PALANISAMY RANI,ERODE vs. PCIT-1, COIMBATORE, COIMBATORE

PER S. R. RAGHUNATHA, ACCOUNTANT MEMBER:

This appeal instituted by the assessee is against the order of the Principal Commissioner of Income Tax, Coimbatore-1, for the assessment year 2017-18, vide order dated 16.11.2023.

:-2-: ITA. No:1490/Chny/2023 assessee having returned the entire value as sale of long term capital asset, which had been examined and accepted in the proceedings under section 143(3). The impugned action of the Ld.PCIT amounts to review and not amenable to revisionary jurisdiction. 2. The PCIT was not justified in concluding that it was a depreciable asset so LTCG rate cannot be applied without appreciating that the theater was closed down in the year 2001 and the Assessee having received the property through court settlement had never claimed the depreciation on the building and hence the direction of the PCIT was misconceived to treat the building as depreciable asset and hence the gain on such property sale as Short term capital gain and taxable @ 30%.”

Diff. in sale consideration as per Sect.50C - (Rs.2,63,04,214 – Rs.1,84,77,500) Rs.78,26,714/- Disallowance of cost of construction Rs.12,96,709/- - Denial of deduction U/s.54F Rs.45,15,560/- -

:-3-: ITA. No:1490/Chny/2023 Later, the Ld.PCIT, Coimbatore – 1, invoking the jurisdiction of revisional powers of Section 263 of the Act, considered the order of assessment passed by AO, U/s.143(3) dated 28/12/2019 as erroneous and prejudicial to the interest of revenue and issued a show cause notice dated 10/03/2022 by fixing the hearing date as 15/03/2022 and passed an exparte order U/s.263 of the Act on 23/03/2022. Aggrieved by the order U/s.263 of the Ld.PCIT, the assessee preferred an appeal before this Tribunal in ITA No.667/CHNY/2022 and the Tribunal in its order dated 10/05/2023, by setting aside the order and had directed the Ld.PCIT to afford reasonable opportunity of being heard to the assessee, the revision order may be passed afresh in accordance with law.

:-4-: ITA. No:1490/Chny/2023 “The AO had disallowed the assessee’s claim of indexed cost of acquisition of building Rs.12,96,709/- and taxed her share of sale consideration of building @ 20% considering it as long-term capital gain. However, the ‘sale consideration of building’ ought to have considered as short-term capital gain by the AO, as it was a depreciable asset and hence the same has been taxed @ 30% on Rs.41,27,211/- under the short-term capital gain.”

Aggrieved by the impugned action of the Ld.PCIT, the assessee is before us.

:-5-: ITA. No:1490/Chny/2023 sale documents are reproduced in para4 above. The break up of the value of the land and building as per the registered sale documents were Rs.5,13,55,000 for land and Rs.1,14,70,848. However, in respect of lands registered in DOC No.3738/2017, 3739/2017, 3741/2017, 3742/2017, the land value adopted by the Stamp Valuing authority was Rs.1,36,86,207 each as against the registered value of Rs.1,14,05,000 against those document numbers. Thus, the AO in the course of scrutiny assessment proceedings, reworked the LTCG by disallowing the indexed cost claimed at Rs.12,96,709 and Rs.3,13,718 and made addition to the capital gains already admitted in the return of income. In addition to the above, the AO had disallowed the claim of deduction u/s 54F of the Act amounting to Rs.45,15,560, but has allowed the claim of deduction u/s 54EC of the Act. As against the capital gain admitted in the return of income amounting to Rs.39,17,794, the AO adopted the sale consideration as per section SOC of the Act amounting to Rs.2,63,04,214 and from there, recomputed the LTCG at Rs.1,65,99,279 and added the same to the income returned. This being the factum matrix of the case, it was noticed from the discussion in the impugned assessment order and the miscellaneous records which included the sale deed copies, the written submissions of the assessee before the AO at the time of scrutiny assessment proceedings, that there existed a building in the form of a cinema theatre and prima facie perusal of the facts indicate that the assessee's share of the building was Rs.41,27,211 (being 35.98% of Rs.1,14,70,848). This was also taxed by the AO at 20% slab as applicable to long term capital assets. The building being a depreciable asset, ought to have been taxed at 30% slab and by not doing so, it is held that the order of assessment passed by the AO u/s.143(3) dated 28-12-2019 is made without verification of the actual facts and the order so made, suffers in as much as it is erroneous and prejudicial to the interest of revenue, requiring an intervention to cure the order made erroneous and prejudicial to the interest of revenue. Though in the present proceedings, the assessee had relied upon numerous case laws, it is a fact that there existed a building in the land sold by the assessee and two others and that proper taxation needs to be done by the AO with regard to computation of short term capital gain in respect of buildings and long term capital gain in respect of land. In the impugned assessment order, it is noticed that the AO, after discussion about the various items claimed as deduction in the computation of capital gains, did not give a clear finding as to whether the building was taxed at the appropriate rates or not. From the table mentioned in para.4, it is clear that provisions of section SOC of the Act ought to have been invoked, which the AO had carried out correctly, but the impugned assessment order is

