This is an appeal by assessee against the order of the Commissioner of Income Tax (Appeals)-9, Hyderabad, dated 20-06-2016 for the A.Y. 2003-04.
2. Briefly the facts of the case are that the assessee is a HUF filed its return of income for the AY 2003-04 on 19/11/2003 admitting loss of Rs. 3,47,090/-. Apart from house property income of Rs. 5,73,694/-, the assessee declared loss of Rs. 19,28,443/- from the business of running a printing press, long term capital gains of Rs. 9,92,793/- and income of Rs. 14,878/- from other sources. The return was processed u/s 143(3) of the Act on 19/03/2004 and refund of Rs. 71,663/- issued.
2.1 The AO noticed from the details filed with the return of income that the assessee determined short term capital loss of Rs. 9,87,702/- on demolition of building and set off the same against the long term capital gains. The loss was computed as under:
Sale consideration of salvage value on demolition 1,00,000
Less: WDV as on 31/03/02 10,87,702
Loss 9,87,702
2.2 The AO opined that as demolition of asset does not constitute transfer of capital asset, prima facie the loss was not allowable and income chargeable to tax had escaped assessment within the meaning of section 147 of the IT Act. Accordingly, notice u/s 148 of the Act was issued to the assessee on 09/03/2010. In response, the assessee filed a letter dated 15/04/2010 requesting that the return filed on 10/11/2003 may be treated as filed in response to the notice issue. The AO issues notices u/s 143(2) and 142(1) and informed that the claim was not allowable as there was no transfer of capital asset and that it was proposed to disallow the claim and to file objections if any in respect of the proposed action. The assessee submitted its written objections on 03/09/2010 and 22/11/2010, stating as under:
"With regard to the above we invite your kind attention to the depreciation Statement shown under Annexure 1 to the 3CD Tax Audit Report for the said assessment year 2003-04. In the said statement, building has been shown as a depreciable asset with opening written down value (WDV) of Rs. 10,87,702/- A reference to the depreciation statement of earlier years would also show that depreciation has been claimed on the said building every year. Therefore the ass t under question is a depreciable asset Once an asset is a depreciable asset and forms a part of a block, and such block of assets has ceased to exist at the end of the previous year the provisions of section 50 of the Act become applicable which deals with capital gain relating to depreciation assets.
The assessee while referring to the provisions of section 43 sub section 6 (c) of the Act stated ' ... it would be clear that "in case of an block of assets the aggregate of the written down value at the beginning of previous year shall have to be considered and duly adjusted by the reduction of the moneys payable in respect of any asset falling within that block which is sold or discarded or demolished or destroyed during that previous year ..... "
Further Explanation to section 41 defines money payable as including any insurance, salvage or compensation money payable in respect thereof .
Thus a harmonious reading of section 43(6)(c) and section 50 of the Act would bring out the fact Where an asset is demolished, and the lock of asset ceases to exist the difference between the written down value and e salvage received shall have to be treated as short term capital gain or short term capital loss, as the casemay be.
In my Income tax case for the assessment year 2003-04 the land had been taken on lease and I had constructed the building several year back. On the expiry of the lease. I was under an obligation to return the land to the landlord. Thus, as per the conditions of the lease I was under a legal obligation to demolish the building. Thus the block of asset "building" ceased to exist on its demolition during the previous year relevant to assessment year 2003-04. The difference between the salvage value and the WDV had been treated as short term capital loss as per law and duly portrayed as such in my IT return.”
2.3 Referring to the above, the assessee submitted that the question of disallowing the short term capital loss of Rs. 9,87,702/- relating to the building does not arise. Further, he submitted that during the reassessment proceedings, the AO took the stand that there had been demolition of an asset and realization of salvage value resulting in the particular block of asset ceased to exist, resulting in extinguishment of rights there. He submitted that the said extinguishment had not come about consequent to transfer as contemplated u/s 2(47) and hence set off of the resulting short term capital loss of (-) Rs. 9,87,702 against other long term capital gain is incorrect. He submitted that the AO has reiterated this stand in the assessment order passed u/s 143(3) of the Act.
