M/s. Globe Textiles, Surat V. The Income Tax Officer, Ward-2(1), Now re-designated as Income Tax Officer, Ward 1(2)(6), Surat

ITA 1227/AHD/2016

• Counselvise Citation: [2018] 118 COUNSELVISE.COM (IT) 1924 (ITAT-SURAT)
• Duration Of Justice: 2 year(s) 7 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-12-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Assessment Year: 2011-2012
• Appeal Filed On: 09-05-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANUPAMA SINGLA
• Assessee Lawyers: RASESH SHAH
• Keywords: Business income; Depreciation; Principle of natural justice; Cost of acquisition; Unabsorbed depreciation
• Section: 143(3); 142(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL SURAT BENCH, SURAT BEFORE SHRI AMARJIT SINGH, ACCOUNTANT MEMBER & MS. MADHUMITA ROY, JUDICIAL MEMBER ITA NO.1227/AHD/2016 (ASSESSMENT YEAR : 2011-12) M/S. GLOBE TEXTILES, 45-46, HASHIMI ESTATE, UDHNA MAIN ROAD, SURAT-394 210. VS. ITO, WARD 2(1), SURAT. [PAN NO. AACFG 2121 J] ( APPELLANT ) .. ( RESPONDENT ) APPELLANT BY : MR. RASESH SHAH, A.R. RESPONDENT BY : MS. ANUPAMA SINGLA, SR. D.R DATE OF HEARING 20/11/2018 DATE OF PRONOUNCEMENT 14/12/2018 O R D E R PER MS. MADHUMITA ROY - JM: THE INSTANT APPEAL FILED BY THE ASSESSEE IS AGAINST THE ORDER DATED 25.02.2016 PASSED BY THE COMMISSIONER OF INCOME TAX (APPEALS)- II, SURAT ARISING OUT OF THE ASSESSMENT ORDER DATED 28.03.2014 FOR THE ASSESSMEN T YEAR 2011-12 PASSED BY THE ITO, WARD 2(1), SURAT UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 (THE ACT) WITH THE FOLLOWING GROUNDS: 1. ON FACTS AND CIRCUMSTANCES OF THE CASE, THE L EARNED CIT(A) HAS GROSSLY ERRED IN CONFIRMING THE ACTION OF THE LD. ITO IN NO T ALLOWING THE SET OFF OF THE BROUGHT FORWARD BUSINESS AND DEPRECIATION LOSS AGAINST THE PROFIT ON SALE OF DEPRECIABLE ASSETS, WHICH IS ERRONEOUS AND NEEDS 'TO BE ALLOWED IN THE INTEREST OF NATURAL JUSTICE AND EQUITY. 2. WITHOUT PREJUDICE TO THE AFORESAID GROUND OF APPEAL NO. 1 AND WITHOUT ADMITTING, EVEN OTHERWISE ON FACTS AND CIRCUMSTANCE S OF THE CASE, THE ID, - 2 - ITA NO.1227/A/16 GLOBE TEXTILE VS. ITO ASST.YEAR 2011-12 CIT(A) HAS GROSSLY ERRED IN CONFIRMING THE ACTION O F THE LD. ITO IN TREATING THE ENTIRE CAPITAL GAIN AS SHORT TERM CAPITAL GAIN WITHOUT APPRECIATING THAT FOR THE PURPOSE OF COMPUTATION OF CAPITAL GAIN, LAN D AND BUILDING ARE TWO SEPARATE AND DISTINCT ASSETS AND THEREFORE, THE CAP ITAL GAIN ARISING FROM SALE OF LAND WAS REQUIRED TO BE CONSIDERED AS LONG TERM CAPITAL GAIN AND NOT AS SHORT TERM CAPITAL GAIN AND TAXED ACCORDINGL Y, .WHICH IS ERRONEOUS AND NEEDS TO BE ALLOWED IN THE INTEREST OF NATURAL JUSTICE AND EQUITY. 3. