M/S HARIYALI RURAL VENTURES LTD.,NEW DELHI vs. ITO, NEW DELHI

'short term capital gain' without appreciating the facts and the legal position and even without adjudicating the grounds of appeal as were raised by the appellant in the appeal.

Assessee carried the matter before the ld. CIT (A) who has partly allowed the appeal. Feeling aggrieved, the assessee has come up before the Tribunal by way of filing the present appeal.

We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.

Undisputedly, the assessee company is a wholly owned subsidiary company of M/s. DCM Shriram Limited and has constructed the buildings to be used as retail stores in rural areas by its holding company (M/s. DCM Shriram Ltd.).

Ld. AR for the assessee challenging the impugned order contended that the assessee company being a subsidiary company of M/s. DCM Shriram Limited received the amount of Rs.4,14,10,000/- being the reimbursement of the cost incurred by it for construction of the buildings to be used as retail stores in the rural areas and it has never claimed any depreciation or deduction under the Act. It was further contended that the AO/CIT(A) have erred in holding that the compensation received by the assessee from the holding company against the capital loss by treating the same as short term capital gain.

AO at page 2 of the assessment order categorically recorded that, “assessee had stated and duly admitted that cost admitted by it for making stores was capitalized in its books of accounts under the head building.” But these observations made by the assessee are factually incorrect, when examined in the light of the computation of taxable income filed by the assessee along with return of income, available at page 1 to 4 of the paper book. So, bare perusal of the total computation goes to prove that the assessee has never capitalized the cost incurred by it for constructing stores in its books of account under the head “building”. So, from the very outset, the AO has proceeded on the basis of factually incorrect facts.

Now, the next question arises for determination in this case is “as to whether the assessee company has received the amount as compensation from its holding company for suffering loss in respect of building made available to the holding company for the purpose of running retail stores.”

Undisputedly, the assessee company has suffered losses in the cost of premises on account of closure of these stores during the year under assessment. It is also not disputed that there was no transfer of assets by the assessee company to its holding company, rather assessee company has merely provided the building for running the retail stores to the holding company and when there is no transfer of assets, there is no question of making addition on account of short term capital gain.

When undisputedly holding company (DCM Shriram Limited) has closed the business on 31.03.2012 being not commercially viable, the retail outlets have been vacated and lease arrangement entered into between the assessee company and various other parties for taking the premises on lease were terminated. When the assessee company has undisputedly incurred the construction cost/modification cost in order to make premises suitable for operation, the same was capitalized in the books of account under the head “fixed assets / lease holding improvements”. Cost of construction is shown to have been adjusted by the assessee against the cost appearing in the schedule of fixed assets.

Moreover, when the compensation received by the assessee company is less than the cost incurred by it, the same is not to be treated as short term capital gain. Even otherwise, when the amount of compensation received by the assessee company was less than the book value and assets in the books of account, as is apparent from the notes to the financial statement for the year under consideration and audited balance sheet, there has to be no capital gain u/s 50 of the Act.

So, after adjusting the amount of compensation received by the assessee company, book value/written down value in the books has become nil and in these circumstances, amount is not chargeable to tax as short term capital gain. AO, without disputing the books of account and audited balance sheets, came to the conclusion that the assessee company received the compensation against scrapping of the capital assets and has not been added back as compensation of income.

Even otherwise, when the assessee company has constructed custom made building as per requirement of the DCM Shriram Limited holding company for running the retail outlets in rural area and on closure of the same due to commercial non-viability, the assessee company has certainly suffered loss for which he has received the compensation which cannot be treated as short term capital gain because of non-transfer of capital assets.

So, in view of what has been discussed above, we are of the considered view that this is a case of pure reimbursement of cost incurred by the holding company for the assessee, a subsidiary company, which has never claimed any depreciation or deduction under the Act and as such, reimbursed amount cannot be treated as short term capital gain in any manner whatsoever. Consequently, the present appeal filed by the assessee is hereby allowed.