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TMI Blog2001 (2) TMI 276X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee-firm came into existence vide a deed dated 15-4-1978 with four partners, who are brothers with equal shares in profit or loss. Clause 3 of the said partnership deed relating to object reads as under: "3. The main object of the firm shall be to construct a building with Hotel, Lodging facilities and commercial shop rooms at the site already purchased at Jail Road, Calicut. Any other similar or allied business may also be started in future with the consent of all the partners. For all such new ventures this deed shall be binding on all respects." The stand of the assessee is that the four partners have purchased some land on which a building had been constructed, in which the ground floor was let out for commercial shop rooms and the first floor and above were used to run a lodge. The admitted position is that the assessee claimed depreciation on the portion used as lodge before the building was sold vide the sale deed dated 26-6-1987, and no depreciation was claimed or allowed on the portion let out for shops, presumably because the rental income from the shops was brought to tax under the head 'property'. As we have already mentioned, according to the assessee, what w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Commissioner of Income-tax, however, set aside this assessment exercising his powers under section 263 of the Income-tax Act on the ground that the firm claimed depreciation on the portion of the building used as lodge and in view of the amendment to section 50 of the Income-tax Act with effect from 1-4-1988, capital gains on transfer of depreciable assets should be deemed to be short-term. capital gains and so the assessee is not entitled to deduction, under section 48 and the Assessing Officer has wrongly allowed the claim of the assessee for deduction under section 48 in respect of even the capital gains apportionable to the sale of the lodge. He also mentioned that the assessee-firm did not carry on any business during the year and hence the Assessing Officer erred in allowing the loss under the head 'business', claimed by the assessee. The assessee had no objection for the setting aside of the assessment, subject to its right to plead its case afresh and on any other ground. 6. In the course of the assessment proceedings taken up by the Assessing Officer consequential to the order under section 263, the assessee filed a revised return of income showing 'nil' income. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... --------- Balance 1,10,850 --------- Short Term Capital Gain by Virtue of section 50 Sale price of portion of building used as lodge, furniture, fittings, etc. as discussed in para 9 25,50,800 Less: Written down value 12,35,156 --------- 13,15,664 --------- Taxable income (rounded off) 14,26,510" --------- It may be observed that the Assessing Officer computed the capital gains in respect of the let out portion under the head 'capital gains' and the capital gain on the sale of the lodge under the head 'short-ter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he agreement gives the particulars of the various tenants occupying the shops let out by the assessee. The sale agreement has two schedules, Schedule A and Schedule B, relating to the properties agreed to be sold, and Schedule A giving the description of the property agreed to be sold reads as under: "Description of properties: Included in Registered document No. 464 of 1971 of the Kozhikkode Sub Registry Office and obtained by the first party, and known as Puthankovilakam, Pthiyakovilakam Paramba lying north to the Road and included in the Northern piece of the land out of which as per the plan the shop rooms, restaurant and buildings and all the constructions connected with the same and lands, and the ground floor where the construction is completed and also the first floor and the second floor, the work not completed third floor, the open space of the top floor, including electric fittings pipe connections with all Kuzhikoors improvements and possession along with all equitable rights building Nos. 17............". Schedule B gives particulars of some furniture like tables, cot, chairs, stools, Almirah, etc., and some miscellaneous items like Tape recorder, P.B.X., etc. ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Villiapilly Branch of the Canara Bank for Rs. 5,00,000 (Rupees five lakhs only) and to the South Malabar Grammin Bank, Kuningad Branch Cheque No. 075739 for Rs. 5,00,000 (Rupees five lakhs only) are made as per the proceeds of the two cheques, the sale consideration of Rs. 10,00,000 (Rupees Ten lakhs only) is received and fully satisfied our rights over one share out of four shares in items of properties in the Schedule without separation is surrendered to you by virtue of the sale deed and you are put in actual possession, with the result that the right of over one share we had in the items of properties in the Schedule like Jenmom, Kuzhikoors and improvements, possession and equitable rights, without separation is transferred to you and you obtained the same one share out of four shares independently and merged in you and you have taken possession of the same. So from