KOMAC INVESTMENTS & FINANCE P. LTD, MUMBAI V. ITO 2(2)(2), MUMBAI

ITA 1508/MUM/2010

• Counselvise Citation: 150819914 RSA 2010
• Duration Of Justice: 1 year(s) 2 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-04-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Next Hearing Date: 27-01-2011
• Assessment Year: misc
• Appeal Filed On: 25-02-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A K NAYAK
• Assessee Lawyers: VENUGOPAL C NAIR
• Keywords: Capital asset; Depreciation; Unabsorbed depreciation

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH G MUMBAI BEFORE BEFORE BEFORE BEFORE SHRI SHRI SHRI SHRI D.K. AGARWAL D.K. AGARWAL D.K. AGARWAL D.K. AGARWAL ( (( (J JJ JM) M)M) M) AND AND AND AND SHRI R.K. PANDA SHRI R.K. PANDA SHRI R.K. PANDA SHRI R.K. PANDA ( (( (A AA AM) M)M) M) ITA NO.1508/MUM/2010 (ASSESSMENT YEAR-2005-06) M/S. KOMAC INVESTMENTS & FINANCE PVT. LTD., 106, WADIA BLDG., 22 DR. S.A. BRELVI ROAD, FORT, MUMBAI-400 021 PAN-AAACK2473J VS. THE ITO 2(2)(2), AAYAKAR BHAVAN, MUMBAI-400 020 (APPELLANT) (APPELLANT) (APPELLANT) (APPELLANT) (RESPONDENT) (RESPONDENT) (RESPONDENT) (RESPONDENT) APPELLANT BY: SHRI VENUGOPAL C. NAIR RESPONDENT BY: SHRI A.K. NAYAK O R D E R O R D E R O R D E R O R D E R PER PER PER PER R.K. PANDA(AM) R.K. PANDA(AM) R.K. PANDA(AM) R.K. PANDA(AM) THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER DT. 12.12.2009 PASSED BY THE LD.CIT(A)-5, MUMBAI RELATI NG TO ASSESSMENT YEAR 2005-06. 2. THE ASSESSEE IN ITS GROUND OF APPEAL HAS CHALLENGED THE ORDER OF THE CIT(A) IN CONFIRMING THE ACTION OF THE ASSESSING OF FICER IN DENYING THE SET OFF OF GAIN ON SALE OF A LONG TERM CAPITAL ASSET A GAINST THE BROUGHT FORWARD LONG TERM CAPITAL LOSS ONLY DUE TO THE DEEM ING PROVISIONS OF SEC. 50. 3. THE FACTS OF THE CASE IN BRIEF ARE THAT THE ASSE SSEE COMPANY IS ENGAGED IN THE BUSINESS OF INVESTMENT, FINANCE AND BROKERAGE. THE ITA NO. 1508/M/2010 2 ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS SHOWN TO HAVE DERIVED INCOME FROM CAPITAL GAIN AMOUNTING TO `. 53,16,397/ - ON ACCOUNT OF SALE OF OFFICE PREMISES OWNED BY IT ON WHICH DEPRECIATION WAS CLAIMED. HE NOTED THAT THERE IS A BUSINESS LOSS IN THE YEAR AT ` 11,4 6,422/-. THE ASSESSEE HAS ALSO BROUGHT FORWARD LONG TERM LOSS OF ` 47,13, 107/-. THE ASSESSEE HAS SET OFF THE CAPITAL GAIN OF THIS YEAR WITH THE BUSINESS LOSS OF THE YEAR AND BROUGHT FORWARD CAPITAL LOSS OF THE EARLIER YEA R. HE NOTED THAT DUE TO THE SALE OF THE OFFICE PREMISES THE BLOCK OF ASSET HAS CEASED TO EXIST. THEREFORE IN VIEW OF THE PROVISIONS OF SEC. 50(2), THE INCOME RECEIVED OR ACCRUING