Sale of land taxable as capital gains even if depreciation claimed on quarters built on it : ITAT Mumbai

ORDER

Saktijit Dey, Judicial Member – The aforesaid appeals, one by Revenue and the other by the assessee, are against two separate orders of the Commissioner(Appeals)-6, Mumbai for assessment years 2009-10 and 2011-12, respectively.

ITA No. 4094/Mum/2013 – A.Y. 2009-10

2. The effective grounds raised by the Department in this appeal are as under: —

“2. On the facts and in the circumstances of the case, the Ld. CIT (A) has erred in granting relief to the assessee overlooking fact that the land along with staff quarters constructed thereon formed part of the schedule of depreciable assets and the assessee has been claiming depreciation, thereby making the provisions of Section 50(1) applicable to the transfer.

3. On the facts and in the circumstances of the case, the Ld. CIT (A) has erred in directing that claim regarding deduction of 1.04 crore paid as settlement to the employees is to be allowed overlooking the fact that the assessee had no business activity during the previous year and therefore, such expenditure cannot be allowed.”

3. The brief facts relating to the disputed issue are that the assessee company for the assessment year under dispute filed its return of income on 24.09.2009 declaring Nil income. During the assessment proceedings, from the information and material available on record, the Assessing Officer (AO) found that the assessee was owner of a closed textile mill. After settling the legal disputes and proceedings before the BIFR assessee got possession of the assets of the company. Thereafter, the assessee entered into agreement with different builders for selling the immovable property of the closed textile mill. On verifying the Profit & Loss Account and computation of income the AO found that in the relevant previous year assessee has executed a sale deed with a builder, M/s. Sanghvi Premises P. Ltd. for sale of the property. The AO noticed that the assessee has offered long term capital gain from sale of property by treating it as sale of land. However, the AO was of the view that the properties sold comprise of mill workers quarters against which the assessee has claimed depreciation earlier. The proceeds from sale of property has to be taxed as short term capital gain. Therefore, he called upon the assessee to explain as to why the income should not be assessed as short term capital gain. In response it was submitted by the assessee that the property in question sold by the assessee since was a land, the sale proceeds has to be assessed as long term capital gain. In this context the assessee relied upon the sale deed as well as the confirmation of the buyer, i.e. M/s. Sanghvi Premises P. Ltd. in response to the notice issued under Section 133(6) of the Income Tax Act (hereinafter “the Act”). The AO, however, did not find merit in the submission of the assessee. Referring to Schedule-IV of the Balance Sheet filed along with the return of income of the impugned assessment year the AO observed that property sold by the assessee has been shown as staff quarters on which assessee has claimed depreciation over the years. Therefore, he held that computation of capital gain will have to be made in terms of Section 50(1) of the Act providing for capital gain on depreciable assets. He observed that description of the property as vacant land in the sale deed or confirmation by the buyer are mere afterthoughts and cannot override the taxability of income as short term capital gain. Further, the AO observed that the development agreement between the assessee and M/s. Sanghvi Premises P. Ltd. was registered on 29.10.2005. Thus, according to the AO, as per section 2(47)(b) of the Act transfer of the property took place in the financial year 2005-06, hence, the capital gain should have been taxed in A.Y. 2006-07. In this context the AO referred to the decision of the Hon’ble Jurisdictional High Court in the case of Chaturbhuj Dwarkadas Kapadia of Bombay v. CIT [2003]260 ITR 491 (Bom.). Thus, the AO observed that income chargeable to tax in A.Y. 2006-07 has escaped assessment and proposed to initiate action for reopening of assessment under Section 147 of the Act for A.Y. 2006-07 to bring the capital gain from sale of property to tax in A.Y. 2006-07. Further, the AO observed that for all practical purposes the assessee has relinquished all its rights in the property through the registered agreement dated 29.10.2005 and the assessee has handed over physical possession in February, 2009. Ultimately, the AO observed that short term capital gain arising from sale of the property is to be assessed on protective basis in the impugned assessment year, whereas, substantive addition will be made in A.Y. 2006-07. Accordingly, he made addition of Rs. 2,90,04,307/- on account of short term capital gain on protective basis. Assessee challenged the aforesaid addition before the learned CIT (A).

