Income Tax Appellate Tribunal - Mumbai
Inditravel Pvt. Ltd (Erstwhile Taj ... vs Assessee on 7 September, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH "E",
MUMBAI
BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI R.K.PANDA (A.M)
ITA NO.3884/MUM/2008(A.Y.2003-04)
The ITO 3(3)(3), M/s. Taj Services Pvt. Ltd.
Room No.672, 6th Floor, Madlik Road, Colaba,
Aaykar Bhavan, MK Road, Vs. Mumbai - 400 001.
Mumbai - 20. PAN: AAACT 4287F
(Appellant)
(Respondent)
ITA NO.3933/MUM/2008(A.Y. 2003-04)
M/s.Inditravel Pvt. Ltd. (Erstwhile The DCIT- 3(3)
Taj Services Pvt. Ltd.) Aaykar Bhavan,
Mandlik House,Madlik Road, Vs. MK Road, Mumbai - 20.
Colaba, Mumbai - 400 001.
PAN: AAACT 4287F
(Appellant) (Respondent)
Assessee by : Shri Disnesh Vyas
Rrevenue by : Shri B.Jayakumar
Date of hearing : 07/09/2011
Date of pronouncement : 16/09/2011
ORDER
PER N.V.VASUDEVAN, J.M,
ITA No.3884/Mum/08 is an appeal by the Revenue. ITA
No.3933/Mum/08 is an appeal by the Assessee. Both these appeals are directed against the order dated 29.02.2008 of CIT(A)-XXXIX, Mumbai, relating to AY 03-04. First, we shall take up ITA No.3884/Mum/08 for consideration. Ground No. 1 and 2 raised by the Revenue reads as follows:
2 ITA NO.3884 &3933/MUM/2008(A.Y.2003-04)"1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in allowing amount of Rs.4,70,00,000/- being the sum paid by the assessee company to M/s. Megapode Airlines Ltd., the lessee without appreciating that the payment was not envisaged in the lease agreement"
"2. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in allowing amount of Rs.4,70,00,000/- being the sum paid by the assessee company to M/s. Megapode Airlines Ltd. the lessee without appreciating that the payment is not an expense allowable u/s. 48(1) of the IT Act."
2. The Assessee is a company. It is engaged in the business of rendering travel related services and other professional services. One M/S.Mafatlal Finance Co. Ltd. (MFL) owned an Aircraft. By a lease agreement dated 30.12.1994 MFL leased the aircraft to M/S.Megapode Airlines Ltd. (MAL) for a period of 7 years from 30.12.1994 with an option to renew the lease for an indefinite period of time. The relevant clause in the lease agreement reads as follows:
" Period of Lease: The lessee shall take the equipment for its use on lease for the terms specified in the Lease Summary Schedule hereunder written. The Lessee shall have the option to renew the lease of the equipment for further periods as may be decided upon by the lessee subject, however, to the proviso that such further extension of the lease period shall not have any one renewal exceed 5 years at a time. Such periods for which the lease is renewed are hereinafter referred to as Secondary Lease period(s). The lessee shall pay to the Lessor lease rentals at the rate applicable to the Secondary Lease Period(s) specified in the Lease Summary Schedule hereinwritten, the other terms and conditions fo the renewed lease remaining the same as contained in this Agreement for the Secondary Lease Period(s) also."
The Lease Summary Schedule in column 5 gives the tenure of lease as 7 years. Column 10 of the Lease Summary Schedule describes "Renewal Option" but the description opposite to that says "N.A.".
3 ITA NO.3884 &3933/MUM/2008(A.Y.2003-04)3. By letter dt. 28.12.2001, MFL informed the Assessee that it was agreeable to sell the aircraft to the Assessee subject to the rights of the lessee MAL under the lease agreement dated 30.12.1994 and in particular the right of MAL to an extension of the tenure of the lease. The consideration agreed between the parties for sale of the aircraft was a sum of Rs.43,75,000 to be paid by the Assessee to MFL. MFL also informed the Assessee that MAL had refurbished the aircraft at a cost of Rs.3.18 crores to make it airworthy and that this sum has to be reimbursed to them by the Assessee. The Assessee agreed to the proposal of sale of aircraft by MFL to it.
4. On 15.1.2002 , MFL raised an invoice on the Assessee for sale of the aircraft. On 1.3.2002 the Directorate General of Civil Aviation issued a certificate of registration, registering Assessee as the owner of the Aircraft. The certificate also recognises that the operator of the aircraft is MAL.
5. The original period of lease under the lease agreement dated 30.12.1994 was a period of 7 years. The original period of lease would thus come to an end on 29.12.2001. The date of sale of the aircraft by MFL to the Assessee according to the Assessee was on 28.12.2001. By letter dt. 6.2.2002, the Assessee informed MAL that it was proposing to sell the aircraft to an overseas buyer free from all encumbrances and negotiations are in an advanced stage. Since the aircraft was proposed to be sold free of encumbrances, the Assessee proposed to foreclose the lease arrangement and requested MAL to handover the aircraft. The Assessee gave three months notice of termination and informed MAL that the termination would be effective 6.5.2002.
6. By letter dated 7.2.2002, MAL informed the Assessee that it was not agreeable to surrender of leasehold rights as they had not violated terms of 4 ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) the lease agreement. MAL made a counter offer in this letter that it was likely to lose profits in case premature termination of lease and quantified the same at Rs.5.19 Crores (quantification calculation enclosed along with the letter) and in case the said sum is paid it was agreeable to foreclosure the lease. MAL also demanded the sum of Rs.3.18 Crores it spent on refurbishment of the aircraft.
