2020 (3) TMI 420 - AT - Income Tax

Computation of capital gain - LTCG OR STCG - Block of assets - HELD THAT - As per section 50(1), if the value of consideration exceeds the aggregate of cost of acquisition and expenses on transfer, there will be Short Term Capital Gain. On the other hand, if the value of consideration of the part transferred is less than the cost of acquisition, then the balance left is the WDV of the block at the end of the year on which depreciation will be charged as per section 32 of the Act. The above provision deals with a case where part of the block of depreciable asset is transferred i.e. the block does not cease to exist. As per section 50(2), if the value of the consideration exceeds the aggregate of cost of acquisition and the expenses of transfer, there will be STCG. On the other hand, if the value of consideration of entire block transferred is less than the aggregate of cost of acquisition and expenses of transfer, there will be short term capital loss. The above provision deals with the case where entire block of depreciable assets is transferred i.e. the block ceases to exist. In the instant case, the assessee sold all the 9 units during the impugned assessment year and out of the sale proceeds of the said flats sold, it purchased a property located in Goa. Disallowing the set off of sale of the units at Ashok Towers/Ashok Garden against the new purchase of property at Goa - appellant submits that in the block of assets concept u/s 50, the sale of asset is ought to be set off against the purchase of new assets in the same block - HELD THAT - In the instant case the assessee has set up the business, which was ready to commence its operation. Thus the assessee would be entitled to claim expenditure which were incurred for the purpose of business. The contentions raised by the assessee before the Ld. CIT(A) vide ground no. 4 was that the AO erred in concluding that since there was no business income in the relevant assessment year, depreciation loss will not be allowed. CIT(A) has allowed this ground of appeal. Set off of sale of the units at Ashok Tower / Ashok Garden against the new purchase of property at Goa - In the block of assets concept u/s 50, the sale of assets ought to be set off against the purchase of new assets in the same block - HELD THAT - We direct the AO to examine it and pass necessary order as per the provisions of the Act. We direct the assessee to file the relevant documents / evidence before the AO. Thus the 2nd ground of appeal is allowed for statistical purposes. In the instant case, we find that the assessee has rightly valued the shares as per Rule 11UA of the Income Tax Rules, 1962 (the Rules) and filed a copy of it before the AO. Further the assessee had even obtained the valuation report from the registered valuer under Rule 11UA. In any case, the value of consideration for transfer of shares is far exceeding the valuation as per Rule 11UA. In the instant case, the AO has failed to point out any mistake in the working of the value of shares as per Rule 11UA. The disallowance made by the AO is based on conjectures. In such a situation, we agree with the findings of the Ld. CIT(A) and confirm it. Short term capital loss - AO disallowed the short term capital loss claimed on the reason that it is not borne out of genuine purchase and sale - HELD THAT - We find that the assessee has rightly valued the shares as per Rule 11UA of the Income Tax Rules, 1962 (the Rules) and filed a copy of it before the AO. Further the assessee had even obtained the valuation report from the registered valuer under Rule 11UA. In any case, the value of consideration for transfer of shares is far exceeding the valuation as per Rule 11UA. In the instant case, the AO has failed to point out any mistake in the working of the value of shares as per Rule 11UA. The disallowance made by the AO is based on conjectures. In such a situation, we agree with the findings of the Ld. CIT(A) and confirm it. Thus the 4th ground of appeal is dismissed. Claim of depreciation and administrative expenses - HELD THAT - It is well settled that where a business unit has been set up by the assessee, which was ready to commence operation, the assessee would be entitled to claim the expenditure which were incurred for the purpose of business. Further, for the purpose of claiming depreciation u/s 32 of the Act, the assets should satisfy the dual conditions of forming part of the block of assets and being used for the purpose of conducting assessee s business. In the instant case, we find that these conditions are satisfied. Therefore, we confirm the order of the Ld. CIT(A) on the above matter

Summary

Issues Involved:
1. Classification of properties as part of the block of assets.
2. Set off of sale of units against the purchase of new property.
3. Allowance of short-term capital loss on the sale of shares.
4. Allowance of depreciation and administrative expenses for the Goa property.

Detailed Analysis:

1. Classification of Properties as Part of the Block of Assets:
The assessee argued that five units purchased at Ashok Garden and Ashok Towers should be included in the block of assets as they were used for business purposes. The Assessing Officer (AO) disagreed, stating that these units were classified as Capital Work in Progress (CWIP) in the balance sheet and were not put to use, thus not eligible for depreciation. The Commissioner of Income Tax (Appeals) [CIT(A)] found that the units were taken possession of on 29.04.2009 and sold on 30.12.2009, and directed the AO to compute long-term capital gains (LTCG) instead of short-term capital gains (STCG) by considering the date of allotment as 01.04.2008. The Tribunal agreed with the CIT(A), noting that the units were capitalized and shown as fixed assets upon completion of construction and were part of the block of assets, thus allowing the first ground of appeal.

2. Set Off of Sale of Units Against the Purchase of New Property:
The assessee claimed depreciation on a property in Goa and office equipment purchased during the year, which the AO disallowed on the grounds that no business activity was undertaken. The CIT(A) observed that administrative expenses were incurred, indicating the property was used for business, and directed the AO to allow the claim of depreciation and administrative expenses. The Tribunal upheld the CIT(A)'s decision, noting that the business was set up and ready to commence operations, thus allowing the second ground of appeal for statistical purposes and directing the AO to examine the matter further.

3. Allowance of Short-Term Capital Loss on the Sale of Shares:
The AO disallowed the short-term capital loss claimed by the assessee on the sale of shares, arguing that the transactions were not genuine and were aimed at evading tax. The CIT(A) found that the shares were sold to an unrelated party, and the valuation was in accordance with Rule 11UA of the Income Tax Rules. The Tribunal agreed with the CIT(A), noting that the AO failed to point out any mistake in the valuation and that the disallowance was based on conjectures, thus dismissing the fourth ground of appeal.

4. Allowance of Depreciation and Administrative Expenses for the Goa Property:
The AO disallowed the claim of depreciation and administrative expenses on the grounds that the Goa property was not utilized for business activities. The CIT(A) observed that the property was furnished and used for business purposes, and allowed the claim. The Tribunal confirmed the CIT(A)'s decision, noting that the conditions for claiming depreciation were satisfied, thus dismissing the fifth ground of appeal.

Conclusion:
The appeal filed by the assessee was partly allowed, while the appeal filed by the revenue was dismissed. The Tribunal upheld the CIT(A)'s decisions on the classification of properties as part of the block of assets, the allowance of depreciation and administrative expenses, and the allowance of short-term capital loss on the sale of shares. The matter of set-off of the sale of units against the purchase of new property was remanded to the AO for further examination.