STANDARD INDUSTRIES LTD, MUMBAI V. DCIT 3(3), MUMBAI

ITA 3623/MUM/2012

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 1069 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 11 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-04-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 10-11-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 21-05-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B S BIST
• Assessee Lawyers: K K VED
• Keywords: Depreciation; Earning of tax free income
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH E MUMBAI BEFORE SHRI JOGINDER SINGH (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) ITA NO. 3623/MUM/2012 ASSESSMENT YEAR: 2006-07 M/S. STANDARD INDUSTRIES LTD. VS. DCIT 3(3) VIJAYALAKSHMI MAFATLAL CENTRE AAYAKAR BHAVAN 57A, DR. G. DESHMUKH MARG M.K. MARG MUMBAI 400026 MUMBAI - 400020 PAN NO. AABCS8888C (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI K.K. VED, AR REVENUE BY: SHRI B.S. BIST, DR DATE OF HEARING : 13/0 2/2017 DATE OF PRONOUNCEMENT: 28/04/2017 ORDER PER N.K. PRADHAN, AM THIS IS AN APPEAL FILED BY THE ASSESSEE. THE RELEVA NT ASSESSMENT YEAR IS 2008-09. THE APPEAL IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER (APPEALS) -7, MUMBAI AND ARISES OUT OF ORDER U/S 143(3) OF THE INCOME TAX ACT, 1961 ( THE ACT). 2. THE GROUNDS OF APPEAL FILED BY THE ASSESSEE READ AS UNDER:- GROUND NO. 1 DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D I. THE LEARNED CIT(A) ERRED IN DISALLOWING AN AMOUNT O F RS. 3,08,904/- OUT OF TOTAL EXPENSES UNDER SECTION 14A OF THE ACT READ WITH RULE 8D AS ATTRIBUTABLE TOWARDS EARNING OF TAX EXEMPT INCOME; NAMELY, DIVIDEND AND INTEREST ON UTI TAX FREE BONDS. HE ERRED IN NOT APPRECIATING THE FACT THAT THE APPELLANT COMPANY HAS NOT INCURRED AN Y EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PAR T OF TOTAL INCOME. ITA NO. 3623/MUM/2012 2 II. THE LEARNED CIT(A) FURTHER ERRED IN CONSIDERING INT EREST PAID ON CASH CREDIT IN CALCULATING DISALLOWANCE UNDER SECTION 14 A READ WITH RULE 8D(II) WITHOUT APPRECIATING THE FACT THAT THE SAME IS NOT ATTRIBUTABLE TO EARNING OF EXEMPT INCOME. GROUND NO. 2 COMPUTATION OF SHORT TERM CAPITAL GA INS UNDER SECTION 50(1) OF THE ACT I. THE LEARNED CIT(A) ERRED IN COMPUTING SHORT TERM CA PITAL GAINS ON SALE OF DEPRECIABLE ASSETS (FORMING PART OF THE PLANT A ND MACHINERY BLOCK) UNDER SECTION 50(1) OF THE ACT AT RS. 14,93,20,516/ - INSTEAD OF RS. 13,48,49,886/- OFFERED FOR TAX IN THE RETURN OF INC OME. II. WHILE COMPUTING CAPITAL GAINS UNDER SECTION 50(1) O F THE ACT, THE LEARNED CIT(A) ERRED IN NOT APPRECIATING THE CONCEP T OF BLOCK OF ASSETS AND TREATING PLANT AND MACHINERY AND MOTOR CARS AND VEHICLES AS SEPARATE BLOCKS EVEN THOUGH SAME PERCENTAGE OF D EPRECIATION; NAMELY 15% IS PRESCRIBED FOR THE AFORESAID ASSETS. 3. THE LD. COUNSEL OF THE ASSESSEE SUBMITS BEFORE T HE TRIBUNAL THAT THE ASSESSEE WOULD NOT PRESS GROUND NO. 1 OF T HIS APPEAL. HENCE GROUND NO. 1 IS DISMISSED AS NOT PRESSED. 