2013 (8) TMI 277 - AT - Income Tax

Computation of Capital gains u/s 50 - deduction of notional depreciation on unused assets - Held that - assessee was not in possession and control of the assets due to the seizure as aforesaid so as to use them for the conduct of the business. There was neither active nor passive use of the said assets as they remain seized by the Banks. The assets were auctioned by the banks to the best bidder and the assets were directly handed over by the bank to the buyer - The assessee who could not exercise any control of ownership could not be called as the owner and could not be said to have used the said asset so as to claim depreciation in respect thereof - Depreciation is inseparable from the actual user for business and depreciation allowance is permissible only on that account. It is not an allowance for natural wear and tear by reason of the aging process. Every building starts aging from the day it is constructed, but depreciation is claimable only on account of its user for business which can result in profits and gains - In section 32 the emphasis is on the user of the asset in the business of the assessee. There must be actual, effective and real user in the commercial sense and the user in the commercial sense and the user must be so linked with the business that it can be said that there is an immediate nexus between the user and the business, i.e. the real business of the assessee - Section 50 contains special provisions for computation of capital gains in the case of depreciable assets. The said section nowhere provides that certain deemed depreciation needs to be allowed - where the depreciation has been allowed as per the provisions of the Act after the fulfilling conditions prescribed u/s 32 of the Act and then the special provisions of section 50 would follow - Following decision of Commissioner Of Income-Tax, Gujarat Versus Suhrid Geigy Limited 1981 (4) TMI 79 - GUJARAT High Court - Decided in favour of assessee. Disallowance u/s 43B - Interest liability not paid - CIT upheld disallowance - Held that - The assessee understood the OTS of ₹ 378.72 lakhs as being first attributed towards interest and balance towards principal leaving a portion of principal unpaid and waived. On this basis, the assessee claimed interest deduction u/s 43B and offered, though, wrongly the waived principal to tax. Even if one would understand the OTS of ₹ 378.72 as being first attributed towards principal and balance towards interest, it means that unpaid interest of ₹ 1,93,96,881 is to be disallowed u/s 43B - As both erroneous offer of waived principal sum to tax and erroneous claim of interest u/s 43B emanated from a single transaction/event i.e. OTS, both should be understood to have cancelled each other. In other words, whichever way the appropriation of OTS is understood, the assessee cannot be put into double jeopardy - Disallowance u/s 43B reduced - Decided partly against assessee.

Issues Involved:
1. Computation of capital gains on the sale of factory building, borewell, and plant & machinery.
2. Disallowance of interest under Section 43B of the Income Tax Act.
3. Exclusion of principal amount of loan waived, which was wrongly offered in the total income.

Detailed Analysis:

1. Computation of Capital Gains:
The assessee sold land, factory building, borewell, and plant & machinery, declaring capital gains of Rs.1,19,90,389. The assets had been seized by banks in 2003 due to loan defaults, and no depreciation was claimed since then as the assets were not used for business purposes. The Assessing Officer (AO) computed capital gains by providing notional depreciation from 2003 onwards, resulting in a capital gain of Rs.1,57,56,169.

The CIT (A) upheld the AO's decision, citing Explanation 5 to Section 32, which mandates depreciation allowance even if not claimed. However, the assessee argued that the assets were not used for business since 2003, and thus, depreciation should not be allowed. The Tribunal agreed with the assessee, noting that the assets were seized and not in use, thus not fulfilling the conditions under Section 32 for claiming depreciation. Consequently, the Tribunal directed that notional depreciation should not be granted, confirming the assessee's computation of capital gains.

2. Disallowance of Interest under Section 43B:
The assessee claimed a deduction of Rs.1.93 crores under Section 43B, representing interest recovered by the bank through the sale of assets. The AO disallowed this deduction, stating that no interest payment details were provided in Form 3CD, and no evidence of such payment was produced. The CIT (A) upheld the disallowance, noting that the interest liability was waived by the bank and not actually paid, as required under Section 43B.

The assessee contended that the interest was effectively paid through the sale proceeds of the assets, and thus, should be allowed as a deduction. The Tribunal analyzed the situation, noting that the assessee had misunderstood the appropriation of the One-Time Settlement (OTS) amount. The Tribunal concluded that the disallowance of Rs.1.93 crores under Section 43B should be subsumed into the offer of Rs.2.57 crores on the waiver of the principal amount, ensuring the assessee is not subjected to double taxation.

3. Exclusion of Principal Amount of Loan Waived:
The assessee argued that the principal amount of Rs.2.57 crores, which was offered to tax due to a misunderstanding, should be excluded from the total income. The CIT (A) dismissed this ground, stating it was based on the assessee's admission.

The Tribunal noted that the waiver of the principal amount should not be taxed under Section 41(1) as it applies to trading receipts and not capital/loan waivers. The Tribunal directed that the erroneous offer of the principal amount should be excluded from the total income, as it resulted from a misunderstanding of the facts and law.

Conclusion:
The Tribunal allowed the appeal to the extent indicated, confirming the assessee's computation of capital gains without notional depreciation, subsuming the disallowance of interest under Section 43B into the waived principal amount, and excluding the erroneously offered principal amount from the total income.

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