today onwards one share out of four shares in the items of property in the Schedule without separation and three shares out of four shares belonging to us, either jointly or by dividing the proportionate share of the Government tax, Corporation tax etc. are to be paid and enjoy the same, from the above said Coolie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the presence of mediators by executing the surrender deed and the consideration of Rs. 30,00,000 (Rupees thirty lakhs only) for the surrender deed is given, as per cheque No. 2983549 drawn in Villiapilly Branch of the Canara Bank Rs. 14,00,000 (Rupees fourteen lakhs only) cheque No. 075733 of South Malabar Grammin Bank Kuningad Branch Rs. 1,00,000 (Rupees one lakh only) cheque No. 075735 of South Malabar Grammin Bank, Kuningad Branch Rs. 3,00,000 (Rupees three lakhs only) cheque No. 075736 of the South Malabar Grammin Bank, Kuningad Branch Rs. 1,00,000 (Rupees one lakh only) cheque No. 2983550 of the Canara Bank, Villiapilly Branch Rs. 1,00,000 (Rupees one lakh only) cheque No. 2208491 of the Canara Bank Villiapilly Branch Rs. 5,00,000 (Rupees five lakhs only) cheque No. 075740 of the South Malabar Grammin Bank, Kuningad Branch for Rs. 5,00,000 (Rupees five lakhs only) and having received the amount by the above cheques and so, fully satisfied, all our rights in the schedule properties with all the equitable rights and easements and surrendered to you by virtue of this surrender deed and you are actually put in possession, so all our rights like Jenmom Kuzhikoors and improvements ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s already mentioned by us, the claim of the assessee is that what was transferred by virtue of the two sale deeds was the entire business undertaking of the assessee and not simply the building(s). We find no factual support in the two sale deeds, which we have referred to herein above, for this claim. The two sale deeds make it clear that the liabilities of the assessee-firm were not taken over by the vendee-college. It also appears that the vendee-college is a charitable institution and it is not conceivable that a charitable institution is interested in taking over the business of running a lodge. At any rate, it has not been explained before us why an Arabic College was interested in taking over a lodge. It appears that the college took over the building only as a building, for possible use as hostel or running the college, etc. There is no reference in the two sale deeds even to the furniture and other miscellaneous items referred to in Schedule B of the agreement dated 26-6-1987. So, it is not clear whether the furniture etc. was also sold and even if it was sold it could be assumed that the consideration of Rs. 10 lakhs, which was omitted in the sale deeds was for the sale o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs 63,451.00 Otis elevator 5l,743.00 Motor appliances 24,146.00 -------------- Total : 12,74,828.00 --------------- Partners capital account: M.M. Ismail Saheb 3,79,233.53 M.M. Meeran Saheb 3,68,479.49 M. Ahammed Saheb 3,46,162.49 M.M. Ghouse Saheb 3,73,296.49 ------------ Total : 14,67,172.00 ------------ It may be observed that there are no business assets except the fixed assets and the fixed asset is only the building and its electrical fittings, sanitary fit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in this case are only those of convenience and deserve to be ignored. 12. Now, the next question is whether the sale consideration of Rs. 30 lakhs received for the building can be legally apportioned between the depreciable portion of the building and the non-depreciable portion, and if it is legally permitted to do so, how to effect the apportionment. We may mention that the contention of the learned counsel before us and before the Revenue has all along been that the apportionment of the sale consideration is not permitted because what is transferred is the entire business undertaking. For this proposition he relied upon various case laws, like the following: 1. Syndicate Bank Ltd v. Addl. CIT [1985] 155 ITR 681 (Kar.) 2. CIT v. EX Periera Sons (Travancore) (P.) Ltd. [1990] 184 ITR 461 (Ker.) 3. Modi Electric Supply Co. Ltd v. ITO [1986] 17 ITD 1057 (Chd.) These are all cases where the entire business undertaking was sold for a slump price. As we hold that, in the present case, what was transferred was only the building and not the business undertaking, these cases are easily distinguishable and we hold that they do not apply to the facts of the present, case. It was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uilding was sold, as we have mentioned earlier, as one unit and not as two separate units. We see no reason for ignoring the history of the building under the I.T. Act and ignoring the fact that depreciation was granted on a portion of the building, and as such under section 50 of the I.T. Act, capital gains on the sale of the depreciable portion should be treated as short-term capital gains. Section 50 of the Income-tax Act, as inserted by the Taxation Laws (Amendment Miscellaneous Provisions) Act, 1986, with effect from 1-4-1988, i.e. relevant for the assessment year 1988-89, is as under: "50. Notwithstanding anything contained in clause (42A) of section 