2018 (5) TMI 1585 - AT - Income Tax

Depreciation - Whether the acquisition of gala at Mumbai should be included in the block of assets - Whether the assesse is entitled for depreciation - Held that - AR himself had fairly considered that assessee was not entitled to claim depreciation - allotment letter from developer is equal to acquisition of an asset-is not tenable, especially when it had not submitted the basic documents like approval of Municipal/ Panchayat authorities approving the plan of the proposed gala or the commencement certificate - it would not entitle the assessee to claim benefit of section 50 - as it has claimed deduction for non-existent asset - Decided against the assessee. Disallowance of set off of brought forward losses - Held that - as per the provisions of section 74 of the Act brought forward losses from long-term capital asset could be set off only against long-term capital gains, that there was no provision for allowing set off of brought forward losses, arising out of transfer of long-term capital assets, against STCG - as per AO STCG could not be treated as profit and gains of business or profession - that brought forward business losses could not be allowed to be set off against STCG - issue of carry forward of loss needs further verification by the AO - appeal stands partly allowed

Issues Involved:
1. Confirmation of addition under the head Short-Term Capital Gains (STCG).
2. Non-allowance of set-off of brought forward losses.

Issue-wise Detailed Analysis:

1. Confirmation of Addition under the head Short-Term Capital Gains (STCG):

The primary issue concerns the confirmation of an addition of ?62.02 lakhs under STCG. The Assessee had sold a factory building along with land for ?80 lakhs and computed the profit after reducing the written down value of the assets and further reducing it by the investment made in acquiring a new factory gala. The Assessing Officer (AO) disallowed the investment of ?44.01 lakhs made by the Assessee in acquiring a new asset, arguing that the new asset was not acquired within the meaning of Section 50(2) of the Income-tax Act, 1961, as it was neither in possession nor ready for business use during the year under consideration.

The First Appellate Authority (FAA) upheld the AO's decision, noting that the new gala was not taken over by the Assessee, and the allotment letter issued by the developer did not constitute a legal right to claim the asset as part of the block of assets. The FAA emphasized that for claiming depreciation, the asset must be owned and used for business purposes, which was not the case here.

Upon appeal, the Tribunal examined whether the Assessee was right in claiming depreciation and whether the acquisition of the gala at Mumbai should be included in the block of assets. The Tribunal concluded that the mere issuance of an allotment letter did not entitle the Assessee to claim STCG benefits, as the asset in question was not existing at the time of payment. The Tribunal emphasized that Section 50, being a deeming provision, must be strictly construed, and the Assessee's claim for deduction of ?44.01 lakhs for a non-existent asset was not tenable. The Tribunal confirmed the FAA's order, deciding the first ground of appeal against the Assessee.

2. Non-allowance of Set-off of Brought Forward Losses:

The second issue pertains to the non-allowance of set-off of brought forward losses amounting to ?7.75 lakhs. The AO found that the Assessee had brought forward business losses of ?17,77,990 from earlier years and had set off the same against the current year's business profit. However, the AO held that STCG could not be treated as business profits, and thus, brought forward business losses could not be set off against STCG. The Assessee was allowed to set off unabsorbed depreciation of ?7.48 lakhs.

The FAA upheld the AO's decision, stating that Section 50 is a deeming provision that only applies to the computation of capital gains and cannot be extended beyond its intended purpose. The FAA referred to the case of Manali Investments and held that the capital gain arising from the transfer of an asset held for more than three years retains the character of long-term capital gains (LTCG) for other provisions and qualifies for set-off against brought forward losses from long-term capital assets as per Section 74 of the Act.

Before the Tribunal, both parties agreed that the issue of carry forward of loss requires further verification by the AO. Consequently, the Tribunal remitted the issue back to the AO for fresh adjudication, directing the AO to afford a reasonable opportunity of hearing to the Assessee. The second ground of appeal was decided in favor of the Assessee, in part.

Conclusion:

The appeal filed by the Assessee was partly allowed. The Tribunal confirmed the FAA's order regarding the addition under STCG and remitted the issue of set-off of brought forward losses back to the AO for fresh adjudication. The order was pronounced in the open court on 23rd May 2018.

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