2016 (5) TMI 702 - AT - Income Tax

Tribunal dismisses revenue's appeals, partially allows for statistical purposes

I.T.O Ward 9 (1), Kolkata Versus M/s. Mid Land Projects Ltd

The Tribunal dismissed the revenue's appeals on the first, second, fourth, and fifth issues, finding in favor of the assessee. However, the third issue ... Addition towards capital gains - invoking provisions of section 50C - Held that:- AO had simply disregarded the stand of the assessee by observing that a single unit (i.e Unit No. 407) cannot be divided as capital asset and stock in trade as shown by the assessee. We find that this observation is totally contrary to the order of amalgamation approved by the Hon’ble Calcutta High Court , wherein the manner of treatment of assets by M/s Nice View Properties Private Limited were simply carried over by the assessee at book values pursuant to amalgamation with effect from 1.4.2000. It is not in dispute that M/s Nice View Properties Private Limited had held 284 Sq. ft amounting to ₹ 8,56,122/- (book value) as on 31.3.2000 as Fixed Assets comprising of Unit No. 407A. The same treatment was followed by assessee in its books of accounts post amalgamation period. Hence the gains arising on transfer of the same would only result in capital gains. It is also not in dispute that M/s Nice View Properties Private Limited had held 850 Sq. ft amounting to ₹ 10,48,320/- as closing stock of commercial flats as Stock in Trade as on 31.3.2000 comprising of Unit No. 407B. The same treatment was followed by assessee in its books of accounts post amalgamation period. Hence the gains arising on transfer of the same would only result in business income. The same treatment was followed by assessee in its books of accounts post amalgamation period. It is well settled that prior to introduction of provisions of section 43CA in the Statute Book by the Finance Act 2013 w.e.f. 1.4.2014, the provisions of section 50C of the Act could not be made applicable for assets held as stock in trade. The case relied on by the Learned AR in this regard on the decision of the Hon’ble Madras High Court in the case of CIT vs Thiruvengadam Investments Pvt Ltd reported in (2009 (12) TMI 48 - MADRAS HIGH COURT ) is very well placed. We also find from the balance sheet of the assessee for the financial year 2007-08, that the assessee had duly reflected the value of Unit No. 407B at ₹ 10,48,320/- as stock in trade as on 1.4.2000. Hence there is no question of treating the same as capital asset and invoking section 50C for the purpose of computing capital gains on sale of the same. - Decided against revenue Addition towards alleged bogus construction expenses - Held that:- Revenue had not brought any evidence on record to prove that the development work on the property was never carried out by the assessee through these parties. It only alleged that the parties had not done any development work in the past and had done only for the assessee during the asst year under appeal. This observation of the Learned AO had been found to be irrelevant consideration by the Learned CITA which has not been controverted by the Learned DR before us. With regard to the non-availability of Mr.Anup Kumar Shukla at the time at which Inspector visited his premises, we find that the Learned CIT(A) had observed that no person could be expected to always remain available at his place of work and secondly it is not the case of the Inspector that there was no such person at the place. This aspect also has not been controverted by the Learned DR before us. In view of the aforesaid facts and findings, we hold that the assessee had duly bifurcated the development expenses of ₹ 11,44,634/- towards Unit No. 407A (capital asset) at ₹ 2,86,664/- which is to be granted deduction while computing capital gains and balance sum of ₹ 8,57,970/- towards Unit No. 407B (stock in trade) which is to be granted deduction while computing business income. - Decided against revenue Addition u/s 68 - Held that:- Learned DR prayed that the additional evidences admitted by the Learned CIT(A) were never submitted before the Learned AO and hence prayed for set aside of this issue to the file of the Learned AO, for which the Learned AR fairly agreed. Hence we deem it fit and appropriate, in the interest of justice and fairplay, to set aside this issue to the file of the Learned AO, to decide this issue afresh, in accordance with law, in the light of evidences and documents submitted by the assessee before him. Disallowance of expenses - Held that:- We have held in the previous ground no.1, that the sale of Unit No. 407B which was held as stock in trade should be treated as income from business and had also given relief to the assessee in ground no. 2 with regard to grant of deduction towards development expenses against the sale consideration of stock in trade. Hence it is not in dispute that the assessee is indeed engaged in business activities. It