Hirsh Bracelet India Pvt. Ltd. Vs ACIT (ITAT Bangalore)
Section 50 of the Act is a special provision for computation of capital gains in case of depreciable assets and is applicable only to capital assets forming part of Block of Assets on which depreciation has been allowed under the Act. and also only for the purposes of sections 48 and 49 of the Act.
It is undisputed that the capital assets transferred by the assessee are lease hold right in the land (acquired in 1991) and building on the land constructed subsequently. It is undisputed that right in lease hold land cannot form part of any Block of Assets on which depreciation can be claimed. It is undisputed that no depreciation was claimed or allowed under the Act on the right in lease hold land. It is also undisputed that buildings form a part of Block of Assets on which depreciation and that depreciation was claimed and allowed under the Act on the buildings.
On a plain reading of section 50 of the Act, it is clear that it is applicable for transfer of buildings and not for transfer of right in lease hold land. Therefore, the Capital Gains on the transfer of the right in lease hold land has to be computed under the normal provisions as Long Term Capital Gains and the Capital Gains on the transfer of the buildings has to be computed under the provisions of section 50 as Short Term Capital Gains. The observations of the CIT(Appeals) contrary to the aforesaid provisions are unsustainable and are hereby vacated. The ld. counsel for the assessee has in this regard rightly placed reliance on the decision of Hon’ble Rajasthan High Court in the case of CIT v. Vimal Chand Golecha [1993] 201 ITR 442 (RAJ.) wherein it was held that when price of two capital assets is charged at one consolidated price, where a gain from one of capital assets was a short-term capital gain while from other it was a long term capital gain, then the assessee is entitled to bifurcate the same and benefit to assessee could not be denied in respect of gain arising from sale of an asset which could be considered as long-term capital gain.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal by the assessee is directed against the order dated 24.10.2018 of the CIT(Appeals)-3, Bangalore relating to assessment year 2015-16.
2. The concise grounds of appeal filed by the Assessee reads as follows:-
“1. The order of the learned CIT(A) is against the provisions of law and contrary to the facts of the case and is therefore unsustainable.
2. The learned CIT(A) erred in law and on facts in holding that operations of the Company have stopped without considering that the Company was still in existence and the expenditure was needed to be made for maintaining the legal status and for disposing the assets and settling the liabilities.
3. The learned CIT(A) erred in law and on facts in holding that decision of Hon’ble Supreme Court in Goetz (India) Ltd Vs Commissioner Of Income Tax (2006) 157 Taxman 1, where no scrutiny assessment was pending, was applicable to appellant’s case without appreciating the fact that in the appellant’s case scrutiny was pending before the assessing officer.
4. The learned CIT(A) failed to appreciate that u/s 143(3) of the Income Tax Act, 1961 it is the responsibility of the assessing officer to conclude an assessment after taking into account all the material produced by the Appellant and gathered by the assessing officer. It is incumbent on the assessing officer to consider the submissions of the Appellant on assessability of the capital gains on the sale of land as Long-Term Capital Gains.
5. The learned CIT(A) erred in upholding the assessment order which is against the CBDT Circular No. 14(XL-35) dated April 11, that has been judicially noted and approved.
6. The learned CIT(A) erred in law and on facts in holding that transfer of leasehold land along with the buildings on it leads to short-term capital gains u/s 50 of the Income Tax Act, 1961 without appreciating that Sec 50 of the I.T.Act,1961 is applicable in the case of depreciable assets, and land/lease hold land is not a depreciable asset.
7. The learned CIT(A) erred in law and on facts in holding that it is not possible to bifurcate the consideration between land and buildings.”
3. The additional grounds of appeal sought to be raised by the assessee reads as follows:-
“1. The learned CIT(A) erred in law and on facts in not allowing the set off of unabsorbed depreciation u/s32(2) rws 71 of the I.T. Act.
2. The learned CIT(A) erred in law and on facts in not allowing the set off of brought forward business loss against the short term capital gains on sale of business assets.”
4. The above additional grounds sought to be raised by the Assessee were grounds of appeal which were agitated by the Assessee before the CIT(A) but were not adjudicated by the CIT(A). These grounds are therefore admitted for adjudication.
5. There are basically three issues to be decided in this appeal viz.,
(i) Disallowance of expenses of Rs.1,08,54,687;
(ii) Non-consideration of claim of assessee that capital gain on sale of land and building has to be bifurcated into two i.e,
(a) capital gain on sale of land which has to be regarded as long term capital gain; and
(b) capital gain on sale of a building has to be regarded as short term capital gain u/s. 50 of the Income-Tax Act, 1961 [“the Act”]; &
(iii) claim of assessee for set off of unabsorbed depreciation u/s. 32(2) r.w.s. 71 of the Act.