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, ALTE R, SUBSTITUTE, MODIFY IN ANY OR ALL THE ABOVE GROUNDS OF APPEAL, IF NECESSARY, O N THE BASIS OF SUBMISSIONS TO BE MADE AT THE TIME OF PERSONAL HEAR ING. 2. THE MOOT POINT INVOLVED IN THIS PARTICULAR CASE AS TO WHETHER BROUGHT FORWARD BUSINESS AND DEPRECIATION LOSS CAN BE SET OFF AGAIN ST THE PROFIT ON SALE OF DEPRECIABLE ASSETS. IF YES, THEN HOW CAPITAL GAIN ARISING OUT O F THE SALE OF THE BUSINESS ASSETS BEING FACTORY LAND WITH BUILDING IS REQUIRED TO BE CALCUL ATED. 3. THE ASSESSEE BEING A PARTNERSHIP FIRM ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADING OF YARN AND GREY CLOTH FILED ITS RETURN OF INCOME ON 28.09.2011 DECLARING TOTAL INCOME OF RS. NIL FOR A.Y. 2011-12. UPON SCRUTINY N OTICE U/S 143(2) WAS ISSUED ON 03.08.2012 FOLLOWED BY A FURTHER NOTICE DATED 24.12 .2013 U/S 142(1) OF THE ACT ALONG WITH QUESTIONNAIRE UPON THE ASSESSEE. IT APPEARED FROM THE PROFIT AND LOSS ACCOUNT OF TH E ASSESSEE THAT IT HAS SOLD FIXED ASSETS BEING PLOT NO.A/12/21, UDHNA UDHYOG NAGAR, A MOUNTING TO RS.1,04,94,105/-; THE SAME BEING A FACTORY LAND ALONG WITH A BUILDING THE ASSESSEE CLAIMED DEPRECIATION AS ALSO SET OFF OF THE BROUGHT FORWARD BUSINESS AND DEPRECI ATION LOSSES. THE ASSESSEE, THEREAFTER, WAS SERVED WITH A SHOW-CAUSE NOTICE DATED 14.03.201 4 AS TO WHY THE SAID AMOUNT OF RS.1,04,94,105/- SHOULD NOT BE TREATED AS SHORT TER M CAPITAL GAIN FOR THE A.Y. 2011-12 AND ALSO WHY SUCH CLAIM OF SET OFF OF THE CARRIED FORWA RDED BUSINESS LOSS OF EARLIER YEAR SHOULD NOT BE DISALLOWED U/S 71 & 72 OF THE ACT. T HE EXPLANATION RENDERED BY THE - 3 - ITA NO.1227/A/16 GLOBE TEXTILE VS. ITO ASST.YEAR 2011-12 ASSESSEE WAS, HOWEVER, NOT FOUND ACCEPTABLE BY THE LEARNED AO. THE NET PROFIT OF THE ASSESSEE DERIVED AFTER DEDUCTING CURRENT YEAR BUSIN ESS LOSS AND DEPRECIATION BEING RS.88,78,792/- AS SHOWN IN P&L ACCOUNT WAS ULTIMATE LY ADDED TO THE TOTAL INCOME OF THE ASSESSEE BY THE LEARNED AO AGAINST WHICH APPEAL WAS PREFERRED. THE LEARNED CIT(A) IN TURN CONFIRMED THE SAME. HENCE, THE INSTANT APPEAL. 4. LEARNED ADVOCATE APPEARING FOR THE ASSESSEE AT T HE TIME OF THE HEARING OF THE MATTER SUBMITTED BEFORE US THAT THE ASSESSEE THOUGH WAS ENGAGED IN THE BUSINESS FOR MORE THAN 2 DECADES STARTED INCURRING DEPRECIATION LOSS IN THE INITIAL YEAR 2002-03 AND THEN EVEN BUSINESS LOSSES FROM A.Y. 2004-05. THUS, THE A SSESSEE DECIDED TO SELL OFF ITS BUSINESS ASSETS BEING THE FACTORY AND BUILDING THER EON. SINCE THE SAID FACTORY BUILDING WAS A BUSINESS ASSET AND NOT AN INVESTMENT, THE PRO FIT ON SALE THEREOF WAS OFFERED BY THE ASSESSEE AS BUSINESS INCOME AND THE CARRIED FORWARD UNABSORBED DEPRECIATION AND BUSINESS LOSS HAS BEEN SET OFF AGAINST THE SAME. IT WAS FURTHER SUBMITTED BY THE LEARNED AR THAT THE CONTENTION OF THE ASSESSEE THAT SINCE T HE ASSETS SOLD ARE BUSINESS ASSETS AND THE BROUGHT FORWARD LOSSES ARE ALLOWED TO BE SET OF F, WAS NOT FOUND ACCEPTABLE TO THE LEARNED AO THEN, THE ENTIRE PROFIT UNDER THE HEAD CAPITAL GAIN WITHOUT ALLOWING THE SET OFF OF BROUGHT FORWARD LOSSES, COULD NOT HAVE BEEN