4. WE NOW COME TO GROUND NO. 2 OF THIS APPEAL. BRI EFLY STATED, THE FACTS ARE THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE SOLD CERTAIN ASSETS. ITS EFFECT HAS BEEN REFLECTED IN TH E DEPRECIATION (AS PER I.T. RULES) IN THE FOLLOWING MANNER:- BLOCK OF ASSETS RATE OF DEP. WDV AS ON 01.04.2007 INITIAL DEPRECIAT ION. WDV AFTER REDUCTION OF INITIAL DEPRECIATION. ADDITION DURING THE YEAR TOTAL BLOCK VALUE DEDUCTION / SALE DURING THE YEAR BLOCK AFTER DEDUCTION PLANT & MACHINERY 60% 1759669 1759669 140346 1900015 32022500 (30122485) PLANT & MACHINERY 15% 296301912 3774886 292527026 292527026 425650765 (133123739) MOTOR CAR & VEHICLES 15% 9785894 9785894 5014384 14800278 333035 14467243 4.1. THE ASSESSING OFFICER (A.O.) OBSERVED THAT TH ERE ARE ASSETS PHYSICALLY AVAILABLE IN THE BLOCK OF MOTOR VEHICLES @ 15%. THEREFORE, ASSESSEES CLAIM OF SHORT TERM CAPITAL LOSS IS ERRO NEOUS. THE OLD MOTOR ITA NO. 3623/MUM/2012 3 VEHICLES WERE SOLD DURING THE YEAR. THE NEW MOTOR V EHICLES WORTH RS.50,14,384/- WERE PURCHASED DURING THE YEAR. THE MOTOR VEHICLES PURCHASED DURING THE YEAR WERE NOT SOLD OR DISPOSED OFF. THE ASSESSEE CONTINUES TO HAVE THESE ASSETS IN ITS POSS ESSION. SOME OF THE OLD MOTOR VEHICLES WERE SOLD DURING THE YEAR FOR A CONSIDERATION OF RS.3,33,035/-. AS THE BLOCK VALUE REMAINS THERE, TH ERE CANNOT BE ANY SHORT TERM CAPITAL LOSS. THE A.O. DISALLOWED THE CL AIM OF SET OFF OF SHORT TERM CAPITAL GAIN ON SALE OF PLANT AND MACHIN ERY AGAINST THE WDV OF MOTOR CAR BLOCK OF ASSET ON THE FOLLOWING RE ASONS:- (I) IT IS ONLY SINCE A.Y. 2006-07 THAT THE RATE OF DEPRECIATION ON MOTOR CAR AND PLANT & MACHINERY ARE THE SAME I.E . 15%. PRIOR TO THAT, THE RATE OF DEPRECIATION ON THE MOTOR CAR BLO CK AND PLANT & MACHINERY BLOCK WERE DIFFERENT (20% & 25% RESPECTIV ELY). (II) IN THE TAX AUDIT REPORT THE ASSESSEE HAS ITSE LF TREATED MOTOR CAR AND PLANT AND MACHINERY AS DIFFERENT BLOC KS OF ASSETS. (III) ONCE THE BLOCK OF ASSETS IS CREATED, THE SAM E CANNOT BE MERGED SUBSEQUENTLY. (IV) MOTOR CAR AND PLANT & MACHINERY ARE SEPARATE GROUP OF ASSETS. THEREFORE, CAPITAL GAINS IS TO BE CALCULATE D ON BOTH THE GROUPS SEPARATELY. (V) THE RELIANCE PLACED BY THE ASSESSEE ON THE PRO VISIONS OF SECTION 2(11) IS INCORRECT BECAUSE THIS SECTION BAS ICALLY IS OPERATIVE WHEN THE ASSETS ARE FIRST ACQUIRED AND BUSINESS STA RTS. THE PROVISIONS ARE APPLICABLE AT THE TIME OF CREATING BLOCK OF ASS ETS. ONCE, BLOCKS ARE CREATED, THE SAME CANNOT BE MERGED SUBSEQUENTLY. IN THIS CASE, ASSESSEE HAS NOT MERGED THE BLOCKS BUT HAS ACTUALLY CLAIMED SET OFF OF SHORT TERM CAPITAL GAIN OF ONE BLOCK AGAINST THE BO OK VALUE OF THE OTHER BLOCK (I.E. MOTOR CAR). 4.2. THUS THE A.O. CALCULATED SHORT TERM CAPITAL GA IN ON SALE OF PLANT AND MACHINERY @ 60% AT RS.3,01,22,485/- AND ON SALE OF PLANT AND MACHINERY @ 15% AT RS.13,31,23,739/-. HE DEDUCTED T HE SHORT TERM ITA NO. 3623/MUM/2012 4 CAPITAL LOSS ON PLANT & MACHINERY (RESEARCH & DEVEL OPMENT @ 15%) AMOUNTING TO RS.1,39,25,708/- FROM RS.16,32,46,224/ - BECAUSE THE SAME IS ADDED IN COMPUTATION OF INCOME UNDER THE HE AD PROFITS U/S 41(1). THUS, THE AO CALCULATED SHORT TERM CAPITAL G AIN ON SALE OF ASSETS AT RS.14,93,20,516/-. 