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Income Tax Appellate Tribunal, MUMBAI BENCH “C”, MUMBAI
Before: SHRI RAJESH KUMAR & SHRI AMARJEET SINGH
Per Rajesh Kumar, Accountant Member:
The present appeal has been preferred by the assessee against the order dated 16.12.2016 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2012-13.
The various grounds raised by the assessee are as under: “1. On the facts and in the circumstances of the case and in law the CIT (Appeals) was not holding that the provisions of S. 50C are applicable to the sale transaction s the composite transaction of land and building.
On the facts and in the circumstances of the case and in law the Learned Commissioner of Income-tax (Appeals) erred in directing the Assessing Officer to adopt the sale value of the land at Rs. 2,42,87,930/- and that of the building at Rs. 3,36,59,570/-.
2 ITA No.1393/M/2017 M/s. Powernetics Equipment India Pvt. Ltd. 3. On the facts and in the circumstances of the case and in law, the CIT (Appeals) erred in confirming the applicability of the provisions of S. 50C of the Income-tax Act 1961, inspite of the fact that the difference between the FMV of Rs. 5,79,47,500/- and the sale consideration of Rs: 5,25,00,0007- is less than 10% and held by various decisions.
On the facts and in the circumstances of the case and in law the CIT (Appeals) grossly erred in not applying the land rate of Rs. 15,960/- per sq. mt. as per MIDC and instead working out the market value of land by some arbitrary proportionate method at Rs.2,42,87,930/- and that of the building at Rs.3,36,59,570/-.
On the facts and in the circumstances of the case and in law the CIT (Appeals) erred in rejecting the appellant's/claim in respect of the write off of project expenses amounting to Rs.3,02,372/-.
The appellant craves leave to, add to, alter, modify, delete and/or change all or any above grounds or before the hearing of the appeal.”
The issue raised in ground No.1 is against the order of Ld. CIT(A) upholding the order of AO wherein the provisions of section 50C of the Act has been held to be applicable to the assessee’s case ignoring the fact that the assessee was having only leasehold rights in the property. The assessee has also challenged by way of ground no 3 the confirmation of applicability of provisions of section 50C of the Act despite the fact that difference between fair market value of Rs.5,79,47,500/- and actual sale consideration of Rs.5,25,00,000/- is less than 10%. In the ground No.4, the assessee has challenged the order of Ld. CIT(A) in not applying the rate at Rs.1,596/- as per sqr. mtr. as per MIDC to the land and calculated the market value of the land by arbitrary method at Rs.2,42,87,930/- and that of the building at Rs.3,36,59,570/-.
The facts in brief are that the assessee filed the return of income at Rs.27,912/- declaring a loss of Rs.85,06,067/- which
3 ITA No.1393/M/2017 M/s. Powernetics Equipment India Pvt. Ltd. was processed under section 143(1) of the Act. Thereafter, the case of the assessee was selected for scrutiny and statutory notices were duly issued and served upon the assessee. During the course of assessment proceedings, the AO observed that assessee has shown income from capital gain during the year and accordingly called upon the assessee to furnish the sale agreement and other documents relating the sale of property. The AO after perusal of the sale agreement noticed that stamp valuation of the property admeasuring 3600 sq. mtr. plot No.EL- 179 in the TTC Industrial area was Rs.5,79,47,500/- as against the sale consideration shown by the assessee of Rs.5,25,00,000/- and therefore applied the provisions of section 50C of the Act taking the value as per the stamp valuation authority as deemed consideration. The AO also noted that assessee has reduced Rs.2,25,69,464/- on account of unpaid mortgage loan while computing the capital gain which was not allowable. Finally the AO computed the capital gain after rejecting the reply of the assessee as under: “Sale price as per Section 50C. Less; Rs. 5,79,47,500/- (i.e. as per stamp duty valuation) Less; Indexed cost of land Rs. 1,33,82,663/- Less: Opening WDV of building Rs. 1,15,57,936/- Rs. 2.49,40,599/- Taxable Capital Gain Rs. 3,30,06,901/”
The assessment was framed vide order dated 13.03.2015 passed under section 143(3) of the Act by adding income from capital gain of Rs.3,30,67,901/-.
