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Receipts from sale of office premises held as asset for over 36 months are assessable as Long Term Capital Gain or loss, despite having been rented out at some point of time in the past: ITAT

2019-TIOL-1551-ITAT-MUM

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH ‘C’ MUMBAI

ITA No.1849/Mum/2018
Assessment Year: 2014-15

PLUTO SECURITIES PVT LTD
L-1/110, THE SUMMIT, NEAR SAWAN CLUB
VILE PARLE (E), MUMBAI-400057, MAHARASHTRA
PAN NO: AAACP8330R

Vs

DEPUTY COMMISSIONER OF INCOME TAX
CENTRAL CIRCLE-10(3)(2), ROOM NO 509
AAYAKAR BHAVAN, M K ROAD, MUMBAI-400020

Mahavir Singh, JM & Rajesh Kumar, AM

Date of Hearing: June 19, 2019
Date of Decision: June 19, 2019

Appellant Rep by: Dr K Shivram & Shri Rahul Hakani, AR
Respondent Rep by: 
Shri Arvind Kumar, DR

Income Tax – Sections 50 & 50A.

Keywords – Long term capital loss – Sale of office premises – Investments.

THE assessee company had purchased four immovable properties. The assessee in the balance sheet had shown these premises as office premises under the head fixed assets. During the year under consideration, the assessee company had sold the office for a total consideration of Rs. 4.50 crores as recorded in the sale deed. The assessee company claimed that it had treated such office as investment and hence, it computed long term capital loss of such sale and disclosed the same in the return income. The AO in the assessment proceedings treated the long term capital loss computed on such sales as short term capital gain since the office was disclosed under the head fixed assets in the balance sheet. According to the AO, the assessee had claimed depreciation on the said office premises and hence, computed the capital gain as per the provisions of section 50 and 50A of the Act. The AO reworked the capital gain. The AO also invoked the provisions of section 50C of the Act and taken the full sale consideration for the purpose of computation of short term capital gain as computed by the registering authority for the purpose of stamp valuation at Rs.4,55,51,800/-. On appeal, CIT(A) confirmed the action of the AO.

On appeal, Tribunal held that,

Whether if asset in form of office premises are held as an investment for more than 36 months, even though in some earlier years the assessee used the asset for rental income, gain or loss arising out of sale of office premises is to be assessed as long term capital gain/loss – YES : ITAT

++ in the balance sheet, the assessee has disclosed this office as investment under the head of fixed assets. The assessee claimed the gain arising out of the sale as long term and computed the long term capital loss and claimed in the return of income. The AO and the CIT(A) both treated the gain arising out of the above transactions as short term capital gain in view of the provisions of section 50 and 50A of the Act. We noted that the provisions of section 50 and 50A of the Act are for the purpose of computing income under the head “capital gains”. As per section 50 and 50A of the Act, it is mandatory that the assessee should have claimed depreciation u/s 32 of the Act in any of the preceding assessment years. In the instant case, the assessee, right from the date of purchase had made a provision for depreciation as per Companies Act, 1956 amounting to Rs. 1.41 crore till 31.03.2011 but did not claim depreciation as per Income Tax Act, 1961. The said fact can be corroborated from the returns filed by the assessee company for all of the preceding assessment years. Now, the assessee has field copies of acknowledgement and computation of income from A.Y. 1999-2000 to A. Y. 2014-15 in its paper book to prove this fact. Also, during the course of assessment proceedings the AO treated the long term, capital gain on sale of immovable property as short term capital gain in assessment order by stating that “the office premise being depreciable capital asset forms part of block of assets within the meaning of section 2(11) of the Act and cannot be excluded from being a part of block of assets. It was contended by the AO that depreciation under section 32 of the Act is mandatory in nature, whether or not the assessee has claimed it. The premise was held as investment and was never a part of block of assets as per section 32 of the Act 1961. The company’s sole intention was to hold the property and earn rental income as well as capital gains on sale of such asset. In fact, the assessee company had given the said premises on lease from June 2003. The rental income received from the office premise was offered as taxable income under the head income from House Property. The assessee has also filed copy of leave and license agreement along with ledger of such rental income in its paper book;

