Cholamandalam MS General Insurance Company Limited, CHENNAI V. ACIT, CHENNAI

ITA 1483/CHNY/2015

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 8110 (ITAT-CHENNAI)
• Duration Of Justice: 7 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-01-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 04-11-2015
• Assessment Year: 2003-2004
• Appeal Filed On: 18-06-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A B KOLI IRS
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Depreciation; Cost of acquisition; Valuation report
• Section: 37(1)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI , . , ! ' BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER ./ I.T.A. NO.1483/MDS/2015 ! # $# / ASSESSMENT YEAR : 2003-2004 M/S. CHOLAMANDALAM MS GENERAL INSURANCE COMPANY LTD, DARE HOUSE 2 ND FLOOR, NO.2, N.S.C. BOSE ROAD CHENNAI 600 001. VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, LARGE TAX PAYER UNIT, CHENNAI. [PAN AABCC 6633K ] ( / APPELLANT) ( /RESPONDENT) %& ' ( / APPELLANT BY : SHRI. R. VIJAYARAGHAVAN, ADVOCATE )*%& ' ( /RESPONDENT BY : SHRI. A.B. KOLI, IRS, JCIT. ' + / DATE OF HEARING : 04-11-2015 ,-$ ' + / DATE OF PRONOUNCEMENT : 28-01-2016 / O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER : THE APPEAL FILED BY THE ASSESSEE COMPANY IS DIREC TED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEA LS)-VII, CHENNAI IN ITA TR.12/13-14/LTU(A), DT. 30.01.2015 FOR THE ASSESSMENT YEAR 2003-2004 PASSED U/S.143(3) AND 250 OF THE INCOME T AX ACT, 1961. ITA NO. 1483/MDS/2015 :- 2 -: 2. THE ASSESSEE HAS RAISED GROUNDS IN RESPECT OF TWO DISALLOWANCE BY THE ASSESSING OFFICER (I) DISALLOWA NCE OF PRE-OPERATIVE EXPENSES (II) DEPRECIATION ON BUILDING. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE I S IN THE BUSINESS OF GENERAL INSURANCE AND WAS INCORPORATE D ON 2 ND NOVEMBER, 2001 AND OBTAINED IRDA LICENSE ON 15 TH JULY, 2002 AND FILED RETURN OF INCOME DECLARING LOSS OF >2,75,21,4 24/- ON 27.11.2013. THE RETURN OF INCOME WAS PROCESSED U/S.143(1) OF TH E ACT AND SUBSEQUENTLY, THE CASE WAS TAKEN UP FOR SCRUTINY AN D NOTICE U/S.143(2) OF THE ACT WAS ISSUED. IN COMPLIANCE TO THE NOTICE , THE ASSESSEES AUTHORISED REPRESENTATIVE APPEARED AND FILED DETAIL S AS CALLED FOR. THE ASSESSING OFFICER AFTER VERIFYING THE SUBMISSIO NS DEALT WITH THE ISSUE ON PRE-OPERATIVE EXPENSES . THE LD. AUTHORIS ED REPRESENTATIVE EXPLAINED THAT BUSINESS OF GENERAL INSURANCE COMPUT ATION WILL BE BASED ON SPECIAL PROVISIONS APPLICABLE U/S.44 OF TH E ACT AND PART B OF SCHEDULE I OF INCOME TAX ACT. COMPUTATION OF BUSI NESS OTHER THAN LIFE INSURANCE WILL BE MADE AS PER IRDA NORMS. THE ASSESSEE CLAIMED AN EXPENDITURE OF >2,86,22,000/- AS A PRE-OPERATIVE EXPENSES AS PER THE ANNUAL ACCOUNTS SUBMITTED BEFORE THE INSURANCE