TaxTMI 
TaxTMI 
2001 (2) TMI 276
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.... of the case. 3. The assessee-firm came into existence vide a deed dated 15-4-1978 with four partners, who are brothers with equal shares in profit or loss. Clause 3 of the said partnership deed relating to object reads as under: "3. The main object of the firm shall be to construct a building with Hotel, Lodging facilities and commercial shop rooms at the site already purchased at Jail Road, Calicut. Any other similar or allied business may also be started in future with the consent of all the partners. For all such new ventures this deed shall be binding on all respects." The stand of the assessee is that the four partners have purchased some land on which a building had been constructed, in which the ground floor was let out for commercial shop rooms and the first floor and above were used to run a lodge. The admitted position is that the assessee claimed depreciation on the portion used as lodge before the building was sold vide the sale deed dated 26-6-1987, and no depreciation was claimed or allowed on the portion let out for shops, presumably because the rental income from the shops was brought to tax under the head 'property'. As we have already mentioned, accordin....
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....p; 22,44,074 --------- Capital gain 7,55,926 Less: Exemption u/s 48 of first 10000 full 10,000 on below @ 50% &nbs....
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....p; 3,09,736.43" ------------ It may be observed that in this return the assessee had disclosed capital gains on the sale of building and we may clarify that the building is the same as we have referred to herein above. 5. The assessment was made under section 143(1) on 27-2-1990 accepting the income returned. The Commissioner of Income-tax, however, set aside this assessment exercising his powers under section 263 of the Income-tax Act on the ground that the firm claimed depreciation on the portion of the building used as lodge and in view of the amendment to section 50 of the Income-tax Act with effect from 1-4-1988, capital gains on transfer of depreciable assets should be deemed to be short-term. capital gain....
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....nbsp; 4,49,200 Less: Cost 2,17,500 --------- &nb....
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....nbsp; --------- Short Term Capital Gain by Virtue of section 50 Sale price of portion of building used as lodge, furniture, fittings, etc. as discussed in para 9 25,50,800 Less: Written down value 12,35,156 ---------  ....
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....e assessee has raised various grounds before us in the appeal memo, but during the course of hearing he filed revised grounds, which are as under: " 1. Since the sale is of the 'business as a whole' and since there is no allocation of the sale value to any particular asset, the computation of capital gain ought to have been on the basis of the 'business as a whole', which in itself is a capital asset. 2. It is judicially well-settled by now that a business as such can be a capital asset and since depreciation has not been granted on that invocation of section 50 is not permissible. 3. Assuming for the sake of argument but not admitting that a bifurcation is possible, even then the allocation of the value is incorrect. 4. The appellant had claimed certain deductions by way of mortgage charges as well as expenses all of which are deductible under section 48." We restrict ourselves to the consideration of the above grounds. 8. Now we shall consider the sale agreements and sale deeds relating to the transfer of the said building. There are two sale agreements dated 30-11-1986 and 1-7-1987, which along with their English translations may be seen at pages 30 to 66 of th....
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.... payment of sale consideration was extended by another three months. This agreement also states that another sum of Rs. 10 lakhs was received from the vendee and now it is agreed between the parties that the assessees should transfer 1/4th share in the property shown in Schedule A as per the original agreement. In this agreement, there is no reference to the properties shown in Schedule B of the original agreement, i.e. furniture and other-miscellaneous items. In terms of the agreement dated 1-7-1987, the assessee-firm executed a sale deed dated 26-6-1987, the English translation of which may be seen at page 77 of the assessee's paper book. The 1/4th share of the assessee-firm in the said property mentioned in Schedule A is conveyed by this sale deed, and the relevant portion reads as under: "But as said above, the items of properties described in the Schedule below and belonging to us the rights like Jenmom Kuzhikoors and improvements, possession and all other equitable rights, we retain and reserve for us three shares with no distinct separation and one share out of four without distinct separation, all rights like Jenmom, Kuzhikoors and improvements, possession and all other ....