5. AGGRIEVED BY THE ORDER OF THE A.O., THE ASSESSEE FILED AN APPEAL BEFORE THE LD. CIT(A). WE FIND THAT THE LD. CIT(A) AGREED WITH THE REASONS GIVEN BY THE A.O. AND DISMISSED THE APPEAL FILED BY THE ASSESSEE. 6. BEFORE US, THE LD. COUNSEL OF THE ASSESSEE RELIE D ON THE DECISION IN THE CASE OF CIT VS. ANSAL PROPERTIES & INFRASTRUCTURE LTD. (2012) 20 TAXMANN.COM 770 (DELHI) AND THE ORDER OF THE ITAT F BENCH MUMBAI IN THE CASE OF M/S FILMKRAFT PRODUCTIONS (I) LTD. VS. ADDITIONAL CIT (ITA NO. 7358/MUM/2012). 7. ON THE OTHER HAND, THE LD. D.R. RELIED ON THE OR DER PASSED BY THE LD. CIT(A). 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL OF RECORD. WE BEGIN WITH THE DECISIONS CIT ED BEFORE US. IN ANSAL PROPERTIES & INFRASTRUCTURE LTD. (SUPRA), DURING THE PERIOD RELEVANT TO THE ASSESSMENT YEAR 1989-90, THE RESPONDENT- ASSESSEE HAD SOLD THE ENTIRE PLANT AND MACHINERY OF THEIR PAPER DIVISION AND HAD STOPPED AND CEASED TO CARRY ON BUS INESS IN THEIR PAPER DIVISION WITH EFFECT FROM 2 ND JUNE, 1987. THE ASSESSING OFFICER AFTER EXAMINING THE FACTUAL MATRIX CAME TO THE CONC LUSION THAT THE MANUFACTURING ACTIVITY IN THE PAPER DIVISION HAD ST OPPED EVEN BEFORE 30 TH APRIL, 1987. THE ASSESSING OFFICER NOTICED THAT FU RNITURE AND FIXTURE HAVING WRITTEN DOWN VALUE OF RS.2,39,459/- HAD BEEN SOLD FOR ITA NO. 3623/MUM/2012 5 A SUM OF RS.1,50,000/- RESULTING IN A SHORTFALL/LOS S OF RS.89,459/-. PLANT AND MACHINERY, INCLUDING AFFLUENT TANK, LABOR ATORY EQUIPMENT, TUBE WELL ETC. HAD BEEN SOLD FOR RS.2,31,94,888/- R ESULTING IN SHORT TERM CAPITAL GAIN OF RS.1,33,22,068/- AS THE WRITTE N DOWN VALUE OF THE SAID PLANT AND EQUIPMENT WAS RS.98,72,820/-. AFTER SETTING OFF SHORT TERM CAPITAL LOSS OF RS.89 ,459/- ON THE SALE OF FURNITURE AND FIXTURES, THE SHORT TERM CAPI TAL GAINS WAS SHOWN AS RS.1,32,32,609/- CHARGEABLE U/S 50 OF THE ACT. T HE ASSESSING OFFICER HELD THAT SECTION 50 OF THE ACT IS NOT APPL ICABLE AS THE ENTIRE DIVISION, I.E., PLANT AND MACHINERY BELONGING TO TH E PAPER DIVISION HAD BEEN SOLD. HE CAME TO THE CONCLUSION THAT SECTION 5 0 INCLUDING SUB- SECTION (2) OF THE ACT WAS NOT APPLICABLE. ACCORDIN GLY, THE GAIN WAS TAXABLE AS SHORT TERM CAPITAL GAIN AND THE NEW ASSE TS PURCHASED BY THE ASSESSEE WOULD NOT FORM PART OF THE BLOCK OF AS SETS RELATING TO THE PAPER DIVISION. IN OTHER WORDS, HE DIFFERENTIATED B ETWEEN THE BLOCK OF ASSETS BELONGING TO THE PAPER DIVISION AND THE BLOC K OF ASSETS RELATING TO OTHER DIVISION OF THE ASSESSEE. THE HON'BLE HIGH COURT HELD THAT BLOCK OF ASSETS FOR PURPOSE OF SECTION 50 WOULD MEAN ASSETS OF ALL UNITS OF ASSESS EE HAVING SAME RATE OF DEPRECIATION AND NOT ASSETS OF ONE DIVISION OR UNIT HAVING SAME RATE OF DEPRECIATION. IN THE CASE OF M/S FILMKART PRODUCTIONS (I) LTD. (SUPRA) THE ASSESSEE IS A FILM PRODUCER, DISTRIBUTOR AND EXHIBI TOR. THE ASSESSEE IS ALSO HAVING INCOME FROM PROPERTY, INCOME FROM OTHER SOURCES AND CAPITAL GAINS. WHILE SCRUTINIZING