6. The assessee is a company engaged in the business of manufacturing of wrist watch straps. The assessee took land at Plot No. 45, Part SF 646 PT, 647 PT, 648 PT 650 PT, SIPCOT Complex 1, Hosur-635126 from State Industries Promotion Corporation of Tamil Nadu Ltd (SIPCOT) on lease for a period of 99 Years for the purpose of setting up a unit for designing, importing, exporting, dealing in and manufacture of wrist watch straps. The assessee put up a factory on the leasehold land and carried on the business of manufacture of wrist watch straps from 1992.
7. Due to operational difficulties and continued business losses over the years, it ceased manufacturing operations in the year 2006 and continued with trading operations till 2010 when it finally decided to close down the business. As the assessee was operating from the leasehold land allotted by SIPCOT, it had to seek permission from SIPCOT to transfer the leasehold rights over the land as well as the factory shed built over the land to a buyer. It entered into a Memorandum of Agreement dated 27th November 1991 with M/s Devas Engineering Pvt Ltd to transfer the leasehold interest in the land and ownership rights over the building thereon subject to approval from SIPCOT. Approval of SIPCOT was received vide Approval letter dated 06/02/2014 and the transfer of leasehold land and building was completed thereafter. Permission and approval were further subject to payment of dues and claims which prevented the assessee from commencing the procedure of Closing and Winding up of Business.
8. Also, due to pending claims of creditors, labour matter, sales tax demands and property tax dues, the assessee had to incur expenses towards Office Rent, Legal Professional Fees, Property Maintenance Charges, fees towards meeting compliance under Companies Act, Income Tax Act and other Statutory applicable laws.
9. In the return of income filed for A.Y. 2015-16 on 30/11/2005, the assessee returned Capital Gains on transfer of leasehold rights in land and buildings put up on it by the assessee as Short Term Capital Gains at Rs. 3,67,67,836 and after adjusting current years business expenses of Rs. 1,08,54,687 (including depreciation as per the I.T. Act) under the applicable provisions of the Income Tax Act, 1961 (Set off provision under section 71 of the Act), returned a total taxable Income of Rs. 2,59,15,640.
10. In the assessment proceedings, the assessee claimed that the sale of the leasehold rights over the land that was sold gave rise to long term capital gain (LTCG). That the sale of building was taxable as short term capital gain (STCG) u/s. 50 of the Act as the building was a depreciable asset and was part of the block of assets of ‘building’ on which the assessee had claimed depreciation. The plea of assessee was that whenever an asset comprising of land & building is sold, capital gain has to be computed by bifurcating sale consideration towards land and building. Land is not a depreciable asset and therefore capital gain on sale of land has to be computed as LTCG as it was held by the assessee for more than 36 months. The assessee submitted that by mistake (wrong advise), the assessee had declared capital gain on sale of land & building as STCG in the return of income.
11. In the assessment order dated 24/11/2017 passed u/s 143(3) of the Act, the Assessing Officer (AO) disallowed the setting off of the expenditure of Rs.1,08,54,687 against the Capital gains, stating that there was no business and that the expenditure claimed is disallowed u/s 37 of the Act. Out of the expenditure, reimbursement of expenditure of Rs.13,41,015 was also held to be not allowable because no TDS was made on it. Regarding the submissions on recomputation of Capital gains and set off of brought forward business losses, the AO assessed capital gains on sale of land and buildings as Short Term Capital Gains and did not set off the brought forward business losses. No reasons were assigned by the AO for doing so.
12. The assessee preferred an appeal against the assessment order before the CIT(Appeals). The learned CIT(A) dismissed the appeal. He held that as the business was completely stopped, the action of the AO in disallowing the expenditure of Rs. 1,08,54,687 cannot be faulted with. Citing the decision of Hon’ble Apex court in the case Goetze (India) Ltd Vs. Commissioner of Income-tax [2006] 157 Taxman 1 (SC), he held that the claim of the assessee for recomputing the Capital gains declared as STCG cannot be considered by the AO in the absence of a revised return.
13. The assessee is in appeal before this Tribunal against the order of the CIT(Appeals).
14. We have heard the rival submissions on the issue of disallowance of expenses of Rs. 1,08,54,687. The ld. counsel for the assessee relied on the decision of jurisdictional High Court in the case of CIT v. Lawrence D’Souza [2011] 15 com 148 (Karnataka) rendered on very similar facts. In that case the assessee was engaged in running a hotel and he stopped his business from August 1994 onwards due to labour problem. The business premises was a leased premises and was sold along with furniture, fixtures, etc., during the previous year relevant to A.Y. 1996-97. In the return of income, the assessee claimed deductions for expenditure including for renovation of the buildings after the business was stopped, post operative rent and post operative interest. The Hon’ble Court rejected the contention that no deduction is to be allowed as the business was completely stopped and also that the expenditure claimed was also not substantiated. It held that the liabilities like paying rent etc., are not personal liabilities of the assessee and that all the expenditure including the expenditure for renovation of buildings etc., incurred after the business was stopped has to be allowed, though the business was stopped in the year 1994.
15. The ld. counsel for the assessee submitted that the assessee has to maintain its legal status as a company till the assets are disposed and liabilities are paid. He brought to our notice the break-up of the various expenses claimed which are as follows:-