++ there is no doubt that the asset was held as an investment and assessee being a private limited company, the Companies Act provides that the office premise should be shown as fixed asset, even if it is not held as a business asset but as an investment. The AO in his assessment order, mentioned that the assessee was carrying on its business from the premises, which was admitted by the assessee. It was noted that the assessee was using the office premises as its registered office. Counsel for the assessee relied on the decision of co-ordinate Bench of this Tribunal in the case of Prabodh Investment & Trading Co. V. ITO. The Tribunal held that Section 50 of the Act creates a legal fiction only for the purposes of section 48 and 49 of the Act but it cannot restrict the applicability of section 54 of the Act. The Tribunal discussed the entire provisions and held that once the asset is held for more than 36 months, even though in some earlier years the assessee used the asset for the business purposes or rental income was assessed as business income, the same cannot be held against the assessee. It was noted that the assessee’s gain was arising out of sale of office premises was to be assessed as long term capital gain and consequential relief was to be allowed.

Assessee’s appeal partly allowed

ORDER

Per: Mahavir Singh:

This appeal filed by the assessee is arising out of the order of the Commissioner of Income Tax (Appeals)]-17, in short CIT(A), in appeal No. CIT(A)-17/IT-200/10785/16-17 vide dated 19.02.2018. The Assessment was framed by the Dy. Commissioner of Income Tax, Central Circle 10(3)(2), Mumbai (in short DCIT/ITO/AO) for the A.Y. 2014-15 vide order dated 02.12.2016, under section 143(3) of the Income-tax Act, 1961 (hereinafter ‘the Act’).

2. The two interconnected issues in this appeal of assessee is raised against the order of CIT(A) confirming the action of the AO in treating the capital gain arising out of sale of office premises as short term capital gain instead of long term capital gain claim by assessee. Further, the assessee also challenged the disallowance of cost of improvement to the property and difference in cost of acquisition. For this assessee has raised the following two grounds: –

“1. The Hon’ble Commissioner of Income Tax(A)-17, Mumbai erred in confirming the addition made by the ld. AO in treating the capital gain amounting to Rs.2.61,71,50() arising on sale of office premises as short term capital gain instead of long term capital gain without appreciating the fact that appellant company had treated such asset as an Investment in its books of accounts and had never claimed depreciation on such asset under section 32 of the Income Tax Act, 1961 and

2. The learned CIT(A) further erred in confirming the action of the AO of in disallowing expenses amounting to Rs.46,65,700 on account of cost of improvement to the property and Rs.2,87,800 on account of difference in cost of acquisition.”

3. Briefly stated facts relating to this issue are that the assessee company has purchased four immovable properties, being office nos. 301, 302, 303 and 304 in building “center point” situated at Santa Cruz, West, Mumbai in the year 1998 for an amount of Rs.1,86,62,800/-. The assessee in the balance sheet has shown these premises as office premises under the head fixed assets. During the year under consideration, the assessee company had sold the said office for a total consideration of Rs.4.50 crores as recorded in the sale deed. The assessee company claimed that it had treated such office as investment and hence, it computed long term capital loss of such sale and disclosed the same in the return income. The AO in the assessment proceedings treated the long term capital loss computed on such sales as short term capital gain since the said office was disclosed under the head fixed assets in the balance sheet. According to the AO, the assessee has claimed depreciation on the said office premises and hence, computed the capital gain as per the provisions of section 50 and 50A of the Act. The AO reworked the capital gain and also disallow the expenses on cost of improvement amounting to Rs.46,65,700/- and also different in cost of acquisition being amount of Rs. 2,87,800/-. The AO also invoked the provisions of section 50C of the Act and taken the full sale consideration for the purpose of computation of short term capital gain as computed by the registering authority for the purpose of stamp valuation at Rs.4,55,51,800/-. Aggrieved, assessee preferred the appeal before CIT(A).

4. The CIT(A) simply confirmed the action of the AO and for this he gave particular finding in Para 4.2.2. as under: –

“4.2.2. Thus, it is very clear that the use test is “block of assets”. If a particular property is a part of “block of assets” and subsequently transferred or sold then section 50 and 50A is automatically attracted. The submission on all other issues such as leasing out property etc., becomes irrelevant in the background of guiding principle laid down by the Hon’ble Jurisdictional High court in case of Smt. Meena Pamnani (Supra). Hence, short term capital gain on sale of office premises as per provision of section 50 and 50A of the Act is upheld and ground of appeal on this issue is dismissed.”

