Bombay High Court
Ponds (India) Limited vs Dputy Commissioner Of Income-Tax. on 1 November, 1996
Equivalent citations: (1997)59TTJ(MUMBAI)560
ORDER
O. P. JAIN, J.M. :
This appeal is directed against the order of the CIT(A) dt. 18th December, 1995 pertaining to the asst. yr. 1992-93.
2. In ground No. 1, objection has been raised to the following disallowances sustained by the CIT(A) under s. 37(2A) of the IT Act :
Rs.
(a) Expenditure on lunch/refreshments served outside the office premises to employees/business associates 40,000
(b) 25 per cent of Rs. 2,12,941 being expenses on lunch/ refreshments served within office premises to employees/ business associates 53,235
(c) Out of pocket expenses incurred on business trips of foreign visitors to India - hotel bills including room rent Rs. 16,402 and Laundry expenses. 312 18,199
(d) Expenditure on staff get-together 18,077
3. As regards item (a) above, it was the case of the assessee that the expenditure incurred on lunch to employees and the business associates, etc. outside the premises of the assessee-company does not amount to an entertainment. This contention of the assessee was not accepted by the AO as also by the CIT(A) and as such disallowance of Rs. 40,010 was made.
4. In the appeal before us, the learned counsel for the assessee has reiterated that the expenditure does not amount to entertainment. According to him, lunch/refreshment was provided to the employees outside the premises of the company. In that connection, he has invited our attention to the description of the expenses as given at p. 8 of the assessees compilation. It was contended that the lunch/refreshment provided to the employees outside the premises of the company should be treated as refreshment provided at the place of the work. In the alternative, it was contended that the disallowance made is excessive. To give strength to his submissions, the learned counsel for the assessee has cited the decision in CIT vs. Mysore Minerals Ltd. (1986) 162 ITR 562 (Kar). The submissions of the assessee were opposed by the learned Departmental Representative.
5. We have considered the submissions advanced by the parties. Although in the description given at p. 8 it is stated that lunch/refreshment was provided to the employees but as noted by the AO the tax audit report mentions that such refreshment was provided to the employees and business associates outside the companys premises. In the circumstances, it is not possible to hold that there is no element of entertainment. However, the possibility of the employees having participated while entertaining the business associates cannot be ruled out. Therefore, it would be reasonable to allow the expenditure which can be attributed to the employees. In absence of specific details, we hold that 25 per cent of the expenditure should be allowed.
6. As regards item (b) above, the CIT(A) has already allowed 25 per cent of the expenses. The contention advanced on behalf of the assessee is that the disallowance made is excessive. After considering the submissions advanced by the learned representatives of the parties, we are of the view that the disallowance made is appropriate and calls for no interference.
7. As regards item (c) above, it was the case of the assessee that Shri R. P. Furlong, a director of the assessee-company, had visited Bombay and had stayed at Taj Mahal Hotel and the expenses were borne by the assessee-company. According to the assessee, no entertainment is involved. It was also contended that at any rate the expenditure includes the sum of Rs. 16,402 as room rent and Rs. 312 paid by way of laundry expenses and these expenses should not be treated as entertainment expenses. The contention of the assessee was not accepted by the AO. He has noted that nothing have been brought on record to show that the expenditure includes hotel room charges as claimed by the assessee. He has also noted that similar disallowance made in the asst. yr. 1990-91 has been upheld in appeal. Thus, the assessees claim was denied by the AO and the same has been confirmed in appeal by the CIT(A). He has observed that the expenditure of hotel bills for the stay of the foreign visitors is directly hit by the extended definition of entertainment as contained in the Expln. to s. 37(2A), which takes in its sweep the hospitality of every kind. He has referred to the decision of the Kerala High Court in CIT vs. Alleppy Co. Ltd. (1994) 207 ITR 598 (Ker) wherein it was held that expenses on stay of foreign visitors was in the nature of hospitality. He has also relied on the decision of the Supreme Court in CIT vs. Patel Bros. & Co. Ltd. (1995) 215 ITR 165 (SC).
8. The learned counsel for the assessee has reiterated the stand that the expenditure incurred on the visit of the director of the company does not amount to entertainment. The copy of the hotel bill has been filed at pp. 3 to 6 of the assessees compilation. On the other hand, the learned representative for the Revenue has supported the findings of the CIT(A).
