2016 (6) TMI 25 - AT - Income Tax

Disallowance of depreciation - whether price paid for purchase of flat will be taken as the cost of flats or to be bifurcated between land and flat - Held that - In the instant case, the assessee has paid the purchase price for purchase of flats and it is not discernible from the sale deed that it has paid anything separately for land. On the contrary, the sale deed makes it very clear that what was conveyed was only the super structure of the flats. On the contrary, it is an undisputed fact that the ownership of the land has remained with the vendor till the end of the year under consideration. The conveyance deed also makes it very clear that the land shall be transferred by the vendor to a co-operative society or any other form of organization. The assessee does not have any right or say in the matter of conveyance of land. These clauses coupled with the provisions of Maharashtra Apartments Act makes it clear that the assessee shall have only right of interest in the common area and facilities. Hence we are of the view that the tax authorities are not justified in bifurcating the selling price between the land and building without bringing any material to support their view. It is an undisputed fact that the assessing officer has allowed depreciation on the flats in AY 2006-07 and 2007-08. Hence, we are of the view that it may not be proper on his part to draw adverse inferences during the instant year, on the basis of certain presumptions entertained by him, that too without bringing any material on record to support his views. On the contrary, as stated earlier the recitals made in the conveyance deed actually supports the contentions of the assessee. Thus we direct the AO to allow the depreciation as computed by the assessee taking the price paid for purchase of flat as the cost of flats. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of depreciation on flats purchased by the assessee.
2. Bifurcation of the purchase price between land and building.
3. Treatment of additional ground regarding the computation error by the AO.

Detailed Analysis:

1. Disallowance of Depreciation on Flats:
The assessee, engaged in the business of real estate development, purchased two flats and claimed depreciation on them from AY 2006-07 onwards. Initially, the AO disallowed the depreciation in AY 2006-07 but was later allowed by the CIT(A). In AY 2007-08, the AO allowed the depreciation. However, for the assessment year under consideration, the AO revisited the claim and disallowed the depreciation on the ground that the purchase price included the cost of land, which is not depreciable. The CIT(A) upheld the AO's decision, stating that the undivided share in the land is ascertainable and should be allocated to the flats.

2. Bifurcation of Purchase Price Between Land and Building:
The AO argued that the cost of the flats should be bifurcated between land and building, using the Ready Reckoner rate to determine the construction cost and attributing the remaining amount to land. The CIT(A) disagreed with the AO's method and suggested using the stamp duty valuation for land. The assessee contended that the conveyance deeds clearly indicated that only the superstructure was purchased, not the land, which remained with the builder or would be transferred to a co-operative society in the future. The Tribunal found that the conveyance deed explicitly stated the transfer of only the superstructure, with the land to be conveyed to a society or other entity, supporting the assessee's claim.

3. Treatment of Additional Ground Regarding Computation Error:
The AO made an error in computing the total income by disallowing the excess depreciation claimed, which the assessee failed to note during the appeal before the CIT(A). The Tribunal acknowledged this mistake and noted that correcting the depreciation claim would automatically rectify this error.

Conclusion:
The Tribunal concluded that the tax authorities did not have sufficient material to support their view of bifurcating the purchase price between land and building. The conveyance deeds and other records supported the assessee's claim that only the superstructure was purchased. Hence, the Tribunal set aside the CIT(A)'s order and directed the AO to allow the depreciation as claimed by the assessee, taking the entire purchase price as the cost of the flats. The additional ground regarding the computation error was also resolved in favor of the assessee, as correcting the depreciation claim would rectify the mistake.

Final Judgment:
The appeal filed by the assessee was allowed, and the AO was directed to allow the depreciation as computed by the assessee. The order was pronounced in the Open Court on 27.5.2016.