2017 (5) TMI 780 - AT - Income Tax

Loss arising on the demolition of a depreciable asset - whether demolition of asset does not constitute transfer of capital asset? - Held that - From the Depredation Statement shown under Annexure I to the 3CD Tax Audit Report for the said assessment year 2003-04 it is seen that Building has been shown as a depreciable asset with opening written down value (WDV) of 1087702/-. A reference to the depreciation statement of earlier years would also show that depreciation has been claimed on the said Building every year. Therefore the asset under question is a depreciable asset. Once an asset is a depreciable asset and forms apart of a Block and such block of assets has ceased to exist at the end of the previous year the provisions of Section 50 of the Act become applicable which deals with capital gain relating to depreciable assets Thus a harmonious reading of sections 43(6)(c) and section 50 of the Act would bring out the fact where an asset is demolished and the block of asset ceases to exist the difference between the written down value and the salvage received shall have to be treated as short term capital gain or short term capital loss as the case may be. In view of the above discussion the action of the Assessing Officer in adding back the short term capital loss of (-) 9, 87, 702/- to the Income of the assessee is erroneous and is not in accordance with the Law. Therefore direct the AO to delete the addition made on this count. Accordingly the grounds raised by the assessee are allowed.

Summary

Issues Involved:
1. Validity of notice issued under section 148 of the Income Tax Act.
2. Allowability of short-term capital loss on the demolition of a building.
3. Interpretation of "transfer" under section 2(47) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Validity of Notice Issued Under Section 148:
The assessee argued that the notice under section 148 was issued based on an audit objection, which is not a valid reason for reopening the assessment. The CIT(A) verified the records and found no mention that the assessment was reopened based on an audit objection. The AO confirmed that the reasons for reopening were recorded independently. Therefore, the CIT(A) dismissed this ground, and the Tribunal did not find it necessary to contest this issue further.

2. Allowability of Short-term Capital Loss on Demolition of Building:
The assessee claimed a short-term capital loss of ?9,87,702 on the demolition of a building, setting it off against long-term capital gains. The AO disallowed this claim, stating that demolition does not constitute a transfer of a capital asset under section 2(47) of the Act. The CIT(A) upheld the AO's decision, agreeing that the demolition did not result in a transfer as defined under the Act.

The Tribunal, however, found that the building was a depreciable asset forming part of a block of assets. According to section 43(6)(c) and section 50, if a block of assets ceases to exist, the difference between the written down value (WDV) and the salvage value should be treated as short-term capital gain or loss. The Tribunal held that the demolition of the building resulted in the block of assets ceasing to exist, and thus, the loss should be considered a short-term capital loss. The Tribunal directed the AO to delete the addition made on this count.

3. Interpretation of "Transfer" Under Section 2(47):
The AO and CIT(A) contended that the demolition of the building did not qualify as a transfer under section 2(47), which includes sale, exchange, relinquishment, or extinguishment of rights. The Tribunal disagreed, stating that the extinguishment of rights in the asset due to demolition should be considered under section 50, which deals with depreciable assets. The Tribunal emphasized a harmonious reading of sections 43(6)(c) and 50, concluding that the loss from demolition should be recognized as a short-term capital loss.

Conclusion:
The Tribunal allowed the appeal, holding that the short-term capital loss on the demolition of the building was allowable and should be set off against long-term capital gains. The Tribunal directed the AO to delete the disallowed short-term capital loss of ?9,87,702 from the assessee's income. The decision was pronounced in the open court on 12th May 2017.