2017 (9) TMI 240 - AT - Income Tax

Determination of Short term Capital gains u/s 50 - Sale of entire business with all assets - appropriation of sales consideration towards one block of Buildings or all blocks including furniture & fixtures - class of assets - Scope of assets falling in the same class of assets under section 2(11) - Held that - In the instant case, on going through the order of learned CIT (A), it is observed that he has failed to appreciate the fact that section 2(11) specifies as only two class of assets i.e. tangible and intangible assets and within these two classes of assets, assets having same rate of depreciation are prescribed and they fall within the same block. CIT (A) has completely misunderstood and misconceived the aforesaid provisions of the Act and has wrongly interpreted that two assets falling within two different classes can never constitute a single block of assets even though they may be eligible for depreciation at the same rate. Therefore , addition of ₹ 77,81,594/- so sustained by Id. CIT (A) is wholly unwarranted. - Decided in favor of assessee. Disallowance u/s 14A read with rule 8D - Held that - The said disallowance is unwarranted on the facts of the instant case, as the same was so made by AO without recording a proper satisfaction with regards to the books of accounts of the assessee and in deleting the said disallowance of ₹ 1,21, 986/-. My aforesaid view is fortified by the judgment of the Hon ble Supreme Court in the case of Godrej Boyce & Manufactoring Co. Ltd. CIT 2017 (5) TMI 403 - SUPREME COURT OF INDIA .

Summary

Issues:
1. Short term capital gain assessment
2. Interpretation of "class of assets" for computation of capital gain
3. Disallowance under section 14A of the Act

Short Term Capital Gain Assessment:
The appeal was against the Ld. CIT(A)'s order sustaining the short term capital gain assessed by the AO at a higher amount compared to what the appellant declared. The appellant argued that the Ld. CIT(A) misunderstood the concept of block of assets, leading to the erroneous assessment. The appellant contended that the entire block of assets should be considered when calculating short term capital gain, not individual components. The tribunal found that the Ld. CIT(A) misinterpreted the provisions of the Act by focusing on the class of assets rather than the rate of depreciation. As per the provisions of section 2(11) and section 50 of the Income Tax Act, the tribunal held that the short term capital gain should be assessed at the amount declared by the appellant, as the assets sold fell within the same class of assets and had the same rate of depreciation.

Interpretation of "Class of Assets" for Computation of Capital Gain:
The main issue revolved around the interpretation of "class of assets" within the "block of assets" for computing capital gains. The appellant argued that assets within the same block need not be of the same nature or class, but the lower authorities disagreed. The tribunal analyzed the provisions of section 50 and section 2(11) of the Income Tax Act, emphasizing that there are only two classes of assets - tangible and intangible. The tribunal concluded that the Ld. CIT(A) misunderstood the provisions and wrongly interpreted that assets in the same block must belong to the same class, rather than having the same rate of depreciation. The tribunal held that the appellant's interpretation was correct, and the short term capital gain was assessed accordingly.

Disallowance under Section 14A of the Act:
The appellant challenged the disallowance made under section 14A of the Act. The tribunal found the disallowance unwarranted as the AO did not record proper satisfaction regarding the books of accounts of the assessee. Citing the judgment of the Hon'ble Supreme Court in the case of Godrej Boyce & Manufactoring Co. Ltd. CIT, the tribunal deleted the disallowance. Consequently, the tribunal allowed the appeal of the Assessee.

This detailed analysis of the judgment covers the issues of short term capital gain assessment, interpretation of "class of assets" for capital gain computation, and the disallowance under section 14A of the Act.