Income Tax Appellate Tribunal - Pune
Sunny Industrial Products ,, Pune vs Assessee on 25 March, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH " A", PUNE
BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER
AND SHRI G.S. PANNU, ACCOUNTANT MEMBER
I.T.A. No. 616/PN/09
(Asstt. Years: 2004-05)
Sunny Industrial Products, .. Appellant
18 Satyam Apartments, Plot No 14,
Lokmanya Colony, Off. Paud Road,
Pune.
PAN AAFFS1578J
Vs.
Income-tax Officer,
Ward 3(4), Pune .. Respondent
Appellant by: Shri Kishor Phadke
Respondent by: Shri Hareshwar Sharma
ORDER
PER G.S. PANNU, AM
This appeal by the assessee is directed against the order of the Commissioner of Income-tax-II, Pune dated 25.3.2009 passed under section 263 of the Income-tax Act, 1961 (in short "the Act") which, in turn, has arisen from an order dated 20.12.2006 passed by the Assessing Officer under section 143(3) of the Act, pertaining to the assessment year 2004-05.
2. Briefly stated the facts are that in this case the Assessing Officer passed an order under section 143(3) on 20.12.2006 accepting the returned income at Rs 4,11,077/-, being long-term capital gain. On perusal of the assessment records, the Commissioner of Income-tax found that the assessment order passed by the Assessing Officer was erroneous and prejudicial to the interests of Revenue and accordingly exercising his revisional jurisdiction, the Commissioner of Income-tax issued notice under section 263 of the Act on the following three issues:
2 ITA No 616/PN/09 Sunny Industrial Products, Pune
1. That the assessee received sale consideration of Rs 14,14,490/- on sale of a plot of land at MIDC, whereas stamp duty valuation of property was Rs 24,26,000/, and thus, income on account of long-term capital was under assessed as the Assessing Officer failed to apply the provisions of section 50C of the Act;
2. that the assessee showed premium of Rs 1,79,510/- as payable to MIDC but was not actually paid and therefore the same was not allowable as deduction under section 48(1) of the Act; and,
3. that the assessee incurred painting expenses of Rs 42,000/- on building sold. These expenses were revenue in nature and same were wrongly allowed as cost of improvement while computing long-term capital gain. Similarly brokerage charges claimed as expenditure in connection with transfer was not allowable.
3. In response to the notice issued by the Commissioner of Income-tax under section 263 of the Act on the above issues, assessee filed detailed written submissions covering the aforesaid three issues. The Commissioner of Income- tax after considering the submissions of the assessee came to the following conclusions:
"4.1 I have carefully considered submissions of the authorized representative of the assessee, order of the AO and other material on record, and information available on file. 4.2 There is no dispute that stamp duty value of property is Rs 24,26,000/-. Actual consideration received by the assessee is Rs 14 lakhs as per agreement dt 11.5.2004. Assessee in computation of income has taken value of land at Rs 16,49,000/-, and value of other assets are taken as under:
Building Rs 7,57,088/-
MSEB Deposit Rs 17,625/-
Electric installation Rs 2,287/-
As per balance sheet as on 31.3.2004, the valueo f the building as per IT record is Rs 64,161/- andvalue of electric installation is Rs 2287/-.
Keeping in view book value of building i.e. Rs 64,161/-, there is no basis how assessee arrived at sale value of building at Rs 7,57,088/- and value of land at Rs 16.49 lakhs. The AO has accepted above working as it is without raising any query on the issue.
4.3 It is further seen that differential premium of Rs 1,79,500/- payable to MIDC is to be borne by assignee/buyer as per page 4 of the agreement dt 11.5.2004 and as per page No. 3 of the Memorandum of Understanding dt 21.7.2005.