AUTHORITIES AND SUCH EXPENDITURE HAS BEEN INCURRED OTHER THAN RELAT ED TO INSURANCE ITA NO. 1483/MDS/2015 :- 3 -: BUSINESS. BUT FOR THE PURPOSE OF INCOME TAX EXPEN DITURE DEDUCTION WAS CLAIMED. THE PRE-OPERATIVE EXPENSES CONSISTS OF EXPENDITURE INCURRED FOR THE COMMENCEMENT OF THE BUSINESS TILL THE ACTUAL BUSINESS OPERATIONS AND ALSO SOME OF THE EXPENDITURE CAN BE CLAIMED SEPARATELY AND EXPLAINED THE METHODOGLY OF CALCULATION OF INCO ME OF INSURANCE BUSINESS AND ALSO TYPE OF EXPENDITURE INCURRED AND IN COMPLIANCE TO THE SHOW CAUSE NOTICE, THE ASSESSEE FILED DETAI LS OF COMPANY INCORPORATION AND EXPENDITURE, AND OBSERVED IN ASS ESSING OFFICER ORDER AT PARA 1.4 AS UNDER:- THE COMPANY WAS INCORPORATED IN NOVEMBER, 2001. THE FIRST INSURANCE POLICY WAS BOOKED ONLY IN OCT. 2002 ON ACCOUNT OF LICENSING /PRODUCT APPROVALS FROM IRDA. IN THE BOOKS, THE EXPENDITURE INCURRED TILL THE DATE OF LICENSE (JULY 15, 2002) WAS AGGREGATED AMOUNT TO >2,79,62,000/- AN CLAIMED IN THE A.Y. 2003-2004. THE BUSINESS OF THE COMPANY WAS RE ADY LEGALLY IN NOV. 2001 ITSELF. THEREFORE, THE EXPEND ITURE INCURRED FROM THE TIME THE BUSINESS OF THE COMPANY WAS READY IS AN ALLOWABLE DEDUCTION. THE COMPANY HAD W RITTEN OFF THE ENTIRE EXPENDITURE INCURRED PRIOR TO THE ISSUE OF THE FIRST POLICY, IN THE YEAR IN WHICH FIRST POLICY WAS ISSUE D. AS THE EXPENDITURE IS OF REVENUE NATURE THE SAME IS ALLOWA BLE. WITHOUT PREJUDICE TO THE SAME OUT OF THE EXPENDITU RE CLAIMED AS REVENUE, >1,41,77,000/- REPRESENTS COST OF STAFF ON DEPUTATION AND RECRUITMENT AND TRAINING GIVEN TO EM PLOYEES FOR CUSTOMIZING AND IMPLEMENTING THE SOFTWARE. THI S EXPENDITURE SHOULD BE ADDED TO THE COST OF ACQUISIT ION AND IMPLEMENTATION OF SOFTWARE AND ACCORDINGLY, DEPRECI ATION BE GRANTED ON THE SAME. AND THE BALANCE EXPENDITURE I NCURRED DURING THE PREVIOUS YEAR RELEVANT TO THE A.Y. 2003- 04 SHOULD BE ALLOWED AS DEDUCTION . ITA NO. 1483/MDS/2015 :- 4 -: THE ASSESSING OFFICER ON VERIFICATION OF SUCH INFOR MATION HAS MADE A FINDING THAT THE ASSESSEE IS PROVIDING A MISLEADING INFORMATION IN ORDER TO CLAIM HIGHER EXPENDITURE AND ALSO HIGHER DEPRECI ATION. TO COUNTER COMMENTS OF THE ASSESSING OFFICER, THE ASSESSEE HAS FILED DETAILED REPLY ABOUT STAGES OF INCURRING OF EXPENDITURE REFE RRED AT PARA 1.7 OF THE ASSESSMENT ORDER. 'THE PREOPERATIVE EXPENSES CLAIMED BY THE COMPANY H AS BEEN TOWARDS EXPENSES INCURRED FROM THE DATE OF INCORPORATION (2.11.01) TO THE DATE OF FINAL APPROV AL GIVEN BY IRDA (R3 LICENSE) TO START THE INSURANCE BUSINESS T HERE ARE THREE STAGES OF LICENSING ISSUED BY IRDA VIA R1, R2 & R3 I.R1 STAGE: THIS IS THE FIRST APPLICATION TO BE MADE BY THE COMPANY TO IRDA PROPOSING TO DO INSURANCE BUSINESS. THE DETAILS SOUGHT IN R1 ESSENTIALLY INVOLVES BACKGROUND OF THE PROMOTING COMPANY AND THE PROMOTERS, THE CREDENTIAL S OF THE BOARD OF DIRECTORS AND SENIOR EXECUTIVES, THE O RGANIZATION STRUCTURE, SUMMARY OF FINANCIAL INCLUDING 5 YEARS PROJECTIONS, KEY RATIOS AND THE FINANCIALS OF THE P ROMOTER COMPANY. WE HAD OBTAINED THE R1 CLEARANCE FROM IRDA ON 28.12.01. 