UNIVERSAL FOUNDARY P.LTD,MUMBAI vs. ITO 8(3)(4), MUMBAI

The present set of appeals are directed against the orders passed by the Commissioner of Income Tax (Appeals)-18, Mumbai, for A.Ys 2006-07, 2007-08 and 2008-09, each dated 21.06.2012, which in itself arises from the orders passed by the A.O under Sec. 143(3) of the Income-tax act, 1961 (for short „Act‟), dated 30.12.2008, 31.12.2009 and 21.12.2010,respectively. That both the assessee and the revenue have filed cross appeals against the order of the CIT(A) for A.Y. 2007- 08, while for the revenue is in appeal against the orders of the CIT(A) for A.Ys 2006-07 and 2008-09. That as certain common issues are involved in these appeals, therefore, they are taken up and disposed of by way of a consolidate order. We shall first take up the appeal of the revenue for A.Y. 2006-07, wherein the order of the CIT(A) had been assailed before us on the following grounds of appeal: “On the facts and in the circumstances of the case and in law, the CT(A) erred in not upholding the application of sec. 50C of the Act, which was rightly invoked by the AO” “On the facts and in the circumstances of the case and in law, the CT(A) erred in directing the AO to accept the sale consideration as per the sale agreements which is in contravention of the provisions of section 50C of the Act” “On the facts and in the circumstances of the case and in law, the CT(A) erred in relying y\upon various decisions of High Courts which were rendered in 1979, 1980 and 1993, i.e prior to the insertion of sec. 50C in the Act by Finance Act, 2002, w.e.f 01.04.2003”

Briefly stated, the facts of the case are that the assessee company which is engaged in property business had e-filed its return of income for A.Y. 2006-07 on 28.11.2006, declaring income of Rs. 27,093/-. The return of income of the assessee was processed as such under Sec. 143(1) of the Act. The case of the assessee was thereafter selected for scrutiny assessment under Sec. 143(2).

That during the course of the assessment proceedings the A.O obtained the details of the “Sundry creditors” of Rs. 2,00,18,823/- reflected in the balance sheet of the assessee for the year under consideration, viz. A.Y. 2006-07. The A.O deliberating on the details of the creditors observed that the same comprised of an amount of Rs. 1,81,21,800/- shown under the head “Ownership of Gala”. The assessee submitted before the A.O that the amount of Rs. 1,81,21,800/- was the advance received from its tenants of the galas in its premises at “Universal Estate” for converting their tenancy rights into ownership. The A.O observed that the assessee had total 31 tenants in its premises at “Universal Estate”. That a perusal of the facts revealed that the assessee had during the year under consideration, viz. A.Y. 2006-07 had entered into agreement for sale of 19 industrial galas. That the buyers comprised of 17 regular tenants who were already in possession of the respective properties, while for two buyers were not the existing tenants of the assessee and were to 5658/Mum/2012- A.Ys. 2006-07, 2007-08 & 2008-09 Universal Foundary P. Ltd. vs. ITO ITO Vs. Universal Foundary P. Ltd independent buyers. The assessee claimed that as the possession of the respective properties was delivered to the buyers in the immediately succeeding year, viz. the period relevant to A.Y. 2007-08, therefore, the income arising from the sale of the property was taken as the income of the said succeeding year. However, the A.O being of the view that as the sale deeds for all the 19 industrial galas were executed during the year under consideration and the conditions contemplating a transfer as per Sec. 2(47)(v) were satisfied, therefore, the income from the sale of the property/conversion of the tenancy rights into ownership were liable to be brought to tax during the year under consideration itself.

That as the value that was adopted by the Stamp valuation authority at Rs. 2,06,10,719/- while registering the respective sale deeds of the aforesaid 19 industrial galas was more than the sale consideration of Rs. 1,81,21,800/- received by the assessee, therefore, the A.O taking recourse to the provisions of Sec. 50C of the Act computed the income of the assessee under the head „Capital gain‟ by adopting the value of Rs. 2,06,10,719/- as the sale consideration. The A.O thereafter recomputing the written down value of the building forming part of the „block of assets‟ on 01.04.2005 at Rs. 3,15,025/-, worked out the income of the assessee from the sale of the aforesaid industrial galas chargeable under the head capital gain at Rs. 2,02,95,694/-.