It is the contention of the assessee that before transfer he has paid such premium of Rs 1,79,510/- to MIDC and hence, claimed as deduction while computing capital gain but facts remain that such expenses requires to be borne by buyer as discussed earlier, and in fact same has been reimbursed by buyer or assignee to the assessee. Thus, there is no justification in claiming deduction of Rs 1,79,510/-, as expenses incurred in connection with transfer while computing long term capital gain. A.O has not at all verified this aspect and also has not applied his mind. 4.4 Assessee has incurred expenses of Rs 42,000/- towards painting charges for factory building. Assessee was using factory building for business purpose, during relevant previous year so much expenses are revenue in nature, and cannot be said that it is towards cost of improvement of asset. Similarly, Rs 25,000/- assessee has paid as 3 ITA No 616/PN/09 Sunny Industrial Products, Pune brokerage charges, but same has been debited in the Profit and Loss account and were not disallowed while computing income of the business. Assessee has again claimed such expenses towards cost of sale while computing capital gain. In short, there is double claim of expenses of rs 25,000/-. Thus, AO has not at all applied his mind on this issue while computing capital gain on sale of asset"
The Commissioner of Income-tax accordingly held that the Assessing Officer passed the order without examination of the relevant issues and that he had mechanically accepted what the assessee had wanted him to accept without application of mind or enquiry, thus accepting the returned income without any scrutiny of the workings of long-term capital gain. The Commissioner of Income- tax accordingly held that because of non-application of mind by the Assessing Officer, the assessment order became erroneous and prejudicial to the interests of Revenue and it satisfied the conditions laid down by the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. 243 ITR 83(SC). The Commissioner of Income-tax therefore set aside the order of the Assessing Officer on the issue of computation of capital gain with directions to pass a fresh order in accordance with law and after giving due opportunity of being heard to the assessee. It is this order which is the subject-matter of appeal before us.
4. Before us, the learned Counsel for the appellant vehemently argued that the Commissioner has failed to appreciate that the Assessing Officer had accepted the amount of long-term capital gain and short-term capital gain declared by the assessee after proper examination and verification of the account books and the other relevant records, namely, the Deed of Assignment, etc. Our attention was also invited to the communications dated 23.9.2005 and 12.10.2005 addressed to the Assessing Officer, copies of which are placed in the Paper Book to contend that the Assessing Officer had called for the relevant details and the computation of capital gain was accepted after due application of mind even on the points raised by the Commissioner in the impugned order. Moreover, on the aspect of deductions claimed for brokerage and painting charges for computing the amount of capital gain, it was submitted that no prejudice can be said to have been caused to the Revenue on this point because in any case, such expenses are allowable as business expenditure, thus 4 ITA No 616/PN/09 Sunny Industrial Products, Pune increasing the business loss which could be set off against the enhanced capital gain, thus the total income would remain the same. Under these circumstances, according to him, the twin requirements of section 263 of the Act are not fulfilled and following the ratio of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. (supra), the invoking of section 263 of the Act by the Commissioner is wrong and thus the impugned order deserves to be cancelled.
5. On the other hand, the ld CIT-Departmental Representative has defended the impugned order of the Commissioner. According to him, even if it is accepted that the relevant details were called for by the Assessing Officer during the assessment proceedings, but the Assessing Officer did not apply his mind as the assessment order is cryptic and the computation of capital gain has been accepted by the Assessing Officer without any discussion. It is submitted that the assessment order has been rightly held to be erroneous and prejudicial to the interests of the Revenue by the Commissioner.
6. We have considered the rival submissions carefully. Section 263 of the Act empowers a Commissioner to call for and examine the record of any proceeding carried out by the Assessing Officer and after giving the assessee an opportunity of being heard and after making or causing to make such enquiries as he may deem necessary, he may pass such order thereon, as the circumstances of the case justify, including an order enhancing or modifying the assessment, or canceling the assessment and directing a fresh assessment. In this case, the Commissioner has set aside the assessment order passed by the Assessing Officer under section 143(3) of the Act dated 20.12.2006 on the issue of computation of capital gains and has directed the Assessing Officer to pass a fresh order on the issue. The power of the Commissioner enshrined in section 263 of the Act is circumscribed by the conditions prescribed therein, namely, that the assessment order in question should be erroneous insofar as it is prejudicial to the interests of the Revenue. The twin requirements, namely, the order being erroneous and prejudicial to the interests of the Revenue are to be cumulatively 5 ITA No 616/PN/09 Sunny Industrial Products, Pune fulfilled, as held by the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. (supra).
