2019 (6) TMI 1255 - AT - Income Tax

Capital gain arising out of sale of office premises - LTCG OR STCG - characterization of asset - not claimed depreciation under Income tax Act though claimed under companies Act - used the office as registered office - mandatory nature of depreciation - HELD THAT - As decided in SAKTHI METAL DEPOT VERSUS ITO 2004 (11) TMI 507 - ITAT COCHIN character of the asset does not change only for the reason that the flat was used as a business asset/depreciable asset in the past. A long-term capital asset even though used as a depreciable asset in the past still could be a long-term capital asset for the purpose of taxation, if the property was not treated as a depreciable asset at the time of sale. It is always possible that a particular asset can be a personal asset for some time and a business asset for some other time. It entirely depends upon the intention of the owners of the property in which way it should be used. The assessee s gain is arising out of sale of office premises is to be assessed as long term capital gain and consequential relief is to be allowed. Allowance of cost of improvement claimed - assessee is unable to file any evidence before the lower authorities as the transaction of the year 2003-04 and it is 16-year-old matter - HELD THAT - As noted assessee had incurred various expenses on improvement of the 4 galas in the nature of certain architectural changes, during the A.Y. 2004-05 amounting to ₹ 46,45,700/- which was duly explained from the Schedule of Fixed Assets in the Audited Balance Sheet of the company for FY 2003-04. During the course of assessment proceedings, the AO had asked the AR of the assessee firm to produce various documentary evidences in order to substantiate the cost of acquisition as claimed. We direct the assessee to produce all the relevant evidences before AO and AO will consider the relevant accounts of the assessee including schedule of fixed assets from the balance sheet and will decide the issue afresh. Hence, this issue is set aside to the file of the AO. - Appeal of assessee is partly allowed.

Summary

Issues Involved:
1. Classification of capital gain arising from the sale of office premises as short-term or long-term.
2. Disallowance of expenses on account of cost of improvement to the property.
3. Disallowance of the difference in cost of acquisition.

Issue-wise Detailed Analysis:

1. Classification of Capital Gain:
The primary issue in this appeal was whether the capital gain arising from the sale of office premises should be treated as short-term or long-term. The assessee claimed the gain as a long-term capital gain, stating the asset was treated as an investment and had not claimed depreciation under section 32 of the Income Tax Act, 1961. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] treated the gain as short-term capital gain under sections 50 and 50A of the Act, arguing that the office premises were part of the "block of assets" and depreciation was mandatory, whether claimed or not.

The Tribunal noted that the assessee had shown the premises as an investment in the balance sheet and had not claimed depreciation as per the Income Tax Act, 1961. The Tribunal referenced the decision in the case of Prabodh Investment & Trading Co. and Sakthi Metal Depot, where it was held that if no depreciation was claimed or allowed, the asset ceased to be a business asset and should be treated as a long-term capital asset. The Tribunal concluded that the asset was held as an investment, not part of the block of assets, and thus, the gain should be treated as a long-term capital gain.

2. Disallowance of Cost of Improvement:
The second issue was the disallowance of expenses amounting to ?46,65,700 on account of cost of improvement to the property. The CIT(A) upheld the AO's disallowance because the assessee failed to provide documentary evidence to support the claim. The Tribunal acknowledged that the transaction dated back to 2003-04, making it challenging for the assessee to produce evidence. The Tribunal directed the assessee to produce relevant evidence, such as balance sheets showing the addition to the office premises, before the AO. The AO was instructed to consider these documents and decide the issue afresh.

3. Disallowance of Difference in Cost of Acquisition:
The third issue involved the disallowance of ?2,87,800 on account of the difference in the cost of acquisition. This issue was not elaborately discussed in the judgment, but it was implicitly addressed within the broader context of the capital gain classification and the cost of improvement.

Conclusion:
The Tribunal partly allowed the appeal, ruling that the capital gain should be treated as a long-term capital gain and directing the AO to reconsider the cost of improvement claim based on additional evidence provided by the assessee. The Tribunal emphasized the need for the AO to review the relevant accounts and balance sheets to resolve the issue of cost of improvement. The appeal was thus remanded to the AO for a fresh decision on the cost of improvement while affirming the long-term nature of the capital gain.