M/S HIRSCH BRACELET INDIA PRIVATE LIMITED,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-3(1)(2), BANGALORE

The concise grounds of appeal filed by the Assessee reads as follows:-

The additional grounds of appeal sought to be raised by the assessee reads as follows:-

There are basically three issues to be decided in this appeal viz.,

Due to operational difficulties and continued business losses over the years, it ceased manufacturing operations in the year 2006 and continued with trading operations till 2010 when it finally decided to close down the business. As the assessee was operating from the leasehold land allotted by SIPCOT, it had to seek permission from SIPCOT to transfer the leasehold rights over the land as well as the factory shed built over the land to a buyer. It entered into a Memorandum of Agreement dated 27th November 1991 with M/s Devas Engineering Pvt Ltd to transfer the leasehold interest in the land and ownership rights over the building thereon subject to approval from SIPCOT. Approval of SIPCOT was received vide Approval letter dated 06/02/2014 and the transfer of leasehold land and building was completed thereafter. Permission and approval were further subject to payment of dues and claims which prevented the assessee from commencing the procedure of Closing and Winding up of Business.

Also, due to pending claims of creditors, labour matter, sales tax demands and property tax dues, the assessee had to incur expenses towards Office Rent, Legal Professional Fees, Property Maintenance Charges, fees towards meeting compliance under Companies Act, Income Tax Act and other Statutory applicable laws.

In the return of income filed for A.Y. 2015-16 on 30/11/2005, the assessee returned Capital Gains on transfer of leasehold rights in land and buildings put up on it by the assessee as Short Term Capital Gains at Rs.

In the assessment proceedings, the assessee claimed that the sale of the leasehold rights over the land that was sold gave rise to long term capital gain (LTCG). That the sale of building was taxable as short term capital gain (STCG) u/s. 50 of the Act as the building was a depreciable asset and was part of the block of assets of ‘building’ on which the assessee had claimed depreciation. The plea of assessee was that whenever an asset comprising of land & building is sold, capital gain has to be computed by bifurcating sale consideration towards land and building. Land is not a depreciable asset and therefore capital gain on sale of land has to be computed as LTCG as it was held by the assessee for more than 36 months. The assessee submitted that by mistake (wrong advise), the assessee had declared capital gain on sale of land & building as STCG in the return of income.

In the assessment order dated 24/11/2017 passed u/s 143(3) of the Act, the Assessing Officer (AO) disallowed the setting off of the expenditure of Rs.1,08,54,687 against the Capital gains, stating that there was no business and that the expenditure claimed is disallowed u/s 37 of the Act. Out of the expenditure, reimbursement of expenditure of Rs.13,41,015 was also held to be not allowable because no TDS was made on it. Regarding the submissions on recomputation of Capital gains and set off of brought forward business losses, the AO assessed capital gains on sale of land and buildings as Short Term Capital Gains and did not set off the brought forward business losses. No reasons were assigned by the AO for doing so.

The assessee preferred an appeal against the assessment order before the CIT(Appeals). The learned CIT(A) dismissed the appeal. He held that as the business was completely stopped, the action of the AO in disallowing the expenditure of Rs. 1,08,54,687 cannot be faulted with. Citing the decision of Hon'ble Apex court in the case Goetze (India) Ltd Vs. Commissioner of Income-tax [2006] 157 Taxman 1 (SC), he held that the claim of the assessee for recomputing the Capital gains declared as STCG cannot be considered by the AO in the absence of a revised return.

The assessee is in appeal before this Tribunal against the order of the CIT(Appeals).

We have heard the rival submissions on the issue of disallowance of expenses of Rs. 1,08,54,687. The ld. counsel for the assessee relied on the decision of jurisdictional High Court in the case of CIT v. Lawrence D'Souza [2011] 15 taxmann.com 148 (Karnataka) rendered on very similar facts. In that case the assessee was engaged in running a hotel and he stopped his business from August 1994 onwards due to labour problem. The business premises was a leased premises and was sold along with furniture, fixtures, etc., during the previous year relevant to A.Y. 1996-97. In the return of income, the assessee claimed deductions for expenditure including for renovation of the buildings after the business was stopped, post operative rent and post operative interest. The Hon'ble Court rejected the contention that no deduction is to be allowed as the business was completely stopped and also that the expenditure claimed was also not substantiated. It held that the liabilities like paying rent etc., are not personal liabilities of the assessee and that all the expenditure including the expenditure for renovation of buildings etc., incurred after the business was stopped has to be allowed, though the business was stopped in the year 1994.

