The Commissioner Of Income Tax-Ii v. M/S. Contractor & Company

IN THE HIGH COURT OF JUDICATURE AT BOMBAY O. O. C. J. INCOME TAX APPEAL NO.1940 OF 2009 The Commissioner of Income Tax-II..Appellant.Vs. M/s. Contractor & Company..Respondent. .... Mr. Vimal Gupta for the Appellant. Mr. A.V. Borwankar i/b Priten Killedar for the Respondent. .... CORAM:DR. D.Y. CHANDRACHUD, & J.P.DEVADHAR, JJ. 4th January, 2010. P.C.: 1.The following questions of law have been framed in the appeal by the Revenue against the judgment of the Income Tax Appellate Tribunal dated 29th April, 2008 : "1.Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in allowing the adjustment of the cost of land by cost inflation index and treating the sale of land as a long term capital gain, even though the Respondent Assessee has itself claimed depreciation on the land since 1948? 2.Whether the Respondent assessee is allowed to give different treatment to the asset in question from the AY 1948-49 onwards, while claiming depreciation and in AY 94-95, while claiming capital gain?" 2.The Assessment Year in question is 1995-96. The property in question which is situated at Manmad was purchased by the assessee on 2nd December, 1948 for a total consideration of Rs.50,000/- out of which Rs.15,000/- was paid for machinery and Rs.35,000/- was paid for the building. Depreciation was claimed on the entire amount of Rs.35,000/- treating the same as building. The assessing officer concluded that once the assessee claimed depreciation on the entire amount of Rs.35,000/- which included the consideration for the land on which the building was constructed, it would not be open to him to contend that a part of the consideration realized by the assessee on the subsequent sale of the property was for the value of the land. The assessee, it may be noted, sold the property for a consideration of Rs.22 lacs in the Assessment Year in question and claimed that the amount attributable towards the value of the building and machinery was Rs.2 lacs, the balance being the value of the land. The assessment was reopened on 26th March, 2002 on the ground that the taxation of long term capital gains was liable to be made inasmuch as the assessee was not entitled to claim depreciation on the entire cost of the theater including the land and it was not open to him to claim the fair market value of the land as on 1st April, 1981 as its cost of acquisition. Aggrieved by the order of the assessing officer the assessee moved the Commissioner of Income Tax (Appeals). The CIT (A) held that an amount of Rs.20 lacs out of the total sale consideration was attributable to the sale of the land and the balance was attributable to the sale of the building. However, the CIT (A) held that since the assessee had claimed depreciation on the land as well as the building, the cost of acquisition of the land would have to be regarded as nil. Appeals were filed before the Tribunal both by the assessee and by the department. The contention of the assessee was that the CIT (A) should have held that the cost of acquisition of the land was the fair market value as on 1st April, 1981 as adjusted for indexation. According to the Revenue the entire amount of capital gains was taxable as a short term capital gain. as adjusted for indexation. According to the Revenue the entire amount of capital gains was taxable as a short term capital gain. 3.The Tribunal has noted that the assessee had purchased the theater together with the land in 1948. The land was situated at Manmad which was then a remote area at a time when land was available in plenty and a major part of the consideration represented consideration towards the purchase of the building. The value of the land was considered to be relatively insignificant. It was thus, that the entire cost was treated bonafide as representing the cost of the building. The Tribunal held that nonetheless upon the sale of the property during the course of the Assessment Year in question, the assessee was entitled to a bifurcation of the sale consideration and that the CIT (A) was justified in coming to the conclusion that an amount of Rs.20 lacs out of the total sale proceeds was attributable to the sale consideration for the land. In terms of Section 55(2)(b) (1) the assessee had an option to adopt fair market value as on 1st April, 1981, since the asset was acquired before that date, as its cost of acquisition and to adjust it by the capital gains indexation factor. The Tribunal held that this was a statutory right which could not be declined to the assessee. The assessee was thus held to be entitled to be justified in the claim that the value as on 1st April, 1981 as adjusted by the indexation factor be taken as the cost of acquisition for the purpose of computing the long term capital gains. The assessing officer was directed to recompute the capital gains in the light of the aforesaid observations. 4.Insofar as the first question is concerned, the question as framed proceeds on the basis that the assessee claimed depreciation on the land since 1948. This, as a matter of fact, is contrary to the finding of fact in paragraph 5 of the judgment of the Tribunal. The Tribunal has arrived at a finding that the value of the land was insignificant when the property was acquired in 1948 and it was in that situation that the major part of the consideration was regarded as consideration for the purchase of the building. The assessee bonafide treated the entire cost of land and building as representing the cost of the building and this was accepted by the Revenue. Assessments were made and they have attained finality. In these circumstances, no fault can be found with the order of the Tribunal. The appeal does not raise any substantial question of law and is accordingly dismissed. (DR.D.Y.CHANDRACHUD, J.) (J.P.DEVADHAR, J.)