During the year, the assessee sold its factory building which formed a part of its block of assets. The capital gain of Rs. 49,36,293 arising from the sale of the factory building was claimed to be deductible u/s 54EC. The bonds qualifying for deduction u/s 54EC were not available and as a result of various representations, the CBDT had extended the time period for subscribing the bonds upto 31.12.2006, vide its Circular No. 142/9/2006 TPL, dated 30.6.2006. Before filing the return of income, the assessee had deposited Rs. 50 lakh through a fixed deposit with the State Bank of India and had in a letter intimated to the banker that the fixed deposit would be en cashed as soon as the bonds were available. Along with the return of income, the assessee had appended a note explaining the factual position and stating that it will subscribe to the bonds as soon as the same were available. The bonds were available on 22.1.2007 and the assessee applied for them on 27.1.2007, whereupon the bonds were allotted to him on 31.1.2007.
The Assessing Officer held that since the capital asset transferred formed a part of the block of assets, s. 50 deems the gain arising on transfer thereof to be a short-term capital gain arising from the transfer of a short term capital asset. He also held that though the circular extended the time period up to 31.12.2006, the bonds had been purchased on 31.1.2007 which was beyond the due date specified. He, therefore, disallowed the claim of the assessee.
Aggrieved, the assessee preferred an appeal to the CIT(A), who held that following the ratio of the decision of the Bombay High Court in the case of Ace Builders P. Ltd. 281 ITR 210 (Bom), the assessee was entitled to deduction u/s 54EC, subject to satisfaction of conditions stated therein. Since the bonds were not subscribed to by the due date extended by the CBDT circular, the assessee was held not to be entitled to deduction u/s 54EC.
Held : On the basis of facts, the Tribunal held that it was an impossible task for the assessee to comply with the time period laid down u/s 54EC. The delay in purchase due to non-availability of the bonds was held to be a reasonable cause, and the assessee was held to be entitled to exemption u/s 54EC. The Tribunal also noted that in the case of Ram Agarwal 81 ITD 163, on similar facts, it had been held by the Tribunal that the assessee was entitled to claim deduction u/s 54EC. The Tribunal allowed the appeal of the assessee.
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH ‘C’ MUMBAI
BEFORE SHRI R K GUPTA, JM & SHRI B RAMAKOTAIAH, AM
ITA No. 2200/Mum/09
(Asst Year 2006- 07)
|M/s Cello Plast
5 Vakil Indl. Estate
Goregaon (E), Mumbai
|Vs||The Dy Commr of Income Tax
Cen.Cir 39, Mumbai
Assessee by: Shri A V Sonde
Revenue by: Shri Hari Govind Singh
PER R K GUPTA:
This is an appeal by the assessee against the order of the CIT(A) relating to assessment year 2006-07.
2 The first two issues in appeal of the assessee are against in not allowing legal and professional charges of Rs. 1,37,500/- and Rs. 2,28,757/- disallowed on account of deprecation.
3 During the assessment proceedings, the AO noticed that the assessee has declared total sales of Rs. 7,38,299/-. The sale was only of the opening stock available at the beginning of the year amounting to Rs. 7,63,662/-. The AO further noted that no other business activity was actually carried out by the assessee during the year. By further observing that the assessee has closed down the business activities of the concern and therefore, various expenditure clamed in P&L account are not allowable. The explanation of the assessee that the expenses incurred by the assessee during the year are allowable expenses because the assessee is in business was not accepted by the AO. It was further observed by the AO that the assessee has sold its factory building and has also surrendered its electricity meter. Therefore, there is no reason to incur various expenses which are claimed in the P&L account for business purposes. Accordingly, the AO disallowed the entire expenditure of Rs. 5,54,991/- claimed in the P&L account.
3.1 The CIT(A) partly allowed the ground of the assessee by allowing expenses on account of bank charges, ESIC, Insurance, rebate and discount. The expenses claimed on account of legal and professional charges at Rs. 1,37,500/- and depreciation of Rs. 2,28,757/- was not allowed against which the assessee is in appeal here before the Tribunal.
4 After considering the submissions of both sides, we find that the assessee deserves to succeed in this ground. The CIT(A) has confirmed the dis allowance for the reason that details of legal and professional charges were not filed. The ld counsel of the assessee has invited our attention on the details filed before the CIT(A). In these details, it has been clearly mentioned that these expenses were incurred on account of legal and professional charges. The payments are not in dispute. The other expenses which were not allowed by the AO have been allowed by the CIT(A); therefore, this is not the case that the expenses are not allowable. The details have been filed by the assessee. Therefore, in our considered view, the dis allowance of expenses on account of legal and professional charges was not justified.