AS A RESULT OF SUCH TRANSFER OR TRANSFERS SHALL BE DEEMED TO BE THE CAPITAL GAINS ARISING FROM THE TRANSFER OF SHOR T TERM CAPITAL ASSET. HE THEREFORE ASKED THE ASSESSEE TO JUSTIFY THE CLAIM O F SET OFF. 4. THE ASSESSEE RELYING ON THE DECISION OF THE BO MBAY HIGH COURT IN THE CASE OF ACE BUILDERS PVT. LTD. REPORTED IN 281 ITR 210 SUBMITTED THAT THE FICTION CREATED U/S. 50 IS CONFINED TO THE COM PUTATION OF CAPITAL GAINS ONLY AND CANNOT BE EXTENDED BEYOND THAT. IT CANNOT BE SAID THAT SEC. 50 CONVERTS A LONG TERM CAPITAL ASSET INTO A SHORT TER M CAPITAL ASSET. THEREFORE THE ASSESSEE HAS CORRECTLY CLAIMED THE SE T OFF. 5. HOWEVER THE ASSESSING OFFICER WAS NOT CONVINCED WITH THE EXPLANATION GIVEN BY THE ASSESSEE. HE NOTED THAT T HE DECISION OF THE JURISDICTIONAL HIGH COURT RELATES TO ALLOWABILITY O F EXEMPTION U/S. 54E FOR INVESTMENT MADE AND HAS NO APPLICATION AS FAR AS SE C. 50 IS CONCERNED. THE RULING ALSO SAYS THAT THE RESTRICTION U/S. 50 I S LIMITED TO COMPUTATION OF CAPITAL GAINS ONLY AND NOT THE EXEMPTION PROVISIONS . THEREFORE THE ITA NO. 1508/M/2010 3 DECISION IS NOT APPLICABLE TO THE CASE OF THE ASSES SEE. HE ACCORDINGLY REJECTED THE CLAIM OF SET OFF. 6. BEFORE THE LD. CIT(A) IT WAS SUBMITTED THAT ONLY DUE TO THE DEEMING PROVISIONS OF SEC.50, A GAIN IN RESPECT OF A LONG T ERM CAPITAL ASSET IS DEEMED AS A SHORT TERM CAPITAL GAIN, AND THAT THE A SSET ITSELF DOES NOT BECOME SHORT TERM AND HENCE, NO PRIVILEGE, BE IT EX EMPTION U/S.54/54EC OR OF SET OFF LOSSES AS PER PROVISIONS OF SEC.74(1) (B) BE DENIED TO THE APPELLANT. SEC. 74(1)(B) DOES NOT USE THE TERM SHOR T TERM CAPITAL GAIN PER SE. THUS, THE INTENTION OF THE LEGISLATURE HAS TO B E THAT OF A GAIN IN RESPECT OF AN ASSET WHICH IS NOT A SHORT TERM OR OTHERWISE. THUS, WHAT IS IMPORTANT IS THE ASSET BEING SHORT TERM OR OTHER THAN SHORT T ERM AND NOT THE GAIN WHICH IS SHORT TERM, DEEMED SHORT TERM OR LONG TERM . ATTENTION WAS ALSO DRAWN TO THE CASE OF DR. (MRS) SUDHA S TRIVEDI V IT O. IT WAS STATED THAT THE CASE OF ACE BUILDERS (P) LTD. (SUPRA) APPLIED TO TH E APPELLANT ON ACCOUNT OF THE FACT THAT THE ASSET TRANSFERRED BY THE ASSESSEE WAS HELD FOR A PERIOD OF MORE THAN 36 MONTHS MAKING IT AS AN ASSET UNDER LON G TERM CAPITAL ASSET AS PER SEC 2(29A). SEC 74(1)(B) IS AN INDEPENDENT P ROVISION NOT CONTROLLED BY SEC 50. THE FICTION CREATED U/S. 50 IS CONFINED TO COMPUTATION OF CAPITAL GAINS ONLY AND CANNOT BE EXTENDED BEYOND THAT. HENC E, IF A PRIVILEGE OF SEC 54EC CANNOT BE DENIED TO A DEEMED SHORT TERM CA PITAL GAIN, THEN THE OTHER PRIVILEGE AS PER SEC 74(1)(B) CAN ALSO NOT BE DENIED. AFTER ALLOWING