The Commissioner Of Income Tax vs M/S Rudra Industrial Commercial on 25 January, 2011

[Cites 1, Cited by 6]

Karnataka High Court

The Commissioner Of Income Tax vs M/S Rudra Industrial Commercial on 25 January, 2011

Bench: N.Kumar, Ravi Malimath

IN THE HI&H COURT QF KARNATAKA AT 3£&EGALORE Dated this the 25*" day of January, 2C>£1 1' ..

PRESENT 'W V _ TEE HOPWBLE MR. JUsTicE.N-::U_:»§A_§:_ AMd i _ T. THE HONBLE MR. JU'sfr"K:E Lgggi No. A' BETWEEN :

1 Thé {;Ze:r£.rnisS:'i(;)'n er Ea_aco.:1qt%: fra;;;~~._ V' % " __ Building.

Ques:Lr1s% Road . "

_Bang:;i;1or'e _ A " '~ ._ Q .. Et1c0I1§é'T~*:«Officer _ " ~. _Cv..R'13'uixIdi.ng _ ¢ Q':ié»?;ns. 'Read Bangafirgfe ..,AppeEIa.n1:s (By Sm: Vee:r1a Jacihav, Aévocate) ' ISé?§,fss;, Rudra Indus.-triai Commercial Corporation ..._§§0K%§ 9:-£2 Crass "Zr J\-'E 2-1? ¥<"5::hw2'a E"é£1§'£} I321;1g£1i<)I"€ - 569 G03 ...R€:sé;;:):33'1»:§:éi1t :';_ {E3}; Sri. A Shankar Sn' Ea:-*21, Ad\F()<':§i:E'.e$3).TV '- This §'1',zX fiieci L1I'1C§€E"' Se£tE.ioI1:f;'.f*}O~A9€31VV a..1"§s;:i.r1g (ml. of ()E'd€:'I' <iz~1*:.:=2{1 .?,4}0552AOQV5"._ ;jz:$.€~:s:Ci-- ..v%;1 _IT'£T"£-X N:::.529/E3.2mg/ $997 for the. A55sse55snis::3%i:$3223' 'i99'3.~9-»§, ';')_'f':5.1y'1r1g is 1} t'<>m'11.:}ai'.s: the s;u'i3s1.a1'1.1.ia1»rques*;.ifr:1s'of I&1£3Iv'i§£e1L€{§ {.he:"£:§:<1:'V

(ii) allow the appeal 2-1.11:1 sei, as:dVe"1.E}.t% orcier pe1s,sg-:d"'}jy'~i;.he }L'£ZA'1";V in WA No.529zBang/.199? ciziiédi2~<1»--05w2QO5T*¢c)11V£T§:"r11ing we order gaassseci by the Appellaie iC.();f{'1vx:_n:'3§;i.{>1'1€3f'and _<50:1f§r1I1 {[116 Order passed by the §1"1c.c)'_1f1'1~:'~j 'I'a1j.5§: O'ﬂ.i(§€fﬂ1',V>V'i.ZEi7'1'd--6{6}, l3angaio1'e.

This ITA {:()ming 0:1 i'-'gxf N. KUMAR J delivered the fb}10'~;Vii1g: " v_ 'I'h'Es."~apVf:a;E:a11« : by.» 'the 'I""€j"~.7€'1'i'L1f;' chalicnging the order pE3.SE5f;*.Ci 'b§/ the.A}V;pEt.1A1é:'i'§"i7:fib=.,mz:1 holding 1.11ai'. the: money paid {.0 the bahI:; fa seen.-'.e »_1'ii0_ri'gV§1ged p1"c)peH.y H0311 being sold in pubiic 'c1L1{:tir_§i:;..._.which .Wa.<_§ offered as a scCu1'i':y by the surety ,§1}'1}(.i:§i'§1}'{.§s.__J{.(},'b1.1Si'Ii?3$>'E3~~~€XfJf3£'}d§iLL1E'€ and not czapiia} €X[)€?--E}C1i'£L1§"(3 21{1'€i'~ .;'c1Is.c_) 'i,..'i:<c.,VVfi':'1_{ii11g ihaﬁ, ex-'e1'1 t.h.0'L1g}.1 'i.1nmov.:1bie plvperty is-3 ('.(}1j.';'.f'€ifJE.€}'C1."Vii'.1i.(4J'.xS§6(?k"i11"'£.'l"aC1(Tf it' only when the sairi p1'c)p<:*Ifi.y is g::3_1cE., _'!~}1':'*:. i:'idex prexrexilixlg on 11116 (law: of t41'a11sI"e:' is {.0 be faker: Ema cemsideraziiiem fer eieeeeeizzgg tihe <ia'pi'£.aE gains and nstrr the indezx: v2:.l11e§:;;..:.~ rhe dilié of ee::nversie:'L

2. '?he aseesssee is 3: firm e0t1.S§,i't.::ied E:§§g__';:V'VE*ree<:i'-« ef Partnership daieé 'L4r.E992. One ef the b'uein.e's£S :.~§::¥;j:i§g%i%'iee§"_"e§;V' the firm is to eaxriy on the businesza'e»§V2ieq:;iss:t'iQ1':,T tie:-'e}o--§:me':71t and sake of immevable prQperties .:_ The fif1:1'*i*3as"*.;"23;ri{:'u;s "immovable properties ir:e1ue1ir3§"'~--}ane1e the partners towards their egrpitar.reorririifitrtian. 'I"n.e ﬁrm entered into 3 deveiopmeni agreeﬁ3en'te._x§]?i§h Uniteeh Lim.1'.ted on 16.3.iE388__ far"dg»<§1aprm;}ﬁ-t.___oras lands at Shivanahalli and censt'1*ueeii_ei'a pf' property. The firm has been converting the i:n.:niova*b1.e*~*propertiesg one by one, into stock-i;:1« E_T}:1i.1__sg t1ie"fir.m'«e business in deveioprnent 0:" properties .x>eas;_Ve::>:13231e:1t:ed by converting its own properties; into stoc:k«in~ ""€.ra;--rée9 ""EE':e Eirrié has 3. sister eeneerr: by name M/sr Rudra Inq7.:gst.:"j,es._ ffI'he assessee had given as properties as eoﬂaterai S€iCu§'i'"t'}%'AI{O the man borrewed by 5 Rudfra iridustriee from Bank ef M},-reere in 'she year i9'?5 when 135/ e Rudra 33/"

E .

