Income Tax Appellate Tribunal - Mumbai
Hussien Abdulkarim Balwa, Mumbai vs Assessee on 29 June, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH "I", MUMBAI
BEFORE SHRI B.R. MITTAL, JUDICIAL MEMBER AND
SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER
ITA No.2680/Mum/2008
Assessment Year : 2005-06
Shri Ismail Abdulkarim Balwa Dy. Commissioner of Income
A.K. Industrial Estate tax -Range 24(3)
Opp. A.K. Tower Aayakar Bhavan
S.V. Road Maharshi Karve Road
Goregaon (West) Vs. Churchgate
Mumbai-400 062. Mumbai-400 020.
PAN No. AABPB 7570 M
(Appellant) (Respondent)
ITA No.2681/Mum/2008
Assessment Year : 2005-06
Shri Hussein Abdulkarim Dy. Commissioner of Income
Balwa tax -Range 24(3)
A.K. Industrial Estate Aayakar Bhavan
Opp. A.K. Tower Maharshi Karve Road
S.V. Road Churchgate
Vs.
Goregaon (West) Mumbai-400 020.
Mumbai-400 062.
PAN No. AABPB 7572 K
(Appellant) (Respondent)
Shri Jitendra B. Sanghvi &
Assessee by :
Shri Amit Khatiwala
Respondent by : Shri Sanjiv Dutt
Date of hearing : 29.6.2012
Date of Pronouncement : 6.7.2012
ORDER
PER RAJENDRA SINGH, AM:
2 ITA No.2680&2681/Mum/2008
Ismail & Hussein Abdulkarim Balwas These appeals are directed against the orders of CIT(A) both dated 27.3.2008 for the assessment year 2005-06. In these two appeals, identical disputes had been raised relating to computation of long term capital loss from sale of shares, computation of capital gain from sale of property and setting off of unabsorbed depreciation of earlier years against the capital gain from sale of property. The appeal had been heard on 23.6.2009. The then Judicial Member had written the order which could not be finalized due to difference of opinion between the two Members. The mater was referred to the ld. Third member, whose opinion has since been received. The appeals, are, therefore, being disposed off as under.
2. There was difference of opinion between the members who originally heard the appeal in regard to computation of capital gain from sale of property. Shri Ismail Abdulkarim Balwa along with his father Shri Hussein Abdulkarim Balwa, the appellants, had acquired land as per court decree and had constructed a commercial building in which share of the appelant was 45% each. The property had been let out and rental income had been declared as business income in the earlier years which had been accepted by the department. The property had been sold during the year under consideration for Rs.3.40 crores. Both the assessees had computed long term capital gains from sale of property. The AO however held that the property being commercial asset was a depreciable asset and, therefore, provisions of section 50 were applicable and accordingly he computed the capital gain as short term capital gain under the said section. The AO while computing the short term capital gain under section 50 of the Act had also allowed depreciation in earlier years on notional basis though no depreciation had actually been claimed and allowed in earlier years. The ld. Judicial Member had accepted the claim of the assessees as long term capital gains. The ld. Accountant Member in his dissenting order dated 19.8.2009 vide detailed reasons given in the said order held that provisions of section 50 were applicable as the 3 ITA No.2680&2681/Mum/2008 Ismail & Hussein Abdulkarim Balwas property was a commercial asset depreciation on which was allowable and rental income from which had been assessed as business income. Accordingly he upheld the view of the AO that income from sale of property had to be assessed as short term capital gain. On reference the Ld. Third Member in the order dated 11.12.2012 has concurred with the view taken by the ld. Accountant Member. Therefore, following the majority view, it is held that income from sale of property will be assessed by the AO as short term capital gain under section 50 of the Act. Accordingly the order of CIT(A) confirming the order of AO on this point is upheld.
2.1 The ld. AR for the assessee submitted that the assessee had also raised a ground regarding assessability of rental income of the property as house property income on which no orders had been passed by any of the members. We have considered the matter carefully. We find that the nature of income from the property i.e., whether business income or house property income was an integral part of the issue relating to computation of capital gain from sale of the property. The ld. Judicial Member in the proposed order had held that income was assessable as house property income and accordingly treated the income from sale of property as long term capital gain. The ld. Accountant Member in the dissenting order had held that the rental income had been assessed as business income and was assessable as business income with which the ld. Third Member has agreed. It is thus clear that this issue has also been decided and following the majority view, we hold that the rental income from the property is assessable as business income.
3. The second dispute is regarding computation of long term capital loss from sale of shares. Both the assessees held shares of M/s. Balwas e- com Ltd. Shri Ismail Abdulkarim Balwa had sold 1,20,000 shares for a sum of Rs.3,22,500/- @ Rs.2.5 per share and had declared long term capital loss . Shri Hussein Abdulkarim Balwa had sold 1,70,657 shares of M/s. Balwas e-com Ltd.@ 2.5 per share and had declared long term 4 ITA No.2680&2681/Mum/2008 Ismail & Hussein Abdulkarim Balwas capital loss of Rs.15,98,640/-. The AO noted that on the date of sales, shares were quoted on BSE @ 4.5 per share. The AO did not accept the explanation of the assessee that shares were sold at lower rate because of bulk sale. He accordingly adopted sale rate of 4.5 per share and reduced long term capital loss by Rs.2,85,001/- and Rs.3,41,133/- respectively in the two cases. CIT(A) upheld the order of AO. At the level of Tribunal, the ld. Judicial Member accepted the explanation of the assessee that shares had to be sold in bulk at lower rate as the value of these shares was declining to save further losses. The ld. Accountant Member agreed with the proposed order of the ld. Judicial Member. There was thus no difference on this issue. Therefore, the order of CIT(A) confirming the order of AO is set aside and claim of the assessee regarding long term capital loss from sale of shares is accepted for the reasons given in the proposed order dated July,2005 of CIT(A).
4. The third dispute in both the appeals is regarding set off of unabsorbed depreciation against capital gain on sale of property. This aspect has not been dealt with either in the order of Ld. Judicial Member or in the order of Ld. Third Member. However, we find that the ld. Accountant Member in his dissenting order dated 19.8.2009 had considered this aspect. The ld. Accountant Member held that provisions of section 50 were applicable irrespective of sale of asset in respect of which depreciation is allowable in respect of the fact whether depreciation had been actually allowed or not. The Ld. Accountant member also observed that in case depreciation had been actually allowed, it would only affect the quantum of capital gain under section 50. It was held by him that while computing short term capital gain, depreciation in respect of earlier years will not be taken into account on notional basis as no depreciation had been actually allowed in the earlier years. We, agree with the view taken by the ld. Accountant Member on this issue. Since the depreciation had not been actually allowed in the earlier years and it will not be taken into account in the computation of capital gain. There is thus no question 5 ITA No.2680&2681/Mum/2008 Ismail & Hussein Abdulkarim Balwas of set off of unabsorbed depreciation of earlier years against capital gain. The ground raised by the assessee is, therefore, dismissed as having become infructuous.
4. In the result, both the appeals are partly allowed.
Order pronounced in the open court on 6.7.2012.
Sd/- Sd/-
(B.R. MITTAL) (RAJENDRA SINGH)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, Dated: 2012.