9. Having considered the rival submissions, we are inclined to agree with the learned Departmental Representative. The expenditure incurred on the stay and entertainment of a foreign visitor would amount to an expenditure on entertainment and it has been rightly disallowed by the Revenue authorities under s. 37(2A) of the Act. We, therefore, confirm the disallowance.
10. As regards item (d) above, it has been contended that a picnic for the members of the staff was arranged and an expenditure of Rs. 18,077 was incurred. According to the learned counsel for the assessee, the picnic was arranged as a staff welfare measure and, therefore, the Revenue authorities have erred in disallowing the expenditure. On the other hand, the learned representative for the Revenue has supported the findings of the Revenue authorities.
11. Having considered the rival submissions, we are inclined to accept the submissions of the assessee on the point. The expenditure incurred in arranging a picnic for the members of the staff can be rightly treated as an expenditure on staff welfare. We, therefore, delete the disallowance of Rs. 18,077.
12. Ground No. 2 relates to the disallowance of Rs. 1,03,446 sustained by the CIT(A) out of the expenditure incurred on repairs and maintenance of buildings and other assets. The details were furnished during the assessment proceedings. The AO had treated the expenditure to the extent of Rs. 1,61,154 as capital in nature. On appeal, the CIT(A) has upheld the addition to the extent of Rs. 1,03,446 in respect of the following items :
Rs.
(1) Gutterline for disposal of waste water 31,000 (2) Cement concrete road 4,009 (3) New line of water connection 25,839 (4) Fixing of new floodlights 3,828 (5) New cable assembly 7,200 (6) Cost of new panel board to receive 65 HP supply from Taloja - New unit 17,000 (7) Heavy duty new geyser 8,015 (8) Laying new armoured copper cable line 6,555 1,03,446
13. The learned counsel for the assessee has invited our attention to the details of the repairs carried out by the assessee and as noted by the AO in the assessment order. Referring to item No. 1 to 4 above, it has been pointed out that the gutter-line, cement concrete road, line of water connection and floor-lights were already in existence and repairs were carried out. Thus, it has been contended that the Revenue authorities have erred in treating the expenditure on repair of such items as capital in nature. However, it has been admitted that items No. 5 to 8 above were new. On the other hand, the learned representative for the Revenue has supported the findings of the CIT(A).
14. Having considered the rival submissions and after going through the details of the work carried out by the assessee, we are of the opinion that the expenditure incurred on items No. (1) to (4) above should be treated as revenue in nature and the expenditure on items No. (5) to (8) above should be treated as capital in nature and we hold accordingly.
15. Ground No. 3(a) relates to the disallowance of Rs. 30,000 being the fees paid to a consultant in respect of the plain layout for the proposed factory at Daman. The proposal for setting up of the factory was abandoned. In the circumstances, the Revenue authorities have denied the assessees claim that this expenditure should be treated as revenue in nature. In the appeal before us also, the learned counsel for the assessee has submitted that the expenditure was incurred for the purposes of business and, therefore, deduction for the same should have been allowed. Having considered the submissions advanced before us, we are of the view that the deduction has been rightly refused by the Revenue authorities because it is the admitted case that the new plan never materialised and the project was abandoned. We, therefore, confirm the disallowance.
16. Ground No. 3(b) relates to the disallowance of Rs. 70,020 out of the legal and professional charges. The assessee had incurred total expenditure of Rs. 77,800. It includes the fees of Rs. 28,800 paid to Shri Manohar Sawant, Advocate, for fixation of rateable value of rented premises. The other payments have been made for service for consultation and execution on the reorganisation of the office store and laboratory, service charges for submitting application to B.S.E.S. for enhancement of power, etc. service charges for organising and supervision, relocation of telephone pole, etc., to co-ordinate and discuss with the architect the building of office and laboratory and to organise supervision, wiring and commissioning of BPL exchange. The AO has opined that the benefit resulting from these services would enure for many years and, therefore, this expenditure was treated as capital in nature. However, he had allowed depreciation at 10 per cent and thus the disallowance worked out to Rs. 70,020. The action of the AO was confirmed in appeal by the CIT(A).
17. The learned counsel for the assessee has reiterated that the expenditure incurred by the assessee was revenue in nature and not capital. On the other hand, the learned Departmental Representative has supported the findings of the Revenue authorities.
18. On consideration of the submissions advanced before us and after looking to the details as noted by the AO, we are of the view that the expenditure incurred on obtaining various services should be treated as revenue in nature. We hold accordingly. As a consequence of this finding, the AO has to withdraw the depreciation allowed by him.
