Case Law Details

Case Name : Deputy Commissioner of Income-tax, Company Circle-V(3) Vs Rajeswari Foundations Ltd. (ITAT Chenai)
Appeal Number : IT Appeal No. 444 & 445 (MDS.) OF 2011
Date of Judgement/Order : 16/03/2012
Related Assessment Year : 2006-07 & 2007-08
Courts : All ITAT (4269) ITAT Chennai (215)

IN THE ITAT CHENNAI BENCH ‘B’

Deputy Commissioner of Income-tax, Company Circle-V(3)

V/s.

Rajeswari Foundations Ltd.

IT APPEAL NOS. 444 & 445 (MDS.) OF 2011

[ASSESSMENT YEARS 2006-07 & 2007-08]

MARCH 16, 2012

ORDER

George Mathan, Judicial Member

ITA No. 444/Mds./11 is appeal filed by the Revenue against the order of Commissioner of Income Tax(A)-V, Chennai in appeal No. 119/08-09 dated 30.11.10. ITA No. 445/Mds./11 is appeal filed by the Revenue against the order of Commissioner of Income Tax(A)-V, in appeal No. 406/09-10 dated 30.11.10. Shri M.N. Naik, Ld. C.I.T. DR represented on behalf of the Revenue and Shri R. Sundara Rajan, C.A., represented on behalf of the assessee.

2. It was submitted by Ld. DR that for assessment year 2006-07, there were two issues. The first was against the action of the Commissioner of Income Tax(A) in allowing capital expenses of Rs. 12,68,286/- on conversion of land held as capital assets and later converted into ‘stock in trade’. The second issue was against the action of the Ld. Commissioner of Income Tax(A) in allowing the terminal depreciation on the WDV of the cost of the factory building and land as a revenue expenditure. It was the submission that in the revenue appeal No. 445/Mds./11, there was only one issue against the action of the Commissioner of Income Tax(A) in allowing WDV being the terminal depreciation as a revenue expenditure.

3. It was the submission that the assessee had acquired land and put up a factory during 1995. It was the submission that the assessee was doing the business of offset printing and typesetting. It was the submission that in 2003, the assessee had stopped its business of offset printing and typesetting and it had converted the land and building into stock in trade. It was the submission that the assessee had shifted its business into new line of business being real estate development. On the said land, the assessee had been constructing dwelling units and had sold the same. It was the submission that during the assessment year 2006-07, the assessee had demolished 75% of the factory building and had used the land thereon for putting up the construction of the dwelling units and had also sold the same. During the assessment year 2007-08, the balance of 25% of the factory building was demolished and the land thereon used. It was the submission that when computing the business profits of the assessee, the assessee had taken the WDV of the factory building and had claimed 75% thereof for the Assessment Year 2006-07 and balance 25% for the Assessment Year 2007-08 as terminal depreciation u/s. 32(1)(iii) of the Act. Further, the assessee had incurred development cost of Rs. 21,54,602/- during 1995, which was also claimed as a revenue expenditure against the sale proceeds of the land and building, which were sold by the assessee. It was the submission that as the land and building had been converted into stock in trade in 2003, the business of the assessee of typesetting and offset printing had been discontinued. As the business had been discontinued, the terminal depreciation in respect of that business could not be claimed as expenditure in the business of real estate. It was the submission that Ld. Commissioner of Income Tax(A) erred in granting the assessee the benefit of deduction as a Revenue expenditure of both the terminal depreciation as also the development cost incurred by the assessee in respect of its business of offset printing and typesetting, which had been discontinued. It was the submission that the order of the Assessing Officer is liable to restored.

4. Ld. Authorised representative of the assessee has filed written submissions as follows:-

“For A.Y. 2007-08

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1. Loss on conversion of Land Rs. 12,68,286/-During 1995 the factory land of 69,478 sq. ft. of and was acquired at the cost of Rs. 23,50,823/- and the assessee have incurred the development cost of Rs. 21,54,602/- for the Land portion in which the Factory Building is constructed during 1995. The factory building was constructed on 14,300 sq.ft. and the development cost of land is incurred only for that portion. The total cost of land including the land development cost is included in the Fixed Assets Schedule during 1995 as cost of land.

