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TMI Blog2016 (3) TMI 78X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. Besides the Ld CIT(A) also partially allowed the claim relating to expenses incurred in connection with the land of land and building. 3. The assessee is aggrieved by the decision of Ld CIT(A) in confirming application of sec. 50 of the Act to the building portion of the property and in not allowing all the expenses claimed by it . The revenue is aggrieved by the decision of Ld CIT(A) in holding that the provisions of sec. 50 shall not apply to the sale consideration relating to land and also in partially allowing the expenses claimed by the assessee. 4. Besides the assessee has also challenged the decision of Ld CIT(A) in holding that the reassessment proceedings are valid in law. 5. We shall first narrate the facts relating to the issue under consideration. The assessee herein is a partnership firm and it has sold the property located at Kalina during the year under consideration. The property consisted of land admeasuring 9874.80 Sq. mts., and structures built thereon. The assessee had purchased several pieces of land admeasuring 9570.80 Sq.mts in the year 1973-74 through nine conveyance deeds. The remaining portion of land was situated in the midst of the lands ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reliance on a decision rendered by the Delhi bench of Tribunal in the case of CIT Vs. Alps Theatre (reference not given) held that the building shall include land also. Before the AO, the assessee contended that it did not claim depreciation on the Kalina Property and hence the provisions of sec. 50 are not applicable. However, the AO took the view that the assessee did not substantiate the said claim by furnishing copies of returns of income filed by it from 1974-75 onwards. He further held that the Explanation 5 inserted by Finance Act 2001 in sec. 32(1) of the Act with effect from 1.4.2002 mandates allowing depreciation compulsorily whether or not the assessee has claimed the same. It may be noticed here that the assessee furnished copies of returns of income filed for AY 1996-97 to 2009-10, but the same was found to be not sufficient for the AO since he had asked for copies from AY 1974-75 onwards. From the copies of return of income filed, the AO noticed that the assessee has claimed depreciation on building. Though the assessee explained that the depreciation was claimed on a building located at Navi Mumbai area, yet the AO did not accept the same. The AO, by making reference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lina property also. Accordingly, the AO took the view that the assessee has constructed certain factory structures on the Kalina Land and the depreciation schedule should include the same, since the identity of the building is lost under the „Block concept‟ for allowing depreciation. 11. Further, in the remand report filed by the AO before the ld CIT(A), it was pointed out that the assessee had purchased the Kalina property for a consideration of Rs. 3,67,500/- and the value of property was shown at Rs. 29,15,509/- from 1995 onwards. Accordingly the AO substantiated his view that there existed a factory building in Kalina property. 12. We notice that the assessing officer has proceeded to treat the Kalina property as an asset on which depreciation has been claimed on the following reasoning:- (a) The purchase deeds make a reference to the existence of commercial buildings. (b) The Building shall include the value of land for the purpose of allowing depreciation. (c) Though it has been claimed that the depreciation has been allowed on Navi Mumbai property and not on Kalina property, yet the depreciation shall be deemed to have been allowed in terms of Explanation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted on the basis of Purchase Deeds which clearly mention that what was purchased was land without any factory building thereon. The assumption of the A.O was based solely on the recital in the indenture of purchase contained in Para 3 read with the Second Schedule. The appellant in its Written Submission dated 14th May, 2012 in Para 4.3 and 4.4 has shown" that the impression has arisen on account of not reading the document in its entirety. The Schedule 2 relied upon states the total larger land out of which what was purchased is contained in Schedule 5 where there is no mention of any factory building. With reference to the plan of the said portion purchased as per Schedule 5, it was shown that those plots had no factory building on them. 3.1 Without prejudice to above, even if there was some structure which was at any point of time used as factory by some previous owner(s) and has still been referred to as factory in the purchase indenture, there is absolutely nothing to show that the appellant used that structure as a factory so as to make the property depreciable. In fact, as mentioned by the appellant in its submissions dated 12th June, 2012 dealing with Para 4 of the A O. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for business. Whatever construction work was carried out by the appellant was for security purposes and necessary infrastructure by way of boundary wall, watchman cabin, electric room levelling of land etc. The nature of property as purchased and with whatever constructions were carried out had no association with assessee's business and accordingly, remained a non-depreciable asset. As has been emphatically submitted by the appellant no depreciation was ever claimed nor allowed in respect of this property which was a non-depreciable asset and, therefore, putting the- same in the block of a depreciable asset with the Navi Mumbai property is not legally sustainable. 4.3 The block of asset introduced in the Act w.e.f 01.04.1988 defines this term as meaning a Group of assets falling within a class of assets in respect of which the same percentage of depreciation is prescribed. It applies to those assets only which are subject to depreciation. In order that an asset can be part of a block, it is necessary to ensure that (i) it falls within a class of asset implying the Block's homogeneous nature (ii) it is depreciable and (iii) it is subject to the same rate of depreciatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch remained with them upto 2004 only. The property remained vacant thereafter till sale. This will show that these temporary structures were created and leasing activity was carried out not as a business but only as a necessity because the land could not have been kept vacant. The appellant has produced financial statements from 1996 onward. The Schedule of depreciation clearly shows that Kalina property was shown separately on which no depreciation was allowed. This position remained undisturbed by the department even when the assessment was completed u/ s.143(3). Taking a different stand now after the continued practice of such long period cannot be justified. 