Jv.
Copy to: The Appellant
The Respondent
The CIT, Concerned, Mumbai
The CIT(A) Concerned, Mumbai
The DR " " Bench
True Copy
By Order
Dy/Asstt. Registrar, ITAT, Mumbai.
6 ITA No.2680&2681/Mum/2008
Ismail & Hussein Abdulkarim Balwas
IN THE INCOME TAX APPELLATE TRIBUNAL
"I" Bench, "Third Member", Mumbai
Before Shri D. Manmohan, Vice President
(As Third Member)
ITA No.2680/Mum/2008
(Assessment Year: 2005-06)
Mr. Ismail Abdulkarim Balwa DCIT, Range 24(3)
A.K. Indl. Estate, Opp. A.K. Tower Aayakar Bhavan, M.K. Road
Vs.
S.G. Road, Goregaon (W) Mumbai 400020
Mumbai 400062
PAN - AABPB 7570 M
Appellant Respondent
ITA No.2681/Mum/2008
(Assessment Year: 2005-06)
Mr. Hussein Abdulkarim Balwa DCIT, Range 24(3)
A.K. Indl. Estate, Opp. A.K. Tower Aayakar Bhavan, M.K. Road
Vs.
S.G. Road, Goregaon (W) Mumbai 400020
Mumbai 400062
PAN - AABPB 7572 K
Appellant Respondent
Assessee by: Shri S.K. Prakash Jotwani
Revenue by: Shri Sanjiv Dutt
Date of Hearing: 13.03.2012
ORDER u/s 255(4) of the Income-tax Act, 1961
PER D.MANMOHAN, V.P.
On account of difference of opinion between the Members of the ITAT "I" Bench, Mumbai the matter was referred to the Hon'ble President under section 255(4) of the I.T. Act, 1961 for nominating a Third Member to pass necessary orders to adjudicate upon the following points of difference: -
"i) Whether on the facts and circumstances of the present case the capital gain on the sale of property in question is liable to be taxed on the basis of long term capital gains?
ii) Whether on the facts of the present case where the AO in the case of one co-owner has accepted the gain as long term capital gains then a different view can be taken in the case of other co-owner?"7 ITA No.2680&2681/Mum/2008
Ismail & Hussein Abdulkarim Balwas
2. The Hon'ble President was pleased to nominate me as a Third Member in this case and accordingly the matter was listed for hearing. Though the facts were elaborately stated in the respective orders passed by both the Members, brief facts which are necessary to adjudicate upon the issues in dispute are stated here, at the cost of repetition. The assessees herein, alongwith their father, acquired land mainly through a court decree. They in turn constructed commercial buildings. The share of the assessees is 45% each whereas the share of father is 10%. The property was let out and the income received by the co-owners was shown under the head 'Profit and Gains of Business'. During the previous year relevant to the assessment year under consideration the above said property, known as 'Ornate Enterprises', was sold for a total consideration of `3,40,00,000/-. The assessees herein declared their share of sale consideration under the head 'Long Term Capital Gains'. During the course of assessment proceedings the AO noticed that the assessees had shown rental income, in the preceding years, as income from business. The property, which is known as 'Ornate Enterprises', being a depreciable asset, he sought to invoke provisions of section 50 of the Income Tax Act. In this regard he observed that the assessees had shown the building only in the Balance Sheet. They had not shown any land. With regard to the property sold as building, the AO applied the prescribed rate of depreciation for computing the WDV and accordingly determined the short term capital gains thereon at `1,04,50,218/- in the hands of each of the assessees herein. The learned CIT(A) having upheld the order of the AO, a second appeal was preferred before the Tribunal. It may be noticed that rent received in this year, till the date of sale, was offered by assessee as business income and assessed accordingly but no appeal was preferred by assessee on that aspect.
3. The Presiding Officer i.e., the learned Judicial Member, observed that the assessees are members of AOP and the assessees had 45% share each in the said building. The building was acquired by the AOP through a court decree and after acquiring the building it was let out by the AOP. Rent received by the AOP was divided after paying electricity bills. The learned Judicial Member further observed that though the rent received by the AOP 8 ITA No.2680&2681/Mum/2008 Ismail & Hussein Abdulkarim Balwas was declared under the head 'Profits and Gains of Business', it was on account of the fact that there was no specific column in Form D of the return and in fact there is an obligation cast upon the AO to bring to tax correct income under appropriate head and he should not have completed the assessment by taking advantage of the ignorance of law on the part of assessees. He also observed that the AO calculated the depreciation of earlier years which was in fact never claimed since depreciation is not allowable against rental income; Therefore the AO was not justified in applying provisions of section 50 of the Act. He was also of the opinion that section 50 of the Act is not applicable in the case of a single asset, since one asset cannot form part of "block of assets", particularly when depreciation was not claimed on such asset. Further, in the present case, except the building there was no other asset and the same has been shown in the Balance Sheet under the head 'Land & Building". In the earlier years assessees have declared rental income under the head 'Business' without claiming depreciation and the AO has not allowed any depreciation. In the light of the circular issued by CBDT on 11.04.1955 the learned Judicial Member was of the view that if the assessees had filed return showing income under the head 'Business or Profession', the AO is under an obligation to rectify the mistake of the assessee by assessing the income under the head 'Property Income' and deduction should have been allowed as if the income is taxable under the head 'Income from Property' whereby assessee would have been entitled for deduction @30% of the income i.e., statutory deduction whereas the assessees have claimed only small deduction of electricity expenses against the returned income by wrongly showing it under the head 'Business or Profession'.
4. The learned Judicial Member has also referred to the decision of the Apex Court in the case of Shambhu Investment P. Ltd. vs. CIT [2003] 263 ITR 143 (SC) in support of his conclusion that rental income is to be assessed to tax only under the head 'Property Income'. In the present case the building was acquired by the assessees, being members of the AOP, and let out the building on rent and had not provided any services to the tenants. Under these circumstances, in the ordinary course, the income 9 ITA No.2680&2681/Mum/2008 Ismail & Hussein Abdulkarim Balwas ought to have been assessed to tax as property income even if the assessee declares the income under the head 'Business' due to ignorance of law.
5. He further referred to the assessment order passed under section 143(3) in the case of assessee' father, Shri Abdulkarim Balwa, wherein the AO accepted that the sale proceeds are taxable under the head long term capital gains. In his view, the decision of the AO in the case of one co-owner should be followed in the case of other co-owners also and thus he concluded that a different approach should not have been taken by another officer, in the light of the decision of Hon'ble Punjab & Haryana High Court in the case of Jaswant Rai vs. Commissioner of Wealth-tax [1977] 107 ITR 477 (P&H) wherein the court observed that so long as one assessment was not challenged in appeal or revision it is not permissible/open to the Department to adopt a different yardstick in the case of other assessee similarly situated. In this regard he has also referred to the decision of the Apex Court in the case of Union of India vs. Satish Panallal Shah [2001] 249 ITR 221 (SC). He then concluded that the income earned by the co-owners ought to have been assessed to tax under the head 'Long Term Capital Gains' and directed the AO accordingly.