2.4 Assessee relied on the decision of Hon’ble Supreme Court in the case of CIT Vs. Grace Collis [2001] 248 ITR 323.
2.5 The assessee submitted that during the assessment proceedings, assessee was informed that the notice u/s 148 had been issued on account of an audit objection raised with regard to the issue relating to set off of short term capital loss. Thus, the opinion of the audit party on the issue involved has determined the issue of notice u/s 148 in case of assessee. He submitted that once this is true, the issue of notice u/s 148 is itself is not valid as held by the Hon’ble Supreme court in the case of Indian and Eastern Newspaper Society vs. CIT, 119 ITR 996.
2.6 After considering the submissions of the assessee, the AO observed that the assessee arrived at short term capital loss of Rs. 9,87,702/- on demolition of building and set off the same against the long term capital gains. The AO was of the view that since the demolition of asset does not constitute transfer of capital asset, prima facie the loss was not allowable and income chargeable to tax had escaped assessment within the meaning of section 147 of the Act. Hence, the AO reopened the assessment and disallowed the short term capital loss of Rs. 9,87,702/-.
3. Aggrieved by the order of AO, the assessee preferred an appeal before the CIT(A).
4. Before the CIT(A), the AR of the assessee reiterated the statement of facts and stated that the notice u/s 148 was issued on account of audit objection.
5. The CIT(A) observed that in the assessment order it was nowhere stated that the assessment was reopened u/s 148 on the basis of audit objection. He, therefore, issued a letter to AO on 04/01/2016 to verify the concerned records and furnish comments as to whether the notice u/s 148 was issued on the basis of audit objection. In response, the AO vide letter dated 01/02/2016 stated as under:
“It is hereby submitted that as per the order sheet noting dated 07/03/2010, the AO has recorded the reasons for reopening of the concerned case and subsequently issued notice u/s 148 on 09/03/2010. The assessment record in one volume is enclosed for ready reference. Accordingly, the appeal may be decided on the merits of the matter.”
5.1 In view of the above, the CIT(A) held that the report of the AO does not mention that the assessment has been reopened on the basis of an audit objection and as such, the contention of the assessee is not acceptable and this ground is therefore dismissed.
6. With regard to the disallowing the set off of short term capital loss of Rs. 9,87,702/- on demolition of building, the AO observed as under:
The assessee's contentions have been given careful consideration but are not acceptable. Under section 43(6) of the Act, 'WDV' of a depreciable asset is def ined in difference situations including demolition destruction of the asset, for the purpose of computing depreciation. The def inition of WDV as laid down in this section is only for the purpose of computing depreciation. Section 50, on the other hand, is applicable to a case where the WDV of a block of assets is reduced to NIL and subsection (2) is specif ically applicable to a situation where the block of assets ceases to exist. However, for arriving at short term capital gain or loss as the case may be under sub section (2), it is essential that there should be a 'transfer" of all the capital assets falling within the block. Here 'transfer' has to be understood in def inition of transfer in section 2(47) includes sale, exchange and relinquishment of the asset or extinguishment of any rights therein. Demolition of an asset which is equivalent to destruction or extinguishment of an asset is not covered by the def inition. Since there is no transfer of asset as contemplated under section 2(47) of the Act, the provisions of section 50 would not come into pay here. A harmonious reading of the sections is not possible as section 50 can be invoked only af ter section 43(6)(c) has been applied. The decision cited by the assessee is also not applicable to the facts of the case in as much as the decisions is not about extinguishment of the asset itself but of extinguishment of the rights therein independent of transfer or consequent to it.
For reasons cited above, computation of short term capital loss on demolition of the building as determined by the assessee is incorrect and not allowable. Since the block of assets has ceased to exist on the last day of the f inancial year no depreciation would be allowable. However, the salvage value of Rs. 1,00,000/- received on demolition of the buildings is a prof it from business and is accordingly reduced from the net loss returned.
7. On appeal by the assessee before the appellate authority, the CIT(A) observed that the assessee relied only on statement of facts and did not file any further submissions on this issue. The CIT(A) held the Assessing Officer had rightly made the addition and not allowing the setoff of short term capital loss. He accordingly, confirmed the disallowance made by the AO.