:-6-: ITA. No:1490/Chny/2023 silent about the taxability of the building involved (i.e) cinema theatre. Therefore, the impugned assessment order is held as erroneous and in not taxing the building at appropriate rates and clubbing it together with L TCG calculation and taxing at 20% tax rate renders it as prejudicial to the revenue and thus, the undersigned is well within the powers to exercise the provisions of section 263 of the Act and accordingly, all the other objections raised by the assessee are rejected. In this regard, support is drawn from the decision of the Hon'ble Supreme Court in the recently delivered judgment of CIT vs. Paville Projects Pvt Ltd in C.A. 6126 of 2031 dated 6.4.2023, wherein the revisionary powers of the PCIT has been strengthened and the Hon'ble Apex Court had distinguished the decision rendered by the Hon'ble Apex Court itself in Malabar Industrial Co. Ld. Case. The relevant portion of the judgment is reproduced here below for the sake of clarity and convenience:- "7.2 Thus, even as observed in paragraph 9 by this Court in the case of Malabar Industrial Co. Ltd. (supra) that the scheme of the Act is to levy and collect tax in accordance with the provisions of the Civil Appeal No. 6126 of 2021 Page 18 of 20 Act and this task is entrusted to the Revenue. It is further observed that if due to an erroneous order of the Income Tax Officer, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the Revenue. However, only in a case where two views are possible and the Assessing Officer has adopted one view, such a decision, which might be plausible and it has resulted in loss of Revenue, such an order is not revisable under Section 263. 7.3 Applying the law laid down by this Court in the case of Malabar Industrial Co. Ltd. (supra) to the facts of the case on hand and even as observed by the Commissioner, the order passed by the Assessing Officer is erroneous as well as prejudicial to the interest of the Revenue. Having gone through the assessment order as well as the order passed by the Commissioner of Income Tax, we are also of the opinion that the assessment order was not only erroneous but prejudicial to the interest of the Revenue also. In the facts and circumstances of the case, it cannot be said that the Commissioner exercised the jurisdiction under Section 263 not vested in it. The erroneous assessment order has Civil Appeal No. 6126 of 2021 Page 19 of 20 resulted into loss of the Revenue in the form of tax. Under the Circumstances and in the facts and circumstances of the case narrated hereinabove, the High Court has committed

:-7-: ITA. No:1490/Chny/2023 a very serious error in setting aside the order passed by the Commissioner passed in exercise of powers under Section 263 of the Income Tax Act. 8. In view of the above and for the reasons stated above, present appeal succeeds. The impugned judgment and order passed by the High Court is hereby quashed and set aside and that the order passed by the Commissioner passed in exercise of powers under Section 263 of the Income Tax Act is hereby restored. In result, present appeal is allowed. Thus, it is clearly held that once an assessment order is erroneous and prejudicial to the interest of revenue, the same can. be revised by virtue of powers vested under PCIT u/s 263 of the Act. Therefore, it is held that the impugned assessment order is both erroneous and prejudicial to the interest of revenue.”

:-8-: ITA. No:1490/Chny/2023 assessment proceedings by the AO, before considering the said claim of deduction of cost of acquisition of the asset as Long term capital gain, while framing the Assessment order U/s.143(3) of the Act. In support of the assessee’s claim of asset (which was earlier a depreciable asset) as long term capital asset, the ld. counsel relied on decision of ITAT, Mumbai in the case of Prabodh Investment & Trading Co. Vs. ITO, ITA No.6557/Mum/2008 dated 28/11/2011, wherein the tribunal has dealt the identical issue and termed the asset as capital asset and considered as long term capital asset by holding as under : “7. The next contention of the assessee is the one based on the order of the Cochin Bench of the Tribunal cited supra. In that case the assessee stopped claiming depreciation on the flat from the assessment year 1995-96 onwards on the ground that it was no more used for the purpose of the business. In the books of account the flat was shown as an investment from 01.04.1995. In the sold and the surplus was declared as long term capital gains. The income tax authorities held that the capital gains should be assessed as short term capital gains on the footing that the flat might have been used for business purposes even in the assessment years 1996-97 and 1997-98. On further appeal to the Tribunal, it was held that the flat ceased to be a business asset or depreciable asset on and with effect from 01.04.1995 and its character during the accounting year ended on 31.03.1998 was that of a long term capital asset and, therefore, the capital gains should be computed as long term capital gains. In this order the provisions of section 50A were referred to. This section makes special provision for cost of acquisition in the case of depreciable asset. It says that where the capital asset is one in respect of which depreciation was allowed in any previous year; the provisions of sections 48 and 49 shall apply subject to the modification that the written down value of the asset, as adjusted,