6. The learned Accountant Member was of the view that the income on sale of property is assessable to tax under the head 'Short Term Capital Gains'. In this regard he observed that the limited issue in dispute is with regard to assessment of income from sale of property, income which has been declared and accepted in the earlier assessment years as business income. This in turn depends upon the interpretation of the provisions of section 50 of the Act. Admittedly, no depreciation had been claimed in the earlier years. The learned Accountant Member observed that if an asset is held for more than 36 months, even if the asset is connected with the business, the income from sale has to be assessed as long term capital gains, under the normal process. However, provisions of section 50 specifically provide that in respect of depreciable assets used in business, income from sale of such property has to be assessed as short term capital gains even if the asset is long term capital asset as defined under section 2(29A). Section 50 refers to the expression "has been allowed" which has to 10 ITA No.2680&2681/Mum/2008 Ismail & Hussein Abdulkarim Balwas be interpreted as "allowable under the Act", considering the basic object of section 50 as mentioned in the marginal note which is to compute capital gain in respect of depreciable assets i.e. assets in respect of which depreciation is allowable. The words "has been allowed", in the opinion of the learned Accountant Member, is to make a provision and it need not be actually allowed. Whenever the Legislature intended to use the expression "actually allowed" it was spelt out clearly. For example, section 43(6) defines the WDV of an asset acquired before the previous year as the actual cost of the asset less depreciation "actually allowed". But in section 50 of the Act the Legislature used the expression "has been allowed", and not "actually allowed". He therefore concluded that section 50 applies to all depreciable assets used for the purpose of business, whether the deprecation has been actually allowed or not.
7. The AO, while computing the WDV, has notionally allowed depreciation as the same was allowable to the assessees in the earlier years, whether claimed or not. The learned Accountant Member observed that the approach adopted by the AO is not correct in the light of the language employed in section 43(6)(b) of the Act.
8. The next contention of the assessee was that section 50 would apply to 'block of assets' i.e., when there is more than one asset in the block. The learned Accountant Member rejected the submission of the assessee by noting that the concept of block is to categorise certain assets in one block and it is not necessary that there should be more than one asset in a block.
9. With regard to the next contention that though the income from property has been declared and assessed as business income under law it is assessable as house property income and therefore capital gains has to be assessed as long term capital gains, the learned Accountant Member observed that the assessee voluntarily offered to tax under the head 'Business Income' in the earlier years and it has attained finality in which event the same cannot be changed while computing income from sale of property. He also observed that the property was known as Ornate Enterprises, which itself suggests some commercial exploitation and hence it 11 ITA No.2680&2681/Mum/2008 Ismail & Hussein Abdulkarim Balwas cannot be said that the only view possible in this matter is to bring to tax the income from letting out under the head 'Property Income'. In other words, in the circumstances of the case the AO is not under a legal obligation to suggest the head under which rental income is assessable to tax. Moreover, the property had been let out on month to month basis which indicates that there was commercial exploitation and hence there is no way that the AO could have come to a different conclusion particularly when a conscious decision was taken by the assessee to declare it as business income from year to year. He distinguished various decisions relied upon by the learned counsel and concluded that even if it is accepted in the case of a co-owner, there is no res judicata in the tax proceedings particularly when the order passed in the hands of the co-owners does not indicate detailed examination of the facts. The main thrust of the learned Accountant Member was that once the income is assessed under the head 'Income from Business' and depreciation is allowable compulsorily under the Act, irrespective of whether assessee claimed depreciation or not, provisions of section 50 of the Act comes into play and consequently, on the sale property, the AO has to compute income under the head 'Short Term Capital Gains' only.
10. To resolve the issue of difference the matter was listed for hearing. The learned D.R. filed detailed written submission whereas the learned counsel for the assessees filed a paper book containing case law and also advanced oral arguments. The learned counsel for the assessees submitted that the co-owners had acquired the land through a court decree. Construction of the building was carried out from 1997 to 1999, which was let out in April 1999 on monthly lease. The income from rent was offered to tax under business income in the hands of each of the co-owners. However, the assessees never claimed depreciation on the said building. In the year under consideration the property was sold and income thereon was offered to tax under the head 'Long Term Capital Gains'. Admittedly, the assessees have not claimed depreciation and it is the only asset in that category and hence it is not part of block of assets. However, the AO applied section 50 of the Act to bring to tax the income on sale of property under the head 'Short 12 ITA No.2680&2681/Mum/2008 Ismail & Hussein Abdulkarim Balwas Term Capital Gains'. The lower authorities were of the opinion that only the building was sold whereas the building was constructed on the land and building was sold alongwith land. He adverted my attention to page 29 of the paper book to submit that on 15th March 1999 the assessees let out the property to one tenant i.e. M/s. Autoland India P. Ltd. and it is not a case of providing any other services other than letting out of the building. In the light of the decision of the Hon'ble Supreme Court in the case of Shambhu Investment Pvt. Ltd. (supra) income earned on letting out of property is assessable to tax only under the head 'Property Income'. Therefore, even if the assessee has committed a mistake of declaring it as business income there is an obligation on the part of the AO to correct the mistake and to assess the income under the appropriate head. He adverted my attention to page 65 of the paper book to submit that no expenditure was claimed against rental income whereas had it been taxed under appropriate head assessee would have been entitled for higher benefit of 30% deduction. Thus it was only on account of ignorance of correct legal position assessee declared the income under the head 'Business Income' and it is the duty of the AO to bring to tax under appropriate head. To highlight that the assessees have not carried on business in the form of letting out the building he adverted my attention to pages 66 to 73 of the paper book wherein cost of land and building known as Ornate Enterprise was shown only as investment in the books of account. The learned counsel also relied upon the decision of the ITAT Mumbai Bench in the case of Sadhuram Patel & Sons vs. ITO 121 TTJ 180 wherein the Bench observed that for the purpose of section 50 WDV has to be computed on the basis of the actual depreciation allowed by the assessing authority and in a case where depreciation was not actually claimed section 50 cannot be invoked since deemed depreciation cannot be taken into account. Similar view was taken by the ITAT Mumbai Bench in the case of Divine Construction Co. vs. ACIT 138 TTJ 72 where the Bench observed that provisions of section 50 are not applicable if depreciation was never claimed and allowed actually by the AO (page 121 of paper book); This matter pertains to assessment year 2006-07.
13 ITA No.2680&2681/Mum/2008Ismail & Hussein Abdulkarim Balwas
11. Pages 123 and 129 of the paper book is also another decision of the ITAT Mumbai Bench wherein the Bench observed that if depreciation was not claimed and assessee converted it as non-business asset before sale merely because rental income was offered as business income in the earlier years, the amount received on sale of the property cannot be assessed under the head short term capital gains, since it ceases to be a business asset. The Bench further observed that it is possible for a business asset to change its character into that of fixed asset or investment. The learned counsel also relied upon the decision of the Hon'ble Bombay High Court in the case of Mangla Homes P. Ltd. vs. Income Tax Officer 325 ITR 281 wherein the court observed that eventhough assessee was carrying on the business of dealing/ investment in property, flats, warehouses, etc. and purchased flats for trading purpose but the monthly rental received on letting out of the said properties would be assessable to tax under section 22 of the Act. Similarly in the case of Bhagyanagar Construction (P.) Ltd. Vs. ITO99 ITD 18 the ITAT Hyderabad Bench observed that if an assessee is not the owner of the building, income from letting out of the same can be assessed under the head 'Profits and Gains of Business' or under 'Other sources' but if own flats are let out it is assessable to tax under the head 'Property Income' only.
