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2018 (7) TMI 1162 - AT - Income TaxRevision u/s 263 - directing the AO to disallow the short term capital loss and instead assess short term capital gain - Held that - In the audited financial statements of the appellant/assessee, the assessee had made appropriate disclosure which established that the assessee had sold both the plant and machinery and Capital WIP for a composite consideration of ₹ 27,50,00,000/- and the resultant loss of ₹ 12,65,47,945/- was declared in the P&L Account. The assessee had in fact made proper disclosure of the aforesaid facts in the audited accounts as well as in the transactional documents which proved that the assessee had in fact sold both plant & machinery and Capital WIP for a composite consideration of ₹ 27,50,00,000/-. In the aforesaid facts and circumstances, we hold that the finding of the Ld. Pr CIT that consideration received by the appellant/assessee pertained to only sale of plant & machinery and no evidence in support of sale of Capital WIP was furnished is factually incorrect and, therefore, unsustainable. Since the facts of the instant case demonstrate beyond doubt that the price of ₹ 27,50,00,000/- received by the assessee was in respect of plant & machinery as well as Capital WIP, the Ld. Pr. CIT s finding that such price was paid only in respect of plant & machinery was based on no material and, therefore, the finding recorded by the Ld. Pr. CIT on incorrect understanding of the facts is unsustainable in law. Similarly, the Ld. Pr. CIT s finding in show cause notice as well as impugned order that the loss on sale of fixed assets was determined by AO without conducting any enquiry is also even factually wrong. Therefore, Ld. Pr. CIT s order which is based on incorrect understanding of the material facts as discussed above is unsustainable and needs to be set aside on this score alone. Notice u/s. 142(1) of the Act dated 03.11.2014, the AO had raised specific question requiring the assessee to furnish details of machinery and capital WIP sold and the reasons for low sale consideration. From the material placed before him and only after examination of the document furnished the AO passed the assessment on 16.01.2015. On these facts, therefore, we are unable to accept the Ld. Pr. CIT s allegation in the show cause notice that the AO has passed the order without obtaining any information from the assessee on the issue. As far as the question whether cost of capital WIP is required to be computed for computing capital gains, we hold that the Ld. Pr. CIT s reference to section 50(2) of the Act was irrelevant. It should be kept in mind that section 50(2) of the Act only lays down the manner of computation of capital gain on sale of depreciable assets. It does not define the term Capital Asset . One may say that capital WIP is not a depreciable asset unless put to use, but it is indeed a capital asset and hence, any gain/loss arising on this transaction is taxable by way of capital gain/loss. Section 2(14) of the Act which defines the term Capital Asset is an inclusive definition which means it is not exhaustive and, therefore, it includes within this ambit Property of every kind . In the circumstances, by no stretch of imagination one can argue that any blind person would pay a consideration of almost seven times of the actual cost at which the machinery was originally acquired but at the relevant time of sale have been used, old, depreciated and worn out scrap item. Indeed therefore, we concur with the assertion of assessee that the capital WIP was sold along with the plant and machinery which were lying idle in the appellant/assessee s factory whose business was under suspension. Accordingly, both the appellant/assessee as well as the AO was right on the facts and in law in taking into account the cost of acquisition of capital WIP for computing the overall loss accruing on sale of fixed assets including capital WIP. For the reasons set out in the foregoing we are therefore, unable to agree with the Ld. Pr. CIT s finding in the impugned order that no evidence was furnished before him satisfying the claim raised by the assessee is not tenable and, therefore, we find that the jurisdiction invoked for exercising his revision jurisdiction is not tenable in the eyes of law and, therefore, we have no hesitation in quashing the impugned order passed by the Ld. Pr. CIT. Therefore, the ground of appeal of assessee is allowed.
Issues Involved:
1. Jurisdiction of Pr. CIT under Section 263 of the Income-tax Act, 1961. 2. Validity of the notice issued to a non-existing entity. 3. Computation of short-term capital gain/loss on the sale of plant and machinery and Capital Work-in-Progress (WIP). 4. Whether the AO conducted adequate enquiry before completing the assessment. Issue-wise Detailed Analysis: 1. Jurisdiction of Pr. CIT under Section 263 of the Income-tax Act, 1961: The appellant challenged the jurisdiction of the Pr. CIT under Section 263, arguing that the AO's order was neither erroneous nor prejudicial to the interest of the Revenue. The Tribunal referred to the Supreme Court's decision in Malabar Industries Ltd. vs. CIT, which held that for the Pr. CIT to invoke Section 263, the order must be both erroneous and prejudicial to the Revenue's interest. The Tribunal found that the Pr. CIT's assumptions that the sale price pertained only to scrap plant and machinery and that no enquiry was conducted by the AO were factually incorrect. The Tribunal concluded that the AO had indeed examined the relevant facts and documents before completing the assessment, making the Pr. CIT's invocation of Section 263 unsustainable. 2. Validity of the notice issued to a non-existing entity: The appellant argued that the notice under Section 263 was issued in the name of a non-existing entity, M/s. Bhatapara Paper Mills Ltd. The Tribunal did not specifically address this issue in its detailed analysis, focusing instead on the substantive issues related to the computation of capital gains and the adequacy of the AO's enquiry. 3. Computation of short-term capital gain/loss on the sale of plant and machinery and Capital Work-in-Progress (WIP): The appellant sold its scrap paper manufacturing plant, including Capital WIP, for ?27,50,00,000. The AO assessed a short-term capital loss of ?9,65,11,775. The Pr. CIT argued that under Section 50(2), the cost of Capital WIP should not be considered in computing the capital gain, as it did not form part of the block of assets. The Tribunal found that the sale agreement and audited financial statements clearly indicated that the sale included both plant and machinery and Capital WIP. The Tribunal held that Capital WIP is a capital asset under Section 2(14) and its cost should be considered in computing capital gains. The Tribunal also noted that the Pr. CIT's assumption that the entire sale consideration was for plant and machinery was factually incorrect. 4. Whether the AO conducted adequate enquiry before completing the assessment: The Tribunal found that the AO had issued specific notices under Section 142(1) and had received detailed responses from the appellant, including documents related to the sale of fixed assets and Capital WIP. The AO had examined these documents and accepted the appellant's computation of the short-term capital loss. The Tribunal concluded that the AO had conducted adequate enquiry and that the Pr. CIT's finding to the contrary was factually incorrect. Conclusion: The Tribunal quashed the Pr. CIT's order under Section 263, holding that the AO's original assessment was neither erroneous nor prejudicial to the interest of the Revenue. The Tribunal allowed the appellant's appeal, emphasizing that the AO had conducted a proper enquiry and that the Pr. CIT's assumptions were factually unfounded. The Tribunal also affirmed that the cost of Capital WIP should be considered in computing capital gains, as it is a capital asset under the Income-tax Act.
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