No substantial question of law would arise especially in a situation where a finding of fact is not demonstrated to be contrary to the evidence on the record

HIGH COURT OF BOMBAY,

CIT Vs Scindia Investment Pvt. Ltd.,

APPEAL NO: ITA No. 2416 of 2009

March 31, 2010

ORAL JUDGMENT

(Per DR.D.Y.CHANDRACHUD, J.):

1. In an appeal which arises out of an order passed by the Income Tax Appellate Tribunal on 6th March, 2009 the Revenue seeks to espouse the following substantial question of law :

“Whether on the facts and in the circumstances, and in law the Tribunal was right in holding that Padma Vilas Palace was not a building used as a hotel?”

Since the question as framed above comprehensively covers all the issues which were sought to be raised in the several questions which have been formulated in the memo of appeal, counsel appearing on behalf of the Revenue has stated before the Court that the challenge is being addressed before the Court to the order of the Tribunal in terms of the formulation set out above.

2. The assessee is the owner of a hotel at Gwalior called Usha iran Palace Hotel. The assessee also owned an immovable property at Pune consisting of an area of 48,480 sq. mtrs. A structure by the name of Padma Vilas Palace was constructed on the property. The dispute in the present case relates to Assessment Year 19992000. Following an agreement to sell dated 30th June, 1998, the assessee by a registered deed of conveyance dated 9th November, 2008 conveyed to the Indian Hotels Company Limited 42.13% of the undivided share in the land more particularly described in the First Schedule together with the structure of Padma Vilas Palace at and for a consideration of Rs.11.50 Crores. A portion of the property had been developed earlier by the construction of bungalows and row houses for which agreements for sale had been entered into by the assessee. By the terms of the deed of conveyance, the assessee conveyed to the purchaser 42.13% of the undivided share in the land, the structure of Padma Vilas Palace and the right to use and enjoy the property described in the Second Schedule (admeasuring 16,105 sq. mtrs) which was delineated on a plan annexed thereto. The total sale consideration under the agreement between the assessee and the Indian Hotels Company was distributed as Rs.7.5. Crores for the land and Rs.4 Crores for the building. In addition, a noncompete agreement was entered into between the assessee and the purchaser on 25th November, 1998 by which in consideration of the payment of a sum of Rs.1 Crore to the assessee, the assessee undertook that for a period of twenty five years it shall not compete directly or indirectly with the purchaser by setting up or running a hotel within the limits of the Municipal Corporation of Pune and the Cantonment limits.

3. The assessee acquired office premises at Phoenix House in Mumbai for a total consideration of Rs.3,13,15,100/. During the course of the proceedings relating to the assessment for Assessment Year 19992000, the assessee claimed a set off of the amount invested towards the purchase of the premises at Phoenix House against the consideration that was realized on the sale of the immovable property at Pune, under the provisions of Section 50(2) of the Income Tax Act, 1961. On this basis the short term capital gain was computed at Rs. 85,08,270/. The Assessing Officer came to the conclusion that the immovable property at Pune was a building which was used as a hotel whereas the property which is acquired at Mumbai did not belong to the same block of assets within the meaning of Section 2(11) of the Act. In the circumstances, the Assessing Officer was of the view that the assessee would not be entitled to a set off of the amount paid for the purchase of the property at Mumbai against the consideration realized from the sale of the immovable property at Pune. On this basis, the short term capital gain under Section 50(12) was computed at Rs.3,98,23,370/- instead of the figure of Rs.85,08,270/computed by the assessee. According to the Assessing Officer, the intention of the assessee was to treat the building known as Padma Vilas Palace as a hotel building. Consequently, this was held to fall under a separate block of assets, distinct from the block in which the office premises at Mumbai would fall for classification. It was on this basis that the claim of the assessee for a set off under Section 50(2) was disallowed.

4. In appeal, the CIT(A) accepted the contention of the assessee and entered a finding of fact that the building known as Padma Vilas Palace at Pune had not been used as a hotel. The CIT(A) held that though the assessee had in the past classified both Padma Vilas Palace at Pune and Usha Kiran Palace at Gwalior as buildings which were used as hotels, as a matter of fact depreciation had been claimed only at the rate of 10% and not at the rate of 20% which was allowable in respect of a building used as a hotel. On the basis of an evaluation of all the facts and circumstances, to which a reference would be made in greater detail in a subsequent part of this judgment, the Appellate Authority held that Padma Vilas Palace was not a building which was used as a hotel. Consequently, that immovable property as well as the premises which were acquired in Mumbai fell within the same block of assets entitling the assessee to the benefit of a set off under Section 50(2). This finding of fact has been affirmed by the Tribunal.