5. For the purpose of disallowance of cost of improvement confirmation, he observed in Para 4.3 as under: –

“4.3 Ground No 3

This ground relates to disallowance of cost of improvement claimed by the appellant company. As per details filed before the AO, it was noted that Rs.46,65,700/- was a cost component, claimed on account of improvement. Such cost of improvement was added in AY 2004-05. Upon show cause, no evidence of incurring of such cost of improvement was filed. Even during the appellate proceedings. Such claim has not been supported by any documentary evidence, in absence of which such claim cannot be allowed. Hence, the disallowance made by the AO is upheld and ground of appeal is dismissed.”

Aggrieved, assessee came in appeal before Tribunal.

6. We have heard rival contentions and gone through the facts and circumstances of the case. We noted from the facts of the case that the facts are admitted as narrated above. The first dispute is regarding computation of capital gains. Admittedly, the assessee has sold four office premises for a sum of Rs.4.50 crores which was purchased for a sum of Rs.1,86,62,800/- in 1998. In the balance sheet, the assessee has disclosed this office as investment under the head of fixed assets. The assessee claimed the gain arising out of the sale as long term and computed the long term capital loss and claimed in the return of income. The AO and the CIT(A) both treated the gain arising out of the above transactions as short term capital gain in view of the provisions of section 50 and 50A of the Act. We noted that the provisions of section 50 and 50A of the Act are for the purpose of computing income under the head “capital gains”. We noted that as per section 50 and 50A of the Act, it is mandatory that the assessee should have claimed depreciation u/s 32 of the Act in any of the preceding assessment years. In the instant case, the assessee, right from the date of purchase had made a provision for depreciation as per Companies Act, 1956 amounting to Rs. 1.41 crore till 31.03.2011 but did not claim depreciation as per Income Tax Act, 1961. The said fact can be corroborated from the returns filed by the assessee company for all of the preceding assessment years. Now, before us, the assessee has field copies of acknowledgement and computation of income from A.Y. 1999-2000 to A. Y. 2014-15 in its paper book to prove this fact. Also, during the course of assessment proceedings the AO treated the long term, capital gain on sale of immovable property as short term capital gain as per para 5.3 of assessment order by stating that “the office premise being depreciable capital asset forms part of block of assets within the meaning of section 2(11) of the Act and cannot be excluded from being a part of block of assets. It was contended by the AO that depreciation under section 32 of the Act is mandatory in nature, whether or not the assessee has claimed it. We noted that the said premise was held as investment and was never a part of block of assets as per section 32 of the Act 1961. The company’s sole intention was to hold the said property and earn rental income as well as capital gains on sale of such asset. In fact, the assessee company had given the said premises on lease from June 2003. The rental income received from the office premise was offered as taxable income under the head income from House Property. The assessee has also filed copy of leave and license agreement along with ledger of such rental income in its paper book.

7. From the Above facts, we noted that there is no doubt that the said asset was held as an investment and assessee being a private limited company, the Companies Act provides that the office premise should be shown as fixed asset, even if it is not held as a business asset but as an investment. We further noted that the AO in his assessment order in para 5.5 had mentioned that the assessee was carrying on its business from the said premises, which was admitted by the assessee vide letter dated 17.11.2016. We noted that the assessee was using the said office premises as its registered office. Addition made by disallowing expenses on account of cost of improvement and difference in cost of acquisition.

8. The learned Counsel for the assessee relied on the decision of co-ordinate Bench of this Tribunal in the case of Prabodh Investment & Trading Co. V. ITO in ITA No 6557/Mum/2008 order dated 28.02.2011 for AY 2004-05. The learned Counsel drew our attention to Para 6 of the order wherein, the Tribunal held that Section 50 of the Act creates a legal fiction only for the purposes of section 48 and 49 of the Act but it cannot restrict the applicability of section 54 of the Act. The Tribunal has discussed the entire provisions and held that once the asset is held for more than 36 months, even though in some earlier years the assessee used the asset for the business purposes or rental income was assessed as business income, the same cannot be held against the assessee. The Tribunal has considered this issue elaborately by considering the decision of another co-ordinate bench of Kochi Tribunal in Sakthi Metal Depot vs. ITO (2005) 3 SOT 368 (Cochin) (Trib.). The Tribunal held in para 6 to 10 as under: –

