Income Tax Appellate Tribunal - Delhi
Vashti Management Services Private ... vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'H' DELHI
BEFORE SHRI C.L. SETHI AND SHRI K.G. BANSAL
ITA No. 819(Del)/2009
Assessment year: 2005-06
M/s Vashti Management Services Income-tax Officer,
Pvt. Ltd., 20/474, Dakshin Puri Extn., Vs. Ward 17(2), New Delhi.
New Delhi-62.
(Appellant) (Respondent)
Appellant by : Shri C.S. Aggarwal, Sr. Advocate &
Shri Gautam Jain, Advocate
Respondent by: Ms. Reena Singh Puri, CIT, DR
ORDER
PER K.G. BANSAL : AM This appeal of the assessee emanates from the order of Commissioner of Income-tax, Delhi-VI, New Delhi, passed on 2.1.2009 under the provisions of section 263 of the Income-tax Act, 1961, pertaining to assessment year 2005-06. The corresponding order of assessment was framed by the ITO, Ward 17(2), New Delhi, on 30.11.2007 under the provisions of section 143(3) of the Act. The assessee has combined the statement of facts and grounds of appeal, which read as under:-
1. "The ld. Commissioner of Income-tax, Delhi-VI has erred in exercising the powers conferred u/s 263 of the Income-tax Act, 1961 2 ITA No.819(Del)/2009 while canceling the earlier assessment for 2005-06 and thus misdirected the ld. Assessing Officer to frame the same de-novo.
2. That the ld. Commissioner of Income-tax, Delhi-VI has erred in maintaining the order of the ld. ITO, Ward 17(2), dated 3011.2007 and treating the same as erroneous by ignoring relevant facts, circumstances and pleadings of the appellant.
3. The ld. Commissioner of Income-tax, Delhi-VI has also erred in maintaining that the order of the ld. ITO, dated 3011.2007 applying section 41(2)of Income-tax Act, 1961 for granting set off against brought forward losses, is unsustainable, and, therefore, resulted in under assessment as the ITO failed to tax short-term capital gain to the tune of Rs. 42,60,394/-.
4. The ld. Commissioner of Income-tax, Delhi-VI has erred in rejecting the submissions made by the assessee and subjectively holding the view that the original order passed by the AO is prejudicial to the interest of the revenue.
5. The ld. Commissioner of Income-tax, Delhi-VI has further erred in considering set off brought forward business losses as speculative loss, by ignoring objective facts, circumstances and pleading of the appellant.
6. The ld. Commissioner of Income-tax, Delhi-VI has erred in observing deduction on depreciation of land, cannot be granted to the assessee by ignoring the facts and circumstances relating to ascertainbility of the value of the land in view of composite contract for purchase of land & building, and, therefore, not quantifiable.
7. That the order made by the ld. Commissioner of Income-tax, Delhi-
VI is bad in law and against basic facts and circumstances of the case and, therefore, legally not liable for re-assessment.
8. That the appellant craves leave to add, amend, alter or modify any or all the grounds of appeal before or at the time of subject hearing."
3 ITA No.819(Del)/2009
2. The facts of the case are that the return of income declaring loss of Rs. 1,25,080/- was filed on 21.09.2005. The statement of income showed the business income at nil. The computation of business income is reproduced below:-
"Income from business 38,68,786.00
Add: Loss on sale of fixed assets as per
Companies Act 1,76,374.00
----------
40,45,160.00
Less: Profit on sale of agricultural land 1,353.00
for separate consideration -----------
40,43,797.00
Less: Profit on sale of building
for separate consideration 39,37,187.00
- -----------
1,06,610.00
Add:
Profit on sale of building u/s 41(2)
-Sale consideration of B-26, Shivalik,N.Delhi 5450000 Less: WDV as per Income-tax Act 1024306 I 4425694
-Actual cost of building 2110000
-WDV ason 1.04.2004 1024306 Excess of actual cost over WDV II 1085694 Profit chargeable to tax u/s 41(2) I-II 33,40,000.00
-----------
4 ITA No.819(Del)/2009
Net profit for the current year 34,46,610.00 Less: Loss on sale of fixed assets (As per IT Act) 1,04,334.00 33,42,276.00 Less: Brought forward losses of earlier years 34,67,356.00
Loss to be carried forward for adjustment in coming years 1,25,080.00"
2.1 The computation was accepted by the AO by making the following remarks:-
"Accordingly income from sale of buildings, furniture etc. on which depreciation was claimed and allowed in earlier years has been shown under section 41, sub-section 2 of the Income-tax Act, 1961, which says that if the income from the buildings, machinery, plant or furniture sold exceeds the WDV so much of the excess as does not excess the difference between the actual cost and WDV shall be chargeable to income-tax as income of the business of the previous year in which the moneys payable for the building, machinery, plant or furniture became due.