8. Aggrieved by the order of CIT(A), the assessee is in appeal before us raising the following grounds of appeal:
1. The learned Commissioner of lncome Tax (Appeals)-9, Hyderabad has erred on facts and in law in not allowing the set off of short term capital loss (-) Rs. 987702 against other long term capital gain of the Assessee, failing to note that on the demolition of Building being depreciable Asset, the Block of Asset bad ceased to exist and the rights of the assessee in the said Asset stood extinguished.
2. The learned Commissioner of Income Tax (Appeals)-9, Hyderabad, erred in Law in taking the stand that extinguishment of rights in an Asset consequent to its demolition does not fall within the definition of Transfer' as provided for in section 2(47) of the Act. The learned Commissioner of Income Tax (Appeals)-9, Hyderabad, failed to appreciate the fact that, as held by the Honourable Supreme Court, one cannot approve the view that the expression 'extinguishment of any rights therein" cannot be "extended to mean extinguishment of rights independent of (or) otherwise than on account of transfer. In the result the learned Commissioner of Income Tax (Appeals)-9, Hyderabad, erred in Law in disallowing the set off of short term capital loss on the extinguishment of rights in the Building consequent to its demolition.
3. The learned Commissioner of Income Tax (Appeals)-9, Hyderabad, failed to note that loss arising on the demolition of a depreciable asset represented by the difference between the WDV of the block and the salvage value received clearly represents short term capital loss that qualif ies for set off against other long term capital gain.”
8.1 Before us, the assessee did not contest reopening of assessment u/s 147 of the Act.
9. Ld. AR submitted that CIT(A) erred in Law in taking the stand that extinguishment of rights in an Asset consequent to its demolition does not fall within the definition of Transfer' as provided for in section 2(47) of the Act. He further submitted that CIT(A) failed to note that loss arising on the demolition of a depreciable asset represented by the difference between the WDV of the block and the salvage value received clearly represents short term capital loss that qualifies for set off against other long term capital gain.
10. Ld. DR, on the other hand, relied on the orders of revenue authorities and relied on the decision of ITA Mumbai Bench in case of Shri Dilip Manhar Parekh Vs. DCIT, in ITA No. 6169/Mum/2013, dated 15/04/2016, a copy of which is available on record.
11. We have considered the rival submissions and perused the material facts on record. From the Depredation Statement shown under Annexure I to the 3CD Tax Audit Report for the said assessment year 2003-04, it is seen that Building has been shown as a depreciable asset with opening written down value (WDV) of Rs. 1087702/-. A reference to the depreciation statement of earlier years would also show that depreciation has been claimed on the said Building every year. Therefore the asset under question is a depreciable asset. Once an asset is a depreciable asset and forms apart of a Block, and such block of assets has ceased to exist at the end of the previous year the provisions of Section 50 of the Act become applicable which deals with capital gain relating to depreciable assets.
11.1 The provisions of section 43(6)(c) of the Act read as under:
" In the case of any block of assets,
In respect of any previous year relevant to the assessment year commencing on the 1st day of April, 1988, the aggregate of the written down values of all the assets falling within that block of assets at the beginning of the previous year and adjusted.
By the reduction of the moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any, so, however, that the amount of such 'reduction does not exceed the written down value as so increased."
11.2 From the above it would be clear that "in case of any block of assets the aggregate of the written down value at the beginning of previous year shall have to be considered and duly adjusted by the reduction of the moneys payable in respect of a.ny asset falling within that block which is sold or discarded or demolished or destroyed during that previous year "
11.3 Further Explanation to section 41 defines money payable as "including any insurance, salvage or compensation money payable in respect thereof."
11.4 Thus a harmonious reading of sections 43(6)(c) and section 50 of the Act would bring out the fact where an asset is demolished, and the block of asset ceases to exist, the difference between the written down value and the salvage received shall have to be treated as short term capital gain or short term capital loss, as the case may be.
11.5 In view of the above discussion, I am of the view that the action of the Assessing Officer in adding back the short term capital loss of (-) Rs. 9,87,702/- to the Income of the assessee is erroneous and is not in accordance with the Law. Therefore, I direct the AO to delete the addition made on this count. Accordingly, the grounds raised by the assessee are allowed.
12. In the result, appeal of the assessee is allowed.