5. Part (c) of Para 13 of the assessment order deals with deemed depreciation in respect of Kalina Property. This observation stems from (b) as the property has been placed in the block which for reasons mentioned in Para 4 above is not legally justified. The appellant further submits that Explanation 5 of Section 32(1) which is being relied upon is not applicable to the facts of the case. The Explanation which is a fiction applies to depreciable assets and deems depreciation as allowed even if the same is not claimed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provision is to ensure that no assessee is able to get the benefit twice once by way of depreciation and again by way of relief of capital gain taxation on the basis of long term asset. It is with this purpose that the legislature has used the expression "in respect of which depreciation has been allowed". If any other view is taken and the provision is applied even in cases where no depreciation has been allowed or where depreciation is only deemed, it will result in double jeopardy which can never be intended by the legislature. The provision applies only when depreciation is actually allowed which is not the case of the appellant. The A.O. is, therefore, not justified in applying the provisions of Sec. 50 to the Kalina property. 6.2 Your attention is invited to Mumbai ITAT's decision on Devine Construction Co. Vs. ACIT 49 SOT URO 6 holding that provisions of s. 50 do not apply where an assessee had included an asset in block of asset but no depreciation was ever claimed. 7. Another issue that came up for discussion was the composite nature of the sale consideration. It was argued that even if it is treated that property consisted of land and building and following t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t has furnished the report of the Valuer as on 01-04-1981 which can provide a reasonable basis for segregating the value. While doing so it is necessary to take account of the fact that building depreciates with the passage of time while land generally appreciates. Suitable adjustments will, therefore, need to be made for inflation as well as depreciation while making such estimation." 14. The Ld CIT(A), after considering the submissions of the assessee and the remand report furnished by the AO, took the view that the sale consideration relating to land should be assessed as Long term capital gain. Since the AO had also placed reliance on the statement given by the partner of the assessee firm, the Ld CIT(A) also addressed the same after considering the retraction letter of the assessee. Further, the ld CIT(A) also directed the AO to conduct enquiries from the Government departments like, labour department, electricity department etc. In order to ascertain about the existence of factory premises. The report given by the AO was also considered by Ld CIT(A) and he has given a finding that none of the Government Agencies have confirmed about the existence of any factory premises in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar as he is concerned Mr.Tanna is an unknown personality and he is totally oblivious of his accounts. Further, his advice doesn't carry any value as he is not even a qualified C.A. Under the circumstances, the partner stated that he had not at all consulted Shri H.G. Tanna regarding his tax matter pertaining to sale of Kalina property. 3.18 As regards to the enquiries conducted from various agencies like Reliance Infrastructure Ltd., ESIC, Labour Department, Industries Department and Building & Factory Department of BMC to ascertain whether any factory was running from the Kalina Property nor not, the A.O. in the remand report has given the details of the enquiries so conducted. The A.O. in his remand report has stated that none of the agencies have stated in their replies that the appellant was not having a factory /industrial unit at the Kalina property in past. The A.O. has also stated that reply from Commissioner of Labour (MS), Mumbai is to be received. 3.19 I have had the occasion to go through the replies furnished by the aforesaid agencies to the A.O. The A.O. had sought specific information about the existence of factory at, Kalina property. The agencies to whom t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g purposes on rental basis. The Kalina property was sold along with these structures in the year 2009. 3.22 The aforesaid observations that there was no factory at Kalina property gets further corroborated from the reply of the Reliance Infrastructure wherein they have enclosed a copy of the electricity bill which makes it clear that the electricity connection was LT (light tariff) with single phase. Obviously, a single phase connection cannot be used for running a factory. Further, the replies received from various departments clearly mentions that the business of the appellant as per their record was being run from Kalachowky property and there is no indication in the records of the any of the offices / departments about the Kalina property 3.23 In one of his letters, the Ld. ACIT-19(3), Mumbai dated 08-08- 2012 stated that as per the provisions of section 32 of the IT. Act 1961, depreciation is allowable only in respect of the assets used for the purpose of business or profession. The assessee has not used the Navi Mumbai property for business or profession. No Income has been generated from the Navi Mumbai property. Neither the assessee has ever shown to have run any office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sturbed. The depreciation therefore, was in respect of Navi Mumbai property and by no stretch of logic or reasoning it can now be related to any other property i.e. the Kalina property. Even if for the sake of arguments it is taken that the depreciation should have been allowed not in respect of Navi Mumbai property but in respect of Kalina Property, the subsequent understanding cannot change what had happened. Without prejudice to the same, the appellant insists that the Kalina property was not depreciable. Whatever income was derived the same was assessable under the head 'income from property' and not 'under the head income from business. Assessee's accounting for the same as business income will not change the character of the property. In any case, even if it is accepted that deprecation was