The condition for computation of short-term capital gains in the way it is stated in section 50A is that the assessee should have been allowed depreciation in respect of a depreciable asset sold in any previous year which obvious means that for the purpose of assessment o f profit on the sale of a depreciable asset, the assessee need not have claimed depreciation continuously for the entire period upto the date of sale of the asset. In other words, in our view, the building which was acquired by the assessee in 1974 and in respect of which depreciation was allowed to 15 of 22 ITR.96.2000 it as a business asset for 21 years, that is upto the assessment year 1995-96, still continued to be part of the business asset and depreciable asset, no matter the non- user dis-entitles the assessee for depreciation for two years prior to the date of sale. We do not know how a depreciable asset forming part of a block of assets within the meaning of section2(11) of the Actcance ase to be part of the block of assets. The description of the asset by the assessee in the balance-sheet as an investment asset inour view is meaningless and is only to avoid payment of tax on short-term capital gains on sale of the building. So long as the assessee continued business, the building forming part of the block of assets will retain its character as such, no matter one or two of the assets in on or two years not used for business purposes dis- entitles the assessee for depreciation for those years. In our view, instead of selling the building, if  the assessee started using the building after two years for business purposes the assessee can continue to claim depreciation based on the written down value available as on the date of ending of the previous year in which depreciation was allowed last. “

In nut shell, it is observed that the AO has worked out short term capital gain u/s 50 of the Act.

21. In first appeal, the ld. CIT(A) confirmed the finding by holding applicability of the provision of Section 50 in the case of the assessee by observing as under:-

6.2.3. ………..  In terms of the period of holding of the property by the appellant as per the provisions of Section 2(29A) r.w.s.2(42A), the building sare long-term capital assets since they have been owned by the appellant for more than three years. And so, what follows next is that the gain from sale of the a foresaid assets is long term capital gain. However, Section 50 is a specific Section which deals with the nature of gain on sale of capital assets used for business activity on which depreciation has been claimed. In the case of the appellant, it is an admitted fact that that these two buildings were used for business of the appellant and depreciation has been claimed and deducted up toA.Y.2012-13. Therefore, even though business in these buildings were discontinued from A.Y.2013-14 and no depreciation was claimed and deducted till the sale of the asset, nevertheless, being a part of the block of capital assets of the business of appellant, these buildings do not cease to be business capital assets until the written down value is nil and all the assets in this block are exhausted. So, the gain arising from sale of these assets is to be worked out treating the written down value as the cost, without in dexation and the gain will be short term capital gain in terms of Section 50.”

22. During the course of hearing, the ld. AR of the assessee submitted that the CIT (A) was wrong in sustaining the addition against sale of building of discontinued business treated as short term capital gain in terms of Section 50 without considering the WDV as on date of discontinue of business, since the buildings of discontinued business was kept as an investment for period more than 3 years and since then no depreciation was claimed on that building. He prayed that the lower authorities have wrongly invoked the provisions of Section 50 of the Act for which the ld. AR has filed the following written submissions.

‘’3 – CLASIFICATION OF LONG TERM CAPITAL GAIN ON BUILDING AS SORT TERM GAIN (Ground 2 assessee)

3.1 The appellant have capital gain on sale of land and building at SEZ Jodhpur on combined consideration. The ld A.O assessed capital gain on land as long term and on building as short term as per provision of section 50 ignoring the fact in the case. In fact the cost of building included in block of assets in 2006-07 but from 1st April 2012 due to building was not used for the purpose of assessee’s business the said building at Jodhpur was considered to be incapable of being termed as depreciable assets and WDV as on 01-04-2012 i.e.Rs70,12,622excluded from block of asses and separately shown in balance sheet. No depreciation has charged on such WDV of building from AY 2013-14 being the building kept as investment only. The fact is verifiable form return filed for AY 2012-13 and 2013-14.Copy of full return as filed and available at portal is submitted(PBPage174-246) where the closing WDV of block of building in schedule DOA of return AY 2012-13 (PB page 186)of was Rs 1,42,26,368 but in return of AY 2013 -14 schedule DOA (PB page 210 ) opening WDV of block taken Rs 72,13,746 by excluding WDV of this building Rs 70,12,622 in compliance of section 50. After compliance of section 50 in 2013-14, the assets transferred to investing assets being incapable to depreciation and sale of such assets made after 3year from date of such transfer/discarded from business assets.

3.2 The Ld CIT appeal has also confirmed the action of A.O simply stating provision of section 50 is applicable on depreciable assets. However the ld CIT Appeal not appreciated the fact that on date of sale the asset is incapable of depreciable assets. As per provision of section 32(1) of the I.T.Act, the said building at Jodhpur was incapable of being termed as depreciable asset as on 1st April 2012 due to asset was discarded from business. Once the assets is incapable of being termed as depreciable assets, it ceased to a part of the block of assets hence reduced from value of block of assets correctly. It is settled law that for availing depreciation under I.T.Act, it is imperative that two criteria are to be satisfied. First is the ownership and second is the use for the purpose of business or profession. These two requirements are set out in section 32(1) itself. In such circumstances, the user criteria is not satisfied to attract section 32(1). Once that is not satisfied, then, the ld CIT Appeal has erred in terming this asset as `part of block of assets’. The provision of section 50 has been complied in the AY 2012-13 when the assets discarded from the business assets

3.3 It is also submitted that Ld A.O referred the case Hon Kerala High Court Bombay High Court, the fact of case not applicable to this case and should not be understood as a general proposition. In the referred case the High Court held that so long as the assessee continued business, the building forming part of the block of assets, will retain its character as such but in our case the particular business got completely closed at that place and vacated building was kept as investment which was not in the case referred . There was no question of definition of `block of assets’ being applicable.