In view of the explanations given therein above, section 50(1) read with section 48 do not apply since these sections deal with the provisions for computing capital gains and mode of computation under head Capital Gains respectively. The submission made by the assessee company appeared to be correct and is accepted.
After discussion with AR of the assessee the declared loss is accepted."
2.2 Thereafter, the ld. Commissioner of Income-tax issued a notice u/s 263 of the Act on 24.09.2008 mentioning inter-alia that the order passed 5 ITA No.819(Del)/2009 by the AO is erroneous and prejudicial to the interest of revenue thereby requesting the assessee to explain why the same may not be cancelled for making de-novo assessment. In this notice, matters regarding computation of profit on sale of depreciable asset, rental income, applicability of section 73(1) read with its Explanation in respect of purchase and sale of shares and deduction of depreciation on land were raised. The assessee filed written submissions. After considering the submissions of the assessee, the revisionary order was passed on 2.1.2009, in which the assessment order was cancelled and the AO was directed to frame a fresh assessment by taking into account the issues mentioned in the revisionary order. In the impugned order, the ld. Commissioner of Income- tax inter-alia held the order to be erroneous and prejudicial to the interest of revenue in respect of taxation of profits arising on sale of depreciable assets, taxation of rental income as business income, setting off of speculation losses against business income and grant of depreciation on land. Aggrieved by this order, the assessee is in appeal before us.
3. In the course of hearing, the ld. counsel for the assessee, Shri C.S. Aggarwal, Senior Advocate, filed synopsis and also explained the case of the assessee. The ld. CIT, DR, Smt. Reena Singh Puri furnished the 6 ITA No.819(Del)/2009 reply. Thereafter, the ld. counsel, Shri C.S. Aggarwal, Senior Advocate, left for High Court after stating the rejoinder on behalf of the assessee shall be furnished by Shri Gautam Jain, Advocate. However, after the reply from the ld. DR, Shri Jain sought adjournment to file the rejoinder. The same was filed by way of written submissions on the following date. The grounds raised before us are discussed in the light of submissions made before us by the rival parties.
4. The ld. Senior Advocate submitted that the assessee had filed the return of income on 21.9.2005. The return was supported by audited financial accounts and tax audit report. The AO scrutinized the return of income and passed the assessment order on 30.11.2007. In this order, the loss declared at Rs. 1,25,080/- was accepted. Adjusted book profit was computed u/s 115JB at Rs. 29,06,582/-. Thereafter, notice u/s 263 was issued and served on the assessee raising four points. Finally, order under section 263 was passed directing the AO to make fresh assessment after considering these four points. It is argued that the revisionary order is bad in law because as for assuming jurisdiction u/s 263, two conditions have to be satisfied, -(i) the order sought to be revised is erroneous, and
(ii) it is prejudice to the interests of revenue. These two conditions have 7 ITA No.819(Del)/2009 to be satisfied cumulatively as held by Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. Vs. CIT, (2000) 243 ITR 83. 4.1 In regard to computation of business profits, our attention was drawn towards the computation of total income, in which a sum of Rs. 33,40,000/- has been added back to the book profits in respect of profit on sale of building, thereby computing the profit for this year at Rs. 34,46,610/-. From this amount, a sum of Rs. 1,04,334/- has been deducted as loss on sale of fixed assets, leading to the computation of business profit at Rs. 33,42,276/-. This profit has been adjusted against brought forward loss, which stood at Rs. 34,67,355/-. After adjusting this amount, the loss of Rs. 1,25,080/- has been carried forward to the subsequent year. The finding of the ld. CIT in this matter is that since the block of assets has been exhausted, the AO should have computed short-term capital gain u/s 50 of the Act. Such gain did not constitute business profit and, therefore, brought forward losses of earlier years could not be adjusted against this gain. The case of the ld. counsel is that the head of income under which a particular amount is to be taxed is not material for this purpose. The material consideration is the nature of income. If the income is of business nature, although taxable under the 8 ITA No.819(Del)/2009 head 'capital gain', brought forward business loss can be set off against such income.