Aggrieved, the assessee assailed the order of the A.O before the CIT(A). The CIT(A) observed that as the assessee had claimed that the value of the industrial galas as adopted by the Stamp Valuation authority was higher than their fair market value (for short „F.M.V‟), therefore, called for a remand report from the A.O. The A.O during the course of the remand proceedings made a reference to the DVO under to 5658/Mum/2012- A.Ys. 2006-07, 2007-08 & 2008-09 Universal Foundary P. Ltd. vs. ITO ITO Vs. Universal Foundary P. Ltd Sec. 50C(2) of the Act. The A.O after receiving the valuation reports from the office of the Assistant Valuation Officer-1, Mumbai (for short „AVO‟), observed that out of 31 properties referred for valuation, in five cases the amount of sale consideration received by the assessee as per the agreement to sell was more than the fair market value, while for in the remaining 26 properties the fair market value determined by the AVO was found to be more than the sale consideration received by the assessee as per the agreement to sell.

The assessee during the course of the appellate proceedings objected to the valuation done by the AVO. It was submitted by the assessee that though the AVO had claimed in the valuation report that the combination of physical method of valuation using appropriate sale instance and rent capitalisation was adopted for valuation of property, but however , the properties were valued by him by adopting only the physical method of valuation using appropriate sale instance in respect of all the 26 properties. The assessee submitted before the CIT(A) that the valuation of the properties by the AVO by using appropriate sale instance was contrary to the provisions of law. The assessee submitted that as all the 26 galas/properties sold by the assessee were let out to various persons over the years, therefore, as per Schedule III- Part B of the Wealth Tax Act, 1957, the said properties should have been valued by using rent capitalisation method. The assessee submitted before the CIT(A) a „Chart‟, which revealed that the valuation of all the 31 galas/properties arrived as per Schedule III – Part B of the Wealth Tax Act, 1957, revealed that the fair market value of the aforesaid properties was less than the value for which the properties had been sold by the assessee as per the respective agreements to sell. to 5658/Mum/2012- A.Ys. 2006-07, 2007-08 & 2008-09 Universal Foundary P. Ltd. vs. ITO ITO Vs. Universal Foundary P. Ltd 7. The assessee further objected to the valuation of the AVO on two counts, viz. (i). that the AVO had erred in uniformly considering 1977 as the year of construction for all the 26 properties, as most of the galas/buildings were constructed by the assessee in the year 1962, while for in the year 1965 a revised plan was submitted to the BMC for extension of additional construction which was completed in the year 1977; and (ii). that the deduction of 20% allowed by the AVO on account of the structure of the buildings being an old shed was not in conformity with the rate of depreciation as was allowed on old buildings for the purposes of stamp duty valuation, as under: Completed age of Value for R.C.C Pukka Value for Half or building in years. Structure /other Pucca Semi-Pukka Structure Structure after after depreciation. depreciation 0 to 2 100% 100% Above 2 to 5 95% 95% Above 5 to 10 90% 85% Above 10 to 20 80% 75% Above 20 to 30 70% 60% 60% 45% Above 30 to 40 Above 40 to 50 50% 30% Thus, in the backdrop of the aforesaid contentions it was averred by the assessee that for the galas constructed in the year 1962 it was entitled to depreciation @ 50/70% as against 20% considered by the AVO. Similarly, for the galas/properties which were constructed in the year 1977 it was entitled to get depreciation @30%/40% as against 20% considered by the AVO. The assessee in the backdrop of its aforesaid objections submitted before the CIT(A) that if the aforesaid mistakes were rectified/considered, then the value of the properties ITA No. 5656 to 5658/Mum/2012- A.Ys. 2006-07, 2007-08 & 2008-09 Universal Foundary P. Ltd. vs. ITO ITO Vs. Universal Foundary P. Ltd would be more or less than that shown in the respective agreements to sell. The assessee thus submitted before the CIT(A) that as the fair market value of the galas/building after considering the aforesaid facts would be found to be in conformity with the sale consideration received as per the respective agreements to sell, therefore, the provisions of Sec. 50C would clearly be ousted.

