TMI Blog1998 (6) TMI 568X X X X Extracts X X X X X X X X Extracts X X X X ..... in pursuance of this decision, the assessee sold the computers, plant and machinery and the furniture and fixtures at Pune during the same year (i.e. year ended 31-3-93). The firm however was not dissolved but continued to remain in existence. On 14-7-94 the premises in Pune was sold for a sum of ₹ 29 lakhs. On 18-3-1995, the assessee entered into an agreement with Smt. Kamini Khanna for the purchase of residential flat in the second floor of the building known as Nilgiri Gardens, Sector 24, CBD, New Bombay. Under the agreement the price fixed for the flat was ₹ 7,17,000. On 20-3-95, the assessee applied to the housing society seeking permission for conversion of the residential flat into commercial use. By letter dated 15-11-95, permission was accorded subject to certain conditions. The conveyance deed was executed in favour of the assessee-firm and registered in the month of November 1995. From January 1996, the flat was let out by the assessee to a company by name M/s. Arnico Builders on leave and licence basis initially for 11 months at a rental income of ₹ 2,000 per month. In January 1998 the assessee took possession of the property allegedly to carry on clo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 50. 3. The Assessing Officer rejected the assessee';s claim for the following reasons : (1)The new flat purchased was not a business asset; (2)The assessee did not carry on any business during the year under consideration. In support of the first reason, the Assessing Officer referred to the facts such as the sale of the computers during the previous year ended 31-3- 93, absence of any business done by the assessee in the assessment year under appeal as also in the immediately preceding year, the purchase of the new flat at a place where the assessee never had any business, that the flat is a residential flat and that it had been given out on rent. On the question of the applicability of section 50, the Assessing Officer was of the view that since the flat purchased during the relevant accounting year in New Bombay is not a business asset, it was obviously not an asset falling within the block of assets. He further observed, without prejudice, that even if the new flat is to be considered as a business asset, the deduction claimed cannot be allowed as the same is transferred in the name of the assessee only on 13-11-95, after the close of the previous year rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the block of assets at the beginning of the previous year as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year, and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short-term capital assets. The basic question to be examined in the light of the persuasive arguments advanced by both the parties before us, is whether it is a requirement of the section that in order to obtain deduction thereunder in respect of the cost of a new asset acquired during the previous year, the assessee should be found to be carrying on some business or the other. Section 14 of the Income-tax Act classifies the income under different heads as under : A Salaries B Interest on Securities (omitted with effect from 1-4-89). C-Income from House Property. D-Profits and Gains of Business or Profession. E-Capital Gains. F-Income from Other Sources. There are different sections in the Act which contain the rules for computation of the income under each of the above heads. Such rules, in respect of the capital gains, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : the former arises from the activity which is called business and the latter accrues because capital assets are disposed of at a value higher than what they cost the assessee. They are placed under different heads; they are derived from different sources; and the income is computed under different methods. It is therefore clear that while examining the applicability of the provisions of section 50, we are not to be influenced by the rules relating to the computation of the business income. 7. The learned departmental representative put forth his case like this. Section 50 applies only in the case of a capital asset which forms part of a block of assets, in respect of which depreciation has been allowed in the assessments and therefore the cost of the new asset is deductible from the sale price only if the new asset forms part of the block of assets, which in turn means that is deductible only if the new asset is a depreciable asset and since depreciation is an allowance granted to the assessee if he carries on the business in which that asset is used, it must follow that the new asset should be one which is put to use in a business which is being carried on by the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question would be whether there is any such built-in or implicit requirement. What the learned departmental representative would say in this regard is that if there was no such requirement, the Legislature need not have prescribed a condition to the effect that the new asset should be one falling within the block of assets. There is force in this argument, sufficient to persuade us to embark upon a further enquiry as to what could be the raison d';etre of such an implicit requirement, if there is one. When section 50 was substituted by the present section by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 with effect from 1-4-1988 the Board issued a circular (Circular No. 469, dated 23rd September, 1986 reported in 162 ITR statutes page 21). After referring to the Budget Speech of the Finance Minister wherein reference was made to the proposal to introduce a system of allowing depreciation in respect of Block of assets instead of the present system of depreciation on individual assets, at paragraph 6.3 the Board stated as follows : As mentioned by the Economic Administration Reforms Commission (Report No. 12, para. 20), the existing system in this rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7) 57 TTJ (Bom.) 549. In this order, reference has also been made to the earlier decision of the Mumbai Bench in the case of Orient Cartons (P.) Ltd. v. Dy. CIT [IT Appeal No. 7165 (Bom.) of 1995 dated 7-6-1996] relating to the assessment year 1995-96. 9. In the absence of any express requirement in the statutory provision or the justification to read into it a built-in requirement, it is not possible to uphold the contention of the learned departmental representative that the assessee should be found to have been carrying on a business in the year in which the new asset is purchased. 