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M/s Firoz Tin Factory Versus Asstt. Commissioner of Income Tax 19 (3) , Mumbai and Vica-Versa

2016 (3) TMI 78 - ITAT MUMBAI

Applicability of the provisions of sec.50 - transaction of sale of land and building located in an area named Kalina (hereinafter “Kalina Property”) in Mumbai - Held that:- The tax authorities have presumed that the Kalina property has formed part of block of assets. The said presumption is not supported by any evidence. The assessee has all along been claiming that it has claimed depreciation on Navi Mumbai office premises and when it was sold the entire surplus arising in the block was offered .....

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he expenses incurred on land levelling, compound wall, etc as land 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 compu .....

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e 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. Shah & Co. (Rs.50,000/-) have been claimed to be towards legal, taxation planning fees. However, the assessee has already paid legal & due diligence fee to /s Kirit Damania & Co. and hence the nature of services .....

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irect the AO to allow 50% of the expenses paid to /s K.N. Gandhi & Co and M/s J.R. Shah & Co.

The remaining expenditure relate to architect fee paid to two firms. The nature of services rendered by the two architect firms has not been brought on record. In the absence of the relevant details, we are not able to decide as to the payment made to the two architect firms relate to the expenditure incurred in connection with the transfer of land. Accordingly, we are of the view that the al .....

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JAY GARG, (JM) For The Assessee : Shri Girish Dave For The Revenue : Shri G M Doss ORDER Per B.R.BASKARAN, Accountant Member: Both the parties have preferred these appeals challenging the order dated 30-08-2012 passed by Ld CIT(A)-30, Mumbai for assessment year 2010-11. 2. The dispute between the parties is with regard to the applicability of the provisions of sec.50 of the Act to the transaction of sale of land and building located in an area named Kalina (hereinafter Kalina Property ) in Mumba .....

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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 .....

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hrough nine conveyance deeds. The remaining portion of land was situated in the midst of the lands acquired by the assessee in 1973-74. Hence the assessee took steps to purchase the remaining portion of land and accordingly purchased the same on 31.07.2008 by settling the dues to the claimants of the land and also to the State Government. There appears to be some confusion about the extent of land purchased on 31.7.2008. The extent of the said land is mentioned as 266 Sq. mts, 264.30 sq. mts and .....

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he sale agreement did not bifurcate the sale consideration between the land and building. The property was sold for a consideration of ₹ 257 crores to a concern named M/s Ultra Space Developers Pvt Ltd. The return of income filed by the assessee was processed u/s 143(1) of the Act. 7. Subsequently, the revenue carried out survey operations at the office premises of the assessee located in Bandra (W), Mumbai on 05-10-2011. During the course of survey operations, a statement was taken from o .....

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ice dated 07.10.2011 u/s 148 of the Act, i.e., immediately after the completion of survey operations. In the reassessment proceedings, the AO assessed the Capital gains arising on sale of Kalina Property as Short term capital gains in terms of 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 plac .....

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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 return of income filed, the AO noticed that the assessee has .....

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of the assessment order). However, in view of the Explanation 5 to section 32(1) of the Act, the AO held that the assessee shall be deemed to have claimed depreciation on the factory building and hence the Kalina Property becomes a depreciable asset. Accordingly he held that the provisions of sec. 50 shall be applicable. In this regard, the AO took the support of the statement given by the partner during the course of assessment proceedings. Accordingly, the AO assessed the gain as Short term c .....

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d on merits. The assessee has held properties at three different places, viz., Kala Chowki, Navi Mumbai and Kalina. The assessee has claimed that it has carried on its manufacturing activities at its Kala chowki premises. It is also stated that the manufacturing operations were discontinued in 1984 and the Kala chowki property was sold in the year 1996. The above said claim of the assessee has not been disputed by the revenue. Subsequently, the assessee has purchased a building at Navi Mumbai Ar .....

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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 h .....

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b) The Building shall include the value of land for the purpose of allowing depreciation. (c) Though it has been claimed that the depreciation has been allowed on Navi Mumbai property and not on Kalina property, yet the depreciation shall be deemed to have been allowed in terms of Explanation 5 to sec. 32(1) of the Act, since the Kalina property is a commercial asset. (d) Since Kalina property is a depreciable asset, the provisions of sec. 50 shall be applicable and hence the Capital gains is as .....

