LATE PRAVINCHANDRA DWARKADAS DALAL (LEGAL HEIR HITEN PRAVINCHANDRA DALAL),MUMBAI V. DY COMMISSIONER OF INCOME TAX IT CIRCLE 42(3)(1) ERSTWHILE CIRCLE 33(2), MUMBAI

ITA 5367/MUM/2024

AI Insights

The case revolves around the sale of an immovable property, 'Pragee Office', by the assessee, Late Pravinchandra Dwarkadas Dalal, for the assessment year 2017-18. The property was initially used in a proprietary business and depreciation was claimed until the business was discontinued in FY 2003-04. The Assessing Officer treated the gains from the sale as short-term capital gains under section 50, applying notional depreciation and a higher tax rate. The assessee contested this, arguing for long-term capital gains treatment and a lower tax rate, citing the property was held for more than three years. The Tribunal's decision addressed the characterization of the asset, the computation of capital gains, and the applicability of tax rates and set-off of losses.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 470903 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-02-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2017-2018
• Other Referred Cases: Ahmedabad Electricity Co Ltd Vs. CIT [1993] 199 ITR 351 (Bombay), Sakthi Metal Depot [2011] 130 taxmann.com 238 (SC), CIT vs. Doom Dooma India Ltd. [2009] 310 ITR 392 (SC), CIT vs. Manali Investments [2013] 39 taxmann.com 4 (Bom), CIT Vs. Ace Builders [2006] 281 ITR 210 (Bom), SKF India Ltd. Vs. DCIT [2024] 168 taxmann.com 328 (Mum)(SB)
• Laws Referred To: Income-tax Act
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business income; Capital asset; Depreciation; Cost of acquisition; Capital Gains
• Section: 143(3); 48

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH MUMBAI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI GIRISH AGRAWAL, ACCOUNTANT MEMBER ITA No. 5367/MUM/2024 Assessment Year: 2017-18 Late Pravinchandra Dwarkadas Dalal (Legal Heir Hiten Pravinchandra Dalal) Plot No.33, ABCD, Government Industrial Estate, Kandivali West, Mumbai – 400 067 Vs. Deputy Commissioner of Income Tax, Circle – 42(3)(1) Erstwhile Circle 33(2), Mumbai (Appellant) (Respondent) Present for: Assessee : Shri Nitesh Joshi, Advocate Revenue : Shri Krishna Kumar – Sr. DR Date of Hearing : 26.11.2024 Date of Pronouncement : 21.02.2025 O R D E R PER GIRISH AGRAWAL, ACCOUNTANT MEMBER: This appeal filed by the assessee is against the order of Ld. CIT(A), National Faceless Appeal Centre (NFAC), vide order no. ITBA/NFAC/S/250/2024-25/1067790185(1), dated 20.08.2024, passed against the assessment order by Assistant Commissioner of Income Tax, Circle – 33(2), Mumbai, u/s. 143(3) of the Income-tax Act 2 ITA No.5367/MUM/2024 Late Pravinchandra Dwarkadas Dalal., AY 2017-18 (hereinafter referred to as the “Act”), dated 27.12.2019 for Assessment Year 2017-18. 2. Grounds taken by the assessee are reproduced as under: “1. Ld. CIT(A) has erred in confirming the action of the AO to assessing gain on sale of Pragee Office as short-term capital gain u/s 50 of the Act, as against long term capital gain computed by the appellant. On the facts and circumstances of the case and in law, long term capital gains computed on sale of Pragee Office ought to be accepted. 2. Without prejudice to ground no. 1 above, Ld. CIT(A) has erred in confirming action of the AO of computing notional depreciation while computing gain on sale of Pragee Office, without appreciating the fact that no such depreciation was claimed by the appellant in the return of income. On the facts and circumstances of the case and in law, no notional depreciation ought to be computed while computing the capital gains on sale of Pragee Office. 3. Without prejudice to the ground no.1 & 2 above, Ld. CIT(A) has erred in confirming the action of the AO for computing tax on gain on sale of Pragee office at 30%, without considering the fact that the asset is held for more than 36 months, therefore, tax has to be computed at 20% being long-term capital assets. On the facts and circumstances of the case and in law, tax rate of 20% ought to be applied while computing tax on gains on sale of Pragee Office. 