22 September, 2011

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DCIT Versus I.K. International (P) Ltd. (ITAT New Delhi)

Exemption u/s 54EC - Sale of land - Long term capital gain or not - Find that assessee has produced valuation report at the time of purchase as well as sale. In Remand, Assessing Officer has not pointed out any lacunae in the same - Moreover, the cost of land so bifurcated was being already reflected in the books of accounts and no depreciation was claimed on that account - In the case of C.I.T. vs. D.C. Ramachandra Rao [1997 -TMI - 16361 - MADRAS High Court], Hon'ble Madras High Court has held that it is possible to bifurcate the capital gain arising out of sell of land and building, even if, they are sold as one unit - Land is an independent and identifiable capital asset and it continues to remain so, even after construction of building thereon - It was further held that land held by the assessee for a period exceeding 36 months - building constructed later and held by the assessee for a shorter period, land cannot be treated as short term capital assets - Hence, do not find any infirmity in the Ld. Commissioner of Income Tax (Appeals)'s order accepting long term capital gain arising out of the sale of land. Hence, there is also no infirmity in Ld. Commissioner of Income Tax (Appeals)'s directions to allow exemption u/s 54EC - Thus, the appeal of the revenue is dismissed.



No. - ITA. No. 3375/Del/2010
Dated - November 12, 2010
C.L. Sethi, Shamim Yahya, JJ.
RIS Gill CIT(DR) for the Appellant  
Ajay Wadhwa, CA, for the Respondent  
ORDER  
Shamim Yahya:  
This appeal by the revenue is directed against the order of Learned CIT(Appeals) dated 06.05.2010 and pertains to assessment year 2006-07. The issue raised by the revenue reads as under:

"1. On the facts and circumstances of the case and in law, the learned CIT(Appeals) erred in holding the sale of the asset as resulting into Long Term Capital Gain when the asset so sold was clearly established to be part of the depreciable assets on which depreciation had been claimed resulting into invocation of the provisions of sec. 50(2) of the IT Act.

2. On the facts and circumstances of the case and in law, the learned CIT(Appeals) erred in directing the A.O. to allow exemption to the assessee under sec.54EC of the Act holding the sale of the asset as long term capital gain".

2. The assessee in this case is engaged in the business of trading and publishing of educational books. During the course of assessment proceedings, A.O. observed that assessee has shown long term capital gain of Rs. 2,83,99,571. The same has been claimed under section 54EC of the Income-tax Act, 1961 as the investment has been made in bonds to the extent of Rs. 2,90,00,000. The assessee had also shown short term capital gain to the extent of Rs. 86,28,216. The Assessing Officer asked the assessee to justify the long term capital gain and furnish evidence regarding the same. Assessee responded that the loss is on account of property at S-7 and S-8, Green Park, New Delhi. Assessee also submitted photocopy of purchase and sale deed. It was further submitted that assessee had purchased the property at S-7 and S-8, Green Park, New Delhi for Rs. 2,16,00,000 including stamp duty of Rs. 16,00,000 on 30.03.2001, 25.04.2001 and 03.07.2001 shown under the head 'fixed assets land Rs. 1,48,00,000 and Building Rs. 68,00,000. It was further submitted that assessee has made construction/alteration during the year as per requirement and charged depreciation accordingly year to year. It was further submitted that assessee had never charged depreciation on land. The property was sold for Rs. 5,75,00,100 under the bifurcation land Rs. 4,72,00,000 and building Rs. 1,03,00,000. The capital gain arising form the sale of the assets was invested in the Bonds 'Rural Electrification Corporation Ltd. under sec. 54EC.