The CIT(A) after considering the objections of the assessee to the valuation of the AVO, therefore, remanded the matter to the A.O for obtaining the report of the AVO. The AVO meeting out the objections of the assessee submitted that the rent capitalization method was not followed in the case of the assessee, because the rent fetched was not reasonable. The AVO submitted that the rent capitalization method could be adopted only when the rent is fair, therefore, in the case of the assessee as the rent paid by the tenant was found to be arbitrary, ranging from Rs. 0.50 per Sq. ft to Rs. 2.50 per Sq. ft, which was substantially less than the reasonable rent, therefore, the rent capitalisation method was not followed.

The assessee on receipt of the report of the AVO objected to the same. It was claimed by the assessee that the contention of the AVO was not only arbitrary but also baseless. It was submitted by the assessee that a property which was subject to rent control legislation had to be valued by applying “yield or rent capitalization method” only and cannot be valued by applying the notional market value method. The assessee in support of its contention relied on the judgment of the Hon’ble High Court of Calcutta in the case of CIT Vs. Anup Kumar Kapoor & Others (1980) 125 ITR 684 (Cal) . It was thus submitted by the assessee that as the tenancies in Mumbai are statutorily controlled by the rent control legislations and rent fetched were likely to remain unaltered for years to come, therefore, the “yield or rent to 5658/Mum/2012- A.Ys. 2006-07, 2007-08 & 2008-09 Universal Foundary P. Ltd. vs. ITO ITO Vs. Universal Foundary P. Ltd capitalization method” was the most appropriate method for valuation of the galas/building of the assessee. The assessee on the basis of his aforesaid facts submitted that the addition made in the hands of the assessee by invoking the provisions of Sec. 50C could not be sustained and were liable to be deleted.

The CIT(A) after deliberating on the contentions of the assessee in the backdrop of the case law relied upon, observed that as the property of the assessee was an old tenanted property, therefore, the most appropriate method for valuation was the Rent Capitalization Method. The CIT(A) thus being of the view that as the consideration /sale price shown by the assessee was more than the value as per Rent Capitalization Method, therefore, directed the A.O to consider the sale price shown by the assessee for computing the capital gain and not the value adopted by the A.O by taking recourse to Sec. 50C or the value determined by the AVO.

The revenue being aggrieved with the order of the CIT(A) had carried the mater in appeal before us. The ld. Departmental representative (for short „D.R‟) submitted that the CIT(A) while concluding that the provisions of Sec 50C would not be applicable to the case of the case had wrongly relied on the judicial pronouncements which were rendered prior to insertion of Sec. 50C on the statute w.e.f 01.04.2003. Per Contra, the ld. Authorised representative (for short „A.R‟) for the assessee relied on the order of the CIT(A). The ld. A.R submitted that the CIT(A) had bifurcated the sale consideration between Land (70%) and Building (30%), which thus would be liable to be assessed as „Long term Capital Gain‟ (LTCG) and „Short Term Capital Gain‟ (STCG), respectively. The ld. A.R taking us through the facts of the case submitted that the CIT(A) had rightly concluded that the valuation of the property under consideration was to 5658/Mum/2012- A.Ys. 2006-07, 2007-08 & 2008-09 Universal Foundary P. Ltd. vs. ITO ITO Vs. Universal Foundary P. Ltd to be valued as per the rent capitalization method. The ld. A.R took us through the value of the 31 galas/buildings of the assessee in “Universal Foundry”, as determined on the basis of Rent Capitalization Method provided in Schedule III – Part B of the Wealth tax Act, 1957 (Page 6 of „APB‟).

