Income Tax Appellate Tribunal - Bangalore
Joy Ice-Creams (Bangalore) (P.) Ltd. vs Income-Tax Officer on 23 March, 1989
Equivalent citations: [1990]32ITD575(BANG)
ORDER
A.V. Balasubramanyam, Judicial Member
1. These cross appeals arise out of the assessment for the year 1984-85. We find it convenient to dispose them of by a common order inasmuch as one of the grounds in the assessee's appeal has reference to the ground raised by the revenue in its appeal.
2. The assessee is a company by name Joy Ice Creams (Bangalore) Private Ltd. It started its business in the manufacture and sale of ice-creams in the year 1966. The factory premises of the assessee were situated in a portion of the premises bearing No. 82, Annie Besant Road, Worli, Bombay. The said premises belonged to a firm called M/s. Joy Ice Cream. The lease had been granted by the owners (firm) on 24-8-1981. The owners agreed to sell the premises to M/s. Indage Engineering Company Pvt. Ltd. in August, 1981. The sale was subject to lease. The purchasers had initially agreed to provide alternate accommodation to the assessee (tenants). However, they were unable to procure one. Therefore, the purchasers made further negotiations with the assessee. As per that, the assessee was to yield up possession of the leased premises and relinquish all their rights on account of which the purchasers should pay Rs. 45 lakhs. This amount was received by the assessee from the purchasers during the previous year relevant to this assessment
3. The character and complexion of Rs. 45 lakhs are the subject of controversy. It appears to us that the assessing officer initially was inclined to process this receipt under the provisions of capital gains. He, however, treated this as a revenue receipt and brought the entire amount to charge and he placed reliance upon the decision of the Supreme Court in the case of CIT v. Shamsher Printing Press [1960] 39 ITR 90.
4. The addition had been disputed in appeal by the assessee. The stand of the assessee was that Rs. 45 lakhs received from the purchasers was a capital receipt inasmuch as it was consideration received for giving up leasehold rights in respect of a factory premises. But it was claimed that the said receipt was not susceptible to capital gains as the assessee had not incurred any cost for acquiring that asset. When this position was canvassed before the Commissioner of Income-tax (Appeals), he disagreed with the Income-tax Officer that it was a revenue receipt. He held that it was a capital receipt. He also held that the cost of acquisition of the asset was nil. In conclusion, the Commissioner (Appeals) directed that the entire receipt of Rs. 45 lakhs should be charged for capital gains after allowing permissible deductions.
5. The first ground raised by the assessee is that the receipt, although capital in nature, is not to be reckoned for the purpose of capital gains inasmuch as it had not incurred any cost for acquiring the same. The ground raised by the revenue in its appeal is that the view of the Income-tax Officer, that this was a business receipt, should be upheld.
6. The basic question is whether the receipt of Rs. 45 lakhs was a capital or a revenue receipt. The facts are not in dispute at all. The assessee was tenant of a premises undisputedly used for factory purposes. There was a sale by the former owners Joy Ice Creams in favour of M/s. Indage Engineering Company Pvt. Ltd. and that was subject to lease. The purchasers who had undertaken to provide alternate accommodation to the assessee failed to procure one. They, therefore, entered into an agreement with the assessee on 10-12-1981. A copy of the agreement is at page 4 of the compilation.
7. The preamble of the agreement dated 10-12-1981 reads:
AND WHEREAS at the request of the Purchasers the Tenants have irrevocably agreed to accept a sum of Rs. 45,00,000 (Rupees fortyfive lakhs only) to be paid by Purchasers to the tenants to themselves arrange for alternate accommodation and as lump sum damages for losses which may be suffered and/or incurred by the Tenants on account of such shifting and incidental thereto and surrender their tenancy rights in respect of the said premises on the ground floor and first floor as shown on the plan annexed hereto and shown thereon in Red Colour wash on the terms and conditions herein contained:
AND WHEREAS the Tenants are fully aware that the Purchasers have agreed to pay and/or have paid the said sum of Rs. 45,00,000 (Rupees fortyfive lakhs only) to the Tenants on the specific Agreement and assurance on the part of the Tenants to quit, vacate and deliver the quiet, vacant and peaceful possession of the said respective portions on the ground and first floor premises as set out hereinafter.
