TMI Blog2016 (3) TMI 78X X X X Extracts X X X X X X X X Extracts X X X X ..... d improvement cost, since they have been predominantly incurred to protect the land only. Deduction of expenses while computing the capital gains - Held that:- We notice that the assessee has obtained valuation report from /s M.B. Sabnis & Co. in order to ascertain the market value of property as on 1.4.1981 and has paid a sum of ₹ 55,150/-. The valuation report so obtained would only serve for the purpose of computation of capital gains and hence the same cannot be considered to be expenses incurred in connection with the transfer of land. Accordingly, we are of the view that the tax authorities are justified in disallowing this claim. The expenses incurred on soil testing, in our view, is connected with the sale transaction and hence the same should be allowed, since the assessee has carried out the same only to establish the quality of soil available on the land. The legal & due diligence fee of ₹ 75.00 lakhs paid to Kirit Damania & Co. was related to the examination of title deeds and carrying out due diligence and hence we are of the view that the Ld CIT(A) was justified in allowing the same. The payment made to K.N. Gandhi & Co. (Rs.82,72,500/-) and J.R. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same shall apply. The Ld CIT(A) held that the gain arising on sale of land portion of the Kalina Property is assessable as Long term capital gains and building portion is assessable as Short term capital gains under the provisions of sec. 50 of the Act. Besides the Ld CIT(A) also partially allowed the claim relating to expenses incurred in connection with the land of land and building. 3. The assessee is aggrieved by the decision of Ld CIT(A) in confirming application of sec. 50 of the Act to the building portion of the property and in not allowing all the expenses claimed by it . The revenue is aggrieved by the decision of Ld CIT(A) in holding that the provisions of sec. 50 shall not apply to the sale consideration relating to land and also in partially allowing the expenses claimed by the assessee. 4. Besides the assessee has also challenged the decision of Ld CIT(A) in holding that the reassessment proceedings are valid in law. 5. We shall first narrate the facts relating to the issue under consideration. The assessee herein is a partnership firm and it has sold the property located at Kalina during the year under consideration. The property consisted of land admeasurin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of sec. 50 of the Act. It is pertinent to mention here that the assessing officer did not bifurcate the sale consideration between land and building and accordingly did not give separate treatment between them. The Assessing officer, by placing reliance on a decision rendered by the Delhi bench of Tribunal in the case of CIT Vs. Alps Theatre (reference not given) held that the building shall include land also. Before the AO, the assessee contended that it did not claim depreciation on the Kalina Property and hence the provisions of sec. 50 are not applicable. However, the AO took the view that the assessee did not substantiate the said claim by furnishing copies of returns of income filed by it from 1974-75 onwards. He further held that the Explanation 5 inserted by Finance Act 2001 in sec. 32(1) of the Act with effect from 1.4.2002 mandates allowing depreciation compulsorily whether or not the assessee has claimed the same. It may be noticed here that the assessee furnished copies of returns of income filed for AY 1996-97 to 2009-10, but the same was found to be not sufficient for the AO since he had asked for copies from AY 1974-75 onwards. From the copies of retu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. However, the assessee could furnish details from assessment year 1996-97 onwards. The assessing officer noticed that the assessee has claimed depreciation under the block factory building @ 10% and accordingly presumed that the said block should include the Kalina property also. Accordingly, the AO took the view that the assessee has constructed certain factory structures on the Kalina Land and the depreciation schedule should include the same, since the identity of the building is lost under the Block concept‟ for allowing depreciation. 11. Further, in the remand report filed by the AO before the ld CIT(A), it was pointed out that the assessee had purchased the Kalina property for a consideration of ₹ 3,67,500/- and the value of property was shown at ₹ 29,15,509/- from 1995 onwards. Accordingly the AO substantiated his view that there existed a factory building in Kalina property. 12. We notice that the assessing officer has proceeded to treat the Kalina property as an asset on which depreciation has been claimed on the following reasoning:- (a) The purchase deeds make a reference to the existence of commercial buildings. (b) The Building shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xplanation 5 to Sec. 32(1). d) The asset sold being a depreciable asset provision of Section 50 are applicable. 