In the appellate proceedings, the assessee took an additional ground challenging the order of AO on the ground that the property in question which was sold for a consideration of Rs.5,25,00,000/- was a leasehold property and assessee was
4 ITA No.1393/M/2017 M/s. Powernetics Equipment India Pvt. Ltd. not the absolute owner of the said property and therefore the provisions of section 50C of the Act are not applicable to the sale of lease rights. The Ld. CIT(A) ,after admitting the additional ground, dismissed the appeal of the assessee by observing and holding as under: “4.7. I am unable to accept the contention that section 50C does not apply since the land was leased from MIDC. Here the transfer is of a composite property comprising of land and building and not merely the lease of land. As per the appellant's books the value was WDV of Rs 115,57,936 for the building and Rs 83,38,927 for the land. I find that on similar facts the hon'ble ITAT Mumbai bench in the decision reported in [2013] 33 taxmann.com 491 (Mumbai - Trib.) IN THE ITAT MUMBAI BENCH 'E' in the case of Shavo Norgren (P.) Ltd. v. Deputv Commissioner of Income-tax, Circle 3(3) DECEMBER 14, 2012 held that section 50C is applicable. The head notes reads as follows.
Not only the above, as seen from deeds of assignment, assessee transferred the rights in the plots as well as rights in the building, since there is building involved in this assignment, the transfer of property in question do attract provisions of section 50C and, therefore, assessee’s contention on this cannot be accepted. As seen from the marking given in the 'scheduled property' in the deed of transfer substantial portion was covered by the building thereon and as seen from the MoU, assessee seems to be developing the property by utilizing the development rights. In view of this, since both land and building were assigned by these deeds, provisions of section 50C are attracted in this case. [Para 18]
In para 18 the following is stated
"18, Not only the above, as seen from deeds of assignment, assessee transferred the rights in the plots as well as rights in the building, since there is building involved in this assignment, we are of the opinion that the transfer of property in question do attract provisions of section 50C and therefore, assessee's contention on this cannot be accepted. As seen from the marking given in the 'scheduled property' in the deed of transfer substantial portion was covered by the building thereon and as seen from the MoU, assessee seems to be developing the property by utilizing the development rights. In view of this, since both land and building were assigned by these deeds, we are of the opinion that provisions of section 50C are attracted in this case. As seen from the report of the valuation placed on record from page Nos. 95 to 99 the valuation report also indicate that the valuation was undertaken as plot of land and not as 'leasehold rights'. This also supports our opinion that assessee has more than leasehold rights on the plot of land"
4.8 In this decision the case of Atul G. Puranik v. ITO (2011) 132 ITD 499/11 taxmann.com 92 (Mum) and ITO v. Pradeep Steel Re-Rolling Mills (P.) Ltd. (IT
5 ITA No.1393/M/2017 M/s. Powernetics Equipment India Pvt. Ltd. Appeal No.341 (Mum) of 2010, cited by the appellant before me were considered. The additional ground and ground of appeal no 1 is therefore dismissed.”
After hearing both the parties and perusing the material on record, we observe that the only issue in ground No.1 is against the order of Ld. CIT(A) upholding the order of AO on the application of provisions of section 50C of the Act in the case of sale of leasehold rights. The case of the assessee is squarely covered in its favour by the jurisdictional High Court in the case of CIT vs. Green Hotels and Estates Pvt. Ltd. & Ors. in ITA No.735 of 2014 vide order dated 24.02.2016 wherein the identical issue was decided by the Tribunal was upheld by the High Court by dismissing the appeal of the Revenue. The relevant observation of the High Court is as under: “2. The Revenue urges the following question of law for our consideration:
“Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in upholding the order of the CIT(A) in deleting the addition of Long TermCapital Gain of Rs.80,58,000/ on the ground that provisions ofsection 50C of the IT Act, 1961 were not applicable to transferof land and building, being a leasehold property?