4 E:1c§:..:s1:ries xxms <rc}:*2si'ii'.1.1i"@<i( The szzlid i:'2dusE'r°_§,;= 1r)<.--*<:%;".:n"2e S«'i{'.k. Tht-3y wt31'c: L1I1a?)1e to pay the loan bcmfoweci fmrzl. Siat,e"*}3a::}k of IX/IIys0I'e. A suit Came 'to be filéad for reCove1'y of {,}1é'---%§;1.:1t>11z1i. agaiI1st. the said firm. The. assesses was 21130 E3.'1'c§.{}§',*:a?.1"§Z3éi.1*ifQ"i,f}"_ i,§1-:-3 saiil suﬂ. E1. is ms} recmrd ﬂlai, 3.}-";'!i>',">E-1'f?3*f:':{:"'Si'~f'f'E3€f wais~Ta]--d,ea'1§.:1g' j in the p'r0c1uci:s ma'1"1L1f'ac1.u1'ed by /E:-_ F {L1E'd>éi. 'I.11.CEvL£Si,;l"Iﬁ'€$. "said 'th.e1.'e was an on going 1'e1a1,.i0;;1_sh..i_p be'£w_ee';.1vthe"as'Sessee aﬁd the said M/s Rudra Ei.3d'_1,1S"t'1'i'.€SA.,.~~~If'_-iES_bG.QEl1ESE3" ofihafﬁ reason the assesses had colisidered"*cxp.eCEi:ef'1t}t(> 'p1f0:?ic¥e co11a!';e1'a.1 security to the loan !:>07_.r'mwc-:d1Afi'b'ri1:"«M/s.u*.R11ﬁira i IﬁdL:s1,'1*ies. in the pari,ne'1fsh.i_p. dé{3:;§ .-:,i_ait.t:d'wE.VC);.VE__ 1 51.975 of the assesses, it is ciaarly .z1:em,joI1Ec1 I:hat.0jnC: E[hE; Gbj"e<t:t.s of the was (.0 ad. as agems for s«;3E(:%" e1r1d_ di.st.j'i.oi:iion of producis mar1L1fac'tured by Oﬁ1.C1;j§3' "The 1§2'11z2.11p_:e;«¢r5}1c2et of EVE/s Rudra Endusmes For the y.e:;,1f'ss and 313.1980 shews the assesses as d€bi':()I's _i1'1V 1,]:*1€--: b"{*,-.g>}<;v:;"cv>.£_' '§;.('.(f'f()'L1E"lf.S mai111.ai'm--:c1 by M / s Rtldra industries. \Kf11é'h 1,'}1(:V'.:'j_E"ié5S€SSCC started developing the property at Shii?a.11a*I1211ii'.Vwiéh the hcip of M/s Unitech. Cc>r'p01*a1.i0n, "amder . i':}"1{: §.c;*,1"1*§1s of $1.10 ag1'(;'.e.r11em, *i.l'.':€*y 'A-'f;',1'€ obﬁgeci 10 13215353 011 21 clean? Eg éme its} the §}HI'{".'1'1.2-15'w'€"§'.':'é :13? the Elana; f:"ee frzsrn aii en(:z21'1;'i31f2i:';<3es. ~( The ssaécl ;:>1'<'3;:»e1'1.y Eaacji been z1'10r1.ga1ge7:I '$15 -../___-1:~s:i_e_1"£;e Bank GE E\.'Ey5_~;<)re 2111:} the pri_r1c%ip2:7i debE';_c>~i'~~».--v§f'aS "~$:ic:«1<; giizd. 'WE-15 mot': payizzg the E1"L0:3e3:., V€§1£3.I1 the saicle 1fiv:'ci pe:"i.§;"ivéis4 'v1ei_ke:3§£ 10 'bmught, 'is 82136 Em: I'€3{'.(}\='€E'i';I'1'g_' 'éhe'Y.:1a"o11e.~_gr géi'z:;eVV EE'0:'.if1. 1%! S, R:.1d.:-21 Ei'"1dL1ES'E'.I'i£'.':S§ 'they t1l1O{3'V'g%!f'i1;V":' %_s;': expedient to pay ihe by M/ 5 Rudy;/1 1~;'1d1,1s"c.:"ies;V_a1<>ngAVwii}1VV back E1196 {ﬁle deeds and £?1ea'1" title to the purchasersi. they entered imio a c0Inpr¥3E111i§;eS"{ Mysore in the pending suit and paiei :;1 SL1rﬁ :31: being the interest dues and; £.herei'<s:"e, illey-.§:1ai'med {he ssaid amount of RS.37.25 Lakhs V " bxisitieéé £2;$%iper1ditL11~e.

_a .s5ses5i11g au1"'.1101'ié.y while ass<~3ssir1g the :°e'1'.'L11'n:s fi§e.d by held i,hai', the ai'<);'esaic§ amoum of Laiiﬁis ctamleé be *i'1*ez11'.ed as bL1SiI"1€SE_-} €X[}f;"TE1d.i1L1§'{3, an s.

