M/S KEMWELL PVT LTD,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, BANGALORE

The assessee has raised the following grounds:- “9. The impugned order is bad in Law.

The assessee is engaged in the business of manufactures of drugs and pharmaceutical. The assesee filed its original return of income on 14/10/2010 and subsequently filed a revised return of income on 29/9/2010 declaring an income of Rs.1,03,05,662/-. The case was selected for scrutiny and the notice u/s 143(2) of the Income- tax Act (the Act) was duly served on the assessee. During the course of hearing, the AO made a disallowance u/s 14A r.w.r 8D for Rs.2,66,123/- and brought to tax a sum of Rs.93,80,891/- as short term capital gain u/s 50 of the Act.

Aggrieved by the order of the AO, the assessee is instituted an appeal before the CIT(A).

The CIT(A) partly allowed the appeal of the assessee whereby he deleted the disallowance u/s 14A and confirmed the short term capital gain as computed by the AO.

Aggrieved by the order of the CIT(A), the assessee is in appeal before us.

The assessee owns a building at various places and some of the buildings were let out on rent. One such building at the Dalamal Towers, Mumbai is used for the business purpose of the assessee and the assessee duly claimed depreciation u/s 32 of the Act. Buildings owned by the assessee were part of block of assets. The assessee has demerged its Pharmaceutical business division along with assets and liabilities in favour of M/s.Kemwell Biopharma Pvt Ltd effective 01/04/2009. After the demerger, the assessee did not have any business in Mumbai and there was no necessity to keep the building. Hence during the relevant assessment year, the assessee sold the building at Dalamal Towers at Mumbai for a sale consideration of Rs.95,00,000/- from the block of assets. The AO during the course of hearing, found that the assessee has claimed the profit earning of sale of fixed assets as deduction from the total business income and asked for further details. The assessee submitted before the AO that the sold property was part of block of assets as defined u/s 2(11) of the Act and that the assessee was claiming depreciation on the said building until the previous financial year. The assessee also submitted that during the year under consideration, no depreciation was claimed since the asset was not put to use for business purposes during the year. The assessee further submitted that, the assets continued to be part of the block of

The AO did not accept the submissions of the assessee and held that the sale proceeds of the said building cannot be adjusted against the block of assets as of the remaining assets in the blocks are let out buildings.

Aggrieved by the order of the AO, the assessee preferred an appeal before the CIT(A), who upheld the decision of the AO stating that the asset sold is no longer part of the block of assets, as no depreciation was claimed on the asset and hence the gain arising out of the sale of asset has to be treated as short term capital gains.

The assessee is now in appeal before the Tribunal against the order of the CIT(A). The Ld AR, drew our attention to the depreciation schedule as re-produced below for the previous financial year and the year under consideration.

The Ld AR submitted that buildings which are let out though part of the block, no depreciation was claimed for those buildings. The Ld AR also submitted that during the year under consideration no depreciation was claimed for all the assets except vehicles, as they have not been put use for the purpose of business post demerger. The Ld AR argued that the remaining value of the assets in the block is not exhausted and hence the assessee adjusted the sale value of the asset against the block as per the provisions of section 32 of the Act.

The Ld DR supported the decision of the lower authorities and argued that as per the provisions of section 2(11) the assets to be part of the same block should be same class of assets chargeable with same percentage of depreciation. The Ld DR submitted that the buildings that are rented out are also being considered as part of the block and hence the sale value being adjusted against the said block is not correct.

We have heard the rival submissions and perused the materials on record. From the perusal of the depreciation schedule submitted by the assessee, it is clear that the assessee has shown (i) Factory Building, (ii) Building used for business purposes and (iii) Buildings let out under the same block of assets. So the first issue that needs to be considered is whether all these buildings are correctly grouped to be part of the block of assets. We will look at the provisions of section 2(11) which defines the term block of assets

From the definition it is clear that all the assets falling under the same class and for which the same rate of depreciation is prescribed, constitute one block of asset. In assessee’s case, the let out building against which no depreciation is claimed i.e. the building with NIL depreciation is grouped under the block. The income from letting out of these buildings is already assessed as income from house property against which statutory deduction under section 24 of the Act is already allowed. Hence in our considered view buildings that are let out cannot be part of the block of assets as defined u/s.2(11) of the Act.

The asset other than the asset sold in the block is the ‘Factory Building’. The rate of depreciation for factory building is same as that of the other building used for the purpose of the business and the factory building belongs to the same class of asset. Therefore it is correct to group the factory building as forming part of the block of assets along with other building used for the purpose of business. In the fixed asset schedule submitted, we notice that that the value of the factory building is Rs.169,333,730/- and that the value of the block is not exhausted after reducing the sale value of the building Dalamal Towers. The contention of the AO and CIT(A) that there is no depreciation asset appearing in the block is not correct basis the fact

Considering the facts that the value of the block of asset under the class of assets ‘Building’ is more than the sale value of building Dalamal Towers, we hold that the assessee is right in reducing the sale

In the result, the appeal of the assessee is allowed