After 2003, because of the recession imprinting industry for which the Company is originally formed, the management of the Company thought of utilizing the vacant land available for promoting independent residential dwelling units and diversified their line of activity and got necessary approvals from the Government authorities. In the first two years 2003-04 and 2004-05 only vacant factory land is utilized and only the cost of the land and the conversion value is taken into account in the books.

However, during 2005-06 accounting year, the land wherein the factory building has been constructed is demolished and the portion used for Second Phase and Third Phase of the project. The development cost has to be absorbed only in the second and third phase of units constructed and sold as independent bungalows. During 2005-06 75% of the developed land is used for construction of dwelling units and balance 25% in 2006-07. Three agreements are entered into between the individual bungalow unit buyer’s and the Assessee Company, Land sale agreement, Development agreement and the Construction agreement.

A separate development agreement is entered into between the individual bungalow unit buyers and the Assessee Company for recovering the development cost including the cost of Building demolished. The land cost and the development cost are recovered in 2005-06 and offered as income during that year.

The cost recovered from the individual bungalow units for Land and Land development is more than the cost claimed in the books of account we request you to allow the Loss on conversion of Land Rs. 4,22,762/- as expenditure. This amount is arrived at after the conversion cost of Rs. 57 per sq ft cost of land for 5003 sq ft (Rs. 2,85,174/-) as per land cost to individual bungalow units from 25% of land cost Rs. 7,07,936/- deducted in the fixed assets schedule balance of Land cost. The land and the land development cost for the some of the units in this phase is already collected in the earlier year i.e. 2005-06.

Since the development cost of the land is recovered and included in the sale of bungalow units, the land development cost recovered can be allowed as expenditure.

2. Written down value of building demolished Rs. 19,45,692/-As explained earlier during 2005-06 a portion of Factory Building (75%) is demolished and utilized the same vacant land for construction of dwelling units and sold the dwelling units as sale of Bungalow units. The Balance 25% building is also demolished during the year 2006-07. WDV value of building block now no longer exist Rs. 19,45,694/- has been debited a Written down value of building demolished and claimed as terminal depreciation relying on Section 31(1)(iii). The salvage materials are again used for building individual bungalow units constructed by the Assessee company.”

“For A.Y. 2006-07

1. Loss on conversion of Land Rs. 12,68,286/- During 1995 the factory land of 69,478 sq. ft. of and was acquired at the cost of Rs. 23,50,823/- and the assessee have incurred the development cost of Rs. 21,54,602/- for the Land portion in which the Factory Building is constructed during 1995. The factory building was constructed on 14,300 sq.ft. and the development cost of land is incurred only for that portion. The total cost of land including the land development cost is included in the Fixed Assets Schedule during 1995 as cost of land.

After 2003, because of the recession imprinting industry for which the Company is originally formed, the management of the Company thought of utilizing the vacant land available for promoting independent residential dwelling units and diversified their line of activity and got necessary approvals from the Government authorities. In the first two years 2003-04 and 2004-05 only vacant factory land is utilized and only the cost of the land and the conversion value is taken into account in the books.

However, during 2005-06 accounting year, the land wherein the factory building has been constructed is demolished and the portion used for Second Phase and Third Phase of the project. The development cost has to be absorbed only in the second and third phase of units constructed and sold as independent bungalows. During 2005-06 75% of the developed land is used for construction of dwelling units and balance 25% in 2006-07. Three agreements are entered into between the individual bungalow unit buyer’s and the Assessee Company, Land sale agreement, Development agreement and the Construction agreement.

A separate development agreement is entered into between the individual bungalow unit buyers and the Assessee Company for recovering the development cost including the cost of Building demolished. The development cost recovered from the independent Bungalow units comes to around Rs. 89,66,138/- and included in sale of bungalow units in addition to the recovery of Rs. 57 per sq ft for the land portion from individual bungalow units around Rs. 13,36,935/-.

