Tca/143/2009 Of M/S Jaidayal Prannath Kapur v. The Income Tax Officer

In the High Court of Judicature at Madras Dated : 18.9.2018 THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAMAND THE HONOURABLE MRS.JUSTICE V.BHAVANI SUBBAROYAN Tax Case Appeal No.143 of 2009 M/s.Jaidayal Prannath Kapur ...Appellant Income Tax Officer, Ward VIII(4), Chennai...Respondent APPEAL under Section 260A of the Income Tax Act, 1961against the order dated 18.7.2008 in ITA No.1010/Mds/2008 on thefile of the Income Tax Appellate Tribunal Madras 'B' Bench forthe assessment year 2004-05 against the order of theCommissioner of Income Tax(Appeal)IX Chennai made in I.T.A. No.358/2006-2007 dated 31.03.2008 and against the order of theIncome Tax officer(Business Ward VIII(IV) Chennai 6 made inPAN/GIR No.AAAFJ3186G dated 29.12.2006 for the Assessment year2004-2005. Judgment was delivered by T.S.SIVAGNANAM,J The Revenue has preferred this appeal challenging the orderdated 18.7.2008 passed by the Income Tax Appellate Tribunal inITA.No.1010/ Mds/2008 for the assessment year 2004-05. 2. The above appeal has been admitted on 22.6.2009 on thefollowing substantials question of law : “i. Whether the Appellate Tribunal iscorrect in law in concluding that the saleof land/property was correctly subjected tocapital gains taxation in terms of Section50 of the Act as against the computationreported as per Section 45 read with Section48 of the Act ? and ii. Whether the Appellate Tribunal iscorrect in law in sustaining the action ofthe respondent in treating the long termcapital loss as speculation loss even thoughthe findings on the non delivery ofscrip/shares by the share broker on behalfof the appellant herein were not correct ?” 3. The assessee is a partnership firm dealing in purchaseand sale of paper. For the assessment year under consideration(2004-05) relevant to the previous year ending 31.3.2004, thereturn of income was filed showing a loss of Rs.40,486/-. Thesaid return was initially accepted under Section 143(1) of theIncome Tax Act, 1961 (hereinafter called the Act) on 27.6.2006.During scrutiny assessment, which was later framed by theAssessing Officer on 29.12.2006, the assessed income wasdetermined at Rs.1,36,22,800/- and while doing so, the AssessingOfficer applied the provisions of Section 50 of the Act tocompute the capital gains arising from the transfer of propertyowned by the assessee situated in Chennai. 4. According to the assessee, the entire asset along withland and building were shown in the balance sheet of the oldfirm, to which, the assessee had succeeded and the depreciationon the building had been claimed and deducted from theconsolidated total. The purchase price of the land was stated tohave not been shown distinctly under the head 'land', while thecost of the building was not shown separately. The assesseefurther stated that the depreciation was not separately deductedfrom the written down value (WDV) of the building while the samewas deducted from the consolidated value of the land andbuilding. The land and building in question was sold under ajoint development agreement to a builder for construction of acommercial and residential complex. The assessee, sent a letterdated 26.12.2006 to the Assessing Officer, pointing out theabove facts and objecting to the proposal to invoke Section 50of the said Act. 5. The Assessing Officer did not agree with the contentionsadvanced by the assessee, but held that the assessee failed tofurnish any concrete proof to show that only the building hasbeen subjected to depreciation all along, that the land was nota part of the schedule for fixed asset at any point of time and 5. The Assessing Officer did not agree with the contentionsadvanced by the assessee, but held that the assessee failed tofurnish any concrete proof to show that only the building hasbeen subjected to depreciation all along, that the land was nota part of the schedule for fixed asset at any point of time and that the land was shown separately elsewhere in the balancesheet under asset projections. The Assessing Officer furtherheld that the assessee had not given any satisfactory replysupported by documentary evidence and that the provisions ofSection 50 of the Act are squarely applicable to the assessee'scase. Further, the Assessing Officer, while computing the shortterm capital gains in terms of Section 50 of the Act, hadadopted the sale consideration at Rs.3,84,35,774/- as againstthe contracted value of Rs.2.07 Crores adopted in theircomputation. 6. With regard to the claim of long term capital loss on thesale of shares, the assessee contended that the shares werebought through M/s. Aditya Securities Limited while enteringinto a contract of Port Folio Management on 16.11.2001 and thatthe share broker had bought and sold shares on behalf of theassessee and after deducting the sale value of the shares, a sumof Rs.1,05,52,013/- was claimed as long term capital loss. 7. The Assessing Officer did not agree with the submissionsmade by the assessee, however, held that the memorandum ofagreement gave a proxy to the latter and that the contents ofthe agreement were formulated in a convenient and maneuveringmanner in as much as the clauses in the contract would soundalmost dictatorial. Accordingly, the assessee's contentions wererejected and the Assessing Officer disallowed the claim of setoff of speculative loss against capital gains. 8. As against the assessment order dated 29.12.2006, theassessee filed an appeal before Commissioner of Income Tax(Appeals)-IX [for short the CIT (A)]. The appeal was dismissedvide order dated 31.3.2008. Challenging the order passed by theCIT (A), the assessee filed an appeal before the Tribunal, whichwas dismissed by order dated 18.7.2008, which is impugned inthis tax case appeal. 