ALL THE AVAILABLE PRIVILEGE, THE BALANCE, IF ANY, W OULD ATTRACT TAX APPLICABLE TO THE SHORT TERM CAPITAL GAIN. ITA NO. 1508/M/2010 4 7. HOWEVER, THE LD. CIT(A) WAS NOT SATISFIED AND UP HELD THE ACTION OF THE ASSESSING OFFICER BY HOLDING AS UNDER: I HAVE CAREFULLY CONSIDERED THE ABOVE FACTS. THE A PPELLANT HAS PLACED RELIANCE ON CERTAIN DECISIONS WHICH ARE FACTUALLY DISTINGUISHABLE AND ARE NOT ON THE ISSUE DIRECTLY. THE QUESTION OF SETTING OF LONG TERM CAPITAL LOSS AGAINST SHORT TER M CAPITAL GAINS DETERMINED U/S.50 HAS NOT BEEN ADJUDICATED IN THE S AID DECISIONS. MOREOVER, ON EXAMINING THE ISSUE IN THE LIGHT OF TH E PROVISIONS OF SECTION 50 R.W.SECTION 2(42A) WHICH DEFINES THE TER M SHORT TERM CAPITAL ASSETS MEANING AN ASSET HELD BY ASSESSEE FO R NOT MORE THAN THIRTY SIX MONTHS IMMEDIATELY PRECEDING THE DATE OF ITS TRANSFER, THE CONTENTION THAT THE SAID ASSETS WERE HELD FOR MORE THAN THIRTY SIX MONTH HAS BECOME INCONSEQUENTIAL AS THE DEEMING PRO VISIONS SECTION 50 WOULD TREAT SUCH ASSETS ALSO AS SHORT TE RM ASSET. THUS, ONCE THE ASSET HAS BEEN TREATED AS SHORT TERM AND T HE RESULTANT GAINS/LOSS SHORT TERM, THERE IS ABSOLUTELY NO BASIS FOR CLAIMING THE BENEFIT OF SET OFF AGAINST LONG TERM CAPITAL LOSS I N TERMS OF SECTION 74. THEREFORE, ACTION OF THE AO IN DENYING THE SET OFF IS UPHELD. 8. AGGRIEVED WITH SUCH ORDER OF THE LD. CIT(A), THE ASSESSEE IS IN APPEAL BEFORE US. 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS MADE BY BOTH THE SIDES, PERUSED THE ORDER OF THE AO AND LD. CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. THERE IS NO DISPUTE TO THE FACT TH AT THE ASSESSEE, DURING THE IMPUGNED ASSESSMENT YEAR, HAS SOLD THE OFFICE P REMISES ON WHICH DEPRECIATION HAS BEEN CLAIMED AND THEREBY DERIVED C APITAL GAIN OF `. 53,16,397/-. THERE IS ALSO NO DISPUTE TO THE FACT THAT THE ASSESSEE HAS BUSINESS LOSS OF `. 11,46,422/- AND BROUGHT FORWARD LONG TERM CAPITAL LOSS OF `. 47,13,107/-. WE FIND THE ASSESSING OFFICER I N THE ASSESSMENT ORDER ALLOWED THE SET OFF OF BUSINESS LOSS OF `. 11,46,42 2/- AND ALLOWED THE BROUGHT FORWARD UNABSORBED DEPRECIATION OF `. 25,39 ,085/- FROM SUCH ITA NO. 1508/M/2010 5 CAPITAL GAIN BUT DID NOT ALLOW THE CLAIM OF SET OFF OF BROUGHT FORWARD CAPITAL LOSS OF `. 47,13,107/- ON THE GROUND THAT T HE CAPITAL GAIN DERIVED BY THE ASSESSEE IS SHORT TERM CAPITAL GAIN ON TRAN SFER OF A DEPRECIABLE ASSET IN VIEW OF THE DEEMING PROVISIONS OF SEC. 50( 2) OF THE I.T. ACT. WHILE DOING SO, HE DISTINGUISHED THE DECISION OF THE JURI SDICTIONAL HIGH COURT IN THE CASE OF ACE BUILDERS PVT. LTD (SUPRA) WHICH HAS BEEN UPHELD BY THE LD. CIT(A). 