4. Ld. CIT (A) has erred in confirming the action of the AO to disallow Rs. 2,79,818/- towards management fees paid to AIF. On the facts and circumstances of the case and in law, no disallowance of management fees ought to be made. 5. The appellant craves leave to add, amend, alter, edit, delete, modify, or change all or any of the grounds of appeal at the time of or before the hearing of the appeal.” 3. Assessee has also raised additional ground vide application dated 23.11.2024 requesting for its admission. The prayer made for admission of the additional ground is extracted below: “Setoff of brought forward long-term capital loss of Rs. 1,63,34,215 against the short-term gain computed on depreciable assets u/s 50 of the Income-tax Act a. The appellant had purchased an immovable property namely \"Pragee Office\" in FY 2000-01. Initially, until FY 2002-03 the appellant had used the said property for his proprietary business \"Mangal Textile\" and claimed depreciation u/s 32 of the Act upto AY 2003-04. b. The appellant had discontinued the business carried on in the name of Mangal Textile in FY 2003-04 and stopped claiming depreciation from AY 2004- 3 ITA No.5367/MUM/2024 Late Pravinchandra Dwarkadas Dalal., AY 2017-18 05 onwards. The appellant thereafter had shown the said asset as fixed assets in his books at WDV of Rs. 33,02,106 c. During the year under consideration, the appellant has sold Pragee office for a total consideration of Rs 1,45,00,000/-, Since Pragee office was held by the appellant for more than 3 years, the appellant has offered the gains on the same as Long term capital gains after claiming indexed cost of acquisition on the WDV as on 31.03.2003. d. Further, the appellant has brought Long Term Capital Loss of Rs. 1,63,34,215% which is available for setoff against long term capital gains. e. However, the Ld. AO did not accept the contention of the appellant and computed short term capital gain on sale of Pragee office u/s 50 of the Act and also levied the tax at the rate applicable to short term capital gain instead of long-term capital gain and did not allow the setoff of brought forward long-term loss. a. Accordingly, the Appellant most respectfully submits even though short-term capital gains is computed u/s 50 of the Act, he is eligible to set off against brought forward long-term capital loss as the asset was held for more than 3 years. b. The Appellant is therefore desirous of taking the following ground of appeal as an additional ground of appeal: \"Without prejudice to ground no 1 to 3, Learned CIT(A) has erred confirming the action of the AO of not allowing set off of brought forward long-term capital loss of Rs. 1,63,34,215/-against the short-term gain computed on depreciable assets under section 50 of the Income-tax Act, 1961. On the facts and circumstances of the case and in law, setoff of brought forward long- term capital loss ought to be allowed against the short-term capital gains computed on depreciable assets.\" 4. The Applicant most humbly submits that the Hon'ble Tribunal has power to admit the additional grounds in view of the full bench decision of the Bombay High Court in the case of Ahmedabad Electricity Co Ltd Vs. CIT [1993] 199 ITR 351 (Bombay). 5. The Applicant further humbly submits that admission and adjudication of the above additional ground of appeal is necessary in the interests of justice and for complete and proper disposal of the appeal filed by the Applicant.” 3.1. From the above, sum and substance of the additional ground raised is that assessee claims set off of short-term capital gain computed u/s.50 against brought forward long-term capital loss. From the prayer made above, we note that all the facts and material relating to the aforesaid claim are already on record and goes to the root of the matter, accordingly, we find it appropriate to admit the 4 ITA No.5367/MUM/2024 Late Pravinchandra Dwarkadas Dalal., AY 2017-18 same for adjudication, more particularly when nothing was objected upon for its admission from the other side. 4. In respect of ground no. 4, it is noted that during the course of assessment, a disallowance of Rs.2,79,818/- is made towards management fees paid to Category-II Alternative Investment Funds, by holding it as excess expenditure claimed against interest expenditure. In the course of hearing this ground is not pressed. Hence, it is dismissed as not pressed. 