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Income Tax Appellate Tribunal, MUMBAI BENCH “F” MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI N.K. PRADHAN
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “F” MUMBAI BEFORE SHRI SAKTIJIT DEY (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) ITA No. 66/MUM/2018 Assessment Year: 2011-12 Unique Properties & Securities Private Assistant Commissioner-Central Circle Limited, 4th floor, Malhotra House, Opp. Vs. 38, [Now DCIT Central Circle 6(3)], 19th GPO, Fort, Mumbai-400001. floor, Air India Building, Nariman Point, Mumbai-400021.
PAN No. AAACU0702G Appellant Respondent
Assessee by : Shri Prayag Jha - AR Revenue by : Shri D.G. Pansari - DR Date of Hearing : 14/08/2019 Date of pronouncement : 08/11/2019
ORDER PER N.K. PRADHAN, AM This is an appeal filed by the assessee. The relevant assessment year is 2011-12. The appeal is directed against the order of the Commissioner of Income Tax-54, Mumbai [in short ‘CIT(A)’] and arises out of the assessment completed u/s 143(3) of the Income Tax Act 1961, (the ‘Act’).
The 1st ground of appeal
The Ld CIT(A) erred in not accepting the assessee’s contention that Profit on sale of land was Long Term Capital Gains and not business income as inadvertently shown in the IT Return.
ITA 66/MUM/2018/A.Y.2011-12 UNIQUE PROPERTIES & SECURITIES PRIVATE LTD. 2 3. Briefly stated the facts of the case are that the appellant-company filed its return of income for the AY 2011-12 on 14.10.2010 declaring total income of Rs.4,59,836/-. Thereafter it filed a revised return of income on 23.11.2011 declaring total income of Rs.2,00,292/-. During the year under consideration, the appellant had sold a property, land admeasuring 1.87 acres and building admeasuring 1550 sq ft. at survey no. 79 of village Gajularamaram, Taluka- Medchal, District – Ranga Reddy to Supermax Personal Care Pvt. Ltd for a consideration of Rs.10,70,00,000/-. The appellant has shown profit from sale of land at Rs.8,32,55,976/- under the head ‘profits and gains from business or profession’ in the return of income filed. The depreciation schedule attached to the audit report reflects the land and the factory building in question as fixed assets on which depreciation has been claimed year after year.
In view of above facts, the AO treated the profit on the said sale of land as income from business or profession and disallowed the expenditure claimed on the premise that the assessee did not carry out any business activity during the year and therefore, is ineligible for any expenditure.
In appeal, the ld CIT(A) observed that (i) the appellant has not declared Long Term Capital Gains (LTCG) in the return of income, it has clearly shown them as income from business or profession arising from profit on sale of land, (ii) the appellant has shown cost of this land at Rs.1,26,10,175/- in the block of assets; cost of the building on this land was shown at Rs.12,06,585/- after reducing depreciation the WDV as on 31.03.2010 of Rs.3,08,567/-, (iii) as per appellant’s own admission the net gain of Rs.8,32,92,969/- was shown in the ITR-6 under the head ‘profits and gains from business other than
ITA 66/MUM/2018/A.Y.2011-13 UNIQUE PROPERTIES & SECURITIES PRIVATE LTD. 3 speculative business’, (iv) nowhere, the property has been shown as an investment by the assessee.
In view of above facts, the ld. CIT(A) held that income is liable to be taxed as income from business and not LTCG.
Before us, the ld. counsel for the assessee, relying on the decision in CIT vs. Pruthvi Brokers & Shareholders (2012) 23 taxmann.com 23(Bom.) submits that the assessee is entitled to raise before the appellate authorities additional grounds in terms of additional claims not made in return filed by it. Further, relying on the decision in CIT v. ACE Builders (P.) Ltd (2015) 144 Taxman 855(Bom.), it is stated by him that an assessee is entitled to exemption u/s. 54E in respect of capital gains arising on transfer of capital assets on which depreciation has been allowed. Further, relying on the decision in Tuticorin Alkali Chemicals and Fertilizers Ltd. (1997) 93 Taxman 502 (SC), it is explained that accounting entries are not final and decisive.
