INDOGEM,MUMBAI vs. ITO 19(1)(5), MUMBAI

Brief facts of the case for the purpose of disposal of this appeal are that the assessee is a firm engaged in the business of trading in cut and polished diamonds and filed return of income on 13.9.2012 declaring a total loss of Rs.15,33,833/-. In the relevant previous year assessee sold its office premises, which was forming part of the block of assets, for a sum of Rs.5,82,43,292/- whereas the written down value (WDV) of the block of assets was Rs.1,04,62,779/-, and in the same previous year they have included another building in the block of assets claiming to have acquired the same for a sum of Rs.13,27,07,432/-.

The Assessing Officer initiated proceedings u/s 143(3) of the Income Tax Act, 1961 (in short ‘the Act’) and called upon the assessee to explain the acquisition of new building, namely, office premises No. 402, situated in the building ‘Capital’ at BKC, Mumbai at a value of Rs.13,27,07,432/-. In the return of income, no gain on transfer of depreciable asset being sale of a building for a sum of Rs.5,82,43,292/- was declared u/s 50 of the Act. The claim of assessee was that the WDV of block of assets at the beginning of previous year was Rs.1,04,62,779/- and after reducing the sale consideration of the building sold for Rs.5,82,43,292/- and adding the cost of the new office premises acquired during the year of Rs.13,27,07,432/-, the resultant WDV of the block of assets came to Rs.8,46,26,919/- on which depreciation of Rs.21,91,127/- was claimed. Thus, it was canvassed that there was no gain computable in terms of Sec. 50 of the Act. The Assessing Officer, however, took the view that assessee was not entitled to claim accretion for the cost of acquisition of the new office premises of Rs.13,27,07,432/- while computing the gain specified in Sec. 50 of the Act. According to the Assessing Officer there was no agreement for acquiring the property, and mere payment of full consideration does not ipso facto amount to acquisition of property for the purposes of Sec. 50(1)(iii) of the Act in the absence of possession or usage of the same. It is emerging from record that assessee stated before the Assessing Officer that insofar as Sec. 50 of the Act is concerned, possession or usage of the property is not mandatory, which is in contrast to Sec. 32(1) of the Act. However, the Assessing Officer was not satisfied with the submissions of the assessee and instead computed the capital gains on sale of depreciable asset in terms of Sec. 50 of the Act at Rs.4,77,80,513/- by reducing from the full value of sale consideration in respect of the property sold for Rs.5,82,43,292/-, the opening WDV of the block of assets of Rs. 1,04,62,779/-. Simultaneously, the depreciation claimed by the assessee on the new office premises and the attendant office equipment was also denied, which amounted to Rs.21,91,127/- and Rs. 60,029/- respectively, on the ground that the same were not put to use. The aforesaid points of difference between the assessee and the Assessing Officer were carried in appeal before the CIT(A).

Aggrieved by the impugned order, assessee is in appeal before us on the following Grounds :

Both the lower authorities erred in passing their respective orders without granting your Appellant adequate opportunity of being heard.

The learned counsel for the assessee argued that in contrast to Sec. 32 of the Act, use of the property is not necessary in respect of acquisition thereof for the purpose of Sec. 50(1)(iii) of the Act. Further, according to the learned counsel for the assessee, the Assessing Officer and the CIT(A) erred in relying upon Sec. 53A of the Transfer of Property Act to state that acquisition is incomplete without possession or usage of the property. He placed reliance on a decision reported in Mysore Minerals Ltd. vs. Commissioner of Income Tax, (1999) 106 Taxman 166 (SC) in support of his contention.

On the other hand, it was argued by the ld. DR that though the assessee claims to have paid the entire sale consideration before issuance of allotment letter, according to the letter dated 27.2.2012 issued by the builder to the assessee, the building was handed over to the assessee only for the purpose of fit-outs and not for usage, whereas the Occupancy Certificate of the property was issued only on 14.12.2012, as such, it was to be seen that possession was given long after the end of the previous year, it cannot be said that the assessee acquired the property during the relevant previous year. It is his further argument that the part Occupation Certificate dated 27.7.2012 shows clearly that in respect of the 3rd & 4th floors no area is mentioned, whereas vide Occupation Certificate dated 14.12.2012 an area of 3285.18 sq. mtrs. was shown in respect of 4th floor. According to the ld. DR there was no property in existence before the end of the relevant financial year, as such, no question of acquisition of such non-existent property arises.

Basing on the above contention, the following points arises for our consideration.

Point No. 1 – By way of Paper Book, the assessee furnished the copies of the allotment letter dated 21.12.2011, letter dated 27.2.2012 by the builder evidencing the handing over of property to the assessee for out-fits, letter dated 7.2.2014 by the builder addressed to the Assessing Officer confirming the contract of sale and handing over of the property, Part-Occupancy Certificates dated 27.7.2012 and 14.12.2012.

