9911796707
TMI Blog1998 (6) TMI 568X X X X Extracts X X X X X X X X Extracts X X X X ..... to wind up the business at Pune and in pursuance of this decision, the assessee sold the computers, plant and machinery and the furniture and fixtures at Pune during the same year (i.e. year ended 31-3-93). The firm however was not dissolved but continued to remain in existence. On 14-7-94 the premises in Pune was sold for a sum of ₹ 29 lakhs. On 18-3-1995, the assessee entered into an agreement with Smt. Kamini Khanna for the purchase of residential flat in the second floor of the building known as Nilgiri Gardens, Sector 24, CBD, New Bombay. Under the agreement the price fixed for the flat was ₹ 7,17,000. On 20-3-95, the assessee applied to the housing society seeking permission for conversion of the residential flat into commercial use. By letter dated 15-11-95, permission was accorded subject to certain conditions. The conveyance deed was executed in favour of the assessee-firm and registered in the month of November 1995. From January 1996, the flat was let out by the assessee to a company by name M/s. Arnico Builders on leave and licence basis initially for 11 months at a rental income of ₹ 2,000 per month. In January 1998 the assessee took possession of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idential flat and that it had been given out on rent. On the question of the applicability of section 50, the Assessing Officer was of the view that since the flat purchased during the relevant accounting year in New Bombay is not a business asset, it was obviously not an asset falling within the block of assets. He further observed, without prejudice, that even if the new flat is to be considered as a business asset, the deduction claimed cannot be allowed as the same is transferred in the name of the assessee only on 13-11-95, after the close of the previous year relevant to the assessment year under consideration. 4. For the above reasons he rejected the assessee';s claim for deduction of the cost of the new flat in the computation of the short-term capital gains and reworked the capital gains at ₹ 17,69,735. 5. The Commissioner of Income-tax (Appeals) disposed of the matter briefly by holding as under : "(4) I have considered the submissions of the A.R. However, I would hold that the facts relating to the asset brought out by the Assessing Officer would support the conclusion that he has arrived at and for that reason I see no reason to interfere with his act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uired during the previous year, the assessee should be found to be carrying on some business or the other. Section 14 of the Income-tax Act classifies the income under different heads as under : A Salaries B Interest on Securities (omitted with effect from 1-4-89). C-Income from House Property. D-Profits and Gains of Business or Profession. E-Capital Gains. F-Income from Other Sources. There are different sections in the Act which contain the rules for computation of the income under each of the above heads. Such rules, in respect of the capital gains, are contained in sections 45 to 55A. Broadly speaking, section 45 contains the charging provisions and brings to charge the profits and gains arising from the transfer of a capital asset effected in the previous year, in the year in which the transfer took place. Section 46 prescribes rules for computation of capital gains on distribution of assets by companies in liquidation. Section 47 lists out the transactions which are not to be regarded as transfer of capital assets. Section 48 provides for certain deductions from the consideration received as a result of the transfer. Section 49 prescribes what is the cost to be deducte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of a capital asset which forms part of a block of assets, in respect of which depreciation has been allowed in the assessments and therefore the cost of the new asset is deductible from the sale price only if the new asset forms part of the block of assets, which in turn means that is deductible only if the new asset is a depreciable asset and since depreciation is an allowance granted to the assessee if he carries on the business in which that asset is used, it must follow that the new asset should be one which is put to use in a business which is being carried on by the assessee. To put it differently, he says that the assessee should be found to be carrying on a business in order that he can get a deduction in respect of the cost of the new asset. As a matter of construction of the section, we are afraid the contention cannot be accepted. Section 2(11) of the Income-tax Act defines "Block of assets" as meaning a group of assets falling within a class of assets, being buildings, machinery, plant or furniture, in respect of which the same percentage of depreciation is prescribed. The definition does not speak of depreciation having been allowed in the assessments in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mendment and Miscellaneous Provisions) Act, 1986 with effect from 1-4-1988 the Board issued a circular (Circular No. 469, dated 23rd September, 1986 reported in 162 ITR statutes page 21). After referring to the Budget Speech of the Finance Minister wherein reference was made to the proposal to introduce a system of allowing depreciation in respect of Block of assets instead of the present system of depreciation on individual assets, at paragraph 6.3 the Board stated as follows : "As mentioned by the Economic Administration Reforms Commission (Report No. 12, para. 20), the existing system in this regard requires the calculation of depreciation in respect of each capital asset separately and not in respect of block of assets. This requires elaborate book-keeping and the process of checking by the Assessing Officer is time consuming. The greater differentiation in rates, according to the date of purchase, the type of asset, the intensity of use, etc., the more disaggregate has to be the record-keeping. Moreover, the practice of granting the terminal allowance as per section 32(1)(iii) or taxing the balancing charge as per section 41(2) of the Income-tax Act necessitate the keep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chased. 10. We also find force in the argument of Mr. Patil, the learned counsel for the assessee, that if the stand of the income-tax authorities is to be accepted, it would also mean that in the present case, the assessee having allegedly stopped its business in the year ended 31-3-1994, the concept of block of as sets itself had come to an end because according to the department, carrying on of a business is an essential condition for the application of section 50. 