ACIT 19(3), MUMBAI vs. FIROZ TIN FACTORY, MUMBAI

The assessee is aggrieved by the decision of Ld CIT(A) in confirming application of sec. 50 of the Act to the building portion of the property and in not allowing all the expenses claimed by it . The revenue is aggrieved by the decision of Ld CIT(A) in holding that the provisions of sec. 50 shall not apply to the sale consideration relating to land and also in partially allowing the expenses claimed by the assessee.

Besides the assessee has also challenged the decision of Ld CIT(A) in holding that the reassessment proceedings are valid in law.

We shall first narrate the facts relating to the issue under consideration. The assessee herein is a partnership firm and it has sold the property located at Kalina during the year under consideration. The property consisted of land admeasuring 9874.80 Sq. mts., and structures built thereon. The assessee had purchased several pieces of land admeasuring 9570.80 Sq.mts in the year 1973-74 through nine conveyance deeds. The remaining portion of land was situated in the midst of the lands acquired by the assessee in 1973-74. Hence the assessee took steps to purchase the remaining portion of land and accordingly purchased the same on 31.07.2008 by settling the dues to the claimants of the land and also to the State Government. There appears to be some confusion about the extent of land purchased on 31.7.2008. The extent of the said land is mentioned as 266 Sq. mts, 264.30 sq. mts and 304 Sq.mts at different places of the orders. However, it is clarified somewhere that the extent of land was 264.30 as per PR card and 304 Sq.mt. as per ULC. However, this variation in the extent of land may not be significant for us.

The assessee filed the return of income for the year under consideration on 27-07-2010 declaring a total income of Rs.236.42 crores. The assessee declared the gain arising on sale of Kalina property as Long term capital gain. It is pertinent to note that the sale agreement did not bifurcate the sale consideration between the land and building. The property was sold for a consideration of Rs.257 crores to a concern named M/s Ultra Space Developers Pvt Ltd. The return of income filed by the assessee was processed u/s 143(1) of the Act.

Subsequently, the revenue carried out survey operations at the office premises of the assessee located in Bandra (W), Mumbai on 05-10-2011. During the course of survey operations, a statement was taken from one of the partners of the firm, named Shri Kaizer T Lokhandwala. In the statement, he admitted that the gain arising on sale of Kalina property was wrongly disclosed as Long term Capital gains and agreed to pay additional taxes by treating the gains as Short term capital gains. However, the assessee immediately retracted from the same by filing a letter dated 07.10.2011 before the assessing officer.

The assessing officer reopened the assessment of the year under consideration by issuing a notice dated 07.10.2011 u/s 148 of the Act, i.e., immediately after the completion of survey operations. In the reassessment proceedings, the AO assessed the Capital gains arising on sale of Kalina Property as Short term capital gains in terms of the provisions of sec. 50 of the Act. It is pertinent to mention here that the assessing officer did not bifurcate the sale consideration between land and building and accordingly did not give separate treatment between them. Property and hence the provisions of sec. 50 are not applicable. However, the AO took the view that the assessee did not substantiate the said claim by furnishing copies of returns of income filed by it from 1974-75 onwards. He further held that the Explanation 5 inserted by Finance Act 2001 in sec. 32(1) of the Act with effect from 1.4.2002 mandates allowing depreciation compulsorily whether or not the assessee has claimed the same. It may be noticed here that the assessee furnished copies of returns of income filed for AY 1996-97 to 2009-10, but the same was found to be not sufficient for the AO since he had asked for copies from AY 1974-75 onwards. From the copies of return of income filed, the AO noticed that the assessee has claimed depreciation on building. Though the assessee explained that the depreciation was claimed on a building located at Navi Mumbai area, yet the AO did not accept the same. The AO, by making reference to the recitals made in the conveyance deed, held that the kalian property purchased by the assessee includes factory building and structure also. However, the AO accepted the fact that the factory premises were not used for the business purposes by the assessee from AY 1983-84 onwards (page 11 of the assessment order). However, in view of the Explanation 5 to section 32(1) of the Act, the AO held that the assessee shall be deemed to have claimed depreciation on the factory building and hence the Kalina Property becomes a depreciable asset. Accordingly he held that the provisions of sec. 50 shall be applicable. In this regard, the AO took the support of the statement given by the partner during the course of assessment proceedings. Accordingly, the AO assessed the gain as Short term capital gains in terms of sec. 50 of the Act. The assessee had also claimed deduction of certain expenses as relating to the transfer of the property. The AO disallowed the said claim. As stated earlier, the Ld CIT(A) held that the gain arising on sale of land portion of the Kalina Property is assessable as Long term capital gains and building portion is assessable as Short term capital gains. He also allowed the claim for deduction of expenses partially.

We shall first address the issues urged on merits. The assessee has held properties at three different places, viz., Kala Chowki, Navi Mumbai and Kalina. The assessee has claimed that it has carried on its manufacturing activities at its Kala chowki premises. It is also stated that the manufacturing operations were discontinued in 1984 and the Kala chowki property was sold in the year 1996. The above said claim of the assessee has not been disputed by the revenue. Subsequently, the assessee has purchased a building at Navi Mumbai Area in the year 1997 and sold the same in 2008. Thus, we notice that the assessee had held three properties in all and has sold all of them. The Kalina property was sold at last.