We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record. We are of the considered view that the revenue misdirecting itself and misconstruing the observations of the CIT(A) that the provisions of Sec. 50C would not be applicable to the case of the assessee, had assailed the same before us. We find that the CIT(A) had concluded that the provisions of Sec. 50C would not be attracted in the case of the assessee, not for the reason that the same were not applicable in the case of depreciable assets, but rather, for the reason that the sale consideration received by the assessee as per the agreement to sell, was found to be more than the fair market value of the tenanted galas/building as determined by applying the Rent Capitalisation Method contemplated in Schedule III – Part B of the Wealth Tax Act, 1957. Be that as it may, we herein advert to the challenge thrown by the revenue to the finding of the CIT(A) that the provisions of Sec. 50C would not be applicable to the case of the assessee. We find that it remains as a matter of fact that as conceded by the A.V.O in his report filed with the A.O that the rent capitalization method was not adopted for valuation of the property as the rent fetched by the galas/building under consideration was not found to be reasonable. We are persuaded to be in agreement with the contention of the ld. A.R that as the tenancies in Mumbai are statutorily controlled by the rent control legislations, and rent fetched is likely to remain unaltered for years to come, therefore, the Rent Capitalisation Method contemplated in Schedule III – Part B of the ITA No. 5656 to 5658/Mum/2012- A.Ys. 2006-07, 2007-08 & 2008-09 Universal Foundary P. Ltd. vs. ITO ITO Vs. Universal Foundary P. Ltd Wealth Tax Act, 1957 was the most appropriate method for valuation of the galas/building of the assessee. We find that our aforesaid view is fortified by the judgment of the Hon’ble High Court of Calcutta in the case of CIT Vs. Anup Kumar Kapoor & Others (1980)125 ITR 684(Cal), wherein the High Court observed that in case of tenanted property, "yield or rental method" should be applied, held as under: “Tenancies in Calcutta are statutorily controlled by the rent control legislations and its impact on the valuation of tenanted properties cannot be ignored. In our view, it would be unreasonable if not absurd to value such property on the basis of a notional market value in disregard of such control”. We thus are of the considered view that as the tenancies in Mumbai are statutorily controlled by the rent control legislations and rent fetched were likely to remain unaltered for years to come, therefore, in the case of the present assessee before us the valuation of the property, as observed by us hereinabove, was required to be done as per the Rent Capitalization Method. We though are principally in agreement with the view taken by the CIT(A) who had held that the most appropriate method of valuation of the galas/building of the assessee was by applying the Rent Capitalization method, but however, do not approve of the summary acceptance by him of the claim of the assessee that as the sale price of the galas/buildings received by the assessee was more than the value determined as per the Rent Capitalisation Method, therefore, no addition was called for in the hands of the assessee. We though are not oblivious of the fact that the assessee had placed on record the valuation of the 31 galas/building as per the Schedule III – Part B of the Wealth tax Act, 1957, but then, we are of the considered view that the said valuation furnished by the assessee was required to be verified and could not have been accepted on the very face of it. We thus in all fairness restore the matter to the file of A.O, and therein direct that the Fair to 5658/Mum/2012- A.Ys. 2006-07, 2007-08 & 2008-09 Universal Foundary P. Ltd. vs. ITO ITO Vs. Universal Foundary P. Ltd market value of the property be got determined as per the Rent Capitalization Method. Needless to say, during the course of the set aside proceedings the assessee shall be afforded sufficient opportunity of being heard by the lower authorities, and shall further remain at a liberty to support its claim on other grounds as regards the issue under consideration.

The appeal of the assessee is allowed for statistical purposes. A.Y. 2007-08 14. We shall now take up the appeal of the revenue for A.Y. 2007-08, wherein the order of the CIT(A) had been assailed before us on the following grounds of appeal:

Briefly stated, the facts of the case are that the assessee company had e-filed its return of income for A.Y. 2007-08 on 12.11.2007, declaring income at Rs. Nil. The return of income of the assessee was processed as such under Sec. 143(1) of the Act. The case of the assessee was thereafter selected for scrutiny assessment under Sec. 143(2).

