2022 (10) TMI 215 - AT - Income Tax

Disallowance being custom duty paid towards Yacht - whether the liability to pay the Customs Duty was of assessee or not and in which year assessee could claim the expenses? - HELD THAT - Customs and Excise Settlement Commission has categorically held that the liability to pay Customs Duty was on the assessee because the yacht was used in India and therefore the assessee alone should pay the Customs Duty. The payment of Customs Duty by the assessee was a statutory liability of the assessee company which has been dispensed with and accordingly assessee has rightly claimed the payment of Customs Duty as expenses. As the year of claim of expenses is concerned though the assessee had paid the Customs Duty in the year 2009 it was only to release the yacht attached with the Customs authorities and same was done under protest as it was contesting the levy of Customs Duty on the ground that since it is a foreign flag vessel there was no liability to pay the Customs Duty. When the Customs and Excise Settlement Commission had fixed the liability and determined the liability in the financial year 2012-13 relevant to Assessment Year 2013-14 the liability has definitely crystallised in this year only and therefore the same has rightly been claimed in this year. Accordingly the order of the ld. CIT (A) is confirmed and the grounds raised by the Revenue is dismissed. Rate of tax on sale of depreciable assets - Long term capital gains on sale of helicopter - AO noted that the helicopter was part of block of assets and was a depreciable asset and why it should not be treated as Short term capital gains - Applicability of section 50 - whether sale of a depreciable asset (i.e. helicopter) which was part of block of assets and held for more than 3 years is taxable u/s 50 as Short term capital gains then whether the rate of tax would be of Long term capital gains treating it to be a long term capital asset or rate of short term capital gain? - HELD THAT - As per Section 2(42A) of the Act short term capital asset means capital asset held by the assessee for not more than 36 months immediately preceding the date of transfer. Section 50 is a special provision for computing the capital gains in case of a depreciable asset and is not only restricted to provisions of Section 48 and 49 of the Act. It is a deeming fiction carved out for treatment of depreciable asset which has limited application for the purpose of mode of computation of capital gains contained in Section 48 and 49 - Ergo it deals with capital asset which forms part of block of assets in which depreciation has been allowed under this Act and therefore the mode of computation of profit u/s 48 and 49 of the Act are applied with certain modifications. In other words the fiction created in Section 50 of the Act is only restricted to the mode of computation u/s 48 and 49 of the Act which cannot be extended beyond that. This issue had come up for consideration before case of CIT vs Ace Builders 2005 (3) TMI 36 - BOMBAY HIGH COURT wherein the Hon ble High Court in the context of claim of deduction under Section 54E of the Act in respect of capital gain arising on transfer of a capital asset on which depreciation has been allowed which is deemed to be Short term capital gains under Section 50. Applicability of section 50 is for the limited purpose of working out the cost of acquisition u/s.48 and 49 of the depreciable asset sold and the applicability of section 50 is restricted for that purpose only and for the purpose of other provisions of the Act the capital gain has to be treated as long term capital gain if the period of holding is more than 3 years. The ratio and the principle as culled out from the aforesaid judgments are that the legal fiction created in Section 50 of the Act deems capital gains as short term capital gains but does not deem the asset as short term capital asset and therefore it cannot be said that Section 50 of the Act converts long term capital asset into short term capital asset. Thus if we apply the same ratio and principle here then as per Section 112 of the Act the tax on long term capital gains on transfer of a long term capital asset is @ 20% and therefore even if the capital gains is deemed as short term capital gains in terms of Section 50 of the Act but for all other purposes including for the purpose of Section 112 the deeming fiction cannot be extended for rate of taxes and therefore the rate of tax has to be as per Section 112 of the Act i.e. 20%. Accordingly the order of ld. CIT (A) is confirmed and ground no. 2 is dismissed.

Summary

Issues Involved:
1. Disallowance of Customs Duty paid towards Yacht.
2. Taxation of profit on transfer of Capital Asset (Helicopter) as Long Term Capital Gain versus Short Term Capital Gain.

Detailed Analysis:

Issue 1: Disallowance of Customs Duty paid towards Yacht

Facts and Background:
The assessee-company, involved in travel and chartering services, claimed a deduction of Rs. 26,49,31,101/- as Customs Duty paid for a yacht named 'Tian'. The yacht was taken on rent from M/s. Ammolite Holding Limited. The Assessing Officer (AO) disallowed this claim, reasoning that the yacht was used for personal purposes by Shri Anil Ambani and his family, and thus, the Customs Duty paid could not be considered a business expense under Section 37(1) of the Income Tax Act, 1961.

Assessing Officer's Observations:
1. The yacht was purchased by M/s. Ammolite Holding Limited for personal use of Shri Anil Ambani and family.
2. The Customs Duty was not incurred during the relevant previous year.
3. The expense was not revenue in nature and was personal rather than business-related.
4. The yacht was used for personal purposes, contradicting the business purpose criterion.

Commissioner of Income Tax (Appeals) [CIT(A)] Observations:
1. The yacht was used for business purposes by the assessee-company to provide services to Reliance ADA Group Pvt. Ltd.
2. The Settlement Commission levied Customs Duty on the assessee, crystallizing the liability in the relevant assessment year (2013-14).
3. The expense was incurred for business purposes and not for personal use.

Tribunal's Findings:
1. The assessee-company was engaged in legitimate business activities, including chartering yachts.
2. The revenue earned from the yacht operations was accepted as business income in previous years.
3. The liability to pay Customs Duty was crystallized in the relevant assessment year as per the Settlement Commission's order.
4. The yacht was not used for personal purposes by the assessee-company, and the payment of Customs Duty was a statutory liability.

Conclusion:
The Tribunal upheld the CIT(A)'s decision allowing the deduction of Customs Duty as a business expense, confirming that the expense was incurred for business purposes and crystallized in the relevant assessment year.

Issue 2: Taxation of profit on transfer of Capital Asset (Helicopter) as Long Term Capital Gain versus Short Term Capital Gain

Facts and Background:
The assessee-company sold a helicopter and declared a profit of Rs. 19,09,32,707/- as Long Term Capital Gain (LTCG). The AO reclassified this as Short Term Capital Gain (STCG), arguing that the helicopter was a depreciable asset within a block of assets, thus subject to Section 50 of the Income Tax Act.

Assessing Officer's Observations:
1. The helicopter, being a depreciable asset, falls under the purview of Section 50, which deems the gains from such assets as STCG.
2. The provisions of Section 2(42B) define STCG as gains from the transfer of short-term capital assets, which include depreciable assets.

CIT(A) Observations:
1. The CIT(A) referred to the Supreme Court and Bombay High Court rulings, which clarified that while Section 50 deems gains from depreciable assets as STCG for computation purposes, it does not convert the asset into a short-term capital asset.
2. The CIT(A) concluded that for tax rate purposes, the gains should be treated as LTCG if the asset was held for more than three years.

Tribunal's Findings:
1. The Tribunal affirmed that the helicopter, held for more than three years, qualifies as a long-term capital asset.
2. The deeming fiction of Section 50 applies only to the computation of gains, not the classification of the asset.
3. The tax rate applicable should be that for LTCG as per Section 112 of the Act, i.e., 20%.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, confirming that the profit on the sale of the helicopter should be taxed at the LTCG rate of 20%, despite the computation being under Section 50.

Final Judgment:
The appeal by the Revenue was dismissed, and the orders of the CIT(A) were confirmed, allowing the deduction of Customs Duty as a business expense and taxing the gain from the sale of the helicopter at the LTCG rate.