Income Tax Appellate Tribunal - Ahmedabad
Mardia Wire-Rods Ltd.,, Ahmedabad vs Assessee on 24 November, 2008
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "B"
Before SHRI T K SHARMA,JM & SHRI A N P AHUJ A, AM
ITA No.441/Ahd/2009
(Assessment Year:-1999-2000)
Maradia W ire Rods Ltd. V/s Income-tax Officer, W ard-
[now a Dissolved 4(4),Ahmedabad
Company], C/o Rasiklal S
Maradia,183, Manekbag
Society, Ambawadi,
Ahmedabad
PAN: AABCM 4770 D
[Appellant] [Respondent]
Assessee by :- Shri P D Shah, AR
Revenue by:- Shri R K Dhanesta,DR
O R D E R
A N Pahuja: This appeal by the assessee against an order dated 24-11-2008 of the ld. CIT(Appeals)-VIII, Ahmedabad, raises the following grounds:-
1 "That the learned CIT(A) has erred in law and facts in confirming the action of the learned AO of disallowance of the deduction of Rs.21,80,640/-, being the amount paid towards non-use charges, while computing the capital gain.
2 Your appellant craves liberty to add, alter and/or to amend the ground before the final hearing of the appeal."
2. Facts, in brief, as per relevant orders are that return declaring loss of Rs.20,50,373/- filed on 21-12-1999 by the assessee, after being processed u/s 143(1) of the Income-tax Act,1961[hereinafter referred to as the 'Act'] was taken up for scrutiny. The assessment was initially completed u/s 143(3) of the Act on 27-03-2002. Thereafter, an order u/s 143(3) r.w.s. 147 of the Act was passed on 30-03-2005, with the disallowance of Rs.21,80,640/- on account of penalty paid to GIDC for non-use of the two industrial plots while computing capital gains on transfer of these plots on the ground that ITA no.441/Ahd/2009 the said expenditure was not incurred wholly and exclusively in connection with transfer envisaged under sec. 48(i) of the Act, resulting in assessment of income of Rs.1,30,267/-. On appeal, the learned CIT(A), vide his order dated 22-08-2005 allowed the appeal of the assessee and deleted the disallowance made by the AO. On further appeal by the Revenue, the ITAT vide their order 26-05-2006 in ITA no.2258/Ahd/2005 restored the matter to the file of the AO with certain directions. In terms of these directions of the ITAT, the AO allowed fresh opportunity to the assessee vide notice dated 10.10.2006 u/s 143(2) of the Act. None responded on behalf of the assessee. Even in response to a subsequent notice dated 12.1.2007 issued u/s 142(1) of the Act, seeking ,inter alia, the following details/documents:
a) "The details of properties and computation of capital gains with supporting.
b) How the expenditure of Rs.21,80,640/- is wholly and exclusively in connection with transfer.
c) What is the motive of such expenditure? If yes, details there of with proof.
d) Whether there was any encumbrances on property sold.
e) Produce relevant records, terms and conditions with Gujarat Development Corporation and others.
f) Any other documents, evidences, proof and written submissions in this matter if any."
Shri Rasiklal S. Maradia, ex-Director of the company requested adjournment. Despite adjournment ,none responded thereafter until 27-8-2007. In response to another notice dated 27-8-2007 u/s. 142(1) of the Act, the ex-Director of the company informed vide letter dated 10.9.2007 sent through speed post that the company had been dissolved on 1-4-2003 and the Registrar of Companies had struck off the name of the company from their register. Since the details sought vide earlier notice dated 12-1-2007 were not furnished, the AO vide letter/notice dated 9.10.2007 u/s 142(1) of the Act allowed another opportunity to furnish the 2 ITA no.441/Ahd/2009 said details by 18-10-2007 . Even this notice was not replied to. In response to another notice dated 15.11.2007 u/s 142(1) of the Act, the assessee submitted reply dated 3.11.2007 through speed post, wherein the assessee stated as under:
"From the above directions, it is very clear that on account of unavailability of certain important facts with the ITAT at the time of appeal hearing like (1) whether there was any encumbrance on property sold (2) terms and conditions of Gujarat Industrial Development corporation for transfer of property etc. On account of this, the Hon'ble ITAT was not able to decide whether the expenditure incurred was wholly and exclusively in connection with the transfer or not. Therefore, for this limited review, the matter has been set aside by the Hon'ble ITAT.