TAXED RATHER ALTERNATIVELY, THE LEARNED AO SHOULD HAVE TREATED LAND AND BUILDING AS TWO SEP ARATE AND DISTINCT ASSETS. SINCE THE LAND IS NOT A DEPRECIABLE ASSET AND THE SAME WAS AC QUIRED PRIOR TO MORE THAN 3 YEARS, THE CAPITAL GAIN ARISING OUT OF SALE OF SUCH LAND OUGHT TO HAVE BEEN TAXED AS LONG TERM CAPITAL GAIN AND NOT AS SHORT TERM CAPITAL GAIN AND THUS CO ULD HAVE BEEN CHARGED TO TAX ACCORDINGLY. THE LEARNED AR FURTHER RELIED UPON THE JUDGMENT PASSED BY THE HONBLE ITAT, MUMBAI BENCH IN THE MATTER OF DIGITAL ELECTRO NICS LTD.-VS-ACIT (2011) 135 TTJ (MUM) 419 IN SUPPORT OF HIS ARGUMENT. ON THE OTHER HAND, LEARNED DR RELIED UPON THE ORDERS PASSED BY THE AUTHORITIES BELOW. - 4 - ITA NO.1227/A/16 GLOBE TEXTILE VS. ITO ASST.YEAR 2011-12 5. WE HAVE HEARD THE RIVAL CONTENTIONS MADE BY THE PARTIES, PERUSED THE RELEVANT MATERIALS AVAILABLE ON RECORD. WE HAVE ALSO GONE TH ROUGH THE ORDER PASSED BY THE AUTHORITIES BELOW AND THE SUBMISSIONS MADE BY THE A SSESSEE. THE FOLLOWING WORKING OF THE PROFIT ON SALE OF THE BUSINESS ASSET HAS BEEN M ADE BY THE ASSESSEE IN SUPPORT OF HIS CASE: PARTICULARS AMOUNT (RS.) SALE CONSIDERATION 1,19,67,000 LESS: BROKERAGE ON SALE @ 1% 1,19,670 NET SALE CONSIDERATION 1,18,47,330 LESS : COST OF ACQUISITION 13,53,225 NET PROFIT ON SALE OF FACTORY LAND AND BUILDING 1,0 4,94,105 LESS: SET OFF OF LOSSES - CURRENT YEAR BUSINESS & DEPRECIATION LOSS - BROUGHT FORWARD BUSINESS LOSS 16,35,871 88,58,234 NET INCOME NIL IT APPEARS FROM THE RECORD THAT THE ASSESSEE WAS DI RECTED TO EXPLAIN AS TO WHY THE AMOUNT OF RS.1,04,94,105/- SHOULD NOT BE TREATED AS SHORT TERM CAPITAL GAIN FOR A.Y. 2011-12 AND THE CLAIM OF SET OFF OF CARRIED FORWARD BUSINESS LOSS AND DEPRECIATION LOSS OF EARLIER YEAR SHOULD NOT BE DISALLOWED AS PER PROVIS ION OF SECTION 71 & 72 OF THE ACT. IN REPLY WHEREOF, THE ASSESSEE DULY EXPLAINED THAT EVE N IF THE GAIN ON SALE OF BUSINESS ASSET IS TAXABLE AS CAPITAL GAINS, ITS CHARACTER REMAINED THAT OF BUSINESS INCOME INASMUCH AS THE GAINS AROSE ON TRANSFER OF A BUSINESS ASSET ON WHIC H DEPRECIATION WAS ALLOWED. IF THAT BE SO, THEN THE ASSESSEE IS ENTITLED FOR SET OFF OF BR OUGHT FORWARD BUSINESS AND DEPRECIATION LOSSES AGAINST THE SAID CAPITAL GAINS. HOWEVER, THE SAID PLEA OF THE ASSESSEE WAS NOT DULY CONSIDERED BY THE LEARNED AO IN ITS PROPER PROSPECT IVE AND HE THEN DISALLOWED THE ENTIRE SET OFF OF BROUGHT FORWARD AND DEPRECIATION LOSS AG GREGATING TO RS.88,77,695/- PERTAINING TO THE EARLIER YEARS AGAINST THE PROFIT ON SALE OF DEPRECIABLE ASSET BY TREATING THE SAME AS SHORT TERM CAPITAL GAIN. FURTHER THAT ON THAT BASIS THE LEARNED AO HOLD THAT SET OFF OF BROUGHT FORWARD BUSINESS AND DEPRECIATION LOSS CANN OT BE ALLOWED AGAINST SHORT TERM - 5 - ITA NO.1227/A/16 GLOBE TEXTILE VS. ITO ASST.YEAR 2011-12 CAPITAL GAIN. IN APPEAL, WE FIND NO DELIBERATION HA S BEEN MADE BY THE APPELLATE AUTHORITY ON THIS ASPECT ONLY ON THE SOLE GROUND THAT THE ASS ESSEE HAS NOT FILED THE DETAILS OF THE SALE DEED IN THE ABSENCE OF WHICH THE BASIS OF THE CLAIM MADE BY THE ASSESSEE COULD NOT BE ASCERTAINED. THE JUDGMENT RELIED UPON BY THE ASSESS EE ON THIS COUNT PASSED BY THE HONBLE ITAT, MUMBAI BENCH IN THE CASE OF DIGITAL ELECTRONICS LTD.