BHARAT HOMES LTD.,MUMBAI vs. A.C.I.T. - 9(1), MUMBAI

The facts relating to thereto are set out in brief. The assessee is engaged in the business as builders and developers of real estate. The assessee had purchased two flats, viz., one at 3rd floor, Aman Chambers admeasuring 8977 Sq.ft. super built up area for Rs.8.977 crores and another one in 5th floor admeasuring 6793 Sq.ft. super built up area for Rs.6.703 crores. Both the properties were purchased on 23.11.2005. The assessee claimed depreciation on the above said values in AY 2006-07 onwards. The depreciation claimed in AY 2006-07 was disallowed by the AO on the reasoning that these properties were not put to use in that year, but the same was allowed by Ld CIT(A). In AY

In the year under consideration, the AO examined the claim of depreciation afresh and took the view that the cost of purchase of above said properties would include cost of land also. Accordingly he took the view that the depreciation claimed on the value relating to land is not allowable under the Act. The assessee submitted that such kind of segregation is not possible, as it has purchased flats only and not land, but the same was not acceptable to the AO. Accordingly he proceeded to arrive at the cost of construction on the basis of Ready Reckoner rate-2007 prescribed by the Stamp duty authorities under the Registration Act and determined the cost of construction of flats at Rs.75.28 lakhs for both the properties. Consequently it was held that the balance portion of the cost of purchase represents land cost. Accordingly, the AO held that the depreciation is allowable on the above said amount of Rs.75.28 lakhs only, since the remaining portion of the purchase value represents land cost.

The AO computed the total income by adopting the profit shown in the profit and loss account. He added depreciation claimed in the books of account and other disallowable expenses to the profit. Then he should have reduced only the depreciation allowable under the Income tax Act, i.e., Rs.7,89,205/- in order to arrive at the total income. However, the AO disallowed the excess claim of depreciation Rs.106.62 lakhs (Rs.114.51 lakhs claimed by the assessee (less) Rs. 7.89 lakhs determined by AO as allowable), which is apparently not correct. The assessee has also failed to note this mistake at the time of prosecuting appeal before Ld CIT(A) and hence it has filed an additional ground seeking rectification of this mistake.

In the appeal filed before Ld CIT(A), the assessee submitted that the land has not been transferred to it and it is still owned by the builder. Further it was submitted that, in any case, the land shall be transferred to the co-operative society that shall be formed in future. Accordingly it was contended that the assessee shall not become owner of the land at any point of time. The Ld CIT(A), however, expressed the view that the undivided share in the land in respect of flats constructed in high rise buildings is well defined and determinable. The Ld CIT(A) referred to the definitions given in sec.6 of Maharashtra Apartment Ownership Act 1970 to the terms viz., “Common Areas and Facilities” and “apartment owner” and held that the above said Act provides that the assessee is having undivided interest in the common areas and facilities. He further held that the undivided share in the land could be allocated to the individual flat’s super built up area in the ratio of Individual flat’s area to the Aggregate built up area. The Ld CIT(A) agreed with the view taken by the AO that the co-operative society is a creation of the flat owners and even if the land is owned by the co-operative society, the undivided share in land could be ascertained on the basis of shareholding. The Ld CIT(A) further observed that, since the land has not been transferred, in the instant case, to the co-operative society and it is still being held by the builder, the Undivided share in land should be allocated to the flats purchased by the assessee. The Ld CIT(A) referred to the decision rendered by Hon’ble Supreme Court in the case of Mc Dowell & Co. Ltd Vs. CTO (1985)(22 Taxman 11) and held that the avoidance of tax by colourable devices should be discouraged. He further held that the true nature of transaction should be taken into consideration for income tax purposes and the transfer of land to the name of the assessee by way of registration is not a precondition to determine the ownership of the land. With regard to the contention that the depreciation has been allowed in AY 2006-07 and 2007-08, the Ld CIT(A) placed reliance on the decision rendered by Hon’ble Supreme

However, the Ld CIT(A) did not agree with the method adopted by the AO to determine the value of land. We have earlier noticed that the AO ascertained the construction cost of flats from the Ready Reckoner rate prescribed by the Stamp duty authorities. Apparently, the sale consideration paid over and above the cost of construction as determined by the AO, was taken as the value attributable to the land. The Ld CIT(A) held that the value of undivided share of land should be ascertained on the basis of stamp duty valuation prescribed for ascertaining the value of land. Accordingly he directed the AO to work out the depreciation allowable on the value of flats.