The assessing officer asked the assessee to furnish the past income tax records to justify the claim that it has not claimed depreciation on Kalina Property. However, the assessee could furnish details from assessment year 1996-97 onwards. The assessing officer noticed that the assessee has claimed depreciation under the block “factory building” @ 10% and accordingly presumed that the said block should include the Kalina property also. Accordingly, the AO took the view that the assessee building is lost under the „Block concept‟ for allowing depreciation.

Further, in the remand report filed by the AO before the ld CIT(A), it was pointed out that the assessee had purchased the Kalina property for a consideration of Rs.3,67,500/- and the value of property was shown at Rs.29,15,509/- from 1995 onwards. Accordingly the AO substantiated his view that there existed a factory building in Kalina property.

We notice that the assessing officer has proceeded to treat the Kalina property as an asset on which depreciation has been claimed on the following reasoning:- (a) The purchase deeds make a reference to the existence of commercial buildings. (b) The Building shall include the value of land for the purpose of allowing depreciation. (c) Though it has been claimed that the depreciation has been allowed on Navi Mumbai property and not on Kalina property, yet the depreciation shall be deemed to have been allowed in terms of Explanation 5 to sec. 32(1) of the Act, since the Kalina property is a commercial asset. (d) Since Kalina property is a depreciable asset, the provisions of sec. 50 shall be applicable and hence the Capital gains is assessable as Short term Capital gain.

During the course of appellate proceedings before Ld CIT(A), the assessee submitted that it had never claimed depreciation on the Kalina Property. It was further submitted that the constructions carried on the Kalina property consisted of land filling & leveling, construction of a compound wall and a watchman cabin. It was submitted that the assessing officer‟s observation about the availability of building structures in the land purchased by the assessee was wrong, since the AO has referred to wrong portion of the conveyance deeds. It was also submitted that the Kalina land was let out as halting place for Marine freight containers and later it was let out L & T Company. It was submitted that the tenant has deducted tax at source u/s 194I of the Act on the rent paid by it to the assessee. The assessee also contended that the land shall not form part of depreciable asset and further the provisions of sec. 50 shall not be applicable, if the property has not entered into the block at all. The submissions made by the assessee before the Ld CIT(A) are extracted below, for the sake of convenience:- “3.10 The appellant submitted another letter dated 18.6.2012 which is reproduced below: “In continuation of the written submissions made by the appellant dated 14th May, and 12h June, 2012 and with reference to proceedings conduced on different dates the appellant makes following submissions: During the hearing held on 13th June, 2012, the AO relied on 2. para 13 of his order of assessment wherein he has stated that: the assessee had purchased a factory building and land a) appurtenant thereto and the same has been sold now Depreciation has been claimed in respect of Navi Mumbai b) property - property falling wherein the same block of assets. The property in question is deemed to have been allowed c) depreciation in terms of explanation 5 to Sec. 32(1). The asset sold being a depreciable asset provision of Section 50 d) are applicable.

The appellant has in its earlier submissions emphatically denied that it purchased any factory building at Kalina. The allegations were refuted on the basis of Purchase Deeds which clearly mention that what was purchased was land without any factory building thereon. The assumption of the A.O was based solely on the recital in the indenture of purchase contained in Para 3 read with the Second Schedule. The appellant in its Written Submission dated 14th May, 2012 in Para 4.3 and 4.4 has shown" that the impression has arisen on account of not reading the document in its entirety. The Schedule 2 relied upon states the total larger land out of which what was purchased is contained in Schedule 5 where there is no mention of any factory building. With reference to the plan of the said portion purchased as per Schedule 5, it was shown that those plots had no factory building on them.

1 Without prejudice to above, even if there was some structure which was at any point of time used as factory by some previous owner(s) and has still been referred to as factory in the purchase indenture, there is absolutely nothing to show that the appellant used that structure as a factory so as to make the property depreciable. In fact, as mentioned by the appellant in its submissions dated 12th June, 2012 dealing with Para 4 of the A O.'s remand report, the land when purchased was an agricultural land on which no factory could have been constructed. It was only in 1981, as reflected in the property Register Card attached to the Sale Deed dated 30-12-2009, that the agricultural land was converted into non-agricultural. Around that time the assessee had closed its manufacturing business which fact has been admitted by the A.O. in Para 8 of his Assessment Order.

2 The above will show that the observation at (a) of Para 13 of his order that the assessee purchased a factory building is without any basis and contrary to facts on record. The assessee neither purchased a factory building nor constructed any factory building thereon and his conclusion based on such misunderstanding of facts are vitiated.

Coming to (b) of Para 13 of the assessment order, the AO has gone wrong in equating the Kalina property in question with the Navi Mumbai property and placing the two in the same block of assets. By his own assertion, the Kalina property was a factory building with land appurtenant. The documents clearly state Navi Mumbai property as office premises with garage. The law has treated factory building as separate from any other building which is evident from separate rates of depreciation provided under I.T. Rules for factory buildings prior to 1987. In any case when the block concept came in 1988-89, the assessee already owned the Kalina land. It is expected that in case the property was considered depreciable it must have formed a block then. Now Bombay property being later acquisition would have joined the block. No material exist that there was a block of buildings including Kalina property which was subjected to depreciation. The assertion now is mere assumption without basis. On the other hand, the appellant has by producing records of 1996-97 onward showed that Kalina property was never subjected to depreciation. 4. 1 As submitted by the appellant the property purchased was land which fact is evidenced by the relevant documents. Even if a few dilapidated small structures were there which might have been used for protection of property at some points of time it does not alter the nature of the property. The same being non-depreciable could not have formed the block of assets.

