VIKAS GUPTA,NEW DELHI vs. ACIT, NEW DELHI

ORDER

Per N. K. Saini, AM:

2 Vikas Gupta 3. In ITA No. 2332//Del/2015 for the assessment year 2010-11, following grounds have been raised: “1. That the Learned Assessing Officer has erred in disallowing and the Learned Commissioner of Income Tax (Appeals-11) has erred in confirming the same the following on baseless assumptions and reasoning which have no ground and without paying any heed to the facts, circumstances, prevailing in the case of the assessee and without considering the information/documents produced before him. Based on the facts and circumstances of the case and on the circumstantial evidence thrown up by the documents produced by the assessee during the course of assessment proceedings, the Learned Assessing Officer has erred in disallowing and the Learned Commissioner of Income Tax (Appeals-11) has erred in confirming the following expenses:- a. Disallowance of Rs. 19,30,819/- being depreciation claimed. b. Disallowance of Rs. 3,95,568/- being Interest paid on Loan.

2. Based on the facts and circumstances of the case and on the information and documents produced by the assessee, the Learned Assessing Officer has erred in making and the Learned Commissioner of Income Tax (Appeals-11) has erred in confirming the disallowance of Rs. 23,26,387/- as in doing so, they have also gone against the principle of natural justice and the generally accepted practice adopted in accounting of expenditure of such nature.

3. That the Learned Assessing Officer has erred in making and the Learned Commissioner of Income Tax (Appeals-11) has erred in confirming these disallowances as they have done so on the basis of an incorrect interpretation of the provisions of the Act and has completely ignored the intent of the law.

4. That the Learned CIT (Appeals-11) has erred in upholding the disallowances made by the Learned Assessing Officer by relying 3 ITA No. 6550/Del/2016 Vikas Gupta on case laws whose facts are completely different from those existing in the case of the assessee.

5. That the Learned Assessing Officer has erred in making and the Learned Commissioner of Income Tax (Appeals-11) has erred in confirming these disallowances as they have done so they have not considered the exigencies of business. Based on the above, it is prayed that the disallowances made in the case of the assessee be deleted by this Hon'ble Bench on the grounds of natural justice and for reason of the same being unjustified in view of the facts and circumstances of the case and of the intention of law.”

4. The first issue relates to the confirmation of disallowance of Rs.19,30,890/- made by the AO on account of depreciation claimed by the assessee.

4 Vikas Gupta a) The property was purchased for Rs. 3.65 crores as per Sale Deed. Please submit evidence in respect of the balance amount of Rs. 24,07,750/-. b) It is further seen from the copy of Agreement to Sell that the building purchased by you consisted the cost of land of 2000 sq. mtrs. Thus, the purchase cost includes the cost of land, which is substantial in these deals and often more than the value of building. You have not segregated the cost of land from the purchase cost in your balance sheet and have taken depreciation thereon also. Your kind attention is drawn to the fact that no depreciation is allowed on land. Accordingly, you are requested to explain why the depreciation claimed at Rs.38,61,638/- may not be disallowed by 50% being cost of land."

, the AR has impugned the addition made by the AO by disallowing the claim of depreciation of Rs.19,30,819/- and interest paid of Rs.3,95,568/- treating the loan obtained in individual capacity. Since all the grounds are co-related, same are being dealt together in the following manner: 4.1.1 In the submissions, it has been contended by the AR that appellant had paid composite price for the purchase of entire factory including the cost of rights in the lease hold land underneath such building. AR in this regard placed his reliance in the case reported as CIT Vs Rajesh Exports Ltd. (2006)

