IN THE ITAT MUMBAI BENCH ‘B’
Narotamdas Bhau
v.
Assistant Commissioner of Income-tax
S.C. Tiwari, Accountant Member and
T.K. Sharma, Judicial Member
IT Appeal No. 5029 (Mum) of 2006
[Assessment Year 2004-05]
May 8, 2007
I Section
50 of the Income-tax Act, 1961 - Capital gains - Computation in case of
depreciable assets - Assessment Year 2004-05 - Assessee, a partnership firm,
Assessee, had purchased a house property on 22-10-1963 - During previous year,
assessee had sold said property and declared gain arising on sale of property
as long term capital gain - Assessee had always shown income from said property
under head ‘Income from house property’ - Assessing Officer having noticed that
assessee had claimed depreciation on said property and same had been allowed to
assessee for 40 years invoked provisions of section 50 and worked out short
term capital gain on sale of property under section 50 and charged same to tax
- Whether Assessing Officer was justified in his action - Held, yes
II Section
14A of the Income-tax Act, 1961 - Expenditure incurred in relation to exempt
income - Assessment year 2004-05 - Whether dividend income can be earned by
incurring no or nominal expenditure - Held, no - Whether all expenses connected
with the exempt income have to be disallowed under section 14A whether it is
direct or indirect - Held, yes - Whether Assessing Officer is statutorily
required to compute the disallowance under section 14A in the manner provided
by sub-sections (2) and (3) of section 14A - Held, yes
The assessee, a partnership firm, had purchased a property on 22-10-1963 for Rs. 2,41,551. During the previous year, the assessee had sold the said property and declared the gain arising on sale of the property as long term capital gain. The Assessing Officer verified the returns of the assessee for the earlier assessment years 2001-02 to 2003-04 and observed that the assessee had shown W.D.V. of the property as on 31-3-2003 at Rs. 4,891/- whereas as per statement of depreciation for assessment year 2004-05, the assessee had not shown the property in the chart for depreciation which indicated that the assessee had sold the depreciable asset on which depreciation was claimed in earlier years. The Assessing Officer further asked the assessee to show-cause as to why the long term capita gain on sale of house property be not treated as ‘short term capital gain’ as per provisions of section 50. The assessee, in reply submitted that the property was not business asset of the firm that the income from the property had already been shown as income under the head ‘Income from house property’; that both the claim of depreciation and allowance of depreciation in respect of the property were outside the provision of the Act inasmuch as no depreciation could have been claimed or allowed in respect of the said property, and that the total depreciation allowed in respect of the property amounted to Rs. 2,36,660. The Assessing Officer rejected the submissions of the assessee and worked out the short term capital gain on sale of the property under section 50 and charged the same to tax.
On appeal, the Commissioner (Appeals) upheld the action of the Assessing Officer treating the property as a depreciable asset and treating the gain arising out of transfer of the said property as short term capital gain under section 50.
On further appeal:
The assessee-firm had purchased the said property on 22-10-1963. The
original cost of the property was Rs. 2,41,551. Upto the year ending on
31-3-2003, the assessee had claimed depreciation amounting to Rs. 2,36,660/-.
Thus W.D.V. as on 31-3-2003 was Rs. 4,891. The depreciation on the property,
which was forming part of a block of asset had been allowed to the assessee for
about 40 years. Section 50 nowhere provides to examine whether the depreciation
claimed in past was right or wrong. It is the marginal note to section 50
contained the phrase ‘depreciable assets’ whereas in the body of section 50,
legislature has used the phrase ‘assets forming part of a block of asset,
depreciation has been allowed’. It is
well settled law that in a taxing Act, one has to look merely at what is
clearly said. There is no room for any intendment. There is no equity about
tax. At any rate, there can be no justification for restricting the section by
the marginal note, and the marginal note cannot certainly control the meaning
of the body of the section if the language employed therein is clear. In
section 50 language implied by the legislature is clear and they have used the
word depreciation has been allowed whereas the user of phrase is ‘depreciable
asset’. Keeping in view the fact that marginal note cannot control the meaning
of the body of the section. The Assessing Officer had rightly invoked the
provisions contained in section 50 and computed the short term capital gains.
Further the provisions contained in section 112(d) are applicable to the long
term capital gains and not in respect of short term capital gain. Hence, the
impugned order to be upheld. [
The assessee earned dividend income amounting to Rs. 25,90,378 which was exempt under section 10(33) and claimed that since the entire amount of sale proceeds of the house was invested in Mutual Funds, there was no expenditure incurred for earning the dividend income and therefore, no disallowance was called for under section 14A. The Assessing Officer disallowed the assessee’s claim and estimated the expenditure incurred on earning the dividend income at Rs. 25,000 and accordingly disallowed the same under section 14A.
On appeal, the Commissioner (Appeals) upheld the impugned order.
On second appeal:
Section 14A clearly makes a distinction between exempt income and taxable
income. It is difficult to accept the hypothesis that one can earn substantial
dividend income without incurring any expenses whatsoever including management
or administrative expenses. It is therefore, not correct to say that dividend
income can be earned by incurring no or nominal expenditure. As per provisions
of sub-sections (2) and (3) of section 14A inserted by the Finance Act, 2006,
all expenses connected with the exempt income have to be disallowed under
section 14A whether it is direct or indirect. Moreover, it is no longer open to
the Assessing Officer to apply his discretion in computing the disallowance or
make adhoc disallowance under section 14A. The Assessing Officer is statutorily
required to compute the disallowance under section 14A in the manner provided
by sub-sections (2) and (3) of section 14A.
Accordingly the impugned order passed by the Commissioner (Appeals) was
set aside and the matter was restored to the Assessing Officer for a fresh
decision in the light of the provisions of section 14A including sub-sections
(2) and (3) thereof. [
It was also held by the Tribunal that for the year under consideration the Assessing Officer had rightly assessed the income from the aforesaid property under the head ‘Income from house property’ at Rs. Nil, as in the year consideration neither the property was used for the purposes of business, nor was let out.