3.The impugned order of the Tribunal has dismissed the Revenue's appeal from the order dated 15 June 2012 passed by the Commissioner of Income Tax (Appeals). The issue before the Tribunal was whether Section 50C of the Act would be applicable to transfer of leasehold rights in land and buildings. The impugned order of the Tribunal followed its decision in Atul G. Puranik vs. ITO (ITANo.3051/Mum/2010) decided on 13 May 2011 which held that Section50C is not applicable while computing capital gains on transfer of leasehold rights in land and buildings.4.Mr. Kotangale, learned Counsel for the Revenue, states that the Revenue has not preferred any appeal against the decision of the Tribunal in the case of Atul Puranik (supra). Thus, it could be inferred that it has been accepted. Our Court in DIT vs. Credit Agricole Indosuez377 ITR 102 (dealing with Tribunal order) and the Apex Court in UOI vs. Satish P. Shah 249 ITR 221 (dealing with High Court order) has laid down the salutary principle that where the Revenue has accepted the decision of the Court/Tribunal on an issue of law and not challenged it in appeal, then a subsequent decision following the earlier decision cannot be challenged. Further, it is not the Revenue's case before us that thereare any distinguishing features either in facts or in law in the presentappeal from that arising in the case of Atul Puranik (supra). 5.In the above view, the
6 ITA No.1393/M/2017 M/s. Powernetics Equipment India Pvt. Ltd. question as framed by the Revenuedoes not give rise to any substantial question of law. Thus, not entertained.”
Similarly, in the case of Farid Gul Mohammad vs. ITO in ITA No.5136/M/2014 dated 16.03.2016, the co-ordinate bench of the Tribunal has held that provisions of section 50C of the Act are not applicable to the transfer of leasehold rights considering the decision relied by the Ld. CIT(A) in the case of Shavo Norgarven Pvt. Ltd. vs. DCIT Circle-3(3) as reported in (2013) 33 taxmann.com 491 (Trib.-Mum). We, therefore, respectfully following the Hon’ble Bombay High Court decision and coordinate bench decision on the issue hold that provisions of section 50C of the Act are not applicable to the transfer of leasehold rights and accordingly set aside the order of Ld. CIT(A) on this issue. The ground no. 1 of appeal of the assessee is allowed and AO is directed to take the sale consideration at Rs.5,25,00,000/- for the transfer of leasehold right and calculate the capital gain accordingly.
The ground No.2 is not pressed by the Ld. A.R. at the time of hearing and therefore dismissed as not pressed.
The issue in ground No.3 is that the difference between the fair market value as per stamp valuation authority and the sale consideration is less than 10% and therefore the provisions of section 50C of the Act are not applicable. Since we have already decided the issue that provisions of section 50C of the Act are not applicable to the assessee, therefore this ground is infructuous and needs no adjudication.
7 ITA No.1393/M/2017 M/s. Powernetics Equipment India Pvt. Ltd. 11. The issue in ground No.4 is against the order of Ld. CIT(A) in not applying the rate of Rs.15,960/- per sq. mtr. Which is as per MIDC a Govt body and instead calculating the market value arbitrarily of the land at Rs.2,42,87,930/- and building at Rs.3,36,59,570/-.
The facts in brief are that in the assessment proceedings the AO calculated the capital gain by taking the index cost of land at Rs.1,33,02,663/- and the opening WDV of building at Rs.1,15,57,936/- aggregating to Rs.2,49,40,599/- thereby computing the taxable capital gain at Rs.3,30,06,901/-.