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e assessee was wrong, since the AO has referred to wrong portion of the conveyance deeds. It was also submitted that the Kalina land was let out as halting place for Marine freight containers and later it was let out L & T Company. It was submitted that the tenant has deducted tax at source u/s 194I of the Act on the rent paid by it to the assessee. The assessee also contended that the land shall not form part of depreciable asset and further the provisions of sec. 50 shall not be applicable .....

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012, the AO relied on para 13 of his order of assessment wherein he has stated that: a) the assessee had purchased a factory building and land appurtenant thereto and the same has been sold now b) Depreciation has been claimed in respect of Navi Mumbai property - property falling wherein the same block of assets. c) The property in question is deemed to have been allowed depreciation in terms of explanation 5 to Sec. 32(1). d) The asset sold being a depreciable asset provision of Section 50 are .....

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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 .....

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reflected in the property Register Card attached to the Sale Deed dated 30-12-2009, that the agricultural land was converted into non-agricultural. Around that time the assessee had closed its manufacturing business which fact has been admitted by the A.O. in Para 8 of his Assessment Order. 3.2 The above will show that the observation at (a) of Para 13 of his order that the assessee purchased a factory building is without any basis and contrary to facts on record. The assessee neither purchased .....

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ge. The law has treated factory building as separate from any other building which is evident from separate rates of depreciation provided under I.T. Rules for factory buildings prior to 1987. In any case when the block concept came in 1988-89, the assessee already owned the Kalina land. It is expected that in case the property was considered depreciable it must have formed a block then. Now Bombay property being later acquisition would have joined the block. No material exist that there was a b .....

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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 wh .....

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erm 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 assets only which are subject to depreciation. In order that an asset can be part of a block, it is necessary to ensure that (i) it falls within a class of asset implying the Block's homogeneous nature (ii) it is depreciable and (iii) it is subject to the same rate of depreciation. The law does not provide for a block of non-depreciable .....

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visions of law when he puts the Kalina property in the block and subjects the same to depreciation. The learned A.O. has totally ignored the distinction between land and building which is apparent from his consideration of even that parcel of land which was purchased in 2008 to make the land contiguous, as a building, and calculating depreciation thereon. There is not even an iota of evidence of any structure thereon. Computation of Short Term Gain as made by him in the table in Para 15 of the o .....

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parate assets for the purpose of depreciation and other provisions of the Act including capital gains. The appellant purchased the property as land for ₹ 3,63,500/-and spent ₹ 25,52,000/- on construction and levelling, filling of land. He could, at the most, have taken a part of ₹ 25,52,000/- only (after exclusion of cost of boundary walls etc.,) within the block. It may be of relevance to say that even this part was never treated as depreciable obviously because the appellant .....

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nd 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 .....

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n as allowed even if the same is not claimed by the assessee. The Explanation nowhere provides that depreciation will be deemed to be allowed even in respect of assets which are not depreciable under the law. The fiction does not make a non-depreciable asset as depreciable. In the facts of the case 'once it is accepted that the asset was a land which is indisputably non-depreciable, the deeming fiction has no relevance. Even if a different view is taken and the property is held composite, th .....

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d to be depreciable. Whatever doubts remained were also removed when the Kalachowky property was sold in 1996. It is, therefore, clear that in 2002 when the Explanation came into force there was no business asset. No deeming provision as stated above, can be applied to an asset which had ceased to be subject to depreciation. It is, therefore, wrong to invoke the Explanation and draw conclusion there from. 5.2 Attention is drawn to the decision of Hon'ble.High Court of Kerala. In CIT vs. Kera .....

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s out that the property was not depreciable, no depreciation was ever claimed, no depreciation was ever allowed and the provisions 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 ben .....

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pplies 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. 50 do not apply where an assessee had included an asset in block of asset but no depreciation was ever claimed. 7. Another issue that came up for discussion was the compos .....

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sis' of a reasonable estimation after taking into consideration the relevant facts available. Your kind attention is drawn to the observations of Hon 'ble Bombay High Court in CIT vs. Hindustan Hotels & Anr. 335 ITR 60 (BOM.) which are reproduced below: ACIT V. Hindustan Hotels Ltd. & Anr. 335 ITR 60 (Born.): At para 10 the High Court observed that the decision in CIT v. Vimal Chand Golecha (1993) 201 ITR 442 (Raj.) therein that the Rajasthan High Court has followed the decision .....