2. R2 STAGE: ONCE R 1 APPROVAL IS OBTAINED FROM IRDA THE COMPANY HAS TO FILE THE R2 APPLICATION, WHICH COVE RS THE BUSINESS STRATEGY, BUSINESS PLANS, ORGANIZATION STR UCTURE AND OTHER OPERATIONAL PLANS. THE COMPANY ALSO NEEDS TO GIVE INFORMATION WITH REGARD TO THE PRODUCTS PROPOSED TO BE SOLD, CHANNELS OF DISTRIBUTION, MARKETING PLANS, UNDERWRI TING PLANS, PROPOSED INVESTMENT POLICY, PLAN ON INVESTME NTS AND APPLICATION OF INFORMATION TECHNOLOGY, CUSTOMER SER VICING, REINSURANCE POLICIES AND DIFFERENT LEVELS OF INTERN AL CONTROLS. THE R2 APPROVAL INDICATES AN IN-PRINCIPLE APPROVAL OF IRDA TO PROCEED WITH THE COMMENCEMENT OF INSURANCE BUSINESS SUBJECT TO COMPLIANCE WITH REGARD TO CERTAIN OTHER FORMALITIES AS PER IRDA REQUIREMENTS. WE HAD OBTAINED THE R2 CLEARANCE FROM IRDA ON 3.4.02 3. R3 STAGE : THE R3 APPROVAL IS FINAL APPROVAL REQUIRED TO BE OBTAINED BY THE COMPANY FROM IRDA AND ONLY ON RECEI PT OF ITA NO. 1483/MDS/2015 :- 5 -: THE SAME IT IS PERMITTED TO ISSUE POLICIES AND COLL ECT PREMIUM FROM ITS CUSTOMERS. WE HAD OBTAINED THE R3 CLEARANCE ON 14.7.02 THE PROCESS OF OBTAINING THE VARIOUS APPROV AL NORM S PRESCRIBED BY IRDA REQUIRES EXTENSIVE ANALYSIS OF DATA AND MARKET RESEARCH, FOR WHICH WE HAD TO INCUR EXPENDIT URE ON THE FOLLOWING HEADS : 1. RECRUITMENT AND TRAINING OF EMPLOYEES 2. SALARY AND STAFF WELFARE OF THE EMPLOYEES 3. TRAVEL AND RELATED EXPENSES OF EMPLOYEES 4. RENT , POWER AND RELATED OFFICE EXPENSES 5. PROFESSIONAL FEES PAID TO CONSULTANTS. THE ASSESSING OFFICER CONSIDERED THE EXPENDITURE W AS INCURRED PRIOR TO COMMENCEMENT OF BUSINESS AND SUCH EXPENDITURE IS CAPITAL IN NATURE AND DISALLOWED THE CLAIM AND MADE AN ADDITIO N. AGGRIEVED BY THE ORDER OF THE ASSESSING OFFICER, THE ASSESSEE PR EFERRED APPEAL BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS). 4. IN THE APPELLATE PROCEEDINGS AFTER EXPLAINING THE B USINESS OPERATIONS OF THE ASSESSEE COMPANY AND ARGUING THE GROUNDS OF THE APPEAL, THE LD.CIT(A) ACCEPTED THAT THERE IS A NEC ESSARY REQUIREMENT UNDER IRDA TO INCUR CERTAIN EXPENDITURE AT VARIOUS STAGES OF RI, R2 AND R3 BY THE COMPANY. THE COMMISSIONER OF INCOME T AX (APPEALS) HAS BIFURCATED CERTAIN EXPENDITURE WHICH HAS TO BE ALLOWED IN A PHASED MANNER AND UNILATERALLY CONCLUDED THAT INCURRED PRI OR TO COMMENCE OF BUSINESS AND CONCURRED WITH THE FINDINGS OF THE ASS ESSING OFFICER AND CONFIRMED THE ORDER. AGAINST THE ORDER OF THE COM MISSIONER OF ITA NO. 1483/MDS/2015 :- 6 -: INCOME TAX (APPEALS) , THE ASSESSEE FILED AN APPEAL BEFORE THE TRIBUNAL. 