14. Capital Gains – Cost of Acquisition – Value as on
1-4-1974 – High Court not to interfere with the finding of fact by the Tribunal
unless the same is palpably incorrect and therefore perverse – Assessing
Officer and Commissioner of Income Tax valued the land at Rs. 2 or 3 per sq.
yard while the Tribunal determined the value at Rs.150/- per sq. yard which
finding was reversed by the High Court.
Ashok Prapann vs. CIT (2016) 389 ITR 462 (SC)
The assessment year in question was 1989-90. The Assessee has
been subjected to payment of income-tax on capital gains accruing from land
acquisition compensation and sale of land. It was not in dispute that the land
in question was sold for Rs.150/- per sq. yard. The dispute was as to how the
cost of acquisition was to be worked out for the purposes of deduction of such
cost from the receipts so as to arrive at the correct quantum of capital gains
exigible to tax under the Income-tax Act, 1961 (for short “the Act”).
The Assessing Officer as well as the first appellate authority took into
account the declaration made in the return filed by the Assessee under the
Wealth-tax Act (Rs. 2 per square yard) in respect of the very plot of land as
the cost of acquisition. Some instances of comparable sales showing higher
value at which such transactions were made (Rs. 70 per square yard) were also
laid by the Assessee before the Assessing Officer. The same were not accepted
on the ground that such sales were subsequent in point of time, i.e., 1978-79
whereas u/s. 55(2) of the Act the crucial date for determination of the cost of
acquisition was April 1, 1974.
The learned Tribunal took the view that the comparable sales
could not altogether be ignored. Therefore, though the comparable sales were at
a higher value of Rs. 70 per square yard, the learned Tribunal thought it
proper to determine the cost of acquisition at Rs. 50 per square yard. In the
second appeal, the High Court exercising jurisdiction u/s. 260A of the Act
reversed the said finding.
The Supreme Court observed that a declaration in the return
filed by the Assessee under the Wealth-tax Act would certainly be a relevant
fact for determination of the cost of acquisition which u/s. 55(2) of the Act
to be determined by a determination of fair market value. Equally relevant for
the purposes of aforesaid determination would be the comparable sales though
slightly subsequent in point of time for which appropriate adjustments can be
made as had been made by the learned Tribunal (from Rs. 70 per square yard to
Rs. 50 per square yard). The Supreme Court held that comparable sales, if
otherwise genuine and proved, could not be shunted out from the process of
consideration of relevant materials. The same had been taken into account by
the learned Tribunal which is the last fact finding authority under the Act.
Unless such cognizance was palpably incorrect and, therefore, perverse, the
High Court should not have interfered with the order of the Tribunal. According
to the Supreme Court, the order of the High Court overlooked the aforesaid
severe limitation on the exercise of jurisdiction u/s. 260A of the Act.
The Supreme Court further noted that apart from the above, it
appeared that there was an on-going process under the Land Acquisition Act,
1894 for determination of compensation for a part of the land belonging to the
Assessee which was acquired [39 acres (approx.)]. The reference court enhanced
the compensation to Rs. 40 per square yard. The above fact, though subsequent,
would not again be altogether irrelevant for the purposes of consideration of
the entitlement of the Assessee. However, as the determination of the cost of
acquisition by the learned Tribunal was on the basis of the comparable sales
and not the compensation awarded under the Land Acquisition Act, 1894 (the
order awarding higher compensation was subsequent to the order of the learned
Tribunal) and the basis adopted was open for the learned Tribunal to consider,
the Supreme Court was of the view that
in the facts of the present case, the High Court ought not to have interfered
with the order of the learned Tribunal.
Consequently and taking into account all the reasons stated
above, the Supreme Court allowed the appeal. The order of the High Court was
set aside and that of the learned Tribunal was restored.
15. Cost of Construction – Reference to the Department
Valuation Officer though made in 1997 was valid in view of insertion of section
142A by Finance (No.2) Act, 2014 w.r.e.f. 15-11-1972 and subsequent amendments,
as the assessment had not become final and conclusive because appeal filed by
Revenue u/s. 260A was pending before the High Court but the order of the High
Court not interfered with in view of the finding recorded by the Tribunal that
local Public Work Department rates are to be applied and adopted in place of
Central Public Works Departments rates.
CIT vs Sunita Mansingha (2017) 393 ITR 121
The proceedings for block assessment year 1997-98 were
initiated against the Respondents as a result of search conducted at the
residence of assessee u/s. 132 of the Act on 24.3.1997. The Assessing Officer inter
alia found that the assessee had half share in a farm house cum swimming
pool and she owned a residential House at 13-37, Shastri Nagar, Bhilwara. The
said properties were referred to the Departmental Valuation Officer (DVO) for
valuing the cost of construction. By a report dated 2.6.1997, the cost of farm
house was determined at Rs.23,54,200 as against Rs.5,82,600 declared as cost of
construction. The 50% difference in the cost of construction, which worked out
at Rs.8,81,300 was added to income of the assessee as income from undisclosed
sources. Similarly, an addition of Rs.12,19,145 was made on account of
undisclosed investment in cost of construction of house at Shastri Nagar as per
the report of DVO.