._ the c:<>11t.:ra1';; he asss:~:e.5s::;<;éci 11, as; busixaess p'r0§i't'; Seeonéiy. he E3 1"0(}§<: '¥"h€ ﬁnders: Value on the <i£1.i'e of <.'€}:':\7c?1'a§.cm (.34?Ehtt"i~:'a'1:2_t§zz;3.l}i&3 progacézn.--* 21111.0 s§.c)<:k»i1"1~'z:1'21de, i.e;, 16.3.1988 (§£11CLk18.{iI1g {he c.apiEaE gains ir1s':.e21c§>Q'f%I'11e (i'afi(%" '()f"'E.£"éimSife1" v21I}u(:'1.% passed aha" assess.111er1t. o:rde1_-:5. Agg:':i.'e'v:>t1 1&3},-r'AI'.h:t: :§§;%{i2';;€'Z'?i.ajia:11e L} Tax{Appea1s].

4. The AppeiIai'e~.__AL:1.1a6'i*it3?_':;sn'*-.;feaappf€c£a1i0n of the £mt1'3:e material on record 1'16-id' *1:.}i'a'i'. 1'_hé-.}a::fu.a1 paynlent. of the amount due EQ .'e:=11&(-3'--~ba1ik. by 10 maintain and protecéi its bLisiv:":r:s§s"ir11:eréafa. txriilu its clients and consequimtly 10 furihezj its b.;1SLxécsé,*~.__§$r':>§pects. Considering the eariie.1* éausiness CO"1'ivT1E5C.?iQ.1v~1.E5A€1_1'1C§".ih€ commercial. expediency at a later stavgég, t.hC a1110'L:'r'1*:§_e_1i»d to tile bank should be allowed as a ba,=1$ir1es5, :--32<fpcz1ditu1"ea and, §.h<:'r1'e£b1'e, ighe t;ém;.ir<:: sum of W '§:&_s j..c1aimed by U"1f3 assessee was allowed as a r<':Vci'1ue ex§5j_<*1.15'ciit.u1'e. In assezssing 2.126 c:apiia1 gains he held 't;ha.1 'ih€' i&.z'1ti.éx vaIue;>. L0 be 2'1dopi.ed on the date of sale is 223 a11r:1 n£)t~1{'$1 Whi.C,h W215; p1feVai.1ing on the: date 0f(:o11v<:%1."sic}n of ,4 preferred an appea3"':.'::x_ the Cmnmis:<ii{§'i1£'r.,pf _.i:1c::m<1Qt* «J §!11'§"£E{}V'2'-lb}? §;~mp<?1'1y 1.11m s'j~;tc><">k~i:'1~§ra.(.i€: and. i§1#:?;f€?§:f._}f"£ﬁ he granmd £116 1'e}.i::*.I' "£0 ihvs: E1SS€S§':53f;'f:'..

5. Agg§1*iev€:c:§ by E,.i':<~3 3.I"c}2"(::.sai.c1. <)r<:1€:19."-._t.hé_T*~ 1"ei.-*é:'-5:6"

sreiﬁmrad an appeal 119 "H15? 'I'r'ibu1'123f1. '._I'i"'£bL;.:;:;1_§ i.:,_g)h<;*1%1d €116:

order passed by tine C0'1"nm1'ssiQr1€:r of'3§__nii.Qn1e 'Fé;;§' (}'&ppee::§S'}~ .z;1'1';~:?§ dismissed 'me apptsal. Agg1*.iev'ed,»Ejythe 1f*:*;:véi*1ue is iﬂ appea}.

6. I,ea.1'n<-;<:i <:oL1ﬁsc--:'I:- 'f91fE=«Ekhé'f:eVe:1ue assailing the imp'L1gi':€3d_Cm:iérjC:Qiiitf:I1dé'd__ihai in the first piace, wh.er1 the ioan. wasrgsi. §3drr.Dw~~e;:E 1_3y.,;i.}"1"a--:"'assessee and he had oniy affered his pmperiy 'a$V aV.$'em3;ri1'§r. {.0 M/ Rudra indusines to enabie ' .,iher;1C'to,.A'z*.ais;£; 21 10a1ii;"'v€§1eI1 a suit is ﬂied for nonpayment of the '2};11i'{;--11131.__by i:h€§é' State: Bank of Mys01'£3. Ihe an'10L:nt paid by the a:3.s€sS€:e' {i";3d¢1* 3. C{)1"ﬂ]3I'()I1.'1§.S¢':*. in res'per;:1 01' i1*11'Te1'ess1., by no s€rei'j<r11 "-- o.1'" i.rI1z1gi11a1E.§()n. can be said to be a bL1SiI1(:'.SS . _ 'a:xp¢11.c:ii:;*ﬁre( 'ﬁ'1<:?tr::!:fc)1't::. both éihe Appellate Auih01*i%:y and 1.11.?

" -TE'1'ibs_,.%11e:1 c;><>m;"1:1iE.1,ed 23. S£'I"i{)1.ES e;'rc):° 1'11 E.z'e21'{.i11g ii, as 21 btlssinesss E é/,..