Further it is very important to reiterate the fact which has been time and again informed to you with necessary proofs that Mardia Wire Rods Limited is a dissolved company and it was dissolved 4 1/2 years back on 01.04.2003, and therefore, being the ex-director I am not able to trace out the number of details and records which are being called for by your office vide your letter dated 12.01.2007, which in my humble and respectful submission, are not at all required to carry out the directions given by the Hon'ble ITAT. And most of the details have been submitted by the company with the Return of Income and also during the assessment and reassessment proceedings.
Without prejudice to above, I would like to submit the details available with me as under:-
The addition made by the Ld. Assessing Officer in the reassessment proceedings was deleted by the Ld. CIT(Appeals) on merits of the case holding that the transfer of industrial plots can be registered only after getting no objection certificate from the Gujarat Industrial Development Corporation. The Gujarat Industrial Development Corporation could not have given such certificate to the assessee company unless the penalty for non-usage of such industrial plots was paid by the assessee company. The CIT(A) was of the view that the payment for non usage penalty of Rs.21,80,640/- was wholly and exclusively connected with the transfer of two industrial plots sold by the assessee company.
(d) Whether there was any encumbrances on property sold The industrial plots had been allotted to the Company by the Gujarat Industrial Development Corporation Ltd. (GIDC) and the company was required to pay the quarterly installments for10 years, and till the date this amount and other dues like water charges, non-use penalty etc. are paid, the GIDC has encumbrance on the property. From the statement of amount paid to GIDC which includes the payment of lease rent and capital 3 ITA no.441/Ahd/2009 amount, it can be said that on the date of sale, the property was encumbered to GIDC.
(e) Produce relevant records, terms and conditions with Gujarat Development Corporation and others I would like to enclose herewith the letter of Allotment of plot by GIDC inter-alia putting the condition of repossessing plot for non-utilization (Refer Condition 9) and also a document of GIDC downloaded from the GIDC website inter-alia giving the details of non-utilization charges."
2.1. After considering the aforesaid reply on behalf of the assessee, the AO while referring to the condition no. 9 in the letter dated.27-6-1988 bearing no.RM/AED/ALW/PL/3300 for allotment of plots in Vatva Estate, in response to assessee's application no. 1417 and relying upon decisions in R.M. Arunachalam Etc. vs. CIT (1997) 141 CTR (SC) 348: (1997) 227 ITR 222 (SC), V.S.M.R. Jagadishchandram (Decd) by LRs vs. CIT (1997) 141 CTR (SC) 361 : (1997) 227 ITR 240 (SC) , CIT vs. S.R.V. Press & Publications (P) Ltd. (2000) 158 CTR (Ker) 22: (2000) 241 ITR 626 (Ker) , CIT vs. N. Vajrapani Naidu (2000) 241 ITR 560 (Mad) , CIT vs. Roshanbabu Mohammed Hussein Merchant (2005) 195 CTR (Bom) 106 : (2005) 275 ITR 231 (Bom) and CIT vs. Attili N. Rao (2001) 171 CTR (SC) 188 : (2001) 252 ITR 880 (SC) disallowed the claim for deduction of payment of Rs.21,80,640/-for non usage of the two plots to GIDC u/s. 48 of the Act while computing capital gains on transfer of the said plots.
