2025 (12) TMI 1648 - AT - Income Tax

Sale of depreciable factory building and leftover land claimed as agricultural; s.50 gain upheld, exemption remanded for review

Depreciable factory building: The Tribunal held that once depreciation had been claimed, the asset retained its character as a commercial depreciable ... Capital gains treatment of a depreciable asset u/s 50 - Classification of land pertaining to the factory building - HELD THAT:- Admittedly, depreciation was charged for one year in the beginning and thereafter, there was no such charge in the profit & loss account. In our opinion, the character of the asset would not change since there are a catena of judgments which indicate that a commercial asset need not be used commercially for there to be a right to claim depreciation. The fact that the building was not used commercially and was even encroached would not matter since the original character of the said building would remain commercial. It is also a trite position of law that one can advert to descriptions and definitions etc. as per some other rule or law only when the I.T. Act is silent on such aspect. In the present instance there is a clear provision for the treatment of a depreciable asset u/s 50 of the Act and the same shall prevail over any other classification that may be rendered on the basis of any other local rule or law. Thus, the view of the Ld. AO in regard to the treatment of the said factory building is worth supporting and we do so. Capital gains of agricultural land - Claim of the remaining portion of land (out of total 5 acres) that has been treated as agricultural land on the strength of its description in the revenue records, it is felt that Section 2(14)(iii) of the Act requires a degree of fact finding which was certainly not done by the Ld. AO as no documents were produced before him and even before the Ld.CIT(A) by the assessee. It is seen that some documents have been produced at first appeal stage, which have been accepted at face value without testing the facts against the provisions of section 2(14)(iii) of the Act. Accordingly, the entire land parcel, except the piece of land on which the factory is situated, deserves to be examined in the light of the provisions of Section 2(14)(iii) of the Act and thereafter it needs to be decided whether the said parcel of land can be justifiably termed as “agricultural land” in India. Accordingly, we set aside the impugned order to the extent of the findings given for the entre parcel of land, other than the land on which the factory is situated, and remand this matter back to the file of Ld. AO for examination of facts in the backdrop of the provisions of Section 2(14)(iii) of the Act. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether the factory building constituted a depreciable asset attracting section 50 treatment, thereby excluding indexation and requiring computation as per the special provision for depreciable assets, notwithstanding subsequent non-use, dilapidation, encroachment, or description in local/revenue records. (ii) Whether the remaining portion of land claimed as agricultural land could be accepted as excluded from 'capital asset' merely on the basis of revenue classification, or whether it required fresh fact-finding and examination strictly against section 2(14)(iii). 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Applicability of section 50 to the factory building and denial of indexation Legal framework (as discussed by the Court): The Court examined section 50 as the governing provision for computation of capital gains where the capital asset is a depreciable asset forming part of a block in respect of which depreciation has been allowed. Interpretation and reasoning: The Court held that a 'plain reading' of section 50 mandates its application to depreciable assets. It found it undisputed that depreciation had been charged for one year on the factory building. The Court reasoned that the asset's character as a commercial/depreciable asset does not change merely because depreciation was not claimed in subsequent years, or because the building was not used commercially, had become dilapidated, or was encroached. It further held that where the Income-tax Act contains a clear provision on treatment of depreciable assets, that statutory rule prevails over any other classification or description derived from local rules or revenue records (including describing the building as 'residential' in the sale deed). Conclusion: The Court upheld the assessing authority's approach insofar as the factory building was concerned, holding that section 50 governed its capital gains treatment and that indexation could not be allowed for the depreciable factory building. The appellate relief allowing indexation/contrary treatment for the building was therefore not sustained. Issue (ii): Whether the remaining land could be treated as 'agricultural land' without examination under section 2(14)(iii) Legal framework (as discussed by the Court): The Court referred to section 2(14)(iii), which defines when agricultural land in India is excluded from 'capital asset', and noted that its application requires specific factual verification. Interpretation and reasoning: The Court found that the necessary fact-finding required by section 2(14)(iii) had not been undertaken. It noted that no supporting documents were produced before the assessing authority, and that even at the first appellate stage, documents produced were accepted 'at face value' without testing them against section 2(14)(iii). The Court therefore held that the question whether the portion other than the factory-site land qualified as 'agricultural land' could not be conclusively decided on the existing record and required examination in light of the statutory conditions in section 2(14)(iii). Conclusion: The Court set aside the appellate findings concerning the land parcel other than the portion on which the factory stood and remanded the matter to the assessing authority for fresh examination and decision strictly in the backdrop of section 2(14)(iii), i.e., to determine whether that parcel can justifiably be treated as 'agricultural land' for capital gains purposes.