Section 2(11) of the Indian Income Tax Act, 1961 specifies as only two class of assets i.e. tangible and intangible assets and within these two classes of assets, assets having same rate of depreciation are prescribed and they fall within the same block. Whereas, the concept of an asset falling within the same block is driven by the same rate of depreciation once it falls in the same class of assets and namely there are only two classes of assets- tangible assets and intangible assets.
IN THE ITAT DELHI BENCH ‘SMC’
Panchshila Hospitality Ventures Ltd.
Spl. ACIT, Circle 14(1), New Delhi
IT APPEAL NO. 5984 (DELHI) OF 2016
[ASSESSMENT YEAR 2007-08]
AUGUST 31, 2017
Salil Aggarwal, Adv. for the Appellant. T. Vasanthan for the Respondent.
1. This appeal by the assessee is against the order of the Ld. CIT (A) dated 7.10.2016, which order has been passed after the order of the ITAT in the first round of proceedings dated 13.2.2016. In the first round of proceedings, the Ld. CIT (A) has not admitted the appeal of the assessee company on account of delay in filing the appeal, however pursuant to the directions of the ITAT in the first round of proceedings, the Ld. CIT (A) has condoned the said delay and has decided the issue on merits and as such, the impugned appeal is filed pertaining to assessment year 2007-08 on the following grounds:—
|1.||That the learned Commissioner of Income Tax (Appeals) has grossly erred in sustaining the short term capital gain assessed by AO at Rs. 72,81 ,594/- as against short term capital gain of Rs. 7,87,982/-, as declared by the appellant.|
|1.1||That in doing so, the ld. CIT (A) has arrived at the erroneous conclusion that the full value of consideration of Rs. 1.15 crores received by the appellant towards sale of its restaurant consisting of Building, Furniture and Fixtures (Rs. 1,00,00,000) and Plant and Machinery (Rs. 15,00,000) has been split on account .of sale of building, furniture & fixtures, (under one block) and plant & machinery (under different block).|
|1.2||That the ld. CIT (A) has further misunderstood and misread the concept of block of assets and in the process has treated the particular block of assets as a different ‘class or assets’ within the same block, which concept is alien to the scheme of block of Assets under the Indian Income Tax Act, 1961 .|
|1.3||That the ld. CIT (A) has further erred in ignoring the evidence filed by the appellant though admitted as additional evidence during the proceedings before him a Board Resolution and confirmation from the buyer and break-up of sale of assets disclosed in the depreciation chart forming part of computation and income tax return disclosing building (Rs. 70,00,000) furniture & fixture (Rs. 30,00,000) and machinery (to the tune of Rs. 15,00,000/-.|
|1.4||That the ld. CIT (A) has grossly erred in not appreciating the fact that the value of entire block of assets of building and furniture & fixture, on transfer of any asset in the block needs to be set off against full value of the block and the surplus of the sale proceeds vs. the value of block is to be treated as short term capital gain, as computed by the appellant company.|
|1.5||That the learned Commissioner of Income Tax (Appeals) has further grossly erred in relying on the provisions and judgments totally inapplicable to the facts of the case of the appellant company.|
|2.||That the learned Commissioner of Income Tax (Appeals) has erred in sustaining the addition u/s. 14A to the extent of 0.5% of the investment although no satisfaction had been recorded by the AO and the facts that the appellant had not incurred any expenses in relation to the exempt income.|
|3.||That the Ld. CIT (A) has erred sustaining the levy of interest u/s. 234B and 234C of the Act.|
2. The brief facts of the case are that the assessee company has sold during the year under consideration a running restaurant at commercial space B-247, Supermart-I, DLF Phase-IV, Gurgaon on “as is where is” basis including all interior work, civil work, electrical work, kitchen equipment, utensils, Furniture & Fixtures attached to the said premises for a sale consideration of Rs. 1,15,00,000/- (comprising of Rs. 70,00,000/- for building and Rs. 30,00,000/- for Furniture and Rs. 15,00,000/- for Plant & Machinery) for which necessary documents confirming the said sale of assets was filed before the lower authorities. Apart from the above sale of Rs. 1,15,00,000/-, the assessee has sold Plant & Machinery for Rs. 3,00,000/- and Vehicles for Rs. 80,000/- during the year under consideration.
2.1 In the return of income filed by the assessee company, for the AY 2007-08 the assessee had shown a short term capital gain of Rs. 7,87,982/- which was assessed and enhanced by the AO as short term capital gain of Rs. 77,81,594/- instead of the short term capital gain of Rs. 7,87,982/- so claimed by the assessee company. The aforesaid claim by assessee company and so recomputed by AO in assessment order dated 21.12.2009, has been worked out as follows:
Claim of Assessee
|Opening WDV of the block of building/Furniture & Fixture||91,95,520/-|
|Add: Additions during the year||16,538/-|
|Less: Sale Consideration|
|(b) Furniture & Fixtures||30,00,000/-||1,00,00,000/-|
|Balance capital gain as reflected by the assessee Co. in its return of income:||Rs. 7,87,942/-|
|Assessment made by A.O. duly confirmed by CIT (A)|
|Value of consideration||1,15,00,000/-|
|Less: Opening WDV of building||37,18,466/-|
|Short Term Capital Gain||77,81,594/-|
3. During the hearing, learned Counsel of Assessee, Sh. Salil Aggarwal, Advocate, summarized the issue and argued that the issue involved in the instant matter is with respect to interpretation of “class of assets” so included in the “block of assets” for the purposes of computation of capital gain. In simple words, the main thrust of the argument of learned counsel for assessee was that for the purposes of computation of capital gains in the case of depreciable asset under section 50 of the Act, the only condition is that the assets should fall in the same block and there is no requirement that the assets in the same block should also be of same nature or same class.
