2016 (2) TMI 270 - AT - Income Tax

Addition on account of short term capital on sale of gala - Held that - The factory gala sold by the assessee was part of the blocked assets in the business of the assessee who was engaged in the business of manufacturing of self adhesive labels and stickers. The said gala remained the part of the block of fixed assets of the assessee. However, the assessee did not claim and depreciation on the said gala because the same was given on rent during the 2 years i.e. AY 2007-08 and AY 2008-09. In the AY 2009-10 the said gala was sold and the sale proceeds in respect of the said gala was treated in accordance with the provisions of section 50 of the Act by reducing the said consideration from the block of asset pertaining to factory gala and no short term capital gain had resulted from the said sale as the WDV at the year end worked out at ₹ 29,33,290/- before depreciation and after taking opening WDV plus additions and sale during the year. We also find that the ld. AO treated the sale of gala as sale of short term asset and denied the benefit of blocked of assets u/s 43(6) and of special provisions u/s 50 for calculating capital gain in case of depreciable assets. The short term capital gain was calculated at ₹ 60,42,693/- by applying the provision of 50C of the Act. In our opinion the ld. CIT(A) had rightly reversed the action of AO by holding that sale of gala was part of relevant block of assets as per the provisions of section 43(6) and short term capital gain was to be computed in accordance with section 50 of the Act. Thus we do not find any infirmity in the order passed by the CIT(A). We, therefore, dismiss the appeal of the revenue by upholding the order of CIT(A). - Decided against revenue

Summary

Issues Involved:
1. Whether the Industrial gala ceased to be part of the Block of Assets when treated as house property and given on rent.
2. Whether the assessee can shift the gala back to Block of Assets to avail the benefit of Section 43(6) and avoid tax liability under Section 50 of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Industrial gala as part of Block of Assets
The primary issue raised by the Revenue was the deletion of the addition made by CIT(A) on account of short-term capital gain on the sale of the gala. The assessee had purchased a factory gala and claimed depreciation on it until AY 2006-07. For AYs 2007-08 and 2008-09, the gala was rented out, and the rental income was declared as "income from house property," with no depreciation claimed. The assessee treated the gala as part of the block of assets of "factory gala" before its sale. The AO rejected this contention, stating that the gala ceased to be part of the block of assets once it was rented out and treated as house property income. The AO computed the short-term capital gain by taking the stamp value as the sale price and reducing the purchase price, resulting in a gain of Rs. 60,42,693.

Issue 2: Shifting gala back to Block of Assets
The CIT(A) allowed the appeal of the assessee, rejecting the AO's conclusion that the factory gala was not part of the block of assets because it was let out and rental income was offered under the head "income from house property." The CIT(A) referred to the schedules enclosed with the report u/s 44AB, showing the net block value of the factory gala as Rs. 29,33,290 as of 31/03/2009. The CIT(A) noted that Section 50 of the Act provides for the computation of capital gains in case of depreciable assets and that there is nothing to indicate that an asset part of a block of assets will be excluded merely because it gave rise to income assessable under another head. The CIT(A) cited the Kerala High Court decision in CIT v. M/s Sakthi Metal Depot, which held that a depreciable asset continues to be part of the business asset and depreciable asset, even if not used for business purposes for some years.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, stating that the factory gala sold by the assessee was part of the block of assets in the business of manufacturing self-adhesive labels and stickers. The gala remained part of the block of fixed assets, and depreciation was not claimed for two years because it was rented out. The sale proceeds were treated under Section 50 of the Act, reducing the consideration from the block of assets, resulting in no short-term capital gain as the WDV at the year-end was Rs. 29,33,290. The AO's treatment of the sale as a short-term asset and denial of benefits under Sections 43(6) and 50 was reversed by the CIT(A). The Tribunal found no infirmity in the CIT(A)'s order and dismissed the Revenue's appeal, upholding the CIT(A)'s decision. The order was pronounced in open court on 08th January 2016.