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also drawn to the following observation of Bombay High Court in CIT vs. Citi Bank NA 261 ITR 570 (BOM) :- CIT v. CITIBANK N.A. 261 ITR 570 (Bom).: Surplus realized from sale of land beneath the superstructure is long term capital gains and not a short term capital gain. Held, under Section 31 (1), no depreciation 'is admissible for land. Secondly, the department can assess the Company to short term capital gains only qua depreciable assets. It was held that on sale of land attached to the b .....

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y 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 .....

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out the existence of factory premises. The report given by the AO was also considered by Ld CIT(A) and he has given a finding that none of the Government Agencies have confirmed about the existence of any factory premises in the Kalina Property. The observations made by the Ld CIT(A) are extracted below, for the sake of convenience:- 3.17 From the above statement of the partner Shri Kaizer T. Lokhandwala, it appears that he had made the statement under stressful condition being a sick person. Th .....

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erm capital gain is of hardly any significance. What is important is to state and evaluate whether the facts and the circumstances of the case demonstrates that the said gain is short term capital gain or not. The statement of the partner can only be an indication and not the final word. Therefore, on the basis of the statement of the partner, the issue on hand cannot be decided and the conclusions of the A.O. as well as of the Addl. CIT, Range-19(3), Mumbai as given in the final remand report a .....

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2007-08 onwards. As regards to the statement of Shri H.G. Tanna, wherein, he has stated that he had broadly discussed the issue and had clarified to Shri Lokhandwala that the sale of Kalina property appears to be a case of short term capital gain. Shri Lokhandwala averred in his statement 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 th .....

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nducted 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 Kalina property i .....

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factory in Kalachowky. As regards to the information from M/s. Reliance Infrastructure Ltd. referred to by the A.O. in his remand report, the partner of the appellant firm has stated as under in this regard: M/s Reliance Infrastructure. on the basis of whatever records were available with them have mentioned that the assessee's account was active till March 2010 as a commercial connection. The electricity bill enclosed with the report makes it clear that the connection was LT (Light Tariff) .....

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shed beyond a shadow of doubt that the Kalina Property was never used for any factory / industrial unit which supports the contention that no depreciation was ever claimed or allowed in respect thereto . 3.20 As regards to the non receipt of reply from the Commissioner of Labour (MS), Mumbai, the appellant has submitted as under in this regard: "The Ld A.O has mentioned about non receipt of reply from Labour Commissioner. He appears to be ignoring the response received from the Assistant Co .....

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cturing 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 .....

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, the Ld. ACIT-19(3), Mumbai dated 08-08- 2012 stated that as per the provisions of section 32 of the IT. Act 1961, depreciation is allowable only in respect of the assets used for the purpose of business or profession. The assessee has not used the Navi Mumbai property for business or profession. No Income has been generated from the Navi Mumbai property. Neither the assessee has ever shown to have run any office from the Navi Mumbai property. As per the letter dated 15.02.2010 submitted by the .....

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also stated that entire receipt from the warehousing activity relates to kalina property and the entire income has been generated from the Kalina property only. No income has been generated from Navi Mumbai property as the same was never put to use for business or profession. Therefore, depreciation claimed by the appellant has to be relating to the Kalina property only since, this is the only since, this is the only property that has been put to use for business i.e. warehousing activity. In th .....

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by him is totally contrary to the facts and untenable in law. The depreciation is asset specific and always relate to any particular asset. After introduction of the "block concept ", it relates to the assets falling within that block. If depreciation has been allowed in respect of a particular asset, it is not given to the department to relate it to any other asset for the simple reason that the asset yielded income whereas the asset to which it originally related did not yield any in .....

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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 .....

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eciation was allowed in respect of Navi Mumbai property, the same will be depreciation allowed to the block which include the Kalina property. The appellant has submitted detailed explanation in the submission made on 18'h June 2012. The facts on record are clear about the fact that no such block was ever created comprising of the Kalina properly and the Navi Mumbai property. On the other hand the Schedule of the fixed assets enclosed to the returns makes it abundantly clear that Kalina prop .....

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the Kalina land and the Navi Mumbai office as the land, as per the settled law, is a non depreciable asset which cannot be combined with any depreciable asset. From the Schedule it will be seen that the block of building was up to the A. Y.1996- 97 comprised of the W.D.V. of the building part of Kala Chowky property. In the A.Y 1997-98, when Kala Chowky property was sold, the block was reduced by the sale price of the building portion and was increased by the cost of Navi Mumbai office. The buil .....