The Commissioner of Income-tax (Appeals) sustained the
addition to the tune of Rs.2,56,691 on account of alleged unexplained
investment in the construction of residential house at Shastri Nagar, Bhilwara.
The Tribunal deleted the entire amount added by the Assessing Officer.
A question was raised before the High Court regarding
deletion of addition on account of unexplained investment in construction of
house property on the basis of reference to Departmental Valuation Officer. The
High Court noted that no question was raised regarding deletion of addition of
Rs.8,81,300 though the same had been deleted for the same reason.
The High Court, following the decision of Supreme Court in Smt.
Amiya Bala Paul vs. CIT (2003) 262 ITR 407 (SC), held that the Assessing
Officer could not have made addition of certain amount by way of unexplained
investment in construction of immovable property namely residential house
situated at Bhilwara and farm house situated at Atun on the basis of valuation
report obtained by referring the issue to DVO, as no power existed under the
Act of making such a reference.
The Supreme Court observed that even though the Tribunal had
held that the reference to the Departmental Valuation Officer in question was
not valid, in view of the decision of the Supreme Court in the case of Smt.
Amiya Bala Paul vs. CIT (supra), it had also held that it was a settled
principle of law that in place of Central Public Works Department rates, local
Public Works Department rates were to be applied and adopted to determine the
cost of construction.
The Supreme Court held that in view of the fact that section
142A was inserted by the Finance (No. 2) Act, 2004 (23 of 2004) w.r.e.f. 15th
November, 1972 and subsequently again substituted by the Finance Act, 2010 (14
of 2010) w.e.f. 1st July, 2010 and the Finance (No. 2) Act, 2014 (25
of 2014) w.e.f. 1st October, 2014, as the proviso to sub-section (3)
of section 142A as it existed during the relevant period, reference to the
Departmental Valuation Officer could have been made because assessment in the
present case had not become final and conclusive because the appeal preferred
by the Revenue u/s. 260A of the Income-tax Act, 1961 was pending before the
Rajasthan High Court.
However, in view of the finding recorded by the Tribunal that
the local Public Works Department rates were to be applied and adopted in place
of Central Public Works Department rates, the Supreme Court did not find any
good ground to interfere in the impugned judgment on this issue on merits. The
appeal was thus dismissed.
16. Capital or Revenue Expenditure – Interest and other
expenditure towards creation of assets is revenue expenditure and is to be
allowed as deduction in the year it is incurred though capitalized in the
books.
CIT vs. Shri Rama Multi Tech Ltd. (2017) 393 ITR 371 (SC)
For the assessment year 2000-01, the Respondent, a public
limited company, had incurred an expenditure of Rs.3,37,84,348 towards payment
of interest on loans taken and other items for setting up the industry. Even
though it had capitalised the said amount and claimed depreciation before the
assessing authority, however, in appeal, the Respondent raised additional
ground claiming deduction of the aforesaid amount on interest paid with some
other expenditure on other items connected therewith as revenue expenditure.
The Commissioner of Income-tax (Appeals) vide order dated
March 5, 2004, allowed the claim of the Respondent-Assessee only to the extent
of interest amount of Rs. 2,92,45,670 paid on loans taken by it for
establishing the industry. He, however, disallowed the other expenditures,
namely, financial charges, professional expenses, upfront fee, etc.
The Revenue, feeling aggrieved by the said allowance,
preferred an appeal before the Income-tax Appellate Tribunal which vide order
dated December 2, 2004 upheld the order of the Commissioner of Income-tax
(Appeals) in so far as it related to the allowance of the expenditure claimed
towards payment of interest and also allowed expenditure on other items connected
therewith. The High Court did not interfere in the appeal preferred by the
Revenue on the ground that the Tribunal has followed the decision of the
Gujarat High Court in the case of Deputy CIT vs. Core Healthcare Ltd.
[2001] 251 ITR 61 (Guj).
Feeling aggrieved, the Commissioner of Income-tax has
preferred appeal before the Supreme Court.
The Supreme Court noted that it had in the case of Deputy
CIT vs. Core Health Care Ltd. [2008] 298 ITR 194 (SC) had affirmed the view
taken by the Gujarat High Court.
In this view of the matter, the Supreme Court held that the
Income-tax Appellate Tribunal was justified in allowing the expenditure of Rs.
3,37,84,348 towards the interest paid on the loans taken and expenditure on
other items connected therewith for establishment of the unit, while affirming
the order of the Commissioner of Income-tax (Appeals).