4. The learned CIT (A), after considering the submissions of the assessee and perusing the development agreement between the parties executed on 29.10.2005, observed that as per the terms of development agreement assessee was responsible for vacating the employees from the staff quarters at his own cost and risk and hand over the vacant possession of the land to the developer. He observed, since, the assessee could not get the staff quarters vacated, finally the developer has to step in to get the staff quarters vacated by paying an amount of Rs. 1,04,00,000/- to various employees of the assessee by issuing cheques to them over a period from 26.11.2007 to 25.02.2009 and reduced the said amount from the agreed sale consideration. He further observed that in response to notice issued under Section 133(6) of the Act the developer has clearly stated that he has acquired the land for the purpose of developing and converting it into real estate. Thus, the learned CIT (A) was of the opinion that the intention of the parties was to transfer the land only as the developer was not interested in buying staff quarters, which were occupied by the employees of the assessee and, in fact, the staff quarters were creating a hindrance in the transfer of the land. Thus, the CIT (A) held that the staff quarters did not yield any gain to the assessee, rather, it took away Rs. 1.04 crores from the consideration of land for getting those staff quarters vacated. The learned CIT (A) concluded that since the asset transferred was a land on which no depreciation is allowable under the Act, the provisions of Section 50(1) are not applicable. Hence, the gain on transfer of land is assessable as long term capital gain. As regards the observation of the AO that capital gain should have been taxed in A.Y. 2006-07, the learned CIT (A) taking note of the fact that the AO has not taken any action for assessing the capital gain in A.Y. 2006-07, observed that the matter pertaining to any assessment year other than the impugned assessment year cannot be subject matter of appeal.

5. The learned Departmental Representative relying upon the observations of the AO, submitted that there is no dispute that the property sold by the assessee from which the capital gain arose was comprising of land and building used as staff quarters for the employees of the assessee. He submitted that there is no dispute that assessee has claimed depreciation on staff quarters over the years and the property is also mentioned as staff quarters in the Schedule of fixed assets forming part of the Balance Sheet of the assessee. Thus, the learned D.R. submitted that as per assessee’s own admission the property sold is a building used as staff quarters on which assessee has claimed depreciation and computation of capital gain has to be made in terms of section 50(1) of the Act as has been provided for depreciable assets. Thus, it was submitted that the learned CIT (A) was not justified in hold that the gain derived from sale of property has to be assessed as long term capital gain. Further, the learned D.R. submitted that the recitals of the development agreement does not mention anything about the quarters standing over the land and it is not clear whether the property was given for development with quarters or whether the assessee has demolished the quarters and sold the land only. Thus, it was submitted that the addition made by the AO should be restored.

6. The learned A.R. strongly relied upon the finding of the learned CIT (A) and submitted that as per the recitals of the development agreement the property transferred is only land. He submitted that the capital asset transferred as per the deed of recitals is only land and the AO was wholly misconceived in treating the gain as short term capital gain. He submitted that even in response to the notice issue under Section 133(6) of the Act the buyer has confirmed that it has only purchased the land from the assessee. The sale deed further enjoins upon the assessee to get the staff quarters vacated at its own cost and since the assessee failed to get it vacated even after considerable lapse of time, the buyer took it upon itself to vacate the property by paying an amount of Rs. 1.04 crores to the employees of the assessee, which was adjusted against the sale consideration. The learned A.R. submitted that as per provisions of Section 50(1) of the Act, the capital asset must form part of block of asset. He submitted that in the case of the assessee it is not so as the land in question never formed part of the block of asset. He submitted that as per section 2(11) of the Act block of asset does not include land. Therefore, provisions of Section 50(1) is not applicable as the land is not subjected to depreciation. The learned A.R. submitted, the allegation of the AO that the claim of sale of vacant land as per the sale deed and confirmation of the buyer is an afterthought is misplaced considering the fact that the assessee has entered into development agreement in the year 2005 which cannot be considered to be an afterthought in the year 2011. Without prejudice to the aforesaid submission, the learned A.R. submitted that the assessee has entered into a registered development agreement in the financial year 2005-06 relevant to A.Y. 2006-07. As per the terms of development agreement, transfer of the property has taken place on the date of execution of the agreement in terms of Section 2(47)(v) as held by the Hon’ble Jurisdictional High Court in the case of Chaturbhuj Dwarkadas Kapadia of Bombay (supra). He submitted, the AO himself has accepted this fact in the assessment order and has given a categorical finding that the capital gain arising from the said transaction should have been taxed in A.Y. 2006-07 and, therefore, proposed initiation of proceedings under Section 147 of the Act and added the short term capital gain in the impugned assessment year on protective basis. Thus, it was submitted, when the transfer of capital asset has taken place in A.Y. 2006-07, it cannot be assessed in the impugned assessment year even on protective basis. The learned A.R. submitted, since the CIT (A) has not properly dealt with this aspect of the issue the assessee is entitled to raise the issue in support of the order of the learned CIT (A) as per the provision contained in Rule 27 of the Income Tax Appellate Rules, 1963. In support of such contention he relied upon the following decisions: –