5. BEFORE THE TRIBUNAL, THE ASSESSEE HAS ARGUED ON THE GROUND OF CLAIM OF PRE-OPERATIVE EXPENDITURE AND RAISED AD DITIONAL GROUND IN RESPECT TO EXPENDITURE INCURRED AT RI, R2 AND R3 ST AGES, IF TOTAL PRE- OPERATIVE EXPENDITURE IS NOT ALLOWABLE WITHOUT PREJ UDICE TO THE GROUND IT SHOULD BE ALLOWED INDIVIDUALLY UNDER DIFFERENT S ECTIONS OF INCOME TAX ACT. THE ASSESSEE REITERATED HIS SUBMISSIONS THAT THE COMPANY WAS INCORPORATED ON 01.11.2011 AND OBTAINED LICENSE FRO M IRDA ON 14.07.2002 AND THE ASSESSEE HAS INCURRED EXPENDITUR E TO OBTAIN LICENSE TO CARRY ON GENERAL BUSINESS IN THREE STAGE S RI, R2 & R3 STAGES AND AT RI STAGE EXPENDITURE INCURRED AT >44.36 LAKH S, R2 STAGE EXPENDITURE INCURRED AT >88.76 LAKHS AND R3 STAGE E XPENDITURE INCURRED AT >108.10 LAKHS TOTAL AGGREGATING TO >236 .22 LAKHS AND EXPENDITURE INCURRED INCLUDES SOFTWARE DEVELOPMENT COST AND FEES PAID TO REGISTER OF COMPANIES TO INCREASE AUTHORIZED CAP ITAL. THE LD. AR SUBMITTED THAT EXPENDITURE HAS BEEN INCURRED WHOL LY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND NO PERSONAL EXPENSE S HAS BEEN CLAIMED. INSURANCE COMPANY HAS COMPLIED WITH BUSINE SS EXPEDIENCY THROUGH PROPER MAINTENANCE OF BOOKS OF ACCOUNTS AN D STATUTORY ITA NO. 1483/MDS/2015 :- 7 -: RECORDS AND DREW ATTENTION TO THE CHART SHOWING DIF FERENT TYPE OF EXPENDITURE INCURRED IN THREE STAGES AND THERE IS N O DISPUTE ABOUT GENUINESS EXCEPT THE NATURE OF EXPENDITURE AND TO S UPPORT HIS ARGUMENT RELIED ON THE JUDICIAL DECISIONS AND PLEAD ED FOR ALLOWING THE EXPENDITURE. 6. ON THE OTHER HAND, THE LD. DEPRTMENTAL REPRESENTATI VE RELIED ON THE ORDERS OF LOWER AUTHORITIES AND CONTE STED THE GROUND. 7. WE HEARD THE RIVAL SUBMISSIONS OF BOTH THE PARTIES , PERUSED THE MATERIAL ON RECORD AND ALSO JUDICIAL DECISIONS CITED. THE ASSESSEE COMPANY BEING IN GENERAL INSURANCE COMPANY HAD OBTA INED LICENSE FROM IRDA IN JULY 2002. THE NORMS OF IRDA ARE STAN DARD AND REGULATORY BODY FORMED UNDER THE STATUTE. THE EXPE NDITURE IS INCURRED IN COMPLIANCE TO THE GUIDELINES OF IRDA WH ICH REGULATES THE OPERATION OF INSURANCE BUSINESS. THE ASSESSING OFF ICER MADE DISALLOWANCE WITH FINDING THAT EXPENDITURE CANNOT B E ALLOWED U/SEC 37(1) OF THE ACT AND TREATED AS CAPITAL IN NATURE . THE EXPENDITURE INCURRED BY THE ASSESSEE COMPANY IN STAGES OF R1, R 2, AND R3, THE INCORPORATION OF THE COMPANY IS 02.11.2001 AND OBTA INED LICENCE FROM IRDA IN JULY, 2002 AFTER COMPLETION OF STAGES OF EX PENDITURE OF R1 AND R2 ONLY. BUT THE ASSESSEE CANNOT COMMENCE THE BUSI NESS AT STAGE R1 ITA NO. 1483/MDS/2015 :- 8 -: AND R2 UNLESS APPROVED FROM IRDA AT R3 STAGE IS OBT AINED. THE ASSESSEE COMPANY CANNOT BE SAID TO HAVE COMMENCED B USINESS UNLESS READY FOR ENTRY INTO INSURANCE CONTRACTS COMMERCIAL LY. WE ARE OF THE OPINION THAT THE LD.CIT(A) HAS VERIFIED THE EVIDENC E ON RECORD VIS-A-VIS THE EXPLANATIONS MADE BY THE ASSESSEE. WE DO NOT S EE ANY REASON TO INTERFERE WITH THE ORDER OF THE LD.CIT(A) AND WE UP HELD THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) ON THIS IS SUE AND DISMISS THE GROUND OF THE ASSESSEE. 