Tribunal directs Assessing Officer to compute capital gains and delete deemed dividend addition

The appeal of the assessee was allowed by the Tribunal. The Tribunal directed the Assessing Officer to compute capital gains by adopting the cost of acquisition at Rs. 13,40,000 for two acres of land, based on the value of the asset as per the books on the date of transfer. Additionally, the Tribunal ruled that the addition of deemed dividend under Section 2(22)(e) of the Income Tax Act cannot be sustained as the conditions of the provision were not satisfied. Therefore, the Tribunal directed the Assessing Officer to delete the addition made, resulting in the appeal of the assessee being allowed.

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Issues Involved:
1. Computation of capital gain by adopting the cost of acquisition of land.
2. Addition of deemed dividend under section 2(22)(e) of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Computation of Capital Gain by Adopting the Cost of Acquisition of Land:

This appeal of the assessee is directed against the order dated 12/08/13 of ld. CIT(A)-V, Hyderabad relating to AY 2006-07. Assessee is a private ltd. company. For the AY under dispute, assessee filed its return of income declaring total income of Rs. 1,00,08,846. During the assessment proceeding for AY 2004-05, AO noticed that out of 9680 sq.yds land allotted to it by A.P. Government in FY 1973-74, assessee has sold land admeasuring 5807 sq.yd. Assessee had shown cost of acquisition of land for the entire 9680 sq.yd. at Rs. 13,40,000. AO noticed that to arrive at the index cost of acquisition, assessee has taken the year of acquisition as 1991-92 and indexed cost of acquisition was computed at Rs. 18,17,291. AO called upon assessee to produce all relevant documents relating to purchase and sale of land along with details of brokerage paid for computation of capital gain. Assessee submitted that the land was allotted by Govt. of A.P, hence, there is no purchase deed for land. Assessee submitted a letter on 21/08/06 giving details of transfer of land. The partnership firm in the name and style of Bimco Products was allotted two acres of industrial land by AP Govt. vide G.O.No. 849 dated 19/09/1973. The firm was later converted into a private ltd. company on 01/10/91 and all the assets and liabilities were taken over by the company. AO proceeded to compute capital gain by adopting cost of acquisition of land at Rs. 10,000 per acre as on 01/04/1981, which resulted in determination of long term capital gain at Rs. 2,78,18,050. Being aggrieved, assessee preferred appeal before ld. CIT(A).

During the scrutiny assessment proceeding for the impugned year, AO noticed that out of 9680 sq.yds. of land available to assessee, it sold 5807 in AY 2004-05 and the balance 3873 sq.yds. was sold by assessee in the impugned AY and as per the SRO value assessee received sale consideration of Rs. 1,89,00,684. AO following the observation made in the assessment order passed for AY 2004-05, adopted the cost of acquisition of land at Rs. 10,000 per acre as on 01/04/1981, which resulted in determination of long term capital gain at Rs. 1,11,18,460. Being aggrieved, assessee challenged the same in appeal before CIT(A).

In the remand report, AO noted that in the year 1987, the partnership firm had revalued the land at Rs. 13,40,000 and credited to the partners' capital account. AO noted that the cost of acquisition of asset should be either historical cost at Rs. 10,000 per acre and year of acquisition should be 1981 or the cost of acquisition of asset is to be taken as nil and the year of acquisition as 1991. AO observed that in the absence of any profits or gains arising to the dissolved firm on account of transfer of land, the original cost only i.e., Rs. 20,000 per 2 acres, should be taken as the cost of acquisition in the hands of the assessee-company for the purposes of computation of long term capital gains. CIT(A) confirmed the computation of capital gain made by AO.

The learned AR submitted that there is no dispute to the fact that book value of the asset at the time of transfer was Rs. 13,40,000. Therefore, the cost of acquisition cannot be adopted at Rs. 10,000 per acre. The learned DR supported the order of AO and ld. CIT(A). The Tribunal held that the value of the asset as per the books on the date of transfer has to be taken as cost of acquisition. The Tribunal referred to the decision of the Hon'ble Karnataka High Court in case of Suvardhan Vs. CIT, 287 ITR 404, and directed the AO to compute capital gains by adopting the cost of acquisition at Rs. 13,40,000 for two acres of land.

2. Addition of Deemed Dividend under Section 2(22)(e) of the Income Tax Act:

During the assessment proceeding, AO noticed that assessee company has received certain advances from its sister concern M/s Bimco Isolators Ltd. AO noted that Shri Ashwin Bhuva and Pankaj Bhuva are common shareholders in both the companies and are holding more than 20% of the share. AO proposed to treat advances received as deemed dividend u/s 2(22)(e) of the Act. AO treated an amount of Rs. 18,82,901 as deemed dividend u/s 2(22)(e) of the Act. Assessee challenged the addition before ld. CIT(A), who confirmed the addition.

The learned AR submitted that as assessee is not a registered shareholder of M/s Bimco Isolators, the provisions of section 2(22)(e) will not apply. The learned AR relied upon the decisions in ACIT Vs. Bhaumic Colours Pvt. Ltd., CIT Vs. Standipack (P) Ltd., CIT Vs. Sarva Equity (P) Ltd., and CIT Vs. Impact Containers (P) Ltd. The learned DR supported the orders of revenue authorities. The Tribunal held that as conditions of section 2(22)(e) are not satisfied, addition of Rs. 18,82,901 cannot be sustained and directed AO to delete the addition made.

Conclusion:

In the result, appeal of the assessee is allowed.

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