Income Tax Appellate Tribunal - Mumbai
Western India Warehousing Corpn. vs Tenth Income-Tax Officer on 25 May, 1987
Equivalent citations: [1987]22ITD427(MUM)
ORDER
K.C. Srivastava, Accountant Member
1. This appeal by the assessee is directed against the order of the CIT (Appeals) and relates to assessment year 1977-78. The appeal is late by 6 days. The assessee has applied for condonation of the delay. We have perused the application for condonation and we are satisfied that the explanation given is reasonable. The delay is, therefore, condoned and we proceed to decide the appeal on merits.
The main dispute in this appeal relates to the disallowance of Rs. 7,73,981 paid by the assessee to the Official Liquidator of the landlord-company, M/s, Elphinstone Dye Works Pvt. Ltd. The basic facts in the present case are that the present business undertaking in the name of M/s. Western India Warehousing Corporation had been acquired by the trustees, of Shri Vithaldas Madhavji Khakkar & Seth Tapulal Chakubhai Bhammar Trust. Before the acquisition of this business activity by the trust, it belonged to a partnership firm consisting of Chandrakant Kumudchandra Cheeda, and Snehalata Ratilal Chotalia. They had taken as tenants an immovable property belonging to the above comps Elphinstone Dye Works Pvt. Ltd. in Old Prabhadevi Ro Bombay. Later on, when the Western India Warehousing Corpo tion activities was assigned to the trust which acquired it aj going concern together with its goodwill and beneficial advanta the trust incurred certain expenses and started earning so income from the warehouse which was given to the Custo Department.
2. The company went into liquidation and was represented by ¦ Official Liquidator. Though, in the beginning the Official Lie dator was receiving the rent @ Rs. 3,000 per month on behalf the company, later on, the old arrangement was challenged him in the court of law. According to him, the agreement betw< M/s. Western India Warehousing Corpn. and the latter assignm by the firm in favour of the turst was stated to be void and it \ claimed that it should not be held binding on the Official Lie dator. The relief sought was that the vacant possession of above premises should be given to the Official Liquidator. Me; while one of the settlors of the trust Muktaben B. Kakkar too: transfer of the mortgage created by the company in liquidation favour of the Maharashtra State Financial Corpn.
3. The agreement regarding tenancy was for a period of 50 yea The trust invested certain sums of money before letting it to the Customs authorities on a monthly rent of Rs. 57,920. Official Liquidator realised that the company was getting oi Rs. 3,000 per month, whereas the trust was deriving an income Rs. 57,000 or more from the Customs Department. As against 1 legal action taken by the Official Liquidator seeking the decla tion of the agreement and assignment of 1972 and 1974 as vo the trustees made an application to the High Court seeking p mission to sue the Official Liquidator and for declaring that t trustees were the lawful tenants. The position is stated by 1 assessee before the CIT (A) as under :-
Finding that the title of the Trust as to the tenancy in respt of the said premises under serious challenge, one of the Settlors Muktaben Khakhar paid the mortgage dues of the said Mai rashtra State Finance Corporation for transfer of mortgage frc Maharashtra State Finance Corporation in her favour, who h already filed a petition under the provisions of Maharashtra Stt Finance Corpn. Act, 1951, against the Company for seve: branches of the mortgage deed including the nonpayment of the dues.
On 2-10-1975 Muktaben B. Khakhar got in her favour transfer of mortgate executed by the Maharashtra State Finance Corpn. by paying to Maharashtra State Finance Corporation its mortgage debt and costs amounting to Rs. 3,50,500.66 due by the Company under the aforesaid Deed of Mortgage dated 13-10-1965 executed by the Company in favour of mortgagee. The Trustees, however, agreed to reimburse Muktaben B. Khakhar any costs, charges, expenses, loss or damages or shortfall that she may sustain in connection with or in respect of or as a result of such transfer of mortgage, since she procured assignment of mortgage security in her favour with a view to protect the title of the Trust as a tenant of the said premises.
The said Muktaben as Transferee/Mortgagee put up the Company's property for sale without the intervention of the Court under the power of sale reserved to her under the original Deed of Mortgage dated 13-10-1965. The Official Liquidator naturally became apprehensive at this step of Muktaben that if the Company's property is sold away by auction sale, the Official Liquidator will lose the chance of recovering the said sum of Rs. 57,920 every month. He thereupon took out Company Judge's Summons, being Company application No. 206 of 1975 against the said Muktaben and obtained an ad-interim injunction on 13-12-1975 preventing her from exercising the power of sale. The Official Liquidator categorically contended that Muktaben's taking over the transfer of the mortgage was only with a view to protect the tenancy of the Trustees in respect of the said premises.
