2015 (12) TMI 1914 - AT - Income Tax

Decision upholds DVO fair market value Rs 1,80,88,560 for long-term capital gains; section 41(1) addition deleted, short-term gains set off

ITAT, Nagpur upheld CIT(A)'s acceptance of the DVO's FMV of Rs.1,80,88,560 for long-term capital gains, rejecting reliance on an alternative sale instance ... Long Term Capital Gain - CIT(A) referred the matter to the DVO - Considering the DVO’s report and assessee’s response, CIT(A) held that the value adopted by the Valuation Officer should be affirmed - HELD THAT:- We find that there is no cogent basis on record as to why this sale instance should be followed when the stamp valuation authorities have determined it already at Rs. 2.61 crores. There is no cogent reason why another sale instance should be given preference. Nothing is on record as to what are the facts and circumstances of that sale. DVO has already considered the assessee’s submissions and factored all the disadvantages while determining the FMV at Rs. 1,80,88,560/-. The assessee has already got a relief of around Rs. 80 lakhs. In our considered opinion CIT(Appeals) is correct in holding that the value adopted by the DVO should be taken into account. Thus we do not find any infirmity in the order of CIT(Appeals). Accordingly we uphold the same. Addition u/s 41(1) - sales tax liability on the payment of deferred sales tax converted into loan by the AO - On identical issue Hon’ble jurisdictional High Court in the case of CIT vs. Sulzer India Ltd. [2014 (12) TMI 267 - BOMBAY HIGH COURT] has decided the issue in favour of the assessee as held main object of prepayment of the sales-tax liability has clearly been held to be non inviting the rigours of section 41(1). To arrive at the above conclusion has taken into account Hon’ble Apex Court decision cited by the Revenue in Sundaram Iyengar & Sons [1996 (9) TMI 1 - SUPREME COURT] and has found it distinguishable on facts. The orders of the authorities below are set aside and the issue is decided in favour of the assessee. Non adjustment of deemed Short Term Capital Gain on depreciation assets for brought forward business loss - Short term capital gain out of sale of depreciable assets can be adjusted against brought forward business loss. Hence following the decision Nirmal Plastic Industry [2011 (11) TMI 776 - ITAT MUMBAI], we set aside the order of learned CIT(Appeals) and decide the issue in favour of the assessee. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether, for computation of long-term capital gain on sale of leasehold plots, the stamp valuation authority's rate mandated by section 50C must be applied, or whether a departmental valuation report (DVO) or a registered valuer's report can displace the stamp valuation rate. 2. Whether remission/settlement on prepayment of deferred sales-tax liability (converted into a loan) results in income chargeable under section 41(1) as 'amounts obtained' on cessation/remission of trading liability, or whether such prepayment/settlement falls outside section 41(1) in view of the nature and purpose of sales-tax deferral schemes. 3. Whether an assessee's written-off amount (claimed as bad debt/trading loss) of Rs. 5,48,648/- should be allowed (issue not pressed). 4. Whether deemed short-term capital gain under section 50 (arising on transfer of depreciable assets) can be adjusted against brought forward business losses and unabsorbed depreciation (i.e., whether such deemed short-term capital gain is to be treated as business income for set-off purposes). 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Valuation for long-term capital gain: application of section 50C, role of DVO and registered valuer reports Legal framework: Section 50C (statutory mandate) requires adoption of stamp valuation authority's rate as consideration for transfer of land for purposes of computing capital gains; however, the statutory scheme permits disregarding the stamp valuation rate where a departmental valuation report is obtained. Precedent treatment: The authorities below applied section 50C and, on appellate reference, the CIT(A) directed reliance on the Valuation Officer's (DVO) report rather than the stamp rate adopted by the Assessing Officer; the assessee relied on a registered valuer's report and specific comparable sale(s). Interpretation and reasoning: The Tribunal noted that a departmental valuation report was obtained and that the DVO had considered the assessee's submissions (including disadvantages of the property) and fixed a market value materially lower than the stamp valuation rate. The Tribunal rejected the assessee's contention that a particular sale instance (occurring after the assessee's transfer) or the registered valuer's valuation should be preferred, observing absence of cogent basis or factual detail to prefer that sale instance over the DVO's considered valuation or the stamp valuation. The Tribunal emphasized the statutory primacy of the stamp valuation rate subject to replacement by a departmental valuation report where obtained, and accepted the DVO valuation as reasonable and as providing substantial relief vis-à-vis stamp duty valuation. Ratio vs. Obiter: Ratio - Where a departmental valuation report is obtained under the statutory scheme, that DVO valuation can validly displace the stamp valuation authority's rate mandated by section 50C; absent cogent comparative evidence to the contrary, a considered DVO valuation is to be adopted. Obiter - Remarks rejecting the registered valuer's singular sale instance as inherently inferior without detailed analysis of that sale's facts (reflective of the case record rather than a general rule). Conclusion: The Tribunal upheld the CIT(A)'s adoption of the DVO value (Rs. 1,80,88,560/-) over the stamp valuation rate (Rs. 2,61,22,000/-) and over the registered valuer's contentions, allowing the assessee the reduction effected by the DVO valuation. Issue 2 - Remission/settlement of deferred sales-tax liability converted into loan: applicability of section 41(1) Legal framework: Section 41(1) deems amounts obtained on remission or cessation of loss, expenditure or trading liability (for which a deduction/allowance was earlier made) to be income of the year in which the remission/cessation occurs. The factual matrix involves governmental sales-tax deferral/prepayment schemes and subsequent settlement at discounted amounts (prepayment/settlement leading to partial waiver). Precedent treatment: The authorities below treated the settled/waived portion as income under section 41(1). The assessee relied on a jurisdictional High Court decision holding that prepayment of deferred sales-tax liabilities under incentive/deferral schemes does not constitute remission/cessation attracting section 41(1). The Tribunal examined that High Court decision and found it apposite and controlling. Interpretation and reasoning: The Tribunal examined the character of the sales-tax deferral/prepayment schemes (legislative/administrative incentives to promote industrial development) and accepted the High Court's reasoning that the incentive structure and legislative intent distinguish such prepayment/settlement from ordinary remission of trading liabilities contemplated by section 41(1). The Tribunal found the High Court's view (that the prepayment/settlement does not attract section 41(1)) to be applicable on the facts; it further noted that the High Court had considered and distinguished Apex Court authority relied upon by Revenue. The Tribunal therefore set aside the additions made under section 41(1) and decided the issue in favour of the assessee. Ratio vs. Obiter: Ratio - Prepayment/settlement of deferred sales-tax liabilities under statutory/administrative incentive schemes, when effected in the context and purpose of such schemes, does not automatically amount to 'remission or cessation' of trading liabilities attracting section 41(1); therefore, such amounts are not chargeable under section 41(1) where the controlling High Court decision so holds on analogous facts. Obiter - Observations about the policy/object of the deferral scheme, while explanatory, are ancillary to the controlling ratio. Conclusion: The Tribunal, following the jurisdictional High Court's reasoning, allowed the appeal on this issue and directed deletion of the addition under section 41(1) relating to the settled sales-tax liability. Issue 3 - Written-off amount claimed as bad debt/trading loss (Rs. 5,48,648/-) Legal framework: Allowability of bad debts/trading losses depends on statutory and evidentiary proof; procedural posture permits abandonment of grounds by appellant. Precedent treatment: The assessee's counsel expressly stated that this ground was not pressed. Interpretation and reasoning: As the ground was not pressed by the assessee, the Tribunal treated the ground as abandoned. Ratio vs. Obiter: Ratio - Unpressed grounds are dismissed as not pressed. Obiter - None. Conclusion: The ground was dismissed as not pressed. Issue 4 - Set-off of deemed short-term capital gain under section 50 against brought forward business loss/unabsorbed depreciation Legal framework: Section 50 creates a legal fiction taxing consideration on transfer of depreciable assets as short-term capital gain; set-off and carry-forward provisions (sections concerning set-off of losses and unabsorbed depreciation) apply according to the nature of income. Precedent treatment: The CIT(A) held that the deemed short-term capital gain under section 50 is a legal-fiction-based capital gain and not business income, therefore not eligible for set-off against brought forward business losses/unabsorbed depreciation. The assessee relied on coordinate bench Tribunal decisions (including Visakhapatnam and Mumbai Bench precedents) which held that, notwithstanding the fiction, gains on sale of depreciable assets are in substance business income and allow set-off against brought forward business loss and unabsorbed depreciation. Interpretation and reasoning: The Tribunal followed coordinate-bench authority recognizing that section 50's legal fiction taxes as short-term capital gain amounts which in substance arise from sale of business assets and therefore, for practical purposes of set-off, may be treated as business income permitting adjustment of brought forward business loss and unabsorbed depreciation. The Tribunal distinguished or limited contrary Special Bench authority to its facts and ratio, noting no conflict where set-off is against business income. The Tribunal accepted the coordinate-bench reasoning that the legal fiction should not be extended beyond its purpose to deny set-off in such cases. Ratio vs. Obiter: Ratio - Deemed short-term capital gain under section 50 arising from sale of depreciable assets may be set off against brought forward business losses and unabsorbed depreciation where consistent with precedent treating such gains as business income for set-off purposes. Obiter - Observations about scope of Special Bench decisions as fact-specific and non-conflicting where set-off is against business income. Conclusion: Following coordinate-bench authority, the Tribunal allowed set-off of the deemed short-term capital gain against brought forward business loss/unabsorbed depreciation and set aside the CIT(A)'s contrary view. Cross-references The Tribunal's conclusions on Issues 2 and 4 were reached by following binding/coordinate judicial precedents (jurisdictional High Court on Issue 2; Tribunal coordinate-bench decisions on Issue 4) and by applying statutory interpretation principles limiting the reach of legal fictions and recognizing the factual/policy matrix underpinning statutory incentive schemes. The Tribunal affirmed the CIT(A)'s adoption of the DVO valuation on Issue 1 where a departmental valuation report existed and was reasonably founded on consideration of the facts.