4.2 In this connection, he relied on the decision of Hon'ble Supreme Court in the case of CIT Vs. Cocanada Radhaswami Bank Ltd., (1965) 57 ITR 306. In that case, the assessee was carrying on banking business and as a part of the business it held securities as trading assets. In the previous year relevant to assessment year 1949-50, it incurred business loss of Rs. 64,400/- and earned interest on securities amounting to Rs. 8,488/-, thus, the net loss amounted to Rs. 55,912/-. For three succeeding years, the Income-tax Officer allowed this loss to be set off against the business income, but refused to set it off against the income computed under the head interest on securities. The Hon'ble Court held that the assessee was entitled to set off loss of Rs. 55,912/-, brought forward from assessment year 1949-50, against the income computed under the head 'interest on securities' in the succeeding year. It was mentioned that the securities were held as trading assets and, therefore, the interest has the character of business income notwithstanding the fact that under the scheme of 1922 Act, it has to be taxed under the head 'interest on securities'. It was further mentioned that the purpose of computation of 9 ITA No.819(Del)/2009 income under different heads is to indicate the class of income. The heads do not exclusively de-limit sources form which income arises, which is made clear by the decision of the court in the case of United Commercial Bank Ltd., (1957) 32 ITR 688, that income is broken up under different heads only for the purpose of computation of total income; by that break-up the income does not cease to be the income of the business, the different heads of income being only the classification prescribed by the Act for computation of income. While disposing off this case, the Hon'ble Court also refer to its own decision in the case of CIT Vs. Express Newspapers Ltd. (1964) 53 ITR 250, wherein it had been held that section 26(2) and its proviso deal only with profits and gains of a business, profession or vocation and they do not provide for assessment of income under any other head, e.g., capital gains. The reason for this conclusion is stated to be that the deeming clause in section 12B only introduces a limited fiction that capital gains accrued will be deemed to be income of the previous year in which the sale was effected. The fiction does not make them profits or gains of business. It is well settled that a legal fiction is limited to the purpose for which it is created and should not be extended beyond its legitimate field. The profits and gains of business and capital gains are two distinct concepts 10 ITA No.819(Del)/2009 in the Income-tax Act, the former arises from the activity which is called the business and the latter accrues because capital assets are disposed off at a value higher than what they cost to the assessee. They are placed under different heads; they are derived from different sources and the income is computed under different methods. The fact that capital gains are connected with capital assets of the business cannot make them the profit of the business. They are only deemed to be income of the previous year and not the profits or gains arising from business during the year.
4.3 Further, he relied on the decision of Hon'ble Supreme Court in the case of Western States Trading Co. Pvt. Ltd. Vs. CIT (1971) 80 ITR 21. Two questions, referred to the court and material for our purpose are as under:-
"(1) Whether, on the facts and in the circumstances of the case, the sum of Rs. 11,257/- being a claim for loss on sale of assets on which dep``reciation was allowable in earlier years is allowable under section 10(2)(vii) in computing the total income of the assessee?
(2) Whether, on the facts and in the circumstances of the case, dividend income was to be taken as income, profits and gains of business of the company and set off against losses brought forward from earlier years under section 24(2)?" 11 ITA No.819(Del)/2009
The facts are that the assessee owned a coal mine and it entered into an agreement for its sale on 29.11.1954. The same was to be completed within one year from the date of execution of the agreement. Pending completion of sale or delivery, the assessee was to carry on the business on behalf of purchaser from 1.9.1954. The price of the coal mine was fixed at Rs. 3.50 lakh and the book value of the assets was Rs. 4,80,290/-. The assessee claimed a loss of Rs. 70,290/-, which was disallowed by the AO on the ground that the assessee did not carry on any business in the relevant previous year. After making some adjustments, he determined the loss at Rs. 11,257/-. This loss was disallowed. The AAC upheld the order of the ITO. However, the Tribunal accepted the contention of the assessee that it carried on the business till 29.11.1954, but did not allow the loss on the ground that it resulted from closing down of the business. The contention of the assessee was that it was found as a matter of fact by the Tribunal that it carried on the business till 29.11.1954, and it was only by virtue of the agreement made on that day that it agreed to treat the business having been transferred to the purchaser w.e.f. 01.09.1954. By means of the agreement, it was not possible to alter the actual state of affairs. This 12 ITA No.819(Del)/2009 argument was accepted by the Hon'ble Court and it was mentioned that there is nothing to show that the business of the assessee should have been carried on for the whole of the year or that the machinery or plant should have been used for whole of the accounting period or if the assessee worked only for a part of the year and then sold out, the loss that he incurred was not a business loss. In regard to the second question, it was held that the assessee would be entitled to get a set off u/s 24(2) if the shares on account of which the dividends were received formed part of assessee's trading assets. In this connection, the case of CIT Vs. Cocanada Radhswamy Bank Ltd. (supra) was quoted with approval. Thus, the ratio of this case, as in the case of Cocanada Radhaswamy Bank, is that if income has been received from trading assets, it will be of the nature of business income against which the loss of the business may be set off.