-VS-ACIT (2011) 135 TTJ (MUM) 419 HAS ALSO BEEN TAKEN CARE OF BY US. IT IS HELD THAT THE INCOME EARNED BY THE ASSESSEE IN THE RELEVANT YEAR ON SALE OF FAC TORY BUILDING, PLANT AND MACHINERY ALTHOUGH NOT TAXABLE AS PROFIT AND GAINS OF BUSINES S OR PROFESSION IS AN INCOME IN THE NATURE OF BUSINESS THOUGH ASSESSED AS CAPITAL GAIN U/S 50 AND, THEREFORE, THE ASSESSEE IS ENTITLED TO SET OFF OF BROUGHT FORWARD LOSSES AGAIN ST SUCH CAPITAL GAINS. THE SAME VIEW HAS ALSO BEEN UPHELD IN ANOTHER MATTER BY THE APEX COUR T IN THE CASE OF CIT-VS-COCANADA RADHASWAMI BANK LTD. (1965) 57 ITR 306 (SC). TAKING INTO CONSIDERATION, THE CASE MADE OUT BY THE ASSESSEE WHICH IS EVIDENT ON RECORD AND ALSO RELYING UPON THE RATIO SETTLED BY THE JUDGMENT AS DISCUSSED ABOVE, WE ARE OF THE CONSIDERED VIEW THAT THE SET OFF OF BROUGHT FORWARD DEPRECIATION AND BUSINESS LOSS A GAINST CAPITAL GAINS IS ALLOWABLE IN THE PRESENT FACTS AND CIRCUMSTANCES OF THE CASE AND THE ASSESSEE IS ENTITLED TO SUCH CLAIM. NOW WE PROPOSE TO DEAL WITH THE MODE OF CALCULATION OF SUCH CAPITAL GAIN OUT OF THE SALE OF BUSINESS ASSETS COMPRISING OF FACTORY P REMISES WITH LAND. AT THE VARY ON SET IT HAS BEEN CONTENDED BEFORE US BY THE ASSESSEE THAT T HE SALE DEED HAS DULY BEEN SUBMITTED BEFORE THE LEARNED CIT(A) WHO MIGHT HAVE MISSED THE SAME WHILE CONSIDERING THE CASE OF THE ASSESSEE. WE FIND THAT WHILE COMPUTING THE C APITAL GAIN ON SALE OF FACTORY BUILDING INCLUDING LAND, THE LEARNED ITO HAS ERRONEOUS TREAT ED THE ENTIRE CAPITAL GAIN AS SHORT TERM CAPITAL GAIN. WE DO NOT HESITATE TO OBSERVE THAT TH E LEARNED AO FAILED TO CONSIDER THAT LAND AND BUILDING ARE TWO SEPARATE AND DISTINCT ASS ETS; THE CAPITAL GAIN ARISING FROM THE SALE OF LAND OUGHT TO HAVE BEEN CONSIDERED AS LONG TERM CAPITAL GAIN AND NOT AS SHORT TERM CAPITAL GAIN AND TAXED ACCORDINGLY ON THE SOLE PREM ISES THAT THE LAND HAS BEEN ACQUIRED BY - 6 - ITA NO.1227/A/16 GLOBE TEXTILE VS. ITO ASST.YEAR 2011-12 THE ASSESSEE FOR MORE THAN 36 MONTHS AND NO DEPRECI ATION HAS BEEN CLAIMED BY THE ASSESSEE IN RESPECT THEREOF AND THUS THE DEEMING PR OVISION OF SECTION 50(2) ARE NOT APPLICABLE IN RESPECT OF THE SALE OF LAND. WE FIND A SEPARATE WORKING SHOWING THE CAPITAL GAIN/PROFIT ON SALE OF FACTORY BUILDING AS SHORT TE RM CAPITAL GAIN AND PROFIT ON SALE OF LAND AS LONG TERM CAPITAL GAIN HAS BEEN SUBMITTED BY THE ASSESSEE BEFORE US WHICH IS ALSO MADE AVAILABLE TO THE LEARNED AR. THE SAME IS ALSO EVIDE NT FROM THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE LEARNED CIT(A) RECORDED IN THE ORDER