7. In this case, genesis of the dispute relates to the computation of capital gain returned by the assessee, which can be understood as follows. By way of a lease deed dated 01.03.1984, assessee firm had taken on 95 years lease, an industrial plot at Pimpri Industrial Area from Maharashtra Industrial Development Corporation (MIDC) and it constructed a factory shed thereon. This plot of land alongwith factory shed together with the water and electricity connection of the property, was transferred by the assessee during the year under consideration by way of a Deed of Assignment for a consideration of Rs 14,00,000/-. However, for the purposes of stamp duty payable, the valuation was ascertained at Rs 24,60,000/-, and accordingly in terms of section 50C of the Act, assessee adopted the said amount as the full value of consideration received for the purposes of computing the capital gain on such transfer. The assessee allocated the deemed consideration and computed the capital gain as follows:
"Income from capital gains Short Term
1. Sale of Factory Building 757088 Cost of selling 42000 Net sale consideration 715088 Cost of acquisition Rs 64161/- 01.04.2002 64161 Capital gain 650927
2. Sale of electrical installation 2287 Cost of acquisition Rs 2287/- 01.04.2002 2287 Capital gain 0
3. Sale of MSEB and MIDC deposit 17625 Cost of acquisition Rs 17625/- 01.04.2002 17625 Capital gain 0 Total short term capital gains 650927 Long Term
1. Sale of leasehold land 1649000 Cost of selling 204510 Net sale consideration 1444490 Cost of acquisition Rs 80000/- 01.03.1984 With Indexaton @ 463/116 319310 Capital Gain 1125180
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TOTAL LONG TERM CAPITAL GAINS 1125180"
8. The above total capital gain was set-off against the current year's business loss as well as the brought forward past losses and the total income 6 ITA No 616/PN/09 Sunny Industrial Products, Pune was computed at Rs 4,11,080/-, and the same has been accepted by the Assessing Officer in the assessment order dated 20.12.2006. The first objection of the Commissioner is that the assessee has not provided any basis to allocate Rs 7,57,088/- and Rs 16,49,000/- out of the full value of consideration against the factory building and land respectively, and the Assessing Officer accepted the workings of the assessee without raising any query. In our considered opinion, the objection of the Commissioner is ill-founded. The communications of the assessee dated 23.9.2005 and 12.10.2005 addressed to the Assessing Officer, copies of which are placed in the Paper Book, reveal that the detail and the basis of allocation of deemed consideration was provided by the assessee in response to a query raised by the Assessing Officer. The assessee provided a Schedule showing the allocation of the deemed consideration and the basis thereof, which is placed at page 40 of the Paper Book. It clearly emerges that the consideration has been allocated towards land on the basis of the prevailing MIDC rates, and for MSEB deposit/electrical installation on the basis of the book values and the residual amount was allocated towards the Factory building. There is nothing in the impugned order to suggest as to how such an allocation is not satisfactory or that the Assessing Officer did not raise any query with regard to the computation of capital gain. Thus, on this objection we find no reasons to uphold the action of the Commissioner under section 263 of the Act to set aside the assessment, since the Commissioner has not demonstrated any error in law or on facts within the meaning of section 263 of the Act.