12. It may be noticed that the view of the Revenue is that the assessee offered the rental income under the head profits and gains of business and that it was not the case of the assessee even before the appellate Tribunal that it is income from property and hence it may not now be claimed that that the sale proceeds are assessable to tax under the head long term capital gains.
13. In this regard the learned counsel submitted that in the grounds of appeal filed before the Tribunal a specific ground was raised contending, inter alia, that rental income ought to have been taxed under the head "Income from House Property". At any rate, in the light of the decision of the Apex Court in the case of CIT vs. Mahalakshmi Textile Mills Ltd. 66 ITR 710 the Tribunal is empowered to determine the pertinent issue which arises out of the orders passed by the lower authorities and all questions, whether of law or of facts, which relate to the assessment of the assessee can be raised 14 ITA No.2680&2681/Mum/2008 Ismail & Hussein Abdulkarim Balwas before the Tribunal. He thus strongly supported the order passed by the learned Judicial Member.
14. On the other hand, the learned D.R. submitted that the expression "actually allowed" has to be understood in the context of Explanation 5 to section 32(1) of the Act whereby depreciation has to be mandatorily allowed to an assessee on an asset which was used for the purpose of business. The insertion of Explanation 5 to section 32 as well as the language used in section 50 should be read together to understand the intention of the Legislature and in the instant case the learned Accountant Member was justified in holding that once the assessee has claimed it as business income in the earlier years, which was not challenged before any authority, only the WDV of the asset has to be taken into consideration in which event the income on sale of property is assessable to tax under the head 'Short Term Capital Gains'. The brief written submissions of the Revenue are extracted for immediate reference: -
"QUESTION OF LAW (i)
1. It is a well-established principle of law that whether an asset is held as stock-in-trade or investment will depend upon the assessee's intention to deal with the asset. This intention can be inferred from the entries in his books of account as well as his subsequent conduct in dealing with the asset. If the accounting practice followed by the assessee is in consonance with general principles of accountancy and is not repugnant to any provision of law, it has to be considered for the purpose of ascertaining the taxable income of the assessee, as laid down in CIT v. UP State industrial Development Corporation 225 ITR 703 (SC).
2. It is a matter of record that both the assessees (each owning 45% share) along with their father (owning the remaining 10% share) formed an AOP named "Ornate Enterprises" to develop the plot of land at Malad (W) into a commercial building and that the said plot was developed from 1996 to 1999 into a full-fledged commercial building having 'A' and 'B' wings and other structures. It is evident that this was an adventure in the nature of trade whereby the assessees/AOP constructed a commercial building on this land with the object of its commercial exploitation.
In other words, the said commercial building was held by the assessees/ AOP as a business asset/stock-in-trade. A perusal of the Tenancy Agreement shows that the commercial property was let out on "monthly tenancy basis" [Please refer Page 32 of the Paper Book filed in case of Shri Ismail Abdulkarim Balwa). The 15 ITA No.2680&2681/Mum/2008 Ismail & Hussein Abdulkarim Balwas Hon'ble JM in Para 9/Page 7 of the order has been misled into holding that "the building was acquired by the AOP out of the outcome of the decree suit filed in the Civil Court" and that "after acquiring the building, the building was rented out by the AOP ". This conclusion is at variance with the facts as noted by the Hon'ble JM himself in Para 6.1/Page 4 of the order. As a matter of fact, what was acquired through court decree was only a plot of land on which commercial buildings were later constructed. On the other hand, the conclusion of the Hon'ble AM is based on proper appreciation of facts of the case including the AOP's intention of commercial exploitation of the said property.
3. Till the said commercial building was sold in A.Y. 2005-06, rental income from the said property was offered by the assessees as well as other co-owners for 6 years from A.Y.1999-2000 to A.Y.2004-05 as business income, further showing that the assessees treated the building as a business or commercial asset. The view that income from property could be assessed as business income where there is commercial exploitation of the property by letting it out finds support from a number of judicial precedents viz. National Storage Pvt. Ltd. 66 ITR 596 (SC), S. G. Mercantile Corporation Pvt. Ltd. 83 ITR 700 (SC) etc. Moreover, this position has been accepted by the Department in case of the present assessees in earlier assessments which have become final.
4. During the A.Y. under consideration, when the said commercial building was sold, the assessees could not take a somersault and claim it to be an investment with a view to escaping the rigours of Section 50. Having consistently shown income from the said property as business income for over 6 years, the assessees cannot now claim that the said property was not held as a business asset. It remains a business asset and hence its sale would be governed by the provisions of Section 50 of the Act, as has been rightly held by the Hon'ble AM.
5. The mere fact that no depreciation was claimed on this asset from A.Y. 1999-2000 and onwards will not by itself convert the business asset into investment, because as per the then prevailing legal position, claim of depreciation was at the option Of the assessee and in view of the decision of the Hon'ble Supreme Court in the case of CIT v. Mahendra Mills (2000) 243 ITR 56 (SC), if the assessee did not furnish the necessary particulars as prescribed u/s 34, depreciation could not be thrusted or forced on the assessee.
6. Further, the insertion of Explanation S in Section 32 by Finance Act, 2001 w.e.f. A.Y.2002-03 strengthens the view that the assessee has option not to claim depreciation in its books of account but for purposes of the Act, such depreciation will be deemed to have been claimed and allowed. Since the assessee's case pertains to A.Y.2005-06, deduction for depreciation for 16 ITA No.2680&2681/Mum/2008 Ismail & Hussein Abdulkarim Balwas earlier years would be automatically deemed to have been allowed despite the fact that no such claim was made in the returns of income. The action of the AO in computing the short term capital gain by deducting the notional WDV and not the original cost of the property from the sale consideration is also in consonance with the decision of the Hon'ble ITAT in the case of Sri Padmavathi Srinivasa Cotton Ginning & Pressing Factory v. DCIT (2009) 125 TTJ (Visakha.) 411. Thus, as per the said decision, depreciation cannot be taken to be "notionally allowed" but it will be deemed to be "actually allowed" in respect of the A.Y.s for which depreciation was not claimed by the assessees. Further, the assessees can have no grievance in so far as the AO has calculated notional depreciation w.e.f. A.Y. 2002-03 and not given any retrospective effect to Explanation 5 to Section 32(1).
7. Though no depreciation was claimed on the commercial building, it is a matter of record that certain other expenses were claimed as deduction which were otherwise not allowable, if the property was held as investment/non-business asset income wherefrom was assessable under the head "Income from House Property". This also shows that the commercial building in question was held as a business asset. It is claimed that much less expenses were actually claimed by the assessees against income from the commercial building than what would have been admissible if such income had been returned as income from house property. However, this cannot be a valid ground for not treating the said property as a business asset.