THE RETURN OF INC OME, THE AO NOTICED THAT THE ASSESSEE HAS SOLD MACHINERY AND HAS REALIZ ED POSITIVE INCOME OF RS.30,75,231/-. THE A.O. NOTICED THAT THE ASSESSEE HAS ADJUSTED THE SAME AGAINST WDV OF MOTOR CAR CLAIMING THAT BOTH THE ITA NO. 3623/MUM/2012 6 BLOCK OF ASSETS HAVE SAME RATE OF DEPRECIATION, HEN CE PROFIT ON ONE CAN BE ADJUSTED AGAINST THE PENDING WDV OF THE OTHE R. THE A.O. HELD THAT THE BLOCK OF ASSET PERTAINING TO PLANT AND MAC HINERY CANNOT BE SET OFF AGAINST THE WDV OF MOTOR CARS. SINCE BOTH A RE DIFFERENT BLOCKS AND PROFITS EARNED IN SELLING AN ASSET IN ONE BLOCK CAN BE SET OFF AGAINST THE WDV IN THE SAME BLOCK BUT NOT AGAINST A NOTHER BLOCK. THE A.O. DISALLOWED RS.33,75,231/-. THE TRIBUNAL ALLOWE D THE APPEAL FILED BY THE ASSESSEE ON THE GROUND THAT WHEN SECTION 2( 11) IS READ WITH THE APPENDIX OF RATE OF DEPRECIATION IN THE INCOME TAX RULE, IT IS FOUND THAT PLANT AND MACHINERY AND MOTOR CAR HAVE T HE SAME RATE OF DEPRECIATION I.E 15%. THUS, IN THE LIGHT OF THE AFO REMENTIONED PROVISION, READ WITH THE RULES, PLANT AND MACHINERY AND MOTOR CAR FALL WITHIN THE SAME BLOCK OF ASSETS. THE TRIBUNAL FOLLOWED THE JUDGMENT OF THE HON'BLE DELHI HIGH COURT IN ANSAL PROPERTIES AND INFRASTRUCTURE (SUPRA) AND ALLOWED THE APPEAL FILED BY THE ASSESSE E. 8.1 IN THE INSTANT CASE THE BASIC CONTENTION OF THE ASSESSEE IS THAT AS THE RATE OF DEPRECIATION ON PLANT AND MACHINERY AND MOTOR CARS ARE SAME (I.E. 15%) AND BOTH THE ASSETS FALL UNDER THE SAME CLASS OF ASSETS (I.E. PLANT AND MACHINERY) THEREFORE, WHILE CALCULATING THE CAPITAL GAINS, THE CLUBBING OF THE TWO BLOCK OF ASS ETS IS CORRECT. ON THE OTHER HAND, IT IS THE CONTENTION OF THE A.O. AND TH E LD CIT(A) THAT MOTOR CAR AND PLANT AND MACHINERY ARE SEPARATE GROU P OF ASSETS AND THEREFORE, CAPITAL GAINS IS TO BE CALCULATED ON BOT H THE GROUPS SEPARATELY. BE IT STATED THAT A BLOCK OF ASSETS INCLUDES ASSE TS OF ALL UNITS OF THE ASSESSEE HAVING THE SAME RATE OF DEPRECIATION AND N OT ASSETS OF ONLY ONE UNIT. BLOCK 5 IS DEPICTED BELOW: ITA NO. 3623/MUM/2012 7 NUMBER NATURE OF ASSET RATE OF DEPRECIATION BLOCK 5 PLANT MACHINERY ANY PLANT OR MACHINERY (NOT COVERED BY BLOCK 6, 7, 8, 9, 10, 11 & 12) AND MOTOR CARS (OTHER THAN THOSE USED IN A BUSINESS OF RUNNING THEM ON HIRE) ACQUIRED OR PUT TO USE ON OR AFTER APRIL 1, 1990 15% WE FIND THAT THE ISSUE IN THE INSTANT CASE IS COVER ED BY THE JUDGMENT BY THE HON'BLE DELHI HIGH COURT IN ANSAL PROPERTIES AND INFRASTRUCTURE LTD. (SUPRA) AND THE ORDER OF THE CO-ORDINATE BENCH IN M/S FILMKARFT PRODUCTIONS (I) LTD. (SUPRA) . WE FOLLOW THE ABOVE DECISIONS AND ALLOW THE APPEAL FILED BY THE ASSESSEE. 9. IN THE RESULT, THE APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 28/04/2017 SD/- SD/- (JOGINDER SINGH) (N.K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBE R MUMBAI: DATED: 28/04/2017 BISWAJIT, SR. P.S. COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A) - 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE . BY ORDER, //TRUE COPY// (DY./ASSTT. REGISTRAR) ITAT, MUMBAI