As submitted above, the Ld CIT Appeal wrong, unjust and error in law in allowing computing capital gain on building as short term as per provision of 50.”

23. On the other hand, the ld. DR relied on the orders of the authorities below.

24. We have heard both the parties and perused the materials available on record. We find that the assessee was having land & buildings at SEZ Jodhpur which was used for business upto the period relevant to assessment year 2012-13. The business of the assessee was discontinued from 01-04-2012. The assessee had kept the land and building as investment assets. However, the assessee had excluded the WDV from block of assess and separately shown in balance sheet in order to comply with the Section 50 of the Act in the year of assets discarded as business assets. It is also noted from the record that the assessee had not charged depreciation from A.Y. 2013-14 on such value of building. To this effect, the assessee has filed the copy of return for the assessment year 2012-13 and 2013-14. It is seen that the assessee has treated the value of building as investment assets from the A.Y. 2013-14 which has become as incapable depreciable asset meaning thereby it has become as part of block of asset u/s 32 (1) of the Act and the assesse had sold the asset after a period of 3 years treating it as Long Term Capital Asset. It is also noted that the ld. CIT(A) has confirmed the action of the AO holding that the provisions of Section 50C is applicable on depreciable assets. However, authorities below have ignored the fact that once the assets is incapable of being termed as depreciable assets then it will be ceased to a part of the block assets after reducing the value of the same from the value of the block assets. The AO has taken the recourse of Bombay High Court judgment in case of smt.Meena Pamnani and Hon’ble Kerala High Court in case of Sakthi Metal Depot (supra) but the facts of the judgement do not match to the facts of the assessee’s case. Thus, both the judgements are not applicable in assessee’s case. Even if Section 50 is to be applied as per the dictum of the AO, then full value of the consideration had to be reduced from the complete block of WDV i.e. all building (Jodhpur and Jaipur). However, the AO had reduced the WDV of Jodhpur in his assessment order where as he should have reduced the WDV of both the places of Jodhpur and Jaipur meaning thereby the AO has treated separate building from block of depreciable asset. In view of the matter, we feel that there has been lacuna on the part of the lower authorities in applying Section 50 of the Act, on building of Jodhpur. Thus, consideration peculiar the facts, and circumstances of the case, it would not be justified to approved the findings of the lower authorities. We find merit in the contentions of the appellant and therefore, accept the prayer of the appellant that provisions of section 50 of the Act are not applicable in the case of the assessee and thus, the Ground No. 2 of the assessee is allowed.

25. In Ground No 3, the assessee is aggrieved that the ld. CIT(A) has eerred in directing the AO to compute notional rent on old unusable house relying on the ratio laid down in the case of M/s. Ansal Housing Finance and Leasing Ltd. by the Hon’ble High Court of Delhi.

26. The AO had made addition of Rs.32,28,309/- under the head income from house property as assessee charged with notional rent on house property which were claimed by the assessee as old and unused property situated at Jawahar Nagar, and being held as its stock in trade. In this case the AO has taken recourse of the decision of Hon’ble Delhi High Court in the case of CIT vs Ansal Housing Finance & Leasing Co. Ltd.

27. In first appeal, the ld. CIT(A) had accepted the decision of Hon’ble Delhi High Court in the case of CIT vs Ansal Housing Finance & Leasing Co. Ltd. as mentioned by the AO in his order. The Ld AR argued that the ld. CIT(A) has not appreciated the facts as submitted by the assesse that the seven house properties forming stock-in-trade are old and damaged/dilapidated condition with no electricity and water supply and also not habitable. However, the ld. CIT(A) directed the AO to ascertain the ALV of building for which the property might reasonably be expected to let from year to year without bringing on record any corroborative supporting documentary evidences or rebuttal to the evidences filed before him by the appellant assessee. Such a decision of the ld. CIT(A) passed in mechanical manner mentioned that the AO should consider the municipal value, Standard Rent and Fair Rent receivable of houses is not justified in the eyes of law.

28. The Ld. AR argued that the decision of Ansal Housing Finance & Leasing Co. Ltd. is distinguishable on peculiar fats of the instant case. In that case, there were ready built Flats in the building for trading purposes, however, in the present case, the property was old, dilapidated condition and not fit for habitable purposes. In this situation, the building cannot be let out unless major renovation take place. Thus, Hon’ble Court applied notional rent on the income computed on the unsold constructed flats accounted as stock-in-trade which are in usable and live in conditions but in case of appellant, the house properties were in damaged condition and not fit to use.

29. The ld DR relied on the order of the ld. CIT(A).

30. We have heard both the parties and perused the materials available on record. It is noted from the available record that the assessee had 07 buildings at Jawahar Nagar which were held by the asseesse as stock in trade for trading purpose. The conditions of the house building was very old, dilapidated condition and not fit for habitable purposes. The AO also deployed his Inspector to inspect the conditions of the building whose report was silent on the evidences produced by the assessee during the assessment proceedings which approved the validity of the submission of the Assessee as to the state of affairs of the building. It is also imperative to mention that the case of Ansal Housing Finance & Leasing Co. Ltd. (Supra) cited by the authorities below does not apply to the facts of the present case. As in the case of M/s Ansal Housing Finance & Leasing Co. Ltd. (Supra) there was a new building ready to use in for habitable purpose whereas in the assesses case it was a damaged / dilapidated and inhabitable building. Therefore, the finding of the AO/CIT(A) based on decision of Ansal Housing Finance & Leasing Co. Ltd. are devoid merit. Considering the facts and circumstances of the case we do not incline to agree with the findings of the ld. CIT(A). Thus, the Ground No. 3 of the assessee is allowed.

31.  In the result, the appeal of the revenue is dismissed and that of the assesee is allowed.

Order pronounced in the open Court on 07/06/2022