The ld. counsel submits that the LTCG was wrongly shown in the ITR-6 in part B under the heading ‘profit and gains from business other than speculative business’ and this mistake was realized during the course of assessment proceedings and computation of total income as per law was submitted before the AO and the amount of Rs.8,32,55,976/- was net profit as per profit and loss account which included LTCG. It is stated that the appellant indicated the net profit in part B of the ITR but the amount of LTCG was not shown separately under the specific head in the ITR and the column in which LTCG was to be shown was left blank.
ITA 66/MUM/2018/A.Y.2011-14 UNIQUE PROPERTIES & SECURITIES PRIVATE LTD. 4 The ld. counsel submits that this was purely a clerical mistake and it happened due to inadvertence.
On the other hand, the ld. Departmental Representative (DR) submits that the appellant has admitted that the cost of this land was shown at Rs.1,26,10,175/- in the block of assets. Further, the cost of the building on this land was shown at Rs. 12,06,585/- and after reducing depreciation, the WDV as on 31.03.2010 was Rs. 3,08,567/-. As per the appellant’s own admission, the net gain of Rs.8,32,92,969/- was shown in the ITR-6 under the head ‘profits and gains from business other than speculative business’.
Thus, the ld. DR submits that as per the appellant’s own admission the land and building in question were always shown as fixed assets in the hand of the company and depreciation has been claimed on the building from year to year and the properties being business assets, any profit arising from sale of such assets will have to be taxed as profit and gains and not LTCG.
We have heard the rival submissions and perused the relevant materials available on record. The reasons for our decision are given below.
In ACE Builders (P.) Ltd (supra), the assessee, a private limited company had a flat which was shown as capital asset in its books of account. It claimed depreciation thereon from year-to-year. The resulting written down value as on 31-3-1991 was Rs.1.43 lakhs. In the previous year relevant to the assessment year 1992-93, it sold the said flat for Rs. 5.20 lakhs and invested the net sale proceeds in the units of 'UTI Capital Gains Scheme’ with a view to claim deduction under section 54E and, accordingly, in the return of income, it declared nil income under the head 'Income from capital gains'. The Assessing
ITA 66/MUM/2018/A.Y.2011-15 UNIQUE PROPERTIES & SECURITIES PRIVATE LTD. 5
Officer held that since the entire block of building had ceased to exist on account of sale of the flat, the written down value of the asset was liable to be taken as cost of acquisition under section 50(2) and that, as the assessee had availed depreciation on the said asset, the gain arising on transfer of such a long-term capital asset was liable to be treated as short-term capital gain and, therefore, the benefit under section 54E was not available. On appeal, the Commissioner (Appeals) upheld the order of the Assessing Officer. On further appeal, the Tribunal held that the deeming fiction attached to section 50 had to be restricted only for the method of computing the capital gains and could not be read into while considering the case for non-chargeability of capital gain. Accordingly, Tribunal held that the assessee was entitled to the exemption under section 54E. On appeal, the Hon’ble Bombay High Court held:- “The assessee fulfilled all the conditions set out in section 54E to avail exemption, but the exemption was sought to be denied in view of fiction created under section 50. The assessee could not be denied exemption under section 54E, because, firstly, there is nothing in the section to suggest that the fiction created in section 50 is not only restricted to sections 48 and 49 but also applies to other provisions. On the contrary, section 50 makes it explicitly clear that the deemed fiction created in sub- sections (1) and (2) of section 50 is restricted only to the mode of computation of capital gains contained in sections 48 and 49 and cannot be extended beyond that. Secondly, it is well established in law that a fiction created by the Legislature has to be confined to the purpose for which it is created. Thirdly, section 54E does not make any distinction between depreciable asset and non-depreciable asset and, therefore, the exemption available to the depreciable asset under section 54E cannot be denied by referring to the fiction created under section 50. Section 54E specifically provides that where capital gain arising on transfer of a long-term capital asset is invested or deposited (whole or any part of the net consideration) in
