2017 (10) TMI 1000 - AT - Income Tax

Addition on account of profit on sale of factory building treating the same as Income from Other Sources - Sec 50 applicability - Held that - The undisputed factual matrix is that the assessee has purchased a property comprising of land and factory building during the year and also expended money on its extension. It is also notable that the factory building was not put to use by the assessee for its business of manufacturing of packing material. Instead, during the year itself assessee sold the said property for a consideration, which has yielded surplus. The surplus has not been offered for taxation and instead, assessee claimed depreciation on the block of factory building on the WDV as reduced by the sale consideration. Notably, the cost of acquisition and cost of improvement thereof amounting to ₹ 15,00,000/- (net of ₹ 3,00,000/- in respect of land) and ₹ 1,09,96,039/- respectively were added to the value of the block of factory building. In considered opinion, the assessee has clearly brought out that the factory building was not put to use and was sold out prior to it being used for business. Therefore, in such a situation, the provisions of Sec. 50 of the Act do not come into operation, as canvassed by the assessee before me. Sec. 50 prescribes for computation of Capital Gains in cases where the capital asset forms part of block of assets in respect of which depreciation has been allowed under the Act. Quite clearly, it is a conceded position that the factory building in question was not put to use for business and thus, it cannot be construed to be a capital asset in respect of which depreciation has been allowed under the Act. Therefore, the treatment accorded by the assessee is incorrect. At the same time, even the treatment by the Assessing Officer of assessing the surplus on the sale of factory building as income from other sources is also untenable. Pertinently, the factory building is a capital asset and merely because assessee has acquired it and sold during the year itself would not change its character. Therefore, it is a case where the capital asset on which depreciation has not been allowed has been sold within a period of less than 12 months of its acquisition and, therefore, the resultant surplus is a Short Term Capital Gain. Such a surplus ostensibly cannot be assessed as income from other sources .

Summary

Issues:
1. Addition of profit on the sale of factory building under the head Income from Other Sources.
2. Treatment of surplus arising from the transaction of purchase and sale of property.

Analysis:
1. The appellant challenged the addition of ?12,50,767 under the head Income from Other Sources. The Assessing Officer considered the profit on the sale of the factory building as income from other sources. The appellant contended that the property was a fixed asset, and the surplus was accounted for in accordance with the provisions of the Income Tax Act. The Assessing Officer disagreed, citing a profit on the purchase and sale of the property. The CIT(A) affirmed this decision, stating that the factory building was not part of depreciable assets and the surplus was rightly taxed as income from other sources. The Tribunal noted that the property was not used for business and the surplus was not offered for taxation. It ruled that the factory building was a capital asset, and the surplus should be treated as Short Term Capital Gain, not income from other sources. The judgment cited by the Assessing Officer was deemed inapplicable to the case, and the order of the CIT(A) was set aside.

2. The appellant argued that the factory building was acquired for expanding manufacturing activities but was sold without being utilized for manufacturing due to business prospects. The Revenue supported the lower authorities' reasoning. The Tribunal observed that the factory building was purchased and sold in the same year without being used for business, resulting in a surplus. It clarified that the property did not qualify for depreciation as it was not used for business. The Tribunal concluded that the surplus should be treated as Short Term Capital Gain, not income from other sources. The order of the CIT(A) was overturned, directing the Assessing Officer to recompute the total income of the assessee based on the Tribunal's directions.