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....relevant portion of the deed reads as under: "...and when so continuing our Jenmom right, right of improvements, possession, tenancy rights etc. with all equitable rights, out of four shares three shares were reserved and retained by us with making no separation of the items, the remaining one share out of four shares, without making any separation of the items of properties the Jenmom right, Kuzhikoors and improvements and tenancy rights and all other equitable rights are all assigned to you as per registered document No. 696 of 1987 of the Kozhikode Sub-Registry office and mentioned in Book No. 1, volume 233 pages 19 to 25 of that office dated 26th June, 1987 and by virtue of the same, the items of properties in the schedule one share out of four shares with no separation you are entitled and three shares out of four shares, without separation we are entitled jointly, as stated above the coolie is collected from the coolie kudiyans, the items of properties are in our joint possession with the coolie kudiyans and the coolie is collected from them and there are debt liabilities. But the items of properties over which we have a joint right and which are in our joint possession an....
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....30-11-1986. The admitted position before us is that the land on which the building in question was situate or constructed was in the names of the partners and so the capital gains attributable to the sale of the land is not to be brought to tax in the hands of the assessee-firm. This position is not questioned by the Assessing Officer or by the learned Departmental Representative before us. We may, however, mention that the first sale agreement dated 30-11-1986 mentions at page 2 of the deed that 'the lands and rights over the same merged in the partnership firm'. So, as per the narration in the agreement, the land also became an asset of the partnership firm, but we do not want to get into this controversy, because no dispute is raised in this regard either by the Assessing Officer or by the learned Departmental Representative. It appears that Rs. 10 lakhs, out of the consideration of Rs. 40 lakhs stipulated in the agreement dated 30-11-1986 was for the transfer of the land and as the land was the separate property of the partners and not of the assessee-firm, it was excluded from the sale consideration and the capital gains was worked out by the Assessing Officer only with refere....
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....e building. Whatever rights are conveyed by the two sale deeds in question are only rights relating to the land or the building. 9. The assessee has filed balance-sheet of the assessee-firm on 8/12/1987 and it is supposed to be the balance-sheet as on the date of the sale, even though it seems to be a few days subsequent to the sale. This balance-sheet reads as under: "Balance-sheet as at 8th December, 1987. Liabilities Current liabilities: Rehmani Arabic College 27,50,000.00 ------------ Total &nb....
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.... 9,71,172.00 Electric fittings 54,971.00 Furniture 1,09,345.00 Plumbing & Sanitary fittings 63,451.00 Otis elevator 5l,743.00 Motor appliances &nb....
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.... ------------ Total : 14,67,172.00 ------------ It may be observed that there are no business assets except the fixed assets and the fixed asset is only the building and its electrical fittings, sanitary fittings, lift and motor appliances. The furniture is a meagre item, which, as we have already mentioned, is not even referred to in the sale de....
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....s. 30 lakhs received for the building can be legally apportioned between the depreciable portion of the building and the non-depreciable portion, and if it is legally permitted to do so, how to effect the apportionment. We may mention that the contention of the learned counsel before us and before the Revenue has all along been that the apportionment of the sale consideration is not permitted because what is transferred is the entire business undertaking. For this proposition he relied upon various case laws, like the following: 1. Syndicate Bank Ltd v. Addl. CIT [1985] 155 ITR 681 (Kar.) 2. CIT v. EX Periera & Sons (Travancore) (P.) Ltd. [1990] 184 ITR 461 (Ker.) 3. Modi Electric Supply Co. Ltd v. ITO [1986] 17 ITD 1057 (Chd.) These are all cases where the entire business undertaking was sold for a slump price. As we hold that, in the present case, what was transferred was only the building and not the business undertaking, these cases are easily distinguishable and we hold that they do not apply to the facts of the present, case. It was not the case of the assessee before us that, even when what was transferred was only the building, no apportionment of the considerat....
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....---------------------------------------------------------------------------------- 1404493.43 116662.29 159220.31 57916.58 249994.03 116614.98 ---------------------------------------------------------------------------------- Total: 2104901.62" It may be observed that the investment in both the depreciable and non-depreciable portions of the building has been recorded as one unit and it is not as though the assessee-firm had constructed two separate units, out of which one is depreciable and the other is non-depreciable. In other words, the entire building was one asset, but it was used for two different purposes, i.e. (a) for running a lodge, and (b) for being let out as shop rooms and, as per the statutory provisions, a portion of the b....
