ORDER
T.K. Sharma, Judicial Member
1. This appeal filed by the assessee is against the order dated 20-6-2006 of Commissioner (Appeals)-XVI, Mumbai for the assessment year 2004-05. Grounds raised by the assessee are as under :
On the facts and circumstances of the case and in law, the Learned Commissioner (Appeals)-XVI, Mumbai
(i) erred in holding that the assessee’s building, “Bhau Mansion” was used for business, ignoring the fact that Bhau Mansion was let out and earned rental income which was declared and consistently assessed under the head “Income from house property” for the past 20 years, and that this classification of income consistently applied by the lower authorities could not be changed when there was no change in the facts of the case.
(ii) erred in holding that the sum of Rs. 2,75,00,000 realized on the saleof the assessee’s building “Bhau Mansion” attracted the provisionsof Section 50 of the Income Tax Act on the ground that the said BhauMansion was a depreciable asset, ignoring the fact that Bhau Mansion was always a building let out uninterruptedly for the past 20 years to UCO Bank, the rental income from which was consistently shown and also assessed under the head “Income from house property” and was therefore not a depreciable asset.
(iii) erred in holding that the provisions of Section 112(d) were not applicable to the long-term capital gains declared by the assessee.
(iv) erred in denying the assessee’s claim under the head “Income fromhouse property” of loss of Rs. 55,087 on municipal taxes paid on the vacant property.
(v) erred in upholding the ad hoc disallowance of Rs. 25,000 under Section 14A, only on presumptions and conjectures that the assessee would have incurred some expenditure to earn income from dividends.
2. The facts relating to controversy involved in Ground Nos. 1 to 3 are that the assessee is a partnership firm. For the assessment year under appeal, it filed the return of income declaring total income at Rs. 85,48,245 A accompanied with statement of computation of total income, statement of income from house property, long-term capital gain, tax audit report in Form N6. 3CB, Form No. 3 CD along with Schedules thereto, profit and loss account, balance sheet as on 31-3-2004 proof of payment of prepaid taxes, etc. In the computation of income, the assessee has shown long-term capital gain of Rs. 89,31,795 on account of sale of immovable property, i.e. Bhau Mansion, 247, Sheikh Memon Street, Zaveri Bazar, Mumbai-400 002. Along with the return of income, valuation report of this property from M/s. Kishore Karamsey Co. dated 18-11-2003 was filed showing value at Rs. 39,03,500 as on 1 -4-1981. On verification of return for earlier three years, i.e. assessment years 2001-02,2002-03 and 2003-04, the assessing officer observed that the assessee has shown W.D.V. of the building at Rs. 4,891 whereas as per statement of depreciation for assessment year 2004-05, the assessee has not shown building in the chart for depreciation which indicated that the assessee has sold the depreciable assets i.e. “Bhau Mansion” on which depreciation was claimed in earlier years and income under the head “Long-term capital gain” has been shown at Rs. 89,31,795 for the assessment year under consideration on account of sale of said property. The assessing officer for obtaining more detail about the asset sold issued a questionnaire along with notice under Section 142(1) dated 18-10-2005. In this notice, the assessing officer asked the assessee to furnish the clarification regarding property for which W.D.V. shown as on 31-3-2003 at Rs. 4,891. The assessee vide letter D dated 22-11-2005 made the following submissions :
Value of Building in Books
The Building E&hau Mansion was purchased for Rs. 2,41,551. The written down value of Bhau Mansion, as stated in the depreciation schedule attached to the Balance Sheet as on 31-3-2003 is Rs. 4,891. The reduction in value of the building represents depreciation thereon. This depreciation has been claimed in the income-tax returns and allowed in income-tax g assessment of the assessee firm. In the books of account the assessee firm the value of Bhau Mansion has been shown as Rs. 1,83,675.
For and up to assessment year 2000-01 the assessee has claimed depreciation on Bhau Mansion in the returns of income and this has been allowed in the assessments. For assessment year 2001 -02 and onwards the assessee has not claimed depreciation on Bhau Mansion in the returns of income.
Bhau Mansion usage
The building Bhau Mansion, was used for the purposes of letting out. The Bhau Mansion was not use for the purposes of business of the assessee firm. Bhau Mansion was wholly let out. to UCO bank from the year 1964. This is evident by a lease agreements with UCO bank dated 20-6-1964 and 30-10-1987.
Income from Bhau Mansion has always been shown, in the return of income, and assessed under the head ‘Income from House Property’. The income from Bhau Mansion has never been assessed under the head ‘Profit and Gains of Business or Profession’.