That during the course of the assessment proceedings the A.O observed that the assessee had during the year under consideration, viz. A.Y. 2007-08 converted the tenancy rights of 10 parties into ownership. The assessee claimed that as the accrual of capital gain had taken place in A.Y. 2008-09 and not during the year under consideration, therefore, the income arising from the sale of the property was taken as the income of the said succeeding year. However, the A.O being of the view that as all of the 10 agreements were executed during the year under consideration, therefore, the income from the sale of the property/conversion of the tenancy rights into ownership were liable to be brought to tax during the year under consideration.

That as the value that was adopted by the Stamp valuation authority at Rs. 59,55,952/- while registering the respective sale deeds of the aforesaid 10 galas was more than the sale consideration of Rs. 33,44,000/- received by the assessee, therefore, the A.O taking recourse to the provisions of Sec. 50C of the Act computed the income of the assessee under the head „Capital gain‟ by adopting the value of Rs. 59,55,952/- as the sale consideration.

Aggrieved, the assessee assailed the order of the A.O before the CIT(A). The CIT(A) by referring to the observations as were recorded by ITA No. 5656 to 5658/Mum/2012- A.Ys. 2006-07, 2007-08 & 2008-09 Universal Foundary P. Ltd. vs. ITO ITO Vs. Universal Foundary P. Ltd him while disposing of the appeal of the assessee for the immediately preceding year, viz. A.Y. 2006-07, observed that as the property of the assessee was an old tenanted property, therefore, the most appropriate method for valuation was the Rent Capitalization Method. The CIT(A) thus being of the view that as the consideration/sale price shown by the assessee was more than the value as per Rent Capitalization Method, therefore, directed the A.O to consider the sale price shown by the assessee for computing the capital gain and not the value adopted by the A.O by taking recourse to Sec. 50C or the value determined by the AVO.

The revenue being aggrieved with the order of the CIT(A) had carried the matter in appeal before us. We find that as the facts and the issue involved in the present appeal of the assessee for A.Y. 2007- 08 are the same as were involved in the earlier appeal of the revenue for A.Y. 2006-07, marked as therefore, our order passed in the said appeal shall apply mutatis mutandis for disposing of the present appeal of the revenue for A.Y. 2007-08, marked as ITA No. 5657/Mum/2012.

The appeal of the revenue is allowed for statistical purposes in terms of our observations recorded while disposing off the appeal of the revenue for A.Y. 2006-07, marked as ITA No. 5656/Mum/2012. ITA NO. 5710/Mum/2012 A.Y. 2007-08

We shall now advert to the appeal of the assessee for A.Y. 2007- 08. The assessee assailing the order of the CIT(A) had raised before us the following effective grounds of appeal:

Briefly stated, the facts pertaining to the issue under consideration are that the assessee had in its return of income clamed a „Short Term Capital Loss‟ (for short „STCL‟) of Rs. 76,50,000/-. During the course of the assessment proceedings, though initially the assessee did not come forth with the details as regards its aforesaid claim of loss, but finally submitted that it had purchased 4,500 shares of M/s Instamac P. Ltd. for a consideration of Rs. 81,00,000/-, which thereafter were sold for Rs. 4,50,000/-, thus resulting into a STCL of Rs. 76,50,000/-.