2 The appellant also did not carry out any construction of factory or any other structure to be used for business. Whatever construction work was carried out by the appellant was for security purposes and necessary infrastructure by way of boundary wall, watchman cabin, electric room levelling of land etc. The nature of property as purchased and with whatever constructions were carried out had no association with assessee's business and accordingly, remained a non-depreciable asset. As has been emphatically submitted by the appellant no depreciation was ever claimed nor allowed in respect of this property which was a non-depreciable asset and, therefore, putting the- same in the block of a depreciable asset with the Navi Mumbai property is not legally sustainable.

3 The block of asset introduced in the Act w.e.f 01.04.1988 defines this term as meaning a Group of assets falling within a class of assets in respect of which the same percentage of depreciation is prescribed. It applies to those assets only which are subject to depreciation. In order that an asset can be part of a block, it is necessary to ensure that (i) it falls within a class of asset implying the Block's homogeneous nature (ii) it is depreciable and (iii) it is subject to the same rate of depreciation. The law does not provide for a block of non-depreciable assets or making a non-depreciable asset part of a depreciable asset. Doing so will make a non-depreciable asset subject to depreciation which the law does not permit. Reference in this connection may be made to Hon'ble ITAT observations in Asst. CIT vs. Jagdish C. Shah (2006) 285 ITR (AT) 179 wherein it has been held that "An asset, not entitled for depreciation, cannot form part of a block of assets eligible for depreciation ".

4 The learned AO is, therefore, not within the provisions of law when he puts the Kalina property in the block and subjects the same to depreciation. The learned A.O. has totally ignored the distinction between land and building which is apparent from his consideration of even that parcel of land which was purchased in 2008 to make the land contiguous, as a building, and calculating depreciation thereon. There is not even an iota of evidence of any structure thereon. 15 of the order may be referred to. 4.5 Without prejudice to appellant‟s submission about the property being mainly land which is non-depreciable, even if a different view is taken and some structures are taken to be business assets subject to Depreciation the inclusion in the block should have been confined to the cost of those structures only. The law is well settled by the Apex Court decision in Alps Theatre case that land and building comprising in an immovable property are to be considered as separate assets for the purpose of depreciation and other provisions of the Act including capital gains. The appellant purchased the property as land for Rs.3,63,500/-and spent Rs.25,52,000/- on construction and levelling, filling of land. He could, at the most, have taken a part of Rs.25,52,000/-- only (after exclusion of cost of boundary walls etc.,) within the block. It may be of relevance to say that even this part was never treated as depreciable obviously because the appellant was never in the business of leasing. Whatever leasing was done was not carried on as a regular business activity. As mentioned in Para 1.3 of the submissions dated 14th May, 2012 leasing for container storage was done between 1990 and 1994 only. The property remained vacant from 1995 to 1999 when again the same was let out to Larsen and Toubro which remained with them upto 2004 only. The property remained vacant thereafter till sale. This will show that these temporary structures were created and leasing activity was carried out not as a business but only as a necessity because the land could not have been kept vacant. The appellant has produced financial statements from 1996 onward. The Schedule of depreciation clearly shows that Kalina property was shown separately on which no depreciation was allowed. This position remained undisturbed by the department even when the assessment was completed u/ s.143(3). Taking a different stand now after the continued practice of such long period cannot be justified.

Part (c) of Para 13 of the assessment order deals with deemed depreciation in respect of Kalina Property. This observation stems from (b) as the property has been placed in the block which for reasons mentioned in Para 4 above is not legally justified. The appellant further submits that Explanation 5 of Section 32(1) which is being relied upon is not applicable to the facts of the case. The Explanation which is a fiction applies to depreciable assets and deems depreciation as allowed even if the same is not claimed by the assessee. The Explanation nowhere provides that depreciation will be deemed to be allowed even in respect of assets which are not depreciable under the law. The fiction does not make a non- depreciable asset as depreciable. In the facts of the case 'once it is accepted that the asset was a land which is indisputably non- depreciable, the deeming fiction has no relevance. Even if a different view is taken and the property is held composite, the land will have to be separated and the Explanation will not have any application to land part of the property.

1 Further, the learned A.O has ignored the fact that the Explanation came into effect w.e.f 01-04-2002. The Explanation has no retrospective effect and can apply from 01-04-2002 only. The A.O. has recognised in Para 8 of his order that the factory premises was not used for the business purpose from 1983-84 onward. This being so, the property, considered as factory by the A.O., ceased to be depreciable. Whatever doubts remained were also removed when the Kalachowky property was sold in 1996. It is, therefore, clear that in 2002 when the Explanation came into force there was no business asset. No deeming provision as stated above, can be applied to an asset which had ceased to be subject to depreciation. It is, therefore, wrong to invoke the Explanation and draw conclusion there from.