3. The aforesaid submission of the assessee were considered by the assessing officer in para 2.1 of the assessment order. After analyzing the provisions contained in Section 50 of the Income Tax Act, 1961, the assessing officer vide Note sheet noting dated 22-11-2005 asked the assessee why not treat the long-term capital gain on sale of house property r> as ‘short-term capital gain’ as per provisions of Section 50 of the Income Tax Act, 1961. The assessee vide letter dated Nil have made submissions which are reproduced hereunder :
Capital gain on sale of Bhau Mansion should not be treated as short-term capital gain for the following reasons :
(i) Bhau Mansion is not a business asset of the assessee firm.
(ii) Income from Bhau Mansion has already been shown as incomeunder the head ‘Income from House Property’.
(iii) Depreciation has been claimed in the income-tax returns and depreciation has been allowed in the income-tax assessments of the assessee-firm in respect of Bhau Mansion.
(iv) Both the claim of depreciation and allowance of depreciation inrespect of Bhau Mansion are outside the provision of the Income Tax Act, 1961. No depreciation could have been claimed or allowedin respect of Bhau Mansion.
(v) The total depreciation allowed in respect of Bhau Mansion is as under:
Original cost of the property
:
Rs. 2,41,551
Less I.T. w.d.v. as on 31-3-2003
:
Rs. 4,891
Total depreciation claimed in I.T. from year of
purchase till year prior to year of sale (i.e. up to y/e /31/3/2003
:
Rs. 2,36,660
4. After considering the aforesaid submissions, the assessing officer worked out the short-term capital gain on sale of house property i.e.”Bhau Mansion” at Rs. 2,70,00,109 under Section 50 of the Income-tax Act, 1961 for the detailed reasons given in para 2.2 &2.3 of the assessment order.
5. On appeal before the Commissioner (Appeals), the assessee stated that there was bona fide mistake in claiming and allowing depreciation which was compounded by successive assessment whereas the income from the said property was tax under the head “Income from house property”. It was explained that the claim for depreciation made and allowed in respect of an asset whose income is computed under the head “Income from house property” is patently erroneous. No asset, income from which is computed under the head “Income from house property” can depreciate under the provisions of the Act. In this case, income from said property has been assessed under the head “Income from house property” and not under the head “Profits and gains of business or profession”, therefore, it was emphasized that it is not a depreciable asset under Section 50 read with Section 32 of the Income Tax Act, 1961.
6. Before the Commissioner (Appeals), it was also stated that mere claim and allowance of depreciation in the Return of Income and Assessment order respectively is not enough to convert the property, undoubtedly a capital asset, into a depreciable asset as per Section 50 of the Income Tax Act as the said property was never “used for the purpose of business or profession” and in that sense, never depreciated in terms of Section 32. Attention was also invited to rule 5 of the Income-tax Rules, relating to rate of depreciation on a block of assets, which stipulates “the written down value such block of assets as are used for the purposes of the business or profession of the assessee at any time during the year”. It was also contended that if the asset on which depreciation is allowable is not used for business but for some other purpose, depreciation cannot be allowed thereon under Section 32 and the said asset cannot be considered as depreciable asset for the purpose of Section 50 of the Act. Before the Commissioner (Appeals) it was contended that the mere fact of depreciation having been claimed and allowed on an asset does not make the asset a depreciable asset. Without prejudice to the above submissions, before the Commissioner (Appeals) it was also submitted that the assessing officer erred in taxing the capital gain arising due to transfer of property in question at the rate applicable not @ 20% as applicable to long- term capital gain under Section 112 of the Act. It was also stated that the property was a long-term capital asset, the capital gain arising therefrom, has to be charged to tax under the provisions of Section 112(l)(d) of the Act. Before the Commissioner (Appeals), it was also stated that in the case of ITO v. Jayant Fibre Industries (P.) Ltd. Vide (ITAT order dated 24-11 -2003), there was no dispute whether the asset sold was a depreciable asset, whereas in the case of the assessee, the main issue is whether the asset Bhau Mansion is a depreciable asset. With regard to decision in Chhabria Trust v. Asstt. CIT (2003) 87 ITD 18 (Mum.)(SB) it was pointed out that the relevant asset was a factory building which was only used for the purpose of business of the assessee on which depreciation was properly claimed, whereas Bhau Mansion was a building which earn rental income. It was therefore, pointed out that the finding of the assessing officer as regards similarity of facts of assessee’s case with the aforesaid cases decided by the ITAT are not correct.