4.3 Reliance was also placed on the decision of Hon'ble Supreme Court in the case of Nectar Beverages Pvt. Ltd. Vs. DCIT, (2009) 314 ITR 314. The question for determination in that case was -whether, the concept of balancing charge in section 41(2) could be read into section 41(1) of the Income-tax Act, 1961? The assessee was a manufacturer of 13 ITA No.819(Del)/2009 soft drinks and he purchased bottles and crates, each item costing less than Rs. 5,000/-. Therefore, the whole of the amount was deducted as depreciation in the year in which the assets were acquired. When the bottles and crates got worn out, they were sold and proceeds therefrom were credited to miscellaneous income account in the subsequent year. It was mentioned by the Hon'ble Court that if the sales had taken place prior to assessment year 1988-89, the sale proceeds would have definitely been income u/s 41(2) as balancing charge. By analogy, the department taxed the amount u/s 41(1). The Hon'ble Court came to the conclusion that depreciation is neither a loss, an expenditure or a trading liability referred to in section 41(1). Therefore, the provisions of this section could not be employed to tax the sale proceeds. Further, the concept of "block of assets" was introduced w.e.f. 01.04.1988 when section 41(2) stood deleted. However, even after 1.4.1988, the proviso to section 32(1)(ii) continued till 1.4.1996. Thereafter, asset below Rs. 5,000/- also came within the concept of "block of assets". 4.4 Reliance was also placed on the order of 'D' bench of Delhi Tribunal in the case of Ankay Khanna Management & Consultants (P) Ltd. Vs. ITO in ITA No. 3720(Del)/2003 for assessment year 2000-01 14 ITA No.819(Del)/2009 dated 01.06.2009. The argument of the ld. counsel for the assessee in that case was that the provision contained in section 71(2) is clear which allows the set off of business loss in the form of unabsorbed depreciation against income under the head "capital gains". It was mentioned that the ld. DR could not canvas any other provision of law to controvert the aforesaid position. In view thereof, the business loss was allowed to be set off against capital gains. For the sake of ready reference, paragraph nos. 4 and 5 of the order are reproduced below:-
"4. Learned counsel for the assessee, Shri C.S. Aggarwal, Sr. Advocate contends that the action of lower authorities is not correct inasmuch as section 71(2) is very clear and allows the set off of business loss in the form of unabsorbed depreciation and income under the head "capital gains" as under:-
"71(1) Where in respect of any assessment year the net result of the computation under any head of income, other than "capital gains", is a loss and the assessee has no income under the head "capital gains", he shall subject to the provisions of this Chapter, be entitled to have the amount of such loss set off against this income, if any, assessable for that assessment year under any other head."
It was contended that this being so, there is no justification on the part of the AO to refuse the set off.
5. Learned DR, Smt. Kusum Gupta, on the other hand, could not canvass any other provision of law to controvert the proposition of law canvassed by the Sr. Advocate. In 15 ITA No.819(Del)/2009 view thereof, we hold that the assessee is eligible to the set off."
4.5 It was argued that the impugned order has been passed u/s 263 of the Act. What is to be seen for validity of such an order is the position of law existing at the time of passing the revisionary order, as held in the case of CIT Vs. Max India Ltd., (2007) 295 ITR 282(S.C.). For the sake of ready reference, the relevant portion of the portion at placitum 2 is reproduced below:-
"At this stage we may clarify that under paragraph 10 of the judgment in the case of Malabar Industrial Co. Ltd. (2000) 243 ITR 83 this court has taken the view that the phrase "prejudicial to the interests of the revenue" under section 263 has to be read in conjunction with the expression "erroneous" order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue. For example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of revenue, unless the view taken by the Income-tax Officer is sustainable in law. According to the learned Additional Solicitor General, on an interpretation of the provision of section 80HHC(3) as it then stood the view taken by the Assessing Officer was unsustainable in law and, therefore, the Commissioner was right in invoking section 263 of the Income-tax Act. In this connection, he has s further submitted that in fact the 2005 amendment which is 16 ITA No.819(Del)/2009 clarificatory and retrospective in nature itself indicates that the view taken by the Assessing Officer at the relevant time was unsustainable in law. We find no merit in the said contentions. Firstly, it is not in dispute that when the order of the Commissioner was passed there were two views on the word "profits" in that section. The problem with section 80HHC is that it has been amended eleven times.