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not a depreciable asset and hence the provisions of sec. 50 shall not be 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 .....

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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 building should be segregated while ascertaining the capital gains:- (a) CIT Vs. Vimal Chand Golecha (201 ITR 442)(Raj) (b) CIT Vs. D.L.Ramachandra Rao (236 ITR 51)(Mad) (c) CIT Vs. C.R.Subramanian (242 ITR 342)(Kar) (d) CIT Vs. Hindustan .....

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e segregated between land and building and the value of land should be assessed as long term capital gain. 17. We have earlier noticed that the assessee has purchased a small portion of land, which was lying in the middle of the land already owned by the assessee, in the year 2008. The Ld CIT(A) has held that the capital gain arising there from should be assessed as Short term capital gain, since the said asset was held for less than 36 months. The Ld A.R argued that the assessee had purchased t .....

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of land. In fact, identity of both the lands were clear and was not obscure. The purpose of purchase of small portion of land is to aggregate the same with existing large extent of land, so that both the lands could be sold as a single bit. Accordingly, we are of the view that the Ld CIT(A) was justified in holding that the capital gain arising on sale of land purchased in 2008 is assessable as short term capital gain. 18. The next issue relates to the nature of capital gain arising on sale of .....

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acted 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 w .....

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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 19. Having held so, the Ld CIT(A) proceeded to hold that the assessee cannot escape from the mischief of sec. 50 of the Act for the reason that the assessee was not able to substantiate its contention ( .....

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ng activity and was subjected to depreciation. The appellant denies this and claims that the property was not used for carrying on any business. It was since 1984 intermittently let out initially for container parking and later on to Larsen & Toubro. However, the appellant is not able to substantiate its contentions by production of assessment records since the time of purchase. The claim of the department is based on the fact that since the property was used for running manufacturing activi .....

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the fact that Kalina Property was never subjected to depreciation. What happened in the prior period may be different. In view of appellant‟s inability to lead reasonable evidence of non allowance of depreciation, I am inclined 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 s .....

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een 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 spent thereon) ₹ 29.15 lakhs remained the same since 1995 onwards. .....

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so, we are not able to understand as to how the Ld CIT(A) could hold that the Kalina property could have been subjected to depreciation. The facts noted down by the Ld CIT(A), in our view, shows that the Kalina property remained to be a land with a minimum structure of a shed and compound wall. This is further fortified by the fact that the assessee has let out the land for container parking and thereafter to Larsen & Toubro. It is an accepted fact that the rent paid by Larsen & Toubro w .....

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o produce the assessment records for the periods from AY 1975-76 onwards during the course of assessment proceedings undertaken in the year 2012. It may be noticed that considerable time has elapsed by that time and it would be difficult for anyone to produce old records, that too, more than 20 years old. This is fortified by the fact that the revenue also did not possess the old records. Under these set of facts, we are of the view that the tax authorities are not justified in taking adverse vi .....

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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 som .....

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assessee has let out the land only for container parking and later to Larsen & Toubro, we are of the view that the question of applicability of provisions of Explanation 5 to sec. 32(1) shall not apply to the assessee. 23. We further notice that the tax authorities have presumed that the Kalina property has formed part of block of assets. The said presumption is not supported by any evidence. The assessee has all along been claiming that it has claimed depreciation on Navi Mumbai office prem .....

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his issue. Accordingly, we direct the AO to compute the capital gain by treating the expenses incurred on land levelling, compound wall, etc as land improvement cost, since they have been predominantly incurred to protect the land only. 25. The next issue relates to the claim for deduction of following expenses made by the assessee while computing the capital gains:- Architect fee to Rajiv Harmalkar 10,00,114 Soil testing 1,76,700 Architect fee to Shekar Arolkar & Associates 36,95,050 Broker .....

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684/-. The Ld CIT(A) allowed the payment made to Kirit Damania & Co - ₹ 75,00,000/- 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 pa .....

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he 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. 28. The payment made to K.N. Gandhi & Co. (Rs.82,72,500/-) and J.R. Shah & Co. (Rs.50,000/-) have been claimed to be towards legal, taxation planning fees. However, the asse .....

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