Except to the extent of existence or non-existence of the property, there does not seem to be much dispute in respect of the genuineness of these documents or assessee paying full sale consideration in respect of the building in question. As a matter of fact, the record does not reveal that the Assessing Officer has taken any steps in that direction by examining the builder or someone else at relevant time on this aspect. Further, by way of letter dated 7.10.2014 the builder unequivocally stated that though they have not entered into a registered agreement with the assessee in respect of the property in question, the legal formalities will be complied with later, but the property was sold and they have handed over the same for fit-outs on 27.2.2012.

First point for consideration is whether there is an agreement for acquisition of property between the builder and the assessee. Agreement means set of promises forming consideration for each other. Law does not require that an agreement shall always be in writing or if reduced into writing, it shall be in a particular/specific format. As could be seen from the record, the allotment letter runs into so many clauses and, in our view, it answers the description of an agreement. When all the terms agreed upon by the parties are reduced into writing in detail, nothing more is required than formal compliance with the stamp and registration requirements. On a careful perusal of this allotment letter, we find that it contains all the details that were agreed upon by the parties, as such, by no stretch of imagination could it be said that there is no valid agreement for acquisition of the property.

Part Occupation Certificates referred to by the ld. DR clearly show that in respect of the floors below and above the floor said to have been acquired by the assessee, some extent of area is mentioned. It clearly shows that the structure was in existence as on the date of issuance of such Certificates. Further, the unequivocal statement of the builder that he handed over the building for fit-outs on 27.2.2012 goes unchallenged and un-impeached, and it clearly shows that by 27.2.2012 there was a structure containing the floor said to have been acquired by the assessee and the same was handed over to the assessee for the purpose of fit-outs. It is difficult to hold that there was no property in existence, to be acquired by the assessee.

When once the entire sale consideration was paid, the terms of agreement are reduced into writing by way of allotment letter and assessee proceeded to take over the building for outfits, all these facts clearly show the state of mind of the builder and the assessee that the rights of the parties are crystallized as on the date of allotment letter itself, but for the legal formalities like execution of a proper covenant and issuance of Occupation Certificate by authorities. When once the proper covenant was executed with due compliance of stamp and registration requirement, it is a settled principle of law that the transaction relates back to the date of original agreement itself, as such, formal execution of the covenant would only evidence and reinforce the rights accrued under the allotment letter.

As rightly argued by the learned counsel for the assessee, Sec. 50 of the Act does not contemplate use of property to complete the process of acquisition of property. Acquisition is a process whereby the rights of the parties are crystallized in unequivocal terms and each party has complied with or is ready to comply with the mutual obligations. Here, in this case, all that has to be done by the assessee was done by parting with valuable consideration and starting the work of fit-outs well before the end of the financial year. Possession has both physical and psychological components and when once the assessee started with work of fit-outs, having discharged his obligation under the contract, his animus possidendi accompanies the act of corpus possidendi. The distinction between possession and occupation has to be kept in mind, which is relevant only for the purpose of determining the question of “use”, but not for the purpose of acquisition contemplated in Sec. 50(1)(iii) of the Act. Occupation could be equated to the term “use” as contemplated u/s 32 of the Act whereas it cannot be equated to the concept of possession to understand the completion of the process of acquisition in terms of Sec. 53A of the Transfer of Property Act. Here, in this matter, assessee did all that he has to do under the contract, and his further act of taking over the property in furtherance of his animus of owning the property thereby excluding every other from dealing with or interfering with the property, is suffice to hold that the assessee acquired the property during the financial year for the purposes of Sec. 50(1)(iii) of the Act.

For these reasons, we are unable to accept the contentions of the Revenue that there was no property in existence before the end of the relevant financial year, that there was no agreement between the parties and there is no acquisition that took place during the relevant financial year. We hold that the assessee by his acts of parting with full sale consideration and gaining the ability to have every other person excluded from dealing with the property and by proceeding with the work of fit-outs has demonstrated that it acquired the property for the purposes of Sec. 50(1)(iii) of the Act. We hold the issue in favour of the assessee. Thus, assessee succeeds on Ground of Appeal no. 1.

Issue no. 2 - On this aspect, there is not much dispute. It is the admission of the assessee that there was no usage of the property before the Occupation Certificate was issued by the appropriate authority. As a matter of fact, it is the argument of learned counsel for the assessee before us that in order to have the benefit of Sec. 32 of the Act one has to satisfy the twin requirements of owning the property and making use of it on any day in the relevant previous year. Here, prior to ending of the relevant financial year, though the assessee had an opportunity to take possession of the property for the purpose of fit- outs, he cannot say that he has put the property to use for the purposes of claim of depreciation under Sec. 32 of the Act either in respect of building or machinery therein; as such, we hold that the assessee is not successful to show its entitlement to the relief of depreciation u/s 32 of the Act. For these reasons, we uphold the stand of the Revenue in Ground of Appeal

In the result, appeal of the assessee is allowed in part, as indicated above.