9. We have heard Mr.A.S.Sriraman, learned counsel appearingon behalf of the appellant and Mr.M.Swaminathan, learned SeniorStanding Counsel for the Revenue. 10. After carefully going through the facts of the case andthe stand taken by the assessee before the Assessing Officer, onthe first issue as to whether the depreciation was claimed onthe land, we find that the factual explanation given by theassessee was not properly construed. 11. The assessee, vide letter dated 21.12.2006, hadspecifically stated that no depreciation was claimed on thebuilding after 31.3.1998, that the land with the abandonedbuilding was handed to the developer for development, that thesame was demolished, that the entire block of the abandoned https://hcservices.ecourts.gov.in/hcservices/ building was claimed as a short term capital loss and that thisshort term capital loss had been debited to the profit and lossaccount. The assessee further stated that they never claimed anydepreciation on the land, that no assessee can make a claim ofdepreciation on the land, that in the depreciation statementalso, the description given was with reference to a buildingonly, that no depreciation had ever been claimed in respect ofthe land, as the land never depreciates and the land onlyappreciates and that the capital gains arise on sale of theland. The assessee further contended that in the depreciationschedule, nowhere a land is shown as asset eligible fordepreciation and that there is no rate prescribed for allowingdepreciation on land. 12. Therefore, the Assessing Officer is not correct instating that the land sold is a short capital asset, on which,depreciation had been claimed. 12. Therefore, the Assessing Officer is not correct instating that the land sold is a short capital asset, on which,depreciation had been claimed. 13. Further, referring to the development agreement, it wascontended that the agreement clearly stated that the land alonehad been the subject of development and that the building in theland had been demolished. 14. The Assessing Officer was of the view that the assesseedid not produce sufficient records to establish their contentionthat no depreciation was claimed on the land, but concluded thatin the absence of any satisfactory reply supported by documents,the provisions of Section 50 of the Act squarely becameapplicable to the assessee's case. The said finding wasconfirmed by the CIT (A) as well as the Tribunal. 15. An identical issue came up for consideration before theDivision Bench of this Court in the case of CIT Vs. Union Co.(Motors) Ltd. [reported in (2006) 283 ITR 0445]. In the saidcase, the assessee owned an extent of land in Bangalore with anequivalent built up area and the same was treated as abusiness asset and depreciation was claimed. The assesseetherein sold the property and claimed the gains arisingtherefrom as long term capital gains. The Assessing Officertreated the same as short term capital gains under Section 50 ofthe Act on the ground that consolidated value was given to theland and building and no break-up was possible. Accordingly, thedifference between the WDV and the sale consideration wastreated as short term capital gains. On appeal before the CIT(A), the finding was set aside noting that the purchaser of theproperty in the said case had sought permission to demolish thesuperstructure, that there was no value for the building andthat consequently, what remained was only the land, which wasnot a depreciable asset, as no depreciation could be taken onthe land and it was held that the provisions of Section 50 ofthe Act had no application to the case of the assessee therein. The said finding of the CIT (A) was confirmed by the Tribunal.Challenging the same, the Revenue preferred an appeal before theDivision Bench of this Court. The substantial question of law,which was framed for consideration in the said case, was as towhether the Tribunal was right in holding that the capitalgains arising on the sale of land and building, on which,depreciation had been claimed, would not be hit by theprovisions of Section 50 of the Act. 16. We find that the substantial question of law, which wasframed for consideration in the case of Union Co. (Motors) Ltd.,is identical to question No.1 framed in this appeal. The saidquestion was answered in favour of the assessee following theearlier decision in the case of ACIT Vs. Raka Food Products[reported in (2005) 277 ITR 261 (Mad.)]. The operative portionsof the judgment in Union Co. (Motors) Ltd., read as follows : case, it is clear that the saleconsideration made by the purchaser is onlyfor the land, since the building had novalue and therefore, got demolished.” 17. In our considered view, the above decision is a straightanswer to the case of the Revenue. The Revenue does not disputethe fact that land is not a depreciable asset and also the legalposition that Section 50 of the Act deals only with transfer ofdepreciable assets. 18. The case before us is a better case on facts than thecase of Union Co. (Motors) Ltd., wherein the purchaser hadapplied for demolition of the building and subsequentlydemolished whereas in the case of the assessee herein, thebuilding had already been demolished in terms of the conditionscontained in the joint venture development agreement. case, it is clear that the saleconsideration made by the purchaser is onlyfor the land, since the building had novalue and therefore, got demolished.” 