8. The plea of the assessees that rental income was shown as business income by them "due to mistake" and also because "there is no column in the return form to show the share from the AOP" is totally unacceptable and untenable and has rightly been rejected as invalid by the Hon'ble AM in Para 6.1/Page 12 of his separate order. It is an indisputable fact that there is a specific column for disclosing "Income from House Property" in IT Return Form No.2/ 2D [Please refer Pages 1, 8, 9, 12, 13 and 25 of the Paper Book filed in case of Shri Ismail Abdulkarim Balwa] where the assessees could very well have shown the income from letting out of the said commercial property. The assessees could also have clarified the correct position in the "Statement of Computation of Income" attached with the returns of his income [Please refer Pages 2 and 3 of the Paper Book filed in case of Shri Ismail Abdulkarim Balwa]. It is observed from the record that the assessees have, in fact, shown income from certain other properties under the head "Income from House Property" in their statements of income enclosed with their returns. If the assessees genuinely believed that rental income from the commercial building in question was shown as business income by mistake consecutively for 6 A.Ys., there was nothing to prevent them from filing revised returns u/s 139(5) of the Act correcting such mistake. Alternatively, the assessees could have applied to the 17 ITA No.2680&2681/Mum/2008 Ismail & Hussein Abdulkarim Balwas AO for rectification of the alleged mistake u/s 154 or even approached the CIT concerned for revision u/s 264 of the Act. This position has been duly recognized by the Hon'ble AM in Para 6/ Pages 9-10 of his order. Although relying heavily on the ratio of decision of the Hon'ble Apex Court in the case of Shambhu Investment, the assessees have not explained as to why, following the said judgment rendered on 21.01.2003, they could not show income from the said commercial buildings as income from house property in their subsequent returns for A.Y.s 2003-04 arid 2004-05. All this shows "that it was a conscious decision of the assessee to declare it as business income and not by mistake", as rightly held by the Hon'ble AM.
9. Similarly, the assessee's plea of "ignorance of law" is also not acceptable, because it is well-settled that ignorance of law is no excuse and also because the assessees have been availing the professional services of a CA in regard to their tax matters.
10. The Hon'ble AM in Para 10/ Page 8 of the order has been misled into holding that except building, there is no other asset which is factually incorrect. A perusal of Pages 6 and 7 of the Paper Book filed in case of Shri Ismail Abdulkarim Balwa and Page 3 of the assessment order clearly shows that besides land and building, the AOP also owned some Furniture & Fixture and a Water Pump. Even if it is assumed (for the sake of argument only) that there is only one asset, this will not alter the situation and the commercial building in question will constitute a "block of assets" for the purpose of computation of short term capital gains u/s 50, because the building as such is a capital asset on which rate of depreciation has been prescribed.
11. The Hon'ble JM has failed to appreciate that the assessee's reliance on CBDT Circular No.14 of 1955 dated 11.04.1955 is totally out of context. There is no allegation of denial of any refund or relief to the assessees by the AO. There was no material available with the AO to conclude from the returns filed by the assessees that their income from the subject property was liable to be assessed as income from house property rather than as business income. Nor is the AO endowed with any clairvoyance. It would be too much to expect the AO to unilaterally change the head of an income in the absence of any claim by the assessees and any supporting evidence in this behalf. This position has rightly been affirmed by the Hon'ble AM in Para 6.1/ Pages 10-12 of his order. There was no effort on part of the assessees to approach the AO for grant of any alleged relief on this account either in the earlier assessment years or in the A.Y. under consideration. The Hon'ble AM in Para 6.2/ Pages 12-14 after distinguishing the case laws cited by the assessees has brought out the legal position in its proper perspective and correctly held that past assessments having not been challenged by way of revision or appeal etc. and the same having become final, the 18 ITA No.2680&2681/Mum/2008 Ismail & Hussein Abdulkarim Balwas nature of income cannot be changed to house property income at this belated stage while computing capital gain on sale of the property. "None of the cases can be considered as an authority for the proposition that while taking consequential action as per law in the subsequent year, the nature of income declared and assessed in the earlier years, which had become final, can be changed". It is also notable that even in the course of assessment/appellate proceedings for the A.Y. under consideration, no plea was ever taken by the assessees before the AO as well as the CIT(A) that they had wrongly shown income from the said property as business income. Accordingly, the assessees cannot be allowed at this stage to change the entire complexion of the case and make out an altogether new case before the Hon'ble Tribunal.
12. With due respect, the Hon'ble JM is not correct in holding that "the provisions of Section 50 are not applicable on the facts of the present case" because no depreciation has been claimed by/ allowed to the assessees in the past or in the A.Y. under consideration. His direction to the AO to treat the property of the AOP as a capital asset and to compute the profit on sale of the said property as Long Term Capital Gains does not seem to represent the correct position on facts and in law. On the other hand, the Hon'ble AM rightly concludes that "Section 50 applies to all depreciable assets used for the purpose of business, whether the depreciation has been actually allowed or not ". In Para 5.1/Page 7 of the order, the Hon'ble AM has held that though Section 50 refers to the capital asset in respect of which depreciation "has been allowed" under the Act, the phrase "has been allowed" has to be interpreted not as "actually allowed" but as "allowable under the Act", considering the basic object of Section 50 as mentioned in the marginal note which is to compute the capital gain in respect of depreciable assets i.e. assets in respect of which depreciation is allowable under the Act. He goes on to add that "had the intention of the legislature been that depreciation should have been actually allowed, it would have been so stated as in the case of definition of written down value (WDV) ". However, the Hon'ble AM seems to be contradicting himself by holding that while computing short term capital gain, depreciation in respect of earlier years will not be taken into consideration on notional basis as no depreciation had actually been allowed in the earlier years. In this connection, kind attention is invited to the unreported decision of the Hon'ble ITAT, 'F' Bench, Mumbai dated 25.06.2004 in the case of Mr. Suresh C. Mehra v. ITO in ITA No.61 63/Mum/2003 for A.Y. 1994-95, wherein it was held that Section 50 would apply in case of depreciable assets and an asset would be considered to be depreciable, if the Act provided for allowance of depreciation thereon and that once an asset was found to be capable of being depreciated under the Act, such asset would be a depreciable 19 ITA No.2680&2681/Mum/2008 Ismail & Hussein Abdulkarim Balwas asset falling within the ambit of Section 50 regardless of whether depreciation had been actually allowed or not. It was also held that the phrase "depreciation has been allowed" in Section 50 did not envisage that depreciation should have been actually allowed to the assessee. Reliance is also placed in this regard on the decision of the Hon'ble Visakhapatnam Bench of Tribunal in the case of Sri Padmavathi Srinivasa Cotton Ginning & Pressing Factory v. DCIT (supra).
13. It is vehemently contended on behalf of the assessees that the words "depreciation has been allowed" as occurring in Section 50 should be interpreted as "depreciation has been actually allowed". However, this contention is not legally tenable for the following reasons:
(i) It is well-settled that a court is not empowered to either add words to a statute or substitute words while interpreting a provision. The Court can only read and interpret the language employed by the statute. If the language of the statute is capable of a plain meaning, without doing violence to the language, it is not open to the Court to add any words therein so as to give a meaning which one or the other side thinks to be more appropriate [Cargo Clearing Agency (Guj.) v. JCIT (2008) 307 ITR 1 (Guj.)). It would not be reasonable or permissible for the court to rewrite the section or substitute words of its own for the actual words employed by the Legislature [CIT v. N.C.Budharaja & Co.