The above shows the situation that existed just prior to the agreement. The indenture witnesses (in clause 3):
In consideration of the Purchasers having agreed to pay aggregate sum of Rs. 45,00,000 (Rupees fortyfive lakhs only) to the Tenants as lump sum consideration to enable the tenants to themselves arrange for alternate accommodation and as lump sum damages for losses and damages which the tenants may suffer or incur on account of such shifting and incidental thereto and surrender of their tenancy rights in respect of the said premises and out of which a sum of Rs. 20,00,000 (Rupees twenty lakhs only) is already paid simultaneously on the execution of these presents to the Tenants (the payment and receipt whereof the tenants do hereby admit and acknowledge and acquit, release and discharge the Purchasers from the Payment the receipt thereof) and balance amount of Rs. 25,00,000 (Rupees twentyfive lakhs only) is payable on Tenants delivering quiet, vacant and peaceful possessed of the said premises by the tenants we do hereby declare and confirm that the said Agreement to provide alternative accommodation is treated and cancelled and the tenants shall quit, vacate and deliver quiet, vacant and peaceful possession of the said premises being a portion on the ground floor and portion on the first floor as shown on the plan annexed hereto and shown thereon in Red colour wash latest by 5th day of October 1982 time being of the essence to the Purchasers with right to demolish, renovate, alter, deal with or dispose of the said premises or any part thereof to any third party or person as the Purchasers may deem fit in their absolute discretion. As incidental to the aforesaid Agreement the tenants do hereby, agree, declare and confirm that they have irrevocably surrendered their tenancy rights, title, interest, claim and demand in respect of the said premises and every part thereof in favour of the Purchasers with benefit thereof to the Purchasers for ever and the tenants do hereby further declare and confirm that between the date of execution of these presents and 5th day of October, 1982 the tenants shall not claim any tenancy, sub-tenancy, lease, licence or occupancy in respect of the said premises or any part thereof and shall not induct any third party or person or create any tenancy, sub-tenancy, lease, licence or occupancy in respect of the said premises or any part thereof in any manner whatsoever.
8. It is clear to our minds that Rs. 45 lakhs paid was a recompense for relinquishing all the rights the assessee had in the tenanted property. Shri Shah, appearing for the assessee, demonstrated before us that the assessee had not suffered any loss in business on account of shifting and we are convinced about that. Compensation or damages could also be for an injury suffered. Inconvenience or any possible loss on account of change from one place to another is incidental to vacating the tenanted premises. If the purchasers were in a position to provide alternate accommodation, then there would have been no question of paying compensation. Because they were unable to find one suitable to the assessee, they had to pay a consideration to obtain vacant possession of the premises.
9. Reliance upon the decision of the Supreme Court in the case of Shamsher Printing Press (supra) by the Income-tax Officer was entirely wrong. That was a case where there was a specific claim for compensation for loss of business, among other things, which had resulted on account of requisition order passed by the Government. Compensation was granted not only for vacation of the premises but also on account of loss of business. There was a specific claim in this behalf and in such circumstances Their Lordships held that it was a revenue receipt. This case law has no application to the present case which is entirely on a different set of circumstances.
10. We agree with the Commissioner (Appeals) that the entire compensation of Rs. 45 lakhs was towards relinquishment of the tenancy rights and that is a fair reading of not only what is stated in the preamble but in clause 3 of the agreement dated 10-12-1981. Such relinquishment or surrender of rights in a property is transfer in relation to a capital asset within the meaning of Section 2(47), Income-tax Act. Reference may be made to the decision of the Gujarat High Court in the case of Rajabali Nazarali & Sons v. CIT [1986] 29 Taxman 419/[1987] 163 ITR 7.
11. It was contended for the assessee that though Rs. 45 lakhs is consideration for transfer of capital asset, there is no capital gains chargeable to tax since the asset had not been acquired incurring any cost. In this behalf, a catena of decisions were cited. They were the decision of the Delhi High Court in the case of Bawa Shiv Charan Singh v. CIT [1984] 149 ITR 29/17 Taxman 225; the decision of the Andhra Pradesh High Court in the case of CIT v. Markupakula Agamma [1987] 165 ITR 386; the decisions of the Bombay High Court in the case of CIT v. Mrs. Shirinbai P. Pundole [1981] 129 ITR 44%, Evans Fraser &Co. Ltd. v. CIT [1982] 137 ITR 493 and CIT v. Trikamlal Maneklal (HUF)[1987] 168 ITR 733; the decision of the Calcutta High Court in the case of CIT v. Clive Mills Co. Ltd. [1984] 148 ITR 14; the decision of the Madhya Pradesh High Court in the case of CIT v. H.H. Maharaja Sahib Shri Lokendra Singhji [1986] 162 ITR 93 and the decision of the Bombay Bench of the Tribunal in the case of Star Trading Co. (P.) Ltd. v. ITO [1987] 20 ITD114. We must also mention here that the decision of the Supreme Court in the case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 was cited as an illustration in support of the argument that in the case of a self-generated asset there is no capital gain. The learned departmental representative contended that the whole of the receipt is susceptible to charge in the event of the Tribunal holding that it was a capital receipt and that the deductions permitted under Section 48 are only, if any, for the benefit of the assessee. He distinguished the decision in the case of B.C. Srinivasa Setty (supra) on the reason that goodwill is a self-generated asset to which a cost cannot be attributed and that a transaction is exigible to capital gains so long as a cost is either actually present or capable of being reckoned unless in respect of those assets the element of cost is altogether inconceivable and the present is" of a different nature.