7. The Assessee by its letter dated 9.2.2002 offered to give Rs.4.7 crores as compensation for premature closure of the lease agreement provided possession of the aircraft is handed over without waiting for 3 months' notice period. By letter dt.11.2.2002 MAL agreed to the termination of lease agreement subject to payment of Rs.4.70 Crores as compensation. MAL also agreed to deliver the aircraft in good working condition on or before 6.5.2002.
8. Though there was an agreement between the Assessee and MAL to foreclose the lease and surrender possession of aircraft on payment of compensation of Rs.4,70 crores for premature termination of lease, by lease Agreement dated 25.2.2002 between the Assessee as owner and lessor of the aircraft and MAL as the lessee, the lease period of the aircraft to MAL was extended by 5 years effective from 30th Dec.2001.
9. On 15.4.2002, the Assessee sold the aircraft to one M/S.Conair Jet Sales Inc. for a sale consideration of Rs.8,92,87,147. Since the transfer by way of sale of the aircraft took place on 15.4.2004 falling within the previous year relevant to AY 03-04, the capital gain on such transfer was offered to tax by the Assessee in its return of income for AY 03-04. The following was the computation of short term capital gain on sale of the Aircraft.
Sale Consideration received on sale of Aircraft Rs.8,92,87,147 Less: Cost of Acquisition (Written Down Value) Rs. 34,66,920 5 ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) Cost of Improvement (refurbishment) Rs.3,18,09,045 Expenses on Transfer (Compensation paid for premature termination of lease rights) Rs.4,70,00,000 Rs.8,22,75,965 Short term Capital Gain Rs. 70,11,182
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10. As can be seen from the above computation of Short Term Capital Gain, the sum of Rs.4,70,00,000/- paid to MAL as compensation for premature termination of lease was claimed as a deduction u/s.48(i) of the Act, as expenditure incurred wholly and exclusively in connection with transfer of the capital asset. The dispute raised by the Revenue in ground no.1 and 2 is regarding the correctness of the order of the CIT(A) in allowing the same as deduction while computing capital gain as expenditure incurred wholly and exclusively in connection with transfer of the capital asset.
11. The AO rejected the claim of the Assesssee for deduction on account of compensation paid to MAL as expenditure incurred in connection with the transfer while computing capital gains, for the following reasons:
1. MFL had received a sum of Rs.17.51 crores as lease rentals from MAL till sale of the aircraft to the Assessee. Thus on sale of the aircraft for Rs.43.75 lacs to the Assessee and the lease rentals earned on lease of the aircraft to MAL, MFL had recovered the entire cost. Therefore it was a good sound business proposal for MFL to sell the aircraft for Rs.43.75 lacs. It would sell the aircraft to any person either the Assessee or MAL. According to the AO if MAL had acquired the aircraft from MFL and eventually sold it, the difference between the sale consideration and cost + cost of improvement would have been taxed as profit on sale of asset.
2. According to the AO the Assessee and MAL belonged to the same group of companies. The Assessee therefore bought the aircraft, paid for the improvement expenses and the surplus received was its profits.
According to the AO, MAL had huge carried forward losses and therefore the Assessee shifted part of the profit it gained on sale of the 6 ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) aircraft to MAL instead retaining the entire profits for itself. Had the Assessee retained the entire profits, those profits would have suffered tax at the hands of the Assessee.
3. The transaction was not a genuine business transaction, because the termination of the lease of MAL by the Assessee was on 6.2.02, whereas the renewal lease agreement with MAL was entered into only on 25.2.2002 and even this lease agreement did not contain clauses for termination of the lease and the monetary compensation quantified and agreed between the parties.
4. In a nutshell, the group has accommodated Mafatlal Finance and also decided to sell off the aircraft. It could very well be that M/s. Mafatlal Finance could have brokered the sale of the aircraft in a mutually beneficial way so as to also avoid taxation. This can be safely presumed as M/s. Maftlal Finance agreed to transfer the aircraft on 28/12/01 and also decided to terminate the lease with MAL on 06/02/2002, which was even before the assessee acquiring the aircraft on 31/3/2002 from M/s. Mafatlal Finance. Moreover MAL in its accounting year 2002-03 relevant to A.Y 2003-04 has declared a loss as per profit and loss account of Rs.82,00,000/- even after inclusion of compensation for surrender of lease rights received from the assessee company. Eventually a net loss of Rs. 9.87 lacs has been computed in the computation of income. Thus it is seen that the profit on sale of Aircraft has been conveniently diverted to MAL which as discussed above has suffered huge losses thereby avoiding payment of legitimate taxes on the profit arising to the group out of the sale of the aircraft.
On the above observations at point 4 above, we have to state that there are factual inaccuracies. Firstly, the proposed termination of lease by MFL was by its letter dated 7.12.2000 when it got a proposal for purchase of aircraft by one Miles Aviation Ltd. In that letter MFL had offered Rs.5.50 crores as 7 ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) compensation for premature termination of the lease. This offer did not fructify. On 28.12.2001, the proposal for sale of the aircraft by MFL to the Assessee was made and the same was accepted and acted upon. On 15.1.2001 MFL raised an Invoice for sale of the aircraft. The AO says that the aircraft was sold only on 31.3.2002. This conclusion is based on the certification of registration of ownership of the aircraft issued by the Director of Civil Aviation dated 1.3.2002 but wrongly referred to as 31.3.2002 by the AO. Thus the sale of the aircraft was completed much earlier to 31.3.2002 and the conclusion of the AO in this regard are erroneous.
12. The Assessee's plea before the AO was that the payment made to MAL for surrender of lease rights over the aircraft was akin to surrender of tenancy rights by a tenant when the property is sold by the owner and such payments are allowed as deduction u/s.48(i) while computing capital gain. The AO however rejected the above plea and he held that when the landlord pays tenant money for surrender of tenancy right that cannot be regarded as expenditure incurred in connection with transfer.