In the appellate proceedings, the Ld. CIT(A) bifurcated the sale proceeds in the ratio of book value of land and building thereby dividing the sale consideration between land and building at Rs.2,42,87,930/- and Rs.3,36,59,570/- respectively by observing and holding as under: “4.10. This rate translates to Rs 574,56,000/- for 3600 sq. mts . of plot whose book value was Rs 83,38,927/-and adopting the same would mean that the building sale value was only Rs 4,91,500/- for built up area of 1325 sq.mts. whose WDV was Rs 115,57,936/- which is highly improbable It is further noted that the valuation as per MIDC also corroborates the market value of the property sold which is much higher than the stated consideration. However, there is certainly merit in the contention that since land value is shown separately in the balance sheet, as an asset on which no depreciation is claimed, the transfer should give rise to long term capital gains. In the present case where sales consideration is a composite one, a more reasonable basis would be to bifurcate it in the ratio of the book value of land and buildings. Thus, the sales value of land is to be taken as Rs 242,87,930/- and for building Rs 3,36,59,570/- The assessing officer is directed to adopt these values and compute gain for land separately allowing indexation which will be long term capital gain and for building it will be short term capital gain. The WDV of building will be verified from records as the same is not readily verifiable from the copy of audited accounts filed. Grounds of appeal 2 and 3 are partly allowed.”
After hearing both the parties and perusing the material on record, we observe that in this case the sale consideration has been apportioned between land and building in the ratio of book
8 ITA No.1393/M/2017 M/s. Powernetics Equipment India Pvt. Ltd. value of these assets in the books of accounts. We find merit in the contentions of the Ld. A.R. that the apportionment of sale consideration is not fair and proper as it was based upon subjectivity and arbitrariness especially due to the fact that the land has huge value whereas the building has a very meager value therefore the same should be adopted by applying an objective and scientific method. The Ld. A.R. suggested that the more objective and scientific method. The Ld. A.R. suggested that the more objective and scientific method should be applied to determine the value of the land and building. The Ld. A.R. also submitted that the sqr. mtr. rate as per MIDC a government body is Rs.15,960/- per sqt. Mtr which is the most reliable and objective rate. According to the said rate the value of the land comes to Rs.5,74,56,000/- for the said leasehold plot admeasuring 3600 sqr. mtr. In our opinion it would be fair and proper if the value assigned to the building is taken at Rs.1,15,58,000/- the book value of the building and the balance of Rs.4,09,42,000/- is attributed to the land which is even lower to valuation as per MIDC rate. Accordingly, we direct the AO to take the sale consideration for land at Rs.4,09,42,000/- for the land and Rs.1,15,58,000/- for the building as there is no objective and fair basis for allocation of the sale consideration other than this. Accordingly, the ground of the assessee is allowed.
The issue raised in ground No.5 is against the order of Ld. CIT(A) rejecting the assessee’s claim in respect of written off project expenses amounting to Rs.3,03,02,372/-.
9 ITA No.1393/M/2017 M/s. Powernetics Equipment India Pvt. Ltd. 16. The facts in brief are that the AO during the course of assessment proceedings observed that assessee has debited a sum of Rs.3,02,372/- on account of project expenses written off in the profit & loss account and accordingly asked the assessee to produce the details and justification thereof. It was submitted by the assessee that it is engaged in the business of manufacturing of electronic UPS for railways and other services. Sometimes the assessee incur expenses on the products which have to be abandoned in view of the non acceptance thereby the customer. So the expenses are written off as being relating business of the assessee wholly and exclusively . The AO rejected the reply of the assessee dated 27.02.2015 and added the same to the income of the assessee by observing that the said expenditure is covered by the provision of section 35D of the Act whereunder the assessee is allowed the amortization of expenses equal to 1/10th of the project expenditure incurred prior to the commencement of the business. However, the assessee has claimed Rs.3,02,372/- which is more than 1/10th of the total project expenses and AO also noted that in the previous year the assessee claimed Rs.3,77,965/- which is also more than 10% of the project expenses and there is no consistency in the treatment of the assessee of these expenses.