<%Xpc%:2di1:.::*< * E;1;¥"id 210$. 131'1sa'i:1£:s:~n% p:{>f;E.§ 25:5: };'":s:§d_ by 1§is.§*v.;1_$5_€§~i;si11g <)f'f'i<ée1", cc}:1s;~:éqL1e:1t:1'y' as a 1101'}»;;:llow21bl<*: eXp<3v1'1ciiii'--! " v.F%5fc::<':_é}£?V%{:1Vi5,<_ 53119. c:()r1tc:z2d<:ci i;h.a.1. whe:r1. once {he 1'.)ITOpf3':'1'T,},"'i€7S" fi§§;:1*é&:%iFt.<3{§ :"mG s€'<)<:k»iz':»t.'rei:£ie 211151 p(}Es:%€E5$:3i():} of §.1-'f;_<:: sszilzijxés hgm-::i':€dV {,0 the cisveiamsz" fer the. §n,11';<:s0ss.ri:' césisris;I':1"{srr1;.i<m'.;"f§:7s;js§e1f; t.a;I«;s3_sL . piace and,_ ¥':,1'1.e're.f<>r<:_ £116: i1'1c{{:x_ ' «,rf;:iL1<: '-E«:)_ 'E36: Vigetken 11211:: c:cmsiderat.i0I1 is the d2it.e_ h..é1I1di1fg«._§ﬁ.rC1i'«.Qf possession of the s~;mck~ir1»i.1'a1de and not 1.hV_e_da1eVﬁ)n:\vh'i--Q£"i'~f§'gi'st:€rCd sale deeds-3 are ex.e(:L:i.eci 1'11 1"é§.:£J"L11' bf théz"113$pv:511€.:is»conwzying undivided interest in fhe i';i'1_mo€ab1é'=fn#o1.3--e.ri.'yQ', Therefore, the 2mth<_>rities again (}on1n'3_it,i.€€§'V21,Se'ric<a.;s§"f:rr.()L* in holding that. oniy the date of sake C16:-.d ctr'L1<*ia"l Ai'11_d"r:c_§i:t3.Vi11g the cxapital gains payable. I361-* §:V01f11r a_. "£;hé"'§ear-ned counsel appearing for the ' V' fc1ss€':S§:%e£;:---L$upp01*'{,ed "1";1'1c'Vi.:1'1pugr1<€:cI orcier-.-is, rm, ;i%1~EE<)iViI1 f;{.. Si_ZbSi,€i1'H.i2ﬂ q1,1<:ss"i.i(}ns of law: ~ "appea1I was adr1'1i¥;'t.ed on 1.0.1.0.2006 E10 consider

ii) iii} W?'z.e,?Zi'zeI: {he a;)pe£Z<zi.e (sz.z£"§'2oriE§es are §'2>i7:f:e{?{. irzr czdoptirzg; jbr the purpose Q!' cornpu{:'c:i"fe75[Qf"iricerrle from capiml gains, the cost. Qf iz';iZaI.io%_:z. 'I':1"'I"(1'.*.'3:'/"\.'.'_'I?G?7__ fz'nanci.al year .1992-£?33 l'I'"t8f(--3C1C'lH_()j"'=.iI'I(iQ}; 4j£)r'":f1e financial year I987'-8&§"ir2" View 'Qf {.!1(;;'gi1t':7§)iS!:V:3TI$"Qf T Section 48 read wiih Seeiioéiiu4~5(2}'c3]"i.?1e Aci?'?~~_ WI'1eI"h.er the czsses:;éfrige»(g[]§icer. iiacij Lvorkeéi our {The capital gair_1__sﬂ(gf _t:F%.e prﬂoertye the cost" of land sold bAJ ihe «per the index relevant:

to financial asset had been con4:_fe'e-Jged ;;1[z}:;.«,s:};;L~;g Em I6-3-I998 which 1,%}zj( )i_;. cor':.s1'd.ered , by 'tF1e""dppellale authorities in '-£"h7:;: refiner' '£073 ecI.ﬁ>'e'cmd conse uenth recorded a _ , I9 , s, _ q ' 2 ' peri2e'r9e;;'iridirig? ' VW,WF'1et'I1.er A'fjIie«.,£1ppe1Zaf,e aui.hon'1ies are correct in alI'c';u,iir1g deduction claimed by the assessee as revenue expenditure in respect Qf the payment made ;4'i.=Q'Sta.iee Bank of Mysore as a guarantor in t.he_face fact' that the borrower, namely M / s. Rudra ' -.«x"nciu.s1riai Szisrer' C()I'iC<:'f'I'2 of {he assessee. fszczd assets to pay me lial)fli.{y which were Qﬂered as security by the borrow-er" and the payment'. was 2/ '$5':

$0 ;:;r:>zn<.>'f'é>(2' 3.3;; av<z:"::srj2§:I?<:>z.::af {'€}.I'%Sid¢::??'€II'i(}?"1_SV.V'€"éZ'}d.._HOE' s nece;>ssiI.a!.e(i 53;; c;'(m'1r7'2e:"cia.l e?xpe(1ier'1Cg;;'i>"-- . __ S , '

9. Regarding question Nos. 1 and 2:;__fI"m;: :;i_*§1":;c§z'i:i§'<)11 b' :'{~:<:c3:'<;§ di${:E€>$€$ 'that'. 11:18 zipgfmliz-1:1§}a péirénEszfssh£A[3.__.Vi'i.:f:1.1V,9:§rh.i.i:E"1 Gwned imm0\r'ab1e p1'(>pe1."iy, c.t().r1.\:er1,€d_ Iii}:-* ES£1II1f3 "§} 1'E,O" s{0c:.}'y»1'1V1'--.

"a1'ade in the yt-Bar .i987--88. 'i;}"'if::?v),-;"*f*?I11.€I't5€i._ii"iAf;f) = agreement. ::iai.ec'i 15.3.1988 wmq M/..§;. u.n':'{_'ec.hfsjiimed Lm;]~ which me said Company was Expf.-'fCt€{i"LG"C1'éx:E31(;.p:Vi.1;1€vﬁifopéfiy', C0ns'{'.ruct ﬂaizs and give._ ,f'1£)>i_.h"G: 'i;hé'ij*_jv~s11'2113a in 'tilde c:o1i1siructed btxiidiiag 2i;sse's§f%:s£;=«3 'i:~;f:{ss&sé§éd' io income tax regulariy. In {he yeajf .IE')88'"89'r\x2\:'.hCI} agi"een1e11t' was emtfsmd inio. the revemlez and moi: "t1'e"221 3.1735' 23. tralasfet' and C.21Hed upon the 21sses,:3e-rz $10 1531}; }7'{ox>ve:»'€:ér, U16? claim. for capital gains is V' "v.1.I}'c1(i€.3':'()1":':_1'}--}¢' Whflll tlaﬁasksessee execmescl 1*egis1.e:*ed ssaie deeds in fa;v($u:r_0v£.°' i.'E1§*~p{z:ich21ser of t:I':e ffats in the financiai year 1992» 91%. h {.}V1;%'t:-.$t";1g§e., fer the pa "p0.<.2;(-3 <>f<:2::.1<:uE2-1E.ir"1.g;;' (3E11")ii.é?:I gairls. ir1$1 éiad. :.ji'.1.;;'&§.ng the cost .inﬂa.i'.ior2 index, they 't:c)Qk the index as 'pAmva.i.1i1v:g§"£1': 1.988,' {he date on w1":i(:?: the, in1r110vab1e p1'c);3eri,y i :3/I /"' E1 was ecmve:"i:er:i into $i:.eek--in~i.1"ade and ee1fi.Se{§iieni.1}?,_etitiered into contract for development of the property.

