2018 (7) TMI 930 - AT - Income Tax

Tribunal decision: Land sale profits as long-term capital gain, employee settlement deductible.

The Tribunal ruled that the gain from the sale of land with staff quarters should be assessed as long term capital gain, not short term. The capital gain ... Computation of capital gain in terms of section 50(1) - assessment year - Held that:- AO himself has held that the capital gain should have been taxed in A.Y. 2006-07, since, the transfer of the capital asset in terms of Section 2(47)(v) has taken place in that assessment year - thus the gain derived from transfer of capital asset was to be assessed in A.Y. 2006-07 and not in the impugned assessment year. Also considering the fact that this without prejudice argument was made by the assessee under Rule 27 of the Income Tax Appellate Tribunal Rules, 1963, under which the assessee is entitled to support the order of the CIT(A) on any ground decided against him,the relief is to be restricted to the extent given by the learned CIT(A). Accordingly, we uphold the order of the CIT(A) on this issue. Deduction of claim towards payment made by the builder to the employees for vacating the staff quarters - Held that:- the assessee has failed in its attempt to vacate the employees. Therefore, the buyer stepped in and after paying compensation of ₹ 1.04 crores to the employees he got the staff quarters vacated. Thus, the said amount was adjusted from the agreed sale consideration to be paid to the assessee. The aforesaid facts make it clear that the amount of ₹ 1.04 crores was never received by the assessee from the buyer as the buyer adjusted it from the sale consideration. In any case of the matter, even if it is treated as part of sale consideration the amount of ₹ 1.04 crores have to be treated as expenditure incurred by the assessee for transferring the property, hence allowable under Section 48 of the Act. Thus, looked at from any angle the amount of ₹ 1.04 crores has to be allowed as deduction. Sale of property - bifurcation in to land and building - Long term / Short term capital gain - Held that:- As could be seen from the facts on record, assessee itself has bifurcated the sale of property to land and building portions and offered long term capital gain and short term capital gain on the sale consideration received. However, when the Bench put a query to the learned counsel for the assessee regarding the exact extent of land and building sold and how the valuation of the land portion and building portion was made, the learned counsel for the assessee fairly submitted that the relevant documents have not been filed. Even, the copy of the sale agreement has not been filed before us. Thus, in the absence of these primary and basic facts and documents such as sale agreement as well as the basis for valuation of property, it is difficult for us to render any conclusive finding on the claim made by the assessee - restore the disputed issue to the AO for de novo adjudication Issues Involved:1. Nature of Capital Gain (Long Term vs. Short Term)2. Assessment Year for Capital Gain3. Deduction of Settlement Amount Paid to EmployeesIssue 1: Nature of Capital Gain (Long Term vs. Short Term)The Department contended that the land along with staff quarters, on which depreciation was claimed, should be taxed as short term capital gain under Section 50(1) of the Income Tax Act. The assessee argued that the property sold was land, which is not depreciable, and thus should be treated as long term capital gain. The Tribunal noted that the development agreement and the buyer’s confirmation indicated the transaction was for land, not the staff quarters. The Tribunal concluded that the asset transferred was land, and as land is not included in the block of assets under Section 2(11), Section 50(1) does not apply. Therefore, the gain is to be assessed as long term capital gain.Issue 2: Assessment Year for Capital GainThe AO argued that the transfer of the property occurred in the financial year 2005-06 based on a registered development agreement dated 29.10.2005, and thus, the capital gain should be taxed in A.Y. 2006-07. The Tribunal agreed, noting that the transfer of the capital asset took place in A.Y. 2006-07 as per Section 2(47)(v) and the decision in Chaturbhuj Dwarkadas Kapaida vs. CIT. Consequently, the gain cannot be assessed in the impugned assessment year, even on a protective basis.Issue 3: Deduction of Settlement Amount Paid to EmployeesThe AO noted that the assessee had no business activity during the previous year and disallowed the deduction of Rs. 1.04 crore paid to employees for vacating the staff quarters. The Tribunal observed that the payment was made by the buyer to the employees, adjusted against the sale consideration. Since this amount was never received by the assessee, it was considered an expenditure incurred for transferring the property and allowable under Section 48 of the Act. Thus, the Tribunal upheld the CIT(A)’s decision to allow the deduction.Separate Judgment for A.Y. 2011-12:Issue: Addition of Short Term Capital GainThe AO treated the gain from the sale of a guesthouse used as staff quarters as short term capital gain, as depreciation was claimed on it. The assessee argued that the land portion should be treated as long term capital gain. The Tribunal noted the assessee’s bifurcation of the sale into land and building portions, offering long term capital gain for land and short term capital gain for the building. However, due to the absence of necessary documents such as the sale agreement and valuation basis, the Tribunal restored the issue to the AO for de novo adjudication.Conclusion:The appeal by the Revenue was dismissed, and the appeal by the assessee was allowed for statistical purposes.