Bombay High Court
Hardiallia Chemicals Ltd. vs Commissioner Of Income-Tax on 21 December, 1995
JUDGMENT Dr. B.P. Saraf, J.
1. By the reference under section 256(1) of the Income-tax Act, 1961, made at the instance of the assessee, the Income-tax Appellate Tribunal, Bombay Bench "C", Bombay, has referred the following questions of law to this court for opinion :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee's contention that the assessment order was not valid in law ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee's claim for deduction of foreign exchange difference amounting to Rs. 30,619 was not allowable ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 8 lakhs agreed to be paid to the Maharashtra Industrial Development Corporation for relocation of villagers at Kukshet village was of capital nature ?
4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that proportionate premium paid for procuring leasehold rights of land on which plant and machinery was installed cannot form part of the actual cost of plant and machinery and, consequently, rejecting the assessee-company's claim for right of depreciation and development rebate ?"
2. Counsel for the parties are agreed that questions Nos. 1 and 2 are should be answered accordingly. Question No. 1 is covered by the decision of this court in Carona Sahu Co. Ltd. v. CIT [1995] 213 ITR 106. Following the same it is answered in the affirmative and in favour of the Revenue. Question No. 2 is covered by the decision of this court in CIT v. Sandoz (India) Ltd. [1994] 206 ITR 599. Following the same it is also answered in the affirmative and in favour of the Revenue.
3. The only questions that require our consideration are questions Nos. 3 and 4. The material facts having a bearing on the determination of question No. 3 are as follows :
The assessee took on lease a plot of land bearing No. 100 at Kukshet village for the establishment of a factory from the Maharashtra Industrial Development Corporation ('the MIDC"). As per the lease agreement, the MIDC was to give vacant possession of the land to the assessee. However, at the time of taking actual possession of the land, it was found that a portion of the above land was in the unauthorised occupation of certain villagers. When this fact was brought to the notice of the MIDC, the MIDC informed the assessee that without financial assistance from the assessee, removal of the villagers from the portion of the land occupied by them would take a long time. As the continued presence of the villagers on the plot would have caused a grave safety hazard to the chemical factory proposed to be set up on the said plot, the assessee agreed to make a further payment of Rs. 8 lakhs to the MIDC to enable them to evict the occupants from the said plot and to relocate them expenditiously. This to the assessment year 1975-76. The assessee claimed deduction of the above amount in its assessment for the assessment year 1975-76 as a revenue expenditure for the purpose of its business. The Income-tax Officer rejected this claim of the assessee on the ground that the expenditure in question was not a revenue expenditure. According to the Income-tax Officer, it was an expenditure in the nature of capital expenditure because it was paid by the assessee to the vendor to get possession of the land which was in the possession of unauthorised occupants. The Income-tax Officer placed reliance on the decision of the Supreme Court in Sitalpur Sugar Works Ltd. v. CIT [1963] 49 ITR (SC) 160 and held that the expenses claimed as relocation expenditure were obviously disallowable, more so because the assessee had acquired possession of the land which hereto was in use for the purpose of residence by the villagers and over which the assessee had no control or possession. Aggrieved by the above disallowance made by the Income-tax Officer, the assessee appealed to the Commissioner of Income-tax (Appeals) who did not approve the findings of the Income-tax Officer and reversed the same. According to the Commissioner (Appeals), the expenditure had been incurred by the assessee for providing an alternative accommodation to the villagers only with a view to expeditiously removing them from the factory site without creating any tension, as other wise, their presence on the said plot of land would have caused a great threat to the security of the factory. Against the above order of the Commissioner (Appeals), the Revenue appealed to the Income-tax Appellate Tribunal ("the Tribunal"). The Tribunal took note of the fact that occupants for the eviction of whom the amount of Rs. 8 lakhs was paid by the assessee to the MIDC were residing on the plot even before the same was taken on the 99 year-lease by the assessee from the MIDC. They had not come to reside on the said plot after the lease was obtained. They were in adverse possession of the land. They had to be evicted for enabling the assessee to have uninterrupted enjoyment of the land. The Tribunal rejected the contention of the assessee that in this process the assessee had not acquired any additional right in the land and the expenditure of Rs. 8 lakhs was merely for facilitating the enjoyment of rights over an asset which the assessee had already acquired. The Tribunal observed that during the course of the hearing, the assessee was called upon to furnish the correspondence between the MIDC and the assessee in connection with the payment of Rs. 8 lakhs to enable it to decide whether it was required to be paid for acquiring better title to the land or the payment merely facilitated the enjoyment of the existing asset. But the assessee failed to place the same despite specific direction to do so. In these circumstances, the Tribunal was of the opinion that the quarters having been there on the land even prior to the lease of the same to the assessee by the MIDC in the year 1966 and the land thus being under adverse possession, what was sought to be effected by payment of Rs. 8 lakhs was to improve the assessee's title to the land. According to the Tribunal, this amount was, in fact, paid to the MIDC in addition to the payment of Rs. 17,93,800 agreed to be paid by the assessee for vacant possession of the land in question for the purpose of the 99-year lease as per the agreement between the assessee and the MIDC. The Tribunal, therefore, reversed the order of the Commissioner (Appeals) in this regard and held that the amount of Rs. 8 lakhs paid by the assessee to the MIDC in addition to the original amount of Rs. 17,93,800 for the 99-year lease of the land in question was not allowable as a deduction in computation of its income as it was not a revenue expenditure but an expenditure of capital nature. The assessee sought reference of the question of law arising out of the above decision of the Tribunal. The Tribunal has referred the same as question No. 3.