11. We now proceed to examine the contention on behalf of the revenue that during the year under consideration the assessee did not carry on any business. Strictly speaking this factual question need not be examined because we have taken the view that it is not necessary for the assessee to carry on business in order to get deduction in respect of the cost of the flat in New Bombay. However in deference to the arguments advanced by both the sides and for the sake of completeness as well as considering the fact that a decision on this aspect is necessary to dispose of the next ground, we proceed to examine the question. We have already seen that during the year ended 31-3-1993 (A.Y. 1993-94), the computers, plant and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iance was placed on the profit and loss account for the year ended 31-3-98 wherein the sale of cloth was shown at ₹ 87,334 as well as the rent for 10 months which was shown at ₹ 22,100. In support of the claim that the assessee started cloth business reliance was also placed on pages 38 to 49 of the paper book. From these facts it was further contended by Mr. Patil that there was only a temporary suspension of the business, that from January 1996 the assessee carried on the business of letting out of its property and from January 1998 the assessee carried on business in cloth from that property and therefore the assessee had throughout continued to carry on some business without any stoppage and that merely because there was a temporary lull in the business it cannot be stated that the assessee did not continue to carry on any business. It was therefore contended that even assuming it was necessary for the assessee to carry on business for obtaining the deduction under section 50(1)(iii) of the Act, the assessee did satisfy that condition. Mr. Patil further submitted that it was not necessary at any rate that the same business (computer classes) should be continued to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partmental representative objected to the admission of the same on the ground that they were fresh evidence not furnished before the departmental authorities. On the merits of the evidence he submitted that the bills did not inspire confidence, that they were all dated after the order of the CIT (Appeals) and were presumably an afterthought, that there were inconsistencies in the papers inasmuch as in these papers the registered office of the assessee-firm was shown as being in Andheri whereas the assessee';s claim is that the business was being carried on from the flat at New Bombay. The learned departmental representative also pointed out that the agreement dated 18-3-1995 which is at page 10 of the first paper book, for the purchase of the flat in New Bombay showed that the vendor, Smt. Kamini Khanna, was not even in possession of the property and this coupled with the fact that the advance tax was paid by the assesee on 22-3-1995 indicated that the documents were not contemporaneously entered into and therefore the assessee has resorted to a tax avoidance measure disapproved by the Supreme Court in McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148 /22 Taxman 11. With regard to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the paper book where the only credit entry therein is the sundry balances written back. This entry also shows an intention to wind up the business. Reverting to the letting out of the property from January 1996, in our considered opinion, letting out of a property cannot amount to a business on the facts of the present case. The position may be different where an assessee owns a number of properties and the letting out is done in a systematic manner so as to amount to a business as well as rendering of connected services as happened in the case of Karnani Properties Ltd. v. CIT (1971) 82 ITR 547(SC). In that case the services rendered by the assessee to its tenants were the result of its activities carried on continuously in an organised manner, with a set purpose and with a view to earn profits. Apart from letting out the flats in Karnani Mansion, Park Street, Calcutta, the assessee supplied electricity by converting high voltage current purchased in bulk into low voltage current, provided lifts, supplied hot and cold water, arranged for scavenging and watch and ward facilities and for all these purposes the assessee maintained a large number of permanent staff. In addition to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee applied to the housing society for permission to use the flat for commercial purposes, it does not follow that the letting out amounted to a business. We have also taken into account Mr. Patil';s repeated reminders that his client';s case was not that there is a temporary letting out of a commercial asset and that the case was that the letting out itself constituted a business. But for the reasons stated above, we are unable to accept the case. 14. As regards the claim that during the year ended 31-3-1998, the assessee did carry on cloth business from the flat in New Bombay, we find that the evidence filed in support thereof (pages 38 to 49 of the paper book) does not inspire much confidence. The address of the assessee-firm is shown as Highland Park, Andheri. Delivery of the cloth is required to be made at the flat in New Bombay (page 38). The goods purchased on 4-2-1998 have been sold on 5-2-1998 to M/s. Sahil Synthetics (page 44). Similarly all the purchases have been sold the very next day. The purchases are all from the same concern, M/s. Zenfab and the sales are all to M/s. Sahil Synthetics. It appears to us that much reliance cannot be placed on this eviden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acity. Therefore the possession must also be taken to have been with the assessee-firm with effect from 18-3-1995. 17. For the aforesaid reasons, we are of the view that the assessee is entitled to the deduction of the cost of the flat in New Bombay under section 50(1)(iii) in the computation of the capital gains in respect of the sale of the Pune property. 18. The second ground which contains three sub-grounds is that the assessee is entitled to the deduction of the business loss of ₹ 1,42,720 which was denied to the assessee on the ground that no business was carried on during the relevant accounting year. The amount consists of the following expenses incurred in the year and debited in the profit and loss account : (i) Telephone charges Rs. 5,368 (ii) Electricity charges Rs. 2,594 (iii) Int. on Term Loan Rs. 90,150 (iv) Profession Fees Rs. 4,000 (v) Bank Charges Rs. 355 (vi) Municipal Taxes Rs. 40,252 Rs. 1,42,720 As regards the claim of interest, the learned counsel for the assessee relied on the following judgments : (1) Veecumsees v. CIT (1996) 220 ITR 185/ 86 Taxman 243and (2) CIT v. Muthaiah Naidu ( 192 ITR 166) (Mad.) (sic). With regar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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