5 Similarly, we find that the depreciation disallowed by the lower authorities was claimed on the assets which were not sold by the assessee during the year under consideration. These assets were part of block of assets. Sales have taken place; therefore, this is not the case that the assessee has sold the entire plant and machinery and no asset remained with the assessee.
6 In similar circumstances, in the case of G R Shipping Ltd, D Bench of the Tribunal has decided the issue in favor of the assessee while deciding the appeal in ITA No. 822/Mum/05 for AY 2001-02 vide order dated 17.7.2008. Copy of the order of the Tribunal is placed on record. Therefore, we hold that depreciation claimed by the assessee is allowable. Accordingly, we direct the AO to allow the deduction on account of legal and professional charges and also depreciation. Accordingly, we allow these grounds of the assessee.
7 The remaining issue is against in not allowing deduction u/s 54EC at Rs. 45,36,293/-.
7.1 The AO, in his assessment order, has observed that in the computation of income an amount of Rs. 49,36,293/- was accrued to the assessee during the year which was claimed exempt as per provisions of section 54 of the I T Act. The assessee, in the computation of income, appended a note in which it has been stated that a sum of Rs. 50 lacs has been deposited in FD since the amount to be invested in bonds u/s 54E could not be invested as the bonds were not available in the market for purchase; as soon as the bonds are available, the said FD will be utilized for the purchase of bonds. No other details such as date of sale, total sale consideration, name and address of the person to whom the asset has been sold was attached with the return of income. The AO further observed that the correct section of the I T Act for claiming exemption on the basis of the above facts is 54EC of the I T Act and not 54E as claimed by the assessee in the return of income. The assessee was required to explain as to why the exemption should not be denied.
7.2 The assessee vide letter dated 11.9.2008 has stated that the firm has sold its factory building on 22.3.2006 and due to the sale there is a long term capital gain of Rs. 49,36,293/-. Since the assessee wants to avail the exemption u/s 54EC of the Act, it has to invest Rs. 50 lacs within six months from the date of sale in any specified bonds having exemption u/s 54EC of the Act. It was further explained that with a view to remove the hardship caused to taxpayers, the CBDT in exercise of powers conferred by clause (C) of sub. Section (2) of sec. 119, ordered by way of Circular no.F.no.142/9/2006 TPL dated 30.6.2006 that the limitation of six months for making investments u/s 54EC of capital gains arising from the transfer of a long term capital assets is extended upto 31.12.2006, but no such bonds are available in the market upto 31.10.2006, which is the due date for filing of the return. The amount of capital gain has been invested in REC bonds on 31.1.2007 as and when scheme was available to avail the exemption u/s 54EC of the Act. The FDR with SBI was with clear instructions to clarify the intention to invest the amount in bonds u/s 54EC of the Act as and when they are available.
7.3 The AO, after considering the reply found that the bond had extended upto 31.12.2006; however, the assessee has purchased the bonds on 31.1.2007. Therefore, the assessee is not entitled for deduction as bonds were not purchased within the time allowed. The AO also held that the factory building is an asset on which depreciation was claimed by the assessee. As per provisions of section 50 of the Act, capital gain on transfer of the depreciable asset shall be deemed to be capital gain arising from the transfer of short term capital asset. On the basis of this provision also the claim of the assessee was held as not allowable.
8 The contention raised before the AO were reiterated before the CIT(A). It was further submitted that exemption u/s 54EC is available to the assessee even if the asset transferred was depreciable asset. Reliance was placed on the decision of the Hon’ble Bombay High Court in the case of Ace Builders P Ltd reported in 281 ITR 210 in which the Hon’ble Court has held that deemed fiction created in sub. section (1) and (2) of sec. 50 is restricted only to the mode of computation of capital gains contained in sec. 48 and 49 and does not apply to other provisions. A fiction created by the legislature has to be confined to the purpose for which it is created. Further, section 54E does not make any distinction between any depreciable asset and non-depreciable asset. Exemption available u/s 54E cannot be denied by referring to fiction created u/s 50. Benefit of section 54E is available to the assessee irrespective of the fact that the computation of capital gains is done either u/s 48 and 49 or u/s 50.
9 After considering the submissions and perusing the material on record, the CIT(A) allowed the ground of the assessee in part. The CIT(A) held that the decision of the Hon’ble Bombay High Court in the case of Ace Builders is squarely applicable on the facts of the present case; therefore, the assessee is entitled for deduction subject to fulfillment of other conditions u/s 54EC of the Act. The CIT(A) further held that conditions for claiming of deduction u/s 54EC are not satisfied as the bonds were not purchased even within the extended time allowed by CBDT. Therefore, denial of exemption u/s 54EC on this issue was upheld.