Different views existed on the day when the Commissioner passed the above order. Moreover, the mechanics of the section have become so complicated over the years that two views were inherently possible. Therefore, subsequent amendment in 2005 even though retrospective will not attract the provision of section 263 particularly when as stated above we have to take into account the position of law as it stood on the date when the Commissioner passed the order dated March 5, 1997, in purported exercise of his powers under section 263 of the Income-tax Act."
5. In reply, the ld. CIT (DR) drew our attention to the provision contained in section 50, under the heading "Special provision for computation of capital gains in case of depreciable assets". It is submitted that the provision comes into operation in a case where a block of assets ceases to exist. In such a case, the gains arising from transfer of assets in the block of assets is deemed to be short-term capital gain by virtue of sub-section (2). For the sake of ready reference, the provision contained in this sub-section is reproduced below:-
"(2) where any block of assets ceases to exist as such, for the reason that all the assets in that block are transferred during the previous year, the cost of acquisition of the block 17 ITA No.819(Del)/2009 of assets shall be the written down value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short-term capital assets."
5.1 Further, she drew our attention to section 14 of the Act, which mandates that the computation of total income shall be classified under five heads. The provision contained in this section is reproduced below:-
"14. Save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income:-
A- Salaries.
B- . . . . .
C- Income from house property.
D- Profits and gains of business or profession. E- Capital gains F- Income from other sources"
5.2 It has been argued that under the scheme of computation of total income, income has to be classified under different heads, which are distinct and apart. Therefore, the heads of income need not be repeated again and again in various provisions of the Act. Section 72 is regarding "Carry forward and set off of business losses". If the computation in a particular year under the head "Profits and gains of 18 ITA No.819(Del)/2009 business or profession" is a loss, which cannot be wholly set off under any other head of income in accordance with the provisions contained in section 71, so much of the loss, as has not been set off, shall be carried forward and set off against the profits and gains, if any of any business or profession carried on and assessable for that assessment year. It was her case that the carried forward loss computed under the head "profits and gains of business" is to be dealt with under this section and the words employed in clause (i) are "profits and gains". These words should be given the same meaning as given to the words "Profits and gains of business or profession" employed in the main sub-section (1). 5.3 It was submitted that the sale and purchase of land and building is not the business of the assessee. The instant transaction is a one off transaction, which cannot be equated with the business notwithstanding the fact that the asset was acquired as fixed assets for carrying on the business. All the assets of the undertaking have been sold. Such sale cannot be said to be a transaction undertaken in the course of business. 5.4 Reliance has been also placed on the decision of Hon'ble Delhi High Court in the case of CIT Vs. Eastman Industries Ltd., (2008) 174 19 ITA No.819(Del)/2009 Taxman 344. In paragraph 14 of the decision, the Hon'ble Court mentioned that a conjoint and plain reading of the provisions of sections 2(11) and 50(2) of the Act would show that "block of assets", as defined in section 2(11) of the Act, means nothing but a group of assets falling in the same class in respect of which the same percentage of depreciation is prescribed. Section 50(2) of the Act comes into play only if assets of the same class cease to exist for the reason that all assets in that block are transferred during the previous year. In paragraph 14.4, it is mentioned that the words "during the previous year" mean throughout the course of the previous year, i.e., after commencement and before its expiration. It may be mentioned here that the facts of the case are that the block of assets had ceased to exist at a particular point of time in the previous year but assets of the same class were purchased before the expiration of the previous year. The Hon'ble Court came to the conclusion that the block of assets did not cease to exist during the previous year and, therefore, the provision of section 50(2) was not applicable. 5.5 On the basis of the aforesaid arguments, it has been argued that the order of the AO was erroneous as well as prejudicial to the interest of the revenue. Therefore, the decision in the case of Malabar Industrial 20 ITA No.819(Del)/2009 Company Ltd. (supra) supported the case of the revenue. Accordingly, it was urged that the order of the Ld. CIT may be upheld on this ground.