10. WE FIND THE PROVISIONS OF SEC. 74(1)(B) READS A S UNDER: 74 (1) WHERE IN RESPECT OF ANY ASSESSMENT YEAR, TH E NET RESULT OF THE COMPUTATION UNDER THE HEAD CAPITAL G AINS IS A LOSS TO THE ASSESSEE, THE WHOLE LOSS SHALL, SUBJECT TO THE OTHER PROVISIONS OF THIS CHAPTER, BE CARRIED FORWARD TO T HE FOLLOWING ASSESSMENT YEAR, AND - (A) .. (B) IN SO FAR AS SUCH LOSS RELATES TO A LONG-TERM CAPITAL ASSET, IT SHALL BE SET OFF AGAINST INCOME, IF ANY, UNDER THE HEAD CAPITAL GAINS ASSESSABLE FOR THAT ASSESSMENT YEAR IN RESPECT OF ANY OTHER CAPITAL ASSET NOT BEING A SHORT-TERM C APITAL ASSET. 10.1 WE FIND THE CBDT VIDE CIRCULAR NO.8/2002 DATED 27.08.2002 HAS EXPLAINED AS UNDER:- 40. MODIFICATIONS OF PROVISIONS RELATING TO SET OF F OF LONG-TERM CAPITAL LOSS. 40.1 THE EXISTING PROVISION CONTAIN ED IN SECTION 70 OF THE INCOME-TAX ACT PROVIDES THAT WHERE THE NE T RESULT FOR ANY ASSESSMENT YEAR IN RESPECT OF ANY SOURCE FALLIN G UNDER ANY HEAD OF INCOME IS A LOSS, THE ASSESSEE SHALL BE ENTITLED TO HAVE THE AMOUNT OF SUCH LOSS SET OFF AGAINST HIS IN COME FROM ANY OTHER SOURCE UNDER THE SAME HEAD. FURTHER, SECT ION 74 OF THE INCOME-TAX ACT PROVIDES THAT A LOSS UNDER THE H EAD CAPITAL GAINS CAN BE CARRIED FORWARD AND SET OFF AGAINST CAPITAL GAINS IN THE FOLLOWING EIGHT ASSESSMENT YEA RS. 40.2 SINCE LONG-TERM CAPITAL GAINS ARE SUBJECT TO LOWER INCIDENCE OF TAX, THE FINANCE ACT, 2002 HAS RECTIFI ED THE ITA NO. 1508/M/2010 6 ANOMALY BY AMENDING THE SAID SECTIONS TO PROVIDE TH AT WHILE LOSSES FROM TRANSFER OF SHORT-TERM CAPITAL ASSETS C AN BE SET OFF AGAINST ANY CAPITAL GAINS, WHETHER SHORT-TERM OR LO NG-TERM, LOSSES ARISING FROM TRANSFER OF LONG-TERM CAPITAL A SSETS, WILL BE ALLOWED TO BE SET OFF ONLY AGAINST LONG-TERM CAPITA L GAINS. IT IS FURTHER PROVIDED THAT A LONG-TERM CAPITAL LOSS SHAL L BE CARRIED FORWARD SEPARATELY FOR EIGHT YEARS TO BE SET OFF ON LY AGAINST LONG-TERM CAPITAL GAINS. HOWEVER, A SHORT-TERM CAPI TAL LOSS, MAY BE CARRIED FORWARD AND SET OFF AGAINST ANY INCO ME UNDER THE HEAD CAPITAL GAINS. 40.3 THE EXISTING PROVISIONS OF SUB-SECTION (3) OF SECTION 74 ARE TRANSITORY PROVISIONS WITH REGARD TO CARRY FORW ARD OF CAPITAL LOSSES RELATING TO ASSESSMENT YEAR 1987-88 AND EARLIER YEARS. SINCE THESE PROVISIONS HAVE BECOME REDUNDANT , THE FINANCE ACT, 2002, HAS OMITTED THIS SUB-SECTION. 40.4 THESE AMENDMENTS WILL TAKE EFFECT FROM 1 ST APRIL, 2003, AND WILL ACCORDINGLY APPLY IN RELATION TO ASSESSMEN T YEAR 2003-04 AND SUBSEQUENT YEARS. 