2016 (9) TMI 448 - AT - Income Tax

Short Term Capital Gain - transfer of cost of improvement being addition to building - whether the sale proceed received by Director of assessee-company was also forming part of the sale against the building occupied by assessee-company? - Held that - From the facts of the case, we find that the assessee, after having incurred renovation expense on the land and building belonging to the Director of assessee-company, made the place as usable for the purpose of its manufacturing activities. The assessee was treated as deem owner for the limited purpose of claiming of depreciation. As such, assessee-company never became the owner of the land and building. Therefore in our considered view sale proceeds received by Director of the assessee-company is taxable in the hands of Director and not in the hands of assessee-company. In view of above, we uphold the order of Ld. CIT(A). Revenue s appeal is dismissed. Addition made on account of damaged opening stock - Held that - Assessee has written off its stock of finished goods on the ground it became unfit for human consumption and for this reason stock of finished goods was for an amount of ₹ 7,19,336/- was destroyed. However the AO found that some sale out of the opening stock of finished goods was made during the relevant year. Therefore the claim of assessee was declined by AO. However, L d CIT(A) deleted the addition made by AO as the amount involved of meager amount of ₹ 24,501/- only. We find that assessee has written off the closing stock of finished goods by debiting in its profit and loss a/c. We also find that business of assessee was of fruit and vegetable and raw materials used for the business was of green mango which was highly perishable. The business of assessee was severely affected for the reason discussed above. From the facts we also find that assessee had to sale its property under distress to repay the loan of the bank. As such, we find that the business of assessee as decreasing on yearto- year basis. Accordingly, we agree with the contention of L d AR that the opening stock of finished goods became unfit for human consumption and same was duly debited in the profit and loss a/c of assessee. L d DR has not brought anything contrary to the find of L d CIT(A). Addition on account of damage/destruction of entire opening stock of packing material - Held that - AO made the addition on surmise and conjecture without bringing any evidence on record. The AR has submitted the ledger copies of the parties for the purchase and sale of goods which is placed on page 88 of the paper book. In this view of the matter, we uphold the order of L d CIT(A) and ground raised by Revenue is dismissed.

Summary

Issues Involved:
1. Deletion of addition on account of Short Term Capital Gains (STCG).
2. Applicability of Section 50C of the Income Tax Act.
3. Deletion of addition on account of damaged opening stock of finished goods.
4. Deletion of addition on account of damaged opening stock of packing materials.

Detailed Analysis:

1. Deletion of Addition on Account of Short Term Capital Gains (STCG):

The Revenue challenged the deletion of an addition of ?62,07,472/- made by the Assessing Officer (AO) on account of STCG. The AO had determined that the sale consideration received by the Director of the assessee-company included proceeds attributable to the building, which the assessee had capitalized and claimed depreciation on. The AO bifurcated the sale price between land and building, attributing ?64,97,321/- to the building and calculating STCG accordingly.

The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, observing that the assessee was not the owner of the property, and hence, Section 50C of the Act was incorrectly applied. The CIT(A) concluded that the capital gain should be taxed in the hands of the Director, not the assessee-company.

The Tribunal upheld the CIT(A)'s decision, noting that the assessee was only a deemed owner for depreciation purposes and not the actual owner of the land and building. Therefore, the sale proceeds received by the Director could not be taxed as STCG in the hands of the assessee.

2. Applicability of Section 50C of the Income Tax Act:

The Revenue contended that the CIT(A) erred in not adopting the value assessed by the Stamp Valuation Authority as the sale consideration. The AO had applied Section 50C, substituting the market value determined by the Stamp Valuation Authority for the sale consideration declared by the assessee.

The CIT(A) ruled that Section 50C, effective from 01.10.2009, was not applicable for the assessment year in question (2007-08). The Tribunal noted that the issue was pending before the Supreme Court in the case of Bagri Impex Pvt. Ltd., where an interim stay was granted. Consequently, the Tribunal set aside the issue to the AO for fresh adjudication based on the Supreme Court's decision.

3. Deletion of Addition on Account of Damaged Opening Stock of Finished Goods:

The AO disallowed the assessee's claim of ?7,19,336/- for damaged opening stock, arguing that the assessee had made sales from the opening stock during the year. The CIT(A) deleted the addition, accepting the assessee's explanation that the local sales were minimal and the majority of the stock had become unfit for human consumption and was destroyed.

The Tribunal upheld the CIT(A)'s decision, noting that the business involved perishable goods, and the assessee had substantiated the claim of stock damage due to poor business performance and other factors. The Tribunal found no contrary evidence from the Revenue and dismissed the Revenue's appeal on this ground.

4. Deletion of Addition on Account of Damaged Opening Stock of Packing Materials:

The AO disallowed the assessee's claim of ?3,75,123/- for damaged packing materials, asserting that the assessee had made export sales without corresponding expenses for packaging materials. The CIT(A) accepted the assessee's explanation that the exported goods were purchased in a packed condition and deleted the addition.

The Tribunal upheld the CIT(A)'s decision, finding that the AO's addition was based on conjecture without evidence. The Tribunal noted that the assessee had provided ledger copies supporting the purchase and sale of goods and found no defect in the assessee's accounts. The Tribunal dismissed the Revenue's appeal on this ground.

Conclusion:

The Tribunal dismissed the Revenue's appeal on the issues of STCG and damaged stock, while remitting the issue of Section 50C applicability to the AO for fresh adjudication based on the pending Supreme Court decision. The appeal was partly allowed for statistical purposes.