In the appellate proceedings, the Ld. CIT(A) also dismissed the appeal of the assessee after considering the assessee’s submissions by observing and holding as under: “5.3. A perusal of the copy of return of income shows that the appellant has not claimed any deduction u/s 35D. It also appears that the assessing officer has mistaken the project expenses write off as preliminary expenses prior to commencement of business. In the balance sheet, the expenses are shown under the head Other Current Assets as Project expenses. Thus, the appellant has capitalized such expenses and is claiming a part of it each year. It appears that the
10 ITA No.1393/M/2017 M/s. Powernetics Equipment India Pvt. Ltd. amount was capitalized in AY 2009-10. If the project for 180 KVA Static Converter has been kept on hold by the customer, there is no reason to claim the expenditure in current year. Accordingly, the claim is not allowable as expense in the current year. The ground is dismissed.
We have heard the rival submissions of both the parties and perused the material on record. We observe from the perusal of the order of AO that the disallowance was made for the want of consistency in the books of accounts as in the assessment year 2011-12, the assessee claimed Rs.3,77,965/- whereas in the current year the assessee claimed Rs.3,02,372/- on account of project expenses written off. The AO held that under section 35D of the Act equal to the 1/10th of the project expenses incurred prior to commencement of business is to be amortized and but it was not done. In the appellate proceedings Ld. CIT(A) has gone on a different footing by observing that the AO has mistaken the project expenses written off as preliminary expenses incurred prior to commencement of business. The Ld. CIT(A) noted that in the balance sheet the said expenses were shown under the head project expenses and a part of expenditure is being written off every year. According to Ld. CIT(A) the said expenditure was capitalized in 2009-10 and in connection with the project for 180 KVA which has been kept on hold by the customer and thus there is no reason to claim the said expenditure and thus dismissed the appeal of the assessee.
Before us the Ld. A.R. submitted that the assessee is engaged in the business of manufacturing of electronic UPS for railways and other services and therefore has to make sample in the form of educational order for soliciting further orders if the project suits the requirements of the customers. The Ld. A.R.
11 ITA No.1393/M/2017 M/s. Powernetics Equipment India Pvt. Ltd. submitted before us that this is a routine course of action of business of the assessee. The Ld. A.R. took us through the pages 157, 158, 159 & 160 which are the copies of supply order by the Indian Railways for educational order specifying make and quality. The Ld. A.R. submitted that it is not necessary that the project expenses which are incurred for making the UPS would necessarily result into the earning of income and soliciting of further order. Therefore whatever expenses are incurred are written off over a period of time. Accordingly, the Ld. A.R. submitted that in the current year the assessee received some order from Railways on which it has been Rs.30,33,720/- towards preparation of project which did not take off. The Ld. A.R. submitted that the Railway changed the specifications in respect of the 180 KVA transformer which was later on changed to 130 KVA transfer and thus whatever expenses the assessee incurred it had decided to write off 1/10th of the project expenses consisting of the feasibility and viability expenses of the project for the Railways. The Ld. A.R. submitted that these expenses which are incurred wholly and exclusively in connection with the business of the assessee and therefore admissible. It is immaterial for the purpose of allowability of expenses that 1/10th of total expenses is not claimed by the assessee.
The Ld. D.R., on the other hand, strongly objected to the reasoning forwarded by the Ld. A.R. and relied upon the order of ld CIT(A).
After considering the facts on records, we are fully convinced with the contentions of the Ld. A.R. that the expenses
12 ITA No.1393/M/2017 M/s. Powernetics Equipment India Pvt. Ltd. on the above said orders for preparation of projects and feasibility etc which are admissible business expenses to be written off against the revenue of the assessee. Therefore, we are not in agreement with the conclusion drawn by the Ld. CIT(A) and accordingly hold that the expenses claimed by the assessee by way of writing the project expenses a part of project expenses are allowed.Accordingly, we set aside the order of authorities below and direct the AO to allow Rs.3,02,000/-.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 26.03.2019.
Sd/- Sd/- (Amarjeet Singh) (Rajesh Kumar) JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, Dated: 26.03.2019. * Kishore, Sr. P.S.
Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT (A) Concerned, Mumbai The DR Concerned Bench //True Copy// [ By Order
Dy/Asstt. Registrar, ITAT, Mumbai.