11. WE FIND THE HONBLE BOMBAY HIGH COURT IN THE C ASE OF CIT VS ACE BUILDERS PVT. LTD. (SUPRA) AT PAGES 219 & 220 HAS H ELD AS UNDER: IT IS TRUE THAT SECTION 50 IS ENACTED WITH THE OBJ ECT OF DENYING MULTIPLE BENEFITS TO THE OWNERS OF DEPRECIABLE ASSETS. HOWEV ER, THAT RESTRICTION IS LIMITED TO THE COMPUTATION OF CAPITAL GAINS AND NOT TO THE EXEMPTION PROVISIONS. IN OTHER WORDS, WHERE THE LONG-TERM CAP ITAL ASSET HAS AVAILED OF DEPRECIATION, THEN THE CAPITAL GAIN HAS TO BE COMPU TED IN THE MANNER PRESCRIBED UNDER SECTION 50 AND THE CAPITAL GAINS T AX WILL BE CHARGED AS IF SUCH CAPITAL GAIN HAS ARISEN OUT OF A SHORT-TERM CA PITAL ASSET BUT IF SUCH CAPITAL GAIN IS INVESTED IN THE MANNER PRESCRIBED I N SECTION 54E, THEN THE CAPITAL GAIN SHALL NOT BE CHARGED UNDER SECTION 45 OF THE INCOME-TAX ACT. TO PUT IT SIMPLY, THE BENEFIT OF SECTION 54E WILL BE A VAILABLE TO THE ASSESSEE IRRESPECTIVE OF THE FACT THAT THE COMPUTATION OF CA PITAL GAINS IS DONE EITHER UNDER SECTIONS 48 AND 49 OR UNDER SECTION 50. THE C ONTENTION OF THE REVENUE THAT BY AMENDMENT TO SECTION 50 THE LONG-TERM CAPIT AL ASSET HAS BEEN CONVERTED INTO A SHORT-TERM CAPITAL ASSET IS ALSO W ITHOUT ANY MERIT. AS STATED HEREINABOVE, THE LEGAL FICTION CREATED BY THE STATU TE IS TO DEEM THE CAPITAL GAIN AS SHORT-TERM CAPITAL GAIN AND NOT TO DEEM THE ASSET AS SHORT-TERM CAPITAL ASSET. THEREFORE, IT CANNOT BE SAID THAT SECTION 50 CONVERTS A LONG-TERM CAPITAL ASSET INTO A SHORT-TERM CAPITAL ASSET. 12. FROM THE ABOVE IT IS CLEAR THAT ALTHOUGH THE GA IN IS SHORT TERM CAPITAL GAIN DUE TO THE FICTION CREATED BY PROVISIO NS OF SEC. 50(2), THE ITA NO. 1508/M/2010 7 ASSET REMAINED AS LONG TERM CAPITAL ASSET. THERE FORE, IN VIEW OF THE RATIO LAID DOWN BY THE JURISDICTIONAL HIGH COURT, THE BROUGHT FORWARD LONG TERM CAPITAL LOSS CAN BE SET OFF AGAINST THE CAPIT AL GAIN ON ACCOUNT OF TRANSFER OF THE DEPRECIABLE ASSET WHICH HAS BEEN HE LD BY THE ASSESSEE FOR MORE THAN 36 MONTHS THEREBY MAKING THE ASSET A LONG TERM CAPITAL ASSET . IN THIS VIEW OF THE MATTER, WE HOLD THAT U/S 74(1)( B) THE ASSESSEE IS ENTITLED TO THE CLAIM OF SET OFF OF LONG TERM CAPIT AL LOSS AGAINST THE INCOME ARISING FROM THE SALE OF OFFICE PREMISES, THE GAIN OF WHICH IS SHORT TERM DUE TO THE DEEMING PROVISION BUT THE ASSET IS LONG TERM. THE GROUND RAISED BY THE ASSESSEE IS ACCORDINGLY ALLOWED. 13. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED ON THIS 27 TH DAY OF APRIL, 2011. SD/- SD/- (D.K. AGARWAL) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED 27 TH APRIL, 2011. RJ COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT-CONCERNED 4. THE CIT(A)-CENTRAL - I CONCERNED 5. THE DR G BENCH TRUE COPY BY ORDER ASST. REGISTRAR, I.T.A.T, MUMBAI