13. For the above reasons the AO rejected the claim of the Assessee for deduction of a sum of Rs.4,70,00,000/- paid to MAL as compensation for premature termination of lease was claimed as a deduction u/s.48(i) of the Act, as expenditure incurred wholly and exclusively in connection with transfer of the capital asset, while computing capital gain.
14. Before CIT(A), the Assessee submitted as follows:
1. On the allegation of the AO that if MAL had acquired the aircraft from MFL and eventually sold it, the difference between the sale consideration and cost + cost of improvement would have been taxed as profit on sale of asset, the Assessee gave a computation of income of the Assessee and MAL after removing the effect of the aforementioned 8 ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) transaction. The same is annexed as annexure to this order. The Assessee submitted that the revenue would be worse off, if the situation as contemplated by the AO had happened.
2. It was possible for the Assessee to get a sum of Rs.8,92,87,147/- as price on sale of aircraft only because the lease of MAL was terminated and possession of the aircraft given to the purchaser and therefore the compensation paid to MAL was reasonable and fair.
3. On the legal issue of allowability of the amount paid to MAL as deduction u/s.48(1) of the Act, the Assessee submitted that the AO has also pointed out that there is no clause in the lease agreement between the assessee and MAL providing for termination of lease and specific value for the same. However, taking such observation of the AO to its logical conclusion, it would mean that the said lease agreement was a water tight agreement and any party wanting to deviate there from would have to compensate the other for losses suffered. Merely because there is no clause for pre-mature termination, it does not mean that none of the parties can make efforts to come out of the 'shackles' of the agreement. This is definitely possible subject, however, to mutual understanding and concurrence of the involved parties.
15. The CIT(A) called for a remand report from the AO on the submissions and alternative tax calculation submitted before him. The AO reiterated his stand as reflected in the order of assessment. The CIT(A) on a consideration of the submissions as well as the remand report of the AO, held as follows:
(1) Under Clause 4.2 of the Aircraft Sale Agreement dt. 15.4.2002, by which the Assessee sold the Aircraft to Conair Jet Inc., it was clear that the transferee demanded the aircraft free of any encumbrance.
Accordingly, the Assessee was under a contractual obligation to detach the pre-existing right of MAL in order to transfer the aircraft free of any lien, encumbrances etc. The CIT(A) therefore held that the Assessee had to pay compensation to MAL for surrendering its rights as the lessee of the aircraft. Had the appellant not paid the compensation to MAL, it would not have been able to conclude the transaction with the transferee. Accordingly, the compensation 9 ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) paid to MAL for surrendering its pre-existing rights as the lessee is inextricably connected to the transfer of the aircraft. (2) The CIT(A) also held that the decision relied upon by the AO in rejecting the claim of the Assessee, viz., CIT vs. R.Ranga Setty 159 ITR 797(Kar) and CIT vs. T. Srinivasa Rao 166 ITR 593 (AP) were distinguishable. The CIT(A) found that in those cases, the assessee had paid compensation to its tenants for vacant the possession of the land consequent to compulsory acquisition of land by the Government. Thus, there was no statutory or contractual obligation to deliver vacant possession of the land. Accordingly, the intention behind making such compensation was more of a gratuitous nature and therefore the deduction was not allowed. He held that in the case of the Assessee, as per clause 4.2 of the Aircraft Sale Agreement, there was a contractual obligation on the Assessee to transfer the aircraft free of any encumbrances, lien etc. The CIT(A) also found that the following decisions relied upon by the Assessee supported the claim of the Assessee: viz.,
- CIT vs. C.V.Soundararajan & anr. [150 ITR 80(Mad)]
- Naozar Chenoy vs. CIT [234 ITR 95 (AP) ]
- CIT vs. A. Venkataraman & Ors. [137 ITR 846(Mad)]
- CI vs. Shakuntala Raheshwar [160 ITR 840(Del)] In all the above cases, the expenses incurred or compensation paid to the tenant for vacating and handing over possession was held to be expenses incidental to the transfer in order for the assessee to transfer the land free of any encumbrances. Accordingly, following the ratio laid down in those decisions, the CIT(A) was of the view that compensation paid by the Assessee to MAL was to be allowed as deduction under Section 48(i) of the Act.
(3) The CIT(A) also found that all flying licenses and permissions were with MAL. The compensation received by MAL was reflected as business income in the hands of MAL.
(4) If the aircraft was directly purchased by MAL and subsequently sold to Conair Jet Inc., the tax treatment would have been more beneficial to the Assessee or other group companies. In this regard the CIT(A) perused the alternative Computation of Income (COI)furnished by Assessee. Upon perusal of the same, was of the view that if the contentions of the AO were to be accepted (about purchasing of aircraft directly by MAL and subsequently selling it) then not only there would not have been any additional tax liability in the hands of MAL but also the sum of Rs. 70,11,182/- presently offered to tax as Short Term Capital Gains by the Assessee would have not been subject to any tax.
10 ITA NO.3884 &3933/MUM/2008(A.Y.2003-04)(5) Irrespective of these considerations, the CIT(A) was of the view that once it is established that the Assessee was under a contractual obligation to provide the aircraft free of any encumbrances for which it had paid compensation to MAL, such compensation is inextricably incidental to the transfer and, hence, allowable as deduction under section 48(i) of the Act.