17. In our considered view, the above decision is a straightanswer to the case of the Revenue. The Revenue does not disputethe fact that land is not a depreciable asset and also the legalposition that Section 50 of the Act deals only with transfer ofdepreciable assets. 18. The case before us is a better case on facts than thecase of Union Co. (Motors) Ltd., wherein the purchaser hadapplied for demolition of the building and subsequentlydemolished whereas in the case of the assessee herein, thebuilding had already been demolished in terms of the conditionscontained in the joint venture development agreement. 19. The learned Senior Standing Counsel for the Revenueplaces reliance on the decision of the High Court of Bombay inthe case of Smt. Meena Pamnani Vs. CIT, Mumbai [reported in(2018) 404 ITR 548]. We have perused the facts of the said casewherein the case pertained to an individual assessee for theassessment year 1991-92 and she was carrying on weaving work onjob basis in her three concerns. There were eight looms inM/s.Gitanjali Silk Mills and four each in the other concerns. Itwas the case of the assessee that the looms of M/s.GitanjaliSilk Mills were operated from gala No.210 and the other looms ofthe sister concerns were operating from gala No.211. In thebackground of these facts, the Court held that the case wasdistinct, that no claim for depreciation was in issue and thatthe question of thrusting it upon the assessee did not,therefore, arise. 20. The decision in Smt. Meena Pamnani is whollyinapplicable to the facts of the present case and hence, it doesnot render any assistance to the case of the Revenue. 21. Therefore, we find that substantial question of law No.1framed for consideration is fully covered by the decision in thecase of Union Co. (Motors) Ltd. Accordingly, substantialquestion of law No.1 is answered in favour of the assessee andagainst the Revenue. 22. The second substantial question of law pertains to lossof sale of shares. The Assessing Officer found that the assesseehad not filed proper details. The Assessing Officer gatheredsome information from M/s.Aditya Securities under Section 133(6)of the Act. But, what was furnished was only a ledger accountand the details of the contract notes, purchase/sales, scripwise, brokerage, credit extension given to the assessee couldnot be provided by the assessee to the Assessing Officer. https://hcservices.ecourts.gov.in/hcservices/ 23. Further, the Assessing Officer found that the depositoryparticipatory client name was furnished as Ritu Kumar, who wasnot the assessee. Based on the said information, the AssessingOfficer took the view that the shares have not been transferredand accordingly, treated the transaction as speculative. Thisfinding was confirmed by the CIT(A) and while doing so, he tooknote of Securities and Exchange Board of India Regulations, 1993and held that the assessee had not claimed short term capitalloss on the sale of shares without proving that the shares werepurchased in the name of the assessee and sold by the FundManager on behalf of the assessee. The transactions having beenfound to be not verifiable, the CIT (A) concurred with the viewtaken by the Assessing Officer. This finding was affirmed by theTribunal. When the assessee has not been able to prove as to whythe transaction in shares should not be treated as speculativetransaction, we find no reason to interfere with the concurrentfinding of facts recorded by the Assessing Officer as confirmedby the CIT (A) as well as the Tribunal. 24. In the assessment order, the Assessing Officer has takennote of the decision of the Hon'ble Supreme Court in the case ofDavenport & Co. Pvt. Ltd. Vs. CIT [reported in (1975) 100 ITR715] wherein the Hon'ble Supreme Court concluded that the words'actual delivery' in Explanation (2) to Section 24 of the IncomeTax Act, 1922, which corresponds with Section 43(5) of the 1961Act, held to mean real as opposed to notional delivery. TheHon'ble Supreme Court pointed out that for income tax purposes,speculative transaction means what the definition of theexpressions in Explanation (2) says. Whether a transaction isspeculative in the general sense or under the Contract Act isnot relevant for the purpose of the said Explanation and theExplanation does not invalidate speculative transactions, whichare otherwise legal, but gives a special meaning to thatexpression for the purposes of income tax only. 25. Thus, in the absence of any evidence produced by theassessee to indicate that there were, indeed, transactions ofpurchase and sales of shares by the assessee, the AssessingOfficer rejected the contention of the assessee and held thatthe purported loss of sale of shares is a speculation loss andcannot be set off against other gains except gains, if any, onany other speculation business as envisaged under Sub-Section(1) of Section 73 of the Act. Thus, we find that the reasonsassigned by the Assessing Officer as confirmed by the CIT (A) aswell as the Tribunal are perfectly legal, valid and do not callfor any interference. Accordingly, substantial question of lawNo.2 is answered in favour of the Revenue and against theassessee. https://hcservices.ecourts.gov.in/hcservices/ allowed. Substantial question of law No.1 is answered in favourof the assessee and against the Revenue. Substantial question oflaw No.2 is answered in favour of the Revenue and against theassessee. No costs. -s/d- Assistant Registrar(CS-IX) True Copy Sub-Assistant Registrar To1.Income Tax Officer, Ward VIII (4), Chennai.2.The Income Tax Appellate Tribunal, Madras 'B' Bench.+1 CC to Mr.S. Sriram, Advocate sr 65079.+1 CC to Mr.M. Swaminathan, Advocate sr 64805.TCA.No.143 of 2009VSNII(CO)SP(12/10/2018)