5. We have heard both the parties and perused the material on record. We have given our thoughtful consideration to the submissions made and material placed on record, including paper book and synopsis, as well as judicial precedents relied upon. Putting up the relevant facts on the issues raised before us and our observations conjointly, it is noted that return of income was filed on 01.08.2017, reporting total income at Rs.10,15,97,150/-. During the year under consideration, assessee sold an immovable property named as “Pragee Office” for a total consideration of Rs.1,45,00,000/-. This property was purchased by the assessee in Assessment Year 2001-02, which assessee used in his proprietary business in the name of “Mangal Textiles” and claimed depreciation thereon u/s.32 of the Act. Assessee continued to claim depreciation against his business income up to Assessment Year 2003-04 and stopped doing so from Assessment Year 2004-05 onwards owing to discontinuance of business carried on by him in the name of “Mangal Textiles”. To this effect, assessee reported this immovable property as fixed asset in his balance sheet at Written Down Value (WDV) of Rs.33,02,106/- which was arrived at in the Assessment Year 2003-04 when depreciation for the last time was claimed. 5 ITA No.5367/MUM/2024 Late Pravinchandra Dwarkadas Dalal., AY 2017-18 5.1. In the year under consideration, when this immovable property was transferred, assessee computed capital gains as “Long Term Capital Gains” since he held this property for more than three years. While arriving at long term capital gain, assessee claimed index cost of acquisition of the WDV of Rs.33,02,106/- as on 31.03.2003. 5.2. While completing the assessment, ld. Assessing Officer held that gain arrived at by the assessee on transfer of immovable property is a short-term capital gain u/s. 50, since it is an asset which formed part of gross block of assets used by the assessee in his business on which depreciation was claimed up to Assessment Year 2003-04. According to him, merely because business operations were not carried out, the capital asset would not cease to be a business asset. He thus, recomputed the capital gain by applying provisions of section 50 to arrive at a short-term capital gain of Rs.1,36,60,649/-. While computing this short-term capital gain, he computed notional depreciation from Assessment Year 2004-05 to Assessment Year 2016- 17 and reduced the WDV on 31.03.2003 from Rs.33,02,106/- to WDV as on 31.03.2016 for Rs.8,39,351/-. 6. As noted, there is no dispute about the fact that impugned property was used by the assessee for the purpose of his proprietary business and depreciation was claimed thereon. Assessee contends that since he had discontinued the business, he stopped claiming depreciation and treated the said property as capital asset in his personal balance sheet. On this contention, we observe that ld. CIT(A) has analysed the copies of return of income, computation of income and profit and loss account and trading account from Assessment Year 2004-05 onwards till Assessment Year 2017-18, i.e., the period 6 ITA No.5367/MUM/2024 Late Pravinchandra Dwarkadas Dalal., AY 2017-18 from where assessee claims to have discontinued his business and not claiming depreciation. This analysis is extracted from para 6.1.2 of the order of ld. CIT(A) as under: AY Income from business or Remarks 2004-05 (2,91,266) Trading account/P-L account shows bank FD interest & license income while expenses under the heads administrative, telephone, office, administrative, advertisement etc are booked. No depreciation was claimed. 2005-06 (1,55,197) P-L account shows bank interest receipts while expenses under the heads telephone, electricity, office etc. are booked. The business loss was set-off against short term capital gains & income from other sources. No depreciation was claimed. 2006-07 (1,37,738) P-L account shows bank interest receipts while expenses under the heads telephone, electricity, office etc. are booked. The business loss was set-off against short term capital gains & income from other sources. No depreciation was claimed. 2007-08 nil Nil profits & gains of business are disclosed in ITR & no depreciation was claimed. 