PRINCIPAL COMMISSIONER OF INCOME TAX 4 vs. STOVEC INDUSTRIES LTD.

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TAXAP/1274/2018HC GujaratGJHC24064241201829 October 2018Author: HONOURABLE MR. JUSTICE AKIL KURESHI,HONOURABLE MR. JUSTICE UMESH A. TRIVEDI3 pages
AI SummaryDismissed

What did the High Court hold?

On the first issue concerning capital gains, the Tribunal agreed with the CIT(A)'s view that the sale consideration arising from the land should be treated as long-term capital gain. The Tribunal found that the CIT(A) had rightly segregated the land and building for capital gains calculation. Consequently, the Tribunal held that no substantial question of law arose on this point. Regarding the second issue of warranty expenses, the Tribunal noted that the assessee had consistently made such claims, which were not disallowed in past assessments. The Tribunal relied on the Supreme Court decisions in Rotork Controls India Private Limited v. Commissioner of Income Tax and Bharat Earth Movers v. Commissioner of Income Tax. It observed that the provision for warranty was estimated on a scientific basis and was therefore allowable. The Tribunal confirmed the CIT(A)'s decision to allow the provision.

What were the facts?

The Revenue filed an appeal against the ITAT's order dated April 11, 2018. The appeal concerned Assessment Year 2009-10. The assessee, Stovec Industries Ltd., sold land and a factory building for Rs. 5.75 crores. The assessee initially declared the proceeds as long-term capital gain. The Assessing Officer (AO) treated the transaction as short-term capital gain, considering the building as a depreciable asset. The Commissioner of Income Tax (Appeals) [CIT(A)] partially allowed the assessee's claim, treating the land sale as long-term capital gain and the building sale as short-term capital gain, thereby restricting the addition. The ITAT confirmed the CIT(A)'s view. The appeal also addressed the disallowance of a provision for warranty expenses amounting to Rs. 21,10,038.

What were the issues?

1. Whether the Appellate Tribunal has erred in law and on facts in confirming the decision of the CIT(A) in deleting the addition on account of Short Term Capital Gain on the sale of land and building of Rs. 4,89,24,276/-? (Section 45 of the Income Tax Act, 1961, concerning capital gains). The Revenue argued that the AO correctly treated the entire transaction as short-term capital gain because the building was a depreciable asset. The Assessee contended that the land and building should be treated separately, with the land sale resulting in long-term capital gain. 2. Whether the Appellate Tribunal has erred in law and on facts in upholding the decision of the CIT(A) on the disallowance of provision of Warranty expenses of Rs. 21,10,038/-? (Section 37 of the Income Tax Act, 1961, concerning business expenditure). The Revenue likely argued for the disallowance, while the Assessee contended for its allowability. The judgment does not explicitly detail the Revenue's arguments on this issue.

Which sections of the Income-tax Act were involved?

Section 45,Section 37

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
C/TAXAP/1274/2018 ORDER IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 1274 of 2018 ========================================================== PRINCIPAL COMMISSIONER OF INCOME TAX 4 Versus STOVEC INDUSTRIES LTD. ========================================================== Appearance: MRS MAUNA M BHATT(174) for the PETITIONER(s) No. 1 for the RESPONDENT(s) No. 1 ========================================================== CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MR.JUSTICE UMESH TRIVEDI Date : 29/10/2018

ORAL ORDER (PER : HONOURABLE MR.JUSTICE AKIL KURESHI)

1.

Revenue has filed this appeal challenging the judgment of ITAT dated 11.4.2018 raising the following question for our consideration: “[A] Whether the Appellate Tribunal has erred in law and on facts in conforming the decision of CIT(A) in deleting the addition on account of Short Term Capital gain on account of sale of land and building of Rs.4,89,24,276/-?” [B] Whether the Appellate Tribunal has erred in law and on facts in upholding the decision of CIT(A) on disallowance of provision of Warranty expenses of Rs.21,10,038/-?”

2.

The question (A) arises out of the action of the assessee of sale of land and building during the period relevant to the C/TAXAP/1274/2018 ORDER Assessment Year 2009-10. The assessee had sold the factory building situated at GIDC, Narol, for a total sale consideration of Rs.5.75 crores. In the return, the assessee declared the proceeds as long term capital gain. The Assessing Officer was of the opinion that the property was a depreciable assets. The assessee had shown the land and building as one asset. He

therefore assessed the tax on the basis of the transaction being one of short term capital gain.

3.

CIT(Appeals) granted relief to the assessee by treating the sale consideration arising out of the land as long term capital gain and that arising out of the sale of building as short term capital gain. He, therefore, restricted the addition made by the Assessing Officer. The Tribunal confirmed the view of the CIT(Appeals) observing that he has rightly treated the sale consideration arising out of the sale of land as long term capital gain. With this view, we are in broadly agreement. No question of law therefore arises.

4.

The second question pertains to disallowance of a sum of Rs.20.10 lakhs which was by way of provision of warranty expenses. CIT(Appeals) and the Tribunal noted that the assessee had been making such claim consistent with the past which was never disallowed by the assessing officer in scrutiny the assessment order except the one which was reversed by the CIT(Appeals). The Tribunal relied on the decision of the Supreme Court in the case of Rotork Controls India Private Limited v. Commissioner of Income Tax [314 ITR 62 SC] and Bharat Earth Movers v. Commissioner of Income Tax [245 ITR 428] and observed that the provision for the warranty was estimated by the C/TAXAP/1274/2018 ORDER assessing officer by scientific basis and was therefore allowable.

5.

In the result, Tax Appeal is dismissed. (AKIL KURESHI, J) (UMESH TRIVEDI, J) syed/

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