is not in dispute that the aforementioned expenditure are not business expenditure. We hold that these expenditures are regularly incurred for the purpose of business of the assessee in its normal course. - Decided against revenue Disallowance u/s 14A - Held that:- The total value of investments included investment in commercial flats amounting to ₹ 58,25,442/- wherein, the resultant income would definitely not fall under the ambit of exempt income. The legislature never wanted to consider the entire investments for making disallowance u/s 14A. It only contemplated expenditure incurred for earning any income which do not form part of total income. Admittedly, the income that would arise out of investment in commercial flats would only result in taxable income and therefore outside the scope of primary intention of section 14A of the Act. Hence we hold that the Learned CIT(A) had rightly reduced the same while computing 0.5% of average value of investments. - Decided against revenue Issues Involved:1. Addition towards capital gains of Rs. 42,05,664/-2. Addition towards alleged bogus construction expenses of Rs. 11,44,634/-3. Addition u/s 68 of the Act amounting to Rs. 2,40,000/-4. Disallowance of expenses of Rs. 4,33,699/-5. Disallowance u/s 14A of the Act amounting to Rs. 74,315/-Issue-wise Detailed Analysis:1. Addition towards capital gains of Rs. 42,05,664/-:The core issue was whether the addition towards capital gains could be made. The assessee, a company engaged in developing land and buildings, sold two office units: Unit No. 407A (284 sq.ft) held as a capital asset and Unit No. 407B (850 sq.ft) held as stock in trade. The amalgamation of various companies, including M/s Nice View Properties Private Limited, led to the transfer of assets to the assessee. The AO substituted the value determined by the stamp valuation authority for Unit No. 407B as the full value of consideration and computed capital gains. However, the assessee argued that Section 50C was not applicable to Unit No. 407B as it was held as stock in trade. The CIT(A) agreed and deleted the addition. The Tribunal upheld this decision, stating that the AO failed to appreciate the distinction between the capital asset and stock in trade as per the amalgamation order and financial statements. The gains from Unit No. 407A were capital gains, and those from Unit No. 407B were business income, thus dismissing the revenue's appeal on this ground.2. Addition towards alleged bogus construction expenses of Rs. 11,44,634/-:The assessee claimed development expenses of Rs. 11,44,634/- for the property sold. The AO disallowed these expenses, questioning the genuineness of the parties involved. However, the CIT(A) noted that the parties had confirmed the development work and shown receipts in their returns, subjected to TDS. The AO's disallowance was based on irrelevant considerations, such as the parties working only for the assessee during the year. The Tribunal agreed with the CIT(A), stating that the AO's observations were not substantiated by evidence. The development expenses were bifurcated correctly between the capital asset and stock in trade, leading to the dismissal of the revenue's appeal on this ground.3. Addition u/s 68 of the Act amounting to Rs. 2,40,000/-:The assessee received monies from Smt. Gendi Devi Bindawala and Mr. Raghav Bhartia, which the AO treated as unexplained cash credits due to lack of evidence of creditworthiness and genuineness. The CIT(A) accepted additional evidence submitted by the assessee, which was not considered by the AO. The Tribunal set aside this issue to the AO for fresh consideration, directing the assessee to provide necessary evidence and documents, thus allowing the revenue's appeal for statistical purposes.4. Disallowance of expenses of Rs. 4,33,699/-:The AO disallowed business expenses on the grounds that the assessee did not carry on any business. The CIT(A) observed that the expenses were incurred for business purposes and were not personal. The Tribunal upheld this decision, noting that the assessee was engaged in business activities, and the expenses were legitimate business expenditures, thus dismissing the revenue's appeal on this ground.5. Disallowance u/s 14A of the Act amounting to Rs. 74,315/-:The AO invoked Rule 8D(2)(iii) to calculate disallowance u/s 14A for earning exempt income. The CIT(A) reduced the disallowance by excluding investments in commercial flats, which would generate taxable income. The Tribunal agreed, stating that only investments generating exempt income should be considered for disallowance under Section 14A. The revenue's appeal on this ground was dismissed.Conclusion:The Tribunal dismissed the revenue's appeals on the first, second, fourth, and fifth issues while allowing the third issue for statistical purposes, directing a fresh examination by the AO. The overall appeal of the revenue was partly allowed for statistical purposes.