(1993) 204 ITR 412 (SC)).
(ii) The meaning of the phrase "actually allowed" in Section 43(6)(b) came up for consideration of the Hon'ble Supreme Court in Madeva Upendra Sinai v. Union of India (1975) 98 ITR 208 (SC). It was held that the key word "actually" was the antithesis of that which was merely speculative, theoretical or imaginary.
"Actually" contra-indicates a deeming construction of the word "allowed" which it qualifies. The connotation of the phrase "actually allowed" is thus limited to depreciation actually taken into account or granted and given effect to, i.e., debited by the AO against the incomings of the business in computing the taxable income of the assessee. It cannot be stretched to mean "notionally allowed' or merely allowable on a notional basis. Thus, it follows from the above authoritative pronouncement of the Hon'ble Apex Court that the meaning of the words "depreciation has been allowed" as contained in Section 50 could not be confined to actual allowance of depreciation by the AO but would legitimately cover cases of notional allowance of depreciation as well.
(iii) There is another reason as to why the words "depreciation has been allowed" cannot be so construed as to mean "depreciation has been actually allowed". It is a matter of common knowledge that only a small percentage of the IT returns are picked up for scrutiny every year. Accordingly, it would not be practically feasible for the AOs of the IT Department to go through 20 ITA No.2680&2681/Mum/2008 Ismail & Hussein Abdulkarim Balwas each and every return, identify the assessees who have not claimed deduction of depreciation and then initiate necessary action for carrying out actual allowance of depreciation in each such case. In fact, with a view to putting the issue at rest, Explanation 5 has been inserted below Section 32(1) w.e.f.
01.04.2002 so as to clarify that in computing the profits and gains of business or profession for any previous year, deduction of depreciation u/s.32 will be mandatory, whether or not the assessee has claimed such deduction in his return.
(iv) In the present case, the AO has given working of year-wise allowance of depreciation from A.Ys. 2002-03 to A.Y.2004-05 so as to ascertain the WDV at the beginning of the previous year. This action of the AO is in accordance with the provisions of Explanation 5 below Section 32(1).
(v) Assuming (for the sake of argument only) that for the purpose of invoking Section 50, depreciation ought to have been "actually allowed", it is a matter of record that each assessee has been allowed set off of unabsorbed depreciation of A.Ys. 2002-03 to A.Y.2004-05 worked out by the AO against the capital gains u/s.50 computed by him. In this sense, the assessees have received effective advantage or benefit of depreciation and therefore, relying upon the principle laid down by the Hon'ble Bombay High Court in the case of Allied Publishers Pvt. Ltd. Vs. CIT 68 ITR 546 (Born), it cannot be claimed any longer that depreciation has not been actually allowed to the assessees. Thus, the assessees' case fails even on this count.
(vi) In case the plea of the assessees is accepted, it would result in making the provisions of Explanation 5 to Section 32(1) and Section 50 redundant and ineffective. Evidently, such a course of interpretation is not to be allowed in view of settled principles of construction of statutes. An interpretation which makes the provisions of an enactment nugatory and otiose is' to be avoided at all cost and under all circumstances.
14. Besides being distinguishable on facts, the case laws cited by the appellant (Shambhu investment, Estate of Omprakash Jhunjhunwala, Keyaram Hotels, Nutan Warehousing, Margadarsi Housing, Mangla Homes (F) Lid, Bhagyanagar Construction (P) Ltd., Lintas India and Automann India) are not relevant at all because the present case is one wherein the property in question being subject to commercial exploitation was claimed as well as held to be assessable under the head "business income" rather than "income from house property". Nor does it involve any allegation of under-statement of consideration (K.P.Varghese). The crucial issue for consideration in the present appeals is not the assessability of income from leasing of the commercial property in question any more but the taxability of profits earned on sale thereof under the provisions of Section 50. Thus, in Para 12.1/ 21 ITA No.2680&2681/Mum/2008 Ismail & Hussein Abdulkarim Balwas Page 10 of the order, the Hon'ble JM has been misled into holding that the ratio of the decision of the Supreme Court in case of Shambhu Investment is squarely applicable on the facts of the present case. The Hon'ble AM, on the other hand, has elaborately brought out in Para 6.1 / Pages 10-11 of his order as to how the judgment in case of Shambhu Investment was distinguishable in the present case and the assessee's reliance thereon was of no help to them. The decision in case of Sadhuram Patel & Sons 121 TTJ (Mum) 180 will not apply here because it pertains to A.Y.2001- 02 which is prior to insertion of Explanation 5 to Section 32(1). Likewise, reliance on the unreported decision of ITAT, Mumbai dated 20.02.2011 in the case of Prabodh Investment & Trading Co. v. ITO (ITA No.6557fMum/2008 for A.Y. 2004-05) will be of no help to the assessee, because in that case, relief was allowed to the assessee by applying the decision of Cochin Bench of Hon'ble Tribunal in Sakthi Metal Depot which has since been reversed by the Hon'ble Kerala High Court vide 232 CTR (Ker)
279. In the recent case of Divine Construction Co. v. ACIT (2011) 138 TTJ (Mum) 72 relied upon by the assessees, it has been held that provision of Section 50 cannot be applied on the sale of an asset where no depreciation is ever claimed or allowed on such asset. The action of the AO in computing capital gains uls.50 by invoking the provisions of Explanation 5 to Section 32 did not find favour with the Hon'ble Tribunal in that case. In other words, the Hon'ble DB in that case took the same view being canvassed by the assessees in the present case that depreciation should have been actually allowed by the AO before invoking the provisions of Section 50 so as to compute capital gains in respect of depreciable assets. With due respect, this view being at variance with the view taken by the Hon'ble Tribunal in another case of Dr. (Mrs.) Sudha S. Trivedi v. ITO (2009) 31 SOT 38 (Mum), warrants reconsideration in light of the submissions made in Para 13 above.
15. In Mahalakshmi Textile Mills Ltd., the question for consideration was whether, on the facts and circumstances of the case, the Tribunal had the jurisdiction to decide whether the particular sum constituted an allowable item of expenditure as current repairs rather than as development rebate as claimed by the assessee. It was held that since the Tribunal had rejected the assessee's claim for development rebate, it was not bound to disallow the claim of the assessee for allowance of the amount spent, if on the basis of available evidence it came to the conclusion that such sum was a permissible allowance on another ground. However, relying upon this judgment, the appellant cannot be allowed to urge the Hon'ble Tribunal to re-write the assessment history of its case after the earlier assessments have become final and are not the subject matter of the present appeals. Reliance is placed in this regard on the judgment of the Hon'ble Supreme Court of India in the case of CIT v. Rum Kumar Aggarwal & Bros. 205 ITR 251 22 ITA No.2680&2681/Mum/2008 Ismail & Hussein Abdulkarim Balwas (SC), wherein it has been held that having treated the shares as stock-in-trade for several years, the assessee was bound by its admission and course of conduct in earlier years and could not subsequently contend that shares ceased to be stock-in-trade. QUESTION OF LAW (ii)
16. It is well-established that there is no estoppel against correct application of law. Whether income from letting of business asset is income from house property or business income is a mixed question of fact and law. Rule of consistency does not apply here. Reliance is placed on the judicial precedents in the cases of H.A. Shah &(79 i) Co. v. CIT 30 ITR 618 (Bom), and CIT v. Oswal agro Mills LIS 313 ITR 24 (SC). Subsequent acceptance of the profit on sale of property as Long Term Capital Gains by another Assessing Officer in the case of another co-owner (owning 10% share) by way of a non- speaking order and without due inquiry will not act as 'res judicata' and will not bind the AO in the present cases. In Paras 7.1 and 7.2/ Pages 15-17 of his order, the Hon'ble AM has distinguished all four judicial precedents relied upon by the assessee and held very categorically and unequivocally that there is full justification in case of present assessees for making deviation from the assessment made in case of the co-owner without considering the relevant factual and legal position. As held by the Hon'ble AM in Para 7.2/ Page 17 of the order, the decision in case of co-owner which is contrary to provisions of law cannot be followed.