3. On appeal, the learned AR on behalf of the assessee submitted before the learned CIT(A) that the two industrial plots in question were allotted to the company by the GIDC for industrial use within the prescribed period. Since the assessee company did not carry any industrial activity on these two plots within the stipulated time, GIDC imposed a penalty of Rs. 21,80,640 on the company for non-use of the plots. Since the transfer of industrial plots could be registered only after getting "no objection" certificate from the GIDC, the payment of non-use penalty of Rs.21,80,640 was wholly and exclusively connected with the transfer of the two industrial plots sold by the company, and therefore, the same is deductible in computing the capital gain on 4 ITA no.441/Ahd/2009 the sale of such plots. In the light of these submissions, the ld. CIT(A) upheld the disallowance in the following terms:
"4.3 I have carefully considered the submission of the Learned Authorized Representative of the appellant. The Hon'ble ITAT while setting aside the issue to the file of the AO made following observations:
"The admitted facts of the case that the assessee has paid penalty of Rs.21,80,640/- to Gujarat Industrial Development Corporation for non-usage of industrial plots allotted to the assessee company. The expenses for non-utilization penalty has been incurred by the assessee wholly and exclusively for the purpose of securing the valid transfer. In the name of transferee in the records of Gujarat Industrial Development Corporation Ltd. and in case of non-payment the assessee was not able to self these plots. On the basis of above fact, the controversy to be examined by us whether penalty paid by the assessee on account of non-usage of plot amounts to an expenditure incurred wholly and exclusively in connection with such transfer. While interpreting the expression "wholly and exclusively", it has been held that the first adverb "wholly"
refers to the quantum of the expenditure, the money spent, while the second adverb "exclusively" has reference to the motive or object behind the" expenditure. Further, the expression "wholly and exclusively" does not mean "necessary". Thus, in the computation of capital gains, in order to qualify for deduction under section 48, the expenditure should be "wholly" in terms of quantum in connection with transfer and the motive for such expenditure should also be the transfer of the capital asset in order that such expenditure comes within the ambit of the word "exclusively". The allowability shall have to be examined from this angle. In the case under consideration, we noticed that certain important facts whether there was any encumbrance on property sold. The facts regarding the expenditure were wholly and exclusively in connection with transfer are required to be recorded after examining the relevant records, terms and conditions with Gujarat Development Corporation and others. In absence of complete facts the matter cannot be decided at this stage. The relevant material is not readily available. Under the circumstances, we thing proper to send back the matter to the file of Assessing Officer with a direction to decide the issue afresh in accordance with law after \ providing reasonable opportunity of hearing to the assessee".
5ITA no.441/Ahd/2009 4.4 It is clear from the directions of the Hon'ble I.T.A.T. that the appellant was required to show that whether there was any encumbrance on the property sold. The appellant during the assessment proceedings carried out in pursuance of the directions of the Hon'ble I.T.A.T. could not bring any material on record to establish that there was an encumbrance on the property under reference. The appellant's claim that due to non- payment of penalty, etc., the GIDC had encumbrance on the property is bereft of reasoning.
4.5 As regards the terms and conditions with Gujarat Industrial Development Corporation, the violation thereof led to levy of penalty was also required to be examined. As per condition No. 9, mentioned in the letter of allotment of plot by GIDC dated 27th June, 1997 the appellant was required to put up the shed for industrial use for manufacturing the products mentioned in application within a period of six months from the date of allotment failing which, the Corporation was entitled to obtain the possession back. In case the appellant was planning to construct building thereon it was required to get the plan approved within six months and to start the production at the end of two years from the date of allotment failing which, the Corporation was entitled to take back the possession of the plot unless extension was granted by it. It was further laid down that in case plot/shed is not utilized within the stipulated time limit extension may be granted in genuine cases subject to charging non-utilization penalty at the rate of 1% for first year, thereafter 2% for second year, 3% for third year and at the rate of 4% for subsequent years of the prevailing allotment price for the said year.
4.6 The aforesaid would show that the penalty under reference is a cumulative amount which has been charged from the appellant at the rates referred to above for each year of default. The appellant violated the conditions laid down in the order allotting the plot of land to it. The appellant acquired the property free from all encumbrances from GIDC and thereafter due to default committed by him the dues were accumulated against him. These dues can not be held as encumbrances so as to allow him deduction under sec.48 of the Act. The payments made by the appellant in obtaining the no-objection from GIDC, therefore, can not be held as an expenditure incurred wholly and exclusively in connection with such transfer of land under reference. Therefore the appellant's ground against the same is hereby rejected."