the questien that arises for eonsideratienh;g;'r.;gx,r1;ieh' is' 'ihe relevexii date to be taken inie e£:ns§ide1{atiaVr§".fe:"i~.h_e';§i1i4§:>€;s;e7of assessing the capiiai game.

10. Section 45(2}fw-'Vhich..i'S"revlexierifi reai:1S"as viinder:--

"45. Capito4:iqaii:s,..:'i"

{.2/,'--,_}V afii;+'i'?ii:1§ contained in sufamseciirzirij _e{ai»:is arising from the iitan$jexrVi'iI:*y...;eay a'£','()i'"1J6fS1'OI'l by the Owner Qf a Ceipital e,ssef'iiﬁii(§,"oiA"iis.~~~treaimeni by him as stock- in--ireu:;ie qfeL~__b£Lsir1eé§s carried on by him shall be .«§gehergeai5£e._.V:ie i:ieome»ia,r as his income of the i which such stocloinvirade is sold V iransferred by him and, for the h " section 48, ihefair marl-cei uahie of the c1,s::s.e'%Li"('V'):/1 the date qf such conversion or treatment '}s.?zi;§,zi be deemed to be the fuii Lsaiue of the H consideration received or accruing as 0, result Qf the A transfer of the capital asset'. "

E2 1 1. Exp121:2at§01'1. {iii} to Sec'Lic>:'; 48 ciefirlzass i.1h1c1_e_x,cj.{1.<_'C<;s't'. of a1cqL1isEEéo1:1 which 211621313 an 2m'1()'m'11. whizth beaE_s'~§__t{)' L)_£' a.(:qu1'siILi.oh {.118 521.1119 proport:ic>r: as C051. II1E~§.E{T.i'L)!i:'IE}C3€:X"'§bh['.§_'[?i€, year in which the 21356:. is t.r21I'i:é;,{'e:*:t*£%r1.:v bear:-3 "'i,c)"'f'i:i':_;; };hf]aticm. Index for the firsat. year-in wI91'i_c.h'"Lhe .§yf;1s held the assessee or for the yamr begi:<2_I1ir1_g 011'£,--h_é'1'5*'- cijay 0fApr1T}, 1981, whichever is Iai'.e'r.__ Vv _

12. A }'1£-3.I'l}1OI1iO1,ES'lV11'{€.TI).%ff§3;LQ;'[i0ﬁ".O'f,I'.I'5'3S€ two provisions makes viiW(*;i::Aafi:as "tfEé"hciiar,&'the cii;jj'1é1I gains is to be taken into coiusideiatiioh.' Féf:31i'-W6' find out xvhat is the fair mai'ket', value of t.h(é"-«£139,621. Q11'1:}1er..:iai€ of conversion, then to find out " '~ \v%1£;1{'3'«is IE/ﬁe: Uiélfkéii."J.E11L1'€ of the Iarolneriy On the date oi"'c.1"3.nsfer. 'E'w0§"é'»u -._computc--: fihe capital gains payable, it is the ni£i1'E{é£' \='é1E.{1juE: ml the date of t:'zmsf<3z' Lhat, is reievzmt and in ] eLrr§v'i;3gV'':1{. i,h.a'L {i'1E':i"k<3EI v.a1L1.e the mciex cos': of 2u:qL1isiii<)'1"1 _"..pi.'eTs*c;"ibed on the d&1E(-3 of E.'1'a'11sfe.:' is to be taken into <:fc;:r1side1"ati<)11 anti not Lin-3 date of cc)1'1ve=rsi03'a. In the ins1.:am'. vs ..i'.wc'3L"fi«rr11s awe c::0m1e:3<::E<:d wi.t'.11 :'zac:I'1 {3t.}1er as iia clean' from 'the % "E3 <*.2:~1:~'a€:¢ {E36 3§.;3d&?x <?(i}5é5f.. <3?' ;::<:'<;:.;§53s:i"i0I'x wg.1:s; 223 an t.h.:2.--'£§[email protected]? of U'::'1I1$f€r' in 'i.h<:/7 ;y*ear e31'1c§i:'§g 1.993 zmcl H1:-*. i11d{%;§j{)i"

aCqL1is1'ti0I1 cm the r;i.a1L€ of C,{.)x.1v€:':"s:si¢i)1T1 161. -f'I*h<é:ic::f"(;=:;é9. f£*1¢3W a:~3ssc.sssir1g ()I1€i_c€;;' (.E{J1'3{1iI'1i{.U3C§ :1 S€?Fi()L1£3"'€'.'1'"§'0f is é'.a}<;if:g".i61»._g;.s ' index. Tm: Appeiiaur Aui'h01'£E4i€%s3 h212'%§"z"i€ﬁ§hTtI'Ei; i§1"i.e':?_f:?:33jt%'j {hie said assessnsezli. allci have £211atéV;é"~V223 2i':.~? r:o.r_1'éof[, 'nfﬁiiezsg (7031: (if V acqTuisi'Lior1. '£'heref'ore, '_X:'£-'ht";'I1 'i.mp.:,ggnéd"'ordeyipassed by the AppeIEat.e :X1:1.I1<>1*it';i§é-- V:'i:'3.§1é :.wit:h the aforesaid statL1t.<')1'Y I3r0\»'isi.c'3Az";A'3._f of law have '(.0 be and zigziinsi: the reve:n.u&3. _ , . .