“6. The assessee is in further appeal before the Tribunal. We have carefully considered the facts and the rival contentions. In the case of Ace Builders P. Ltd. (supra), the Hon’ble Bombay High Court held that the fiction contained in section 50 is limited to computation of capital gains only and not to the exemption provisions such as section 54E, for which purpose no distinction can be drawn between a depreciable asset and non-depreciable asset. It was accordingly held that the exemption under section 54E was allowable to a long term capital asset notwithstanding that it was held as a business asset on which depreciation had been allowed. In other words, it was held that section 50 created a legal fiction only for a limited purpose, namely, for the purpose of sections 48 and 49 and that it cannot be extended to section 54E of the Act. In our humble understanding, the judgment is not of assistance to the assessee in the present case. As pointed out on behalf of the departmental authorities, the ratio of the judgment is that the fiction contained in section 50 only affects the computation of the capital gains in accordance with sections 48 and 49 but does not affect the benefit conferred by section 54E of the Act. However, the judgment also recognized that where the long term capital asset has availed of depreciation, then the capital gain has to be computed in the manner prescribed by section 50 and the capital gains tax will be charged as if such capital gains had arisen out of the transfer of a short term capital asset. If by legal fiction the long term capital gains is to be treated as short term capital gains, then under section 50 there is no scope for allowing the benefit of cost indexation. The judgment of the Hon’ble Bombay High Court was not concerned with the benefit of cost indexation and the question whether even where the capital gains is to be treated as short term capital gains under section 50, the assessee would be eligible for the cost indexation. In fact the observations of the Hon’ble High Court at pages 219-220 of the report do show that the decision is confined to the relationship between section 50 and section 54E of the Act. At page 218, the question was posed as to whether the deeming fiction created under section 50 is restricted to section 50 only or is it applicable to section 54E of the Act as well? We accordingly hold that the assessee cannot rely on the judgment of the Hon’ble Bombay High Court in the case of Ace Builders P. Ltd. (supra) to contend that the cost indexation benefit should be given even in the case of computation of short term capital gains under section 50 of the Act.

7. The next contention of the assessee is the one based on the order of the Cochin Bench of the Tribunal cited supra. In that case the assessee stopped claiming depreciation on the flat from the assessment year 1995-96 onwards on the ground that it was no more used for the purpose of the business. In the books of account the flat was shown as an investment from 01.04.1995. In the previous year relevant to the assessment year 1998-99, the flat was sold and the surplus was declared as long term capital gains. The income tax authorities held that the capital gains should be assessed as short term capital gains on the footing that the flat might have been used for business purposes even in the assessment years 1996- 97 and 1997-98. On further appeal to the Tribunal, it was held that the flat ceased to be a business asset or depreciable asset on and with effect from 01.04.1995 and its character during the accounting year ended on 31.03.1998 was that of a long term capital asset and, therefore, the capital gains should be computed as long term capital gains. In this order the provisions of section 50A were referred to. This section makes special provision for cost of acquisition in the case of depreciable asset. It says that where the capital asset is one in respect of which depreciation was allowed in any previous year; the provisions of sections 48 and 49 shall apply subject to the modification that the written down value of the asset, as adjusted, shall be taken as the cost of acquisition. Relying on this provision the Tribunal held that but for the difference in the cost of acquisition, a past claim of depreciation does not change the character of the asset as such. This order of the Tribunal supports the assessee’s case before us. In the present case also the assessee had stopped claiming depreciation in the income tax return for the assessment years 1992-93 and 1993-94. It had claimed depreciation in respect of the flat only in the assessment years 1990-91 and 1991-92. For the assessment year 1994-95 and all subsequent years the assessee had made a Note in its accounts filed with the returns clarifying that no depreciation was provided in respect of the flat as the same was not used during the year for the purpose of the business. From the assessment year 1994-95 up to the assessment year 2004-05, the flat was classified in the Balance Sheet as a fixed asset and shown at cost less depreciation. These facts are recorded in paragraph 8 of the assessment order. In the assessment years 2000-01 and 2001-02, the flat had been let out and the rental income was shown under the head “Income from house property”. It would thus appear that after the assessment year 1993-94 no depreciation was provided even in the books of account and no depreciation had been claimed or allowed in the return or in the assessments. In this factual situation the order of the Cochin Bench of the Tribunal cited supra is applicable, in which it was held that if no depreciation had been claimed or allowed in respect of the asset, even though for an earlier period depreciation was claimed and allowed, from the year in which the depreciation claimed was discontinued, the asset would cease to be a business or depreciable asset and if the asset had been acquired beyond the period of thirty six months from the date of sale, it would be a case of long term capital gains. In our humble understanding, the ratio of the order appears to be that the asset had ceased to be a business asset and had become an investment.