4. The assessee is now appeal before us against the aforesaid findings of the learned CIT(A). The ld. AR on behalf of the assessee merely reiterated their submissions before the ld. CIT(A) in the following terms:
6ITA no.441/Ahd/2009 "A. That the leasehold plot under consideration has not been put to use for the purpose of the business.(Refer Para 3 of page No.7 of Assessment order) B. The condition no.9, of the allotment letter of plot of GIDC dated 27th June 1997, reads as under: -
"According to the policy of corporation you shall put the shed for industrial use for manufacturing of the product/s mentioned in your application within a period of 6 months period from the date of allotment, failing which the corporation is entitled to obtain the possession back. In case of plots you are required to get the building plans approved within a period of 6 months and you shall start the production at the end of 2 years from the date of allotment of the plot, failing which the corporation is entitled to take back the possession of the plots unless extension is given by the Corporation."
C. In case plot/shed is not utilized within stipulated time limit extensions may be granted in genuine cases, subject to charging of non-utilization penalty at the rate of 1% for first year, thereafter 2% for the second,3% for third year and at 4% for subsequent years of the prevailing allotment price for the said year.
D. Accordingly, there was encumbrance on the property from the date of allotment itself and therefore the expenses for non-utilization has been incurred for wholly and exclusively for the purpose securing valid transfer, in the name of transferee in the records of GIDC and in case of non-payment of the amount under consideration, GIDC would have not given the NOC (No objection Certificate) and the assessee was not able to sell these plots/or possession of the plot would have been taken back. Accordingly, the payment under consideration is for obtaining NOC for the transfer of the plot and to remove encumbrances of GIDC and allowable expenses u/s. 48(i) of the Act. In this regard reliance is placed on the judgment of the Hon'ble ITAT-Mumbai in the case of Damodar G. Naglia Vs ACIT 12 SOT 599(Mum).Gist of the judgment enclosed as Annexure-1.
E. Alternatively, the said non-use charges is to be treated as cost of improvement, while computing the capital gain, as the same has not been claimed as revenue expenses and the payment under consideration is directly related to the plot and therefore is allowable u/s. 48(ii) of the Act."
7ITA no.441/Ahd/2009 4.1 The learned DR, on the other hand, supported the findings of the learned CIT(A).
5. W e have heard both the parties and gone through the facts of the case. As is apparent from the facts of the case, despite sufficient opportunity allowed by the AO in terms of directions of the ITAT vide their order 26-05-2006 in ITA no.2258/Ahd/2005, the assessee did submit details sought by the AO nor established as to how the amount paid towards penalty for non-usage of two industrial plots was encumbrance on the said plots or was an expenditure incurred wholly and exclusively in connection with their transfer. The onus is on the assessee to establish that the said amount was an expenditure incurred wholly and exclusively in connection with transfer of two industrial plots allotted by GIDC to the assessee. Indisputably, the aforesaid amount of Rs.21,80,640/- on account of penalty for non-usage of two industrial plots was paid to GIDC and deduction was claimed u/s 48 of the Act. The relevant extant provisions of sec. 48 of the Act read as under:
"48. Mode of computation.
The income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely:-
(i) expenditure incurred wholly and exclusively in connection with such transfer;
(ii) the cost of acquisition of the asset and the cost of any improvement thereto:
................................................................................................."
5.1 Cost of acquisition of asset and cost of improvement referred to in sec. 48 above have been defined in sec. 55 of the Act. The provisions relevant to the issue before us are extracted hereunder:8
ITA no.441/Ahd/2009 "55. Meaning of "adjusted", "cost of improvement" and "cost of acquisition".
(1) For the purposes of sections 48 and 49,-
(b)"cost of any improvement", -
.............................................................................. (2) in relation to any other capital asset,-
(i) where the capital asset became the property of the previous owner or the assessee before the 1st day of April, 1981 , means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset on or after the said date by the previous owner or the assessee, and
(ii) in any other case, means all expenditure of a capital nature incurred in making any additions or alterations to the capital asset by the assessee after it became his property, and, where the capital asset became the property of the assessee by any of the modes specified in sub-section (1) of section 49 , by the previous owner, but does not include any expenditure which is deductible in computing the income chargeable under the head "Interest on securities", "Income from house property", "Profits and gains of business or profession", or "Income from other sources", and the expression "improvement" shall be construed accordingly.
(2) For the purposes of sections 48 and 49, "cost of acquisition",-
..........................................................................................
(b) in relation to any other capital asset,-
(i) where the capital asset became the property of the assessee before 1st day of April, 1981 , means the cost of acquisition of the asset to the assessee or the fair market value of the asset on the 1st day of April, 1981 , at the option of the assessee;
..................................................................................."