3.1 Ld. Counsel of the assessee further stated that the AO as well as Ld. CIT (A) have mainly gone by the concept that under section 50 of the Act, it is mandatory that the assets should fall within same “class of asset” and also in the same “block of asset” and should also be eligible for the same rates of depreciation and further, two assets falling within two different class of assets can never constitute a single “block of assets” even though they may be eligible for depreciation at the same rate and thus, the lower authorities have worked out short term capital gain by only considering “building” as the capital asset sold, as the “furniture” and “plant & machinery” fall under different classes of assets. In view thereof, the assessee claim that that building, furniture & fixture and plant & machinery claimed to have transferred by it form the single block of asset was rejected by lower authorities.
4. On the contrary, the learned Sr. DR, Sh. T. Vasanthan, relied on the orders of lower authorities and reiterated the findings of the lower authorities.
5. I have heard both the parties and perused the records available with me and also gone through the facts of the case and the paper books filed by the assessee. Before adverting to main issue, I would like to refer the provisions of section 50 and section 2(11) of the Indian Income Tax Act, 1961. The relevant provisions are reproduced below:
“Section 50 Special provision for computation of capital gains in case of depreciable assets.
Notwithstanding anything contained in clause (42A) of section 2, where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act or under the Indian Income-tax Act, 1922 (11 of 1922), the provisions of sections 48 and 49 shall be subject to the following modifications :—
|(1)||where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of the assets during the previous year, exceeds the aggregate of the following amounts, namely :—|
|(i) expenditure incurred wholly and exclusively in connection with such transfer or transfers;|
|(ii) the written down value of the block of assets at the beginning of the previous year; and|
|(iii) the actual cost of any asset falling within the block of. assets acquired during the previous year, such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets;|
|(2)||where any block of assets ceases to exist as such, for the reason that all the assets in that block are transferred during the previous year, the cost of acquisition of the block of assets shall be the written down value 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.]|
|According to Section 2 (11):|
|“Block of Assets” means a group of assets falling within a class of assets comprising:|
|(a) Tangible assets, buildings, machinery, plant & furniture|
|(b) Intangible assets; being no harm, patents, copy rights, trade marks, licenses, franchisees or any other business or commercial right of similar nature.”|
5.1 After perusing the above provisions of the Act, more specifically section 2(11) of the Act, one thing that evidently becomes clear is that in the Income Tax Act, there are only two categories of class of assets i.e. Tangible and Intangible and within the same class, various block of assets are covered. In the instant case, on going through the order of learned CIT (A), it is observed that he has failed to appreciate the fact that section 2(11) of the Indian Income Tax Act, 1961 specifies as only two class of assets i.e. tangible and intangible assets and within these two classes of assets, assets having same rate of depreciation are prescribed and they fall within the same block. Whereas, the concept of an asset falling within the same block is driven by the same rate of depreciation once it falls in the same class of assets and namely there are only two classes of assets- tangible assets and intangible assets.
5.2 In view of the above, I find that Ld. CIT (A) has completely misunderstood and misconceived the aforesaid provisions of the Act and has wrongly interpreted that an asset can be in the same block only on the basis of class of assets, as well as rate of depreciation and not on rate of depreciation alone. It is the finding of the Ld. CIT (A) that for an assessee to be in the same block of asset, it is mandatory that they should fall within same “class of asset” should also be eligible in the same rate. Ld. CIT (A) in his order has held that, “Two assets falling within two difference classes can never constitute a single “block of assets” even though they may be eligible for depreciation at the same rate.
5.3 The findings recorded by learned CIT (A) is against the provisions as envisaged under the Income Tax Act, which has also been consistently being adopted and followed by the assessee company, which view has also been accepted by the Income Tax Department in the earlier and subsequent years and in light of the provisions of section 2( 11) of the Act read with section 50 of the Act, order so passed by learned CIT (A) is dismissed and addition so sustained by learned CIT (A) is therefore deleted and accordingly, it is held that the short term capital gain of the assessee company be assessed at Rs. 7,87,942/- as declared in its return of income as the same has arisen on sale of assets falling in the same class of assets under section 2(11) of the Act as the rates of depreciation so prescribed for the said building and furniture & fixtures is also the same. Hence, I hold that addition of Rs. 77,81,594/- so sustained by Id. CIT (A) is wholly unwarranted in as much as same was based on complete misreading of the provisions so envisaged in section 2( 11) of the Income Tax Act and as such, appeal of assessee with respect to ground nos. 1 to 1.5 is allowed.
6. With regard to ground no. 2 the assessee is concerned, in this ground the assessee has challenged the disallowance so made under section 14A of the Act read with rule 8D amounting to Rs. 1,21,986/-. Now, in this regard, having heard the arguments of learned counsel of Assessee and learned DR, I hold that the said disallowance is unwarranted on the facts of the instant case, as the same was so made by AO without recording a proper satisfaction with regards to the books of accounts of the assessee and in deleting the said disallowance of Rs. 1,21, 986/-. My aforesaid view is fortified by the judgment of the Hon’ble Supreme Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. CIT  394 ITR 449
7. In the result, the appeal of the Assessee is allowed.