Our Lady Of Band Engg. P.Ltd, Mumbai vs Assessee

Our Lady of Band Engg. Pvt. Ltd. Asst. CIT-10(3), बनाम/ C/o. Vidya & Co., 27 Shagun Arcade, Mumbai Goregaon East, Mumbai-400 063 Vs. थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. AAACO 5804 B (अपीलाथ /Appellant) : ( यथ / Respondent)

अपीलाथ क ओर से / Appellant by : Shri N. R. Agarwal यथ क ओर से/Respondent by : Shri Jeetendra Kumar

सुनवाई क तार ख / : 30.03.2015 Date of Hearing घोषणा क तार ख / : 29.06.2015 Date of Pronouncement

आदे श / O R D E R Per Sanjay Arora, A. M.:

This is an Appeal by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals)-22, Mumbai ('CIT(A)' for short) dated 13.03.2012, dismissing the Assessee's appeal contesting its assessment u/s.143(3) of the Income Tax Act, 1961 ('the Act' hereinafter) for the assessment year (A.Y.) 2009-10 vide order dated 24.12.2011.

2. The facts of the case are that the assessee-company returned Long Term Capital Gain (LTCG) for the year at Rs. 1,35,96,138/-. The same was on sale of factory land and building, against which exemption u/s.54 for investment in REC Bonds at Rs. 50 lacs (on 2 ITA No. 3109/Mum/2012 (A.Y. 2009-10) Our Lady of Band Engg. Pvt. Ltd. vs. Asst. CIT

31.12.2008), was claimed. While the land (1,000 sq.mts), which was on lease-hold basis from MIDC since 1992, was a long-term capital asset, the factory building (admeasuring 340 sq mts.), being a depreciable asset, capital gain thereon would have to be computed u/s.50 of the Act as Short Term Capital Gain (STCG). Thus, in the view of the Assessing Officer (AO), the capital gain shall have to be computed for land & building separately, requiring ascribing the sale consideration, received in the composite sum of Rs. 2 crores, to each. The factory building was subject to depreciation @ 10% p.a. Working backward on the basis of its' Written Down Value (WDV) as at the end of the immediately preceding year (Rs. 3 lacs), he computed its cost at Rs. 14.57 lacs, while that of the leasehold land was at Rs. 3.04 lacs, yielding a cost ratio of Rs. 17.25: 82.75. The capital gain for the two assets was worked out accordingly, as: LTCG (at Rs. 26,57,723) and STCG (at Rs. 1,62,50,0230). The assessee disputed the same, stating that the factory building had in fact been constructed at a cost of Rs. 6,30,433/-, with major renovation carried out (at Rs. 4,20,300/-) in f.y.1994-95. The AO was thus wrong in working the original cost of the factory building at Rs. 14.57 lacs. Further, the sale value of the factory was in fact that of the plot of land alone, the market not placing any value of the superstructure, also seeking to place on record the market value of the plot as per the stamp valuation authority. The same, however, did not find favour with the learned CIT(A). The assessee had clearly sold land and building, so that the total sale value had to be allocated to both, for which a reasonable basis is to be, and in fact stood, adopted. No sufficient cause had been shown by the assessee for not furnishing the materials being now sought to be relied upon, so that the same were not admitted. The assessment of the capital gains being confirmed thus, the assessee is in second appeal.

3. We have heard the parties, and perused the material on record.

In our clear view, firstly, both the parties are at fault. The assessee, on its part, had not furnished the relevant materials so as to enable proper estimation of the sale value to be imputed to each of the two assets and, thus, a proper assessment of LTCG and STCG. This, despite being represented before both the Revenue authorities to whom the matter 3 ITA No. 3109/Mum/2012 (A.Y. 2009-10) Our Lady of Band Engg. Pvt. Ltd. vs. Asst. CIT

had travelled prior hereto. We, thus, do not set much store for its plea for admission of additional evidence/s. At the same time, it is undeniable that while land does not depreciate, building does, and which is precisely the reason for treating the two assets separately, even as the two form an integral part of the same commercial asset, i.e., an industrial unit (refer: CIT v. Alps Theatre [1967] 65 ITR 377 (SC) and CIT v. Citi Bank N.A. [2003] 261 ITR 570 (Bom)). How could then, one may ask, the AO treat the two at par, which assumption underlies his appropriation algorithm or formulae, i.e., by treating their respective costs (at a particular point of time) as the basis. This represents the basic fallacy in the Revenue's case. The same presumes that the same forces impinge on the two, resulting in the same mark up or inflation in their cost (price) over time. Land, being not subject to depreciation, the sole basis for the movement in its price would be the market, which represents the equilibrium of demand and supply forces, unless and to the extent regulated, as where the government acquires and provides land on freehold or leasehold basis; the instant being a case of the latter. Building or the civil construction, is, firstly, subject to depreciation in-as much it has a defined life, which could be assessed fairly and accurately on the basis of the technical analysis of the structure. Two, the building cost would witness variation in price also for the reason of the increase in the price of the various input materials - which turn depends on the market price of its factors of production, including direct labour of different types, involving different skill sets, that is engaged.

We are, however, in agreement with the Revenue that it is both the land and building that can be considered as having been sold together for a composite price. This is as there is nothing on record to show that the sale consideration was only towards land. The proper basis, therefore, for arriving at a fair ratio between, or the comparative weights to be assigned to, the two assets sold together (as a unit), is to value them independently at their respective market prices. The assessee has in this regard adduced the sale value of land. This may be relevant, though may have to be factored for the unexpired period of lease inasmuch the rights in land are for a defined period. Again, the building value at current prices shall have to be discounted for the depreciation for the 4 ITA No. 3109/Mum/2012 (A.Y. 2009-10) Our Lady of Band Engg. Pvt. Ltd. vs. Asst. CIT

expired period of its life (at the time of transfer). The capital gain shall have to be computed by allocating the sale consideration in the ratio so arrived at, yielding LTCG and STCG qua the transfer of land and building respectively.