8. The order of the Cochin Bench in the case of Sakthi Metal Depot (supra) has been distinguished by the CIT(A) on the ground that in that case the property was specifically treated in the books as an investment whereas in the assessee’s case the flat has been shown in the Balance Sheet as a fixed asset and not as an investment. This however does not make any difference to the ratio of the said order for the reason that in the case before the Cochin Bench the assessee was a partnership firm and could therefore show the asset as an investment in the Balance Sheet whereas in the case before us the assessee is a private limited company and the Companies Act provides that the flat should be shown as fixed asset, even if it is not held as a business asset and is held as an investment. The character of the asset has been changed from that of a business asset to an investment shown as fixed asset in the Balance Sheet. Even otherwise, the manner in which the asset is shown in the accounts of the assessee may not be conclusive if there are facts to show that for a long period of time the asset had ceased to be a business asset and no depreciation was claimed or allowed thereon. In the present case not only was the claim of depreciation in respect of the flat discontinued by the assessee after the assessment year 1993-94, but the flat had been let out for rent from the assessment year 1994-95. For a few years, i.e. from the assessment years 1994-95 to 1999-2000, the rental income was offered as business income. However, from the assessment year 2000-01, the rental income was offered for assessment under the head “Property”. There is nothing to show that it was one of the businesses of the assessee, as per its object clause in the Memorandum of Association, to let out flats on rent. Even if that were to be so, when there is a specific head under which the rent has to be assessed, namely, “Income from house property”, the fact that it was assessed for some years as business income cannot be held against the assessee. The question is whether the character of the asset did change and the asset became a fixed asset or investment and ceased to be a business asset. In our opinion, the moment the assessee stopped claiming depreciation in respect of the flat and even let out the same for rent; it ceased to be a business asset. Accordingly the order of the Cochin Bench in Sakthi Metal Depot (supra) applies in favour of the assessee.

9. Our view is also fortified by another order of the Mumbai Bench of the Tribunal dated 31.01.2007 in the case of M/s Glaxo Laboratories (I) Ltd. for the assessment years 1989-90 to 1991-92. Though in this case the controversy was different, the Tribunal has noticed and observed that when certain flats which were earlier used for business purpose ceased to be so used and were let out for rent, the character of the asset had altered or changed and therefore no depreciation would be allowable on those flats. The fact to be noticed in this order is that the assessee had claimed depreciation on the flats for an earlier period and thereafter the flats were let out for rent, but still the assessee claimed depreciation against the rental income. The basis of the claim was that the flats continued to remain in the block of assets. The claim was disallowed by the Tribunal on the ground that since the user of the flats was changed, the character of the assets also underwent a change and they can no longer be considered as business assets.

The principle of this order, though laid down in a different context would support the assessee in the sense that it is possible for a business asset to change its character into that of a fixed asset or investment.

10. In the present case there is also no dispute that the flat under consideration was purchased by the assessee in the year 1987. It was thus held for a period of more than thirty six months and therefore a long term capital asset. Accordingly, the capital gains is directed to be assessed as long term capital gains after allowing the benefit of cost indexation as claimed by the assessee.”

9. We noted from the above that the assessee’s gain is arising out of sale of office premises is to be assessed as long term capital gain and consequential relief is to be allowed.

10. As regards to the aspect of allowance of cost of improvement claimed by assessee, we noted that the assessee is unable to file any evidence before the lower authorities regarding incurring of cost of improvement. Now, before us, the assessee contended that this is almost the transaction of the year 2003-04 and it is 16-year-old matter, there are chances that evidences are not available with the assessee. He stated that in case the matter is restored back to the file of the AO, he can file the evidences in the shape of balance sheets wherein, addition made to the office premises can be proved, which are records of the Department.

11. We noted that assessee had incurred various expenses on improvement of the 4 galas in the nature of certain architectural changes, during the A.Y. 2004-05 amounting to Rs. 46,45,700/- which was duly explained from the Schedule of Fixed Assets in the Audited Balance Sheet of the company for FY 2003-04. During the course of assessment proceedings, the AO had asked the AR of the assessee firm to produce various documentary evidences in order to substantiate the cost of acquisition as claimed. We direct the assessee to produce all the relevant evidences before AO and AO will consider the relevant accounts of the assessee including schedule of fixed assets from the balance sheet and will decide the issue afresh. Hence, this issue is set aside to the file of the AO.

12. In the result, the appeal of assessee is partly allowed.

(Order pronounced in the open court on 19.06.2019)

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