3. Assessing Officer further observed that property was purchased for Rs. 2,16,00,000 including stamp duty charges. He further observed that building has been purchased and there is no working lost of land or construction. He held that no evidence had been given by the assessee to justify adopting the cost of land at Rs. 1,48,00,000. He observed that the assessee had sold the entire building as well as furniture and fixture hence he observed that assessee's claim that it has sold land building and other assets separately is not correct. Assessing Officer held that assessee has never purchased the land and building separately and it is not possible to bifurcate the value as shown by the assessee in the balance sheet or in the calculation of capital gain. The claim of assessee treating the land as long term assets is, therefore, not correct and acceptable. Thus, Assessing Officer rejected the claim of long term capital gain and proceeded to compute the capital gain by applying the provisions of sec. 50(2) of the Act. In his computation, he came to a figure of Rs. 4,30,40,600 as short term capital gain in view of the provisions of section 50(2) of the Act.

4. Assessing Officer further held that assessee's claim of deduction under section 54EC of the Act is not allowable because the depreciable assets i.e. building has been purchased on which there are additions up to 31.3.2003. Since the building along with furniture and fixtures has been sold on 19.8.2005 i.e. within a period of three years. Hence Assessing Officer held that assessee's claim of long term capital gain is not correct and, therefore, the claim of deduction under sec.54EC of the Act is not allowable.

5. Upon assessee's appeal, Learned CIT(Appeals) considered that arguments and submissions filed in this regard. He observed that assessee had purchased property situated at S-7 and S-8, Green Park, New Delhi comprising of land and two and half storied building purchased vide sale deed executed on 30.3.2001 and 25.4.2001 relevant to the assessment year 2001-02 and 2002-03 for a consideration of Rs. 2,16,00,000 and a further sum of Rs. 24,64,243 was spent on cost of construction which was completed on 24.11.2001. In the balance sheet, for the year ended on 31.3.2001, 31.3.2002, the value of land was separately shown at Rs.1.48 crores and the value of the building was shown at Rs. 92,64,243 in the schedule of interest assets forming part of the balance sheet. The break up of the value of land and building in respect of S-7 and S-8, Green Park, New Delhi sold during the year was done on the basis of two valuation reports, one close to the date of purchase and another close to the date of sale vide valuation report dated 30.6.2001 and 31st July 2005 respectively. The said property was sold on 29th August 2005 as per the sale deed filed. Hence, the assessee submitted that Assessing Officer was not at all justified in treating the holding period of land and building as less than 36 months and thereby treating the capital gain as short term and denied the exemption under sec. 54EC of the Act.

6. Since the valuation reports were not filed before the Assessing Officer, a remand report was called for by the Assessing Officer. Vide his report dated 8.4.2010 submitted that valuation report of the approved valuer may not be admitted as the conditions laid down under Rule 46A of the Income-tax Rules are not fulfilled by the assessee company. On merit, Assessing Officer submitted that the transaction for sale was composite in nature and the resultant gain was short term in nature. Learned CIT(Appeals) held that he was of the opinion that Assessing Officer was not justified in saying that valuation report now submitted by the assessee are not admissible evidence under Rule 46A of the Income-tax Rules. Learned CIT(Appeals) gave a finding that on perusal of the extract of order sheet entry filed by the assessee he found that during the course of assessment proceedings, Assessing Officer never asked the assessee to produce the valuation reports which were available with the assessee. He noted that in fact no notice to explain the valuation basis of the property or the intent composite sale was given to the assessee hence Learned CIT(Appeals) held that additional evidence was admissible under Rule 46A of the IT Rules. The assessee further submitted a chart showing computation of capital gain and submitted as under:
Sales Consideration of Land S-7 and S-8, Green Park, New Delhi
4,72,00,000
Less:- Transfer Expenses - Index Cost of Acquisition 10,16,521
2000- 200290,00,000x(497/406) 1,10,17,241
2001-2002 58,00,000x(497/426) 67,66,667 1,88,00,429
Long-term Capital Gain
2,83.99.571

7. Further assessee relied upon Hon'ble Madras High Court's decision in the case of CIT vs. D.L. Ramchandra Reassessment order 236 ITR 51. Several other decisions were also relied upon including the case of CIT vs. Vimal Chand Culecha 201 ITR 442, Smt. Laxmi B. Menon and another 204 ITR 76 (Ker.), CIT vs. CITI Bank 261 ITR 571 (Bom) and CIT vs. Ace Builders 281 ITR 210. Considering the above, Learned CIT(Appeals) held that he was of the view that Assessing Officer was not at all justified in treating the holding period of land at less than 36 months and thereby denying the exemption claimed under sec. 54EC of the Act on sale of land. Hence, he directed the Assessing Officer to allow exemption under section 54EC as claimed by the assessee company.