We may also clarify on the application of the decision by the hon'ble jurisdictional high court in the case of CIT vs. ACE Builders Pvt. Ltd. [2006] 286 ITR 210 (Bom), relied upon by the assessee. It, on its basis, claims to be entitled to exemption u/s. 54EC (wrongly stated in the assessment order as u/s. 54) for investment in REC bonds for Rs. 50 lacs on the STCG in-as-much as it arises on the transfer of a long-term capital asset. As explained by the hon'ble court, the deeming of section 50 is limited only to the manner of computing capital gains qua depreciable assets and, two, in its categorization as STCG, i.e., irrespective of the period of holding. True, the provision (section 50) specifically speaks of overriding section 2(42A), defining short-term capital asset. As such, where and to the extent inconsistent, s.50 shall prevail. Section 54EC, however, speaks of long-term capital asset, and which definition is not impacted by the deeming of section 50. The assessee shall, accordingly, be entitled to exemption u/s. 54EC, subject to the total at Rs. 50 lacs, also against the STCG computed u/s. 50.

The matter shall travel back to the file of the AO for computing LTCG and STCG arising on the transfer of the assessee's industrial unit during the year, allowing the assessee a reasonable opportunity to present its case before him, by issuing definite findings of fact, in accordance with law. The assessee shall be entitled to rely on any materials it may deem fit for the purpose, and the AO, similarly, on materials, if any, that may be gathered by the latter in rebuttal or to meet the assessee's case, and so on. In other words, the adjudication qua the said issue is open. One may be tempted, on our so directing, to suggest that we have therefore indirectly admitted the assessee's plea qua admission of additional evidences, i.e., in-so-far as they relate to the merits of the claim. Be that as it may, the tribunal is not constrained not to set aside the matter under reference, for justifiable reasons - as found by us, for fresh consideration. The admission of additional evidence/s, in view thereof, loses significance, even as rule 29 of the Appellate Tribunal Rules, 1963 itself provides for admission of additional evidences for 5 ITA No. 3109/Mum/2012 (A.Y. 2009-10) Our Lady of Band Engg. Pvt. Ltd. vs. Asst. CIT

any substantial cause. Also, it being an open set aside, the reliance by the assessee is not limited to the materials sought to be admitted as evidences. It would, in fact, extend also to evidences that may be adduced to meet the Revenue's case. We decide accordingly.

4. The assessee has raised an additional ground, filing a revised Form 36 (PB pgs. 93-94), and which only was considered at the time of hearing. Vide Ground 3 thereof, the assessee seeks set off of the brought forward unabsorbed depreciation allowance (from A.Ys. 1998-99 to A.Y. 2008-09/PB pg. 95) against the STCG or, as the case may be, LTCG. The issue raised being legal, with all the relevant facts on record; the assessee having in fact claimed the unabsorbed depreciation and loss from A.Ys. 1998-99 to A.Y. 2004-05 per the return of income itself (PB pg. 76), the additional ground (numbered as ground 3 of the revised memo of appeal) is admitted. As regards the merits, the issue is no longer res integra, having been clarified by the apex court as far back as in CIT vs. Virmani Industries P. Ltd. [1995] 216 ITR 607 (SC), so that the unabsorbed depreciation would stand to be set off against the income assessable under any other head of income. This would be so even where the business to which the depreciation pertains stands discontinued, or there is no business activity, as clarified in, among others, CIT vs. Kriti Resorts P. Ltd. [2011] 243 CTR 341 (HP) and CIT vs. GTM Synthetics [2012] 347 ITR 458 (HP). Further, the amendment to section 32(2) by Finance Act, 2001 restoring the provision to that as existed prior to the amendment by Finance (No. 2) Act, 1996 (and further amended by Finance Act, 2000), providing for a time limit for the carry forward of unabsorbed depreciation allowance, has been interpreted in General Motors India (P.) Ltd. vs. Dy. CIT [2013] 354 ITR 244 (Guj) to mean that the unabsorbed depreciation from AY 1997-98 onwards, which has not been absorbed till AY 2002-03, shall be carry forward to the succeeding years, i.e., AY 2003-04 onwards, till final set off.

We accordingly direct for the allowance of the brought forward unabsorbed depreciation allowance u/s. 32(2) against the STCG or LTCG, if any, assessable for the current year, with the balance being carry forward ad infitim. We decide accordingly, allowing the assessee's claim.

6 ITA No. 3109/Mum/2012 (A.Y. 2009-10) Our Lady of Band Engg. Pvt. Ltd. vs. Asst. CIT

5. In the result, the assessee's appeal is partly allowed and partly allowed for statistical purposes.

Order pronounced in the open court on June 29, 2015

Sd/- Sd/- (Sanjay Garg) (Sanjay Arora) या यक सद य / Judicial Member लेखा सद य / Accountant Member मुंबई Mumbai; दनांक Dated : 29.06.2015 Sharwan Kumar, PS & Roshani, Sr. PS आदे श क त ल प अ े षत/Copy of the Order forwarded to : 1. अपीलाथ / The Appellant 2. यथ / The Respondent 3. आयकर आयु त(अपील) / The CIT(A)-22, Mumbai 4. आयकर आयु त / CIT - concerned 5. वभागीय त न ध, आयकर अपील य अ धकरण, मुंबई / DR, ITAT, Mumbai 6. गाड फाईल / Guard File आदे शानुसार/ BY ORDER,

उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील य अ धकरण, मुंबई / ITAT, Mumbai