12. We have gone through the authorities cited at the Bar. At the outset, we must remark that the cases do support the view that the impugned receipt of Rs. 45 lakhs was capital in nature and this observation is only by way of gloss to the finding we have recorded in paragraph 10 above. The question that remains is whether the assessee had not incurred any cost and, if so, the capital receipt is not to be processed for capital gains. The lease deed (copy) dated 26-12-1968 was produced and it shows that the tenants (assessee) had agreed only to pay rent for use and occupation. Rs. 20,000 paid on the date of lease was rent paid in advance as an earnest deposit. Rent is payment towards use and occupation. Premium is consideration for the grant of lease. From the lease deed dated 26-12-1968 it is clear that no consideration had been paid for the grant of lease. There is no other material to show that the assessee had paid any other amount to obtain or acquire the leasehold rights. We, therefore, affirm the finding of the Commissioner (Appeals) that for acquiring the leasehold rights the assessee had not incurred any expenditure and the cost should be taken as nil.
13. Perhaps some of the cases cited by Sri Shah are distinguishable. Indeed they can be. In Clive Mills Co. Ltd. 's case (supra), it was sale of loom hours and the capital asset was an intangible property which had been acquired on account of allotment. In the case reported in H.H. Maharaja Sahib Shri Lokendra Singhji (supra) the asset sold was a jagir property for the acquisition of which there was no cost in. terms of money. Jagir is a Crown grant and as such element of cost is not involved at all. In Mrs. Shirinbai P. Pundole' s case (supra), it was a case of rejection of application under Section 256(2). No doubt, their Lordships formulated the question whether a transaction of exchange attracted liability to tax as capital gains. But the application was rejected following an earlier decision in the case of Jekmi Jal Cooper [IT Application No. 59 of 1977] and we do not have the full benefit of the reasons. However, the Bombay High Court has, in its subsequent decision in the case of Trikamlal Maneklal (HUF) (supra) made an observation to the contrary. In that case, the point was whether conversion of self-acquired property into joint family property was a case of devolution within the meaning of Section 49(l)(iii)(a). Their Lordships held that the legal fiction created ,by Section 49 applies only to the situation set out therein. However, their Lordships remarked:
.. If the actual cost of acquisition is nil, it is that nil figure that must be taken into account.
While the above is only an observation in passing, we have two cases directly on the point.
14. In the case of Bawa Shiv Charan Singh (supra) the assessee surrendered his tenancy rights for the acquisition of which he had paid nothing while he had received Rs. 30,000 for surrendering all tenancy rights. Their Lordships held that such a transaction had not resulted in capital gains chargeable under the Act. In the case of Markapakula Agamma (supra) the Andhra Pradesh High Court held that compensation received by a protected tenant on compulsory acquisition of land cannot be computed for capital gains since for acquiring the asset (protected tenancy) the tenant had not paid any amount to the landlord or anybody. Following the same we hold that the amount of Rs. 45 lakhs received by the assessee for surrender of the tenancy rights is not chargeable to capital gains.
15. Our conclusion in the earlier paragraph disposes of the appeal by the assessee. It also disposes of the first ground raised by the revenue in its appeal.
16. There are two more grounds in the appeal by the revenue which we now take up. The second ground is in regard to commission payment in respect of which the Commissioner (Appeals) granted relief. The amount paid as commission is Rs. 7,55,337. The amount mentioned in the ground is Rs. 9,04,145. The learned departmental representative concedes that this is a mistake and that the correct figure is Rs. 7,55,337. The said payment was disallowed by the Income-tax Officer applying the provisions of Section 37(3A). The Commissioner (Appeals) held that this expenditure was one which could not be disallowed under Section 37(3 A). It was argued for the revenue that the commission payment had the effect of sales promotion and as such the expenditure was one to which Section 37(3 A) applies. These amounts had been paid by the assessee to its dealers whenever they had exceeded the target. In support the decisions of the Tribunal in the case of Mopeds India Ltd. v. I AC [1984] 7 ITD 324 (Hyd.) and ITO v. Meera & Co. [1986] 15 ITD 227 (Chd.) were cited. In these cases, it has been held that payment made to dealers as an incentive to achieve certain target does not come under the mischief of Section 37(3A). Following the same, we affirm the finding of the Commissioner (Appeals).
17. The last ground raised by the revenue is in regard to a disallowance made by the Income-tax Officer applying the provisions of Section 43B. Here again there is a mistake in the ground in specifying the amount. According to memorandum of appeal, the amount is Rs. 67,691 but from paragraph 16 of the order of the Commissioner (Appeals), the correct amount is Rs. 6,769. The learned departmental representative concedes this position. Rs. 6,769 was the amount payable by the assessee as contribution to ESI, PF.
This contribution related to the last month of the year. In this behalf the Commissioner (Appeals) held:
.. I hold that disallowance cannot be made in respect of the aforesaid payments of Rs. 6,769 if the payments due have been made subsequently within the time permitted by the relevant statutory provisions of the Act governing their levy. Accordingly, the ITO is directed to verify whether the said payments have been within the statutory time in the next accounting year and if so to delete the disallowance of the expenditure of payments in respect of the outstandings.
The learned counsel for the assessee cited the decision of the Andhra Pradesh High Court in the case of Srikakollu Subba Rao & Co. v. Union of India [1988] 173ITR 708. The principle laid down therein applies to the facts of this case. This decision supports the contention advanced by Shri Shah. We find no error in the order passed by the Commissioner (Appeals).
18. In the result, the appeal by the assessee is allowed. The appeal by the revenue is dismissed.