6. In the rejoinder, it is mentioned that the ld. DR wrongly relied on the decision in the case of Eastman Industries (supra). The case is squarely covered by the decision of Western States Trading Co. (P) Ltd., Cocanada Radhaswamy Bank Ltd. and Ankay Khanna Management & Consultants (P) Ltd. It is further mentioned that there is a difference between the expression "attributable to" and "derived from", as held by Hon'ble Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. Vs. CIT, 113 ITR 84 (S.C.). In view of this decision, the capital gains on transfer of business assets can be said to be the income attributable to the business. The case of CIT Vs. Excellent Commercial Enterprises & Investments Ltd., 282 ITR 423, has been cited in support of the proposition that income received from shares held as stock-in- trade will be business income. Reliance has also been placed on the decision of Income-tax Appellate Tribunal, Visakhapatnam Bench, in the case of Sri Padmavathi Sreenivasa Cotton Ginning & Pressing Factory Vs. Dy. CIT, (2009) 318 ITR (AT) 156, rendered on 6.3.2009, i.e., after passing the revisionary order on 2.1.2009. Placing reliance on this case 21 ITA No.819(Del)/2009 is against the decision of Hon'ble Supreme Court in the case of Max India Ltd., which has been relied upon by the ld. Senior Advocate. The Tribunal held that unabsorbed depreciation of earlier years becomes the depreciation of this year, which can be set off against other income as provided in the Act.
7. We have considered the facts of the case and submissions made before us. The facts of the case are that the assessee claimed set off of profit earned on transfer of depreciable assets, amounting to Rs. 34.40 lakh, against brought forward business losses of earlier years. The computation of the profit on sale of assets, which were depreciable in nature, was made on the basis of section 41(2), which was omitted with effect from 1.4.1988. The AO accepted this computation by inter- alia observing that the submission made by the assessee company appears to be correct and is accepted. The order of the AO in this behalf has been reproduced in paragraph 2.1 (supra). The order itself shows that the AO had not applied his mind to come to a definite conclusion whether the submissions of the assessee were correct or not, as it was mentioned that the submissions appeared to be correct. With these preliminary remarks, we proceed to decide the issue at hand on the basis of decisions 22 ITA No.819(Del)/2009 cited before us. The ratio in the case of Cocanada Radhswamy Bank Ltd. (supra) is that interest earned on securities held as stock-in-trade is in the nature of business income although taxable under a different head "interest on securities". Therefore, brought forward business losses can be set off against such interest income. The ratio of this case is not applicable to the facts of this case as the depreciable asset held by the assessee is a fixed asset and not stock-in-trade. This becomes more clear from the decision in the case of Express Newspapers Ltd. (supra), wherein it is mentioned that section 26(2) and its proviso deal with the profits and gains of business but they do not provide for assessment of income under any other head, for example, capital gains. The decision in the case of Western States Trading Company (P) Ltd. (supra) is on the same lines as in the case of Cocanada Radhaswamy Bank Ltd. and Express Newspapers Ltd., in which dividends were received on shares which formed part of assessee's trading asset. The facts of the case of Nectar Beverages Pvt. Ltd. are distinguishable as the concept of block of assets did not exist at the relevant point of time. Section 41(2) also stood deleted with the introduction of concept of "block of assets". The decision in the case of Ankay Khanna Management & Consultants (P) Ltd. was rendered under section 71(1) dealing with set off of loss 23 ITA No.819(Del)/2009 under any other head against capital gains of the same year. In the instant case, we are dealing with set-off of brought forward losses against profits computed u/s 50 in respect of depreciable and fixed assets. The case of the ld. DR in this behalf is that the sale of such asset is a one-off transaction, which has not been undertaken in the course of business of the assessee. The gains arise from transfer of a capital asset, although such capital asset was used for the purpose of business. Therefore, the very nature of the gain is different from business profit and it is in the nature of surplus realized on sale of a capital asset. We find that this argument is correct in view of the decision in the case of Cocanada Radhaswamy Bank Ltd. and the cases subsequently decided about the nature of income for the purpose of set-off. The assessee sought to rely on the decision in the case of Sri Padmavati Srinivasa Ginning & Pressing Factory (supra), which has been rendered after passing of the revisionary order. Therefore, this case cannot be taken into consideration in the light of decision in the case of Max India Ltd. (supra). Nonetheless, the decision is that unabsorbed depreciation brought forward from earlier years becomes current year's depreciation. Therefore, it can be set off against short-term capital gains computed u/s 50. However, in this case there is no question of computation of 24 ITA No.819(Del)/2009 depreciation of the current year as the block of assets undoubtedly ceases to exist in this year. Therefore, even in law, the ratio of the aforesaid case is not applicable. Hon'ble Delhi High Court has held in the case of Eastman Industries Ltd. (supra) that provision contained in section 50(2) comes into operation when the block of assets ceases to exist. The AO had not applied this section, which is in force, but applied the provision of section 41(2), which no longer exists on the statute. We are also of the view that distinction between "attributable to" and "derived from"