E Regardimf. <ii'u§:5s1:i,c1g:1 No.3:-v The naaterial on record discloses that: the ir:11iT;.()sv}:2.FﬁV1c property at Shivanahalli beiongs to ¥;.V1'1'é%:.21s__S€:sVsee. ;E"hé:...sa1id p1'opr;:<1'1Ty was offemzd as a s5ec:uri1;'y to ':3i'.:[email protected]*.:%1i'K :»':.;:f' 'Myss0re for tha ioan bO'1'I'(')W'f3d by sister c.0nce1"'r1 1\/1',f§~\/,i:'{z1ci':'2=:V_ jIn?;iLzSE,ries. 'I'}'1e was cloaking w'i't.h the 'V D1*()dL1fT;€,.Vs'».{Jf"Vthe saicé sis't'e1* CO¥'1{,'.CI'I"1. The b1.:si1'1esses of {base 24 b21Ia12ee eheet: of M/e Reidra Emcee:-eE'riee where they h€L§'f%"'Sh0Wﬂ {Ede ame'u§2i;s due by the aeeeseee to them in dispute. The eaid eieter Concern beeame 2: siege» ' "f . were unable in discharge the: §oa11.::.;'»EA'§:eefefei°'ej, b Suﬁ we z"eeex:e1~y ef the ar11ez,m.jt:. agaireeiﬂizeg prEee_E_;;3§:§» {*:'€}yi'%"é'::{')::1".,:{%..1;.'g.'f§; the aesessee whe is the surei.je:V""'§t. xxreg. Hzieeeree eeuld have been pe1se'ed decretal amount the Bank. x,ve"L;{Ai£.i the p1"operty at Shivanahaili for saie in pubhe auctien. In? feepeei" iheVj~xze:*yV_San€1.e property, the assessee has entered 1:110 é£1"agfeen:.ef:t.V__of gieveiopmeni with M/s Uniteeh Corp0rat'ie_n' a.nd'VhadeA'e:1E1:ebfteiken in the agreement to convey 3. e}ea1f"em§i meg"-1<AeVta'e1e i'.it1e to the intending puzrehasers 0:" the «'V"'i1.af§ 'eenstreeeed thereon. If the property had been A'~~bre;1g§mi i:Qnsaiefeoid in pubiie auetiene the agreement entered iﬁtez__betxsJeeii' {he assessee and M/.3 Uniéeeh Corporation wouici ijxave in jeepazriy. They would have eoxnmitted breach of " ,:.i1.e _f.er;:11e of éhe eon.t1*e.c:'§, in as m:L1ch as 3; failure 'ﬁe make out a gﬁarketable tiie. Therefore {he aeseesee paid Rs,,3?.25 Iakhs as $5 §z1':':';%'re.&e;'{. {f12?:.ime{1 by {he B2:1:';§a got. back: tile ;3i"()§):%1't}2"':3.ﬁ;d_ 't:1if1.u:~@; made ggeoczl ihe. r11211"kc%§21b1e *;'.it.1e in i'2w<>L1r of tﬂhe."£311:'g:§hé{sers5--.-- ei? {he ﬂats' in {,€1;"§1'1S of {he 21g,_§1'eeme:1t_e:1$".,e_1"ed ;i'f1{'f0" "§'3eLweexi...é;he:i1". 2m<:1 M/S L?1:1i'ieeh CGI'pO'I'E1ii(}IL ii; if:-;. i:'11'_A1'1,];*;A.i§, aétutitexi. :'.i..:iV';'_'-:':.."£1€:;1Ve_[i':'=e sseen w}1et.E1e:' the asssesaeee is ei:':~tii,ie<1A"%t.<) tﬁe T;=§,_:«3;i<:'§ ';221jgn:1ez1i. Bf' interest. as bL.lSi§1f3SS (i?X'p€:I1.S§€$ L1;z_3__d'c:»sf_Seﬁioii' 33?f{.1.) oiﬁhe AC.*{..

14. The Apex cm-i¥j;~ iI1~'_vt:§1§3.V(3213:;,ei'.QOMMISSIONER or INCOME TAX Vs, 32. 00., reported in 38 rm emf, 46}:vee'_{sVe--,v, r;g:Ié_ ._ ~"A?E'€:§.h€%f;_f?i£?{:'VU7!.§ifI- emerges from these cases :sA':r3a::%g.r 'the' incurred for fostering the 'buSfIiE35§8"Qfﬂe1_eI1f)£VH.éF-bflly or was made by way Qf diSiribi1t,%0'r=2.. of pr::Jfz'.f,s or 2513 wholly graiuirrous or seine improper or oblique purpose outside the

