2015 (5) TMI 466 - AT - Income Tax

Tribunal upholds capital gains bifurcation between land & building, deems time limit directory, not mandatory

The Tribunal dismissed both the appeal by the Revenue and the cross-objection by the assessee. It upheld the CIT(A)'s decision to bifurcate the capital ... Dissolution of Firm - Computation of capital gain in the hands of Firm or partners (or new Firm) - whether MSC had actually been dissolved with effect from 30.9.1983 and the new firm had come into existence from 1.10.1983? - whether firm M/s. Maganahalli Steel Corporation was liable to be taxed on capital gains on sale of the immovable property at Binny Company road, Davangere? - Held that:- It is no doubt true that if the circumstances of the assessee having intimated the income-tax department of its dissolution is given due credence and the factum of MA having filed the return of income even prior to the sale of the property is given due credence, it is possible to come to a conclusion that there was a dissolution of MSC on 30.9.1983. We do not wish to take a contrary view that was already taken by the Tribunal on identical set of facts. We give the benefit of doubt to the Revenue, as was done by the Tribunal in its order in the first round of litigation. The evidence on record shows that the factum of dissolution of the firm was neither proved nor disproved. It is held to be “not proved”. Since the burden of proof was on the Assessee, the conclusions drawn by the revenue authorities have to be upheld. With regard to the question as to whether the Assessee owned the property or was it the property of the three individuals as was held by the Tribunal in the find round of litigation, we are of the view that once the dissolution of the firm is held to be not proved, the necessary corollary is that the property continues to be that of the Assessee firm. Admittedly the property was always considered as the property of the Assessee firm, though it stood in the name of partners. Therefore the conclusion that the property belongs to the Assessee has to be upheld. The grievances projected by the assessee in its CO are therefore rejected. - Decided against assessee. Capital gain computation - Whether asset in this case was held for business purpose and depreciation had been claimed and Capital Gains is to be worked out as per Sec.50(2)? - Held that:- The bifurcation of land and building was rightly done by the CIT(Appeals), keeping in mind the directions of the Hon’ble High Court and also following the decision rendered by the Hon’ble High Court of Karnataka in the case of C.R. Subramaniyan (supra). We find no grounds to interfere with the order of the CIT(Appeals) on this issue also. Land is not a depreciable asset and therefore to the extent consideration received on sale of the property is attributable to land, provisions of section 50(2) are not attracted. The grievance projected by the Revenue in this regard is therefore rejected. - Decided against revenue. Issues Involved:1. Dissolution of M/s. Maganahalli Steel Corporation (MSC) and formation of M/s. Maganahalli Associates (MA).2. Tax liability on capital gains from the sale of property.3. Validity of the Assessing Officer's (AO) order passed after the prescribed time limit.Detailed Analysis:1. Dissolution of M/s. Maganahalli Steel Corporation (MSC) and Formation of M/s. Maganahalli Associates (MA):The primary issue was whether MSC was genuinely dissolved on 30.09.1983 and if MA was formed on 02.10.1983. The Department contended that the dissolution deed of MSC and the partnership deed of MA were bogus, asserting that MSC continued to exist until the sale of the property. The Tribunal, after examining the totality of circumstances and the theory of preponderance of probabilities, concluded that the dissolution of MSC and the formation of MA were not genuine. The Tribunal noted that despite the claimed dissolution, various activities and documents indicated MSC's continued existence, such as bank account operations, sales tax assessments, and insurance policies in MSC's name.2. Tax Liability on Capital Gains from the Sale of Property:The dispute was whether MSC or MA was liable for capital gains tax on the sale of the property. The AO assessed the capital gains in MSC's hands, treating the dissolution and formation of MA as a sham. The CIT(A) upheld the AO's decision but directed the AO to bifurcate the capital gains between land and building, following the principle laid down by the Hon'ble Karnataka High Court in the case of CIT Vs. C. R. Subramanian (242 ITR 342). The Tribunal, agreeing with the CIT(A), held that the property continued to be MSC's asset and upheld the bifurcation of capital gains, noting that land is not a depreciable asset and thus provisions of section 50(2) are not attracted for the land portion.3. Validity of the Assessing Officer's (AO) Order Passed After the Prescribed Time Limit:The assessee argued that the AO's order was invalid as it was passed beyond the six-month period prescribed by the Hon'ble High Court. The CIT(A) and the Tribunal held that the time limit set by the High Court was directory and not mandatory. The Tribunal found that the computation of the time limit by the Revenue was proper, considering the procedural aspects of receiving and acting upon the High Court's order.Conclusion:The Tribunal dismissed both the appeal by the Revenue and the cross-objection by the assessee. It upheld the CIT(A)'s decision to bifurcate the capital gains between land and building and confirmed that the property remained MSC's asset, thus making MSC liable for capital gains tax. The Tribunal also ruled that the AO's order was valid despite being passed after the six-month period, as the time limit was considered directory.