DCIT 2(2)(1), MUMBAI vs. JAYEM PROPERTIES P.LTD, MUMBAI

ORDER PER N.K. PRADHAN, A.M. The captioned cross appeals – one filed by the assessee and the other by the Revenue- are directed against the order of the Commissioner of Income Jayem Properties Private Limited 2 & 3335/M/2016 Tax (Appeals)-5 (in short ‘CIT(A)’), Mumbai are arise out of the assessment order passed u/s 143(3) of the Income Tax Act 1961, (the ‘Act’). ITA No. 2881/MUM/2016(AY 2010-11) (Assessee’s Appeal) 2. The 1st ground of appeal

The CIT(A)-5, Mumbai erred in not considering 3 units at Ashok Garden and 2 units at Ashok Towers, purchased for a total consideration of Rs.3,12,86,535/- in the block of assets. The appellant submits that the said unit were purchased and used for a purpose of office/guest house for its business and are eligible to enter in the block of assets.

3. Briefly stated, the facts of the case are that during the year under consideration, the assessee sold five fully constructed units for a consideration of Rs. 5,07,62,001/-. These units were under consideration when purchased by the assessee in the preceding year i.e. Financial Year (FY) 2008-09 relevant to the AY 2009-10. On sale of these units in the year under consideration, the assessee applied the provisions of section 50 of the Act and since the sales consideration was less than the Written Down Value (WDV) of the block of assets, there was no Short Term Capital Gains (STCG). For the purpose of computation of the said capital gains, the assessee adopted the value as per the sale agreement, instead of the one by the Stamp Authorities.

However, the AO was not convinced with the above treatment of the assessee for the reason that (i) as per the audited balance sheet of the year under consideration, in the Fixed Asset Schedule, these five units have been classified as Capital – Work – in – Progress (CWIP) and therefore, these units cannot form part of the block of assets; (ii) as the purchase of these units were Jayem Properties Private Limited 3 & 3335/M/2016 completed only during the impugned assessment year, there was no evidence for these units having been put to use and hence the question of claiming depreciation did not arise; (iii) these units were purchased only to sell and make income and not for the purpose of holding them as business / capital asset for generating income and (iv) the main objective of investment in these units was only to make income rather than hold them for the purpose of conducting business.

With the above reasons, the AO adopted the higher value between the sale agreement and the value as per the Stamp Valuation Authority and made an addition of Rs. 4,30,15,715/- to the income of the assessee. The details considered by the AO are as under :

S. Name of Property and flat No. Date of Purchase price actually No. purchase paid (Rs.) 1. Ashok Garden – F 1901 23.12.2009 75,71,650/- 2. Ashok Garden – E 2001 23.12.2009 73,30,000/- 3. Ashok Garden – F 2001 23.12.2009 73,30,000/- 4. Ashok Tower – C - 1803 23.12.2009 67,56,550/- 5. Ashok Tower – C - 1804 23.12.2009 22,98,335/- Total cost of purchases 312,86,535/- S. Name of Property and flat Agreement (sale) Value as per Value adopted in No. No. value (Rs.) stamp terms of valuation securities. 50C of Authority (Rs.) I.T. Act (Rs.) 1. Ashok Garden – F 1901 1,19,42,791/- 2,12,13,250/- 2,12,13,250/- 2. Ashok Garden – E 2001 1,15,28,605/- 2,04,84,500/- 2,04,84,500/- 3. Ashok Garden – F 2001 1,15,28,605/- 2,04,84,500/- 2,04,84,500/- 4. Ashok Tower – C - 1803 89,50,000/- 89,23,075/- 89,50,000/- 5. Ashok Tower – C - 1804 31,70,000/- 31,70,000/- 31,70,000/- Total Consideration 743,02,250/- Jayem Properties Private Limited 4 & 3335/M/2016 Thus the AO computed the capital gains by taking sale price as per Stamp Duty Valuation minus purchase consideration received from sale of the flats i.e. Rs. 7,43,02,250/- minus Rs. 3,12,86,535/- = Rs. 4,30,15,715/-.