Learned Counsel for the Revenue-Appellant submitted before
the Supreme Court that the Respondent cannot claim depreciation on the amount
of interest which has been allowed as revenue expenditure and therefore, the depreciation referable to such interest expenditure be reversed.
Learned Counsel for the Respondent however, submitted that
there was nothing on record to show that depreciation on this amount had been
taken by the Respondent.
The Supreme Court, in view of the aforesaid contentions,
directed that if as a fact the Respondent has taken any depreciation on the
amount of interest and other items which has been allowed as revenue
expenditure, that much depreciation should be reversed by the assessing
authority.
Subject to the aforesaid observations, the appeals were
dismissed.
17. Capital Gains –
Slump Sale – Section 50 (2) applies to a case where any block of assets are
transferred by the Assessee but where the entire running business with assets
and liabilities is sold by the Assessee in one go, such sale could not be
considered as “short-term capital assets”.
CIT vs. Equinox Solution Pvt. Ltd. (2017) 393 ITR 566 (SC)
The Respondent-Assessee was engaged in the business of
manufacturing sheet metal components out of CRPA & OP sheds at Ahmedabad.
The Respondent decided to sell their entire running business in one go. With
this aim in view, the Respondent sold their entire running business in one go
with all its assets and liabilities on 31.12.1990 to a Company called
“Amtrex Appliances Ltd.” for Rs. 58,53,682/-.
The Respondent filed their income tax return for the
Assessment Year 1991-1992. In the return, the Respondent claimed deduction u/s.
48 (2) of the Act as it stood then by treating the sale to be in the nature of
“slump sale” of the going concern being in the nature of long term
capital gain in the hands of the Assessee.
The Assessing Officer did not accept the contention of the
Assessee in claiming deduction. According to the Assessing Officer, the case of
the Assessee was covered u/s. 50 (2) of the Act because it was in the nature of
short term capital gain as specified in section 50 (2) of the Act and hence did
not fall u/s. 48 (2) of the Act as claimed by the Assessee. The Assessing
Officer accordingly reworked the claim of the deduction treating the same to be
falling u/s. 50 (2) of the Act and framed the assessment order.
The Assessee, felt aggrieved, filed appeal before the CIT
(Appeals). The Commissioner of Appeals allowed the Assessee’s appeal insofar as
it related to the issue of deduction. He held that when it was an undisputed
fact that the Assessee has sold their entire running business in one go with
its assets and liabilities at a slump price and, therefore, the provisions of
section 50 (2) of the Act could not be applied to such sale. He held that it
was not a case of sale of any individual or one block asset which may attract
the provisions of section 50 (2) of the Act. He then examined the case of the
Assessee in the context of definition of “long term capital gain” and
“short term capital asset” and held that since the undertaking itself
is a capital asset owned by the Assessee nearly for six years and being in the
nature of long term capital asset and the same having been sold in one go as a
running concerned, it cannot be termed a “short terms capital gain”
so as to attract the provisions of section 50 (2) of the Act as was held by the
Assessing Officer. The CIT (Appeals) accordingly allowed the Assessee to claim the deduction as was claimed by them before the Assessing Officer.
The Revenue felt aggrieved of the order of the CIT (Appeal),
and filed an appeal before the Income Tax Appellate Tribunal. The Tribunal
concurred with the reasoning and the conclusion arrived at by the Commissioner
of Appeal and accordingly dismissed the Revenue’s appeal.
The Revenue, felt aggrieved of the order of the Tribunal, and
carried the matter to the High Court in further appeal u/s. 260-A of the Act.
By impugned order, the High Court dismissed the appeal holding that the appeal
does not involve any substantial question of law within the meaning of section
260-A of the Act.
It was against this order that the Revenue felt aggrieved and
carried the matter to the Supreme Court in appeal by way of special leave.
The Supreme Court held that no fault could be found in the
reasoning and the conclusion arrived at by the CIT (Appeals) in his order
which, according to the Supreme Court was rightly upheld by the Tribunal and
then by the High Court and called for no interference by it.
According to the Supreme Court, the case of the Respondent
(Assessee) did not fall within the four corners of section 50 (2) of the Act.
Section 50 (2) applies to a case where any block of assets are transferred by
the Assessee but where the entire running business with assets and liabilities
is sold by the Assessee in one go, such sale could not be considered as
“short-term capital assets”. In other words, the provisions of
section 50 (2) of the Act would apply to a case where the Assessee transfers
one or more block of assets, which he was using in thw running of his business.
Such was not the case here because in this case, the Assessee had sold the
entire business as a running concern.
The Supreme Court drew
support with the law laid down by it in Commissioner of Income Tax, Gujarat
vs. Artex Manufacturing Co. 1997 (6) SCC 437 and in Premier Automobiles
Ltd. vs. Income Tax Officer and Anr. 264 ITR 193
The Supreme Court did not find any merit in the
appeal and was accordingly dismissed.