The cost recovered from the individual bungalow units for Land and Land development is more than the cost claimed in the books of account. Hence, the Loss on conversion of Land Rs. 12,68,286/- is an allowable expenditure. This amount is arrived at after the recovery of Rs. 57 per sq. ft cost of land for 15009 sq ft (Rs. 8,55,521/-) as per land sale deed to individual bungalow units from 75% of land cost Rs. 21,23,807/- deducted in the fixed assets schedule of Land cost.

Since the development cost of the land is recovered and included in the sale of bungalow units, the land development cost recovered can be allowed as expenditure.

2. Written down value of building demolished Rs. 19,45,692/-As explained earlier during 2005-06 a portion of Factory Building (75%) is demolished and utilized the same vacant land for construction of dwelling units and sold the dwelling units as sale of Bungalow units. The above sale amount is inclusive of the development cost which includes cost of building demolished. Here cost is 75% of the opening WDV value as on 01.04.2005 (Rs. 81,48,770/-).

The 75% WDV value i.e. Rs. 61,11,577/- has been debited as Written down value of building demolished as expenditure in the profit and loss account. The balance 25% of the building not demolished during the year has been used for storage of construction materials as godown. The salvage materials on demolition of the buildings were utilized for the construction of independent dwelling units.

As per the separate development agreement entered into between the Individual Bungalow Unit buyers the cost of building demolished and the land development cost is recovered during the year amounting to Rs. 89,66,138/- shown as sale of bungalow units and offered as income in the profit and loss account. Hence the cost is recovered and shown as income in the books of account, the written down value of the building demolished can be treated as allowable expenditure and relying on Section 32(1)(iii), the written down value of the building demolished can be allowed as expenditure.

The salvage materials on demolition is again used for Construction of Individual Dwelling Units and hence the same is absorbed in the cost of construction.

3. Depreciation on building Rs. 1,19,481/-

Depreciation has been claimed for the portion of the building not demolished during the year and the same has been utilized for business purposes as godown and the assessee has stored the building materials and other tools used for construction of dwelling bungalow units. The portion of building not demolished is used only for the business purposes and hence the depreciation is claimed in our return of income.”

5. We have considered the written submissions filed by the assessee, as also the submissions made by the Ld. DR. Perusal of the provisions of Sec. 32(1) shows that the words used therein are “used for the purpose of the business or profession”. Admittedly, the assessee was in the business of offset printing and typesetting. In 2003, the assessee admittedly had converted this land and factory building into stock in trade. The Minute of the assessee company did the conversion of the land and factory building into stock in trade, the business assets of the assessee no more survived as the business asset eligible for depreciation. Once this happens, the business of the assessee would be deemed to have been discontinued. Once the business of the assessee is discontinued and the said assets are no more used for the purpose of business or profession, the provision of Sec. 32(1) are no more available to the assessee. Terminal depreciation is provided u/s. 32(1)(iii) of the Act. For claiming depreciation u/s. 32(1)(iii), it must first comply with the provisions of Sec. 32(1) of the Act that the asset is used for the purpose of business or profession. As the asset being the land and factory building, the assets were used in the business of offset printing and typesetting, which was discontinued business from 2003, the provisions of Sec. 32(1) is no more available in regard to such business as the business itself does not exist. The business of real estate is a new line of business and the land and building is the stock in trade. Further perusal of the written submissions filed by the assessee clearly shows that the development cost was incurred for the land portion in which the factory building was constructed during 1995. This is a part of the cost of the land and building. It is also claimed in its balance sheet as the asset of the business of offset printing and typesetting, which has been discontinued. As the business in respect of which the said development cost has been incurred is discontinued, the same cannot be claimed as revenue expenditure in respect of another business being real estate business, just because the land has been converted into stock in trade for the present business. In the circumstances, we are of the view that the finding of the Ld. Commissioner of Income Tax(A) on these issues are liable to be reversed and we do so. In the circumstances, the order of the Commissioner of Income Tax(A) on the issues in the appeals stand reversed and that of the Assessing Officer restored. In the circumstances, the appeals of Revenue are allowed.

6. In the result, appeals of the Revenue are allowed.

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Category : Income Tax (25154)
Type : Judiciary (9976)
Tags : ITAT Judgments (4449) section 32 (124)

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