5.2 As already stated ,admittedly, the assessee was allotted two industrial plots nos. 631 & 632 by the GIDC and their cost of acquisition is Rs.39,07,440/-. The assessee received sale 9 ITA no.441/Ahd/2009 consideration of Rs. 43,48,080/- in terms of an agreement(copy has not been placed before us).At the time of transfer of these plots, payments of Rs. 4,06,823/- have been made to GIDC which include administration charges, NA assessment, water charges and miscellaneous payments. These payments are not in dispute. Only dispute is in respect of an amount of Rs. 21,80,640/- towards non- usage penalty. In terms of following clause 9 of the allotment letter issued by the GIDC , the assessee is required to put the shed or get the building plans approved within the prescribed period. The said clause reads as under:
"According to the policy of corporation you shall put the shed for industrial use for manufacturing of the product/s mentioned in your application within a period of 6 months period from the date of allotment, failing which the corporation is entitled to obtain the possession back. In case of plots you are required to get the building plans approved within a period of 6 months and you shall start the production at the end of 2 years from the date of allotment of the plot, failing which the corporation is entitled to take back the possession of the plots unless extension is given by the Corporation."
5.3 In the event plot/shed is not utilized within stipulated time limits, the assessee stated that extensions can be granted in genuine cases, subject to charging of non-utilization penalty at the rate of 1% for first year, 2% for the second year,3% for third year and @ 4% for subsequent years on the prevailing allotment price for the said year. Thus, the assessee was required to pay penalty towards non-usage of plots and this has no connection at all with the transfer of these two plots. The ld. AR claimed that this penalty was an expenditure incurred wholly and exclusively in connection with transfer or alternatively it should be allowed as cost of improvement. However, the ld. AR did not explain as to how the amount can be categorized as cost of improvement within the meaning of provisions of sec. 55(1)(b)(2) of the Act. The payment of penalty by way of non-usage charges of industrial plots within the 10 ITA no.441/Ahd/2009 stipulated time can not be held to be towards addition or alteration of capital asset viz. land in this case and consequently it does not fall within the definition of cost of improvement in terms of provisions of sec. 55(1)(b)(2) of the Act . Thus, alternative plea on behalf of the assessee is rejected.
5.4 As regards plea on behalf of the assessee that the said amount of penalty is expenditure incurred wholly and exclusively in connection with the transfer of two plots, we are of the opinion that the assessee has miserably failed to establish that the said amount has any connection with transfer of two industrial plots. The amount was paid only to protect title and possession of the plots by the assessee. Any payment towards perfection of title or possession of an asset can not be held be expenditure incurred wholly and exclusively in connection with transfer of asset subsequently. A bare reading of the provision makes it clear that what can be deducted under section 48(i) is expenses incurred wholly and exclusively in connection with the transfer. The crucial words in the provisions are "in connection with such transfer". The expression means intrinsically linked with the transfer. Such expenditure has to be wholly and exclusively in connection with the transfer. Even if such expenditure has some nexus with the transfer it does not qualify for deduction unless it is wholly and exclusively in connection with the transfer. The amount paid towards non-usage charges can not be held to be wholly and exclusively in connection with the transfer of two industrial plots .
5.5 As regards plea on behalf of the assessee that amount due to GIDC being encumbrance on the property sold, we find that in the case of V. S. M. R. Jagdishchandran [1997] 227 ITR 240, the Hon'ble Apex court while following its decision in the case of Rm. Arunachalam [1997] 227 ITR 222 held that where the mortgage is created by the assessee himself, then the expenditure incurred by the assessee to repay the mortgage debt cannot be held to be the cost of acquisition or cost of improvement allowable under section 48(ii) of the income-tax Act.