8. THE ASSESSING OFFICER DISALLOWED DEPRECATION OF BUI LDING. THE BRIEF FACTS OF THE ISSUE IS AS UNDER:- THE ASSESSEE HAS PURCHASED A FLAT AT MUMBAI FOR AN AMOUNT OF >1,35,78,675/- INCLUDING COST OF REGISTRATION AN D OTHER INCIDENTAL EXPENSES AND CLAIMED DEPRECATION AT THE RATE OF 10% . IN THE HEARING PROCEEDINGS, THE LD. AUTHORISED REPRESENTATIVE PROD UCED PURCHASE AGREEMENT AND BIFURCATION OF PURCHASE CONSIDERATION . THE ASSESSING OFFICER FOUND THAT THE COST OF FLAT INCLUDES >1,00, 000/- AND >3,12,500/- REFUNDABLE DEPOSITS PAID TO PROMOTER OF THE FLAT AN D EXCLUDED FROM THE VALUE OF BUILDING. FURTHER CALCULATED COST OF ACQU ISITION OF FLAT AT >6,800/- FOR THE AREA AND MEASURING 1785 SQ.FT AND OBSERVED THAT THE COST OF FLAT ALSO INCLUDES LAND VALUE AND DEPRECATI ON ON LAND IS NOT ITA NO. 1483/MDS/2015 :- 9 -: ALLOWED AND CALCULATED CONSTRUCTION COST AND ARRIVE D AT >750/- OUT OF TOTAL COST PER SQ.FT >6,800/- AND CONCLUDED THAT B ALANCE PERTAINING TO LAND COMPONENT AND ERRED IN BIFURCATING LAND AND B UILDING AND ALLOWED DEPRECIATION ON THE BUILDING COST, THE ASS ESSEE FILED EXPLANATION BY LETTER OBSERVED AT PARA NO.2.4 OF O RDER AS UNDER:- 'THE AMOUNT OF >1,35,79,000/-- BEING THE COST OF FI XED ASSET ON WHICH DEPRECATION IS CLAIMED WHOLLY PERTAI NS TO ONLY THE COST OF BUILDING AS PER THE ARTICLES OF AG REEMENT DTD.25.10.02, A COPY OF WHICH IS SUBMITTED TO YOUR' OFFICE. WE HAVE REPRODUCED THE RELEVANT CLAUSE IN THIS REGA RD FOR YOUR IMMEDIATE REFERENCE. CLAUSE O OF THE ARTICLES OF AGREEMENT FOR THE PURCHASE OF THE UNIT PREMISES READS AS 'THE PROMOTER VENDOR IS SELLING ON WHAT IS KNOWN AS OWNERSHIP BASIS, UNDER THE PROVISIONS OF THE MAHARASHTRA OWNERSHIP FLATS ( REGULATION OF THE PROMOTION OF CONSTRUCTION, SALE, MANAGEMENT AND TRANSFER) ACT, 1963 (HEREAFTER REFER RED A 'MOF AD') UNITS IN THE SAID BUILDING TO THE END AND INTENT THAT AFTER THE CONSTRUCTION OF THE SAID BUILDING IS COMPLETED AND THE OCCUPATION CERTI FICATE IN RESPECT THEREOF IS OBTAINED BY THE PROMOTER / VENDOR FROM MCGM THE SAID BUILDING WOULD BE SUBMITTED AS PER THE PROVISIONS OF MOF ACT TO THE PROVISIONS OF THE MAHARASHTRA APARTMENT OWNERSHIP ACT, 1970 AS AFORES AID. ACCORDINGLY THE PROMOTER/ VENDOR HAD AGREED TO EARMARK, ALLOT AND SELL THE CONFIRMING PARTY, OFFIC E PREMISES, BEING UNIT NO.1 ON THE SIXTH FLOOR OF THE SAID BUILDING ADMEASURING 165.83 SQ.MTS. EQUIVALENT TO 1785 SQ.FT. FOR THE CONSIDERATION AND ON THE TERMS AND CONDITIO