(6) The CIT(A) also held that the objection of the AO in his Remand Report that the alternative COI provided during the course of appellate proceedings is additional evidence which is not permitted to be admitted under Rule 46A of the Income tax Rules, 1962 was unacceptable. The CIT(A) held that the alternative COI was filed in order to refute AO's contention that if MAL had acquired the Aircraft from MFL and eventually sold it off, the difference between the cost + cost of improvement and the sale price would have been taxed as profit on sale of asset. The CIT(A) also held that such alternative COI was submitted for the first time before CIT(A) because the AO had never confronted the Assessee about the tax effect in the course of assessment proceedings.
16. Aggrieved by the order of the CIT(A), the Revenue has raised ground No.1 and 2 before the Tribunal. We have heard the submissions of the learned D.R. and the learned Counsel for the Assessee. The learned D.R. reiterated the stand of the AO as reflected in the order of assessment. He also took us through the various clauses of the lease agreement and submitted that the sum of Rs.4.70 crores fixed as compensation for surrender of lease rights was without any basis and was arbitrary.
17. The learned counsel for the Assessee reiterated the stand of the Assessee as put forth before the CIT(A) and relied on the order of the CIT(A). With regard to the allegation of MAL and the Assessee belonging to the same group, he pointed out that MAL changed hands from Wadia's Bombay Dyeing group to Tata group of companies in the year 1998. He drew our attention to the shareholding pattern in MAL before the aforesaid Transfer and after the transfer(Page 61 of the paper book). He also gave a shareholding pattern in Assessee(page-62 of the paper book). He submitted that many companies holding shares in the Assessee are public limited 11 ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) companies or companies in which the owners of the palaces which have been converted into hotels have stake. According to him there is no common management or control, so as to draw any adverse inference regarding any ulterior motive for carrying out the impugned transaction. In short his submission was that the AO proceeded on surmises and conjectures. The AO cannot rewrite business transaction. The AO has not alleged any malafides or lack of bonafides. He also relied on the computation of income had the sale of the aircraft been made to MAL by MFL and resold by MAL as filed before CIT(A) and the findings of the CIT(A) on such revised computation of income which proves beyond doubt that there was no tax planning or avoidance involved.
18. We have considered the rival submissions. The provision of section 48 of the Act reads as under:
"48. The income 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 the transfer;
(ii).............."
From the admitted facts which we have narrated above, it is clear that MAL had a right to renew the lease agreement with MFL and could retain possession of the aircraft. The Assessee purchased the aircraft from MFL subject to the rights of MAL under the lease agreement between MFL and MAL. The Assessee was therefore under an obligation, if MAL had demanded extension of the lease to accede to such demand. It is also clear that there was bargain between the Assessee and MAL before ultimately the sum of Rs.4.70 crores was decided as compensation to be paid to MAL for termination of its leasehold rights and surrendering possession of the 12 ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) aircraft to the purchaser of the aircraft from the Assessee. The bargain was completed on 11.2.2002, when MAL agreed to deliver possession of the aircraft by 6.5.2002. It is for this reason that the renewal of the lease had to be signed between the Assessee and MAL on 25.2.2002 so that possession of the aircraft by MAL till delivery to the purchaser is made remains lawful. We are also of the view that there can be no complaint regarding compensation paid to MAL being excessive. It is for the parties to the agreement to decide on the rightful compensation. There is no material available on record to show that there was any ulterior motive in paying the sum of Rs.4.70 crores as compensation by the Assessee to MAL for surrendering leasehold rights and delivering possession of the aircraft. In the following cases it has been held that expenses incurred or compensation paid to the tenant for vacating and handing over possession was held to be expenses incidental to the transfer in order for the assessee to transfer the land free of any encumbrances and was to be allowed as deduction under Section 48(i) of the Act.
- CIT vs. C.V.Soundararajan & anr. [150 ITR 80(Mad)]
- Naozar Chenoy vs. CIT [234 ITR 95 (AP) ]
- CIT vs. A. Venkataraman & Ors. [137 ITR 846(Mad)]
- CI vs. Shakuntala Raheshwar [160 ITR 840(Del)] We are also in agreement with the conclusion of the CIT(A) that the compensation paid to MAL for surrendering its pre-existing rights as the lessee is inextricably connected to the transfer of the aircraft as one of the condition for sale of the aircraft by the Assessee was surrender of possession to the purchaser free of all encumbrances. The CIT(A) has rightly distinguished the decisions relied upon by the AO. We are also of the view that the alternative computation of income filed by the Assessee before CIT(A) clearly demolishes the case of the AO that there was any motive to avoid tax. We therefore do not find any grounds to interfere with the order of 13 ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) the CIT(A). Consequently, Gr.No.1 and 2 raised by the Revenue are dismissed.
19. Ground No.3 raised by the Revenue read as follows:
"On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting amount of Rs. 2,41,00,000/- being the sum paid to drivers of third party without appreciating that the drivers were not employees of the company and hence it was a non business expenditure.