:-9-: ITA. No:1490/Chny/2023 shall be taken as the cost of acquisition. Relying on this provision the Tribunal held that but for the difference in the cost of acquisition, a past claim of depreciation does not change the character of the asset as such. This order of the Tribunal supports the assessee's case before us. In the present case also the assessee had stopped claiming depreciation in the income tax return for the assessment years 1992-93 and 1993-94. It had claimed depreciation in respect of the flat only in the assessment years 1990-91 and 1991-92. For the assessment year 1994-95 and all subsequent years the assesses had made a Note in its accounts filed with the returns clarifying that no depreciation was provided in respect of the flat as the same was not used during the year for the purpose of the business. From the assessment year 1994-95 up to the assessment year 2004-05, the flat was classified in the Balance Sheet as a fixed asset and shown at cost less depreciation. These facts are recorded in paragraph 8 of the assessment order. In the assessment years 2000-01 and 2001-02, the flat had been let out and the rental income was shown under the head "Income from house property". It would thus appear that after the assessment year 1993-94 no depreciation was provided even in the books of account and no depreciation had been claimed or allowed in the return or in the assessments. In this factual situation the order of the Cochin Bench of the Tribunal cited supra is applicable, in which it was held that if no depreciation had been claimed or allowed in respect of the asset, even though for an earlier period depreciation was claimed and allowed, from the year in which the depreciation claimed was discontinued, the asset would cease to be a business or depreciable asset and if the asset had been acquired beyond the period of thirty six months from the date of sale, it would be a case of long term capital gains. In our humble understanding, the ratio of the order appears to be that the asset had ceased to be a business asset and had become an investment. 8. The order of the Cochin Bench in the case of Sakthi Metal Depot (supra) has been distinguished by the CIT(A) on the ground that in that case the property was specifically treated in the books as an investment whereas in the assessee's case the flat has been shown in the Balance Sheet as a fixed asset and not as an investment. This however does not make any difference to the ratio of the said order for the reason that in the case before the Cochin Bench the assessee was a partnership firm and could therefore show the asset as an investment in the Balance Sheet whereas in the case before us the assessee is a private limited company and the Companies Act provides that the flat should be shown as fixed asset, even if it is not held as a business asset and is held as an

:-10-: ITA. No:1490/Chny/2023 investment. The character of the asset has been changed from that of a business asset to an investment shown as fixed asset in the Balance Sheet. Even otherwise, the manner in which the asset is shown in the accounts of the assessee may- not be conclusive if there are facts to show that for a long period of time the asset had ceased to be a business asset and no depreciation was claimed or allowed thereon. In !the present case not only was the claim of depreciation in respect of the flat discontinued by the assessee after the assessment year 1993-94, but the flat had been let out for rent from the assessment year 1994-95. For a few years, i.e. from the assessment years 1994-95 to 1999-2000, the rental income was offered as business income. However, from the assessment year 2000-01, the rental income was offered for assessment under the head "Property". There is nothing to show that it was one of the businesses of the assessee, as per its object clause in the Memorandum of Association, to let out flats on rent. Even if that were to be so, when there is a specific head under which the rent has to be assessed, namely, "Income from house property", the fact that it was assessed for some years as business income cannot be held against the assesses. The question is whether the character of the asset did change and the asset became a fixed asset or investment and ceased to be a business asset. In our opinion, the moment the assessee stopped claiming depreciation in respect of the flat and even let out the same for rent; it ceased to be a business asset. Accordingly the order of the Cochin Bench in Sakthi Metal Depot (supra) applies in favour of the assessee. 9. Our view is also fortified by another order of the Mumbai Bench of the Tribunal dated 31.01.2007 in the case of M/s Glaxo Laboratories (I) Ltd. for the assessment years 1989-90 to 1991- 92. Though in this case the controversy was different, the Tribunal has noticed and observed that when certain flats which were earlier used for business purpose ceased to be so used and were let out for rent, the character of the asset had altered or changed and therefore no depreciation would be allowable on those flats. The fact to be noticed in this order is that the assessee had claimed depreciation on the flats for an earlier period and thereafter the flats were let out for rent, but still the assessee claimed depreciation against the rental income. The basis of the claim was that the flats continued to remain in the block of assets. The claim was disallowed by the Tribunal on the ground that since the user of the flats was changed, the character of the assets also underwent a change and- they can no longer be considered as business assets. The principle of this order, though laid down in a different context would support the assessee in the sense that it is

:-11-: ITA. No:1490/Chny/2023 possible for a business asset to change its character into that of a fixed asset or investment. 10. In the present case there is also no dispute that the flat under consideration was purchased by the assessee in the year 1987. It was thus held for a period of more than thirty six months and therefore a long term capital asset. Accordingly, the capital gains is directed to be assessed as long term capital gains after allowing the benefit of cost indexation as claimed by the assessee.”