NS RECORDED IN THE LETTER OF INTENT. FROM THE ABOVE, I T IS VERY CLEAR THAT THE PROMOTER / VENDOR SOLD ONLY THE UNIT UNDER OWNERSHIP BASIS TO THE PURCHASER I.E. THE COMPANY A ND THE ENTIRE COST IS ATTRIBUTABLE TO THE BUILDING ONLY AN D NOT LAND. ITA NO. 1483/MDS/2015 :- 10 -: THE ASSESSEES CONTENTION THAT THE TOTAL AMOUNT REP RESENTS COST OF ACQUISITION PAID TO THE PROMOTER AND NOT AS HOLDE R OF EQUITY SHARE IN PRIVATE LIMITED COMPANY WHICH HOLD THE LAND ON LEAS E. ON PERUSAL OF THE AGREEMENT IT WAS FOUND IN CLAUSE (3) OF ARTICLE 6 OF THE AGREEMENT OBSERVED AT PARA 2.5 ASSESSING OFFICER IS AS UNDER :- ' THE LEASE IN RESPECT OF LAND UNDERNEATH. THE SAID BUILDING FORMING PART OF THE SAID PLOT DESCRIBED IN THE FIRST SCHEDULE HEREUNDER WRITTEN (TO BE GRANTED BY THE PROMOTER / VENDOR IN ACCORDANCE WITH THE TERMS AND CONDITIONS CONTAINED IN THIS AGREEMENT) WILL BE IN FAVOUR OF A PRIVATE LIMITED COMPANY AND THE MEMBERS OF SUCH PRIVATE LIMITED COMPANY SHALL ONLY BE DIFFERENT UNIT PURCHASERS WHO OWN UNITS IN THE SAID BUILDING AND EACH OF SUCH UNIT PURCHASERS SHALL HOLD 1 (ONE) EQ.SHARE OF SUCH PRIVATE LIMITED COMPANY, OF THE FA CE VALUE OF RS.L00/- ( RUPEES ONE HINDERED ONLY) PER UNIT ACQUIRED BY THEM AND THIS SHARE WILL BE ASSIGNABLE AND TRANSFERABLE ONLY ALONGSIDE AND INCIDENTAL TO THE SALE AND CONVEYANCE OF THE UNIT ACQUIRED BY THEM AND NOT SEPARATELY, SINCE SUCH SHARE OF THE PRIVATE LIMITED COMPANY WILL BE MARRIED TO AND WILL BE AN APPENDAGE OF OR APPURTENANT TO THE HOLDING BY THE OWNER ' THE LD. AUTHORISED REPRESENTATIVE EXPLAINED THAT TO TAL CONSIDERATION PAID TO THE PROMOTER IN RESPECT OF PURCHASE OF FLAT IS >1,35,78,675/- AND THE ASSESSEE AS A FLAT OWNER ALLOTTED ONE EQUI TY SHARE OF PRIVATE LIMITED COMPANY IN RESPECT OF LAND HOLDING AND SUCH SHARE IS ASSIGNABLE AND TRANSFERABLE ALONGWITH THE TRANSFER OF FLAT. BUT THE ASSESSING OFFICER PRESUMED THAT ASSESSEE HAS PAID H EAVY ITA NO. 1483/MDS/2015 :- 11 -: CONSIDERATION TO PRIVATE LIMITED COMPANY TO HOLD LE ASE RIGHT ON THE LAND AND CONCLUDED ON SUSPICION THAT THE VALUE OF THE LAND IS EQUAL TO ACQUISITION OF THE SHARE AND NO DEPRECIATION IS ALL OWED AND COMPLETED ASSESSMENT BY ALLOWING DEPRECIATION ON PROPORTIONA TE COST OF BUILDING AND DISALLOWED VALUE CLAIMED BY THE ASSESSEE. AGGR IEVED BY THE ORDER OF THE ASSESSING OFFICER, THE ASSESSEE FILED AN APP EAL BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS). 