20. The assessee as part of its business of rendering services provides cars to the Taj Group of Hotels and, in the course thereof, had engaged the services of various operators at different points of time for providing high quality vehicles alongwith drivers. During the period 1998 to 1999 the assessee had engaged the services of M/s. D.V. Transport Consultants & Operators (D.V.Transport) and M/s. Unity Travels ('Unity'). Upon cancellation of the contract with the aforesaid operators by the assessee, these operators, in turn, terminated the employment of the concerned drivers. Akhil Bharatiya Mathadi & General Kamgar Union(hereinafter referred to as "the Union") who formerly represented the said workman, filed a complaint of alleged unfair labour practices, being Complaint (ULP) No.540 of 1998, in the V Labour Court, Mumbai, against the previous employer of the Workman and M/s. Taj Services Pvt. Ltd. as well as Taj Mahal Hotel inter alia demanding that the several workmen listed therein including the Workman be treated as employees of Taj Mahal Hotel, or in the alternative, as employees of M/s. Taj Services Pvt.Ltd. and obtained an exparte order of 'status quo' from the Labour Court on 25/9/1998. According to these drivers, it was the Assessee who was their de-facto employer and not of D.V. Transport or Unity, because it was the assessee who had ultimate control over the drivers, their working hours, terms and 14 ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) conditions, uniform, etc. During the pendency of the proceedings in Complaint (ULP) No.540 of 1998, with a view to amicably resolve the dispute, the previous employer of the Workman and the Union as well as the Assessee filed a joint purshis in the Labour Court in the said Complaint, whereby the Union and the Workman accepted that the workman as well as other drivers concerned therein were not employees of the Assessee or Indian Hotels Company Limited or Taj Mahal Hotel, and had no claim whatsoever against any of the said entities. The Assessee in turn gave to the Union and the concerned workmen an undertaking inter alia to the effect that in the event of any new contract being awarded for car hire operations in future, the Assessee would insert a clause in such fresh contract to ensure that the new operators shall grant employment in their services to the concerned workmen. On the basis of the said undertaking and other assurances set out in the purshis, the Union unconditionally withdrew the said Compalint (ULP) No.540 of 1998 and these facts are recorded by the Hon'ble Court in its order dated 19.12.1998.
21. In keeping with the spirit of the settlement, and upon cancellation of the contract with D.V Transport and Unity, the assessee continued with the same set of drivers under its new operators M/s. Ramniranjan Kedia Finance Pvt. Ltd. ('RNK') and M/s. Sanjay Auto Services ('Sunjay'). However, the requirement of continuous employment had put a considerable recurring burden on the assessee. In a competitive market, it was not feasible for the assessee to provide employment to these drivers and incur huge cost on an ongoing basis. Hence, during the year under reference, in order to tide over this annual recurring cost and bring about better professionalism, the assessee entered into a settlement with its drivers providing for payment of certain compensation to them in lieu of their giving up their right to employment and other rights. The individual agreements with workers were 15 ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) duly recorded in accordance with the applicable law in the required form. Thus the authenticity of these agreements in accordance with the provisions of the relevant law applicable is not in dispute. According to the Assessee, such lumpsum expenditure benefited the assessee in the following ways:
a) The company got rid of old drivers who were highly paid.
b) The company achieved substantial cost saving in future salary and other incidental cost of drivers.
c) The company incurred this expenditure purely to reduce its wage bill in future years and such expenditure was incurred in the course of business only.
d) The operator reduced the car hire charges resulting in saving of over Rs.3 per km.
22. Accordingly, the Assessee paid a sum of Rs.2.41 crores to various workmen in full and final settlement of their claims under the pursis which was made rule of the Hon'ble Labour Court. The amount payable of Rs. 2.41 crores was duly discharged by the assessee and claimed as business expense. The Assessee also pointed out that as per its understanding with the new operators viz., RNK and Sanjay, it was agreed that pursuant to settlement of these drivers the cost of operating vehicles would get reduced in the hands of RNK and Sanjay and that such saving would be passed over to the assessee in the form of reduced operating rates thereafter. The assessee also furnished a calculation based on past utilization and arrived at a payback period of around 3 years within which the upfront expenditure incurred by the assessee in settling the drivers' claim would get recouped out of reduced car hire charges payable to RNK and Sanjay.
23. The Assessee submitted that the payment of Rs. 2,41,00,000/- is in the nature of compensation paid by the assessee to its own drivers since, by virtue of the proceedings before the Hon'ble Labour Court, the concerned 16 ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) drivers had become employees of the assessee and the assessee was required to provide them continuous employment. Thus, their relationship with RNK and Sanjay ceased to exist in the eyes of law. Even if the proceedings before the Hon'ble Labour Court are ignored, since the assessee had ultimate control over the drivers the said drivers are in reality employees of the appellant. The Assessee placed reliance on the decision of the Hon'ble Gujarat High Court in the case of CIT vs. Prithviraj Bhoorchand (280 ITR 94) wherein it has been held that where the labourers engaged on a contract basis under control of the assessee, they were deemed to be the assessee's employees.
24. Thus it was submitted that the drivers retrenched by the assessee were its own drivers and the payment of compensation to them is in the nature of retrenchment compensation paid to its own employees. The assessee, therefore, claimed the retrenchment compensation of Rs. 2,41,00,000/- paid to its drivers as deductible revenue expenditure.
25. However, the AO disallowed the claim of the Assessee of the aforesaid payment as deductible revenue expenditure on the following grounds:
a) The expenditure is not incidental to the assessee's business, which is that of hiring cars from the Taj Business Hotels. The payment is not incidental to earning the receipts / income for the Assessment Year 2003-04.
b) There is no basis for the revised reduced rates quoted by RNK and Sanjay.
c) The drivers had sought settlement and it did not matter whether RNK paid for the same or the assessee. Thus there was no obligation on the assessee to pay.17 ITA NO.3884 &3933/MUM/2008(A.Y.2003-04)
d) Since the assessee had contested the matter before the Hon'ble Labour Court, there was no intention on its part to entertain the drivers employed by RNK and Sanjay.
e) The expenditure has been incurred in connection with allegations of unfair labour practices and is not allowable as per the provisions of the Explanation to section 37(1) of the Act.
f) Decisions relied upon by the assessee pertain to facts wherein the employer had terminated the services of its own employees; however, in the present case the compensation has been paid to somebody else's employees.