:-12-: ITA. No:1490/Chny/2023 twin conditions should be satisfied before jurisdiction u/s 263 of the Act is exercised by the Ld.CIT. The twin conditions which need to be satisfied are that (i) the order of the Assessing Officer must be erroneous and (ii) as a consequence of passing an erroneous order, prejudice is caused to the interest of the Revenue. In the following circumstances, the order of the AO can be held to be erroneous i.e. (i) if the Assessing Officer's order was passed on assumption of incorrect facts; or assumption of incorrect law; (ii) Assessing Officer's order is in violation of the principles of natural justice; (iii) if the AO's order is passed without application of mind; or (iv) if the AO has not investigated the issue before him. In the circumstances enumerated above only, the order passed by the Assessing Officer can be termed as erroneous for the purpose of S.263 of the Act. Coming next to the second limb, the AO's erroneous order can be revised by the Ld. CIT only when it is shown that the said order is prejudicial to the interest of Revenue. When this aspect is examined one has to understand what is prejudicial to the interest of the revenue. The Hon'ble Supreme Court in the case of Malabar Industries (supra) held that this phrase i.e. "prejudicial to the interest of the revenue'' has to be read in conjunction with an "erroneous" order passed by the

:-13-: ITA. No:1490/Chny/2023 Assessing Officer. The Hon’ble Supreme Court, held that for invoking powers conferred by S.263; the CIT should not only show that the AO's order is erroneous as a result of any of the situations enumerated above but CIT must also further show that as a result of an erroneous order, some loss is caused to the interest of the revenue. Their Lordship in the said judgment held that every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interest of the revenue. It was further observed that when the Assessing Officer adopts one of the course permissible in law and it has resulted in loss to the revenue, or where two views are possible and the Assessing Officer has taken one view with which the Ld. CIT does not agree, it cannot be treated as an order prejudicial to the interest of the revenue unless the view taken by the Assessing Officer is unsustainable in law.

:-14-: ITA. No:1490/Chny/2023 the Scrutiny assessment U/s.143(3) dated 28/12/2019 for the AY 2017-18. During the course of assessment proceedings, the assessee had provided the details of Computation of Long-term capital gain. The assessee along with two of her family members had sold an immovable property (6 sale deeds) for Rs.1,84,77,500/- (Guideline value being Rs.2,63,04,214/- and the same was considered by the assessee for arriving long term capital gain and Income tax thereon) during the Assessment year 2017-18, with the assessee’s share of 35.96%. The assessee had claimed indexed cost of acquisition of Rs.20,78,719/-, Rs.3,13,718/- and Rs.12,96,709/- on account of land, RCC Roof and ACC roof respectively. Further, the assessee also claimed the deduction U/s.54EC of Rs.50,00,000/- and U/s.54F of Rs.45,15,560/-, and declared Rs.39,17,794/- as long-term capital gain to tax. It is pertinent to note that, the AO has observed that the RCC & ACC roof building were constructed by the previous owners and put them for business purposes and the book value of the asset would have been Nil after claiming the depreciation, when the property was inherited by the assessee and hence disallowed the cost of acquisition of the building holding as under in para No.5.9 of the assessment order:

:-15-: ITA. No:1490/Chny/2023 “5.9 The assessee’s explanation offered in this regard is considered but not accepted for the following reasons. It was appeared that the RCC and ACC roof building were constructed much before by the previous owners and put them use for business purposes. It was a depreciable asset and the book value would have been nil when the property inherited by the assessee. Moreover, she has not filed any evidence in support of her claim for the value which was considered in the computation of capital gain. Therefore, the indexed cost of RCC and ACC roof of Rs.3,13,718/- and Rs.12,96,709/- is not allowed in the recomputation of capital gain.”

:-16-: ITA. No:1490/Chny/2023 assessment. This action of the AO was the plausible action because the building was inherited by the assessee was a long- term capital asset, even though the same was a depreciable asset in the hands of the original owner. This view of the AO is in consonance of the decision in the case of Prabodh Investment & Trading Co. Vs. ITO (Supra), which is identical to the facts of the case in considering the erstwhile depreciable asset as long term capital asset for the computation of capital gain in the hands of the assessee. In such a scenario, the AO’s action cannot be termed as erroneous and prejudicial to the interest of revenue.

:-17-: ITA. No:1490/Chny/2023 sold as ‘Long term capital asset’ under ‘Income from Capital gains’ as claimed by the assessee. Therefore, we do not countenance the impugned action of ld.PCIT on the facts and circumstances of the case.