AMRIT LAL JAIN,SONEPAT vs. ITO, SONEPAT

This is an appeal filed by the appellant against the order of the ld. CIT(A)’s- Rohtak dated 17.02.2011 for A.Y. 2007-08 on the following revised grounds: 1. “That on the facts and in the circumstances of the case and in law, the action of the authorities below in picking up for assessment the subject case is arbitrary, without jurisdiction and erroneous and must be quashed; 2. That on the facts and in the circumstances of the case and in law, the authorities below erred in construing capital

Brief facts of the case are that the appellant is an individual and derives income from trading and commission as kacha artia by dealing in sarson, wheat and khal etc. The appellant filed its return of income declaring total income of Rs. 1,65,377/- on 27/11/2007. The return was processed u/s 143(1) and the case was picked up for scrutiny as per CBDT action plan under clause (8) of ITR 4 of the guidelines during the financial year 2008-09. The assessment proceedings were completed by making an addition of Rs. 2,87,910/- under the following head: • Long term capital gains Rs. 3,37,540/-; • Mortgage expenses of Rs. 40,000/- • And household expenses amounting to Rs. 22,900/- • 3. Aggrieved by the order passed by the ld. AO. The respondent appellant went into appeal before the ld. CIT(A). 4. The ld. CIT(A) confirmed the action of the AO and upheld the additions. 5. Aggrieved by the order of the ld. CIT(A) the appellant is in appeal before us.

Ground No.1: This ground of appeal

Aggrieved by the order of the ld.AO, the appellant preferred appeal before the ld.CIT(A). The ld. CIT(A) was also not convinced with the arguments as in his opinion the respondent -appellant is in constructed possession of the said plot. In view of the above and similarly the constructive possession has been transferred to M/s Shubham Enterprises upon receipt of the sale consideration. He held that not entering into an agreement he is of no consequence in view of the facts of the case. Therefore, the ld. CIT(A) upheld the view of the AO and treated the transfer of capital asset in terms of the provisions of section 2(47).

The ld. AR further submits that as there has been no conveyance deed that has been entered into between the appellant and M/s Bhagat Ram Jhugla provisions of section 50C of the Act cannot be invoked. The ld. AR places reliance on the decision by Mumbai Tribunal in the case of Atulji Puranik vs. ITO 12(1)(i) reported in (2011) 11 taxmann.com 92. 14. The ld. DR supports the findings of the authorities below. 15. The major contention put forth on behalf of the appellant is regarding non-applicability of section 50C to the facts of the case. 16. Before we proceed to deal with the rival contention it is necessary to set the records straight inasmuch as there are certain factual inconsistencies recorded in the assessment order. The first being that the appellant was not allotted the plot on ownership basis for perpetuity but only of least basis for a small period of time. None of the authorities below have chosen to controvert the above fact. Now we decide the controversy before us in the light of correct and complete facts as noted above. There is no dispute that M/s Bhagat Ram Jhuglal was the owner of the plot which was acquired by the appellant. Further it is also not disputed that no agreement to transfer the immovable property against the consideration has been entered into between the appellant and M/s Bhagat Ram Jhuglal, when the plot was purchased. Similarly, when the plot was further sold by the appellant, no agreement has been entered into.

Section 45 clearly provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54 to 54H, be chargeable to income-tax under the head 'Capital gains' and shall be deemed to be the income of the previous year in which the transfer took place. What is relevant for applicability of section 45 is the profits or gains arising from the transfer of a capital asset effected in the previous year. It is only the nature of asset transferred in the year which is to be taken into consideration for computing profit or gains chargeable to tax under the head 'Capital gains'. Only the nature of the capital asset so transferred in the previous year is to be viewed de hors the source from which it was acquired. If a 'Capital asset' as per section 2(14) is purchased out of agricultural income, that would not lose its character of capital asset notwithstanding the fact that the income exempt from tax was employed for purchasing such capital asset. Whenever such resulting capital asset is transferred leading to any profit or gain, such amount shall be charged to tax under section 45 of the Act. The sole criteria for considering whether the asset transferred is capital asset under section 2(14) or not is to consider the nature of the asset so transferred in the previous year and not the origin or the source from which such asset came to be acquired. Adverting to the facts of the instant case, once the assessee acquired rights in the Plot.

During the course of assessment proceedings, the appellant contended that the cost of acquisition of the plot was Rs. 3000/- per sq.yard, by applying market rate of the Plot at Rs.3950 per sq. mtr. on the date of transfer. The Assessing Officer, on the other hand, came to the conclusion that the sale price was liable to be taken at Rs. 6,180/- per sq. yards 19. The appellant argued that the market value of the plot of land on the date of allotment should be taken as the cost of acquisition. From the factual matrix of the case, it is noted that the appellant was allotted rights in the shop Plot on 22.02.2001.

The Assessing Officer adopted the value of shop plot sold on 15- 03-2007 at Rs. 6180 per sq.yard., by applying the provisions of section 50C for the purposes of computing capital gain. His view was based on the assessee's submission that the market rate prevailing for land during 1-4-2006 to 31-12-2007 was Rs. v per sq. meter. The Commissioner (Appeals) upheld the action of the Assessing Officer on this score.

On going through the provision of section 50C(1), it transpires that where the full value of consideration shown to have been received or accruing on the transfer of an asset, being land or building or both, is less than the value adopted or assessed or assessable by stamp valuation authority, the value so adopted etc.

It is thus clear that a deeming provision can be applied only in respect of the situation specifically given and hence cannot go beyond the explicit mandate of the section. Turning to section 50C, it is seen that the deeming fiction of substituting adopted or assessed or assessable value by the stamp valuation authority as full value of consideration is applicable only in respect of "land or building or both". If the capital asset under transfer cannot be described as 'land or building or both', then section 50C will cease to apply. From the facts of this case narrated above, it is seen that the assessee was allotted lease right in the Plot for a period of sixty years, which right was further assigned to 'P' in the year in question. It is axiomatic that the lease right in a shop plot neither is 'land or building or both' as such, nor can be included within the scope of 'land or building or both'.

Considering the fact that dealing with special provision for full value of consideration in certain cases under section 50C, which is a deeming provision, the fiction created in this section cannot be extended to any asset other than those specifically provided therein. As section 50C applies only to a capital asset, being land or building or both, it cannot be made applicable to lease rights in a land. As the assessee transferred lease right for sixty years in the Plot and not land itself, the provisions of section 50C cannot be invoked.

In view of the above findings, we allow ground no. 2 raised by the appellant.

Ground no.3: This ground is in respect of the addition made in respect of mortgage expenses incurred for obtaining credit facilities for business purposes.

The Ld. AO disallowed the expenses as according to the ld. AO theses expenses had nothing to do with the business of the appellant.

On perusal of the profit and loss account, it is observed that the appellant has taken loans. The appellant fairly submits that some of the loans have been taken to invest in properties relating to business. The Ld.AR submits that the loan from the Urban Co- Operative Bank, Sonipat has been taken for availing funds from the bank for business. However the ld.AO has not established any nexus between the loans taken with the business activity carried on by the appellant.

We are therefore inclined to send this issue back to the file of ld.AO for establishing nexus if any and then to consider the claim of the appellant.

Ground no. 4: This ground pertains to the addition in respect of household expenses.