2 Attention is drawn to the decision of Hon'ble.High Court of Kerala. In CIT vs. Kerala Electric Lamp Works Ltd., (2003) 129 Taxmann 549 (Ker.) wherein it is held that the Explanation 5 does not have retrospective application. It is, therefore, beyond law to apply the explanation to an asset which ceased to be used for business as back as 1983-84 and in any case in 1996. 6. The observation of the A. O. about the application of Section 50 in (d) of Para 13 is based on his understanding about the nature of Kalina property as a depreciable asset. The discussion aforementioned brings out that the property was not depreciable, no depreciation was ever claimed, no depreciation was ever allowed and the provisions of deemed depreciation are not relevant to such property. The very basis of the observation, therefore, does not subsist and the conclusion drawn about the applicability of Sec. 50 does not remain valid.

1 Sec. 50 envisages actual allowance of depreciation in respect of the asset. The very object of the provision is to ensure that no assessee is able to get the benefit twice once by way of depreciation and again by way of relief of capital gain taxation on the basis of long term asset. It is with this purpose that the legislature has used the expression "in respect of which depreciation has been allowed". If any other view is taken and the provision is applied even in cases where no depreciation has been allowed or where depreciation is only deemed, it will result in double jeopardy which can never be intended by the legislature. The provision applies only when depreciation is actually allowed which is not the case of the appellant. The A.O. is, therefore, not justified in applying the provisions of Sec. 50 to the Kalina property.

2 Your attention is invited to Mumbai ITAT's decision on Devine Construction Co. Vs. ACIT 49 SOT URO 6 holding that provisions of s. 50 do not apply where an assessee had included an asset in block of asset but no depreciation was ever claimed.

Another issue that came up for discussion was the composite nature of the sale consideration. It was argued that even if it is treated that property consisted of land and building and following the decision in Alps Theatre and other cases, the two are to be separated, there is no indication of the consideration of the two taken separately.

2 The appellant submits that the composite consideration cannot stop the authorities from applying the correct legal position. It is given to the authorities, rather it is incumbent to segregate the two on the basis' of a reasonable estimation after taking into consideration the relevant facts available. Your kind attention is drawn to the observations of Hon 'ble Bombay High Court in CIT vs. Hindustan Hotels & Anr. 335 ITR 60 (BOM.) which are reproduced below: “ACIT V. Hindustan Hotels Ltd. & Anr. 335 ITR 60 (Born.): At para 10 the High Court observed that the decision in CIT v. Vimal Chand Golecha (1993) 201 ITR 442 (Raj.) therein that the Rajasthan High Court has followed the decision of the Madras High Court in CIT V/s Dr. D.L. Ramchandra Rao (supra) and has held that if the price for two capital assets has been charged as one consolidated price, then the assessee is entitled to bifurcate the same. As the situation may arise, where again from one of the capital assets is a short term capital gain while from the other it is a long term capital gain, the benefit to the assessee cannot be denied in respect of the gain arising out of the sale of long term asset.

2 Attention is also drawn to the following observation of Bombay High Court in CIT vs. Citi Bank NA 261 ITR 570 (BOM) :- “CIT v. CITIBANK N.A. 261 ITR 570 (Bom).: Surplus realized from sale of land beneath the superstructure is long term capital gains and not a short term capital gain. Held, under Section 31 (1), no depreciation 'is admissible for land. Secondly, the department can assess the Company to short term capital gains only qua depreciable assets. It was held that on sale of land attached to the building vide Conveyance dated 7.8.1078, the gain which accrued to the assessee was long term capital gain and the department was wrong in treating such gain as short term capital gain. There are several other judicial decisions holding the same. Attention is drawn to appellants Written Submissions dated 14th May, 2012 mentioning such pronouncements which may please be referred to. 7.3 The appellant requests that in case your honour decides to hold the structures as depreciable asset its value may be estimated. The Appellant has furnished the report of the Valuer as on 01-04-1981 which can provide a reasonable basis for segregating the value. While doing so it is necessary to take account of the fact that building depreciates with the passage of time while land generally appreciates. Suitable adjustments will, therefore, need to be made for inflation as well as depreciation while making such estimation.”

The Ld CIT(A), after considering the submissions of the assessee and the remand report furnished by the AO, took the view that the sale consideration relating to land should be assessed as Long term capital gain. Since the AO had also placed reliance on the statement given by the partner of the assessee firm, the Ld CIT(A) also addressed the same after considering the retraction letter of the assessee. Further, the ld CIT(A) also directed the AO to conduct enquiries from the Government departments like, labour department, electricity department etc. In order to ascertain about the existence of factory premises. The report given by the AO was also considered by Ld CIT(A) and he has given a finding that any factory premises in the Kalina Property. The observations made by the Ld CIT(A) are extracted below, for the sake of convenience:-

18 As regards to the enquiries conducted from various agencies like Reliance Infrastructure Ltd., ESIC, Labour Department, Industries Department and Building & Factory Department of BMC to ascertain whether any factory was running from the Kalina Property nor not, the A.O. in the remand report has given the details of the enquiries so conducted. The A.O. in his remand report has stated that none of the agencies have stated in their replies that the appellant was not having a factory /industrial unit at the Kalina property in past. The A.O. has also stated that reply from Commissioner of Labour (MS), Mumbai is to be received.

