POLYNOVA PACKERS,MUMBAI vs. ITO 25(2)(2), MUMBAI

In this appeal, assessee has raised the following Grounds of appeal :-

In brief, the facts relevant to adjudicate the controversy raised in this appeal can be summarised as follows. The appellant before me is a Partnership firm engaged in the business of manufacture of packing materials. In the course of assessment proceedings, the Assessing Officer noted that on 01.04.2010 assessee acquired a property, being land and factory building from its sister concern, M/s. Packswell Combine Pvt. Ltd. for a total consideration of Rs.18,00,000/- which, inter-alia, included a sum of Rs.3,00,000/- in respect of land on which the factory building stood. It was also noted by the Assessing Officer that the assessee expended a sum of Rs.1,09,96,039/- on the renovation of such acquired factory building, but due to business reasons the manufacturing activity was not started, and instead the property was sold to another concern in terms of an agreement dated 01.12.2010 for a total consideration of Rs.1,25,00,000/-. In its return of income, assessee reduced the block of factory building by a sum of Rs.1,22,00,000/- on account of factory building sold (net of the land value of Rs.3,00,000/-) and accordingly, claimed depreciation on the balance of the Written Down Value (WDV) lying in the block of ‘factory building’. The Assessing Officer required the assessee to explain as to why the surplus on the sale of the property was not offered to tax. The stand of the assessee was that the treatment accorded by it was in accordance with the provisions of the Act whereby the sale value was reduced from the value of the respective block of asset, and only on the resultant WDV, depreciation was claimed, and it was emphasised that the property in question was a fixed asset. The Assessing Officer, however, disagreed with the treatment accorded by the assessee as, according to him, there was a profit on the purchase and sale of property of Rs.12,50,760/-, which was required to be assessed as ‘income from other sources’. The Assessing Officer noted that the property was purchased and sold in the same financial year and, therefore, the transaction has to be viewed as a business investment inasmuch as the property was never put to use in the normal business activity carried out by the assessee. In order to justify the assessment of the surplus as ‘income from other sources’, the Assessing Officer also referred to the judgment of the Hon'ble Supreme Court in the case of Universal Plasts Ltd. v. CIT, 237 ITR 454 (SC).

The assessee carried the matter in appeal before the CIT(A) who also affirmed the decision of the Assessing Officer. The CIT(A) noted that the renovated factory shed was not being used by the assessee for its business and the same was sold within the year itself. According to the CIT(A), the factory building could not be taken as a part of depreciable block of assets and, therefore, the surplus arising on such transaction of purchase and sale of property was rightly taxed by the Assessing Officer under the head ‘income from other sources’. Against such a decision, assessee is in further appeal before the Tribunal.

Before me, the learned representative for the assessee pointed out that though the assessee acquired the land and factory building for expanding its manufacturing activities, but after it was sold without putting it to use for any manufacturing activity. It was emphasised that after acquisition, assessee had spent a considerable sum of money on its improvement and extension as assessee was planning to expand its manufacturing capacity. So however, in the absence of good business prospects, without putting the factory building to use for manufacturing, it was sold. It was, therefore, contended that it has been wrongly treated as a transaction involving investment in a business asset.

On the other hand, the ld. DR appearing for the Revenue has relied upon the reasoning advanced by the lower authorities, which I have already noted in the earlier paras and is not being repeated for the sake of brevity.

I have carefully considered the rival submissions. The undisputed factual matrix is that the assessee has purchased a property comprising of land and factory building during the year and also expended money on its extension. It is also notable that the factory building was not put to use by the assessee for its business of manufacturing of packing material. Instead, during the year itself assessee sold the said property for a consideration, which has yielded surplus. The surplus has not been offered for taxation and instead, assessee claimed depreciation on the block of factory building on the WDV as reduced by the sale consideration. Notably, the cost of acquisition and cost of improvement thereof amounting to Rs.15,00,000/- (net of Rs.3,00,000/- in respect of land) and Rs.1,09,96,039/- respectively were added to the value of the block of factory building. In my considered opinion, the assessee has clearly brought out that the factory building was not put to use and was sold out prior to it being used for business. Therefore, in such a situation, the provisions of Sec. 50 of the Act do not come into operation, as canvassed by the assessee before me. Sec. 50 of the Act prescribes for computation of Capital Gains in cases where the capital asset forms part of block of assets in respect of which “depreciation has been allowed” under the Act. Quite clearly, it is a conceded position that the factory building in question was not put to use for business and thus, it cannot be construed to be a capital asset in respect of which depreciation has been allowed under the Act. Therefore, the treatment accorded by the assessee is incorrect. At the same time, even the treatment by the Assessing Officer of assessing the surplus on the sale of factory building as ‘income from other sources’ is also untenable. Pertinently, the factory building is a capital asset and merely because assessee has acquired it and sold during the year itself would not change its character. Therefore, it is a case where the capital asset on which depreciation has not been allowed has been sold within a period of less than 12 months of its acquisition and, therefore, the resultant surplus is a Short Term Capital Gain. Such a surplus ostensibly cannot be assessed as ‘income from other sources’ and the decision of the Hon'ble Supreme Court in the case of Universal Plasts Ltd. (supra), relied upon by the Assessing Officer, has no applicability in the instant fact-situation. The judgment of the Hon'ble Supreme Court deals with income derived by way of leasing of factory in a situation where assessee had stopped using it because of closure of business with no intention to revive it. In such a situation, it was observed that such a leasing income was not to be assessed as ‘business income’. The income under consideration by the Hon'ble Supreme Court was income by way of leasing whereas in the instant case, assessee has sold its factory building and the issue pertains to the nature of the sale proceeds. Ostensibly, the decision of the Hon'ble Supreme Court stands on a completely different footing and, therefore, does not support the stand of the Revenue in the present case.

In the result, I set-aside the order of the CIT(A) and direct the Assessing Officer to recompute the total income of the assessee in view of my aforesaid directions. Resultantly, appeal of the assessee is partly allowed.