Clause-b of sub section (1) of section 54G does not use its specific phrase ‘for the purpose of its business of under taking’ except that the business should be in non-urban area. Therefore, it can be interpreted that assessee should carry on any business in non urban area. If the amounts are utilized for acquisition of assets for the purpose of its business, this should qualify for the purpose of exemption under section 54G as there is no requirement that the land and building should be used for the purpose of the business of industrial undertaking.
INCOME TAX APPELLATE TRIBUNAL, MUMBAI
ITA No.4428/Mum/2008 – (Assessment year: 2004-05)
Dy. Commissioner of Income Tax
Enpro Finance Ltd
Date of Pronouncement: 27/06/2012
O R D E R
Per B. Ramakotaiah, A.M.
This is a Revenue appeal against the orders of the CIT (A)-8 Mumbai dated 23.4.2008. The Revenue has raised the following revised concise grounds:
“1. On the facts and circumstances of the case and in law the learned CIT (A) erred in directing AO to allow deduction under section 54G of the Act, ignoring the fact that assessee has not fulfilled the cumulative conditions laid down in section 54G(1) and hence not eligible for deduction under the said section”.
2. On the facts and circumstances of the case and in law the learned CIT (A) failed to appreciate the fact that assessee had closed its business in the financial year 1999-2000 and hence it cannot be said that a transfer was effected in the course of or in consequence of the shifting of such industrial undertaking.
3. On the facts and circumstances of the case and in law the learned CIT (A) further failed to appreciate the fact that the land acquired by assessee in the non urban area was not put to use for the purpose of its business but had been put to use for its business of development of property, which by no stretch of imagination could be termed as the business of the industrial undertaking of assessee”.
2. Briefly stated, assessee filed return of income declaring total income at Rs. 1,57,02,407/- mainly consisting of capital gains. Assessee surrendered its tenancy rights and received an amount of Rs. 4,12,00,000/-. Out of this amount assessee has invested an amount of Rs. 1,40,00,000/- in capital gain Account Scheme and an amount of Rs. 1,14,21,000/- was claimed to have been invested in land and building. It claimed deduction under section 54G of the amount of Rs. 2,54,21,000/- and offered the balance amount as taxable income. It was AO’s contention that assessee sold its entire Plant & Machinery in financial year 1999-2000 and since there is no existence of an undertaking, having sold the entire Plant & Machinery, the claim under section 54G, which provides for exemption for shifting of industrial undertaking from urban area to other than urban area is not eligible to assessee. He made elaborate discussion on this issue vide Para 7 of the order and did not allow the deduction to assessee.
3. Before the CIT (A) assessee submitted that the company decided to shift from urban area to rural area and accordingly sold the Plant & Machinery on immediate basis. However, as assessee was running the industrial undertaking for the past 45 years or so in the premises leased from M/s Patel Engineering Co. Ltd, the surrender of lease rights took some time and negotiations were going on from 1999 onwards which terminated in getting the amount which was offered as receipts in regard to surrender of leased premises. Assessee placed correspondence with the said company, minutes of the board and other documents in support of the contention that the amounts were received in connection with the shifting of the industrial undertaking from urban area. It was also submitted that the capital gains on such transfer have clearly arisen from the transfer of qualifying the capital assets under section 54G which are being used for the purpose of business of an industrial undertaking situated in urban area and was eligible for deduction under that section. It was submitted that AO’s opinion, that the industrial undertaking did not exist from financial year 1999-2000 is not correct as assessee is in existence and continue to undertake other activities and ultimately decided to do the business for the development of property for which amount was spent as per the provisions of the Act.
4. It was further submitted that assessee constructed the building costing Rs. 1.40 crores by utilizing the amount in the capital gains accounts scheme. It also made submissions on the legal provisions of section 54G before the CIT (A). After considering the submissions the CIT (A) allowed the claim by stating as under:
“The issue has been carefully examined. There is merit in the arguments of the appellant. It is not in dispute that on a consideration of Rs. .4,12,00,000/- received on surrender of leased premises, capital gain of an equivalent amount arise ad the cost of acquisition was nil and that the appellant has claimed deduction under section 54G only of Rs. .2,54,21,000/-.