19 I have had the occasion to go through the replies furnished by the aforesaid agencies to the A.O. The A.O. had sought specific information about the existence of factory at, Kalina property. The agencies to whom the A.O. had written letters have nowhere confirmed that there was any factory in the Kalina property. On the contrary in some of the replies, it has been stated that there was a factory in Kalachowky. As regards to the information from M/s. Reliance Infrastructure Ltd. referred to by the A.O. in his remand report, the partner of the appellant firm has stated as under in this regard: “M/s Reliance Infrastructure. on the basis of whatever records were available with them have mentioned that the assessee's account was active till March 2010 as a commercial connection. The electricity bill enclosed with the report makes it clear that the connection was LT (Light Tariff) with single phase. Obviously, a single phase connection cannot be used for running a factory. The fact that the records prior 10 June 2005 are not available with them cannot be used to draw an adverse inference against the assessee. If certain information is not available, but totality of facts point in certain direction that view needs to be taken. The appellant humbly submits that the replies received from various departments in response to the inquiries as directed by your honour have established beyond a shadow of doubt that the Kalina Property was never used for any factory / industrial unit which supports the contention that no depreciation was ever claimed or allowed in respect thereto”.

20 As regards to the non receipt of reply from the Commissioner of Labour (MS), Mumbai, the appellant has submitted as under in this regard: "The Ld A.O has mentioned about non receipt of reply from Labour Commissioner. He appears to be ignoring the response received from the Assistant Commissioner of Labour who is in charge of the said area. He is ignoring the reply received from the office of the Labour Commissioner signed by the person competent to communicate on behalf of that office."

21 Thus, from the replies received from various agencies, the only conclusion that can be drawn is that there was no factory at Kalina property and the property at Kalina was not used for carrying on any industrial activity thereon albeit there was factory at Kalachowky which was manufacturing tin containers till 1984 and the factory was eventually sold in 1996. Thus though the existence of factory at Kalina property has not been proved, but there certainly were structures which were used for warehousing purposes on rental basis. The Kalina property was sold along with these structures in the year 2009. 3.22 The aforesaid observations that there was no factory at Kalina property gets further corroborated from the reply of the Reliance Infrastructure wherein they have enclosed a copy of the electricity bill which makes it clear that the electricity connection was LT (light tariff) with single phase. Obviously, a single phase connection cannot be used for running a factory. Further, the replies received from various departments clearly mentions that the business of the appellant as per their record was being run from Kalachowky property and there is no indication in the records of the any of the offices / departments about the Kalina property

23 In one of his letters, the Ld. ACIT-19(3), Mumbai dated 08-08- 2012 stated that as per the provisions of section 32 of the IT. Act 1961, depreciation is allowable only in respect of the assets used for the purpose of business or profession. The assessee has not used the Navi Mumbai property for business or profession. No Income has been generated from the Navi Mumbai property. Neither the assessee has ever shown to have run any office from the Navi Mumbai property. As per the letter dated 15.02.2010 submitted by the assessee on 16.02.2010 to the JCIT. Range 19(2), Mumbai, the office address of M/s Firoz Tin Factory was changed from CTS No. 5530.CST Road, Santacruz (El, Mumbai 98 to Ground Floor, Rock Cliff, Opp. Joggers Park, Carter Road,Bandra (W), Mumbai - 400050. This letter establishes that the assessee was previously having his office at his Kalina, Santacruz property which was shifted to its present address at Carter Road, Bandra (W), and he never had his office at Navi Mumbai Property. The ACIT has also stated that entire receipt from the warehousing activity relates to kalina property and the entire income has been generated from the Kalina property only. No income has been generated from Navi Mumbai property as the same was never put to use for business or profession. Therefore, depreciation claimed by the appellant has to be relating to the Kalina property only since, this is the only since, this is the only property that has been put to use for business i.e. warehousing activity. In this regard, the partner of the appellant firm has stated as under : “The ld. ACIT has also made a mention about an alternative plea taken by him by his written submission that since the Navi Mumbai property was never put to business or professional use no depreciation was allowable on this property and therefore, the depreciation claimed by the assessee had to be relating to the Kalina property since the same was the only property that was put to use for the business activity. The submission made by him is totally contrary to the facts and untenable in law. The depreciation is asset specific and always relate to any particular asset. After introduction of the "block concept ", it relates to the assets falling within that block. If depreciation has been allowed in respect of a particular asset, it is not given to the department to relate it to any other asset for the simple reason that the asset yielded income whereas the asset to which it originally related did not yield any income. In the facts of the case it cannot be disputed that the assessee claimed depreciation in respect of Navi Mumbai property. The computation thereof was based on the cost of that property. The returns were processed u/s 143 (1). Even in the year, the assessment was completed u/s 143(3), the depreciation claim was not disturbed. The depreciation therefore, was in respect of Navi Mumbai property and by no stretch of logic or reasoning it can now be related to any other property i.e. the Kalina property. Even if for the sake of arguments it is taken that the depreciation should have been allowed not in respect of Navi happened. Without prejudice to the same, the appellant insists that the Kalina property was not depreciable. Whatever income was derived the same was assessable under the head 'income from property' and not 'under the head income from business. Assessee's accounting for the same as business income will not change the character of the property. In any case, even if it is accepted that deprecation was allowable, the same does not make any difference to the issue involved in this appeal as what is relevant is the depreciation actually allowed and not the depreciation that should have been or could have been allowed. The submission was made earlier that the Kalina property and the Navi Mumbai property formed a single block and therefore even if depreciation was allowed in respect of Navi Mumbai property, the same will be depreciation allowed to the block which include the Kalina property. The appellant has submitted detailed explanation in the submission made on 18'h June 2012. The facts on record are clear about the fact that no such block was ever created comprising of the Kalina properly and the Navi Mumbai property. On the other hand the Schedule of the fixed assets enclosed to the returns makes it abundantly clear that Kalina property was always kept separate from the block comprising of buildings and no depreciation was ever claimed or allowed in respect of such property. The contention of block is imaginary only which does not exist and it is not given to any party to imagine a state of affair which, according to it, should have existed then but did not exist. In any case, as submitted by the appellant even if a notional block is allowed to be formed and given effect to, there could not have been a block comprising of the Kalina land and the Navi Mumbai office as the land, as per the settled law, is a non depreciable asset which cannot be combined with any depreciable asset. From the Schedule it will be seen that the block of building was up to the A. Y.1996- 97 comprised of the W.D.V. of the building part of Kala Chowky property. In the A.Y 1997-98, when Kala Chowky property was sold, the block was reduced by the sale price of the building portion and was increased by the cost of Navi Mumbai office. The building block therefore continued and depreciation continued to be claimed in respect of such block. The Kalina property remained away from this block of building. The contention of learned ACIT is therefore, untenable in facts and in law ."