does not advance the case of the assessee. This distinction arose on account of certain words used in sections 80H, 80HH, 80I etc. The two different expressions were used by the legislature to extend or narrow down the scope of the deduction under these sections. Here we are concerned with the nature of income, i.e., whether it arises from business operations or from transfer of a capital asset. Thus, it is clear that the case of the assessee is not supported by law. 7.1 This leaves us with a further question, which we raised with the counsel of the assessee during the course of reply by the ld. DR, but it was not answered. The question is- whether, the depreciation claimed in past and recouped in this year on transfer of fixed assets could be said to 25 ITA No.819(Del)/2009 be the income in the nature of business income, thereby entitling the assessee to a set off to the extent of the amount representing the difference between actual cost and the WDV? As this question has not been elaborated upon before us, we do not think it necessary to give our finding in the matter. The fact remains that the profits have been earned on transfer of fixed assets, which are not in the nature of business income. We have already reproduced the provision contained in section 72(1) which permit setting-off of the loss computed under the head "profits and gains of business or profession" in earlier years against profits and gains of any business carried on in the previous year relevant to the assessment year of set-off. The Courts have made a distinction between "profits and gains of any business" employed in section 72(1)(i) and computation of income under the head "profits and gains of business or profession". However, liberal meaning granted to the word used in clause (i) is applicable only in respect of profits of business and not to profits arising on transfer of a capital asset. 7.2 Coming to the applicability of section 263, there is no possibility of taking different views in this matter. The finding of the ld. CIT is that the AO simply ignored the issue involved despite there being a 26 ITA No.819(Del)/2009 specific query raised by his predecessor. We find that the AO has not examined the nature of the income. He was not sure whether the submissions of the assessee were correct as such submissions only appeared to be correct to him. In view thereof, the order is erroneous as it is not based upon appreciation of facts and law in the matter and, in fact, is contrary to the decisions discussed above. It has also caused prejudice to the interests of the revenue as there has been loss of revenue. The ld. CIT has merely restored the matter to the AO to decide the matter afresh after hearing the assessee. We do not find any fault with his finding. Therefore, it is held that the ld. CIT was right in holding the order to be erroneous and prejudicial to the interests of revenue on this ground.
8. The second ground on which revisionary jurisdiction has been exercised relates to the finding that loss on account of trading in shares constituted speculative loss. It is mentioned that the assessee has set- off speculation loss against the business income. The submission of the assessee was that it had shown profit of Rs. 2,29,913/- from trading of shares, which is its main activity since its incorporation. The ld. CIT accepted the factual position that trading in shares has been the main 27 ITA No.819(Del)/2009 activity of the assessee since its incorporation, but also held that the same is speculative profit in terms of section 73(1) read with its Explanation. Therefore, the AO was directed to re-examine this issue and take necessary action. The submissions of the ld. counsel in this behalf are two-fold -(i) the losses were determined to be business losses in earlier years and the complexion of the losses cannot be changed in the year of setting-off of the losses; and (ii) there is a contradiction in the finding of the ld. CIT in paragraphs 3.1 and 5. In paragraph 3.1 it is mentioned that the loss has arisen on account of purchase and sale of shares which is in the nature of speculative loss under the provisions of section 73(1) read with its Explanation, while in paragraph 5 it is mentioned that trading in shares is the main activity of the assessee since its incorporation. In view thereof, it was agitated that the revisionary order does not establish that the assessment order was erroneous and prejudicial to the interests of revenue. On the other hand, the ld. DR relied on the order of the ld. CIT.