IMPUGNED BEFORE US. 6. IN THIS ASPECT, THE ASSESSEE RELIED UPON THE JUD GMENT PASSED IN THE MATTER OF CIT- VS-CITIBANK N.A. [261 ITR 0570] [BOM.][HC]. IN THAT PARTICULAR CASE, THE LEARNED TRIBUNAL HELD THAT FOR THE PURPOSE OF COMPUTATION O F CAPITAL GAIN LAND AND BUILDING ARE TWO SEPARATE AND DISTINCT ASSETS AND THEREFORE PROF ITS ARISING FROM THE SALE OF LAND WAS REQUIRED TO BE CONSIDERED AS LONG TERM CAPITAL GAIN WHEREAS PROFITS ARISING OUT OF THE SALE OF FACTORY BUILDING WAS REQUIRED TO BE CONSIDERED A S SHORT TERM CAPITAL GAIN. IT IS NEEDLESS TO MENTION THAT THE RATIO OF THE JUDGMENT SQUARELY APPLICABLE TO THE INSTANT CASE TAKING INTO CONSIDERATION THE PARTICULAR FACTS AND CIRCUMS TANCES OF THE MATTER ON RECORD. WE, THEREFORE, CONSIDERING THE ENTIRE FACTS OF THE CASE , THE SUBMISSIONS MADE BY THE ASSESSEE, THE OBSERVATIONS MADE BY THE AUTHORITIES BELOW AND ULTIMATELY THE JUDGMENTS RELIED UPON BY THE ASSESSEE IN SUPPORT OF HIS CASE ARE OF THE O PINION THAT THE CALCULATION OF CAPITAL GAIN IS REQUIRED TO BE CONSIDERED IN THE LIGHT OF THE OB SERVATION MADE HEREINABOVE. THE TAX ON CAPITAL GAIN IS THUS REQUIRED TO BE CALCULATED ACCO RDINGLY BY THE LEARNED AO. IN THAT VIEW OF THE MATTER, WE SET ASIDE THE ORDER AND REMIT THE ISSUE TO THE FILE OF THE LEARNED AO TO CALCULATE THE CAPITAL GAINS ARISING OUT OF TRANSFER OF THE LAND INCLUDING FACTORY BUILDING AS INDICATED ABOVE AND ALSO TO ALLOW SET OFF OF UNOBSE RVED DEPRECIATION AND BUSINESS LOSS OF THE ASSESSEE FIRM AGAINST SUCH CAPITAL GAIN. HOWEVE R, WE MAKE IT CLEAR WHILE MAKING THE SAME THE LEARNED AO SHOULD GIVE THE REASONABLE OPPO RTUNITY OF HEARING TO THE ASSESSEE - 7 - ITA NO.1227/A/16 GLOBE TEXTILE VS. ITO ASST.YEAR 2011-12 AND ALSO TO CONSIDER ANY EVIDENCE WHICH THE ASSESSE E MAY CHOOSE TO RELY UPON AT THE TIME OF HEARING OF THE ASSESSMENT PROCEEDINGS. 7. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. THIS ORDER PRONOUNCED IN OPEN COURT ON 14/12/2018 SD/- SD/- ( AMARJIT SINGH ) ( MS. MADHUMITA ROY ) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD; DATED 14/12/2018 PRITI YADAV, SR.PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / CONCERNED CIT 4. () / THE CIT(A)-II, SURAT. 5. , ! ' , #$%% / DR, ITAT, AHMEDABAD 6. &' () / GUARD FILE. / BY ORDER, //TRUE COPY// / ( DY./ASSTT.REGISTRAR) !, #$ / ITAT, AHMEDABAD 1. DATE OF DICTATION 10/12/2018 (DICTATION PAGES 9) 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 11/12/2018 3. OTHER MEMBER 4. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.P. S./P.S 12/12/2018 5. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 6. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P .S./P.S. 7. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 8. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK ... 9. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER.. 10. DATE OF DESPATCH OF THE ORDER