2008-09 (1,37,746) P-L account shows bank interest receipts while expenses under the heads telephone, electricity, office etc. are booked. The business loss was set-off against short term capital gains. No depreciation was claimed. 2009-10 nil Nil profits & gains of business are disclosed in ITR & no depreciation was claimed. 2010-11 (496) Loss from business disclosed in ITR & no depreciation was claimed. 7 ITA No.5367/MUM/2024 Late Pravinchandra Dwarkadas Dalal., AY 2017-18 2011-12 5,55,142 Profits from speculation business disclosed in ITR & no depreciation was claimed. 2012-13 220 Profits from speculation business disclosed in ITR & no depreciation was claimed. 2013-14 Nil Nil profits & gains of business are disclosed in ITR & no depreciation was claimed 2014-15 Nil Nil profits & gains of business are disclosed in ITR & no depreciation was claimed. 2015-16 (15,291) Loss from speculation business disclosed in ITR & no depreciation was claimed. 2016-17 Nil Nil profits & gains of business are disclosed in ITR & no depreciation was claimed. 2017-18 3,51,818 Sale on account of profits & gains of business are disclosed in ITR though no depreciation was claimed. 6.1. From the above analysis of records of assessee for past 14 years, ld. CIT(A) noted that assessee had some business activity or booked business losses which were set off against capital gain / income from other sources in certain years, even though depreciation on the impugned property was not claimed. He also noted from the profit and loss account that up to Assessment Year 2008-09, assessee carried on the business activities under the name and style of M/s. Mangal Textiles. Ld. CIT(A) by placing reliance on the decision of Hon'ble 8 ITA No.5367/MUM/2024 Late Pravinchandra Dwarkadas Dalal., AY 2017-18 Supreme Court in the case of Sakthi Metal Depot [2011] 130 taxmann.com 238 (SC) concluded that sale of assets held once as business asset on which depreciation had been claimed or was allowable even if not claimed, then even after discontinuation of the business, gain on sale of said asset shall be taxable u/s.50 of the Act. On the claim of benefit of indexation, while computing capital gain by the assessee, ld. CIT(A) upheld the view of ld. Assessing Officer by not giving the benefit of lower rate of tax u/s.112, taking note of the position that capital assets were held by the assessee for more than three years. 7. In the present set of facts and taking note of the observations and findings of the authorities below, we note that section 50 provides for assessment of depreciable asset in respect of which depreciation has been allowed as “short term capital gain” and deductions available u/s. 48 and 49 are to be allowed subject to provisions contained in section 50(1) and (2). 7.1. Considering the analysis done by ld. CIT(A) of past 14 years, in our view, the impugned property which was purchased in Assessment Year 2001-02 and in respect of which depreciation was allowed on the same as the business asset up to Assessment Year 2003-04, continued to be the part of the business asset as a depreciable asset. Assessee has in fact, carried on business in the subsequent years, i.e., during the period from Assessment Year 2004-05 to Assessment Year 2017-18 as noted by ld. CIT(A) in the table extracted above. Submission made by the assessee that asset was reported as an asset in his personal balance sheet as an investment asset has no bearing on the issue before us, since for the purpose of accounting and reporting in financial statements, assets forming part of gross block 9 ITA No.5367/MUM/2024 Late Pravinchandra Dwarkadas Dalal., AY 2017-18 under the Act, would always be so reported as fixed assets in the balance sheet. Accordingly, impugned property forming part of the block of the asset will retain its character as such, irrespective of assessee not claiming depreciation for certain years. The said asset was always available with the assessee withing the gross block for the purpose of using it in the business. We are in agreement with view taken by the ld. CIT(A) by following the judicial precedent in the case of Sakthi Metal Depot (supra) whereby Hon'ble Supreme Court took note of the view of Hon'ble High Court of Kerala in