2012 (7) TMI 58 - AT - Income Tax

Capital gain transfer of property where title is not absolute and clear - land was transferred during the financial year 1999-2000 - sale transaction of the land completed during the relevant previous year under consideration, only the registration has been done subsequently - assessee has received 50% of the total consideration as partial Payment against the sale of property Second Part and another remaining 50% of the sales consideration was kept in an interest bearing escrow account with the agreement that the said amount shall be delivered on-or before the registration Held that - assessee was always ready and willing to perform his part of contract - assessee has also granted an unrestricted exclusive right to use and build upon this land - assessee has transferred a capital asset as defined under section 2(47)(v) of the Income-tax Act. Consequent upon this transfer of capital asset, the assessee is liable to pay the capital gain tax during the year under consideration - Revenue s appeal is allowed. Depreciation - assessee has not claimed the depreciation on the bulk of assets with the contention that the claim of depreciation is at the option of the assessee - assessee also did not claim any depreciation allowances Held that - By not claiming any depreciation allowances, the assessee company had adopted a colorable tax planning devices and hence the case of the assessee is squarely covered within the purview of the decision of the Supreme Court in the McDowell s case (1985 (4) TMI 64 (SC)) - assessee is granted depreciation as per Annexure A to this order. The depreciation shall be allowed to be carried forward for eight succeeding years as per section 32(2) of the I.T. Act and the written down value of the assets/additions to the asset s shall accordingly be reduced and this would be the opening WDV for the assessment year 1999-2000 Expenditure incurred under the VRS - capital or revenue Held that - Expenditure on the voluntary retirement scheme is an allowable expenditure as the same has been incurred on account of commercial expediency - compensation paid to the workmen who retired prematurely and such expenditure incurred by the assessee for commercial expediency in order to facilitate carrying out the business is allowable u/s 37(1) of Income-tax Act, therefore, it cannot be said to be an expenditure of capital in nature - expenditure incurred on VRS is allowable as revenue expenditure In favor of assessee

Issues Involved:
1. Deletion of addition related to capital gain on sale of land.
2. Allowing the assessee not to claim depreciation.
3. Allowing VRS expenditure as revenue expenditure.

Issue-wise Detailed Analysis:

1. Deletion of Addition Related to Capital Gain on Sale of Land
The primary issue was whether the capital gain on the sale of land measuring 28138 sq. meters (7 acres) should be taxed in the assessment year 1998-99 or in the assessment year 2000-01. The Assessing Officer (AO) argued that the sale transaction was completed during the previous year under consideration, despite the registration being done subsequently. The AO considered the sale consideration of Rs. 6.48 crores as taxable under the head Long Term Capital Gain during the year under consideration, citing that the possession of the land was handed over to Tecumseh, and the assessee received the full benefit of the sale consideration.

The CIT(A) granted relief to the assessee, holding that the land could not be legally transferred during the pendency of the acquisition notification by the Haryana Government. The CIT(A) referenced the Karnataka High Court decision in CIT v. H.K. Patil, which held that the sale took place only after obtaining the necessary sanction.

The Tribunal, however, disagreed with the CIT(A), concluding that the assessee had effectively transferred the capital asset as defined under section 2(47)(v) of the Income-tax Act during the previous year under consideration. The Tribunal noted that the possession was handed over, and the sale consideration was received, thus fulfilling the conditions for transfer under section 53A of the Transfer of Property Act. Consequently, the Tribunal allowed the revenue's appeal on this ground, holding that the capital gain should be taxed in the assessment year 1998-99.

2. Allowing the Assessee Not to Claim Depreciation
The AO had allowed depreciation of Rs. 54,94,76,671/- despite the assessee not claiming it, citing that post the deletion of section 34(1) of the Income-tax Act, the particulars required for claiming depreciation were no longer a pre-condition. The AO viewed the non-claiming of depreciation as a tax planning device.

The CIT(A) granted relief to the assessee, referencing the Supreme Court decision in CIT v. Mahendra Mills, which held that depreciation could not be thrust upon the assessee if not claimed. The CIT(A) decided in favor of the assessee, stating that depreciation could not be compulsorily granted if not claimed.

The Tribunal upheld the CIT(A)'s decision, noting that the issue was covered in favor of the assessee by the Delhi Bench of the Tribunal in the assessee's own case for the assessment years 1997-98 and 1999-00. The Tribunal referenced various judicial pronouncements that supported the view that depreciation is not mandatory if not claimed by the assessee.

3. Allowing VRS Expenditure as Revenue Expenditure
The AO had treated the VRS expenditure of Rs. 1,52,81,000/- as capital expenditure, arguing that it provided an enduring benefit to the assessee by restructuring and reducing the workforce.

The CIT(A) granted relief to the assessee, holding that the VRS expenditure was incurred on account of commercial expediency and was allowable under section 37(1) of the Income-tax Act. The CIT(A) referenced multiple judicial decisions that supported the view that VRS expenditure is revenue in nature.

The Tribunal upheld the CIT(A)'s decision, noting that the provisions of section 35DDA, which provide for the amortization of VRS expenditure, were applicable from 1.4.2001 and not relevant for the assessment year 1998-99. The Tribunal cited various judicial decisions that classified VRS expenditure as revenue expenditure, incurred for commercial expediency.

Conclusion
The Tribunal allowed the revenue's appeal on the issue of capital gain, holding that the gain should be taxed in the assessment year 1998-99. However, the Tribunal dismissed the revenue's appeals on the issues of depreciation and VRS expenditure, upholding the CIT(A)'s decisions in favor of the assessee.

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