2019 (9) TMI 250 - AT - Income Tax

Appeal granted for legal expenses deduction & capital gains bifurcation. Review set-off claim for depreciation and business loss.

The Tribunal partially allowed the appeal, permitting the deduction of expenses incurred for maintaining the legal status and liquidating assets. It ... Setting off of the expenditure against the Capital gains - addition stating that there was no business and that the expenditure claimed is disallowed u/s 37 - HELD THAT:- It is an undisputed fact that though business of assessee came to a halt in the year 2010, yet the assessee was liquidating its assets. The assessee had only a leasehold rights on the land and it had to get the permission of SIPCOT for transfer of leasehold rights. The major portion of expenses claimed is on account of sales tax demand of ₹ 53.33 lakhs, property tax, audit fees, property maintenance, settlement amount paid on labour court’s order. It is therefore clear that all these expenses had to be incurred for proper liquidation of assets of the company. In identical circumstances, in the case of Lawrence D'Souza [2011 (9) TMI 212 - KARNATAKA HIGH COURT] took the view that expenditure in question had to be allowed in AY 1996-97, though business came to a halt in the year 1994 - expenses in question have to be allowed as a deduction. This issue is accordingly decided in favour of assessee. Capital gain on sale of land & building and leasehold rights - bifurcation of capital gain - short term capital gain - as per assessee same needs to be treated as short term capital gains for sale of building and long term capital gains for leasehold rights in land - HELD THAT:- On a plain reading of section 50 of the Act, it is clear that it is applicable for transfer of buildings and not for transfer of right in lease hold land. Therefore, the Capital Gains on the transfer of the right in lease hold land has to be computed under the normal provisions as Long Term Capital Gains and the Capital Gains on the transfer of the buildings has to be computed under the provisions of section 50 as Short Term Capital Gains. Observations of the CIT(Appeals) contrary to the aforesaid provisions are unsustainable and are hereby vacated. The ld. counsel for the assessee has in this regard rightly placed reliance on the decision of CIT v. Vimal Chand Golecha [1992 (12) TMI 33 - RAJASTHAN HIGH COURT] wherein it was held that when price of two capital assets is charged at one consolidated price, where a gain from one of capital assets was a short-term capital gain while from other it was a long term capital gain, then the assessee is entitled to bifurcate the same and benefit to assessee could not be denied in respect of gain arising from sale of an asset which could be considered as long-term capital gain. Set off of business loss and unabsorbed depreciation - As per section 32(2) of the Act, the unabsorbed depreciation is deemed to be current year's depreciation and can be set off against Capital Gains as per section 71 of the Act. The AO is directed to examine the claim of assessee for set off in the light of other observations in this order. Issues Involved:1. Disallowance of expenses of Rs. 1,08,54,687.2. Non-consideration of claim of bifurcating capital gain on sale of land and building into long-term and short-term capital gains.3. Claim for set off of unabsorbed depreciation and brought forward business loss against short-term capital gains.Detailed Analysis:1. Disallowance of Expenses of Rs. 1,08,54,687:The assessee, a company engaged in manufacturing wrist watch straps, ceased operations in 2010 and was liquidating its assets. The expenses claimed included office rent, professional charges, sales tax demand, property tax, audit fees, property maintenance, legal expenses, bad debts, and past employee payments. The Assessing Officer (AO) disallowed these expenses, stating there was no business and the expenditure claimed is disallowed under section 37 of the Income Tax Act, 1961. The CIT(A) upheld the AO's decision, citing the business had completely stopped.However, the Tribunal found that the expenses were necessary to maintain the legal status of the company and for liquidating its assets. Citing the Karnataka High Court's decision in CIT v. Lawrence D'Souza, the Tribunal allowed the expenses as deductions, recognizing them as essential for the proper liquidation of the company's assets.2. Non-consideration of Claim of Bifurcating Capital Gain:The assessee argued that the capital gain on the sale of land and building should be bifurcated into long-term capital gain (LTCG) for the land and short-term capital gain (STCG) for the building, as the building was a depreciable asset. The AO and CIT(A) did not accept this claim, stating the assessee had declared the entire capital gain as STCG in its return of income and no revised return was filed.The Tribunal, referencing the Madras High Court's decision in Commissioner of Income-tax, Chennai v. Abhinitha Foundation (P.) Ltd., held that appellate authorities could consider such claims even if not filed in the original or revised return. The Tribunal directed the AO to examine the claim of bifurcating the capital gain, noting that the right in leasehold land is not a depreciable asset and should be considered as LTCG, while the building should be considered under section 50 as STCG.3. Claim for Set Off of Unabsorbed Depreciation and Brought Forward Business Loss:The assessee claimed set off of unabsorbed depreciation and brought forward business loss against the short-term capital gains. The CIT(A) did not render a specific decision on this issue. The Tribunal noted that unabsorbed depreciation is deemed to be current year's depreciation under section 32(2) and can be set off against capital gains as per section 71 of the Act.The Tribunal directed the AO to examine the claim for set off of unabsorbed depreciation and brought forward business loss in light of the observations made in the order.Conclusion:The Tribunal allowed the appeal partly, permitting the deduction of expenses incurred for maintaining the legal status and liquidating assets, directing the AO to reconsider the bifurcation of capital gains and the set off of unabsorbed depreciation and brought forward business loss.