24 From the above, it can be seen that the contention of the appellant is that Kalina property remained away from the block of building and hence the contention of the ACIT is untenable in facts and in law”

The Ld CIT(A) finally held that the land was not a depreciable asset and hence the provisions of sec. 50 shall not be applicable to it. The revenue is contesting the same. However, we do not find any infirmity on the decision of Ld CIT(A) on this issue in view of the decision of Hon‟ble 377)(SC), wherein the Hon‟ble Supreme Court has held that the depreciation on cost of building should exclude the value of land. It has further been held that the value of land does not depreciate, but it only appreciates. The provisions of sec. 32 read with schedules thereon would show that the Statute does not indicate “land” as a depreciable asset. The Hon‟ble Bombay High Court has also held in the case of CIT Vs. CITI Bank N.A (261 ITR 570) has held that no depreciation is admissible on land u/s 32(1) of the Act.

However, the AO has taken the view that the building, if any, has been constructed on the land, the value of building should include the value of land and hence both the assets should be treated as commercial asset falling within the ambit of the provisions of sec. 50 of the Act. The said view taken by the AO is also wrong in view of the following decisions, wherein it was held that the value of land and building should be segregated while ascertaining the capital gains:- (a) CIT Vs. Vimal Chand Golecha (201 ITR 442)(Raj) (b) CIT Vs. D.L.Ramachandra Rao (236 ITR 51)(Mad) (c) CIT Vs. C.R.Subramanian (242 ITR 342)(Kar) (d) CIT Vs. Hindustan Hotels Ltd & Anr. (335 ITR 60)(Bom) (e) CIT Vs. CITI Bank N.A (261 ITR 570)(Bom) No doubt that a building has to be constructed upon a land only; however depreciation is admissible u/s 32 of the Act only on the amount spent on construction of super structure and not on the value of land. Hence, the view entertained by the AO is against the settled principles in this regard. Accordingly, we are of the view that the Ld CIT(A) was justified in holding that the total sale consideration should be segregated between land and building and the value of land should be assessed as long term capital gain.

We have earlier noticed that the assessee has purchased a small portion of land, which was lying in the middle of the land already owned by the assessee, in the year 2008. The Ld CIT(A) has held that the capital gain arising there from should be assessed as Short term capital gain, since the said asset was held for less than 36 months. The Ld A.R argued that the assessee had purchased the above said small portion of land in order to remove the hindrance or obstacle surrounding the larger portion of land and hence it should be considered as expenditure incurred on transfer of land. However, we are not able to agree with the said contentions, since the asset has purchased land, which is a capital asset and hence the capital gain shall arise on sale of it. The existing large extent of land, in fact, cannot be considered to have faced any obstacle by the existence of small portion of land. In fact, identity of both the lands were clear and was not obscure. The purpose of purchase of small portion of land is to aggregate the same with existing large extent of land, so that both the lands could be sold as a single bit. Accordingly, we are of the view that the Ld CIT(A) was justified in holding that the capital gain arising on sale of land purchased in 2008 is assessable as short term capital gain.