3. The appellant has in its earlier submissions emphatically denied that it purchased any factory building at Kalina. The allegations were refuted on the basis of Purchase Deeds which clearly mention that what was purchased was land without any factory building thereon. The assumption of the A.O was based solely on the recital in the indenture of purchase contained in Para 3 read with the Second Schedule. The appellant in its Written Submission dated 14th May, 2012 in Para 4.3 and 4.4 has shown that the impression has arisen on account of not reading the document in its entirety. The Schedule 2 relied upon states the total larger land out of which what was purchased is contained in Schedule 5 where there is no mention of any factory building. With reference to the plan of the said portion purchased as per Schedule 5, it was shown that those plots had no factory building on them. 3.1 Without prejudice to above, even if there was some structure which was at any point of time used as factory by some previous owner(s) and has still been referred to as factor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed for protection of property at some points of time it does not alter the nature of the property. The same being non-depreciable could not have formed the block of assets. 4.2 The appellant also did not carry out any construction of factory or any other structure to be used for business. Whatever construction work was carried out by the appellant was for security purposes and necessary infrastructure by way of boundary wall, watchman cabin, electric room levelling of land etc. The nature of property as purchased and with whatever constructions were carried out had no association with assessee's business and accordingly, remained a non-depreciable asset. As has been emphatically submitted by the appellant no depreciation was ever claimed nor allowed in respect of this property which was a non-depreciable asset and, therefore, putting the- same in the block of a depreciable asset with the Navi Mumbai property is not legally sustainable. 4.3 The block of asset introduced in the Act w.e.f 01.04.1988 defines this term as meaning a Group of assets falling within a class of assets in respect of which the same percentage of depreciation is prescribed. It applies to those a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was done was not carried on as a regular business activity. As mentioned in Para 1.3 of the submissions dated 14th May, 2012 leasing for container storage was done between 1990 and 1994 only. The property remained vacant from 1995 to 1999 when again the same was let out to Larsen and Toubro which remained with them upto 2004 only. The property remained vacant thereafter till sale. This will show that these temporary structures were created and leasing activity was carried out not as a business but only as a necessity because the land could not have been kept vacant. The appellant has produced financial statements from 1996 onward. The Schedule of depreciation clearly shows that Kalina property was shown separately on which no depreciation was allowed. This position remained undisturbed by the department even when the assessment was completed u/ s.143(3). Taking a different stand now after the continued practice of such long period cannot be justified. 5. Part (c) of Para 13 of the assessment order deals with deemed depreciation in respect of Kalina Property. This observation stems from (b) as the property has been placed in the block which for reasons mentioned in Para 4 abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of deemed depreciation are not relevant to such property. The very basis of the observation, therefore, does not subsist and the conclusion drawn about the applicability of Sec. 50 does not remain valid. 6.1 Sec. 50 envisages actual allowance of depreciation in respect of the asset. The very object of the provision is to ensure that no assessee is able to get the benefit twice once by way of depreciation and again by way of relief of capital gain taxation on the basis of long term asset. It is with this purpose that the legislature has used the expression in respect of which depreciation has been allowed . If any other view is taken and the provision is applied even in cases where no depreciation has been allowed or where depreciation is only deemed, it will result in double jeopardy which can never be intended by the legislature. The provision applies only when depreciation is actually allowed which is not the case of the appellant. The A.O. is, therefore, not justified in applying the provisions of Sec. 50 to the Kalina property. 6.2 Your attention is invited to Mumbai ITAT's decision on Devine Construction Co. Vs. ACIT 49 SOT URO 6 holding that provisions of s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral other judicial decisions holding the same. Attention is drawn to appellants Written Submissions dated 14th May, 2012 mentioning such pronouncements which may please be referred to. 7.3 The appellant requests that in case your honour decides to hold the structures as depreciable asset its value may be estimated. The Appellant has furnished the report of the Valuer as on 01-04-1981 which can provide a reasonable basis for segregating the value. While doing so it is necessary to take account of the fact that building depreciates with the passage of time while land generally appreciates. Suitable adjustments will, therefore, need to be made for inflation as well as depreciation while making such estimation. 