It is relevant to mention several dates in order to appreciate further facts. The original agreement of tenancy was dated 7-4-1972 entered into between the Company on the one hand and the partner of Western India Warehousing Corporation on the other hand. The relevant winding up petition was filed on 17th April, 1973. The Official Liquidator was appointed provisional Liquidator in the said petition by an order dated 10th September, 1975. Final order for winding up was made by the Bombay High Court sometime in June 1974. The Trust got the assignment in its favour executed by the partners of Western India Warehousing Corporation on 7-1-1974.
4. There were claims and counterclaims before the Court but ultimately there was a settlement between the Official Liquidator and the assessee-trust. According to the settlement, the trust was to pay to the Official Liquidator a sum of Rs. 7,73,981 so as to settle once for all the challenge to tenancy by the Official Liquidator. The terms of the Consent signed on 24-11-1976 were as under :-
Consent Terms between the applicant and Respondent Nos. 3, 3A, 3B and 4 :
(1) The Official Liquidator accepts the respondents Nos. 3, 3A, 3B and 4 the Trustees of Vithaldas Madhavji Khakhar and Tapulal Chakubhai Bhammer Trast as tenants of the premises more particularly described in the Deed of Assignment dated 7th Jan, 1974, at a monthly rent of Rs. 3,000.
(2) Respondent Nos. 3, 3A, 3B and 4 agree and undertake to pay-all the arrears of rent from 1st April, 1975, up-to-date to the applicant at the rate of Rs. 3,000 per month within four weeks from the date hereof and the applicant to accept such rent and issue rent receipts for payment of such rent.
(3) The applicant agrees not to terminate the tenancy of Respondent Nos. 3, 3A, 3B and 4 except on the ground of non-payment of rent and not raise any objection on the ground that the Respondent Nos. 3, 3A, 3B and 4 have given storage facilities to Respondent Nos. 5 and 6.
(4) Respondent Nos. 5 and 6 are ordered to pay the arrears of storage facilities to Respondent Nos. 3, 3A, 3B and 4 for the period 1st August, 1975, till date and such payment be made to M/s. Bhai-shanker Kanga and Girdharlal, Attorneys for Respondent Nos. 3, 3A, 3B and 4 on their behalf.
(5) The applicant gives up all the remaining claims in the Judge's Summons.
The Consent Terms in another petition bearing petition No. 206 of 1975 were as under :-
(1) By Consent Respondent No. 1 is hereby given permission to exercise the power of sale pursuant to an Indenture of Mortgage dated 13-10-1965 and the Deed of Transfer of Mortgage dated 2-10-1975 to sell the mortgage property by public auction within six months from the date hereof (the terms and conditions whereof will include the terms and conditions set out in the Schedule hereto) and on the conditions set out hereinbelow. Provided however that the power of sale will not be exercised till the time clause 3 is complied with.
(2) Respondent No. 1 accepts that the Respondent Nos. 2 to 5 are the tenants of the mortagaged property in accordance with the Deed of Assignment dated 7th January, 1974 and agreement of tenancy dated 7-4-1972.
(3) Respondent Nos. 2 to 5 undertake to pay to the applicant a sum of Rs. 7,73,931.00 within six weeks from the date hereof.
(3A) The applicant will pay in the first instance out of the said amount within the period of two weeks the property tax, water charges, rates, other taxes, charges outgoings, assessments, land revenues and other impositions paid and/or due and payable under clause 1 of the Indenture of Lease dated 15th December, 1943 in respect of the mortgaged property for the period up to the date of those consent terms.
(4) Agreed that Respondent No. 1 will not be entitled to claim the mortgage debt from the amount referred to in clause No. 3.
** ** ** (14) Agreed that the said mortgage and the transfer of mortgage are valid and subsisting.
(15) Within one week from the completion of sale the Official Liquidator will deliver possession of the said property to the purchaser by attorning tenancy of the Cadell Weaving Mill Company. Ltd. and Respondent Nos. 3, 3A, 3B and 4 as cotrustees of 'Seth Vithaldas Madhavji Khakhar and Seth Tapulal Chakubhai Bhammar Trust' as Assignees of Western India Warehousing Corporation who are in occupation of the said property.
It was in view of the above agreement in the court the trust paid an amount of Rs. 7,73,931 to the Official Liquidator. The dispute is regarding the allowance of this amount" as a deduction in the computation of the income of the assessee.