26. Before CIT(A), the Assessee reiterated its stand that the expenditure has been incurred to retrench old drivers who have been held to be permanent employees of the appellant by the Hon'ble Labour Court, and even otherwise they are its employees in view of the decision of the Hon'ble Gujarat High Court in the case of Prithviraj Bhoorchand (supra). It was submitted upon retrenchment of the old drivers by payment of one time lumpsum compensation, the Assesseet has benefited in the following ways:
a) The company got rid of old drivers who were highly paid.
b) The Company achieved substantial cost savings in future salary and other incidental cost of drivers.
c) The company incurred this expenditure purely to reduce its wage bill in future years and such expenditure was incurred in the course of business only.
It was argued that a lumpsum expenditure incurred in lieu of recurring revenue business expenditure shall be allowable as a revenue deduction as laid down in several judicial pronouncements. It was submitted that by letter dated January 13, 2003 addressed to the appellant by RNK it was clearly stated that the existing rates stand revised from Rs.21.50 per km. to Rs.18.39 per km. with effect from the date of settlement of drivers. Thus by 18 ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) incurring the expenditure in question, substantial benefit accrued to the Assessee. It was argued that the AO has, however, not brought any evidence to prove otherwise. It was reiterated that the salary paid to the new drivers was less than the one paid to the old drivers who were paid lump sum consideration and whose contracts were terminated. It was submitted that allegation of the AO that the expenditure has been incurred in connection with allegations of unfair labour practices and is not allowable as per the provisions of the Explanation to section 37(1) of the Act was not correct. In this regard it was pointed out that the complaint was withdrawn by the union of workmen as settled out of Court and there is no finding of any unfair labour practice either by the Court or in the settlement arrived at between the parties. It was submitted that intention behind insertion of explanation to Sec.37(1) of the Act was something different. This is evident from the Memorandum Explaining Provisions in Finance (No.2) Bill, 1998 wherein it has been stated as under:
"It is proposed to insert an explanation after sub-section (i) of section 37 to clarify that no allowance shall be made in respect of expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law. This propsed amendment will result in disallowance of the claim made by certain tax payers of payments on account of protection money, extortion, hafta, bribes, etc. as business expenditure."
It was submitted that the intention of the legislature in bringing Explanation to section 37(1) on record was to disallow protection money, extortion, hafta, bribes and such other payments. Payment of retrenchment compensation can, in no way, fall into this bracket."
27. The CIT(A) deleted the addition made by the AO for the following reasons:
a) The Assessee had paid retrenchment compensation to the drivers who have been considered as the employees of the Assessee by the 19 ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) order of the Labour Court, Mumbai in December 1998. The CIT(A) was of the view that on perusal of the agreement between the individual employees and the Assessee under which lumpsum payment was made to the employees who were parties to the dispute before the labour court, it was clear that it was the Assessee who had ultimate control over the drivers, their working hours, terms and condition of hiring and firing, uniform etc. The CIT(A) relied on the decision of the Hon'ble Gujarat High Court in the case of CIT vs. Prithviraj Bhoorchand (280 ITR 94), wherein it has been held that the one who has the ultimate control over the affairs of the workmen is to be treated as the actual employer of those workmen. Accordingly, applying the ratio laid down in this decision, the CIT(A) held that the drivers are to be treated as the employees of the Assessee for all practical purpose. Thus the CIT(A) held that the contentions of the AO that the Assessee has paid compensation to somebody else's employees is without any force and, hence, not correct.
b) The CIT(A) also held that the Assessee benefitted in the form of reduced rates in respect of contract for hiring of cars from new contractors and therefore the payment in question was an expenditure incurred to save a recurring revenue expenditure. In this regard, the CIT(A) was of the view that the letter dated 13/01/2003 by RNK to the Assessee wherein it is categorically stated that from the date of settlement of drivers, the rates shall stand revised from Rs. 21.50 per km to Rs.18.39 per km. clearly proved the benefit the Assessee is likely to get in future. The CIT(A) was of the view that it was settled law that a lumpsum consideration paid to avoid or save on to future recurring expenditure is an allowable deduction and in this regard relied on the following decisions wherein the proposition as stated above has been laid down.
- CIT vs.Madras Auto Services P. Ltd. (233 ITR 468) (SC)
- Empire Jute Co. Ltd. vs. CIT (124 ITR 1) (SC)
- CIT vs. Bhor Industries Ltd., (264 ITR 180)(bom)
- Life Insurance Corporation of India vs. CIT (119 ITR 900)(Bom)
- CIT vs. Assam Oil Co. Ltd. (154 ITR 647 )(Cal)
- Overseas Sanmar Financial Ltd. (86 ITD 602) (Mad)
c)With regard to the allegation AO that the expenditure has been incurred in connection with allegations of unfair labour practices, the CIT(A) held that subsequent to settlement of the dispute, the Assessee provided continuous employment to the drivers from 1999 through 2002. The retrenchment compensation was completely separate and distinct from the earlier settlement.
20 ITA NO.3884 &3933/MUM/2008(A.Y.2003-04)d)With regard to the allegation of the AO that the expenditure can also not be disallowed under Explanation to section 37(1) of the Act, the CIT(A) held that the compensation has been paid under a contractual settlement with the drivers which by no means can be treated as payment made in violation of any law. The CIT(A) also held that the intention of the legislature in bring Explanation to section 37(1) on record was to disallow protection money, extortion, hafta, bribes and such other payments, wherein payment of retrenchment compensation can, in no way, fall into this bracket. Accordingly, this contention of the AO is also not acceptable.