14. The Ld CIT(A), after considering the submissions of the assessee and the remand report furnished by the AO, took the view that the sale consideration relating to land should be assessed as Long term capital gain. Since the AO had also placed reliance on the statement given by the partner of the assessee firm, the Ld CIT(A) also addressed the same after considering the retraction letter of the assessee. Further, the ld CIT(A) also directed the AO to conduct enquiries f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt that he is not his counsel/representative as he is not a qualified C.A. and he had not called him on the premises of the survey. He is an unknown personality and had come to the survey premises presumably on the request of his relative Shri Arsiwala whose accounts he is writing. The partner Shri Lokhandwala further stated that as far as he is concerned Mr.Tanna is an unknown personality and he is totally oblivious of his accounts. Further, his advice doesn't carry any value as he is not even a qualified C.A. Under the circumstances, the partner stated that he had not at all consulted Shri H.G. Tanna regarding his tax matter pertaining to sale of Kalina property. 3.18 As regards to the enquiries conducted from various agencies like Reliance Infrastructure Ltd., ESIC, Labour Department, Industries Department and Building Factory Department of BMC to ascertain whether any factory was running from the Kalina Property nor not, the A.O. in the remand report has given the details of the enquiries so conducted. The A.O. in his remand report has stated that none of the agencies have stated in their replies that the appellant was not having a factory /industrial unit at the Kal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kalina was not used for carrying on any industrial activity thereon albeit there was factory at Kalachowky which was manufacturing tin containers till 1984 and the factory was eventually sold in 1996. Thus though the existence of factory at Kalina property has not been proved, but there certainly were structures which were used for warehousing purposes on rental basis. The Kalina property was sold along with these structures in the year 2009. 3.22 The aforesaid observations that there was no factory at Kalina property gets further corroborated from the reply of the Reliance Infrastructure wherein they have enclosed a copy of the electricity bill which makes it clear that the electricity connection was LT (light tariff) with single phase. Obviously, a single phase connection cannot be used for running a factory. Further, the replies received from various departments clearly mentions that the business of the appellant as per their record was being run from Kalachowky property and there is no indication in the records of the any of the offices / departments about the Kalina property 3.23 In one of his letters, the Ld. ACIT-19(3), Mumbai dated 08-08- 2012 stated that as per the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed did not yield any income. In the facts of the case it cannot be disputed that the assessee claimed depreciation in respect of Navi Mumbai property. The computation thereof was based on the cost of that property. The returns were processed u/s 143 (1). Even in the year, the assessment was completed u/s 143(3), the depreciation claim was not disturbed. The depreciation therefore, was in respect of Navi Mumbai property and by no stretch of logic or reasoning it can now be related to any other property i.e. the Kalina property. Even if for the sake of arguments it is taken that the depreciation should have been allowed not in respect of Navi Mumbai property but in respect of Kalina Property, the subsequent understanding cannot change what had happened. Without prejudice to the same, the appellant insists that the Kalina property was not depreciable. Whatever income was derived the same was assessable under the head 'income from property' and not 'under the head income from business. Assessee's accounting for the same as business income will not change the character of the property. In any case, even if it is accepted that deprecation was allowable, the same does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e applicable to it. The revenue is contesting the same. However, we do not find any infirmity on the decision of Ld CIT(A) on this issue in view of the decision of Hon‟ble Supreme Court rendered in the case of CIT Vs. Alps Theatre (65 ITR 377)(SC), wherein the Hon‟ble Supreme Court has held that the depreciation on cost of building should exclude the value of land. It has further been held that the value of land does not depreciate, but it only appreciates. The provisions of sec. 32 read with schedules thereon would show that the Statute does not indicate land as a depreciable asset. The Hon‟ble Bombay High Court has also held in the case of CIT Vs. CITI Bank N.A (261 ITR 570) has held that no depreciation is admissible on land u/s 32(1) of the Act. 16. However, the AO has taken the view that the building, if any, has been constructed on the land, the value of building should include the value of land and hence both the assets should