Nature of capital gains on transfer of buildings /right in lease hold land

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:-

16. He pointed out that the aforesaid expenditure incurred by the assessee was essential for the purpose of maintaining the legal status and for disposing the assets. Further neither the AO nor the CIT(A) have doubted the incurring of the expenditure.

17. The ld. DR relied on the order of CIT(Appeals).

18. We have considered the rival submissions. It is an undisputed fact that though business of assessee came to a halt in the year 2010, yet the assessee was liquidating its assets. The assessee had only a leasehold rights on the land and it had to get the permission of SIPCOT for transfer of leasehold rights. That approval came to assessee only on 06.02.2014. The process of transfer could be completed only during the previous year. A look at the various expenses which were claimed as deduction would show that they were, rather, of the registered office, professional charges, audit fees and property maintenance charges. All these expenses had to be incurred since the assessee was a company and it was required to maintain its legal status till the assets of the company are liquidated. The major portion of expenses claimed is on account of sales tax demand of Rs.53.33 lakhs, property tax, audit fees, property maintenance, settlement amount paid on labour court’s order. It is therefore clear that all these expenses had to be incurred for proper liquidation of assets of the company. In identical circumstances, the Hon’ble High Court of Karnataka in the case of Lawrence D’Souza (supra) took the view that expenditure in question had to be allowed in AY 1996-97, though business came to a halt in the year 1994. Following the aforesaid decision of Hon’ble High Court of Karnataka, we are of the view that the expenses in question have to be allowed as a deduction. This issue is accordingly decided in favour of assessee.

19. As far as the other issue of capital gain on sale of land & building is concerned, the ld. counsel for the assessee submitted that the assessee had wrongly treated the entire capital gains as short term capital gain in its return of income and the same needs to be treated as short term capital gains for sale of building and long term capital gains for leasehold rights in land. He brought to our notice that the CIT(A) rejected the claim of assessee only for the reason that assessee has shown short term capital gains from sale of its capital assets in its return of income. The CIT(A) dismissed the claim of assessee holding as follows:-

“………. No revised return of income was filed by the assessee. So the claim of the assessee could not have been considered by the AO in view of the binding decision of Hon’ble Supreme Court in the case of Goetz (India) Ltd. v. Commissioner of Income Tax 12006] 157 Taxman 1(SC). The power of AO to entertain a claim for deduction otherwise than by filing a revised return was considered by the Hon’ble Supreme Court in this case and the court held that the AO had no such power to entertain any claim of fresh deduction by the assessee, if the same was not filed by way of revised return. Further the building is a depreciable asset and the land on which it is situated cannot be segregated as the sale of land and building is as a whole and separate values to the same have not been assigned during sale. The claim of the assessee that the sale price should be considered to be book value of the building and the balance amount needs to be considered as related to the leasehold rights of land is without any basis. Considering above the grounds of appeal 7 to 9 of the appellant are dismissed.”

20. The ld. counsel for the assessee relied on the decision of the Hon’ble Madras High Court in the case of Commissioner of Income-tax, Chennai v. Abhinitha Foundation (P.) Ltd. [2017] 83 taxmann.com 100 (Madras) wherein on a review of various decisions on the matter including the decision in Goetze (India) case, has held that the claim can be considered by the appellate authorities including the CIT(A) and also on remand by the assessing officer. The relevant portion of the judgement is extracted below:-

“18. In sum, what emerges from a perusal of the ratio of the judgments cited above, in particular, the judgments rendered by the Supreme Court in Goetze’s India Ltd.’s case (supra) and National Thermal Power Co. Ltd.’s case (supra), and those, rendered by the Division Bench of this Court in Ramco Cements Ltd. (supra) and Malind Laboratories (P.) Ltd. (supra) as also the judgments of the Delhi High Court in Sam Global Securities Ltd.’s case (supra) and Jai Parabolic Springs Ltd.’s case (supra), that, even if, the claim made by the assessee company does not form part of the original return or even the revised return, it could still be considered, if, the relevant material was available on record, either by the appellate authorities, (which includes both the CIT (A) and the Tribunal) by themselves, or on remand, by the Assessing Officer. In the instant case, the Tribunal, on perusal of the record, found that the relevant material qua the claim made by the assessee company under Section 80 IB (10) of the Act was placed on record by the assessee company during the assessment proceedings and therefore, it deemed it fit to direct its reexamination by the Assessing Officer.

18.1 In our opinion, the view taken by the Tribunal is unexceptionable and therefore, does not merit any interference.”

21. He submitted that similar decisions have been rendered by the Hon’ble Bombay High Court in the cases: CIT v. Prabhu Steel Industries (P.) Ltd [1988] 171 ITR 530 (Bombay) and CIT v. Pruthvi Brokers & Shareholders [2012] 23 com 23 (Born.). He pointed out that during the assessment proceedings and the proceedings before the CIT(A), the assessee submitted the details of the transfer of lease hold right in the land and building on the land along with the supporting documents and neither the AO nor the CIT(A) have commented adversely on them. It was submitted that the claim of the assessee for correct computation of the Capital gains should be considered by this Tribunal as the relevant record was available on record with the AO and the CIT(A).

22. We have considered the submissions of the ld. counsel for the assessee and are of the view that the CIT(Appeals) ought to have examined the claim of assessee that the capital gain on sale of land & building should be bifurcated by considering the land as a separate capital asset and computed as long term capital gain on its transfer and by considering the building being a depreciable asset as liable to capital gain in accordance with the provisions of section 50 of the Act. The CIT(Appeals) had the power to examine the claim and decision cited by the ld. counsel for the assessee before us clearly supports the proposition that the decision of the Hon’ble Supreme Court in the case of Goetz (India) Ltd. (supra) will not stand in the way of appellate authority examining the claim of assessee and also remanding such a claim to the AO, if the circumstances warrant. We therefore direct the AO to examine the claim of assessee as put forth before the CIT(Appeals), after affording the assessee opportunity of being heard.

23. We are of the view that 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.

24. 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.

25. 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.

26. As far as the issue of set off of business loss and unabsorbed depreciation is concerned, a specific ground was raised by the assessee before the CIT(Appeals), but the CIT(A) has not rendered any decision specifically on this issue. It is a fact that during the assessment proceedings it was submitted to the AO that profit on transfer of a business depreciable asset (which is determined under section 50) and taxable as short-term capital gain under the head “Capital gains” is an income in nature of income of business and the assessee can claim set off of unabsorbed business losses against such income. Decision of the ITAT Mumbai in Digital Electronics Ltd VS CIT (2012) 49 SOT 65 was cited in support. However, in the assessment order, no set off was given for the brought forward business loss.

27. The following are the brought forward business loss and unabsorbed depreciation of the assessee:-

28. As per section 32(2) of the Act, the unabsorbed depreciation is deemed to be current year’s depreciation and can be set off against Capital Gains as per section 71 of the Act. The AO is directed to examine the claim of assessee for set off in the light of other observations in this order.

29. In the result, the appeal by the assessee is partly allowed

Pronounced in the open court on this 03^rd day of July, 2019.