The ld. counsel for the assessee submitted that the assessee has to maintain its legal status as a company till the assets are disposed and liabilities are paid. He brought to our notice the break-up of the various expenses claimed which are as follows:-

He pointed out that the aforesaid expenditure incurred by the assessee was essential for the purpose of maintaining the legal status and for disposing the assets. Further neither the AO nor the CIT(A) have doubted the incurring of the expenditure.

The ld. DR relied on the order of CIT(Appeals).

We have considered the rival submissions. It is an undisputed fact that though business of assessee came to a halt in the year 2010, yet the assessee was liquidating its assets. The assessee had only a leasehold

As far as the other issue of capital gain on sale of land & building is concerned, the ld. counsel for the assessee submitted that the assessee had wrongly treated the entire capital gains as short term capital gain in its return of income and the same needs to be treated as short term capital gains for sale of building and long term capital gains for leasehold rights in land. He brought to our notice that the CIT(A) rejected the claim of assessee only for the reason that assessee has shown short term capital gains from sale of its capital assets in its return of income. The CIT(A) dismissed the claim of assessee holding as follows:-

We have considered the submissions of the ld. counsel for the assessee and are of the view that the CIT(Appeals) ought to have examined the claim of assessee that the capital gain on sale of land & building should be bifurcated by considering the land as a separate capital asset and computed as long term capital gain on its transfer and by considering the building being a depreciable asset as liable to capital gain in accordance with the provisions of section 50 of the Act. The CIT(Appeals) had the power to examine the claim and decision cited by the ld. counsel for the assessee before us clearly supports the proposition that

We are of the view that section 50 of the Act is a special provision for computation of capital gains in case of depreciable assets and is applicable only to capital assets forming part of Block of Assets on which depreciation has been allowed under the Act. and also only for the purposes of sections 48 and 49 of the Act.

It is undisputed that the capital assets transferred by the assessee are lease hold right in the land (acquired in 1991) and building on the land constructed subsequently. It is undisputed that right in lease hold land cannot form part of any Block of Assets on which depreciation can be claimed. It is undisputed that no depreciation was claimed or allowed under the Act on the right in lease hold land. It is also undisputed that buildings form a part of Block of Assets on which depreciation and that depreciation was claimed and allowed under the Act on the buildings.

On a plain reading of section 50 of the Act, it is clear that it is applicable for transfer of buildings and not for transfer of right in lease hold land. Therefore, the Capital Gains on the transfer of the right in lease hold land has to be computed under the normal provisions as Long Term Capital Gains and the Capital Gains on the transfer of the buildings has to be computed under the provisions of section 50 as Short Term Capital Gains. The observations of the CIT(Appeals) contrary to the aforesaid provisions are unsustainable and are hereby vacated. The ld. counsel for the

As far as the issue of set off of business loss and unabsorbed depreciation is concerned, a specific ground was raised by the assessee before the CIT(Appeals), but the CIT(A) has not rendered any decision specifically on this issue. It is a fact that during the assessment proceedings it was submitted to the AO that profit on transfer of a business depreciable asset (which is determined under section 50) and taxable as short-term capital gain under the head "Capital gains" is an income in nature of income of business and the assessee can claim set off of unabsorbed business losses against such income. Decision of the ITAT Mumbai in Digital Electronics Ltd VS CIT (2012) 49 SOT 65 was cited in support. However, in the assessment order, no set off was given for the brought forward business loss.

The following are the brought forward business loss and unabsorbed depreciation of the assessee:-

As per section 32(2) of the Act, the unabsorbed depreciation is deemed to be current year's depreciation and can be set off against Capital Gains as per section 71 of the Act. The AO is directed to examine the claim of assessee for set off in the light of other observations in this order.

In the result, the appeal by the assessee is partly allowed