1. Assam Co. (India) Ltd. v. CIT [2003] [2002] 256 ITR 423 (Gau.)

7. We have considered rival contentions and pursed the material on record. We have also applied our mind to the decisions relied upon. The basic issue arising for consideration before us are twofold. Firstly, whether the gain from the immovable property sold by the assessee is to be treated as long term capital gain or short term capital gain and secondly, the assessment year in which such gain is taxable. In so far as the first issue relating to the nature of capital gain is concerned, it is to be seen that the AO has assessed it as short term capital gain on the reasoning that the property sold by the assessee comprises of staff quarters on which assessee had claimed depreciation. Therefore, it has to be treated as short term capital gain as per Section 50(1) of the Act. Per contra, it is the claim of the assessee that the property sold is land, hence it has to be assessed as long term capital gain. Though, it is a fact that in the schedule of fixed assets forming part of the Balance Sheet assessee has shown the value of staff quarters at Rs. 12,26,193/- and it is also a fact that these staff quarters were standing over the land sold by the assessee, however, after going through the recitals of the registered agreement dated 29.10.2005 it is very much clear that the intention of the parties was to sell the land as the value offered under the sale transaction was the value of land and not the staff quarters. It is further evident that the buyer purchased the property for the purpose of developing the land as a real estate. Thus, reading the development agreement makes it clear that the immovable property subjected to transfer was the land and not the staff quarters. It is further clear from the fact that the terms of the deed required the assessee to vacate the employees from the staff quarters and handover the vacant possession of the property to the buyer. Since, the assessee failed to vacate the staff quarters, the buyer took it upon itself to vacate the employees from the staff quarters by paying compensation to them to the tune of Rs. 1.04 crores. Thus, from the aforesaid facts it is clear that the buyer intended to buy the land for the purpose of developing it and the consideration paid was also for the land in question. Further, if one looks at the consideration paid by the buyer to the assessee, in no stretch of imagination it can be said that the consideration paid was for staff quarters as the value of the staff quarters, as per the Schedule of fixed assets, is only Rs. 12,36,193/-, whereas, the consideration paid to the assessee as per the development agreement is Rs. 2,92,50,000/-. Thus, it becomes clear from the registered development agreement, what the parties intended to transact is the land and the consideration paid was also for the land. Section 50(1) of the Act lays down the procedure for computation of capital gain of a capital asset forming part of the block of asset in respect of which depreciation has been allowed. The block of asset has been defined under Section 2(11) of the Act. As per the said definition it does not include land. Undisputedly, in the present case the asset transferred is a land. That being the case, provisions of Section 50(1) will not be applicable. Thus, the assessee’s claim of long term capital gain by treating the asset sold as land has to be accepted.

8. Having held so, now we will deal with the second issue relating to assessment year in which capital gain has to be assessed. In this context it needs to be mentioned that the learned counsel for the assessee taking resort to Rule 27 of the Income Tax Appellate Tribunal Rules, 1963 has advanced a without prejudice argument that the transfer of capital asset having taken place in the assessment year 2006-07 in terms of section 2(47)(v) of the Act, it cannot be assessed in the impugned assessment year. As could be seen from the facts on record, assessee has entered into a registered development agreement with M/s. Sanghvi Premises P. Ltd. on 29.10.2005. As per the terms of the agreement, transfer of the land should be concluded on the date of execution of the deed. Thus, in terms of Section 2(47)(v) of the Act there was transfer of capital asset in so far as it relates to the land in question. The ratio laid down by the Hon’ble Jurisdictional High Court in the case of Chaturbhuj Dwarkadas Kapadia of Bombay (supra) supports this view. In fact, the AO himself relying on the aforesaid decision has held that the capital gain should have been taxed in A.Y. 2006-07, since, the transfer of the capital asset in terms of Section 2(47)(v) of the Act has taken place in that assessment year. In view of the aforesaid, we hold that the gain derived from transfer of capital asset was to be assessed in A.Y. 2006-07 and not in the impugned assessment year. Further, considering the fact that this without prejudice argument was made by the assessee under Rule 27 of the Income Tax Appellate Tribunal Rules, 1963, under which the assessee is entitled to support the order of the CIT (A) on any ground decided against him, the relief is to be restricted to the extent given by the learned CIT (A). Accordingly, we uphold the order of the CIT (A) on this issue.