8. Against this order, revenue is in appeal before us. We have heard both the counsels and perused the record. We find that the valuation reports of the land and building which is the basis of assessee's claim was never submitted before the Assessing Officer. Learned CIT(Appeals) has admitted the same as additional evidence under Rule 46A holding that assessee was prevented by sufficient cause for filing the valuation reports. We find that as per assessee's submissions, the total purchase value was Rs. 2,16,00,000 on which cost of improvement completed on 24.11.2001, amounting to Rs. 24,64,243 was added and the total cost of the property was Rs. 2,40,64,243. Further in the books of account, the land and building was said to have been separately shown as under:
Property
Description Property
Year of Capitalization
Land
Building
Total
A S-7, Green Park, New Delhi. F.Y. 2000-01 90,00,000 49,32,000 1,39,32,000
B S-8, Green Park, New Delhi. F.Y. 2001-02 58,00,000 18,68,000 76,68,000
A and B Cost Improvement F.Y. 2001-02
24,64,243 24,64,342
Total Capitalization on account of A and B (S-7 and S-8) 1,48,00,000 92,64,243 2,40,64,243
C A-06 Ground Floor, Royal Ind.Estate, Wadals, Mumbai-400 031 F.Y.2002-03 NIL 31,83,038 31,83,038
D Unit No.G3 and G4, Embassy Centre, Crescent Road, Bangalore- 560 001 F.Y. 2002-03 Nil 30,71,144 30,71,144
Total Capitalization on a/c of Properties C and D Nil 62,54,182 62,54,182

9. We have carefully considered the submissions. We find that assessee has produced valuation report at the time of purchase as well as sale. In Remand, Assessing Officer has not pointed out any lacunae in the same. Moreover, the cost of land so bifurcated was being already reflected in the books of accounts and no depreciation was claimed on that account. In the case of C.I.T. vs. D.C. Ramachandra Rao 236 ITR 51, Hon'ble Madras High Court has held that it is possible to bifurcate the capital gain arising out of sell of land and building, even if, they are sold as one unit. Land is an independent and identifiable capital asset and it continues to remain so, even after construction of building thereon. It was further held that land held by the assessee for a period exceeding 36 months - building constructed later and held by the assessee for a shorter period, land cannot be treated as short term capital assets. This case law clearly applies to the facts of the present case. Other case law referred by the Ld. Commissioner of Income Tax (Appeals) also supports the assessee's proposition.

9.1 Thus, when the value of the land and building has been bifurcated at the time of purchase and so reflected in the books of accounts, any construction in building cannot link to the land at the time of sale also. Assessee has submitted a Valuation Report bifurcated the sale value between land and building. No infirmity in this bifurcation has also been pointed out. In such circumstances, revenue's plea that sale of land cannot be bifurcated from the sale of building cannot be accepted. Admittedly, assessee has held the land for a period exceeding 36 months. In such circumstances, we do not find any infirmity in the Ld. Commissioner of Income Tax (Appeals)'s order accepting long term capital gain arising out of the sale of land. Hence, there is also no infirmity in Ld. Commissioner of Income Tax (Appeals)'s directions to allow exemption u/s 54EC. Accordingly, we uphold the order of the Ld. Commissioner of Income Tax (Appeals).

10. In the result, the appeal of the revenue is dismissed.
Decision pronounced in the open court on 12.11.2010.  

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