ITAT Mumbai: New Commercial Offices to Be Included in Block of Assets Even Without Possession by Year-End

Background of the Dispute

The appeal in N.K. Gems Vs ITO (ITAT Mumbai) concerns whether commercial premises purchased near the close of the financial year, without possession and not put to use, can still be considered as part of the “block of assets” for computing capital gains under Section 50 of the Income Tax Act 1961.

The assessee, engaged in the business of gems, had:

  • Sold an existing office at Bharat Diamond Bourse (BDB), which already formed part of a depreciable block of assets, and
  • Entered into registered agreements to acquire two new office units in another commercial building before 31.03.2014, claiming that these new offices should be added to the same block of assets.

The Assessing Officer (AO) refused to recognize the new offices as part of the block and instead computed short-term capital gain (STCG) under Section 50, treating the block as “empty”. The CIT(A)/NFAC upheld this view.

The ITAT Mumbai reversed these findings, giving important clarity on when an asset is considered “acquired” for purposes of the block of assets regime and STCG under Section 50.

Chronology of Facts

Original Office at Bharat Diamond Bourse

  1. The assessee had earlier acquired a commercial office at Bharat Diamond Bourse through an allotment letter dated 24.07.2010.
  2. This office was duly treated as part of the block of assets (office premises) in the books and depreciation had been allowed in earlier years.
  3. On 13.11.2013, the assessee executed a registered Sale Deed in respect of this BDB office before the Sub-Registrar, Andheri, Mumbai.
  4. The sale consideration of Rs. 2,03,68,000 was fully acknowledged in the registered document.

There was no dispute about:

  • The original acquisition of the BDB office, or
  • The sale transaction and receipt of consideration.

Purchase of New Office Premises

Subsequent to the sale of the BDB office:

  1. On 25.03.2014, the assessee entered into registered agreements to purchase two new office units:
    • Office No. 168 (1st Floor) and
    • Office No. 668 (2nd Floor)
      in Kamla Industrial Park, Mumbai.
  2. The combined consideration for these two offices was Rs. 2,08,76,204.
  3. The assessee treated these new offices as additions to the existing block of office premises and claimed that no STCG arose under Section 50 because the block continued with new assets.

AO’s Stand: Treatment as Mere Advance and Application of Section 50

While examining the return, the AO declined to treat the new offices as forming part of the block of assets. The AO primarily reasoned that:

  • The agreements for purchase of new offices were executed on 25.03.2014, i.e., towards the very end of the financial year.
  • As per the AO, only part of the consideration had been paid up to 31.03.2014.
  • Possession of the new premises had not been handed over to the assessee by 31.03.2014.
  • The new offices were not put to use for business during the relevant financial year.
  • Accordingly, the AO treated:
    • The payment made for the new offices as mere advance, not actual acquisition of a new asset; and
    • The block of office premises as effectively exhausted/empty after sale of the BDB office.

Based on this view, the AO invoked Section 50 and computed STCG on the sale of the BDB office as follows:

  • Sale consideration (BDB office): Rs. 2,03,68,000
  • Written Down Value (WDV) of block as on 01.04.2013: Rs. 41,97,963
  • STCG u/s Section 50: Rs. 1,61,70,037 (rounded in the order as Rs. 16,17,0037/-, evidently a typographical error in placement of comma/zero)