the very same case, which is extracted below: \"In other words, in our view, the building which was acquired by the assessee in 1974 and in respect of which depreciation was allowed to it as a business asset for 21 years, that is upto the assessment year 1995-96, still continued to be part of the business asset and depreciable asset, no matter the non-user disentitles the assessee for depreciation for two years prior to the date of sale. We do not know how a depreciable asset forming part of block of assets within the meaning Section 2(11) of the Act can cease to be part of block of assets. The description of the asset by the assessee in the Balance Sheet as an investment asset in our view is meaningless and is only to avoid payment to tax on short term capital gains on sale of the building. So long as the assessee continued business, the building forming part of the block of assets will retain it's character as such, no matter one of two of the assets in one or two years not used for business purposes disentitles the assessee for depreciation for those years. In our view instead of selling the building, if the assessee started using the building after two years for business purposes the assessee can continue to claim depreciation based on the written down value available as on the date of ending of the previous year in which deprecation was allowed last.\" [emphasis supplied by us by underline] 7.2. Hon'ble Supreme Court did not find merit in the appeal filed by the assessee, i.e. Sakthi Metal Depot, since the reasoning given by the Hon'ble High Court commended to the Hon'ble Supreme Court. Thus, we hold that capital gain has to be computed u/s.50 of the Act. However, for the purpose of computing the capital gain, the written down value of the impugned property is to be taken as on 31.03.2003, i.e., Rs.33,02,106/- which was arrived at in the Assessment Year 2003-04 when depreciation for the last time was claimed. Ld. Assessing Officer has computed the capital gain by reducing the 10 ITA No.5367/MUM/2024 Late Pravinchandra Dwarkadas Dalal., AY 2017-18 written down value by the amount of notional depreciation from Assessment Year 2004-05 to 2016-17, amounting to Rs.24,62,755/-. In this regard, we note that section 50 treats the WDV of block of asset at the beginning of the year as cost of acquisition, thereon. Further, section 43(6)(c)(ii) provides for determination of WDV in respect of block of assets, according to which, it has to be inter alia, reduced by depreciation “actually allowed” in respect of that block of asset in the preceding year. 7.3. In the present case before us, depreciation “actually allowed” has to be taken, based on claim made by the assessee up to Assessment Year 2003-04, subsequent to which, there has been no claim made and allowed. Hence, no occasion for computing notional depreciation as done by ld. Assessing Officer from Assessment Year 2004-05. Accordingly, for the purpose of computation of capital gain u/s.50, WDV as at 31.03.2003 at Rs.33,02,106/- is to be reduced from sale consideration of Rs.1,45,00,000/-. 7.4. For this, we find force from the decision of Hon'ble Supreme Court in the case of CIT vs. Doom Dooma India Ltd. [2009] 310 ITR 392 (SC). Hon'ble Court analysed the words “depreciation actually allowed” as occurring in section 43(6)(b) to arrive at “written down value” as defined u/s. 43(6). Hon'ble Court, came to conclusion in para-9 that meaning of the words “actually allowed” in section 43(6)(b) is to be “limited to depreciation actually taken into account or granted and given effect to, i.e., debited by the Income-tax Officer against the incomings of the business in computing the taxable income of the assessee”. We also refer to the decision of Sakthi Metal Depot [2011] 333 ITR 492 (Ker), wherein Hon'ble High Court in para-4, while allowing the appeal of the Revenue, held that WDV to be taken is the 11 ITA No.5367/MUM/2024 Late Pravinchandra Dwarkadas Dalal., AY 2017-18 WDV available as on the date of ending of previous year in which depreciation was allowed last. Accordingly, in the present case before us, WDV as on 31.03.2003 of Rs.33,02,106/- is to be taken into account for the purpose of computing capital gains u/s. 50 of the Act. 8. Assessee has raised additional grounds before us as stated above for claiming set off of brought forward long term capital loss of Rs.1,63,34,215/- from capital gain arising on transfer of impugned property computed u/s. 50 of the Act. In this respect, the settled position of law is that section 50 only substitutes computation provisions as per section 48 and 49. It has no relevance with respect to application of section 74, which deals with carry forward and set off of long term capital loss, as well as section 112 dealing with rate at which tax is to be levied on such capital gains. 