5. Counsel appearing on behalf of the Revenue has assailed the findings which have been arrived at by the Tribunal and has urged, on the basis of the observations contained in the order of the Assessing Officer, that the property at Pune was a hotel and that consequently it would not belong to the same block of assets as the property at Mumbai. In particular, the learned counsel relied upon two circumstances viz. (i) The fact that the assessee had a licence to utilize the property at Pune as a hotel; and (ii) The recital contained in the noncompete agreement to the effect that the assessee was carrying on inter alia the business of operating a hotel viz. Padma Vilas Palace hotel in a part of the immovable property. On the other hand counsel appearing on behalf of the assessee has drawn the attention of the Court to several circumstances which have weighed with the first appellate authority in coming to the conclusion that as a matter of fact the property at Pune was never put to use as a hotel. Consequently, learned counsel submitted that having regard to the pure finding of fact which was rendered by the CIT(A) and which was confirmed by the Tribunal the interference of this Court would not be warranted since no substantial question of law would arise for determination.

6. Section 2(11) defines the expression “block of assets” as follows :

“block of assets” means a group of assets falling within a class of assets comprising (a) tangible assets, being buildings, machinery, plant or furniture;

(b) intangible assets, being know how, patents, copyrights, trademarks, licenses, franchises or any other business or   commercial rights of similar nature in respect of which the same percentage of depreciation is prescribed.”

7. Section 43(6)(c) defines the expression “written down value in the case of any block of assets”. The expression is defined to mean the aggregate of the written down values of all the assets falling within that block of assets at the beginning of the previous year and adjusted (i) by the increase by the actual cost of any asset falling within the block, acquired during the previous year; and (ii) by the reduction of the moneys payable in respect of any asset falling within the block, which is sold or discarded or demolished or destroyed during the previous year together with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the written down value as so increased. Section 50(2) postulates that where a capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under the Act, the provisions of Section 48 and 49 shall be subject to certain modifications.

8. The essential question upon which the resolution of the issue in the appeal depends is as to whether the property at Pune fell within the same block of assets as the property which was acquired by the assessee at Mumbai. In order to determine this question, the issue is whether the property belonged to a group of assets falling within a class of tangible assets in respect of which the same percentage of depreciation is prescribed. Appendix I to the Income Tax Rules 1962 as it was applicable for Assessment Years 198889 to 200203 contained a table of rates at which depreciation is admissible. PartA dealt with tangible assets and item I which is entitled as ‘Building’ was to the following effect:

allowance as

percentage of

written down valuePART – A

TANGIBLE ASSETS

1. BUILDING

(1) Buildings other than those covered by subitem

(3) below which are used mainly for residential purposes

(2) Buildings which are not used mainly for residential

purposes and which are not covered by sub item (3) below

(3) (i) Buildings used as hotels

(ii) Buildings with dwelling units each with plinth area

not exceeding 80 square meters

(iii) New buildings, other than the buildings covered under entry (ii) of this item, with dwelling units each with plinth area not exceeding 80 square metres acquired on or after the 1st day of April, 1999 but before the 1st day of April, 2002

(4) Purely temporary erections such as wooden structures.

(emphasis supplied)

5

10

20

40

100

9. Insofar as is material for this appeal, it would be necessary to note that depreciation allowable on buildings used as hotels was 20% of the written down value. The allowable depreciation in respect of buildings which were not used mainly for residential purposes and those not covered by sub item (3) was 10%.