ITA 66/MUM/2018/A.Y.2011-16 UNIQUE PROPERTIES & SECURITIES PRIVATE LTD. 6
the specified assets, the assessee shall not be charged to capital gains. Therefore, the exemption under section 54E could not be denied to the assessee on account of the fiction created in section 50. [Paras 24 and 25]
It is true that section 50 is enacted with the object of denying multiple benefits to the owners of depreciable assets. However, that restriction is limited to the computation of capital gains and not to the exemption provisions. In other words, where depreciation has been availed on long-term capital asset, then the capital gain has to be computed in the manner prescribed under section 50 and the capital gains tax will be charged as if such capital gain has arisen out of a short-term capital asset, but if such capital gain is invested in the manner prescribed in section 54E, then the capital gain shall not be charged under section 45. To put it simply, the benefit of section 54E will be available to the assessee irrespective of the fact that, the computation of capital gains is done either under sections 48 and 49 or under section 50. The contention of the revenue that by amendment to section 50, the long-term capital asset had been converted into to short-term capital asset was also without any merit. The legal fiction created by the statute is to deem the capital gain as short-term capital gain and not to deem the asset as short-term capital asset Therefore, it cannot be said that section 50 converts long-term capital asset into a short-term capital asset. [Para 26]
Therefore, the Tribunal was justified in allowing the benefit of exemption under section 54E to the assessee in respect of the capital gains arising on the transfer of a capital asset on which depreciation hat been allowed. [Para 27]”
The above decision has relevance in the instant appeal in the backdrop of the sale deed dated 30.12.2002 for purchase of property and deed of conveyance dated 31.03.2011 for sale of property. The above aspects have not been examined by the lower authorities. Therefore, we set-aside the order of the ld. CIT(A) on the above issue and restore the matter to the file of the AO to
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make an order afresh. We direct the appellant to file the relevant documents/evidence before the AO. Needless to say, the AO would give reasonable opportunity of being heard to the appellant before finalizing the order. Thus, the 1st ground of appeal is allowed for statistical purposes.
The 2nd ground of appeal The Ld CIT(A) erred in upholding the disallowance to the extent of Rs.71,39,143/- out of total disallowance of Rs.1,11,59,033/- without appreciating the facts and circumstances of the case properly.
In the profit and loss account, the appellant has shown rental income of Rs.2,39,500/-, profit on sale of land Rs.9,41,12,115/- and other income of Rs.63,394/- totalling to Rs.9,44,15,009/-. Out of this income, it has claimed expenditure of Rs.1,11,22,040/-, the details of which are as under:
Amount (Rs.) Repairs & Maintenance 19,526 Rent 330 Rates & Taxes 41,14,754 Auditors Remuneration 5,515 Insurance Premium 4,181 Legal & Professional Fees 69,53,633 Interest Paid 21,001 Bank Charges 400 Directors Meeting Fees 1,800 Filling Fees 900 Loss on Discarded Assets ---- 1,11,22,040/-
ITA 66/MUM/2018/A.Y.2011-18 UNIQUE PROPERTIES & SECURITIES PRIVATE LTD. 8 Out of the rates and taxes of Rs.41,14,754/- an amount of Rs.40,12,575/- was paid as stamp duty on sale of land. This being mandatory tax/duty to be paid, the ld. CIT(A) held it as allowable. Similarly, auditor’s remuneration to the tune of Rs.5,515/- and director’s meeting fees of Rs.1,800/- were held to the allowable being regular administrative expenses of the appellant. Thus, out of the disallowance of Rs. 1,11,20,040/- made by the AO, an amount of Rs.40,19,890/- was deleted by the ld. CIT(A).