Jayem Properties Private Limited 6 & 3335/M/2016 It is further stated that during the impugned financial year, some foreign parties came to India on various occasions for the purpose of negotiating and discussing the course of action of the said projects and out of these five units, 3 Units viz. flats Nos. F-1901, E-2001, F-2001 so located in the building Ashok Garden were used for their accommodation as guest house and the remaining two units bearing flat No. C-1803 & C-1804 located in the building Ashok Tower were used for back up office purposes and were always intended to be used for the same purposes as Units bearing flat No. F-1901, E-2001, F-2001 located in the building Ashok Garden, as and when the necessity above. Further, it is stated that it was decided to sell all the 9 units and to purchase the property located in Goa. Accordingly, the assessee sold all the 9 units during the impugned assessment year and out of the sale proceeds of the said flats so sold, the assessee purchased the property located in Goa. In the return of income for the impugned assessment year, the assessee claimed that there was no STCG, since the sale proceeds of 9 flats did not exceed the WDV of the block of assts of the assessee by virtue of section 50 of the Act. Further, it is stated by him that the AO in the assessment order for the impugned assessment year incorrectly alleged that the said five units whose possession were taken during the captioned assessment year would not form part of the block of assets on the alleged ground that they were classified as CWIP in the audited balance sheet of the captioned year. Elaborating further, it is stated that these units were classified as CWIP in the preceding financial year i.e. FY 2008-09 relevant to the AY 2009-10 when they were under construction and during the captioned assessment year, on the completion of construction they have been capitalized and shown as “Fixed Assets”. Further, Jayem Properties Private Limited 7 & 3335/M/2016 it is stated that the AO had not denied the benefit to claim depreciation on the ground that these units did not form part of the block of assets, but on the alleged ground that these units were not put to use and that they were held with the sole objective to make income. It is submitted by the Ld. counsel that these units were put to use during the year under consideration and that they were used wholly and exclusively for the purpose of conducting the assessee’s business. Also it is stated by him that assuming without admitting that the AO was correct and admitting higher value as per stamp duty authority u/s 50C of the Act, even then the said value was less than the WDV of the block of assets of the assessee-company and as such there would be no STCG. With the above submissions, the Ld. counsel submits that the addition of Rs.4,30,15,715/- being STCG computed by the AO be deleted.

8. The 2nd ground of appeal The CIT(A) erred in not allowing the set off of sale of the units at Ashok Towers/Ashok Garden against the new purchase of property at Goa. The appellant submits that in the block of assets concept u/s 50, the sale of asset is ought to be set off against the purchase of new assets in the same block.

9. The assessee had claimed depreciation of Rs. 5,39,973/- in its return of income on the property located in Goa and office equipments purchased during the impugned year, after adjusting STCG calculated on sale of 9 units as per section 50 of the Act. The AO disallowed the said depreciation on the ground that the assessee has not undertaken any trading / commercial activity during the year under consideration. In appeal, the Ld. CIT(A) held that : “In this case when we examine the details mentioned in the assessment order, there were administrative expenses for Rs.23,65,299/- including depreciation and this administrative expenses were incurred in the property in Goa which appellant had purchased during the year and which was furnished in which even the building, furniture and fixtures and office equipments were put up. As appellant has claimed Jayem Properties Private Limited 11 & 3335/M/2016 the administrative expenses, it is clear that appellant would have used in his business because even furniture and fixture and office equipments were put up in the premises. AO is not right in not allowing the claim of depreciation and claim of expenditure. Here there was even expenditure of administrative expenses which shows that appellant had used the premises for business. It qualifies the condition of use for the purpose of depreciation as appellant already owned the assets which included in the block of assets. Hence, AO is directed to allow claim of depreciation and administrative expenses of the appellant as appellant's business was set up earlier and appellant had used the assets for the purpose of business.”

10. Before us the ld. counsel for the assessee submits that it is a settled legal position that where a business unit had been set up by the assessee, which was ready to commence business, the assessee would be entitled to claim the expenditure which were incurred for the purpose of business. It is stated that the well furnished property at Goa and office equipments were purchased and held for the purpose of business and as such the said property and office equipments would form part of the block of assets of the assessee-company. On the other hand, the ld DR supports the order passed by the Ld. CIT(A).

Jayem Properties Private Limited 12 & 3335/M/2016 In the 2nd ground of appeal before the Tribunal the assessee has raised the issue of (i) set off of sale of the units at Ashok Tower / Ashok Garden against the new purchase of property at Goa (ii) In the block of assets concept u/s 50, the sale of assets ought to be set off against the purchase of new assets in the same block. As the above matter was not before the Ld. CIT(A), we direct the AO to examine it and pass necessary order as per the provisions of the Act. We direct the assessee to file the relevant documents / evidence before the AO. Thus the 2nd ground of appeal is allowed for statistical purposes.

12. In the result, the appeal filed the assessee is partly allowed. 2010-11) (Revenue’s Appeal)

13. The 1st ground of appeal is general in nature. In view of our discussion at para 3-7 hereinbefore, the 2nd and 3rd ground of appeal do not survive.

14. The 4th ground of appeal On the facts and circumstances of the case and in law, the CIT(A) has erred in holding that the transactions of purchase and sale of shares entered into by the assessee were genuine transactions and allowing short term capital loss incurred without appreciating that the purchase price and sale price of shares shown by the assessee were much lower than actual price of the underlying assets of the companies and such transactions between related parties could not be considered as genuine transactions