8.1. For the first aspect in respect of section 74, we make a useful reference to the decision of Hon'ble Jurisdictional High Court of Bombay in the case of CIT vs. Manali Investments [2013] 39 taxmann.com 4 (Bom) whereby Hon'ble Court up held the claim of assessee to set off its long term capital loss in terms of section 74 against long term capital gain on sale of depreciable asset. It was held that short term capital gain computed on long term depreciable asset can be set off against long term capital loss. For this, Hon'ble Court followed its earlier decision in the case CIT Vs. Ace Builders [2006] 281 ITR 210 (Bom) wherein it was held that “by virtue of section 50 of the Act, only the capital gains is to be computed in terms thereof and be deemed to be short term capital gain. However, this deeming fiction is restricted only for the purpose of section 50 of the Act and the benefit u/s. 54E of the Act which is available only to long term capital gains was extended. In this case, the Tribunal held that the position is similar 12 ITA No.5367/MUM/2024 Late Pravinchandra Dwarkadas Dalal., AY 2017-18 and the benefit of set off against long term capital loss u/s. 74 of the Act is to be allowed.” Accordingly, Hon'ble Court dismissed the appeal of Revenue holding in favour of the assessee. In the present case before us on the stated factual matrix, respectfully following the aforesaid judicial precedents, claim of brought forward long term capital loss is allowed to be set off against short term capital gain computed u/s 50. 8.2. On the second aspect of rate of tax which is to be applied on capital gains computed u/s. 50, Hon'ble Special Bench of ITAT, Mumbai in the case of SKF India Ltd. Vs. DCIT [2024] 168 taxmann.com 328 (Mum)(SB) dealt with the issue to arrive at the conclusion that capital gains arising out of sale of depreciable asset u/s.50 even though deemed to be capital gain arising out of transfer of short term capital asset, that fiction is to be confined only to section 50 and it could not convert short term capital asset into long term capital asset and vice versa, for other purposes of the Act. Thus, rate of tax would be in terms of section 112 at the rate of 20%. In the present case before us, it is undisputed fact that the impugned property is a long term capital asset, acquired by the assessee in Assessment Year 2001-02, even though it forms part of gross block of asset whereon assessee has claimed depreciation in Assessment Year 2003-04. 9. We have held that the capital gain is to be computed u/s.50, impugned asset being depreciable asset by taking into account written down value as on 31.03.2003. Though, capital gain will be deemed to be short term capital gain by virtue of section 50, yet the impugned asset remains to be a long term capital asset and therefore rate of tax would be in terms of section 112 of the Act. Also, brought forward long 13 ITA No.5367/MUM/2024 Late Pravinchandra Dwarkadas Dalal., AY 2017-18 term capital loss is allowed to be set off against short term capital gain computed u/s 50. Thus, on the issue relating to taxability of capital gain on transfer of “Pragee office”, ground no.1 is dismissed and ground no.2, 3 and additional grounds are allowed in terms of our elaborate discussion and observations made in the above paragraphs. 10. In the result, appeal of the assessee is partly allowed. Order is pronounced in the open court on 21 February, 2025 Sd/- Sd/- (Amit Shukla) (Girish Agrawal) Judicial Member Accountant Member Dated: 21 February, 2025 MP, Sr.P.S. Copy to : 1. The Appellant 2. The Respondent 3. DR, ITAT, Mumbai 4. 5. Guard File CIT BY ORDER, (Dy./Asstt.Registrar) ITAT, Mumbai "