The next issue relates to the nature of capital gain arising on sale of super structure existing on the Kalina land. We have earlier noticed that the assessee has been contending right from the beginning that the Kalina shed. During the course of remand proceedings, the Ld CIT(A) directed the AO to make enquiries from the Government agencies and on examination of the replies received, the Ld CIT(A) concluded as under (extracted at the cost of repetition):- “3.21 Thus, from the replies received from various agencies, the only conclusion that can be drawn is that there was no factory at Kalina property and the property at Kalina was not used for carrying on any industrial activity thereon albeit there was factory at Kalachowky which was manufacturing tin containers till 1984 and the factory was eventually sold in 1996. Thus though the existence of factory at Kalina property has not been proved, but there certainly were structures which were used for warehousing purposes on rental basis. The Kalina property was sold along with these structures in the year 2009. 3.22 The aforesaid observations that there was no factory at Kalina property gets further corroborated from the reply of the Reliance Infrastructure wherein they have enclosed a copy of the electricity bill which makes it clear that the electricity connection was LT (light tariff) with single phase. Obviously, a single phase connection cannot be used for running a factory. Further, the replies received from various departments clearly mentions that the business of the appellant as per their record was being run from Kalachowky property and there is no indication in the records of the any of the offices / departments about the Kalina property”

Having held so, the Ld CIT(A) proceeded to hold that the assessee cannot escape from the mischief of sec. 50 of the Act for the reason that the assessee was not able to substantiate its contention (as having not used the Kalina property for business purposes) by producing assessment records. The following observations made by Ld CIT(A) are relevant here:- “ The decisive issue, therefore, is whether the capital asset in question was at any time subjected to depreciation. The property in Kalina was purchased in 1974 when appellant firm was engaged in Tin Manufacturing business in Kalachowky. The case of the on the manufacturing activity and was subjected to depreciation. The appellant denies this and claims that the property was not used for carrying on any business. It was since 1984 intermittently let out initially for container parking and later on to Larsen & Toubro. However, the appellant is not able to substantiate its contentions by production of assessment records since the time of purchase. The claim of the department is based on the fact that since the property was used for running manufacturing activities and even though no depreciation has been claimed by the appellant, this contention cannot save it from the mischief of section 50 in view of Explanation 5 to section 32(1) of the I.T. Act, 1961........ .....VIII. From what has been stated in the preceding paragraphs, it is not possible in the absence of assessment records of relevant period, to hold that no depreciation was allowed in respect of the property in question. The records of AY 1996-97 onwards cannot be taken to be conclusive of the fact that Kalina Property was never subjected to depreciation. What happened in the prior period may be different. In view of appellant‟s inability to lead reasonable evidence of non allowance of depreciation, I am inclined to take the view that whatever structures were there on the land were subjected to depreciation as per law which brings it within the ambit of section 50. It is also an undeniable fact that income from Kalina property was offered as business income. Therefore, the structures become business asset of the appellant. Further, the A.O also appears to be correct in saying that once the appellant has claimed the depreciation in respect of a part of block of assets (Navi Mumbai Property) he cannot take the plea that since, he has not claimed depreciation in respect of particular part of assets falling within the same block of asset, the particular part of asset is non-depreciatble asset on which the provisions of section 50 do not apply.......Once the asset has been incorporated in a block of assets then it loses its individual identity and depreciation is always calculated on the block because all the assets are merged in pool.....”

We are unable to agree with the view expressed by Ld CIT(A) on this issue. It is the Ld CIT(A), who has given a definite finding that the Kalina property did not have any factory structure. The total value of Kalnina Property (cost of land + amount spent thereon) Rs.29.15 lakhs remained the same since 1995 onwards. There is no controversy on this fact. The assessee has given explanation that the amount of about Rs.26.00 lakhs was spent on land levelling, construction of compound wall and a watchman shed. This explanation of the assessee has not been proved to be false. The fact that the assessee has carried on its manufacturing activities in Kalachowki building was also accepted. Hence the Ld CIT(A) has held that the assessee did not carry on any manufacturing activity in Kalina Property. Having held so, we are not able to understand as to how the Ld CIT(A) could hold that the Kalina property could have been subjected to depreciation. The facts noted down by the Ld CIT(A), in our view, shows that the Kalina property remained to be a land with a minimum structure of a shed and compound wall. This is further fortified by the fact that the assessee has let out the land for container parking and thereafter to Larsen & Toubro. It is an accepted fact that the rent paid by Larsen & Toubro was subjected to tax deduction at source u/s 194I of the Act, i.e., as rent only. Thus, we notice that the assessee has received rent for letting out the land only.

We notice that the Ld CIT(A) has decided this issue against the assessee mainly for the reason that the assessee could not produce assessment records pertaining to period prior to AY 1996-97. It is pertinent to note that both the assessee and the revenue did not have assessment record prior to that period. The assessee was asked to produce the assessment records for the periods from AY 1975-76 onwards during the course of assessment proceedings undertaken in the year 2012. It may be noticed that considerable time has elapsed by that time and it would be difficult for anyone to produce old records, that too, more than 20 years old. This is fortified by the fact that the revenue also did not possess the old records. Under these set of facts, we are of the view that the tax authorities are not justified in taking adverse view of the matter. When the Ld CIT(A) has come to a define conclusion that the Kalina produce assessment records. Accordingly, we are of the view that the Ld CIT(A) was not justified in holding that the assessee could have claimed depreciation on the Kalina property, as the said view is based on surmises and conjectures.

