2018 (5) TMI 1876 - AT - Income Tax

Computation of capital gains - succession of business - business was taken over by partnership firm - land transferred / passed on from the previous possessor to the partnership firm - HELD THAT - In the instant case no doubt M/s. Veena Industries as a proprietary concern carried on the same business which was succeeded by the assessee-firm and to that limited extent it can be said that the firm succeeded to the proprietary concern. It is intriguing to note that the sale deed categorically mentions that APIIC is the owner of the said land and in fact the sale deed prescribes 15, 000/- as a sale consideration towards cost of the land including development charges. Since this land cannot be utilised for any other purposes other than for industrial purposes probably the land cannot be transferred / passed on from the previous possessor to the partnership firm and therefore there was a need for the assessee-firm to purchase the land free from all encumbrances from APIIC. The land can only be allotted to persons who are engaged in the activity of manufacture or intended to carry on the old business. In a nutshell the vacant land cannot be said to be the land owned by the previous owner. Assessee relied upon several case law which only speaks of succession of business and they do not refer to a specific land which was previously in the possession of M/s. Veena Industries proprietary concern as a licence holder but it has no rights to transfer the said land whenever there was a change of constitution. In the instant cases the land appears to have been handed over to the partners collectively by virtue of a sale deed entered into in 1990 on payment of 15, 000/- only. The value of the land and not with regard to the structures which are constructed by the previous occupant of the said land. In order to appreciate as to whether APIIC has a right to withhold the property from a manufacturer whenever there is a change of the constitution of the Members manning the business one has to refer to the rules prescribed thereunder but nothing has been placed before me except the sale deed which merely indicates that though the vacant possession was delivered to M/s. Veena Industries (earlier owned by proprietary concern) on 20.11.1973 the same M/s. Veena Industries had to purchase the property by reconstituting itself as a partnership firm for a sum of 15, 000/-. Order passed by the CIT(A) on this aspect does not call for any interference. Since cost as on 07.08.1990 has to be taken into consideration the other contentions of the assessee regarding fair market value as on 01.04.1981 etc. need not be considered. Disallowance of interest - HELD THAT - The assessee categorically states that it was utilised for purchase of house property and the rent received from the said property was offered to tax in the hands of the firm. The agreement of sale as well as the sale deed shows that it was represented by its partner Smt. Sujata Jaiswal and Smt. Sashi Jaiswal who are not referred to as partners in the deed dated 17.04.1986. Since the assessee claims that the rent was offered to tax in the hands of the firm the same requires verification and if the amount is offered to tax by the firm and taxed accordingly there is no case for disallowance of interest. Therefore hereby set-aside this issue to the file of the AO to verify the same and reconsider the issue in accordance with law.

Summary

Issues Involved:
1. Computation of capital gains.
2. Disallowance of interest.

Detailed Analysis:

Computation of Capital Gains:

The assessee firm, engaged in the manufacture of fan and fiberglass components, declared a business loss and long-term capital loss for the assessment year 2008-2009. During scrutiny, it was found that the assessee sold a piece of land and claimed a long-term capital loss. The cost of acquisition was revalued by the assessee, but the Assessing Officer (A.O.) determined that the cost of acquisition should be based on the date when the partnership firm was formed (01.04.1986), not when the land was initially allotted to the proprietary concern (20.11.1973). The A.O. revalued the long-term capital gains accordingly.

The assessee argued that the business was converted into a partnership firm, which should be considered a continuation of the business, thus the fair market value as on 01.04.1981 should be adopted. The Ld. CIT(A) observed that the proprietary concern and the partnership firm are distinct entities, and the land was formally purchased by the partnership firm in 1990. The CIT(A) directed the A.O. to compute the capital gains based on the cost as on 07.08.1990.

The assessee contended that the property was succeeded from the proprietary concern to the partnership firm, and the fair market value as on 01.04.1981 should be considered. The CIT(A) referred to the sale deed and agreement, concluding that the land was purchased by the partnership firm in 1990, and thus, the cost of acquisition should be based on this date. The Tribunal upheld the CIT(A)'s decision, emphasizing that the land was formally purchased by the partnership firm in 1990, and the cost as on 07.08.1990 should be considered for computing capital gains.

Disallowance of Interest:

The assessee debited interest paid on a loan from Smt. Rashmi Chakravarthi in the Profit & Loss Account. The A.O. disallowed this interest as no interest was charged from the persons to whom the money was advanced. The assessee argued that the loan was used for acquiring a property, and the rent received from this property was offered to tax in the subsequent year.

The Ld. CIT(A) upheld the A.O.'s decision, stating that the interest was disallowed as the assessee did not charge interest from the persons to whom the money was advanced. The Tribunal noted that the assessee claimed the loan was used for purchasing a house property, and the rent was offered to tax. The Tribunal directed the A.O. to verify if the rent was indeed offered to tax and reconsider the issue of disallowance of interest accordingly.

Conclusion:

The appeal was treated as allowed for statistical purposes, with the Tribunal upholding the CIT(A)'s decision on the computation of capital gains and directing the A.O. to verify the claim regarding the disallowance of interest.