The facts are that as the appellant were making continuous losses, it decided to shift it industrial undertaking which was existing in an urban area for more than 45 years to a non-urban area; consequently, it started the process of disposing off the assets of the industrial undertaking. The plant and machinery being movable owned assets could be disposed off quickly; the disposal of rights in leasehold premises took some time. However, it cannot therefore be said that the industrial undertaking ceased to exist on sale of the plant and machinery. The process of shifting commenced with the sale of plant ad machinery and continued till the rights in the leasehold premises were surrendered on which capital gains accrued to the appellant. Hence surrender of leasehold premises was effected in the course of shifting of the industrial undertaking and therefore, the capital gains thereon are eligible for deduction under section 54G. Circular No.495 cited by AO clearly supports the case of the appellant, as it has transferred its assets to shift its industrial undertaking to non-urban areas, which is the avowed intention of the statute and thereby assist in balanced regional growth.
Apart from operating the shifted industrial undertaking as mentioned by AO in the assessment order, the appellant has also undertaken the business of development of property and property planners for which it has purchased tracts of land in non-urban area for the purposes of its business in the said area. The appellant has, therefore, used part of the capital gains accruing on shifting of industrial undertaking for acquiring land and constructing building in the non-urban areas, which is an eligible investment to qualify for deduction under section 54G.
In view of the above facts and circumstances of the case, the plea of the appellant is accepted and this ground is decided in favour of the appellant”.
5. The learned DR referred to the order of AO to submit that there is no industrial undertaking in existence and provisions of section 54G are not applicable. It was his contention that on surrender of tenancy rights, the amount was to be offered in its entirety under the head capital gain and claim of section 54G is not allowable to assessee. He referred to the facts as stated by AO that assessee has sold the entire Plant & Machinery and employees have left the company way back in 1999-2000. Therefore, the entire receipt was taxable and no claim can be allowed under section 54G.
6. Learned Counsel referred to the provisions of section 54G, the facts as stated by AO and the additional evidences placed before the CIT (A) with reference to the negotiations with the land owners and other documents on record to substantiate its contentions. He relied on the order of the CIT (A).
7. We have considered the rival contentions and examined the details placed on record. It is an admitted and undisputed fact that the assessee company carried on its manufacturing activity and business at its leased premises at Jogeshwari for more than 45 years. Assessee was engaged in the business of manufacturing equipments, electrical motors and machineries. Subsequently, the company purchased plastic moulding machines and undertook labour jobs for manufacture of moulding plastic parts. Due to severe competition in the plastic industry and high operational overheads in Mumbai, the company incurred losses and the activity was commercially not feasible. During the financial year 1999-2000 the company decided to shift its undertaking to a non urban area. As the plant and machinery was very old, assessee sold them immediately but, for surrendering the tenancy rights it took sometime as it was engaged in negotiations with the lessor and after protracted negotiations, the leased premises on which the industrial undertaking operated was finally surrendered on 1.10.2003 and compensation was received. These aspects were examined by the CIT (A) whose findings are to be upheld. They are in accordance with facts and provisions of law.
8. Provisions of section 54 are as under:
“Section 54G. (1) Subject to the provisions of sub-section (2), where the capital gain arises from the transfer of a capital asset, being machinery or plant or building or land or any rights in building or land used for the purposes of the business of an industrial undertaking situate in an urban area, effected in the course of, or in consequence of, the shifting of such industrial undertaking (hereafter in this section referred to as the original asset) to any area (other than an urban area) and the assessee has within a period of one year before or three years after the date on which the transfer took place,—
(a) purchased new machinery or plant for the purposes of business of the industrial undertaking in the area to which the said undertaking is shifted ;
(b) acquired building or land or constructed building for the purposes of his business in the said area ;
(c) shifted the original asset and transferred the establishment of such undertaking to such area; and
(d) incurred expenses on such other purpose as may be specified in a scheme framed by the Central Government for the purposes of this section, then, instead of the capital gain being charged to income-tax as dealt with in accordance with the following provisions of this section, that is to say,—
(i) if the amount of the capital gain is greater than the cost and expenses incurred in relation to all or any of the purposes mentioned in clauses (a) to (d) (such cost and expenses being hereafter in this section referred to as the new asset), the difference between the amount of the capital gain and the cost of the new asset shall be charged under section 45 as the income of the previous year; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its being purchased, acquired, constructed or transferred, as the case may be, the cost shall be nil ; or
(ii) if the amount of the capital gain is equal to, or less than, the cost of the new asset, the capital gain shall not be charged under section 45; and for the purpose of computing in respect of the new asset any capital gain arising from its transfer within a period of three years of its being purchased, acquired, constructed or transferred, as the case may be, the cost shall be reduced by the amount of the capital gain.