8.1 We have considered the facts of the case and submissions made before us. We find that the ld. CIT has given a categorical finding that trading of shares has been the main business activity of the assessee 28 ITA No.819(Del)/2009 since its incorporation. Section 73(1) and the Explanation lay down two criteria for determining the nature of loss arising from trading in shares, namely, -(i) quantitative test regarding income assessed under various heads of income, and (ii) the test of main activity of the assessee. In view of the finding in paragraph no. 5 of the impugned order, the loss cannot be taken to be speculative loss. Further, this year is the year of setting-off of the losses brought forward from earlier years. In earlier years, the losses were classified as business losses and not speculative losses. This position cannot be changed unless earlier orders are upset. What can be seen in this year is whether the losses can be set-off as per statutory provision and nothing further. Therefore, we are of the view that the ld. CIT erred in holding the order to be erroneous and prejudicial to the interests of revenue on this ground.
9. The third ground on which the assessment order was held to be erroneous and prejudicial to the interests of revenue is regarding grant of depreciation on land.29 ITA No.819(Del)/2009
9.1 In this connection, it is mentioned in the revisionary order that the building and appurtenant land was purchased by way of three separate deeds at aggregate cost of Rs. 21.10 lakh. The deeds reveal that the building was purchased along with proportionate land beneath the building. However, the assessee claimed the deduction of depreciation on the whole of the value of Rs. 21.10 lakh. Thus, the value of land was not excluded for the purpose of computation of depreciation on building.
9.2 The argument of the ld. counsel is that a composite agreement for purchase of land and building was made and, therefore, it is not feasible to ascertain the value of the land. The ld. CIT did not consider this circumstance. On the other hand, the case of the ld. DR is that land is not a depreciable asset.
9.3 We have considered the facts of the case and submissions made before us. The grant of depreciation is a statutory allowance u/s 32 read with rules thereunder, particularly the Appendix-I of the Income-tax Rules, 1962. This Appendix does not classify the land to be the depreciable asset. Further, land was held to be non-depreciable asset 30 ITA No.819(Del)/2009 in the decision of Hon'ble Supreme Court in case of Alps Theatre. Therefore, non-exclusion of the value of land for the purpose of grant of depreciation is against the statutory provision and the case decided thereunder. We do not find any force in the argument that the value of land could not be ascertained because of composite purchase deed as the same could have been ascertained by obtaining valuation of either the land or the building. The order is clearly erroneous. It is also prejudice to the interest of revenue as higher depreciation has been allowed. Therefore, it is held that the ld. CIT was right in restoring this matter to the file of the AO for reconsideration of the matter.
10. No specific ground has been taken before us in regard the head of taxation of rental income by the AO. Therefore, the arguments made by the ld. counsels are taken to be in pursuance of ground no. 1. The finding of the ld. CIT is that it should have been taxed under the head "income from house property". Accordingly he has restored the matter to the file of the AO. The case of the ld. counsel is that income from property has been consistently brought to tax as business income while the case of the ld. DR is that if errors have been committed in past, the same should not be perpetuated in this year also. In this connection, reliance has 31 ITA No.819(Del)/2009 placed on the observations made in the case of Baroda Distributors (Pvt.) Ltd. Vs. Union of India & Others, (1985) 155 ITR 120 and K.K. Khullar Vs. DCIT, (2009) 116 ITD 301. The case of Ld. counsel in rejoinder is that observations made in this case are not applicable. 10.1 It is mentioned in the revisionary order that the assessee treated rental income as business income and the submission of the assessee is that it had been running its business from the premises since 1998-99. However, the issue regarding taxation of the income under the correct head has not been explained. It has also been mentioned that each year is an independent year and even if the income has been incorrectly assessed in past, it will not justify to continue with the incorrect head of income.
10.2 We have considered the facts of the case and submissions made before us. There are not enough facts before us to come to the conclusion as to whether the income is taxable as business income or under the head "income from house property". If the rent has been received qua the owner, the income is normally taxable under the head "income from house property". However, if assets, not required for 32 ITA No.819(Del)/2009 business, are temporarily given on rent, the income would be business income. In view of the fact that there are not sufficient facts brought on record by the ld. CIT, it is held that the assessment order cannot be said to be erroneous and prejudicial to the interests of revenue. Further, assessments made in past show that view taken by the A.O is a possible view. Therefore, the order cannot be said to be erroneous and prejudicial to the interests of the revenue.
11. In the result, the appeal is partly allowed.
The order was pronounced in the open court on 13 August, 2010.
Sd/- sd/- (C.L. Sethi) (K.G.Bansal) Judicial Member Accountant Member Date of order: 13th August,2010. SP Satia Copy of the order forwarded to:-
M/s Vasti Management Services Pvt. Ltd., New Delhi. ITO, Ward 17(2), New Delhi.
CIT(A) CIT The DR, ITAT, New Delhi. Assistant Registrar.