5. It had been submitted before the CIT (A) that the assessee was already having a tenancy right in the above property and the Official Liquidator was accepting the rent in accordance with the agreement of 1972. There was no fresh agreement between the assessee-trust and the Official Liquidator and there was no question of obtaining any new right which was not already there. It was therefore contended before the CIT (A) that the above amount had been paid to protect the rights which were already there and not for acquiring any new right. Reliance was placed on certain decisions Including the decision of the Bombay High Court ' in CIT v. Mohanlal Bros. [1982] 133 ITR 642. In this case, subtenancy had been acquired by the assessee, Mohanlal Brothers in the year 1952 and later on, there were disputes and ultimately a compromise was arrived at and a Consent Decree was passed under which an amount of Rs. 50,000 was paid by the assessee and was claimed as a deduction in the year 1965-66. It was held that the assessee had become a lawful subtenant, further payment of Rs. 50,000 was not paid to acquire the subtenancy but only to protect what was already available with the assessee. The claim was allowed as a revenue deduction.
It had also been contended before the CIT (A) that the tenancy had been recognised from the date of the assignment in favour of the assessee on the basis of the original agreement of 1972. The working of the amount of Rs. 7.73,981 was also given and it was airived at after deducting the amount of mortgage debt and interest thereon to the extent of Rs. 3,87,019 from the amount demanded by the Official Liquidator at Rs. 11,50,000. The balance of Rs. 11,000 represented the legal costs as demanded by the Official Liquidator.
6. The CIT (A) considered the facts and held that the amount paid was 258 times of the monthly rent of Rs. 3,000 and he referred to the various claims made by the parties before the Court. It had been alleged in the application by the Official Liquidator that the assessee was in wrongful occupation of the premises since 17th April, 1973 and therefore they were liable to pay to the Official Liquidator mesne profit or compensation for such wrongful occupation at the rate of Rs. 60,000 per month from 1973. He referred to the directions given by the IAC who had referred to the allegation of fraud as made by the Official Liquidator. Relying on the affirmation made by the Official Liquidator, it was stated that the assessee had no title to the premises and it could not be treated to be a good title. It was also pointed out that the assignment of the tenancy in favour of the assessee was challenged on the ground of invalidity. According to the Official Liquidator it had been stated in his petition that the assessee was a trespasser and was not occupying the property in any legal manner. The CIT (A) referred to the contention of the IAC that prior to the Consent Decree, the assessee-tmst did not have any existing good title to the tenancy of the property in question. The CIT (A) further quoted from the judgment of the Bombay High Court where it was stated that the Judge was not in favour of the compromise being granted as there were allegations of commission of certain offences. The Judge sanctioned the Consent Decree after making it clear that in case a prosecution is launched, it would not be obstructed by the agreement between the parties.
7. The CIT (A) after considering the facts felt that the claim of the assessee could be not be allowed as a revenue deduction. For this he relied on the decision of the Supreme Court in the case of Dalmia Jain & Co. Ltd. v. CIT [1971] 81ITR 754. Though this case was decided in favour of the assessee, it was observed by the Supreme Court, that where the litigation expenses are incurred by the assessee for the purpose of creating, curing or completing assessee's title to the capital, then the expenses incurred must be considered as a capital expenditure, but if the litigation expenses are incurred to protect the business of the assessee, they must be considered as a revenue expenditure. Applying the above principles, the CIT (A) held that the payment was for curing or completing the assessee's title to the tenancy right if not for creating the said title for the first time. He held that as a result of the payment the Official Liquidator accepted for the first time the trustees as the tenants of the premises. He therefore held that the payment was of a capital nature. He distinguished the case decided by the Bombay High Court relied upon by the assessee. In those cases, according to him, the payment had been made for protecting the rights and not for curing or completing the title. As a corollary of the above decisions, the CIT (A) held that the litigation expenses of Rs. 9,260 would also not be held as a revenue expenditure.
8. The learned counsel for the assessee took us through the various documents in the form of agreement of tenancy between Elphinstone Dye Works Pvt. Ltd. and Western India Warehousing Corporation as a firm. A cops'- of the Board of Directors of the company approving the above agreement was also placed before us. Besides the above agreement of 7th April, 1982, a reference was made to the Indenture of Assignment by which the partners of the firm assigned the tenancy in favour of the trustees of the assessee-trust. It was pointed out that under the original agreement, it was lawful for the tenants to sublet whole or any part of the premises or transfer their interest therein. It had been agreed that the landlord-company would not have any objection to such subletting. The assignees had paid certain sum of money for fixtures and furnitures and also another sum of Rs. 45,000 towards goodwill. It was therefore submitted that the whole going concern had been validly assigned to the trust. The asses see-trust was also put in possession of the above premises with effect from 7-1-1974. As the landlord-company M/s. Elphinstone Dye Works had gone under liquidation, their rent was being paid to him and several receipts signed on behalf of the Official Liquidator has been filed. All these receipts are for the year 1974 and certain months of 1975.