28. Aggrieved by the order of the CIT(A), the revenue has raised ground No.3 before the Tribunal. The learned D.R. relied on the order of the AO. In particular it was submitted by him that the decision of the Hon'ble Gujarat High Court in the case of CIT Vs. Prithiviraj Bhoorchand (supra) was rendered in the context of fulfillment of the number of workmen to be employed by an enterprise to claim deduction u/s.80-I of the Act and that analogy cannot be applied to a case of payment of compensation for termination of service of a person who is not in direct employment of the Assessee. According to the learned D.R. there was no employer employee relationship between the Assessee and the person to whom compensation was paid by the Assessee and therefore it cannot be a legitimate business expenditure of the Assessee. He also harped on the point that the payment at best is a payment for the Assessee having indulged in unfair trade practice and therefore the same would be hit by explanation to Section 37(1) of the Act.
29. The learned counsel for the Assessee reiterated submissions as were made before CIT(A) and relied on the order of the CIT(A). In particular reliance was placed on the decision of the Hon'ble Supreme Court in the case of Sasoon J David & Co. Pvt.Ltd. 118 ITR261 (SC).
21 ITA NO.3884 &3933/MUM/2008(A.Y.2003-04)30. We have considered the rival submissions. We are of the view that the order of the CIT(A) does not call for any interference. The AO disallowed the claim for deduction on the ground that there was no employer employee relationship between the Assessee and the person to whom the Assessee made payment. This finding of the AO in our view was rightly reversed by the CIT(A). Perusal of the terms of settlement of dispute between the workers and the new contractor engaged for providing cars on hire to which the Assessee was also a party, it has been clearly accepted that the Assessee would continue to provide employment to the workmen who raised dispute before the labour Court. In fact the workmen alleged that they were employees of the Assessee as they were under the direct control and supervision of the Assessee. They in fact got an interim order to maintain status quo pending disposal of the dispute before the labour court. The subsequent settlement of the dispute and the agreement by which the Assessee made payment to the individual workmen clearly show that there was a legal obligation on the part of the Assessee to make payment in question. In this regard, the decision of the Hon'ble Supreme Court in the case of Sasoon J.David (supra) is relevant. It has been laid down in the aforesaid decision that the expression "wholly and exclusively" used in section 10(2)(xv) of the Indian Income-tax Act, 1922, (corresponding to Sec.37(1) of the Act) does not mean "necessarily". Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under section 10(2)(xv) of the Act even though there was no compelling necessity to incur such expenditure. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under section 10(2)(xv) of the Act if it satisfies otherwise the tests laid down by law. In the present case, the 22 ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) necessity for incurring the expenditure also existed as we have seen the compromise between the parties filed before the labour Court. The facts in the case of Sasoo J.David (Supra) were as follows: Shares of the appellant, an investment company, were held by the Davids. Its assets were worth Rs. 155 lakhs as on December 31, 1955. On December 2, 1955, its directors proposed that the services of 22 employees, the managing director and a director be terminated and that they be paid compensation; and on January 25, 1956, the shareholders accepted the directors' proposal. Under an agreement dated March 23, 1956, the Davids agreed to sell to the Tatas all the shares in the appellant company for Rs. 155 lakhs, the sum voted for payment of compensation to the employees being deductible therefrom. The agreement also provided that the Davids should arrange to terminate the services of all employees with effect from March 31, 1956, and arrange to have all directors resign their offices so that the Tatas would be entitled to appoint their own directors or employers. After the take over, the appellant re-employed 9 of the 22 employees. There was a substantial reduction in the wage bill as a consequence of the retrenchment. The appellant paid Rs. 1,64,899 during the calendar year 1956 relevant to the assessment year 1957-58, which amount, inter alia, included Rs. 16,188 paid to the managing director in lieu of six months' notice, Rs. 21,200 paid towards compensation for termination of pension allowance, and Rs. 16,885, the first of five annual payments as compensation to the director. The appellant claimed deduction of the sum of Rs. 1,64,899 as business expenditure under section 10(2)(xv). The Appellate Tribunal held that the expenditure had been incurred by the appellant not for the purpose of the business but purely as a result of the bargain between the Davids and the Tatas and that, even assuming the payments were beneficial to the appellant, no deduction could be allowed since they had been made to benefit third parties. On a reference the High Court held that only the two amounts of Rs. 21,200 and Rs. 16,188 were allowable as deductions and that the balance of Rs. 1,27,511 paid to 23 ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) the employees and a director was not allowable as a deduction since the expenditure had not been incurred by the company for commercial reasons. On appeal by the appellant to the Supreme Court, held that on the facts, that, even assuming that the motive behind the payment of the compensation was that the terms of the agreement between the Davids and the Tatas for the sale of the shares should be satisfied, as long as the amount of Rs. 1,27,511 was laid out wholly and exclusively for the purpose of the business of the appellant there was no reason for denying the benefit of section 10(2)(xv). The appellant company continued to function even after its control passed on to the Tatas and the expenditure in question was laid out for the purpose of the company's own trade and not for the trade of the Tatas who were only its shareholders. As a result of the expenditure, the appellant company was in fact benefited by reduction in its wage bill. It could not be said that the Tatas were in any way benefited financially because of the deduction in the consideration payable by the in for the shares. The sum of Rs. 1,27,511 was expended by the appellant on the ground of commercial expediency and in order indirectly to facilitate the carrying on of its business, and was, therefore, allowable as a deduction.
31. We are also in agreement with the findings of the CIT(A) that the Assessee did derive an apparent advantage in the form of reduced car hire charges and that the expenditure is not one incurred for indulging in unfair labour practice or one incurred for any purpose which is an offence or which is prohibited by law falling within the ambit of Expln. To Sec.37(1) of the Act. For the reasons given above, we do not find any grounds with the order of the CIT(A). Consequently, Gr.No.3 raised by the Revenue is dismissed.