9. The requirement of section 54G is that assessee should apply the capital gains for one or more of the specified purposes/new assets within the time specified therein as under:
• Purchase of new machinery or plant for the purposes of business of the industrial undertaking in the area where it is shifted.
• Acquire building or land of construct building for the purposes of his business in the said area.
• Shifts the original asset and transfers the establishment of such undertaking to such area.
10. A close reading of this section brings out very clearly that whereas under section 54G(1)(a), the requirement is that the new machinery or plant has to be purchased for the purposes of the business of the industrial undertaking, section 54G(1)(b) merely requires that the acquisition of building or land or construction of building should be for the purposes of its business in such nonurban area. In other words, the phrase “of the industrial undertaking”, which is there in clause 1(a) is conspicuously missing in clause 1(b). Hence, the law clearly makes a distinction between the eligible purposes for utilization of the amount of capital gains.
11. The said section exempts capital gains on compulsory acquisition of land or building or any rights in land or building forming part of the industrial undertaking and used for the purposes of the business of the industrial undertaking, provided the amount of capital gains are used for acquiring any other land or building or any rights therein or constructing any building for the purposes of shifting or re-establishing the said undertaking or setting up another industrial undertaking. Section 54D mandates that, for the capital gains to exempt, the new land or building or rights therein acquired, have to be used only for either shifting or reestablishing or establishing an industrial undertaking (and no other purpose). In contrast, section 54G of the Act permits the use of capital gains for acquiring land or building or constructing building for the purposes of (any) business in the non-urban area.
12. “For the purpose of business” was interpreted by the Hon’ble Bombay High Court in the case of Krishna Sahakari Sakhar Karkhana Ltd v. CIT 229 ITR 577:
“The expression “for the purpose of the business” is wider in scope than the expression “for the purpose of earning profits”. Its range is wide: It may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for the carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business. The only limitation is that it should be for the purpose of the business, that is to say, the expenditure incurred should be for the carrying on of business and assessee should incur it in his capacity as a person carrying on the business”.
13. Further in the case of CIT vs. Lake Palace Hotels and Motels (P) Ltd, 251 ITR 0644, the Hon’ble Rajasthan High Court interpreted:
“a perusal of the scheme of section 32A of the Income Tax Act, 1961, makes it abundantly clear that investment in anything which can be termed in a generic sense as plant and machinery used for the purposes of business has not been made eligible to claim investment allowance and a deduction in respect of such investment, but only such plant and machinery used in business which fulfils further essential conditions and requirements required for laying claim to such deductions. The key words used in this section are for the purpose of business of construction, manufacture or production of any article or thing”.
Therefore, as clause-b of sub section (1) of section 54G does not use its specific phrase ‘for the purpose of its business of under taking’ except that the business should be in non-urban area. Therefore, it can be interpreted that assessee should carry on any business in non urban area. If the amounts are utilized for acquisition of assets for the purpose of its business, this should qualify for the purpose of exemption under section 54G as there is no requirement that the land and building should be used for the purpose of the business of industrial undertaking.
14. The argument that assessee’s industrial undertaking ceased to exist in 1999-2000 as held by AO is not correct as assessee is in the process of shifting and even the section itself provides that shifting was ‘in course of or in consequence of’ of such industrial undertaking”. The surrender of tenancy rights has certainly occurred ‘in consequence of’ shifting of such industrial undertaking and due to protracted negotiations, there was some delay but the surrender of tenancy rights can be held to be in consequence of shifting of such undertaking which was in the business. Therefore, AO’s observation that no industrial undertaking was in existence at the time of surrender of tenancy rights cannot be accepted.
15. It is also seen that in his anxiety to disallow the claim AO has not even considered the amount of Rs. 1.40 crores deposited in capital gains scheme. This amount was eligible for deduction even under other provisions of the act, if not under section 54G. Be that as it may, there is no dispute with reference to the fact that assessee has utilized the funds as per the provisions of section 54G and accordingly the CIT (A) was correct in allowing the claim. We, therefore, uphold the order of the CIT (A) and dismiss the Revenue grounds.
16. In the result, appeal filed by the Revenue is dismissed.
Order pronounced in the open court on 27th June, 2012.