In view of the above position, it is prayed that the stand of the lower authorities in invoking the provisions of Section 50 may kindly be upheld and both the questions of law on point of difference may be adjudicated in favour of the revenue."
15. The learned D.R. pointed out that even going by the rule of consistency, in assessee's own case for earlier years it was claimed as business income and the same having not been challenged assessee cannot now claim that the sale proceeds are assessable to tax under the head 'Long Term Capital Gains' merely because a cryptic order was passed by another Assessing Officer in the case one of another co-owner who has got only 10% share.
16. Joining the issue, learned Counsel submitted that the learned Judicial Member overlooked the fact that only land was acquired through court decree and the buildings were constructed thereon, which was wrongly mentioned as acquisition of building, but the fact remains that the assessees never held the property as stock-in-trade but the co-owners 23 ITA No.2680&2681/Mum/2008 Ismail & Hussein Abdulkarim Balwas always treated the property as investment. With regard to the principle of res judicata, the learned counsel submitted that res judicata is not applicable to income tax proceedings, particularly when any order is passed contrary to certain legal propositions. In the instant case the assessees herein merely let out the building and hence the monthly rent received thereon cannot be assessed as business income. Under such circumstances there is no estoppel from making correct claim in the year of sale.
17. He further submitted that if the Assessing Officer seeks to tax it as business income, in order to apply provisions of Explanation 5 to section 32 of the Act, he should reopen the assessments made in the earlier years to allow depreciation. In the instant case neither any proceedings under section 148 nor under section 263 were initiated by the Revenue. On the other hand, the sale proceeds in the hands of another co-owner was assessed by another Assessing Officer and an order was passed under section 143(3) of the Act and hence the learned Judicial Member was justified in holding that the rental income ought to have been assessed to tax under the head 'Property Income'. He also submitted that the Income Tax Officer, Ward 24(3)(1) passed the order in the hands of Shri Abdulkarim Balwa on 07.12.2007, which was a date falling after the date of assessment orders passed in the hands of the assessees herein and thus it cannot be said that there was non application of mind on the part of the AO who passed the order in the case of the co-owner. The case law relied upon by the learned D.R. are distinguishable on facts in as much as in those cases all the flats and premises were used for own business purpose or it was treated as business asset whereas the assessees herein have already treated it as investment and merely let out to one party on a monthly rent. He relied upon the decision of the ITAT Mumbai Bench in the case of Jagdish C. Sheth 101 ITD 360 in support of his contention that even if it has to be assumed that it formed a part of block of assets in earlier years, if the facts indicate that it is not otherwise eligible for depreciation, it cannot be considered as forming part of block of assets in the subsequent year. He also relied upon the decision of the Apex Court in the case of Mahindra Mills 243 ITR 56 in support of his contention that the expression "actually allowed"
24 ITA No.2680&2681/Mum/2008Ismail & Hussein Abdulkarim Balwas does not mean "notionally allowed". In his opinion it can be treated as allowed only when it is claimed. He thus strongly relied upon the order passed by the learned Judicial Member.
18. I have carefully considered the rival submissions and perused the record. In order to resolve the issue as to whether the income, on sale of property in question, is liable to be taxed as long term capital gains or short term capital gains, the import of deeming provisions of section 50 of the Act has to be analysed. Sale proceeds of any asset which is held for more than 36 months, which is otherwise exigible to tax under the head "long term capital gains", is assessable to tax under the head "short term capital gains", if the case falls within the terms of section 50 of the Act. In otherwords, if a capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act, the gain arising from the sale of such an asset shall be deemed to be the capital gains arising from the transfer of short term capital assets. Section 32 of the Act provides for allowability of depreciation wherein twin conditions are prescribed i.e., (1) an asset should be owned, wholly or partly, by the assessee and (2) it should be used for the purpose of business or profession. Explanation 5 to Section 32 of the Act was inserted by the Finance Act 2001 with effect from 1-4-2002 whereby option is not left to the assessee to claim depreciation ; In otherwords, whether an assessee claims deduction in respect of depreciation or not, deduction has to be allowed towards depreciation. But for the provisions of section 50 and Explanation 5 to Section 32 of the Act an asset which is held for more than 36 months is otherwise assessable to tax under the head "long term capital gains". Therefore, it is necessary, to analyse the meaning of the expression "has been allowed under this Act" used in section 50 of the Act. In the instant case the assessees have all along treated the rental income as business income and even in the year under appeal income received in the form of rent, till the date of sale, was declared as business income and assessed as such, despite the correct understanding of law, for the purpose of claiming that sale consideration is assessable to tax under the head "long term capital gains" since the asset which was sold is not a business asset and 25 ITA No.2680&2681/Mum/2008 Ismail & Hussein Abdulkarim Balwas income in the form of rent is assessable as property income. In fact no such claim was made either before the Assessing Officer or before the CIT(A) ; even before the Tribunal the limited issue that was considered by the Members of the Division Bench was with regard to the assessability of sale consideration and not with regard to the head under which rental income in this year is assessable to tax. The claim of the learned Counsel is that depreciation was never claimed in the earlier years nor allowed by the Assessing Officer and hence, on a proper interpretation of the expression "has been allowed" the case falls outside the purview of section 50 of the Act. Learned A.R. contended that despite bringing to tax the sale proceeds under the head "short term capital gains" the Assessing Officer did not reopen the assessments of the earlier years so as to allow depreciation and thus it cannot be said that depreciation has been allowed to the assessee in the earlier years.
