2005 (11) TMI 362 - AT - Income Tax

Depreciation - value of undivided right in land - Whether the cost of land is entitled to depreciation under the Schedule to the IT Act along with the cost of the building standing thereon - HELD THAT - On a perusal of the Conveyance Deed, it is seen that the assessee has purchased property on 8-1-1996 from one C.A. Batavia. In the Conveyance Deed, description of the property is given in two schedules. As far as Schedule A is concerned, it gives the detailed description of the property in which the total area of the property is shown as 834.40 sq.mtrs. In Schedule B, the property purchased by the assessee is described by the boundaries in which it is stated that undivided right and interest in the site equivalent to 216 sq.mtrs. have been sold to the assessee. Depreciation is allowable only on the value of superstructure on the land and not on the value of land. The legal principles laid down by the Hon ble Supreme Court in the case of Alps Theatre 1967 (3) TMI 6 - SUPREME COURT still holds good. Even u/s 32 of the IT Act, 1961, the word used is building and building is to be interpreted the superstructure. Though it is vehemently argued by the learned counsel for assessee that the purchase price of land was a composite one and for the sake of convenience, the price of land and price of building was separately shown, we are afraid that his contention can be accepted. As far as the Conveyance Deed is concerned, consideration paid by the assessee for land is shown separately. If the transaction was composite one, then no distinction at least in the consideration paid to the vendor would have been made. We are of the opinion that as there is a clear-cut identity in respect of price paid to the land and building, the Assessing Officer was right in allowing depreciation only on the building. The CIT(A) was not justified in directing the Assessing Officer to allow depreciation on the cost of land as the same is not contemplated u/s 32 of the Act. In the result, we set aside the order of the CIT(A) on this issue and restore that of the Assessing Officer. In the result, the revenue s appeal is partly allowed.

Summary

Issues:
1. Addition of gross profit on the sale of jewellery
2. Allowance of depreciation on the value of undivided right in land

Analysis:

Issue 1: Addition of Gross Profit on the Sale of Jewellery
The appeal by the Revenue challenged the deletion of an addition of Rs. 1,13,54,683 in gross profit on the sale of jewellery to M/s. Rajesh Associates. The Assessing Officer observed a significant decrease in the GP rate and questioned the cost of import of gold and jewellery sold to M/s. Rajesh Associates. The Revenue argued that the sale was at a lower price compared to the cost incurred by the assessee, leading to a loss. However, the CIT(A) found no evidence of underpricing and highlighted that market rates fluctuate. The CIT(A) also noted that M/s. Rajesh Associates reported substantial profit, indicating no profit siphoning. The ITAT concurred with the CIT(A) and upheld the deletion of the addition, emphasizing the lack of evidence supporting the Revenue's claims.

Issue 2: Allowance of Depreciation on the Value of Undivided Right in Land
The second issue revolved around the alleged depreciation on the cost of land. The Revenue contended that depreciation should only apply to the building, not the land. The conveyance deed showed a separate consideration for the land and building portions. The ITAT analyzed legal precedents and clarified that depreciation is applicable to tangible assets like buildings, not land. Despite the composite nature of the transaction, the distinct pricing for land and building in the deed led to the conclusion that depreciation could only be allowed on the building. Consequently, the ITAT set aside the CIT(A)'s decision and upheld the Revenue's appeal on this issue.

In conclusion, the ITAT partially allowed the Revenue's appeal, supporting the deletion of the addition in gross profit on jewellery sales but overturning the allowance of depreciation on the cost of land.