2, where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act or under the Indian Income-tax Act, 1922 (11 of 1922), the provisions of sections 48 and 49 shall be subject to the following modifications: (1) where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... simply because the depreciable portion of the building has not been separately transferred. Then the question is how to apportion the sale price, as posed by us herein above. One method can be on the basis of respective plinth areas of the two portions. The other can be on the basis of the respective costs of construction of the two portions. The third can be, as adopted by the Assessing Officer in the present case, on the basis of the written down value of the depreciable portion and cost of construction of the non-depreciable portion. It may be noted that the formula of apportionment on the basis of WDV for the depreciable portion and cost of construction for the non-depreciable portion works out to the advantage of the assessee, compared to the formula of apportionment on the basis of respective costs of construction of the two portions. So, the formula adopted by the Assessing Officer, as contended by the ld. departmental representative before us, is only to the advantage of the assessee, compared to the mode of apportionment on the basis of the respective costs of construction of the two portions. It has been pleaded by the ld. counsel for the assessee before us and also befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s contention. At any rate, we find, that mode of apportionment on the basis of valuation by an expert is preferable, unless there are any particular reasons for rejecting that report. No particular reasons have been adduced by the Assessing Officer for rejecting the report of the approved valuer in the present case. So, we hold of the sale consideration of Rs. 30 lakhs received between the depreciable and non-depreciable portions that the apportionment should be done on the basis of this report. The Assessing Officer may recompute the capital gains on the sale of the depreciable and non-depreciable portions on the basis of this report. While doing that, he may exclude the value of the furniture, which also seems to have been taken into account by the approved valuer in making the valuation of the first floor at page 22 of his report. Subject to this remark, ground Nos. 1 and 2 taken by the learned counsel for the assessee before us, which we have extracted herein above, are rejected, because we hold that what is transferred is not the business as such, but only the building. Ground No. 3 regarding valuation is partly allowed, subject to our direction herein above. We may make it cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Supreme Court, and it had been held therein that the said decision did not lay down the correct law insofar as it held that where the previous concern had mortgaged the property during his lifetime the clearing off of the mortgage debt by his successor could neither be treated as 'cost of acquisition' nor as 'cost of improvement' made by the assessee. It had been held that where a mortgage was created by the previous owner during his lifetime and the same was subsisting on the date of his death, the successor obtained only the mortgagor's interest in the property and by discharging the mortgage debt he acquired the mortgagee's interest in the property and, therefore, the amount paid to clear off the mortgage was the cost of acquisition of the mortgagee's interest in the property which was deductible as cost of acquisition under section 48 of the Act. In the present case, however, the mortgage was created by the assessee himself. This was not a case where the property had been mortgaged by the previous owner and the assessee had acquired only the mortgagor's interest in the property mortgaged and by clearing the same, he had acquired the interest of the mortgagee in the said prope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions 45 to 55A of the Act. The starting point of the computation is the cost of acquisition of the asset and the terminal point is the sale consideration. The fact that the asset had been mortgaged at an intermediate point did not seem to affect the mode of computation of capital gains in view of the decision of the Apex Court in the case of VSMR Jagadischandran. As the Apex Court has held, it will be different if the assessee had acquired an encumbered property and made payment towards the discharge of the encumbrance and the betterment of its title. That was not the situation here. Here was a case where the assessee had, after the acquisition of the asset, obtained the benefit of a commercial loan and in the process mortgaged the property. If, in the circumstances of the instant case, the deduction for the repayment of the mortgage debt was allowed, it would defeat the very mode of computation of the capital gains laid down in sections 48 to 55A. As rightly observed by the Assessing Officer, any person who wants to sell a property and anticipates a big capital gain can enter into a loan transaction and mortgage the property and claim the benefit of the deduction of the repayment ..... X X X X Extracts X X X X X X X X Extracts X X X X
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