4. Mr. R. Murlidhar, learned counsel for the assessee, submits that the sum of Rs. 8 lakhs paid by the assessee to the MIDC for eviction of the unauthorised occupants is a revenue expenditure because it was incurred for facilitating the carrying on of the assessee's business on the plot of land obtained by it on lease from the MIDC. We have carefully considered the above submission. We, however, find it difficult to accept the same. The plot of land was obtained by the assessee from the MIDC for establishment of a factory on payment of a sum of Rs. 17,93,800. In said plot to the assessee. As a part of the said plot was in unauthorised occupation of a number of villagers, the MIDC was not in a position to deliver vacant possession of the same to the assessee immediately. It was necessary to take legal proceedings for their eviction which would have taken a long time, resulting in considerable delay in handing over vacant possession of the same to the assessee and the setting up of the factory thereon by the assessee. It was, therefore, agreed between the assessee and MIDC that the assessee would pay an additional sum of Rs. 8 lakhs to the MIDC to enable it to evict the villagers expenditiously without litigation and to relocate them in some other village. The payment of the above amount of Rs. 8 lakhs, in effect, resulted in the enhancement of the amount of consideration payable by the assessee to the MIDC for obtaining the 99-year lease of the plot and to get vacant possession thereof. By any stretch of imagination, such payment cannot be considered to be a revenue expenditure. This payment was made to the vendor or the lessor to perfect the interest of the assessee in the land or get rid of the threat of litigation which might have delayed the handing over of vacant possession of the plot to the assessee and the establishment of the proposed factory by the assessee thereon. By payment of this amount, the assessee acquired possession of the land which was occupied by the villagers who were in adverse possession thereof. Such expenditure cannot be treated as revenue expenditure. The land was required for setting up a chemical factory. Without vacant possession of the land, it was not possible for the assessee to set up the same. The amount spent for getting vacant possession of the said land, therefore, cannot be regarded as an expenditure for the purpose of carrying on the business. It was incurred for putting up the factory. It is, therefore, a capital expenditure.
5. We are supported in our above conclusion by the ratio of the decision of the Supreme Court in Sitalpur Sugar Works Ltd. v. CIT [1963] 49 ITR (SC) 160, where expenditure incurred by the assessee on shifting the factory from one place to another to improve its business was held to be capital expenditure. It was observed (at page 162 :
"Considering the matter apart from the authorities, it seems to us impossible that the expenditure could be revenue expenditure. It was clearly not incurred for the purpose of carrying on the concern but it was incurred in setting up the concern with a greater advantage for the trade than it had in its previous set up. The expenditure was not incurred in earning any profit but only for putting its factory, that is, its capital, in better shape so that it might produce larger profits, when worked. It really went towards effecting a permanent improvement in the profit-making machinery, that is, in the capital assets. It was, therefore, a capital expenditure and not a revenue expenditure."
6. The following observations of the Supreme Court in V. Jaganmohan Rao v. CIT and CEPT [1970] 75 ITR 373 are also apposite (headnote :
"It is well established that where money is paid to perfect a title or as consideration for getting rid of a defect in the title or a threat of litigation the payment would be a capital payment and not a revenue payment."
7. In view of the foregoing discussion, we answer question No. 3 in the the affirmative and in favour of the Revenue.
8. The controversy involved in question No. 4 pertains to the inclusion of a part of the premium paid for obtaining leasehold rights of the land on which the plant and machinery had been installed by the assessee in the "actual cost of the plant and machinery" for the purpose of depreciation allowance and development rebate. We have perused the order of the Tribunal. In our opinion, the Tribunal was right in holding that the premium paid for procuring the leasehold rights on the land on which the plant and machinery was installed, cannot form part of actual cost of the plant and machinery. It is well-settled by now that depreciation under section 32 of the Act is not allowable on the cost of the land on which building is erected or plant or machinery is set up. Depreciation is available only on the cost of plant and machinery and the cost of the building which does not include the site. See CIT v. Alps Theatre . The capital expenditure incurred by the assessee for obtaining the 99-year lease of the land cannot stand on a different footing than the cost of the land or the site. We are, therefore, of the clear opinion that the value of the land or the premium paid for obtaining leasehold right for 99 years, which is regarded as capital expenditure, cannot be treated as a part of the cost of the plant and machinery."Plant and machinery" does not include the site on which it is located. The analogy of the expenditure incurred on the installation of the plant and machinery or on laying down the foundation for establishing the same, which might form part of the cost of the plant and machinery, is not applicable to the cost of the site or premium paid for obtaining leasehold rights of site on which the plant and machinery is installed. In that view of the matter, in our opinion, the Tribunal was fully justified in holding that the premium paid by the assessee for procuring the leasehold right over the land on which the plant and machinery was installed does not form part of the actual cost of the plant and machinery and in rejecting the assessee's claim for depreciation and development rebate thereon. Accordingly, question No. 4 is answered in the affirmative and in favour of the Revenue.
9. In the result, all the four questions referred by the Tribunal are answered in the affirmative and in favour of the Revenue. This reference is disposed of accordingly.
10. In the facts and circumstances of the case, we make no order as to costs.