10 The ld counsel of the assessee reiterated its contentions raised before the lower authorities here before us. It was further submitted that no bonds were available at the time of filing of return. Even upto 31.12.2006, the bonds were not available. The bonds were available only on 22.1.2007. Immediately after five days i.e. 27.1.2007 the assessee applied for purchase of bonds and on 31.1.207 the bonds were allotted to the assessee. Therefore, this was an impossible task to the assessee to buy the bonds within the specified time as the bonds were not available. Reliance was placed on the decision of the Tribunal reported in 81 ITD163. Attention of the Bench was drawn on paras 15 to 20 of the order of the Tribunal where in similar circumstances, the claim of deduction u/s 54F was allowed. On the other hand, the ld DR placed reliance on the order of the CIT(A).
11 We have heard the rival submissions and considered them carefully. After taking into consideration all the facts and material on record, we find that the assessee deserves to succeed in this ground also. There is no dispute that the assessee has sold its capital asset i.e. plant and machinery during the year under consideration. For claiming exemption u/s 54EC, upto Rs. 50 lac has to be invested in purchase of specified bonds. The assessee approached the concerned authorities. However, the bonds were not available. Various entities approached CBDT. Taking into consideration the hardship faced by various entities, the CBDT vide circular no. 142/9/2006TPL dt 30.6.2006 extended the time for purchasing the specified bonds upto 31.12.2006. The assessee approached the appropriate authorities to buy the bonds; however, they were not available. Therefore, it was an impossible task for the assessee to comply with the conditions of sec. 54EC. The assessee ultimately purchased FDs of Rs. 50 lacs with a view to buy specified bonds whenever they are available. Letter was issued to the SBI while purchasing FDs of Rs. 50 lacs that the bonds are not available in the market and therefore, FD for an initial period of 90 days which may be extended further or may be redeemed prior to expiry date for investing the same in bonds qualified u/s 54E of the Act. Copy of the letter dated 30.10.2006 is placed at page 6 of the compilation. Copies of the FDs are placed at pages 7 & 8 of the compilation. Copy of the letter issued by Rural Electrification Corpn Ltd along with copy of bond certificate is placed at pages 9 of the compilation. In this allotment, it is clarified that the assessee applied for purchase of bonds on 27.1.2007 and they are allotted on 31.1.2007. 500 bonds for a consideration of Rs. 50 lacs were allotted. The bond certificate is also placed at page 10 of the compilation.
11.1 From these facts, it is clearly established that there was reasonable cause in not purchasing these specified bonds within the specified time allowed as they were not available in the market. As soon as the bonds were available in the market, the assessee immediately purchased the same. Therefore, in our considered view, under these circumstances, the assessee is entitled for exemption u/s 54EC.
12 On similar facts, the Tribunal in the case of Ram Agarwal reported in 81 ITD 163 has allowed the deduction to the assessee. In this case, the facts are that the assessee had claimed an exemption u/s 54F in respect of long term capital gain. The return of income originally was filed on 31.8.1995 in which the assessee had shown a business income apart from income from other sources and long term capital gains on sale of property. The requisite deposit to avail exemption u/s 54F was made by the assessee on 1.9.1995. The AO disallowed the claim of the assessee for exemption u/s 54F on two grounds viz first the assessee did not have regular business income and so the prescribed date for filing the return was 30.6.1995 treating it as income from other sources instead of 31.8.1995; secondly, even if the assessee was having business income the deposit was still not made within the prescribed time i.e.31.8.1995, and the deposit was made on 1.9.1995. The CIT(A) found that there was a strike in the bank and that it was also certified by the concerned bank official of PNB in which the deposit was made. So according to the CIT(A), the aspect of deposit being made on 1.9.1995 had no particular relevance; accordingly, he held that commission earned by the assessee was not business income and since commission income was not business income, the due date for filing the return as 30.6.1995. On appeal, the Tribunal allowed the claim of the assessee by holding that due to exceptional circumstances the assessee could not deposit the amount within the prescribed time.
13 In view of the facts and in the view of the decision of the Tribunal in the case of Ram Agarwal (supra), we held that the assessee is eligible for deduction u/s 54EC; accordingly, we direct the AO to allow the claim of exemption, as claimed.
14 In the result, the appeal of the assessee is allowed.
Order pronounced on 19.01.2010
( B RAMAKOTAIAH )
( R K GUPTA )
Place: Mumbai: Dated: 19th, Jan 2010