9. It was submitted that the Official Liquidator who had been appointed in September 1973 challenged the arrangements between the company and the firm and later on with the trust. The Official Liquidator had addressed letters to the Collector of Customs who had taken the warehouse for their use asking for the rent to be paid to the company. He challenged the tenancy in favour of the assessee-trust assessed in the status of association of persons. The Bombay High Court was moved to declare the tenancy agreement dated 7-4-72 and later the Deed of Assignment dated 7-1-74 to be void, and a request was made that the premises should be handed over to the company. As against this, the assessee-trust moved an application for declaration of the trustees as lawful tenants. It has also been alleged that the agreement of 7-1-72 had been antedated and it was executed sometime in October 1972. Thus in the litigation, claims and counterclaims were made and certain statements were made putting the claim of each party in an exaggerated manner. It was this litigation which was compromised and a Consent Decree was passed after both the sides agreed for the isame. It was as a result of this Consent Decree that the trustees of the trust were accepted as the tenants of the premises as given in the Deed of Assignment of 1974. The arrears of rent had to be paid at the agreed rate of Rs. 3,000 per month and it was also agreed between the Official Liquidator and the Trustees that the tenancy could not be terminated except for nonpayment of rent. The Cumstoms Department was to continue to uss the premises as in the past. This compromise had been arrived at on 24-11-1966. The validity of the tenancy was accepted in accordance with the Deed of Assignment of 7-1-1974. Of course, this was subject to the payment of Rs. 7,73,931.
10. The learned counsel for the assessee submitted that the tenancy had been acquired by the assessee in 1974 and after that, the rent had been actually paid to the company represented by the Liquidator. It was submitted that as a result of the Consent Decree, no new right was obtained, but only some obstruction in the enjoyment of the tenancy rights were removed. It was pointed out that the CIT (A) had gone on the basis of the averments made in the course of litigation and it was not proper to rely on such averments which are nothing but exaggerated claims of the parties. He submitted that the CIT (A) has not been able to point out to any defect in the title of the assessee. He submitted that there was no legal flaw in the light of the assesseo and the assignment had been validly made. He further pointed out that the Customs Department had stopped making payments to the assessee and it was necessary to conclude the litigation so as to enable the a.ssessee to continue to get the payments from the Costoms Department. He further submitted that the payment was not to cure any defect in the title or to complete the title of the assessee. It was only to protect and defend the title or the right of the assessee in the enjoyment of the above premises. He submitted that the payment was made to facilitate the carrying on of the commercial activities of the assessee and to ensure the continued receipt of business income.
11. The Departmental Representative, on the other hand, submitted that the CIT (A) has discussed the matter at great length and the payment had been made only to cure the defect in the title or to complete the title. He submitted that but for the acceptance of the tenancy by the Official Liquidator there was no valid right with the assessee and it was after the payment of this amount that such right was acquired. He therefore submitted that the payment was of capital nature as it was made to cure the defect in the title or to perfect the title and not for merely protecting or defending the title of the assessee in the premises. It was also submitted by him that the assessee obtained an enduring benefit as a result of this payment and this amount constituted a multiple of 258 of the rent received by the company. It was therefore contended that it was an expenditure of capital nature.
12. At this stage, we may refer to the cases relied upon by both the parties. We have already referred to the reliance of the assessee on the decision of the Bombay High Court in the case of Mokanlal Bros, (supra) and the decision of the Supreme Court in the case of Dalmia Jain & Co. Ltd. (supra) where the basic principle has been laid down. The learned Departmental Representative referred to the decision of the Bombay High Court in the case of Prabhat Theatres (P.) Ltd. v. CIT [1979] 118 ITR 953. In that case, there was a dispute regarding the lease rights of the theatre and had resulted in a compromise as a result of which an interest of Rs. 34,080 was paid and claimed as deduction. The Tribunal found that none of the leases that were executed from time to time was filed and the assessee had failed to establish that it was in occupation of the theatre as a tenant from the very beginning. The Tribunal held that the amount of interest was paid by the assessee in order to legalise the assessee's right to occupation and not for preserving its tenancy rights and payment of interest was capital expenditure. It may be mentioned that the facts of this case are quite different as in our case. We have got necessary documents and agreements and we have to interpret those agreements. There is also evidence to show that the assessee was in occupation of the premises as a tenant and the landlord-company had received rents for several years and even the liquidator had received such rent.