9. The second objection of the Commissioner is that the assessee has claimed deduction of a sum of Rs 1,79,510/- while computing long-term capital gain on transfer of land, which represented premium payable to MIDC for permission to transfer. As per the Commissioner, the claim is wrong inasmuch as the premium payable to MIDC was reimbursed by the assignee to the assessee and, thus, there was no justification to claim such deduction as an expense incurred in connection with transfer of the land. On this aspect, the learned 7 ITA No 616/PN/09 Sunny Industrial Products, Pune Counsel pointed out that the said error would not ultimately affect the computation of long term capital gain on transfer of land, inasmuch as the reimbursement of premium can be construed as an enhanced sale consideration by the like amount and in any case the full value of consideration has been adopted at Rs 24,26,000/- as against the actual receipt of Rs 14 lakhs only. Thus, there is no prejudice caused to the Revenue on account of such an error. The explanation rendered by the assessee on this aspect, in our view, clearly establishes that as a result of aforesaid error, the total tax liability of the assessee is not affected. The premium payable to MIDC of Rs 1,79,510/- has been claimed as deduction, but the said amount has been reimbursed to the assessee by the buyer and, in this manner, even if it is assumed that the sale consideration is enhanced to that extent, the ultimate full value of consideration considered by the assessee for the purpose of computing capital gains, on account of the effect of section 50C is much higher than the consideration as enhanced by the amount of premium, thus not affecting the ultimate computation of capital gain. Therefore, the said error has not resulted in any prejudice to the Revenue, inasmuch as the tax liability of the assessee is not altered and, therefore, the same is outside the purview of section 263 of the Act. As a result thereof, even with regard to the second objection of the Commissioner, we find no reason to uphold the impugned order.
10. The third objection taken by the Commissioner is that the Assessing Officer allowed an expense of Rs 42,000/- while computing the short term capital gain on transfer of building, which represented painting charges. As per the Commissioner, the painting charges for the factory building was a business expense and the same could not be considered as a cost of improvement of the asset for the purpose of computing the capital gain. Another objection is with regard to the claim of Rs 25,000/- which has not been deducted while computing long term capital gain of the land, being brokerage charges. Here again, as per the Commissioner, it is not clear as to whether such sum was debited in the
8 ITA No 616/PN/09 Sunny Industrial Products, Pune profit and loss account and disallowed while computing the business income of the assessee so as to justify its deduction while computing the income under the head capital gains. Otherwise, as per the Commissioner, it would amount to double claim of expenses of Rs 25,000/-. On the aspect of the painting charges, the computation of total income placed at page 19 of the Paper Book reveals that such an item has been added back while computing the business income and, therefore, its deduction while computing capital gain on sale of building does not amount to a double deduction. In so far as the plea that the same is not allowable while computing capital gain, we find that even if the stand of the Commissioner is upheld, yet it would not make any difference to the ultimate tax liability of the assessee inasmuch as if such expenditure is not allowed while computing capital gains, the same would be eligible for deduction as a business expenditure, which would result in enhanced business loss, which in turn would be available for set- off against income from capital gain thus not affecting the total income of the assessee. Therefore, the said objection of the Commissioner, in our view, does not satisfy the requirements of section 263 of the Act, as the same is not prejudicial to the interests of Revenue, as no tax due to the Department has been lost.
11. Now with regard to brokerage charges of Rs 25,000/-, we find that the charge against the assessee is that the Assessing Officer has not verified whether there is double claim of expense. From the material and facts available on record, we are unable to verify the said contention and, therefore, we affirm the order of the Commissioner on this limited aspect, whereby the Assessing Officer shall verify whether there is a double claim of expense or not. If it is found on verification that there is a double claim of expense of Rs 25,000/-, then the Assessing Officer shall make necessary adjustments to the assessed income and, if it is found that such an expense has not been claimed doubly, no adjustment to the income assessed in the assessment order dated 20.12.2006 (supra) shall be warranted. Thus, the order of the Commissioner is modified and 9 ITA No 616/PN/09 Sunny Industrial Products, Pune on this limited aspect, the Assessing Officer is directed to carry out the necessary verification exercise indicated above, after allowing the assessee a reasonable opportunity of being heard in the matter.
12. In the result, appeal of the assessee is partly allowed.
Decision pronounced in the open court on this 13th day of May 2011.
Sd/- Sad/-
(SHAILENDRA KUMAR YADAV) (G.S. PANNU)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Pune: Dated: 13th May, 2011
B
Copy of the order is forwarded to :
1. Sunny Industrial Products, Pune
2. The ITO Wd 3(4), Pune
3. The CIT-II, Pune
4. The D.R, 'A' Bench, Pune
5. Guard file
"True copy"
By order
Assistant Registrar
ITAT, Pune Benches, Pune
Pune