The assessee during the course of the assessment proceedings submitted before the A.O that M/s Instamac P. Ltd which was engaged in the business of making tea and coffee powder for last many years was running into losses, but the directors were hopeful of turn around in company‟s financial position. It was submitted that the company, viz. M/s Instamac P. Ltd having developed a new product, i.e Herbal ready mix tea & coffee powder, which was approved by M/s Hindustan Unilever Limited (for short „HLL‟), was to get an estimated order of Rs. 15 crores every year for supply of the said product from HLL. The assessee submitted that the aforesaid issue was discussed at the boards meeting of the assessee company on 02.03.2006, and it was resolved to acquire 4500 shares of Rs. 100/- each of M/s Instamac P. Ltd at a premium of Rs. 1800/- per share, that is for a total consideration of Rs. 81 lac. However, as the bank declined to give loan to M/s Instamac P. Ltd for purchasing new machines as well as the new venture capitalist who had earlier agreed to back the payment to 5658/Mum/2012- A.Ys. 2006-07, 2007-08 & 2008-09 Universal Foundary P. Ltd. vs. ITO ITO Vs. Universal Foundary P. Ltd took a negative stand, therefore, in the backdrop of the aforesaid change in circumstances, the entire project had to be scrapped. It was submitted by the assessee that at the said time one Mr. Shrikant Shah was ready to purchase the shares of M/s Instamac P. Ltd so held by the assessee, but for a consideration of Rs. 4,50,000/-. It was submitted by the assessee that it was under the aforesaid compelling circumstances that the assessee accepted the offer and sold the shares for a consideration of Rs. 4,50,000/-, which thus had resulted to STCL of Rs. 76,50,000/- in the hands of the assessee.

The A.O after deliberating on the contentions of the assessee was however not persuaded to accept the same. The A.O after dealing with the aforesaid claim of loss of the assessee at length, therein observed that the explanation of the assessee suffered from serious infirmities and thus could not be accepted. The A.O while discarding the aforesaid claim of STCL of the assessee observed that the same was clearly a sham transaction that was carried out to reduce the taxable short term capital gain of the assessee.

Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) upheld the order of the A.O in respect of the issue under consideration by observing as under:

The appeal of the assessee is dismissed.

Briefly stated, the facts of the case are that the assessee company had e-filed its return of income for A.Y. 2008-09 on 30.10.2010, declaring income of Rs. 8,27,660/-. The return of income of the assessee was processed as such under Sec. 143(1) of the Act. The case of the assessee was thereafter selected for scrutiny assessment under Sec. 143(2).

That during the course of the assessment proceedings the A.O observed that the assessee had during the year under consideration, viz. A.Y. 2008-09 converted the tenancy rights of 2 parties into ownership. The A.O being of the view that as the 2 agreements were executed during the year under consideration, therefore, the income from the sale of the property/conversion of the tenancy rights into ownership were liable to be brought to tax during the year under consideration.

Aggrieved, the assessee assailed the order of the A.O before the CIT(A). The CIT(A) by referring to the observations as were recorded by him while disposing of the appeal of the assessee for A.Y. 2006-07, observed that as the property of the assessee was an old tenanted property, therefore, the most appropriate method for valuation was the Rent Capitalization Method. The CIT(A) thus being of the view that as the consideration/sale price shown by the assessee was more than the value as per Rent Capitalization Method, therefore, directed the A.O to consider the sale price shown by the assessee for computing the capital gain and not the value adopted by the A.O by taking recourse to Sec. 50C or the value determined by the AVO.

The revenue being aggrieved with the order of the CIT(A) had carried the matter in appeal before us. We find that as the facts and the issue involved in the present appeal of the assessee for A.Y. 2008- 09 are the same as were involved in the earlier appeal of the revenue for A.Y. 2006-07, marked as therefore, our order passed in the said appeal shall apply mutatis mutandis for disposing of the present appeal of the revenue for A.Y. 2008-09, marked as ITA No. 5658/Mum/2012.

The appeal of the revenue is allowed for statistical purposes in terms of our observations recorded while disposing off the appeal of the revenue for A.Y. 2006-07, marked as ITA No. 5656/Mum/2012. to 5658/Mum/2012- A.Ys. 2006-07, 2007-08 & 2008-09 Universal Foundary P. Ltd. vs. ITO ITO Vs. Universal Foundary P. Ltd

The appeal of the assessee for A.Y. 2007-08, marked as is dismissed. The appeals of the revenue for A.Ys. 2006-07, 2007-08 and 2008-09, marked as ITA No. 5657/Mum/2012 and ITA No. 5658/Mum/2012 are allowed for statistical purposes. Order pronounced in the open court on 10/01/2018.