2013 (11) TMI 682 - AT - Income Tax

Assessee allowed deduction for new premises in capital gains calculation, upheld exemption for REC Bonds investment.

M/s Lalbhai Kalidas & Co. Versus Income Tax Officer 16(3) (2), Mumbai

The Tribunal allowed the assessee to deduct the cost of new premises from the sale consideration for computing capital gains under section 50 of the ... Computation of capital gain u/s 50 - sale of depreciable assets - block of assets - AO rejected the claim of assessee of deducting actual cost of new office premises acquired during the previous year relevant to the assessment year under consideration from the full value of consideration received on sale of office premises at Prasad Chamber (ibid) while computing the capital gain on the ground that the new office premises cannot form part of block of assets (i) that the assessee failed to take possession of the new office premises (ii) that the said premises were residential property and required to be utilized for that purpose only and thereby not forming part of block of assets – Held that:- No justificationi to deny the claim of the assessee to allow adjustment of cost of new premises acquired as he has not considered the provisions of section 50(1) of the Act correctly - As per Clause (iii) to section 50(1) of the Act, only requirement is that the assessee must acquire the assets which form part of the block assets during the previous year and if so the actual cost of the said acquired assets has to be deducted from the sale proceeds received by assessee on transfer of the assets while computing the capital gains u/s 50 of the Act. Reliance has been placed on the Special bench judgment in the case of Chhabria Trust V/s ACIT [2003 (5) TMI 479 - ITAT MUMBAI], wherein it was held that for the purpose of section 50, it is not necessary that the newly acquired assets must be used for the purpose of business during the year under consideration – Again, reliance has been placed on the judgment in the case of Oceanic Investment Ltd. v. Asstt. CIT [1996 (9) TMI 581 - ITAT MUMBAI], wherein held that use of an asset which has been acquired out of transfer proceedings of the depreciable assets forming part of block of assets is not condition precedent for making adjustment in Block of assets – Following the above decisions, assessee is entitled to take actual cost of new premises aggregating to Rs.54,82,500/- which falls within the block of asset during the previous year to be deducted from the value of consideration received of Rs.67,68,750/- on transfer of earlier business premises whose WDV was NIL, while computing the capital gains u/s 50 of the Act – Decided in favor of Assessee. Whether exemption u/s 54EC is available only for long term capital gain – Held that:- Reliance has been placed on the decision in the case of CIT V/s ACE Builders Pvt Ltd [2005 (3) TMI 36 - BOMBAY High Court ], wherein it was held that even if the assets were depreciable, but held for more than 36 months, the sale proceeds could be invested under the provision of the sec 54EC of the IT Act, 1961 – Decided in favor of Assessee. Issues Involved:1. Deduction of the cost of new premises from the sale consideration while computing capital gains under section 50 of the Income Tax Act, 1961.2. Eligibility for exemption under section 54EC of the Income Tax Act, 1961 for investment in REC Bonds.Issue-wise Detailed Analysis:1. Deduction of the cost of new premises from the sale consideration while computing capital gains under section 50 of the Income Tax Act, 1961:The assessee, a firm engaged in the diamond business, sold its office premises for Rs. 67,68,750/-. The premises were purchased in 1992 for Rs. 41,28,500/- and had a Written Down Value (WDV) of Nil due to claimed depreciation. The assessee computed a Short Term Capital Gain (STCG) of Rs. 67,89,750/-. During the same assessment year, the assessee purchased new office premises for Rs. 54,82,500/- and claimed this amount as a deduction from the sale consideration of the old premises, resulting in a capital gain of Rs. 12,86,500/- under section 50(1) of the Act.The Assessing Officer (AO) rejected this claim, arguing that the new premises could not form part of the block of assets because the assessee did not take possession of the new premises, and they were residential properties. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the new premises were not occupied by the assessee before 31.3.2007 and thus could not reduce the capital gains.The Tribunal, however, reversed this decision, stating that under section 50(1), the only requirement is the acquisition of the asset during the previous year, and there is no necessity for the asset to be put to use for business purposes. The Tribunal cited several precedents, including the Special Bench decision in Chhabria Trust V/s ACIT and ITAT Mumbai decisions in Fluorescent Fixtures (P.) Ltd. and Artic V/s ACIT, which held that the use of an asset is not a condition precedent for adjustment in the block of assets. Consequently, the Tribunal allowed the assessee's claim to deduct the cost of the new premises from the sale consideration.2. Eligibility for exemption under section 54EC of the Income Tax Act, 1961 for investment in REC Bonds:The assessee invested Rs. 12,86,500/- in REC Bonds and claimed exemption under section 54EC. The AO denied this exemption, arguing that section 54EC applies only to long-term capital gains, whereas the gain in question was treated as STCG under section 50.The CIT(A) ruled in favor of the assessee, relying on the Bombay High Court decision in CIT V/s ACE Builders (P.) Ltd., which held that section 50 does not override section 54E, and thus, the exemption under section 54EC could be claimed even for gains treated as STCG under section 50.The Tribunal upheld the CIT(A)'s decision, noting that the issue was covered by the Bombay High Court ruling, which was not contested by the department due to the smallness of the tax effect. Therefore, the Tribunal dismissed the department's appeal and confirmed the assessee's entitlement to the exemption under section 54EC.Conclusion:The Tribunal allowed the assessee's appeal in part by permitting the deduction of the cost of new premises from the sale consideration while computing capital gains under section 50. The Tribunal also dismissed the department's appeal, upholding the CIT(A)'s decision to grant exemption under section 54EC for the investment in REC Bonds. The order was pronounced in open court on 8th November 2013.