2023 (12) TMI 208 - AT - Income Tax

Short term Capital gain / long term capital gain - separation of value of land and building, since depreciation claimed on building - application of the provisions of section 50C - transfer of leasehold rights in the plot of land allotted to the appellant assessee - rejection of claim of cost of construction - whether the provision of section 50C of the Act per se could be applied for transfer of lease hold rate possessed by the assessee? - HELD THAT - As decided in M/s. Green Hotels and Estate Pvt. Ltd 2016 (12) TMI 353 - BOMBAY HIGH COURT S ection 50C is not applicable while computing capital gains on transfer of leasehold rights in land and buildings. Hence, we hold that the sale consideration of transfer of lease hold rate should be considered only Rs. 75 lakhs. Further, we find that the industrial plot of land has been allotted to the assessee on 30.03.2005. The assessee has been making super structure incurring cost of construction in FY 2006-07 onwards. The entire property has been sold by the assessee on 08.10.2009. Hence, the land taken on lease is hold by the assessee for more than 3 years and consequentially eligible for benefit of indexation thereon. Hence, the resultant gain arising on its transfer would be long term capital gain. The building taken by the assessee been held less than three years and deprecation is also claimed by the assessee thereon. Hence, the building taken would be determined based on dimming provision of section 50 of the Act. The facts of assessee incurring expenses towards cost of construction and claiming depreciation thereon is reflected in the financial statement of the assessee itself commencing from 2006-07, 2007-08 and 2008-09. Hence, there is no scope for rejection of claim of cost of construction. Disallowance of business expenses - Addition made as assessee has not carried on any business activity which is also evident from the profit and loss account whether sale or gross receipts shows at Rs. Nil. - HELD THAT - As decided in Mokul Finance Pvt. Ltd. 2007 (7) TMI 351 - ITAT DELHI-I unless there is some material on record to show that the assessee has completely abandoned the share dealing business, merely because there are no business transactions in the relevant previous year cannot be reason enough to come to the conclusion the business has come to an end. Assessee appeal allowed.

Summary

Issues Involved:
1. Application of Section 50C of the Income Tax Act, 1961 for transfer of leasehold rights.
2. Disallowance of business expenses due to no business activity.

Summary:

Issue 1: Application of Section 50C of the Income Tax Act, 1961 for transfer of leasehold rights

The assessee challenged the addition of Rs. 81,81,507/- under the head of short-term capital gains, arguing against the application of Section 50C of the Income Tax Act, 1961. The assessee contended that the stamp duty value does not represent the true fair value of the property, citing financial distress and the nature of the sale as a distress sale. The Assessing Officer (AO) treated the transfer of leasehold rights as a sale, applying Section 50C, and determined the short-term capital gain based on the stamp duty value of Rs. 1,14,06,000/-.

The Tribunal referred to the Hon'ble Bombay High Court's decision in CIT Vs. M/s. Green Hotels and Estate Pvt. Ltd, which held that Section 50C is not applicable to the transfer of leasehold rights. Consequently, the Tribunal concluded that the sale consideration should be Rs. 75 lakhs and not the stamp duty value. Furthermore, the Tribunal acknowledged that the industrial plot was held for more than three years, making it eligible for long-term capital gain treatment with indexation benefits. The Tribunal also recognized the cost of construction incurred by the assessee, allowing the claim for cost of construction.

Issue 2: Disallowance of business expenses due to no business activity

The assessee contested the disallowance of Rs. 16,08,268/- in business expenses, which the AO disallowed on the grounds that no business was conducted during the year. The Tribunal found that the expenses were genuine and necessary for the company's existence and potential future business activities, even if no active business was conducted during the year. The Tribunal relied on judicial precedents, including CIT Vs. Rampur Timber and Tannery Co Ltd and ITO Vs. Mokul Finance Pvt. Ltd, which supported the allowance of such expenses for maintaining the company's status and meeting its obligations.

Conclusion:

The Tribunal partly allowed the appeal, holding that:
1. The sale consideration for the transfer of leasehold rights should be Rs. 75 lakhs, and the resultant gain should be treated as long-term capital gain.
2. The disallowance of business expenses of Rs. 16,08,268/- was not justified and should be allowed.

The appeal was thus partly allowed, with the order pronounced in the open court on 29/09/2023.