The Ld A.R submitted that the tax authorities have failed to examine the conveyance deeds which clearly state that the assessee has purchased only the super structure and not the land. He further submitted that the conveyance deeds are very clear in stating that the land belongs to the vendor only. He further submitted that the co-operative society has not been formed till the end of the year under consideration and hence the land has remained with the builder only. Accordingly he submitted that the observations made by the tax

The Ld A.R further submitted that the assessee has been allowed depreciation in AY 2006-07 and 2007-08 and under the principles of consistency, the AO should not have disturbed the depreciation schedule. He further submitted that these flats have lost their individual identity after entering into the block and hence the AO should not have disturbed the WDV of the block of asset. He further submitted that the Bangalore bench of ITAT has also considered an identical issue and it has held in the case of JCIT Vs. Rajesh Exports (9 SOT 28)(Bang.) as under:-

On the contrary, the ld D.R placed strong reliance on the decision rendered by the Ld CIT(A). He submitted that the costs of flats are not identical in all the areas and they would normally differ depending upon the area where it is located. He submitted that the difference mainly arises due to difference in the prices of land. Accordingly he submitted that the Ld CIT(A) was justified in holding that the cost of flats include the price of land also. He further referred to the CBDT Circular No.9 dated 25.03.1968 [F.No.8/2/69-IT(AI)] and submitted that the CBDT has held that the legal ownership of the flats can be said to vest in the individual members, even if the co-operative society gives the tenancy rights to its members.

We have heard rival contentions and perused the record. The depreciation is allowed u/s 32 of the Act, which states that the depreciation shall be allowed on the building owned, wholly or partly, by the assessee and used for the purposes of business or profession. In the instant case, there is no dispute with regard to the fact that the two flats, referred above, are owned by the assessee and they are used for its business also. It is also an undisputed fact that the AO has allowed depreciation on these two flats in AY 2006-07 and 2007-08 on the value declared by the assessee accepting the cost declared by the assessee.

The controversy is with regard to the value of flats purchased by the assessee. The tax authorities have taken the view that the sale consideration paid for purchase of flats should be bifurcated between the land and the building, since the depreciation is not admissible on the value of land. We notice that the tax authorities have arrived at this conclusion on presumptions, since we notice that the averments made in the conveyance deed supports the case of the assessee. The second schedule of the conveyance deed describes the 7 M/s. Bharat Homes Ltd. nature of property that is being conveyed to the assessee and the same reads as under:- THE SECOND SCHEDULE ABOVE REFERRED TO (Description of the premises)

A careful perusal of the clauses extracted above from the Sale deed would make it clear that the vendor has conveyed only the super structure of flats on “ownership” basis. With regard to the land, it is made clear by the vendor that the same shall be transferred to a society or any other form of organization and it is further made clear that the assessee does not have any right to dispute or challenge the decision of the vendor in this regard.

We notice that the Ld CIT(A) has referred to the definitions given in Maharashtra Apartments Act. A careful perusal of the same shows that the said Act only states that each apartment owner shall be entitled to an interest in the common areas and facilities available in the apartment in the percentage expressed in the declaration. It does not declare anything about the value of land embedded in the cost of flat.

We notice that the Ld CIT(A) has referred to the decision rendered by Hon’ble Supreme Court in the case of Mc Dowell and Co. (supra). But we find that the assessee has not adopted any colourable device in this matter. The 9 M/s. Bharat Homes Ltd. sale deed makes it clear that what was conveyed to the assessee was a flat and not land. Hence, in our view, the above said decision of Hon’ble Supreme Court shall not have any application to the facts of the present case.

In view of the above, we are of the view that there is no material available with the tax authorities to support their view. In our view, the decisions rendered by the Bangalore bench of tribunal in the case of Rajesh Exports and Delhi bench of Tribunal in the case of Millennium Spire India Management (P) Ltd (referred above) are applicable to the facts prevailing in the instant case. In the instant case, the assessee has paid the purchase price for purchase of flats and it is not discernible from the sale deed that it has paid anything separately for land. On the contrary, the sale deed makes it very clear that what was conveyed was only the super structure of the flats. On the contrary, it is an undisputed fact that the ownership of the land has remained with the vendor till the end of the year under consideration. The conveyance deed also makes it very clear that the land shall be transferred by the vendor to a co-operative society or any other form of organization. The assessee does not have any right or say in the matter of conveyance of land. These clauses coupled with the provisions of Maharashtra Apartments Act makes it clear that the assessee shall have only right of interest in the common area and facilities. Hence we are of the view that the tax authorities are not justified in bifurcating the selling price between the land and building without bringing any material to support their view.

It is an undisputed fact that the assessing officer has allowed depreciation on the flats in AY 2006-07 and 2007-08. Hence, we are of the view that it may not be proper on his part to draw adverse inferences during the instant year, on the basis of certain presumptions entertained by him, that too without bringing any material on record to support his views. On the contrary, as stated earlier

In view of the foregoing discussions, we are of the view that the Ld CIT(A) was not justified in confirming the action of the AO. Accordingly, we set aside the order passed by Ld CIT(A) and direct the AO to allow the depreciation as computed by the assessee taking the price paid for purchase of flat as the cost of flats.

With regard to the additional ground, we have already noticed that the assessing officer has committed a mistake in adding the difference of depreciation. Since we have directed the AO to allow the depreciation claimed by the assessee, the above said mistake shall also get automatically rectified.

In the result, the appeal filed by the assessee is allowed.