9. SOT

28. (Bang.) (URO) and claimed that depreciation is allowable on the entire price paid without any break-up between the cost of the building and the land. It has also been 6. Vikas Gupta contended that there was no segregation of cost towards land and building and payment was made for the entire premises. It was also submitted that there was no distinction between the land rights and the cost of building as each owner was getting a proportionate share in the land underneath the building under the purchase which is a common business practice. Further, it has also been claimed by the AR that appellant acquired a right with respect to the land as the land is lease hold received under lease from the Noida Authorities and claimed that land is an intangible asset and entitled for claim of depreciation. AR also placed reliance in the case reported as Cyber Park Development and Construction Ltd. Vs DCIT ITA No.266/Bang./2001 and claimed that appellant is eligible for claiming depreciation on the land. 4.1.2 I have considered the submissions of the AR of the appellant. In the Income Tax Act depreciation is allowable in respect of “Block of assets” means a ground of assets following within a clause of assets comprising: a) Tangible assets, being building, machinery, plant or furniture. b) Intangible assets, being know-how, patents copy rights, trade mark, License. Franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the first day of April, 1998. 4.1.3 The word ‘building’ has not been defined in the Act, therefore, be constructed in its ordinary grammatical sense unless there is something in the context or object of the statute to show that it is used in a special sense different from its ordinary grammatical sense. As per provisions of the Act, depreciation table includes roads, culverts, wells and tube wells in the building. Building in any case, does not include land because land does not depreciate. Any expenditure by an assessee directly referable to the land and not referable to the building as distinct from land, cannot constitute a part of the cost of construction of the 7 Vikas Gupta building for the purpose of allowance of depreciation. In this regard, I place reliance in the case reported as Vijay Shree Pvt. Ltd. Vs CIT (1968) 67 ITR 420 (Del.). Similarly, no depreciation can be granted in respect of premium paid to lease hold land because such premium is not includable in the cost of super structure constructed thereon. In this context my reliance is on the case reported as CIT Vs India Oil Corporation Ltd. (1996) 218 ITR 511. 4.1.4 Further as far as AR’s submission with regard to composite payment made towards land and building is concerned contending that there is no break-up, the same cannot be accepted. This issue has been decided by the ‘A’ Bench of the Hon’ble ITAT Delhi In ITA Nos. 4212 & 4213/Del/2010 in the case reported as Brijwasi Art Press Ltd. Vs DCIT, Circle-3(1), wherein this issue has been dealt with, relevant portion of which is reproduced below: “13. Now, in the light of this legal position, as per the judgment of Hon'ble Delhi High Court, we examine the facts of the present case. In the present case, the assessee has purchased a building along with land for Rs.35.10 lakhs in the year 1995 and without allocating any part of this price of land and building towards land, the assessee has been claiming depreciation @ 10% on this entire value of land & building as if the same is the value of building only and no portion of the price paid by the assessee is relatable to land. This cannot be a bona fide assumption by any person even by a layman that when a building is purchased along with land, no part of the purchase price of such land & building is relatable to land. In fact, major portion of such combined price is relatable to land in most of the cases. Had there been a difference in allocation only, it could have been a bona fide case under which penalty is not imposable if some portion of the composite price would have been allocated by the 8 Vikas Gupta assessee towards land claiming no depreciation thereon and such allocation having been increased by the Assessing Officer, it can be accepted that the action of the assessee is bona fide and for mere difference in estimation of land value, penalty is not justified but in the present case, no portion of combined price of land & building has been allocated by the assessee towards land and for the entire price paid by the assessee for land & building, the assessee has been claiming depreciation and therefore, in the facts of the present case, the action of the assessee is not bona fide in our considered opinion. Therefore, the judgment of Hon'ble Apex Court rendered in the case of Reliance Petro Products (supra), does not help the assessee in the present case.

14. As per above discussion, we have found that none of the judgments of Hon'ble Apex Court on which reliance have been placed by the Ld AR of the assessee is rendering any help to the assessee in the present case. We have also discussed above that the assessee’s explanation is not bona fide because not allocating any portion of the combined price of land & building towards land cannot be accepted as a bona fide action of the assessee and hence, in the facts of the present case, we do not find any reason to interfere in the order of the Ld CIT(A) as per which he has confirmed the penalty imposed by the Assessing Officer because Ld CIT(A) has followed the judgment of Hon'ble Delhi High Court rendered in the case of Escorts Finance Ltd, as reported in 183 Taxman 453 and Ld AR of the assessee could not point out anything to show that this judgment of Hon'ble Delhi High Court is not applicable in the present case. We, therefore, decline to interfere in the order of Ld CIT(A) on this issue.