9. IN THE APPELLATE PROCEEDINGS, THE LD. COMMISSIONER OF INCOME TAX (APPEALS) RELIED ON THE FINDING OF THE A SSESSING OFFICER IN RESPECT OF SEGREGATION AND ACCEPTED THE ACTION OF T HE ASSESSING OFFICER PARTIALLY THE LD. AUTHORISED REPRESENTATIVE ARGUED THAT THE BUILDING AND LAND CANNOT BE SEGREGATED FOR THE PURPOSE OF DE PRECIATION AS THE ASSESSEE IS NOT HOLDING INDIVIDUAL UNIT OF LAND BUT UDS AS PER THE AGREEMENT AND THE ASSESSEE CAN ONLY HAVE INTEREST I N USAGE OF LAND. BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS) THE ASSESSEE FILED WRITTEN SUBMISSIONS AND ALSO AGREEMENT COPIES OF LA ND RELIED ON VARIOUS JUDICIAL DECISIONS. THE COMMISSIONER OF IN COME TAX (APPEALS) CALLED THE REMAND REPORT AND THE ASSESSEE HAS FILED OBJECTION/REPLY TO THE REMAND REPORT. THE COMMISSIONER OF INCOME TAX (APPEALS) ON SUBMISSIONS OF THE LD. AUTHORISED REPRESENTATIVE AN D MATERIAL FILED BEFORE THE ASSESSING OFFICER HELD THAT THE ACTION O F THE ASSESSING ITA NO. 1483/MDS/2015 :- 12 -: OFFICER INCORRECT AS THE LAND BENEATH THE BUILDING CAN NEVER BE IDENTIFIABLE INDIVIDUALLY IN OWNER NAME AND SUCH UN DIVIDED SHARE OF LAND LIMITED TO AREA OF FLAT. THE LD. COMMISSIONER OF INCOME TAX (APPEALS) HAS MADE A DISCRETION IN THE LOGIC APPLIE D BY THE ASSESSING OFFICER AND RELIED ON THE VARIOUS FACTUAL WORKING A ND BY CONCLUDED THAT THE ESTIMATION OF VALUE OF LAND BY THE ASSESSING O FFICER IS ON HIGHER SIDE AND NO YARDSTICK WAS FOLLOWED AND DIRECTED THE ASSESSING OFFICER TO ALLOW DEPRECATION ON 2/3 RD VALUE OF ACQUISITION AND DISALLOW DEPRECATION ON 1/3 RD VALUE OF THE PROPERTY AND PARTLY ALLOWED THE APPEAL. AGGRIEVED BY THE ORDER OF THE CIT(A) THE A SSESSEE HAS FILED AN APPEAL BEFORE THE TRIBUNAL. 10. BEFORE THE TRIBUNAL, THE LD. AUTHORISED REPRESENTAT IVE REITERATED GROUNDS THAT THE ASSESSEE HAS ACQUIRED FLAT AT MUMBAI FOR >1,35,78,675/-AND WHEREAS LEASE RIGHTS OF LAND ARE HELD BY PRIVATE LIMITED COMPANY IDENTIFIABLE WITH SHARE HOLDING ATT ACHED TO THE UNIT FLAT HOLDER. THE LD.AO HAS ESTIMATED THE COST OF C ONSTRUCTION AT >750/- PER SQFT AND THE DEPRECIATION ALLOWED ON SUCH REDUC ED VALUE IS A VERY LOW AND NOT ACCEPTABLE IN ANY BUSINESS PROPOSITION AS COMPOSITE RATE OF FLAT CONSIDERED FOR CALCULATION AND THE LD.COMM ISSIONER OF INCOME TAX (APPEALS) HAS RIGHTLY CONSIDERED THAT THE APPRO ACH OF THE ITA NO. 1483/MDS/2015 :- 13 -: ASSESSING OFFICER IS ILLOGICAL. THE LD.AR HAS EMPHA SIZED THAT THE LAND CANNOT BE DIFFERENTIATED SEPARATELY WITH THE FLAT A REA AND EACH ARE INTER DEPENDENT. THE COST OF FLAT INCLUDE THE UDS VALUE SO IT IS NOT A PRUDENT PRACTICE TO BREAK THE COMPOSITE RATE AND DE PRIVE DEPRECATION. THE LAND WAS HELD ON LEASE BY THE PRIVATE LIMITED C OMPANY AND THE CONSIDERATION WAS PAID ONLY IN RESPECT OF COMPOSITE VALUE OF FLAT AND ASSESSEE COMPANY HAS NO INDEPENDENT RIGHT OVER THE LAND AS THE TERMS OF AGREEMENT. THE ASSESSEE COMPANY HAS BEEN ALLOTTED SHARE IN PRIVATE LIMITED COMPANY TO THE EXTENT OF INDIVID END SHARE OF LAND OF FLAT. HENCE BIFURCATION BASED ON THE LAND COST A ND RELATING VALUE OF SHARE DOES NOT MAKE SENSE AND ASSESSEE IS DEPRIVED OF DEPRECATION. THE LD. AUTHORISED