allowable, the same does not make any difference to the issue involved in this appeal as what is relevant is the depreciation actually allowed and not the depreciation that should have been or could have been allowed. The submission was made earlier that the Kalina property and the Navi Mumbai property formed a single block and therefore even if depreciation was allowed i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d exclude the value of land. It has further been held that the value of land does not depreciate, but it only appreciates. The provisions of sec. 32 read with schedules thereon would show that the Statute does not indicate "land" as a depreciable asset. The Hon‟ble Bombay High Court has also held in the case of CIT Vs. CITI Bank N.A (261 ITR 570) has held that no depreciation is admissible on land u/s 32(1) of the Act. 16. However, the AO has taken the view that the building, if any, has been constructed on the land, the value of building should include the value of land and hence both the assets should be treated as commercial asset falling within the ambit of the provisions of sec. 50 of the Act. The said view taken by the AO is also wrong in view of the following decisions, wherein it was held that the value of land and building should be segregated while ascertaining the capital gains:- (a) CIT Vs. Vimal Chand Golecha (201 ITR 442)(Raj) (b) CIT Vs. D.L.Ramachandra Rao (236 ITR 51)(Mad) (c) CIT Vs. C.R.Subramanian (242 ITR 342)(Kar) (d) CIT Vs. Hindustan Hotels Ltd & Anr. (335 ITR 60)(Bom) (e) CIT Vs. CITI Bank N.A (261 ITR 570)(Bom) No doubt that a building ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e cost of repetition):- "3.21 Thus, from the replies received from various agencies, the only conclusion that can be drawn is that there was no factory at Kalina property and the property at Kalina was not used for carrying on any industrial activity thereon albeit there was factory at Kalachowky which was manufacturing tin containers till 1984 and the factory was eventually sold in 1996. Thus though the existence of factory at Kalina property has not been proved, but there certainly were structures which were used for warehousing purposes on rental basis. The Kalina property was sold along with these structures in the year 2009. 3.22 The aforesaid observations that there was no factory at Kalina property gets further corroborated from the reply of the Reliance Infrastructure wherein they have enclosed a copy of the electricity bill which makes it clear that the electricity connection was LT (light tariff) with single phase. Obviously, a single phase connection cannot be used for running a factory. Further, the replies received from various departments clearly mentions that the business of the appellant as per their record was being run from Kalachowky property and there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g that once the appellant has claimed the depreciation in respect of a part of block of assets (Navi Mumbai Property) he cannot take the plea that since, he has not claimed depreciation in respect of particular part of assets falling within the same block of asset, the particular part of asset is non-depreciatble asset on which the provisions of section 50 do not apply.......Once the asset has been incorporated in a block of assets then it loses its individual identity and depreciation is always calculated on the block because all the assets are merged in pool....." 20. We are unable to agree with the view expressed by Ld CIT(A) on this issue. It is the Ld CIT(A), who has given a definite finding that the Kalina property did not have any factory structure. The total value of Kalnina Property (cost of land + amount spent thereon) Rs. 29.15 lakhs remained the same since 1995 onwards. There is no controversy on this fact. The assessee has given explanation that the amount of about Rs. 26.00 lakhs was spent on land levelling, construction of compound wall and a watchman shed. This explanation of the assessee has not been proved to be false. The fact that the assessee has carried on it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng from the record. Be that as it may, we notice that the assessee has incurred those expenses only to protect the land and hence the same has to be considered as land improvement expenses only. With regard to the observations of the AO that the purchase deeds do refer to the existence of some factory structures, the assessee has explained that the assessing officer has referred to Schedule 2 of the conveyance deeds, which describe the total area owned by the sellers, whereas the property purchased by the assessee was described in Schedule 5. Even though this explanation was given during the course of remand proceedings also, yet the AO did not controvert the said explanations. Hence, we are of the view that the above said explanation of the assessee needs to be accepted. Since the assessee has let out the land only for container parking and later to Larsen & Toubro, we are of the view that the question of applicability of provisions of Explanation 5 to sec. 32(1) shall not apply to the assessee. 23. We further notice that the tax authorities have presumed that the Kalina property has formed part of block of assets. The said presumption is not supported by any evidence. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenses incurred on soil testing, in our view, is connected with the sale transaction and hence the same should be allowed, since the assessee has carried out the same only to establish the quality of soil available on the land. The legal & due diligence fee of Rs. 75.00 lakhs paid to Kirit Damania & Co. was related to the examination of title deeds and carrying out due diligence and hence we are of the view that the Ld CIT(A) was justified in allowing the same. 28. The payment made to K.N. Gandhi & Co. (Rs.82,72,500/-) and J.R. Shah & Co. (Rs.50,000/-) have been claimed to be towards legal, taxation planning fees. However, the assessee has already paid legal & due diligence fee to /s Kirit Damania & Co. and hence the nature of services rendered by the above said two professional firms were not known or properly explained. In any case, the taxation planning activity cannot be considered to be an expenditure incurred in connection with the transfer of land. However, since they have rendered some legal service connected with the transfer of land, we are of the view that a portion of the payment should be considered as expenditure incurred in connection with the transfer of land. Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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