2005 (11) TMI 362 - AT - Income Tax

ITAT Upholds Revenue Appeal on Depreciation: Allows on Building, Not Land; Affirms No Underpricing on Jewellery Sales.

The ITAT partially upheld the Revenue's appeal. It affirmed the deletion of the Rs. 1,13,54,683 addition in gross profit on jewellery sales, agreeing with ... Depreciation on buildings versus land - interpretation of section 32 regarding 'building' - allowability of import duty and import license cost in stock cost - transactions between related/sister concerns and evidentiary burden for siphoning - sale below prevailing market rate as basis for additionAllowability of import duty and import license cost in stock cost - transactions between related/sister concerns and evidentiary burden for siphoning - sale below prevailing market rate as basis for addition - Deletion of addition of Rs. 1,13,54,683 in respect of gross profit on sale of jewellery to M/s. Rajesh Associates was justified. - HELD THAT: - The Assessing Officer computed an inflated cost by allocating the entire year's import duty and import license expenditure to the imported jewellery, and treated sales to a partnership firm in which the assessee held 95% as giving rise to a loss for siphoning of profits. The Tribunal found no material showing that the assessee sold at prices below the prevailing market rates on the dates of sale, nor any evidence of concealment or siphoning of profits to the purchaser; the books of account were not rejected and no defects were pointed out. The Assessing Officer's method of aggregating import-related charges for the whole year without demonstrating their application to the particular transactions was not sustained. In these circumstances the CIT(A)'s deletion of the addition was upheld. [Paras 4]Addition deleted; CIT(A) rightly deleted the addition of Rs. 1,13,54,683.Depreciation on buildings versus land - interpretation of section 32 regarding 'building' - Whether depreciation is allowable on the portion of the purchase consideration attributable to undivided right in land. - HELD THAT: - The Conveyance Deed expressly bifurcated the total consideration into amounts attributable separately to the undivided right in land and to the building. Applying the settled principle-recalled from judicial precedent-that 'building' for depreciation purposes denotes the superstructure and does not include the site, the Tribunal held that land cannot be the subject of depreciation. The separate identification of consideration for land in the deed demonstrated a clear identity as to the component attributable to land, and section 32 permits depreciation on buildings (superstructure) but not on land. Accordingly, the CIT(A)'s direction to allow depreciation on the cost of land was set aside and the Assessing Officer's treatment restored. [Paras 7, 9]CIT(A)'s direction reversed; depreciation not allowable on the cost attributable to land and Assessing Officer's view restored.Final Conclusion: The Revenue's appeal is partly allowed: the deletion of the addition relating to gross profit on sales to M/s. Rajesh Associates is confirmed, while the CIT(A)'s allowance of depreciation on the portion of the consideration attributable to land is set aside and the Assessing Officer's disallowance restored. Issues:1. Addition of gross profit on the sale of jewellery2. Allowance of depreciation on the value of undivided right in landAnalysis:Issue 1: Addition of Gross Profit on the Sale of JewelleryThe appeal by the Revenue challenged the deletion of an addition of Rs. 1,13,54,683 in gross profit on the sale of jewellery to M/s. Rajesh Associates. The Assessing Officer observed a significant decrease in the GP rate and questioned the cost of import of gold and jewellery sold to M/s. Rajesh Associates. The Revenue argued that the sale was at a lower price compared to the cost incurred by the assessee, leading to a loss. However, the CIT(A) found no evidence of underpricing and highlighted that market rates fluctuate. The CIT(A) also noted that M/s. Rajesh Associates reported substantial profit, indicating no profit siphoning. The ITAT concurred with the CIT(A) and upheld the deletion of the addition, emphasizing the lack of evidence supporting the Revenue's claims.Issue 2: Allowance of Depreciation on the Value of Undivided Right in LandThe second issue revolved around the alleged depreciation on the cost of land. The Revenue contended that depreciation should only apply to the building, not the land. The conveyance deed showed a separate consideration for the land and building portions. The ITAT analyzed legal precedents and clarified that depreciation is applicable to tangible assets like buildings, not land. Despite the composite nature of the transaction, the distinct pricing for land and building in the deed led to the conclusion that depreciation could only be allowed on the building. Consequently, the ITAT set aside the CIT(A)'s decision and upheld the Revenue's appeal on this issue.In conclusion, the ITAT partially allowed the Revenue's appeal, supporting the deletion of the addition in gross profit on jewellery sales but overturning the allowance of depreciation on the cost of land.