11ITA no.441/Ahd/2009 5.51 Subsequently, theHon'ble Apex court in the case of CIT v. Attili N. Rao [2001] 252 ITR 880 considered the issue relating to diversion of income by overriding title. In that case, the assessee therein had mortgaged immovable property to the State Government as security for the amounts due to the State. The State Government in exercise of its power under the mortgage, sold the mortgaged property in auction and from the quantum realised, the State deducted the amount due to it and paid over the balance to the assessee. In computing the capital gains accruing on the sale of the above property, the assessee claimed deduction of the amount appropriated by the State Government towards the mortgage debt. The Tribunal held that on mortgage created by the assessee, the State Government had an interest in the mortgaged property and on the sale of the said property the amount of sale proceeds to the extent of the mortgage debt was diverted to the State Government by overriding title and the amount paid towards mortgage debt has not reached the hands of the assessee. The above decision of the Tribunal was upheld by the Andhra Pradesh High Court. Reversing the decision of the High Court, the Hon'ble Apex court held as follows at page 883:
"... What was sold by the State at the auction was the immovable property that belonged to the assessee. The price that was realised therefor belonged to the assessee. From out of that price, the State deducted its dues towards 'kist' and interest due from the assessee and paid over the balance to him. The capital gain that the assessee made was on the immovable property that belonged to him. Therefore, it is on the full price realised (less admitted deductions) that the capital gain and the tax thereon has to be computed."
5.52 From the aforesaid decisions of the Apex court, it is clear that there is a distinction between the obligation to discharge the mortgage debt created by the previous owner and the obligation to discharge the mortgage debt created by the assessee himself. Where the property acquired by the assessee is subject to the mortgage created by the previous owner, the assessee acquires absolute interest in that property only after the interest created in the property in favour of the mortgagee is transferred to the assessee, that is after the discharge of the mortgage debt. In such a case, the expenditure incurred by the assessee to discharge the mortgage debt created by the previous owner to acquire absolute interest in the property is treated as "cost of acquisition" and is deductible from 12 ITA no.441/Ahd/2009 the full value of the consideration received by the assessee on transfer of that property. However, where the assessee acquires a property which is unencumbered, then, the assessee gets absolute interest in that property on acquisition. When the assessee transfers that property, the assessee is liable for capital gains tax on the full value (less admitted deductions) realised, even if an encumbrance is created by the assessee himself on that property and the assessee is under an obligation to remove that encumbrance for effectively transferring the property. In other words, the expenditure incurred by the assessee to remove the encumbrance created by the assessee himself on the property which was acquired by the assessee without any encumbrance is not an allowable deduction under section 48 of the Act. Admittedly, when the assessee was allotted these two plots, these were unencumbered. Thus, the plea taken before the lower authorities was rightly rejected.
5.6 As regards reliance on behalf of the assessee on the decision in the case of Damodar G Nagalia(supra), in that case amount of Rs. 4 lacs was paid to a co-operative society towards transfer charges for obtaining NOC to transfer the flat. Such are not the facts in the instant case. We are of the opinion that the said decision was rendered altogether on different facts and is not of any assistance to the assessee. Thus reliance by the assessee on a decision rendered in different facts and circumstances is totally misplaced.
6. In view of the foregoing ,especially when the assessee has miserably failed to establish before the lower authorities and even before us that the said amount of penalty towards non-usage charges is an expenditure incurred wholly and exclusively in connection with transfer of two industrial plots allotted by GIDC to the assessee or is part of cost of improvement of the said two plots while there is no material so as to enable us to take a different view in the matter, we are not inclined to interfere with the findings of the ld. CIT(A). Consequently, ground no.1 in the appeal is dismissed.
13ITA no.441/Ahd/2009
7. No additional ground having been raised in terms of the residuary ground no.2, accordingly, this ground is dismissed.
8. No other issue was raised or argued before us.
9. In the result, appeal is dismissed.
Order pronounced in the court today on 19-11-2010 Sd/- Sd/-
(T K SHARMA) (A N P AHUJ A) JUDICI AL MEMBER ACCOUNTANT MEMBER Date : 19 -11-2010 MRValera Copy of the order forwarded to:
1. Maradia W ire-Rods Ltd., C/o Rasiklal S Maradia, 183, Manekbag Society, Ambawadi, Ahmedabad
2. ITO, W ard-4(4), Ahmedabad
3. CIT concerned
4. CIT(A)-VIII, Ahmedabad
5. DR, ITAT Bench-B, Ahmedabad
6. Guard File BY ORDER Deputy Registrar Assistant Registrar ITAT, AHMEDABAD 14