REPRESENTATIVE DREW ATTENTION TO THE PAPER BOOK FILED AND REFERRED TO PAGE NO.9 CONTAINING AGREEMEN T BETWEEN M/S.BPM INDUSTRIES PRIVATE LTD AND THE ASSESSEE COM PANY WHERE TERMS AND CONDITIONS WERE DISCUSSED. THE TERMS ARE VERY CLEAR ON ACQUISITION WHICH IS NOT DISPUTED AND THE AUTHORISE D REPRESENTATIVE PRAYED FOR ALLOWING THE DEPRECATION ON TOTAL COST O F FLAT. 11. ON THE OTHER HAND, THE LD. DEPARTMENTAL REPRESENTAT IVE RELIED ON THE ORDERS OF THE LOWER AUTHORITIES AND P RAYED FOR DISMISSAL OF APPEAL ITA NO. 1483/MDS/2015 :- 14 -: 12. WE HEARD THE RIVAL SUBMISSIONS OF BOTH THE PARTIES , PERUSED THE MATERIAL ON RECORD. THE LD. AUTHORISED REPRESE NTATIVE HAS EXPLAINED THE CLEAR TERMS OF AGREEMENT WITH THE BUI LDER BY RELYING ON THE AGREEMENT. THE CLAIM OF DEPRECATION BY THE ASSE SSEE COMPANY ON THE TOTAL COST INCLUDING REFUNDABLE DEPOSITS IS NO T ACCEPTED. AND ON THE ISSUE OF BIFURCATION OF LAND COST AND COST OF CONSTRUCTION. WE RELY TO THE EXTENT OF THE LOGICAL DECISION OF THE COMMIS SIONER OF INCOME TAX (APPEALS) ON THE ISSUE IN DISPUTE. THE LD. AR ACCEPTED THAT THERE ARE REFUNDABLE DEPOSITS AND THE ACTION OF THE ASSE SSING OFFICER IN ESTIMATING THE COST IS WITHOUT ANY BASIS AND THERE IS NO DOCUMENTARY EVIDENCE OR VALUATION REPORT EXCEPT MATHEMATICAL C ALCULATION. SO FAR AS THE SHARE HOLDING IS CONCERNED AS PER THE TERMS OF AGREEMENT, THE ASSESSEE DOES NOT HOLD ANY INDEPENDENT RIGHT OF LA ND AS A OWNER BUT ONLY HOLD A LEASE RIGHT OF LAND BY HOLDING SHARE IN PRIVATE LIMITED COMPANY WHICH IS TRANSFERRED ALONGWITH THE CHANGE O F OWNERSHIP OF FLATT. THE COMMISSIONER OF INCOME TAX (APPEALS) TH OUGH ALLOWED DEPRECATION AT 2/3RD VALUE IT WILL BE DIFFICULT TO ESTIMATE 2/3 VALUE WHERE THE COST IS ALREADY INCURRED. CONSIDERING TH E FACTS AND THE CIRCUMSTANCES AND DOCUMENTARY EVIDENCE, WE ARE OF T HE OPINION THAT THE PRACTICE PREVAILING ON HOLDING OF FLAT ON COMPO SITE VALUE BE ITA NO. 1483/MDS/2015 :- 15 -: ADOPTED. THEREFORE, WE ARE NOT CONCURRING WITH THE FINDINGS OF THE COMMISSIONER OF INCOME TAX (APPEALS) IN GRANTING PA RTIAL RELIEF AND WE SET ASIDE THE ORDER OF THE COMMISSIONER OF INCOM E TAX (APPEALS) ON THIS GROUND AND DIRECT THE ASSESSING OFFICER TO ALLOW DEPRECIATION ON THE COMPOSITE VALUE OF COST OF FLAT EXCLUDING TH E REFUNDABLE DEPOSIT. ACCORDINGLY, THE ASSESSEES GROUND IS PARTLY ALLOW ED. 13. IN THE RESULT, THE APPEAL OF THE ASSESSEE IN ITA NO.1483/MDS/2015 IS PARTLY ALLOWED. ORDER PRONOUNCED ON THURSDAY, THE 28TH DAY OF JA NUARY, 2016, AT CHENNAI. SD/- SD/- ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER ( . ) (G. PAVAN KUMAR) /JUDICIAL MEMBER / CHENNAI . / DATED: 28.01.2016 KV / ' )!+12 32$+ / COPY TO: 1 . %& / APPELLANT 3. 4+ () / CIT(A) 5. 278 )!+! / DR 2. )*%& / RESPONDENT 4. 4+ / CIT 6. 89# : / GF