10. We also find force in the argument of Mr. Patil, the learned counsel for the assessee, that if the stand of the income-tax authorities is to be accepted, it would also mean that in the present case, the assessee having allegedly stopped its business in the year ended 31-3-1994, the concept of block of as sets itself had come to an end because according to the department, carrying on of a business is an essential condition for the application of section 50. 11. We now proceed to examine the contention on behalf of the revenue that during the year under consideration the assessee did not ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment year 1997-98 was shown at ₹ 4,061, which was accepted under section 143(1)(a). For the year ended 31-3-97 the rent of ₹ 20,200 received was similarly shown in the profit and loss account. Based on these facts, Mr. Patil for the assessee submitted that though the business in running computer classes was discontinued, the assessee has commenced business in letting out of the property for which it had the necessary power under clause 2 of the partnership deed. From January 1998, the assessee itself used the property for its cloth business and in support of this claim reliance was placed on the profit and loss account for the year ended 31-3-98 wherein the sale of cloth was shown at ₹ 87,334 as well as the rent for 10 months which was shown at ₹ 22,100. In support of the claim that the assessee started cloth business reliance was also placed on pages 38 to 49 of the paper book. From these facts it was further contended by Mr. Patil that there was only a temporary suspension of the business, that from January 1996 the assessee carried on the business of letting out of its property and from January 1998 the assessee carried on business in cloth from that prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fact that even while granting permission to the assessee to carry on business from the flat in New Bombay, the society has imposed various conditions and the assessee, in spite of obtaining permission, let out the property and chose not to carry on any business. Such a conscious decision, according to the learned departmental representative, indicated an intention to discontinue the business once and for all. As regards the evidence filed in the paper book (item Nos. 1, 2, 7 and 8 of the paper book No. 2) in support of the claim that the assessee carried on business in cloth, the learned departmental representative objected to the admission of the same on the ground that they were fresh evidence not furnished before the departmental authorities. On the merits of the evidence he submitted that the bills did not inspire confidence, that they were all dated after the order of the CIT (Appeals) and were presumably an afterthought, that there were inconsistencies in the papers inasmuch as in these papers the registered office of the assessee-firm was shown as being in Andheri whereas the assessee';s claim is that the business was being carried on from the flat at New Bombay. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ates that existence of a business is essential for the validity of a firm. 13A. The reliance placed by Mr. Patil on clause 2(b) of the partnership deed which says that the firm can carry on any other business as and when the partners mutually agree does not carry the case further. The mere letting out of the property which was acquired towards the end of the accounting year 31-3-1995 cannot constitute a business. It must be remembered that during the year ended 31-3-1994 there was absolutely no business activity and this will be clear on a reference to the profit and loss account which is at page 63 of the paper book where the only credit entry therein is the sundry balances written back. This entry also shows an intention to wind up the business. Reverting to the letting out of the property from January 1996, in our considered opinion, letting out of a property cannot amount to a business on the facts of the present case. The position may be different where an assessee owns a number of properties and the letting out is done in a systematic manner so as to amount to a business as well as rendering of connected services as happened in the case of Karnani Properties Ltd. v. CIT (1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e true import of the three Supreme Court judgments cited by the learned departmental representative is that the income from letting out of house properties is assessable under the head Property in spite of the fact that such letting constituted an organised business, only because a specific head is provided under the Income-tax Act and from the decisions it cannot be inferred that the activity itself is not a business activity. But what we find in the present case is that there is no such organised form of activity of letting out together with rendering of connected services. From the mere fact that the assessee applied to the housing society for permission to use the flat for commercial purposes, it does not follow that the letting out amounted to a business. We have also taken into account Mr. Patil';s repeated reminders that his client';s case was not that there is a temporary letting out of a commercial asset and that the case was that the letting out itself constituted a business. But for the reasons stated above, we are unable to accept the case. 14. As regards the claim that during the year ended 31-3-1998, the assessee did carry on cloth business from the flat in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the property have been assigned to the assessee by the agreement and by clause 4 it was agreed that physical possession would be handed over to the assessee-firm by the builder directly after the vendor receives the full and final payment under the agreement, the legal possession of the building must be taken to be with the assessee. Even otherwise the vendor is none else than one of the partners of the assessee-firm and after the signing of the agreement she must be taken to hold the flat for and on behalf of the firm in her capacity as the partner thereof and not in her individual or separate capacity. Therefore the possession must also be taken to have been with the assessee-firm with effect from 18-3-1995. 17. For the aforesaid reasons, we are of the view that the assessee is entitled to the deduction of the cost of the flat in New Bombay under section 50(1)(iii) in the computation of the capital gains in respect of the sale of the Pune property. 18. The second ground which contains three sub-grounds is that the assessee is entitled to the deduction of the business loss of ₹ 1,42,720 which was denied to the assessee on the ground that no business was carried on du ..... X X X X Extracts X X X X X X X X Extracts X X X X
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