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....ous in terms of section 50 that the Revenue authorities were justified in treating the capital gains in respect of a depreciable asset like the building in question as short-term capital gains and that the capital gains have to be worked out in terms of the said section. The principle that when the entire undertaking is transferred for a slump price, the sale consideration cannot be apportioned between various assets inclusive of the fixed assets cannot, to our mind, be extended to a case where only a single asset, like the building is transferred. In the latter case, the consideration has to be apportioned between the depreciable portion and the non-depreciable portion for implementing section 50 of the Income-tax Act. When a business undertaking is transferred, there are different types of intangible assets like the licences, patent rights, etc., apart from the tangible assets. That is not the situation when only a building is transferred. When only a building is transferred, it is not impossible to apportion the sale price between the depreciable portion and the non-depreciable portion. Without such apportionment, the provisions of section 50 cannot be implemented. We see no rea....
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.... mind, is quite acceptable. The sale consideration can be apportioned on the basis of the market value of the two portions of the building as determined by an expert. We find that the assessee has filed an approved valuer's report, which may be found at pages 101 to 124 of the assessee's paper book, which gives the values of both the portions. In terms of this report, the first floor and above, i.e. the portion used as lodge or the depreciable portion is Rs. 20,46,899 and the ground floor or the portion let out for the shops or the non-depreciable portion is shown as Rs. 10,24,701. The total value of the building is worked out at Rs. 30,71,601. The claim of the assessee is that, without prejudice to his other arguments, the apportionment should be made on the basis of this report of the approved valuer. We find that the Assessing Officer has not given any particular reason for rejecting the valuer's report. He simply preferred to go by the mode of apportionment on the basis of WDV of the depreciable portion and cost of construction of the non-depreciable portion. This method has certain infirmities like, as pleaded by the ld. counsel for the assessee before us, that the WDV and cos....
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....The assessee claimed deduction for these amounts on the ground that they constituted either expenditure necessary for the transfer or amounts transferred by an overriding title before they reached the assessee. The Revenue authorities were not impressed with this argument. Before us, the learned counsel for the assessee pleaded for the deduction of these amounts relying on the following decisions 1. CIT v. Shakuntala Kantilal [1991] 190 ITR 56 (Bom.) 2. Attili Narayana Rao v. ITO [1986] 16 ITD 35 (Hyd.) 3. K.V. Idiculla v. ITO [1985] 22 TTJ (Coch.) 23 4. CIT v. Smt. Thressiamma Abraham (No. 1) [1997] 227 ITR 802 (Ker.). We find that the decision of the jurisdictional High Court in the case of Thressiamma Abraham is in favour of the assessee. But, that decision is not in conformity with the decision of the Apex Court in the case of V.S.M.R. Jagadishchandran (Decd.) v. CIT [1997] 227 ITR 240, which was rendered subsequent to the decision of the jurisdictional High Court. The relevant portion of the head note of this decision reads as under: "Held, dismissing the appeal, that in R.M. Arunachalam v. CIT [1997] 227 ITR 222 (SC) the correctness of the view of the Kerala....
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.... Fancy Corpn. Ltd. v. Dy. CIT [2000] 75 ITD 467, to which one of us is a party. The relevant portion of the head note of this decision reads as under: "Held, the liability incurred by the assessee for the discharge of the mortgage debt was not because of any pre-existing right against the assessee in the mortgagee. The liability was the result of simply a commercial debt incurred by the assessee. The Supreme Court in VSMR Jagadishchandran v. CIT [1997] 227 ITR 240/93 Taxman 389, has implicitly held that the repayment of the mortgage debt cannot be regarded as an expenditure in connection with transfer. Actually, even on general principles, it is difficult to contemplate repayment of a debt as an expenditure incurred. The main plank of the contention of the assessee was that without the repayment of the mortgage debt, the assessee could not have transferred the property to 'X'. In the entire argument, the assessee had ignored the fact that the repayment of the debt was consequential to the obtaining of loan earlier and the benefit that had accrued to the assessee because of the loan did not figure anywhere in the computation of the capital gains or in the argument of the assessee....