STRUCTWEL DESIGNERS AND CONSULTANTS P. LTD,MUMBAI vs. ASST CIT RG 10(3), MUMBAI

Facts of the case are that the assessee filed its return of income on 28.9.2009 declaring total income at Rs.1,06,63,715/- which was processed under u/s 143(1) of the Act. Thereafter, scrutiny proceedings were initiated against the assessee and statutory notices under section 143(2) and 142(1) were issued and served upon the assessee. During the course of assessment proceedings, the AO found that the assessee has sold its Research and Development Unit situated at 401/402, Raikar Bhavan, sector-17, Vashi, Navi Mumbai-400703 and a long term capital gain of Rs.71,76,514/- has been computed on the said sale proceeds. Whereas the assessee has claimed full deduction u/s 35(1) (iv) of the Act at the time of incurring the said capital expenditures. Accordingly, the assessee was issued show cause notice which was replied vide letter dated 26.12.2011 submitting therein that the assessee has rightly calculated the LTCG after claiming indexation on the cost of acquisition of the premises which was claimed at 100% in the year of purchase /incurring expenditure u/s 35(1)(iv) of the Act. However, the AO not convinced with the submissions of the assessee came to the conclusion that once deduction claimed under section 35(1)(iv) of the Act claimed, any profit arising out of transfer of said asset would fall under the head “business income” and not income from capital gains and accordingly added Rs.2 crores to the income of the assessee under the head income “from business or profession” by rejecting the contention of the assessee vide order framed u/s 143(3) dated 29.12.2011 assessing the income at Rs.5,10,43,010/- under the normal provisions of Act and Rs.3,55,70,154/- under the provisions of section 115JB of the Act by making various disallowance as stated at pages 8 and 9 of the Assessment Order.

The ld.CIT(A) came to the conclusion that the cost of acquisition Rs.72,49,250/- of the R&D Unit which was written of 100% in the year purchase/incurring the said expenditure was to be treated as business income under the provisions of section 41(3) of the Act and directed the AO to treat accordingly and did not agree with the opinion of the AO on the issue that the entire sale proceeds of Rs.2 crores were to be treated as business income and directed the AO to treat the gain on the same as income from Short Term Capital Gains by giving detailed observations as contained in para 2.3 to 2.10 of the appellate order.

We have carefully considered the submissions of the parties, perused the material placed before us including the orders of authorities below. The ld. AR vehemently argued before us that the assessee has rightly calculated long term capital gains after claiming indexations of cost of the basis of cost of acquisition of the said assets. The ld. AR submitted that since the R&D unit was fully written off under section 35(1)(iv) of the Act and thus the amount so written off should be treated as income of the business in the current year and qua the balance consideration received the capital gain was rightly calculated after deducting the indexed cost for the purpose of long term capital gains which was rightly calculated. The ld. AR finally submitted that the asset comprising of R&D unit was a long term capital asset and the findings of the ld.CIT(A) that the same fall within the definition of Short Term Capital asset on the plea that 100% depreciation was claimed is untenable and wrong in view of the fact that it was held for more than 36 months which was not in dispute. The ld. AR vehemently contended that the observations of the ld. CIT(A) that though the asset was written off under the provisions of income tax Act fully but the same was practically existing in the books of account of the assessee at NIL cost till the current year when it was sold and Rs.2 crores were realized from the sale of the said assets. Finally, the ld.AR submitted that the order of ld.CIT(A) be set aside and the AO be directed to treat the sale proceeds as sale of long term capital assets and the gains be calculated after indexation of cost of acquisition.

The ld. DR strongly opposed the arguments of the ld.AR relying on the orders of ld.CIT(A) on the ground that the asset was depreciated on at the rate of 100% in the year of purchase and was nonexistent in the block of asset and therefore whatever was realized from the sale of assets should be ld.CIT(A) be upheld by dismissing the appeal of the assessee.

Having considered the facts of the case in the light of submissions of rival parties, we find that R&D Unit which was written off earlier, fully at Rs.72,49,250/- u/s 35(1)(vi) and during the said unit fetched price of Rs.2 crores when sold by the assessee. Now, the issue before us is whether the income from the said Unit will fall under the head business income or LTCG or STCG. In our opinion, the amount written off Rs.72,49,250/- u/s 35(1)(iv) of the Act has to be treated as business income in the year of sale of assets and we are in agreement with the opinion of the ld.CIT(A) on this issue that Rs.72,49,250/- be treated as business income u/s 41(3) of the Act and so far as remaining sale proceeds of Rs.1,27,50,750/- are concerned, the same, in our opinion, are sale proceeds of long term asset and has to be treated accordingly while computing the gains or loss from the said assets. In the present case, the asset though non-existing in the final books were held for more than 36 months by the assessee and therefore is a Long Term Capital asset. Accordingly, we are not in agreement with the observations of the ld.CIT(A) that the same fall under the head STCG on the ground that the same was depreciated assets at the rate of 100% in the year of purchase. The cost of the assets comprising R&D unit, were the asset existing physically with the assessee and therefore, has to be treated as Long Term Capital asset. However, the cost of acquisition of the said asset for the purpose of indexation would be NIL as the same was written off in the year of purchase,. In view of the our observations above we set aside the order of ld. CIT(A) and direct the AO to treat Rs.72,49,250/- as business income u/s 41(3) of the Act and treat the remaining consideration of Rs.1,27,50,750/- as LTCG from the sale of R&D unit and tax accordingly. Resultantly, the grounds taken by the assessee are partly allowed.

In the result the appeal of the assessee is partly allowed. The above order was pronounced in the open court on 10th Aug, 2016. घोषणध खुरे न्मधमधरम भें ददनधंकः 10th Aug, 2016 को की गई । (SHAILENDRA KUMAR YADAV) (RAJESH KUMAR) न्याययक सदस्य / JUDICIAL MEMBER लेखा सदस्य / ACCOUNTANT MEMBER भुंफई Mumbai: 10th Aug, 2016. व.नन.स./ SRL , Sr. PS आदेश की प्रतिलऱपप अग्रेपिि/Copy of the Order forwarded to : अऩीरधथी / The Appellant 1. प्रत्मथी / The Respondent. 2. आमकय आमुक्त(अऩीर) / The CIT(A)- concerned 3. आमकय आमुक्त / CIT concerned 4. ववबधगीम प्रनतननधध, आमकय अऩीरीम अधधकयण, भुंफई /

DR, ITAT, Mumbai concerned 6. गधर्ा पधईर / Guard file. आदेशधनुसधय/ BY ORDER,सहधमक ऩंजीकधय (Asstt.