2019 (7) TMI 1046 - HC - Income Tax

Grant deduction u/s 54G with respect to the long term capital gain earned by the assessee on the sale of its godown situated in Bangalore, an urban area and which has been relocated in a non urban area - assessee sold an explosive godown/property at Bangalore and invested in a property located in a non urban area i.e in the outskirts of Sivakasi town - whether property sold at Bangalore was only a depot/godown/storage place and not an industrial undertaking - ITAT allowed the claim noted that the assessee shifted its godown storing hazardous products to a non urban area and that the activity carried on in the godown being storage and repacking, which is severable from the other activities of the industrial establishment and held that the assessee is entitled to claim exemption of capital gains as per the provisions of Section 54G HELD THAT - Assessing Officer failed to take note of the vital factor namely that the property, which was sold by the assessee in Bangalore, was a 'magazine'. Rule 2(31) of the Explosives Rules, 2008 defines the word 'magazine' to mean a building or structure (other than an explosives manufacturing building) intended for storage of explosives, specially constructed in accordance with the specification provided under these Rules or of a design and approved by the Chief Controller. The expression 'Chief Controller' is defined under Rule 2(9) of the Explosives Rules, 2008 to mean the Chief Controller of Explosives. In terms of Rule 71 of the Explosives Rules, 2008, a person holding licence for possession of explosives granted under these Rules shall store the explosives only in the premises specified in the licence. Thus, possession, usage and sale of explosives are strictly regulated under the provisions of the Explosives Act and the relevant Rules framed thereunder. AO did not take note of this vital factor, but was guided by the common parlance test given to an industrial undertaking. One more factor, which the Assessing Officer lost sight of, was the manner, in which, the first limb of Section 54G(1) of the Act is worded wherein the transfer of a capital asset includes machinery or plant or building or land or any rights in the building or land used for the purpose of business of an industrial undertaking situated in an urban area. T The second limb of Section 54G(1) of the Act is what had weighed in the mind of the Assessing Officer while denying the deduction under Section 54G of the Act. However, what was important to note is that where the capital gains arising from transfer of capital asset, being machinery or plant or land or building used for the purposes of business of an industrial undertaking situated in an urban area effected in the course of or in consequence of the shifting of such industrial undertaking to any area other than an urban area, the assessee is entitled to the benefit of deduction under Section 54G of the Act. The scheme of the Explosives Act and the relevant Rules framed thereunder would clearly bring a 'magazine', which was referred to by the Assessing Officer as a godown to qualify to be a place used for the purpose of business of an industrial undertaking and in fact, going by the definition of the word 'manufacture' under the Explosives Act, the activity done by the assessee namely storage and repacking would also, in our opinion, fall within the definition of the word 'manufacture'. The Tribunal, in paragraph 4.6 of its order, has specifically recorded that the facts are not in dispute. In the light of the above, we find that the interpretation given by the Tribunal to the facts of the case of the assessee is perfectly legal and valid. For the above reasons, the Revenue has not made out any ground to interfere with the order passed by the Tribunal. - Decided against Revenue.

Summary

Issues:
- Eligibility of the assessee to claim deduction under Section 54F of the Income Tax Act for a property sold in Bangalore
- Interpretation of whether the property sold was an industrial undertaking or a depot/godown/storage place
- Justification of directing the Assessing Officer to grant deduction under Section 54G for long term capital gain
- Consideration of LE-3 license obtained by the assessee for the property in Bangalore
- Eligibility of claiming deduction for an amount seized by the Department without intention to deposit in Capital Gains Accounts Scheme

Issue 1: Eligibility for Deduction under Section 54F
The main issue revolves around whether the assessee can claim deduction under Section 54F of the Income Tax Act for a property sold in Bangalore, which was described as a depot/godown/storage place and not an industrial undertaking. The Tribunal found in favor of the assessee, stating that the property was used for storage and repacking activities, qualifying it as an industrial undertaking. The court upheld this interpretation, emphasizing the importance of the Explosives Act and Rules, which define activities like storage and repacking as falling within the scope of 'manufacture.' The Tribunal's decision was deemed legally valid, and the Revenue's appeal was dismissed.

Issue 2: Interpretation of Property Sold
The Assessing Officer initially disallowed the claim for deduction under Section 54G, assessing the amount under 'capital gains.' The Commissioner of Income Tax (Appeals) concurred with this decision, stating that the property sale was a one-off transaction not directly related to shifting an industrial undertaking. However, the Tribunal considered the business activities and the definition of 'industrial undertaking,' ultimately allowing the deduction under Section 54G. The court highlighted the importance of the definition of 'manufacture' under the Explosives Act, which encompassed activities carried out by the assessee, leading to the conclusion that the property qualified as an industrial undertaking.

Issue 3: LE-3 License Consideration
The Revenue raised concerns regarding the LE-3 license obtained by the assessee for the Bangalore property, arguing that it prohibited manufacturing activities. However, the court focused on the definition of 'manufacture' under the Explosives Act, which included activities like storage and repacking. The Tribunal's decision to grant the deduction under Section 54G was upheld, emphasizing the legal validity of the interpretation based on the relevant laws and rules governing explosives.

Issue 4: Seized Amount for Deduction
Another issue raised was the eligibility to claim deduction for an amount seized by the Department without intending to deposit it in the Capital Gains Accounts Scheme. The court did not find grounds to interfere with the Tribunal's decision, dismissing the appeal and answering the substantial question of law against the Revenue.

In conclusion, the court upheld the Tribunal's decision, emphasizing the legal interpretation based on the Explosives Act and relevant rules, allowing the assessee to claim deductions under Section 54F and 54G for the property sold in Bangalore, which was considered an industrial undertaking due to the storage and repacking activities conducted on the premises.