-- business (then. the expense is not In. deciding u:11eZ;'her a payznenf: of rn'o:u4',E is a dedwrifbie expenditure one has to take .§.'r1eiE; eonsideraficm qzaesimrls Qf commercial e,x:ped.:'ei'2.e:?y arid (he pn'r'1eipies Q1' mciinary (?Of?'?I7'1€TCi(?l trading. ff {he payment": Q1' experlciitur 5/ 16 is :'.aca.r,r'ed fer {he purpese Q!' the §?'G.d.€ cg' aseessee ii" does not matter that the paymeai' 'rriay. 3' inure :0 the benegfii' qfa third party. A:1af;he':<, is whether the transaction is prepieriy .en':ered_:fnfe a part of the assesseele iegitiéfazzzie k:ez*r1rz{iere:a;';~~..x°A underiaking in order L0;;"ae,iZitaz'eA.i';ﬁe Car;e:gi':Egf.qr; Q11:

ii?' business; and £1' :25 imauegierial fha!'_ _a"'£h£rd.':pariy also benefits thezregay Bz;;:"£"«..igf2-- 'every ieis a question of fact ""a}heti--aer?.;.b'ﬁhe'*.Vee.3aﬁe.ndit1zre was expended wholly and purpose of trade or: E3L':5;r*:ess §Qf :;he..i1sseSsjee1 TVF0iE?;Wiag;ii1.e"said judgment, the Apex Court in the Case 5: AND CO.P.LTD., Vs. COMM1SSI(5In?ER~ Ge fN(v3'0:ME-«TAX, BOMBAY reported in 261 3 V' 1 8A.{SC)"V1?iéICE' as under:

case of the Company that many of the were aid and superﬂuous and the business caula be carried an with a smaller a'a-rﬁber and the oralg way in which they Could ;.g5iz.LC€ the number was ta terminate the Services of ail the empiegeee by paying {hem eerrzpensaiiarzg W "-Ci ancfi. fh.ere(g;"I.cs?r re--g'2:n_pZ.(;g;i:'2__<3 some igf {Them only,. _[ the <:(m'z;:>a1'1y fell. that, that was a. T?'18i§1()d~~i~,aZ}jif€;_?}" A' would. inure to its E-3e:1e]"it., ii crczm/1c)I. be said§;--}1\a:=§::§ie' payment, of c()mper1sc1I1'ozez 1_1_:a.s__411?;c£;i'e'HV'tj:;f..f{f1 oblique 1"r"1()£fI;e and 1,Ui;ff'1OL1(, 1!}-.{C]C{?7(i . f::o :r;(}r1~im.efefai_ f «:rensiderai:1'ons or expediency." '

16. "iT'h.e Apex eégri-. m" 1.h_e:{ V+::;a"g;éV,,e'o§%s.A. Br}ILDERs Vs. COMMISSIONER _oF INQQMQ-mxjh Fe in (200 7) 288 ITR 1 (SC), afﬁer :"eviét§»;_i::1g the ease 1é1w.v'Vo:f1V£he.f'poi'nt held as under:

""" 'Ae.'AfWf1a'i*?Ii35 re!et:anI' i"s"'Lbhet;f1er the assessee cidvanc-<ed'3';1eAhe a.:*!1o_i£nt't0 its sisier concern as a measure 0j'Ve(3i'nh:r_,?ri:igii' exfped1'er1cy."

"'.'.T:"Ie Vcorreefi Iii-en.) in our o_p1'ni0n was wheiher the an1eU,:3I','__ aglpanced to the subsidiary or asscr:_io;!';ed Company or any other pariy was VV as a measure of commercial " ' expeci ij_<»:1'i.'c_L;. "

' -. »'"On<:*e it is esiablished that {here was nexus ?;etf;~,uee1'1. {he experzdmzre and the purpose 9f the "~._busz'ness {milich need mm" necessan'l;; be U16:

vs 18 mtsfness of the azzssessee iisegf}, {he Rey-en.2:e~«.V"'*. eannei'jusi'§fiabiy claim to put iieeif in the a;;;}&;'cz§s;z: -5 Cf the bu,3i.nes3m::in or in the position of of c::ii'ree£'o:rs and assume the' '%*oEe< .io'..de_ei{:ie'.heu;.:'.V much is reasonable expendiirire1'Z*i:::}ing_reg::r»:;iV the eireurnsiances of theiieafse. I\?1::.¢;b£:3inee'e%ne;.nv_can§ be compelled to profii,,V_ ini:oIne--

tax authorities must puiéeifienieeioes in ihevshoes of the assessee and _ how Zousinessrncin would aei. V The aiiifiozfiiiee :If?1i'iS§ ' -izoolc at the rnatijer VV:':.hei;}_ that of C1 prudent'"hiie_iinessnf;nn;..A3' eq';;*eady stated above, we have'::ir:1'}$ee" the borrowed funds Io Ci fromiiiihe point of view of eenifrierciai not from the point of oieu5i4"iuh,erfh-efie.tfieifamount was advanced for ; 'eczming prefiivs. V"

--."";'?he expression "commercial expediency" is A"an:"ve.>§:pfe=s:'sfion, of wide import and includes such V exjpeneiifure as :1 prudent businessman incurs for ..i!'i"e.V piepose of business. The expenditure may not heioe been incurred under any iegai obligation but ye: ii is a£I.oz,oabZe as a biisinees expenditure if: it L:-else'; the assessee has steeci as sLzre1.y for one of its sisier 39 wags; £n.cm"r::.=(z' en. §,:roz:.:'1d.s :3!" e:romm<3nr:i(1£ experiierwy. "

"£7. '1'1.'1e1"efore from *::1"1e :a.foI*esaic1 cle<:i:=3'i(ms whve1£'e:1*xi:1"ges is first in order to claim the 'z:»ene:fit' of c1edmti§V_on'%%_n*:.1e:f-'._1if'1€:

head of business expenciimre, the "1'1'as_:i.o% ":'3hew !.;_112'1Eﬂ the money is a<rt.uaHy expended. =.._"i'1r1en A. jT"1e7,11'as "'{0'S.i"-:.Qwr;1Ve$,I1e nexus between the expe'1"1.dit:1.:1*e.___and "].3.I:E.1;pOS€'.'(3Eﬂ' fthe buj:-3i11essu.e. in denlonstrating {his nexus, ﬁ:V._i's _11eceSe-aA1*y' {,h;iU{. the Said expenditure incurred 'sl_1"(3«--=,ald-'_ neCeS':s_ar_i1y.A be the expenditure inctL11*1"-ed'fir;-e§jj:1neet§0n'"with '1.1]e"'b'aisi11ess of the assessee. By such e;:<_pe.ndi£are. "{Jje.I7eV"*sh'0_uid be a direct and minimurn benefit to the asse:;se'e_.' if, ~~§11ust' be on account of necessity. In 0th_e§'r,WQAfds, L30nim.erg:i.a1expedieneyis 10 be denlonetraéied. By 'SLv1'(L}'.1V eg<.per';r.;fft;1.1_re, merely because a third party is also b*en'efi1,etf, --i:T£.: --e;'1;nVn0t be diseiliowed. in this baC1«;g1"0u11d if we 100}: at the facts of {hie s "".:>riea'eh. sf ee1':1,rar::£.. If the £'heug.g'h.t it fit {,0 20 <;:one:3e§':':s, §'31:sih»ess sf éhese §.\¥<j3 f§I"IE1,'=?s were. i11tirz121§.c2Ey {Z{)I"§E":f3.'(.'.i'.£3d Whh each otfzerx §f3e<:zu.:se of 21er1~p21y:11e1'11, <:}§1c)23.'I1s. the Eﬁank had filed 9: suit. for recovery of money both the sister eoncerxl as weii as 'the assesses. E3031 Q1' :£:he:'I'1-- ['1:":2.1<:'i"...r;1U.V vaiid ciefenee :0 pm. fonh. Ii was 21 ;1}2.?;u,er <::i'-'1..'im;':--t--§if;':,ai.'v.a"c:?1er;:ree".

w'e'L11d have been passed emd the prepe1_j't'y..:'};1oi'1g.;ag{ed 'F5r{§'i£)1"i};i;1'1g to the assesses would have bee:1-.bro1'1ght. '1,::>V sa1ve'LQ'vre€oVe1' the V Said I:"£II10'LEI1T.( The very same p}."dp_er:'§;_ wasﬂhe stxbgeet H1a1'.ter of an agreement beE,w'eeei1_*{§1e ;_ass"esVsvee'~eand the Developer. Under the t,erms.of theA.E7)exzeE.0p1"r1ent: Agree:n1e:11;, the assessee had u}:::;;1erfca1}<Aei§."i;e._zzlarketable title to the purchasers of the i1ats_ teybe said property. If the property had beerysold je6£>;;rd1zing".t.hé assessee, he would have »::omm'itted sf of the eor1'sraeE:. It Wouid have a 'e.;ise,adi1_'1gAei?ff "<e:t.__ ha»-'i11g regarci to the value of the property. the 21:mC:--uh't ':)f."10eiﬁ[. the im.e'resi payabie I;11e1'e0:1 and 'ifhe va1Eue of {he."p:'(">g§ert.;J"which the assessee was 10 in the deve1o})n1ent 21g.ree:1.1et1t and to see that: the is not zzeeused sf 2:

2% c§is§ct1'12,11'ge {lie Ermze 1''{) %''he E'3ar1k an (1 _g,{ei'. the pz'r)pe:'ry which r1ac>rt',ga1ged, 're1e.a21seci, thus; 1nakir1g.§ good the Liile in 1.er;:n$»ec)£" the deve§0pmer1r agreemexui. and in the process if L-1Ig:~ p.ay Rs.37.25 lakhs towzxrds im.e'res¥;., ii. is an expVer'1'C1.iiL1.re'~whieh incurred by 'the in the eoarrse (3é"t.}_1e.bx-;s5in'e';»s_s._ 'ﬁe 'alias * Lmder a Eegal. oE31iga'ti011 to dise_ha1"geV't}1e--debt. d1;:t§'t~c>'*t.he I:3€lI§}§,. It is in pursuance of the 3ege11"Qhé*:gat.i011;-- .\vi'ih(>L1t"1.giV4i11g room for 23. decree being passed e1r1.(i""t,it1e"property being; brought to sale in pubhc aucti01r1_. he .i_'Lﬁfii.1e3t1;'Vth_e elaim by way of a Compromise. ];)2-..~id the §;m0'11_e');' aIidL"_*g_0t" the property reéeased. Therefore _ 21S'C2...__prudeI§"E___ businessrnan he incurred this expe1'1ditu.re' to cEi:3eh«a 1'gLe"'21bEiebt borrowed by the sister concern and fiimgs sa\}ed_i'.he prbpe1'ty which he had offereﬁ as security 'V 'a.1j1ei"in ii}i:~riVA'wa1s able to make out a rnarketabie title in terms of agreement. It carmot. be said that the peiy-me,11_1_~ ~r_§fj:t:E1.e said a11:f10L11r£ does no: e0.:i3.$ti1,1,1'L,e bL1.Si.I.'1€SS expeIrdiL_L:11'e. Both the dppeiiate a1utE101'i1.i€s on app1'€Ciatior1 of " _t'.he aforesairi r11a1:e1fial rig;h.i,§y heid that the assesssee is erzmiied V pt} 23. dedu.Ct.i.or1 under the h.ea(§ of "business ex.pendit.ure and a E:

22

1*1avé>. :"ig§:{1}-* seéef améds? the <.>1"c§m.' of €222 £5§SSEfSSi£"1g Office!' s:§issa.1.I0wing i:1":c3 said c§ec}uc:t1'0:r;. In that": viexzv of the :11a_?;_.'[€31', the third sub81'.ant,ia§ qL1esi,i0:2 of iaw is emswered in E"z1fv*"o1,:ﬁ1*.._(§'f_The £1f.~T-SCS-.':§€3Ef and a;gai11S1, 'the R€fV€IT1.L1€. Hence t.h<:?1'__r:;' iris ijib $fI":s3'ri':~-- this appeal. Accsrdingly it is dismissed. H ' ' -.(:§§1./ .. 2 n u - . '

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Karnataka High Court

The Commissioner Of Income Tax vs M/S Rudra Industrial Commercial on 25 January, 2011

Bench: N.Kumar, Ravi Malimath