9. As regards deduction of claim of Rs. 1.04 crores towards payment made by the builder to the employees for vacating the staff quarters, the material on record clearly demonstrate that as per the terms of the agreement the assessee was obliged to handover the vacant possession of the land to the builder after vacating the employees from the staff quarters. However, it is evident that the assessee has failed in its attempt to vacate the employees. Therefore, the buyer stepped in and after paying compensation of Rs. 1.04 crores to the employees he got the staff quarters vacated. Thus, the said amount was adjusted from the agreed sale consideration to be paid to the assessee. The aforesaid facts make it clear that the amount of Rs. 1.04 crores was never received by the assessee from the buyer as the buyer adjusted it from the sale consideration. In any case of the matter, even if it is treated as part of sale consideration the amount of Rs. 1.04 crores have to be treated as expenditure incurred by the assessee for transferring the property, hence allowable under Section 48 of the Act. Thus, looked at from any angle the amount of Rs. 1.04 crores has to be allowed as deduction. Therefore, we uphold the order of the CIT (A) on this issue by dismissing the ground raised by the Revenue.

10. In the result, Department’s appeal is dismissed.

ITA No. 2279/Mum/2015 – A.Y. 2011-12

11. The solitary dispute in the present appeal by the assessee is with regard to the addition of an amount of Rs. 1,50,41,209/- as short term capital gain.

12. Brief facts are, during assessment proceedings, on the basis of information available on record, it was found that in the relevant previous year assessee had sold a guesthouse which was given to the Director and staff as quarters. It was also found that the assessee had claimed depreciation over the said asset. Thus, the AO was of the view that the gain arising from the said depreciable asset has to be taxed as short term capital gain. In the course of assessment proceedings, when the assessee was called upon to explain as to why the amount in question should not be assessed as short term capital gain, it was submitted by the assessee that similar transaction undertaken by the assessee in A.Y. 2009-10 was allowed as long term capital gain and the same treatment has to be given in the impugned assessment year also. The AO, however, was not convinced with the explanation of the assessee. He observed that the decision of the CIT (A) in A.Y. 2009-10 has not been accepted by the Department and proceeded to assess the gain derived from sale of assets as short term capital gain by treating the asset as depreciable asset.

13. Assessee challenged the addition made the AO before the CIT (A). The CIT (A), after perusing the material on record, held that as per the Schedule of fixed assets there was no mention of land. On the contrary the staff quarters of Simplex House has been shown as depreciable asset. Further, in the return of income for the impugned assessment year, the assessee has claimed depreciation on the opening written down value of the asset. Thus, the learned CIT (A) held that the assets sold being a depreciable asset the gain derived from sale of asset has to be treated as short term capital gain under Section 50(1) of the Act.

14. The learned A.R. submitted before us that the assessee has sold both land and building and has accordingly offered long term capital gain for sale of land and short term capital gain for sale of building in the return of income filed for the year. He submitted that the land in question not being a depreciable asset, the gain derived from sale of land cannot be treated as short term capital gain under Section 50(1) of the Act.

15. The learned D.R. relied upon the observations of the AO and the learned CIT (A).

16. We have considered rival contentions and perused the material on record. As could be seen from the facts on record the assessee, vide agreement dated 15.04.2009, has sold its ²/3 share in land and structure on Plot No. 44 at Juhu for a consideration of Rs. 3.26 crores, out of which the assessee has received Rs. 1 crore prior to the sale agreement and out of the balance amount of Rs. 2.26 crores assessee received Rs. 51 lakhs during the previous year relevant to assessment year in dispute. In the return of income filed the assessee offered long term capital gain of Rs. 46,75,448/- from sale of land portion and short term capital gain of Rs. 6,78,561/- on the built up portion. Thus, as could be seen from the facts on record, assessee itself has bifurcated the sale of property to land and building portions and offered long term capital gain and short term capital gain on the sale consideration received. However, when the Bench put a query to the learned counsel for the assessee regarding the exact extent of land and building sold and how the valuation of the land portion and building portion was made, the learned counsel for the assessee fairly submitted that the relevant documents have not been filed. Even, the copy of the sale agreement has not been filed before us. Thus, in the absence of these primary and basic facts and documents such as sale agreement as well as the basis for valuation of property, it is difficult for us to render any conclusive finding on the claim made by the assessee. In view of the aforesaid, we are inclined to restore the disputed issue to the AO for de novo adjudication after affording due opportunity of hearing to assessee.

17. In the result, the appeal filed by the assessee is allowed for statistical purposes.

18. In nutshell, the appeal of the Revenue is dismissed and the appeal of the assessee is allowed for statistical purposes.

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