9 Vikas Gupta 16. Order pronounced in the open court on the day of 18th February, 2011. Sd/- Sd/- (I.P. BANSAL) (A.K. GARODIA) JUDICIAL MEMBER ACCOUNTANT MEMBER 4.1.5 In view of the above facts it is held that AO’s action in disallowing the claim of depreciation on land is very much as per provisions of the Income Tax Act, 1961. In the absence of any break-up of the payment made towards building and land, AO rightfully estimated the quantum in the ratio 50:50. Therefore, contention of the AR in this regard is rejected and addition made by the AO of Rs.1930819/- is upheld.”

12 Vikas Gupta “12. From a perusal of the above terms of the agreement, we find that it is a composite agreement; and there is no separate consideration attributable specifically to the land. Therefore the issue is whether on purchase of commercial space for a composite consideration, the assessee is entitled to claim depreciation on the composite consideration. This issue was considered by the Bangalore Bench of ITAT in the case of JCIT Vs. Rajesh Exports 9 SOT 28 (BANG.) ITAT BANGALORE and it was held as under:- "9 SOT 28 (BANG.) ITAT BANGALORE "Now the question is if it is a land, then depreciation under section 32 of the Act is allowable. Section 32(1) reads as under: "32(1) In respect of depreciation of- (i) buildings, machinery, plant or furniture, being tangible assets; It is clear from a reading of section 32(1) that the word 'building' is used by the Legislature. The term 'building' used in section 10(2) of the 1922 Act had come up for Judicial examination before the Hon'ble Supreme Court in the case of CIT v Alps Theatre (65ITR377). The question before the Supreme Court was whether the cost of land is entitled to depreciation along with cost of building standing thereon. Reversing the judgment of the Punjab & Haryana High Court; the Hon'ble Supreme Court held that building does not include the site because there cannot be any question of destruction of site. It is further held that the word used is 'depreciation' and depreciation means decrease in value of property through wear & tear deterioration, obsolescence. (Webster's New Word Dictionary). In that sense, land cannot depreciate. Depreciation is allowable only on the value of superstructure on the land and not on the value of land. The legal principles laid down by the Hon'ble Supreme Court in the case of Alps Theatre (supra) still holds good. Even under section 32 of the IT Act, 1961, the word used is 'building and building is to be interpreted the 13 Vikas Gupta superstructure. As far as the facts before us are concerned, though it is vehemently argued by the learned counsel for assessee that the purchase price of land was a composite one and for the sake of convenience, the price of land and price of building was separately shown, we are afraid that his contention can be accepted. As far as the Conveyance Deed is concerned, consideration paid by the assessee for land is shown separately. If the transaction was composite one, then no distinction at least in the consideration paid to the vendor would have been made. We are of the opinion that as there is a clear- cut identity in respect of price paid to the land and building, the Assessing Officer was right in allowing depreciation only on the building. The CIT(A) was not justified in directing the Assessing Officer to allow depreciation on the cost of land as the same is not contemplated under section 32 of the Act. In the result, we set aside the order of the CIT(A) on this issue and restore that of the Assessing Officer. In the result, the revenue's appeal is partly allowed."

13. Having considered the above case- laws and in the absence of any other contrary decision in respect of a composite consideration, we are inclined to confirm the impugned order of the Id CIT(A). The Id DR has not assailed the factual position that the consideration paid was not a composite consideration, by pointing out any material so as to persuade us to come to a conclusion that there was bifurcation of consideration between land and building. Therefore we confirm the order and dismiss the appeal.”

15. As regards to the second issue relating to the disallowance of interest on the loan. The ld. Counsel for the assessee submitted that the loan was taken by the assessee for the business purpose and it was shown in his capital account as liability, since, the assessee is a proprietor and there is no difference between the individual and the proprietor. It was also stated that nothing was brought on record by the AO to substantiate that the loan was not utilized by the assessee for the business purpose. Therefore, the disallowance made by the AO and sustained by the ld. CIT(A) was not justified.