Before us, the ld. counsel submits that the ld. CIT(A) has confirmed the disallowance to the extent of Rs.71,39,143/- out of total disallowance of Rs.1,11,59,033/- without appreciating the facts of the case. It is stated that a major chunk of the disallowance is Rs.69,53,633/- incurred towards legal and professional fees. It is submitted by him that Allegra Corporate Finance has negotiated the deal between the purchaser and the seller and therefore, has been paid success fee. In this regard, copy of bill of Allegra Corporate Finance was filed before us. Further, referring to the other expenses, the ld. counsel submits that these were incurred for business purpose and should be allowed in appeal.
On the other hand, the ld. DR submits that as recorded by the ld. CIT(A) during the course of appellate proceedings, the appellant was asked to explain the nomenclature success fee and services rendered by Allegro Corporate Finance. In response to it, the appellant merely replied that success fee has been paid by cheque and therefore it is to be allowed. It is submitted by the ld. DR that there is no agreement or terms of reference for the services to be rendered by Allegro Corporate Finance. It is further argued that as per the sale deed, the address of both the purchaser and seller is the same i.e. 4th floor,
ITA 66/MUM/2018/A.Y.2011-19 UNIQUE PROPERTIES & SECURITIES PRIVATE LTD. 9 Malhotra House, Opp. GPO, Mumbai – 400001 and both the parties happen to be sister concerns occupying the same premises. The ld. DR submits that the appellant has failed to bring on record any evidence of any kind of negotiation/service rendered by Allegro Corporate Finance, which would entitle it to receive the payment of Rs.69,48,900/-. Thus, the ld. DR supports the order passed by the ld. CIT(A).
We have heard the rival submissions and perused the relevant materials available on record. In the instant case, the crucial point is evidence regarding negotiation/service rendered by Allegro Corporate Finance, which would entitle it to receive payment of Rs.69,48,900/-. In this respect, one has to keep in mind the fact that the expenditure should be in respect of business which was carried on by the appellant and the profits of which are to be computed and assessed, and should be incurred after the business is set up. The expenses should have been laid out or expended wholly and exclusively for the purpose of such business. We find in the instant appeal that the appellant could not file the complete details in respect of the disputed expenses either before the AO or the CIT(A). In the interest of justice, we set-aside the order of the ld. CIT(A) on the above issue and restore the matter to the file of the AO to make an order afresh in respect of disallowances of Rs.71,31,143/-, keeping in mind that (i) it should be in respect of business which was carried on by the appellant and the profits of which are to be computed and assessed, and should be incurred after the business is set up, (ii) it should have been laid out or expanded wholly and exclusively for the purpose of such business.
We direct the appellant to file the relevant documents/evidence before the AO. Needless to say, the AO would give reasonable opportunity of being
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heard to the appellant before finalizing the order. Thus, the 2nd ground of appeal is allowed for statistical purposes.
The 3rd ground of appeal: Without prejudice to Ground No. 2, the Ld CIT(A) erred in not appreciating that amount of Rs.36,993/- debited as deprecation was added twice because this amount was not deducted while adopting the figure of Rs.8,32,92,969/- as income from business and further disallowed and added back being included in the amount of Rs.1,11,59,033/-.
As the 2nd ground of appeal has been restored to the file of the AO, the 3rd ground of appeal becomes academic in nature. However, to ensure that there is no double addition, we direct the AO to keep in mind the above contentions of the appellant, while deciding the 2nd ground of appeal.
In the result, the appeal is allowed for statistical purposes.
Order pronounced in the open Court on 08.11.2019 Sd/- Sd/- (SAKTIJIT DEY) (N.K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai; Dated: 08.11.2019 S. Samanta P.S.(On tour) Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. The CIT(A)- 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. BY ORDER, //True Copy// ( Assistant Registrar) ITAT, Mumbai