It is also not clear as to when the assessee undertook expenses on land levelling, construction of compound wall etc. The facts relating to the same are not emanating from the record. Be that as it may, we notice that the assessee has incurred those expenses only to protect the land and hence the same has to be considered as land improvement expenses only. With regard to the observations of the AO that the purchase deeds do refer to the existence of some factory structures, the assessee has explained that the assessing officer has referred to Schedule 2 of the conveyance deeds, which describe the total area owned by the sellers, whereas the property purchased by the assessee was described in Schedule 5. Even though this explanation was given during the course of remand proceedings also, yet the AO did not controvert the said explanations. Hence, we are of the view that the above said explanation of the assessee needs to be accepted. Since the assessee has let out the land only for container parking and later to Larsen & Toubro, we are of the view that the question of applicability of provisions of Explanation 5 to sec. 32(1) shall not apply to the assessee.

We further notice that the tax authorities have presumed that the Kalina property has formed part of block of assets. The said presumption is not supported by any evidence. The assessee has all along been claiming that it has claimed depreciation on Navi Mumbai office premises and when it was sold the entire surplus arising in the block was offered as short term capital gain. When an asset has not entered the block, then the question of application of Explanation 5 to sec. 32(1) shall not have application.

In view of the above, we are of the view that the Ld CIT(A) was not justified in holding that the provisions of sec. 50 of the Act shall apply to the structures, if any, available on the Kalina property. Accordingly, we set aside the order of Ld CIT(A) on this issue. Accordingly, we direct the AO to compute the capital gain by treating the expenses incurred on land levelling, compound wall, etc as land improvement cost, since they have been predominantly incurred to protect the land only.

The next issue relates to the claim for deduction of following expenses made by the assessee while computing the capital gains:- Architect fee to Rajiv Harmalkar 10,00,114 Soil testing 1,76,700 Architect fee to Shekar Arolkar & Associates 36,95,050 Brokerage 2,57,00,000 Legal & Due diligence fee to Kirit Damania 75,00,000 Legal, taxation planning & due diligence to K.N. Gandhi & Co. 82,72,500 Valuation preparationcharges to M.B. Sabnis 55,150 Bank charges 1,33,684 For rendering support to K.N. Gandhi & Co. 50,000 The assessee claimed the above said expenses as expenses incurred in connection with the transfer of assets. The AO disallowed the expenses relating to brokerage of Rs.2,57,00,000/- and bank charges of Rs.1,33,684/-. The Ld CIT(A) allowed the payment made to Kirit Damania & Co – Rs.75,00,000/- for legal & due diligence, M/s K.N. Gandhi & Co., for legal, taxation planning fee – Rs.82,72,500/- and Rs.50,000/- to J.R Shah & Co., for assisting /s K.N. Gandhi & Co.

We heard rival contentions on this issue. We notice that the assessee has obtained valuation report from /s M.B. Sabnis & Co. in order to ascertain the market value of property as on 1.4.1981 and has paid a sum of Rs.55,150/-. The valuation report so obtained would only serve for the purpose of computation of capital gains and hence the same cannot be considered to be expenses incurred in connection with the transfer of land. Accordingly, we are of the view that the tax authorities are justified in disallowing this claim.

The expenses incurred on soil testing, in our view, is connected with the sale transaction and hence the same should be allowed, since the assessee has carried out the same only to establish the quality of soil available on the land. The legal & due diligence fee of Rs.75.00 lakhs paid to Kirit Damania & Co. was related to the examination of title deeds and carrying out due diligence and hence we are of the view that the Ld CIT(A) was justified in allowing the same.

The payment made to K.N. Gandhi & Co. (Rs.82,72,500/-) and J.R. Shah & Co. (Rs.50,000/-) have been claimed to be towards legal, taxation planning fees. However, the assessee has already paid legal & due diligence fee to /s Kirit Damania & Co. and hence the nature of services rendered by the above said two professional firms were not known or properly explained. In any case, the taxation planning activity cannot be considered to be an expenditure incurred in connection with the transfer of land. However, since they have rendered some legal service connected with the transfer of land, we are of the view that a portion of the payment should be considered as expenditure incurred in connection with the transfer of land. Accordingly we modify the order of Ld CIT(A) and direct the AO to allow 50% of the expenses paid to /s K.N. Gandhi & Co and M/s J.R. Shah & Co.

The remaining expenditure relate to architect fee paid to two firms. The nature of services rendered by the two architect firms has not been brought on record. In the absence of the relevant details, we are not able to decide as to the payment made to the two architect firms relate to the expenditure incurred in connection with the transfer of land. Accordingly, we are of the view that the allowability of payment made to the architect firms requires fresh examination at the end of the AO. Accordingly we set aside the order of Ld CIT(A) on this issue and restore the same to the file of the AO with the direction to examine the claim of the assessee by examining the nature of services rendered by the two architect firms, viz., M/s Rajiv Harmalkar and M/s Shekhar Arolkar & Associates.

The assessee has also urged two legal grounds viz., (a) there is no valid service of notice (b) the assessing officer did not have reason to believe about the escapement of income and hence reopening is bad in law. Since we have decided the issues contested before us on merits, we do not find it necessary to adjudicate the above said legal issues.

In the result, the appeal filed by the assessee is treated as allowed and the appeal of the revenue is dismissed.

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