10. Several circumstances weighed with the CIT(A) in coming to the conclusion that Padma Vilas Palace was not being used as a hotel. At the outset, the Appellate Authority noted that there were three findings of the Assessing Officer viz. (i) That the assessee was not running Padma Vilas Palace as a hotel and an amount of Rs.1 Crore received from the purchaser cannot be regarded as a non compete fee for not competing in the field of hotel business and that as such it was a revenue receipt; (ii) Alternatively, if it was not a revenue receipt, it was for the sale of the goodwill which was a capital asset having no cost of acquisition and that the entire sale consideration was taxable as capital gains; and (iii) The land and building of the Palace had been sold as a going concern for a total consideration of Rs.12.5 Crores and that the capital gains had to be computed. The Appellate Authority noted that the Assessing Officer had wrongly come to the conclusion that the rate of depreciation claimed by the assessee was at 15%. During Assessment Year 199-98 the rate of depreciation claimed by the assessee was 10% and not 15%. Similarly, for Assessment Year 1998-99 depreciation at the rate of 10% was claimed on the Palace. However, the Palace at Pune was shown in the block of assets along with Usha Kiran Palace Hotel at Gwalior. The fact that the property at Pune was not used as a hotel has been inferred on the basis of the following circumstances :

(i) Since the acquisition of the property, the assessee had not spent any money on renovation or otherwise for converting the Palace into a hotel;

(ii) The assessee had never acquired any assets which were necessary for running a hotel and no such assets were reflected in the balance sheet;

(iii) The assessee had not employed any hospitality staff for running a hotel;

(iv) The Palace did not have necessary adjuncts for running a hotel such as a restaurant or a coffee shop;

(v) For converting a Palace structure into a hotel the assessee, have been required to deploy electrical, sanitary and other fittings of a special nature which were never installed;

(vi) All that the assessee had been doing was to rent out the Palace for film shooting, marriages and other functions. 92.27% of the income for Assessment Year 1996-97 originated in such activity and for Assessment Year 1999-2000 the entire income was from the said activity;

(vii) The total income received between Assessment Year 1996-97 and Assessment Year 1999-2000 is Rs.4.60 lacs, Rs.5.71 lacs, Rs.2.96 lacs and Rs.5,000/- only;

(viii) The only staff engaged at the premises of the Palace consisted of a manager, a clerk, two sweepers, two gardeners, a messenger and a helper. The meager staff was indicative of the fact that the premises were not being used as a hotel.

11. The Appellate Authority held that the amount of Rs.1 Crore received by the assessee from the purchaser was, as a matter of fact, not in the nature of a non compete fee nor was it a payment towards goodwill but formed a part of the sale consideration which would have to be apportioned between the cost of the land and the cost of the structure as stipulated in the agreement.

12. The Tribunal has adverted to the findings of the CIT(A) in a considerable degree of detail and has affirmed the findings of fact. The Tribunal has observed that the receipts earned by the assessee and the number of employees employed at the Palace strengthen the claim of the assessee that it was not running a hotel in the premises and had never claimed the higher rate of depreciation of 20% which was applicable to a hotel building.

13. While dealing with the submissions which have been urged on behalf of the Revenue, the Court must on the one hand have due regard to the finding of fact which has been entered both by the CIT(A) and by the Tribunal on the question as to whether the building in question at Pune was used as a hotel. Undoubtedly as the Revenue urges, the assessee had during the course of Assessment Years 1994-95 to 1997-98 classified the property at Pune and the property at Gwalior in the same block of assets. At the same time, as the Tribunal noted, the assessee had claimed depreciation at the rate of 10% and not at the rate of 20% which was the applicable rate for buildings used as hotels. The assessee evidently had a license to utilize the premises at Pune as a hotel, but the question which fell for determination was whether the premises had been actually used as a hotel. The circumstances which have weighed with the CIT(A) and the Tribunal are relevant and germane to the question as to whether the property was as a matter of fact used as a hotel. The circumstances upon which reliance has been placed by the Revenue have been duly taken into account by the Appellate Authority and by the Tribunal and therefore it cannot be said that there was a failure on the part of the Appellate Authorities to take into consideration relevant and germane material. The balance which has been drawn on the basis of all the circumstances which have been adverted to in the earlier part of this judgment must primarily rest in the finding of fact which has been recorded by the fact finding authorities. No  substantial question of law would arise especially in a situation where a finding of fact is not demonstrated to be contrary to the evidence on the record. Nor has it been established before the Court that there has been any failure on the part of the CIT(A) or the Tribunal to take into consideration relevant and germane circumstances. Consequently, it would not be appropriate or proper for this Court to substitute its own conclusion of fact for a conclusion which has been arrived at by the Tribunal. In the circumstances, the appeal does not raise any substantial question of law and shall accordingly stand dismissed.

NF