7. Finally, before the Commissioner (Appeals), it was also clarified that it was getting monthly rental income from UCO bank in respect of its premises at Bhau Mansion without providing any furniture, secretarial or maintenance services which could have shown that the lease was actually a business transaction. It was rightly and consistently taxed as “income from house property”. It was further stated that although the assessee firm is formed to carry on business, there is nothing in the partnership Act to say that a partnership firm cannot own property which generates income as “Income from House Property”. The assessee firm is carrying on a business in jewellery and it also owned a house property, Bhau Mansion, which earned rental income. There is nothing in the partnership Act which prohibits any firm from investing its surplus funds for acquisition of such asset. The taxability of any entity is the sole domain of the Income Tax Act. The Partnership Act is only a guide to the legality and the consequent genuineness of a partnership. The genuineness of partnership firm Narotamdas Bhau has been affirmed by the assessing officers over a number of years.
8. After considering the aforesaid submission, the Learned Commissioner (Appeals) verified the assessment record, from which, he noted that the property in question was acquired on 5-7-1923. By a deed of transfer dated 22-10-1963, the surviving heirs of the original purchasers transferred the said property to three partners in the firm of M/s. Narotamdas Bhau and accordingly, it became the property of the assessee firm. Therefore, it is clear that the C assessee firm had no connection with the said property prior to 22-10-1963 though the erstwhile owners appear to be related to the then partners of the assessee firm. Each and every contentions of the assessee were considered in paras 3.1 to 3.12 of the impugned order. Finally, 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 of the Act.
9. Aggrieved by the order of the Commissioner (Appeals), the assessee is in appeal before us.
10. At the time of hearing before us, the Learned Counsel for the assessee reiterated the submissions made before the Commissioner (Appeals). He fairly admittedthat depreciation was claimed right from the beginning over 40 years and same was also allowed by the assessing officer, which was not allowable in respect of property in question let out. It was submitted that it was themistake from both the sides. The counsel further submitted that house property in question cannot form part of a block of asset eligible for depreciation. For this reliance is placed on the decision of the ITAT Mumbai ‘A’ Bench in the case of Asstt. CIT v. Jagdish C. Sheth (2006) 101 ITD 360.
11. On the other hand, the learned D.R. supported the orders of the authorities below. He pointed out that the original cost of the property in question was Rs. 2,41,551. Up to 31-3-2003, the assessee has claimed depreciation of Rs. 2,36,660. After claiming this depreciation, the W.D.V. as on 31-3-2003 was Rs. 4,891. The assessee has already claimed 90% of the cost by way of depreciation. The provision contained in Section 50 contains phrase “where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act or under the Indian Income Tax Act, 1922….” In this case, depreciation has been claimed and allowed for about 40 years, therefore, no further inquiry is required and short-term capital gain was required to be computed and which has rightly been computed by the assessing officer as per provisions contained in Section 50 of the Income Tax Act, 1961. Now the A assessee cannot be permitted to turn around and plead that depreciation was wrongly claimed and allowed. As a matter of fact, where an asset which form of a Block of Assets in respect of which depreciation has been allowed under this Act, capital gain is required to be computed as per provisions contained in Section 50 of the Act. He contended that the reliance placed by the assessee in the case of Jagdish C. Sheth (supra) is not relevant. Therefore, the order of the Commissioner (Appeals) be up he learned
12. Having heard both the sides, we have carefully gone through the orders of the authorities below. The factual matrix of the case is not disputed either before us or before both the departmental authorities below. It is pertinent to note that original cost of the property “Bhau Mansion” was Rs. 2,41,551. Up to the year ending 31-3-2003, the assessee has claimed depreciation amounting to Rs. 2,36,660. Thus W.D.V. as on 31-3-2003 was Rs. 4,891.
Section 50 of the Income Tax Act reads as under :
50. Special provision for computation of capital gains in case of depreciable assets.Notwithstanding anything contained in Clause (42A) of Section 2, where the capital asset is an asset forming part of a block of assets in respect of which depreciation has been allowed under this Act or under the Indian Income Tax Act, 1922 (11 of 1922), the provisions of Sections 48 and 49 shall be subject to the following modifications :
(1) Where the full value of the consideration received or accruing as a result of the transfer of the asset together with the full value of suchconsideration received or accruing as a result of the transfer of any othercapital asset falling within the block of the assets during the previous year,exceeds the aggregate of the following amounts, namely :
(i) expenditure incurred wholly and exclusively in connection with such transfer or transfers;
(ii) the written down value of the block of assets at the beginning of the previous year; and
(iii) the actual cost of any asset falling within the block of assets acquired during the previous year,
such excess shall be deemed to be the capital gains arising from the transfer of short-term capital asset.