32. In the result, the appeal by the Revenue is dismissed.
24 ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) ITA No.3933/Mum/08: Assessee's appeal:33. Ground Nos. 1 to3 were not pressed and they are dismissed as not pressed.
34. Ground No.4 and 5 raised by the Assessee reads as follows:
"4. On the facts and in the circumstances of the case, the learned CIT(A) has legally erred in confirming the action of the learned AO in disallowing expenditure of Rs. 36,89,659/- incurred by the appellant with respect to its printing and electroplating activities. It is prayed that the learned AO be directed to allow the revenue expenditure of Rs.36,89,659 incurred by the appellant.
5. without prejudice and in alternative to ground No.4 above and on the facts and in the circumstances of the case, the learned CIT(A) has legally erred in upholding the action of learned AO in bringing to tax revenues earned out of alleged discontinued activities."
35. The assessee is a multi-activity company carrying on composite business mainly from New Delhi and Mumbai. Its business activities consist of Printing, Electroplating, Housing, Car Hire and Ticketing. Inter alia, it was carrying on at Delhi , printing and electroplating activities which it found uneconomical and, therefore, on March, 19, 2001, it discontinued its printing and electroplating activities by giving notice of closure. During the financial Year 2002-03 relevant to assessment year 2003-04, the appellant had earned income of Rs. 71,88,909/- from its discontinued operations and had incurred expenses of Rs. 45,41,375/- thereon. Income was mainly on account of profit on sale of fixed assets whereas the expenses were in the nature of day-to-day expenses incurred on the business establishment. The assessee submitted that it has been a company existing since February 19, 1981. Since its inception it has been engaged in a composite business of multiple activities such as rendering travel related services, professional services, leasing, printing, electroplating etc. It has a common Board of 25 ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) Directors who controls and manages all its activities. All the activities were carried on though common management, common funds, etc. Even the office premises, general staff, etc. are common. All the activities are controlled and managed by the same Board of Directors. Common funds and resources are deployed for day to day running of these activities . These facts have never been challenged by the Income-tax Department in the history of the Company. In all the past years, the assessment have been completed, accepting the above position. It was further submitted that the printing and electroplating activities of the Assessee are part of one composite business activity carried on by the Assesee. Although the business is carried on in various geographical regions, there is common management and control and the entire business is being run as one single unit. However, the AO disallowed the expenses of Rs.45,41,375/- incurred in connection with such discontinued activity on the ground that the expenses were incurred in connection with a closed business. Further the AO observed:
"Even though the assessee has a composite business under head 'Taj Services Pvt. Ltd.' separate profit and loss account is drawn up and separate accounts for this division are maintained."
36. On appeal by the Assessee, the CIT(A) held that the assessee was carrying on a composite business which included business of printing and electroplating, housing, car hiring and ticketing. He found that the income on sale of the fixed assets was earned on sale of the assets pertaining to the discontinued activities of printing and electroplating business. The same was offered to tax and taxed by the AO. Against that income the assessee claimed expenditure but the same was disallowed on the reasoning that the expenses were incurred in connection with closed business. In A.Y 2001-02 on identical issue whether the printing and electroplating business constitute separate business or not the CIT(A) held in favour of the assessee.
26 ITA NO.3884 &3933/MUM/2008(A.Y.2003-04)In this year however, the CIT(A) took a different view and confirmed the order of the AO. Aggrieved by the order of the CIT(A) the assessee has raised Ground No. 4 & 5 before the Tribunal.
37. At the time of hearing the parties agreed that similar issue was considered by the Tribunal in Assessee's own case in ITA No.2344/Mum/2005 for AY 01-02 and this tribunal held that the assessee was carrying on one composite business , which included printing and electroplating division also. It was also held that the printing and electroplating division and the other business constitute one business. It was also held that it was an expenditure incurred for the purpose of business and was not capital expenditure. The Tribunal also followed the decision of the Hon'ble Bombay High Court in the case of Bhor Industries Ltd., 128 Taxman 626, wherein it was held that amounts paid as retrenchment compensation was to be allowed as a deduction. In the light of the decision of the Tribunal referred to above, we are of the view that the deduction claimed has to be allowed. Since the facts and circumstances and the basis of addition made by the revenue authorities are identical as it prevailed in A.Y 2001-02. Respectfully following the decision of the Tribunal, we direct the AO to allow the claim for deduction as made by the Assessee. Thus Grounds No.4 and 5 raised by the Assessee are allowed.
38. In the result, the appeal by the Revenue is dismissed while the appeal by the Assessee is partly allowed.
Order pronounced in the open court on the 16TH day of Sept., 2011.
Sd/- Sd/-
(R.K.PANDA ) (N.V.VASUDEVAN)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Dated. 16th Sept.2011
27 ITA NO.3884 &3933/MUM/2008(A.Y.2003-04)
Copy to: 1. The Appellant 2. The Respondent 3. The CIT City -concerned
4. The CIT(A)- concerned 5. The D.R"E" Bench.
(True copy) By Order
Asst. Registrar, ITAT, Mumbai Benches
MUMBAI.
Vm.
28 ITA NO.3884 &3933/MUM/2008(A.Y.2003-04)
Details Date Initials Designation
1 Draft dictated on 8/9/11 Sr.PS/PS
2 Draft Placed before author 12/9/11 Sr.PS/PS
3 Draft proposed & placed JM/AM
before the Second Member
4 Draft discussed/approved by JM/AM
Second Member
5. Approved Draft comes to the Sr.PS/PS
Sr.PS/PS
6. Kept for pronouncement on Sr.PS/PS
7. File sent to the Bench Clerk Sr.PS/PS
8 Date on which the file goes to
the Head clerk
9 Date of Dispatch of order