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2016 (3) TMI 78 - AT - Income TaxApplicability of the provisions of sec.50 - transaction of sale of land and building located in an area named Kalina (hereinafter Kalina Property ) in Mumbai - Held that - The tax authorities have presumed that the Kalina property has formed part of block of assets. The said presumption is not supported by any evidence. The assessee has all along been claiming that it has claimed depreciation on Navi Mumbai office premises and when it was sold the entire surplus arising in the block was offered as short term capital gain. When an asset has not entered the block, then the question of application of Explanation 5 to sec. 32(1) shall not have application.In view of the above, we are of the view that the Ld CIT(A) was not justified in holding that the provisions of sec. 50 of the Act shall apply to the structures, if any, available on the Kalina property. Accordingly, we set aside the order of Ld CIT(A) on this issue. Accordingly, we direct the AO to compute the capital gain by treating the expenses incurred on land levelling, compound wall, etc as land improvement cost, since they have been predominantly incurred to protect the land only. Deduction of expenses while computing the capital gains - Held that - We notice that the assessee has obtained valuation report from /s M.B. Sabnis & Co. in order to ascertain the market value of property as on 1.4.1981 and has paid a sum of ₹ 55,150/-. The valuation report so obtained would only serve for the purpose of computation of capital gains and hence the same cannot be considered to be expenses incurred in connection with the transfer of land. Accordingly, we are of the view that the tax authorities are justified in disallowing this claim. The expenses incurred on soil testing, in our view, is connected with the sale transaction and hence the same should be allowed, since the assessee has carried out the same only to establish the quality of soil available on the land. The legal & due diligence fee of ₹ 75.00 lakhs paid to Kirit Damania & Co. was related to the examination of title deeds and carrying out due diligence and hence we are of the view that the Ld CIT(A) was justified in allowing the same. The payment made to K.N. Gandhi & Co. (Rs.82,72,500/-) and J.R. Shah & Co. (Rs.50,000/-) have been claimed to be towards legal, taxation planning fees. However, the assessee has already paid legal & due diligence fee to /s Kirit Damania & Co. and hence the nature of services rendered by the above said two professional firms were not known or properly explained. In any case, the taxation planning activity cannot be considered to be an expenditure incurred in connection with the transfer of land. However, since they have rendered some legal service connected with the transfer of land, we are of the view that a portion of the payment should be considered as expenditure incurred in connection with the transfer of land. Accordingly we modify the order of Ld CIT(A) and direct the AO to allow 50% of the expenses paid to /s K.N. Gandhi & Co and M/s J.R. Shah & Co. The remaining expenditure relate to architect fee paid to two firms. The nature of services rendered by the two architect firms has not been brought on record. In the absence of the relevant details, we are not able to decide as to the payment made to the two architect firms relate to the expenditure incurred in connection with the transfer of land. Accordingly, we are of the view that the allowability of payment made to the architect firms requires fresh examination at the end of the AO. Accordingly we set aside the order of Ld CIT(A) on this issue and restore the same to the file of the AO with the direction to examine the claim of the assessee by examining the nature of services rendered by the two architect firms, viz., M/s Rajiv Harmalkar and M/s Shekhar Arolkar & Associates.
Issues Involved:
1. Applicability of Section 50 of the Income Tax Act to the sale of Kalina Property. 2. Validity of reassessment proceedings. 3. Classification of capital gains (long-term vs. short-term) on different components of the Kalina Property. 4. Deductibility of expenses incurred in connection with the transfer of the Kalina Property. Issue-wise Detailed Analysis: 1. Applicability of Section 50 of the Income Tax Act to the Sale of Kalina Property: The primary dispute revolves around whether Section 50 of the Income Tax Act, which deals with the capital gains on depreciable assets, applies to the sale of the Kalina Property. The assessee contended that Section 50 should not apply as no depreciation was claimed on the Kalina Property, whereas the revenue argued otherwise. The CIT(A) held that the gain from the land portion should be treated as long-term capital gains, while the gain from the building portion should be treated as short-term capital gains under Section 50. The tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's ruling in CIT Vs. Alps Theatre and the Bombay High Court's decision in CIT Vs. CITI Bank N.A, which clarified that land is not a depreciable asset and should be segregated from the building for capital gains purposes. 2. Validity of Reassessment Proceedings: The assessee challenged the validity of the reassessment proceedings initiated under Section 148 of the Income Tax Act. The reassessment was triggered by a survey operation wherein a partner of the firm admitted that the gains were wrongly disclosed as long-term capital gains. However, the partner retracted this statement shortly thereafter. The CIT(A) and the tribunal found that the reassessment proceedings were valid, as the assessing officer had reason to believe that income had escaped assessment based on the partner's initial admission. 3. Classification of Capital Gains: The tribunal examined the classification of capital gains arising from the sale of the Kalina Property. The CIT(A) had directed that the sale consideration should be bifurcated between land and building, with the land portion being assessed as long-term capital gains and the building portion as short-term capital gains. The tribunal agreed with this bifurcation, noting that the land was not a depreciable asset and referencing multiple judicial decisions that supported the segregation of land and building for capital gains purposes. 4. Deductibility of Expenses: The tribunal reviewed the deductibility of various expenses incurred in connection with the transfer of the Kalina Property. The CIT(A) had allowed some expenses while disallowing others. The tribunal upheld the CIT(A)'s decision to allow expenses related to legal and due diligence fees but modified the decision regarding payments to K.N. Gandhi & Co. and J.R. Shah & Co., allowing only 50% of these expenses. The tribunal also directed the assessing officer to re-examine the nature of services rendered by the architect firms to determine the allowability of those expenses. Conclusion: The tribunal upheld the CIT(A)'s decision to bifurcate the sale consideration between land and building, treating the land portion as long-term capital gains and the building portion as short-term capital gains. The tribunal also confirmed the validity of the reassessment proceedings and provided specific directions regarding the deductibility of expenses related to the transfer of the Kalina Property. The appeals were decided in favor of the assessee on the merits, while the revenue's appeal was dismissed.
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