19. In my opinion, the expression "has been allowed" has to be understood by taking into consideration the intention of the legislature in inserting the Explanation 5 to Section 32 of the Act. Admittedly in the instant case, assessee treated the rental income as business income for the past six years which includes the assessment years 2002-2003 to 2004- 2005. As per Explanation 5 to Section 32 of the Act depreciation which is mandatorily allowable should not be taken as "notionally allowed" but "actually allowed" as held by the I.T.A.T., Visakhapatnam Bench, in the case reported in 125 TTJ 411. A legal fiction created under statute has to be taken to its logical conclusion. If depreciation has to be mandatorily allowed and irrespective of the claim if it has to be deemed as "actually allowed", even under section 50 of the Act it has to be assumed that "depreciation has been allowed" under this Act. It is not in dispute that the impugned asset is owned partly by the assessees' herein. The other condition prescribed under section 32 is that the asset has to be used for the purpose of business. Learned Counsel submitted that it is only on account of ignorance of law assessees claimed rental income under the head "profits and gains of business" whereas under the head "property income" assessee would have been entitled to a higher claim of 30% deduction which is mainly meant to 26 ITA No.2680&2681/Mum/2008 Ismail & Hussein Abdulkarim Balwas off-set the cost of repairs etc., The tenancy agreement, on the other hand, shows that the tenant has to maintain and repair (major or minor) the tenanted premises and to keep the tenanted premises in a good condition which implies that the assessee need not have to bear any expenditure on the property and, as rightly pointed out by the learned Accountant Member the property constructed was known as "Ornate Enterprises" which gives an impression that property was to be commercially exploited. The question as to whether income received on lease of property falls under the head "Business Income/Income from other sources/Property Income" has to be decided on the facts of each case and it is a mixed question of fact and law and such exercise can be done only when assessee makes a claim which is contrary to the decision to be taken by the Assessing Officer. In the instant case, the assessee voluntarily offered it as business income by enclosing audit report etc., and hence the Assessing Officer accepted the plea that it is a business income which implies that the asset was considered as used for the purpose of business. Unless the Orders passed in the earlier years are reversed it cannot now be said that it is not a business asset. Therefore, the second condition is deemed to have been satisfied and hence Explanation 5 to Section 32 of the Act automatically comes into play whereby depreciation has to be treated as actually allowed. Assessees have not filed any petition under section 154 or otherwise in respect of the earlier years to claim that the rental income is not assessable to tax under the head business income. In fact, even in this year the assessee declared it as business income which shows that the assessees had consistently taken a stand and the Assessing Officer had consistently accepted the plea of the assessees. Thus on an application of Rule of Consistency it has to be treated as a business asset in the earlier years and the fiction created under section 32 of the Act read with Explanation 5 is attracted in the instant case; consequently, on the sale of the said property, section 50 of the I.T. Act gets attracted whereby the sale proceeds are assessable to tax under the head "short term capital gains" only. Learned Counsel contended that a single asset cannot be treated as 'block of assets'. In my considered opinion, learned A.R. was correct in holding that the intention of legislature was to categorise assets 27 ITA No.2680&2681/Mum/2008 Ismail & Hussein Abdulkarim Balwas entitled to a stipulated rate of depreciation under a particular block, whether such block consisting of single asset or multiple assets.
20. Learned Counsel relied upon several case law which are distinguishable on facts. In most of the cases the issue concerns the assessment years prior to insertion of Explanation 5 to Section 32 of the Act and in the other set of cases the implication of Explanation 5 to section 32 was not considered in detail. Though in the case of Divine Construction Company the I.T.A.T. 'D' Bench, Mumbai observed that section 50 of the Act comes into play only when depreciation was actually claimed and allowed in the earlier years but the Bench has not analysed the provisions of Explanation 5 to Section 32 of the Act in coming to such conclusion and merely focused on the language of section 50 of the Act which, in my considered opinion, is at variance with the decision of the I.T.A.T.Mumbai Bench in the case of Mrs. Sudha S.Trivedi (supra) wherein the Bench observed as under :
"..... for entering into a block of assets the actual claim of depreciation is not relevant. If the capital asset is of a nature which fits into categories of the assets prescribed and in respect of which depreciation rate is prescribed, then it will fall within the definition of "block of assets". Adverting to the facts of the instant case, we observe that the assessee sold her building in which she was carrying on her profession. The building as such is a capital asset on which depreciation rate has been prescribed, hence such building will fall within the definition of "block of asset".
"..... Explanation was inserted by the Finance Act, 2001 w.e.f. 1st April, 2002. It is, therefore, clear that from the assessment year 2002- 2003 the demand in respect of depreciation shall be granted automatically notwithstanding the fact that the assessee had not claimed this deduction".
"..... Hence, from the assessment year 2002-2003, Explanation 5 to section 32 will apply only if the assessee had not claimed depreciation. If however the asset is sold in the previous year relevant to the assessment year 2002-2003 and there is no other asset in that block, as in the case before us, then there cannot be any question of allowing depreciation on the asset sold and as such the application of Explanation 5 will be ruled out. ..... The position would have been different if we had been dealing with the assessment year 2003-2004 in which case the depreciation for assessment year 2002-2003 would have been mandatorily allowed and both the conditions of section 50 28 ITA No.2680&2681/Mum/2008 Ismail & Hussein Abdulkarim Balwas viz., capital asset forms part of block of assets and in respect of which depreciation has been allowed, would have been satisfied."
21. The contention of the learned Counsel is that acceptance of sale proceeds as long term capital gains in the case of one co-owner would act as res-judicata. In my considered opinion, the principle equally applies in favour of Revenue inasmuch as the assessees have been consistently claiming rent receipts as business income, including the year under consideration and at no point of time assessees tried to file any petition to seek rectification of the mistake, if any, in the earlier years' orders; Thus in the assessees' case, going by principle of consistency or res judicata, the circumstances would not permit them to raise a new claim to take the benefit of computation of Long Term Capital Gains (see 333 ITR 492 (Ker). The questions as proposed by the Members is not on the issue as to whether the income declared in this year is income from property or income assessable to tax under the head "profits and gains of business". Therefore, it is not necessary to consider the head under which rental income is assessable to tax. The relevant issue for consideration is, as to whether in the light of the facts available on record whether the application of section 50 is in accordance with Law or not. In my humble opinion, provisions of section 50 of the Act were correctly invoked by the Assessing Officer. The learned Accountant Member, in his dissenting order and the learned Departmental Representative in his written submission gave cogent reasons as to why the income on sale of property has to be assessed under the head short term capital gains.
22. Under these circumstances, the points of difference referred to me for a decision is answered in the negative by holding:
(a) that the capital gain on sale of property in question is liable to be taxed as short term capital gains, and
(b) merely because another Assessing Officer has accepted the gain as long term capital gain in the case of one co-owner, without giving detailed reasons to appreciate as to whether he had the benefit of going through the assessment orders in the case of these assessees, the view taken by 29 ITA No.2680&2681/Mum/2008 Ismail & Hussein Abdulkarim Balwas another Assessing Officer may not automatically act as res-judicata while deciding the issue on hand; rather, if at all the principles of res-
judicata needs to be applied, the conduct of the assessees' over a period of six years, apart from the year under consideration, of declaring the rental income under the head "business income" and accepting the assessments as such even after coming to know the implications of the decision of Shambu Investments (supra), would impliedly mean that the assessees had consistently accepted the taxability of income under the head "business" and rule of consistency as well as res-judicata applies in favour of the Revenue in respect of these two assessees.
23. The matter will now be placed before the regular Bench for passing consequential orders in accordance with the majority decision.
Sd/-
(D. Manmohan) Vice President Mumbai, Dated: 11th June, 2012 Copy to:
1. The Appellant
2. The Respondent
3. The CIT(A) - XXIV
4. The CIT- XXIV
5. The DR, "I" Bench, ITAT, Mumbai By Order //True Copy// Assistant Registrar ITAT, Mumbai Benches, Mumbai n.p.