be treated as commercial asset falling within the ambit of the provisions of sec. 50 of the Act. The said view taken by the AO is also wrong in view of the following decisions, wherein it was held that the value of land and build ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... property consisted of land only and further the expenses incurred thereon was towards land leveling, construction of compound wall and a watchman shed. During the course of remand proceedings, the Ld CIT(A) directed the AO to make enquiries from the Government agencies and on examination of the replies received, the Ld CIT(A) concluded as under (extracted at the cost of repetition):- 3.21 Thus, from the replies received from various agencies, the only conclusion that can be drawn is that there was no factory at Kalina property and the property at Kalina was not used for carrying on any industrial activity thereon albeit there was factory at Kalachowky which was manufacturing tin containers till 1984 and the factory was eventually sold in 1996. Thus though the existence of factory at Kalina property has not been proved, but there certainly were structures which were used for warehousing purposes on rental basis. The Kalina property was sold along with these structures in the year 2009. 3.22 The aforesaid observations that there was no factory at Kalina property gets further corroborated from the reply of the Reliance Infrastructure wherein they have enclosed a copy of the el ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to take the view that whatever structures were there on the land were subjected to depreciation as per law which brings it within the ambit of section 50. It is also an undeniable fact that income from Kalina property was offered as business income. Therefore, the structures become business asset of the appellant. Further, the A.O also appears to be correct in saying that once the appellant has claimed the depreciation in respect of a part of block of assets (Navi Mumbai Property) he cannot take the plea that since, he has not claimed depreciation in respect of particular part of assets falling within the same block of asset, the particular part of asset is non-depreciatble asset on which the provisions of section 50 do not apply.......Once the asset has been incorporated in a block of assets then it loses its individual identity and depreciation is always calculated on the block because all the assets are merged in pool..... 20. We are unable to agree with the view expressed by Ld CIT(A) on this issue. It is the Ld CIT(A), who has given a definite finding that the Kalina property did not have any factory structure. The total value of Kalnina Property (cost of land + amount s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccordingly, we are of the view that the Ld CIT(A) was not justified in holding that the assessee could have claimed depreciation on the Kalina property, as the said view is based on surmises and conjectures. 22. It is also not clear as to when the assessee undertook expenses on land levelling, construction of compound wall etc. The facts relating to the same are not emanating from the record. Be that as it may, we notice that the assessee has incurred those expenses only to protect the land and hence the same has to be considered as land improvement expenses only. With regard to the observations of the AO that the purchase deeds do refer to the existence of some factory structures, the assessee has explained that the assessing officer has referred to Schedule 2 of the conveyance deeds, which describe the total area owned by the sellers, whereas the property purchased by the assessee was described in Schedule 5. Even though this explanation was given during the course of remand proceedings also, yet the AO did not controvert the said explanations. Hence, we are of the view that the above said explanation of the assessee needs to be accepted. Since the assessee has let out the lan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,00,000/- for legal due diligence, M/s K.N. Gandhi Co., for legal, taxation planning fee ₹ 82,72,500/- and ₹ 50,000/- to J.R Shah Co., for assisting /s K.N. Gandhi Co. 26. We heard rival contentions on this issue. We notice that the assessee has obtained valuation report from /s M.B. Sabnis Co. in order to ascertain the market value of property as on 1.4.1981 and has paid a sum of ₹ 55,150/-. The valuation report so obtained would only serve for the purpose of computation of capital gains and hence the same cannot be considered to be expenses incurred in connection with the transfer of land. Accordingly, we are of the view that the tax authorities are justified in disallowing this claim. 27. The expenses incurred on soil testing, in our view, is connected with the sale transaction and hence the same should be allowed, since the assessee has carried out the same only to establish the quality of soil available on the land. The legal due diligence fee of ₹ 75.00 lakhs paid to Kirit Damania Co. was related to the examination of title deeds and carrying out due diligence and hence we are of the view that the Ld CIT(A) was justified in allowi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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