(2) Where any block of assets ceases to exist as such, for the reason thatall the assets in that block are transferred during the previous year, thecost of acquisition of the block of assets shall be the written down valueof the block of assets at the beginning of the previous, year, as increasedby the actual cost of any asset falling within that block of assets, acquiredby the assessee during the previous year and the income received oraccruing as a result of such transfer or transfers shall be deemed to be thecapital gains arising from the transfer of short-term capital assets.
It is pertinent to note that depreciation on the asset namely, ‘Bhau Mansion’ which is forming part of a block of assets in respect of which depreciation has been allowed to the assessee for about 40 years. Section 50 of the Income Tax Act 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 assets, depreciation has been allowed”. It is well-settled law that in a taxing Act, one has to look merely at what is clearly salearned There is no room for any intendment. There is no equity about tax. Nothing is to be read in, nothing is to be implied. One can look fairly at the language used. There is presumption that the words are used in an Act of Parliament correctly and exactly and not loosely and in-exactly. Although opinion is not uniform the weight of authority is in favour of the view that the marginal note appended to a section cannot be used for constructing the section. 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 of the Act, 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, we are of the view that the assessing officer has rightly invoked the provisions contained in Section 50 of the Income Tax Act and computed the short-term capital gains at Rs. 2,70,00,109. The provisions contained in Section 112(d) are applicable to the long-term capital gains and not in respect of short-term capital gain. In view of this, Ground Nos. 1 to 3 are dismissed.
13. With regard to Ground No. (iv), the assessing officer computed the income of the property at Nil for the details reasons given in para 4.0. The assessee has claimed loss on account of income from house property at Rs. 55,087. The assessee has claimed long-term capital gain on sale of house property namely, Bhau Mansion. Since there is no income from this property, the assessing officer did not allow loss. On appeal, the Commissioner (Appeals) upheld the action of the assessing officer.
14. The Learned Counsel for the assessee submitted that the loss under the head ‘House property’ amounting to Rs. 55,087 on account of municipal taxes paid on the vacant property was rightly claimed and the Learned Commissioner (Appeals) is not justified in refusing the same on the ground that income at Rs. Nil was rightly assessed by the assessing officer under the head ‘Income from house property’.
15. On the other hand, the Learned D.R. contended that the assessee is not disputing the head of income i.e. ‘Income from house property’. Therefore, the order of the Commissioner (Appeals) be uphelearned
16. We have heard both the sides as well as have perused the provisions contained in the Income Tax Act regarding computation of income under the head ‘Income from house property’. In the assessment year under review, the assessee has sold the property in question. It is the claim of the A assessee that in this year neither it was used for the purpose of business nor was let out. Therefore, the ALV of this property is at Nil Since, the assessee is not disputing the head under which the assessing officer had assessed the income, in our view, the assessing officer has rightly computed the income at Nil This ground is accordingly rejected.
17. With regard to Ground No. (v), the Learned Counsel for the assessee pointed out that no ad hoc disallowance can be made. It is the duty of the assessing officer to identify the expenditure. The entire amount of sale proceeds of the house was invested in Mutual Funds, therefore, there was no expenditure incurred for earning the dividend income. Therefore, no disallowance is called for.
18. On the other hand, the Learned D.R. submitted that the disallowance of Rs. 25,000 under Section 14A for earning Rs. 25,90,378 made by the assessing officer is fair and reasonable, therefore, the same be uphelearned
19. We have heard both the sides. The assessee has disclosed receipt of dividend income from Mutual Funds at Rs. 25,90,378 and claimed the same as exempt under Section 10(33) sic of the Act. Since it was difficult to determine the exact amount of expenditure for earning such income, the assessing officer estimated the expenditure at Rs. 25,000 and disallowed the same. 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 D 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-section (2)/(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 ad hoc c disallowance under Section 14A. The assessing officer is statutorily required to compute the disallowance in the manner provided by subsections (2) and (3) of Section 14A. In support of this, reliance is placed on the decision of the ITAT Mumbai Bench in the case of Kalpataru Construction Overseas (P) Ltd. v. Dy. SOT (2007) 13 SOT 194. We, therefore, set aside the order of the Commissioner (Appeals) and assessing officer in this behalf and rest ore the matter to the assessing officer for a fresh decision in the light of the provisions of Section 14A including Sub-sections (2) and (3) thereof. Needless to add that the assessing officer will go through the details of various expenses, examine the nature and purpose and make an honest attempt to identify expenses if any incurred for earning dividend income of Rs. 25,90,378 which is exempt under Section 10(33) of the Income Tax Act, 1961. This ground is accordingly allowed for statistical purposes.
20. In the result, the appeal of the assessee is treated as partly allowed.