13. The other decision relied upon by the learned Departmental Representative is the decision of the Patna High Court in the case of Jamshedpur Engg. & Machine Mfg. Co. Ltd. v. CIT [1957] 32 ITR 41. In this case, the expenditure incurred on shifting of the office was held to be capital expenditure as the assessee-company derived an enduring benefit from such shifting.
The next case relied upon was the decision in the case of CIT v. Shri Digvijay Cement Co. Ltd. [1986] 159 ITR 253 (Guj.) where the expenditure on obtaining facility in the court for setting up shipyard which was not ultimately set up was held to be a capital expenditure. Reliance was also placed on the decision of the Bombay High Court in the case of Jaya Hind Industries (P.) Ltd. v. CIT [1986] 161 ITR 842 where the expenses on the acquisition of shares was held to be a capital expenditure as it was a new asset which was being acquired.
A reference was also made to the decision of the Supreme Court in the case of CIT v. Jalan Trading Co. (P.) Ltd. [1985] 155 ITR 536 where it was held that a new company which acquired a new right to carry on business of sole selling agency and it was agreed to pay 75 per cent of its annual net profits for acquiring this right and claimed this expenditure as deduction, it was held that it was a capital expenditure.
14. As it would appear from the above discussion, facts of the above cases are entirely different. As regards the assessee acquiring an enduring benefit under the arrangement, the learned counsel for the assessee has drawn our attention to the decision of the Supreme Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 wherein it was held that even if an expenditure is incurred for obtaining an advantage of enduring benefit, it may sometimes be on revenue account and it is not every advantage of enduring nature acquired by an assessee that brings the assessee within the principles laid down in the test of enduring benefit. What was material to consider is the nature of advantage in a commercial sense. Where the advantage is in the capital field, the expenditure'would be disallowable but where the advantage is in the revenue field, it would be allowed as a deduction. The Court held that the test of enduring benefit is not a certain or conclusive test and cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case.
15. Now in the light of the facts of the case and the case-laws relied upon by the two parties, we have to consider the nature of expenditure claimed by the assessee. A perusal of the agreement of 1972 and Deed of Assignment of 1974 clearly shows that the trustees had acquired the legal right of tenancy as well as the right to carry on the activity of exploiting the warehouse. In 1974, the going concern was acquired and for that some consideration was paid. The Customs Department had taken the above premises and were using it as warehouse and were paying a monthly rent of Rs. 57,000 to the assessee. Thus, when the controversy arose, the position was that the assessee was regularly receiving the income from the Customs Department whereas they were paying the agreed rent to the company. It was later on that the Official Liquidator thought that the rent which was being paid to the company was very little considering the income which was being obtained by the trust. It therefore wanted to gain some advantage for the company and for this purpose, he challenged the arrangement. Whenever such litigation takes place, the parties make their different claims in an exaggerated manner and it is not possible to adjudicate on their averments at this stage. What one has to see is the Consent Decree. In the present case, one of the parties in the Consent Decree was the Official Liquidator. Thus, we cannot go beyond the terms of the Consent Decree. Looking to the terms of the Consent Decree, it would appear that the Official Liquidator recognised the legal position of the trustees in respect of the property with effect from the date of Assignment in January 1974. Thus the position regarding the validity of the arrangement in 1974 was not changed. By making the above payment, the Trustees ensured that they would continue to receive the income from the Customs Department in future also without any obstruction or difficulty. In fact what the Official Liquidator was trying to claim is that instead of assessee receiving the income, it is he who should receive this income from the Customs Department. Meanwhile the Customs Deptt. had stopped making payments to the assessee. By making the above payment, the obstruction in the receipt of income was removed and the payment was to ensure and facilitate the activity of the assessee in running the warehouse. No new rights have been acquired and it has not been pointed out by the Revenue authorities as to what was the defect which was sought to be cured by making the above payment. The above payment was made to protect the right of the assessee to earn income by the use of all the rights acquired in January 1974. The fact that the advantage acquired to subsist for several years was not the result of this payment but also of the original agreement of assignment. We are, therefore, of the view that the payment in question was not a capital expenditure and has to be allowed as a revenue expenditure. The addition of Its. 7,73,932 is therefore deleted.
16. The appeal is allowed.