15. During the preceding FY 2008-09 relevant to the AY 2009-10, the assessee had purchased shares of four independent private limited companies Jayem Properties Private Limited 13 & 3335/M/2016 i.e. 10,000 shares of AAA Real Land Developers P. Ltd., 22,000 shares of Pavurotti Finance & Investment P. Ltd., 2,500 shares of JM Realty Management P. Ltd. and 1,500 shares of Lakeview Mercantile Co. P. Ltd. During the impugned assessment year, the assessee had purchased further 21,000 shares of Pavurotti Finance & Investment P. Ltd. Subsequently, during the impugned assessment year, all the above mentioned shares were sold by the assessee to an independent party name Whitecity Mercantile Pvt. Ltd. Accordingly, there was a loss on sale of shares of Rs.2,21,11,150/- in the books. In the assessment order, the AO disallowed the short term capital loss on the ground that (i) the assessee’s act of again acquiring these shares goes to prove that the sale of these shares are not borne out of real transaction, (ii) the purpose of the assessee is only to evade tax payments by adjusting artificial and manipulated losses against the benefit they make on real estate transaction, (iii) the assessee has used unfair and illegal means to manipulate the value of shares as the companies being private limited companies which are controlled by the assessee’s group of persons and (iv) shares are purchased and sold at a rate which does not conform to Rule 11UA of the Rules. Thus the AO disallowed the short term capital loss claimed by the assessee on the reason that it is not borne out of genuine purchase and sale.

16. In appeal, the Ld. CIT(A) held : “5.6 I have considered the appellant's submission. In this issue appellant had purchased shares of the 4 unquoted Private Ltd. companies from its group company Delta in the previous year. Later the shares were sold on credit to Whitecity Jayem Properties Private Limited 14 & 3335/M/2016 Mercantile Pvt. Ltd. by a purchase agreement entered between them. Now AO had disallowed the loss incurred by the appellant on the ground that purchase and sale are not genuine. AO's main argument is appellant’s purchase and sales is between related properties hence the purchase and sales are not genuine. Here when we examine the details though purchase is from related party, sale is to unrelated party i.e. Whitecity Mercantile P. Ltd. whose directors are Alpana Chinai and Mahesh Gupta who are not related to the appellant. Regarding the valuation of shares of the companies, all these companies have a real estate asset lying with them whose appreciation value was not shown in the Balance sheet. As per valuation under Rule 11UA of the IT Rule this appreciation value of real estate assets was not captured hence this value under Rule 11UA had lower level. Here if the appellant had sold the shares at the 11UA value, he would have incurred more loss than they were incurred now. Now there is no restriction in the Act that all the transactions are to be done at the value of 11UA as here the transactions are carried out in more than the value of 11UA. Hence AO's contention that these were valued at higher value were not correct as per law. Further AO had a doubt regarding the loss on the ground that the value of shares should not have fallen so low. Now it is clear in the real estate market from the F.Y. 2008 was in a bearish state and it has not recovered till now. Appellant had to sell the shares and incur the loss. It is also evident that appellant had sold these shares on credit basis by entering into an agreement. This shows the state of real estate at that time. As these transactions are carried out through a bank, while purchasing from Delta and sold on an agreement which was not disproved by AO even in remand report. Hence appellant's claim of short term capital loss has to be allowed. Considering it as genuine purchase and sales, appellant's claim of STCL of Rs.2,21,11,150/- is allowed.”

17. Before us, the ld. DR supports the order passed by the AO. On the other hand, the ld. counsel for the assessee supports the order passed by the Ld. CIT(A).

Jayem Properties Private Limited 15 & 3335/M/2016 18. We have heard the rival submissions and perused the relevant materials on record. In the instant case, we find that the assessee has rightly valued the shares as per Rule 11UA of the Income Tax Rules, 1962 (the Rules) and filed a copy of it before the AO. Further the assessee had even obtained the valuation report from the registered valuer under Rule 11UA. In any case, the value of consideration for transfer of shares is far exceeding the valuation as per Rule 11UA. In the instant case, the AO has failed to point out any mistake in the working of the value of shares as per Rule 11UA. The disallowance made by the AO is based on conjectures. In such a situation, we agree with the findings of the Ld. CIT(A) and confirm it. Thus the 4th ground of appeal is dismissed.

19. The 5th ground of appeal On the facts and in the circumstances of the case and in law, the CIT(A) has erred in allowing the claim of depreciation and administrative expenses without appreciating that the Goa premises had not been utilized, no business activities were earned out, no income had been offered during the year.

20. It is well settled that where a business unit has been set up by the assessee, which was ready to commence operation, the assessee would be entitled to claim the expenditure which were incurred for the purpose of business. Further, for the purpose of claiming depreciation u/s 32 of the Act, the assets should satisfy the dual conditions of forming part of the block of assets and being used for the purpose of conducting assessee’s business. In the instant case, we find that these conditions are satisfied. Therefore, we confirm the order of the Ld. CIT(A) on the above matter and dismiss the 5th ground of appeal.

Jayem Properties Private Limited 16 & 3335/M/2016 In the result, the appeal filed by the Revenue is dismissed. 21. To sum up, the appeal filed by the assessee is partly allowed, whereas the appeal filed by the revenue is dismissed. Order pronounced in the open Court on 10/02/2020.