2019 (3) TMI 1804 - AT - Income Tax

Tribunal directs AO to reconsider valuation, allows write-off of project expenses

M/s. Powernetics Equipment India Pvt. Ltd. Versus DCIT 13 (1) (2), Mumbai

The Tribunal allowed the assessee's appeal, directing the AO to consider the sale value of leasehold rights at Rs. 5,25,00,000/-, adopt a more objective ... Capital gain computation - sale of lease rights - Applicability of section 50C - assessee submitted that property in question which was sold was a leasehold property and assessee was not the absolute owner of the said property - HELD THAT:- As decided in CIT vs. Green Hotels and Estates Pvt. Ltd. & Ors. [2016 (12) TMI 353 - BOMBAY HIGH COURT] and Farid Gul Mohammad vs. ITO [2016 (4) TMI 1053 - ITAT MUMBAI] provisions of section 50C of the Act are not applicable to the transfer of leasehold rights considering the decision relied by the Ld. CIT(A) in the case of Shavo Norgarven Pvt. Ltd. vs. DCIT Circle-3(3) [2013 (1) TMI 372 - ITAT MUMBAI]. We, therefore, respectfully following the Hon’ble Bombay High Court decision and coordinate bench decision on the issue hold that provisions of section 50C of the Act are not applicable to the transfer of leasehold rights and accordingly set aside the order of Ld. CIT(A) on this issue. Not applying the land rate as per MIDC and instead working out the market value of land by some arbitrary proportionate method - A.R. suggested that the more objective and scientific method should be applied to determine the value of the land and building - HELD THAT:- In our opinion it would be fair and proper if the value assigned to the building is taken at ₹ 1,15,58,000/- the book value of the building and the balance of ₹ 4,09,42,000/- is attributed to the land which is even lower to valuation as per MIDC rate. Accordingly, we direct the AO to take the sale consideration for land at ₹ 4,09,42,000/- for the land and ₹ 1,15,58,000/- for the building as there is no objective and fair basis for allocation of the sale consideration other than this. Accordingly, the ground of the assessee is allowed. Disallowance of written off project expenses - According to Ld. CIT(A) the said expenditure was capitalized in 2009-10 and in connection with the project for 180 KVA which has been kept on hold by the customer and thus there is no reason to claim the said expenditure and thus dismissed the appeal of the assessee - HELD THAT:- We are fully convinced with the contentions of the Ld. A.R. that the expenses on the above said orders for preparation of projects and feasibility etc which are admissible business expenses to be written off against the revenue of the assessee. We are not in agreement with the conclusion drawn by the Ld. CIT(A) and accordingly hold that the expenses claimed by the assessee by way of writing the project expenses a part of project expenses are allowed.Accordingly, we set aside the order of authorities below and direct the AO to allow ₹ 3,02,000/-. - Appeal of the assessee is allowed. Issues Involved:1. Applicability of Section 50C of the Income-tax Act, 1961 to leasehold property.2. Adoption of sale value by the Assessing Officer (AO) for land and building.3. Applicability of Section 50C when the difference between fair market value (FMV) and sale consideration is less than 10%.4. Calculation of market value of land and building.5. Rejection of the appellant's claim for the write-off of project expenses.Issue-wise Detailed Analysis:1. Applicability of Section 50C to Leasehold Property:The main contention raised by the assessee was against the applicability of Section 50C of the Income-tax Act, 1961 to the sale of leasehold rights. The CIT(A) upheld the AO's decision, stating that Section 50C applies to the composite transaction of land and building, even if the property was leasehold. The CIT(A) referenced a similar decision by the ITAT Mumbai Bench in the case of Shavo Norgren (P.) Ltd. v. DCIT, which held that Section 50C is applicable to such transactions. However, the Tribunal observed that the case of CIT vs. Green Hotels and Estates Pvt. Ltd., decided by the jurisdictional High Court, concluded that Section 50C does not apply to leasehold rights. Consequently, the Tribunal allowed the assessee's appeal, directing the AO to take the sale consideration at Rs. 5,25,00,000/- for the transfer of leasehold rights and calculate the capital gain accordingly.2. Adoption of Sale Value by AO for Land and Building:The assessee challenged the CIT(A)'s direction to adopt the sale value of the land at Rs. 2,42,87,930/- and the building at Rs. 3,36,59,570/-. The Tribunal noted that the CIT(A) bifurcated the sale proceeds in the ratio of the book value of land and building. The Tribunal found this method subjective and arbitrary, especially since the land had a higher value compared to the building. The Tribunal directed the AO to adopt a more objective and scientific method, suggesting the use of the MIDC rate of Rs. 15,960/- per sq. mtr. The Tribunal determined the value of the land at Rs. 4,09,42,000/- and the building at Rs. 1,15,58,000/-.3. Applicability of Section 50C When FMV and Sale Consideration Difference is Less Than 10%:The assessee argued that the difference between the FMV and the sale consideration was less than 10%, making Section 50C inapplicable. However, since the Tribunal had already concluded that Section 50C does not apply to leasehold rights, this ground became infructuous and required no further adjudication.4. Calculation of Market Value of Land and Building:The AO had calculated the capital gain by taking the indexed cost of land and the opening WDV of the building, resulting in a taxable capital gain of Rs. 3,30,06,901/-. The CIT(A) had apportioned the sale consideration between land and building based on their book values, which the Tribunal found to be unfair and subjective. The Tribunal directed the AO to use the MIDC rate, valuing the land at Rs. 4,09,42,000/- and the building at Rs. 1,15,58,000/-.5. Rejection of the Appellant's Claim for Write-off of Project Expenses:The AO disallowed the write-off of project expenses amounting to Rs. 3,02,372/-, considering them as preliminary expenses under Section 35D. The CIT(A) upheld this decision, noting that the expenses were capitalized in the balance sheet and related to a project kept on hold by the customer. The Tribunal, however, agreed with the assessee that the expenses were incurred in the ordinary course of business and should be written off against revenue. The Tribunal directed the AO to allow the write-off of Rs. 3,02,000/-.Conclusion:The Tribunal allowed the appeal of the assessee, setting aside the orders of the lower authorities on the issues of the applicability of Section 50C to leasehold property, the adoption of sale values, and the write-off of project expenses. The Tribunal directed the AO to reassess the capital gains and allow the project expenses as claimed by the assessee.