19. In ground No. 4, the following disallowances have been challenged :
Rs.
(a) 1/10th of expenses incurred on motor-cars including lease rent 55,902
(b) Expenditure on overseas Medical insurance of companys managers on foreign travel for companys business 4,114
(c) Out of pocket expenses incurred on business trips of foreign visitors to India (50 per cent of car hire charges) 23,678
(d) Professional fees paid for obtaining IT clearance certificate for Shri R. J. Cornelis an expatriate manager in connection with his foreign tours for the purpose of companys business 1,600
20. As regards disallowance out of car expenses, the case of the assessee was that cars of the company are used by the employees for the purposes of the assessees business and if there is any personal user by the employees, the same can be considered as perquisite in their respective hands. This contention has not been accepted by the CIT(A) and he has confirmed disallowance of 1/10th of the expenses with the following reasons :
"Having considered the foregoing submissions I am of the considered view that the disallowance has been rightly made by the AO. For the purposes of ascertaining whether any expenditure has been incurred wholly and exclusively for the purposes of business, the appellant has to adduce proper evidence to support its claim. The appellant has admittedly not maintained any record of the day-to-day movement of the vehicles and the purpose of such movements. In absence of such record, there is complete lack of verification and there is no evidence to support the appellants contention that the motor-cars have been used only for the purposes of the appellants business. On these facts, therefore, it can be reasonably inferred that the cars have also been used to some extent for purposes other than the appellants genuine business purposes. Accordingly the estimate of disallowance at 10 per cent of the motor-car expenses, in my opinion, is quite just and fair and the disallowance made on that basis is confirmed."
21. In the appeal before us, the learned counsel for the assessee has repeated the submissions that were advanced before the CIT(A). The details of the cars have been filed at p. 27 of the assessees compilation, which show that two of the cars were owned by the company and seven cars were obtained on lease. Since most of the cars were obtained on lease, it was contended that the disallowance is not justified. The contention of the assessee was opposed by the learned Departmental Representative. On consideration of the submissions advanced by the parties, we are inclined to agree with the findings of the CIT(A). The arguments advanced on behalf of the assessee lend strength to the belief that the vehicles have been used by the employees for their personal purposes as well. This being so, some disallowance would be justified. The disallowance made by the Revenue authorities, in our opinion, is reasonable and call for no interference. We, therefore, confirm this disallowance.
22. As regards expenditure on overseas medical insurance, the case of the assessee was that the employees had gone abroad for purposes of the business of the assessee and, therefore, insurance premium paid to cover the risk in foreign travel was an allowable business expenditure. This contention has not been accepted by the Revenue authorities holding that the insurance of the employees is the personal expenditure of the employees. The learned counsel for the assessee has repeated the submissions that were advanced before the Revenue authorities and the learned Departmental Representative has supported the disallowance. On consideration of the submissions advanced by the parties, we are of the view that the assessee must succeed on this count. The expenditure was incurred to cover the risk in foreign travel of the employees while on duty. In our opinion, this expenditure was incurred wholly and exclusively for purposes of the business and is, therefore, allowable. We, therefore, delete the disallowance of Rs. 4,114.
23. As regards item (c) above, the assessee under the head out of pocket expenses of the foreign visitors has shown payment of Rs. 47,356 as car hire charges. The AO has noted that in the appeal pertaining to the asst. yr. 1990-91, the CIT(A) has allowed 50 per cent of such hire charges as business expenditure. Following that order, the AO has disallowed 50 per cent of the car hire charges resulting in disallowance of Rs. 23,678. The action of the AO has been confirmed in appeal by the CIT(A).
24. The learned counsel for the assessee has submitted that the car hire charges had been incurred wholly and exclusively for the purpose of the assessees business and, therefore, the disallowance is not justified. It is not in dispute that the car was hired for the use of the foreign visitors. The user of the car for personal purposes of the foreign visitor cannot be ruled out. In the circumstances, we are of the view that the disallowance made by the Revenue authorities is justified. We accordingly confirm the same.
25. As regards item (d) above, it is the admitted case of the assessee that the professional fees of Rs. 1,600 was paid for obtaining income-tax clearance certificate for an expatriate manager.
In the given circumstances, the contention of the assessee that this expenditure was incurred wholly and exclusively for business purposes of the assessee cannot be accepted. We, therefore, confirm the disallowance.
26. Ground No. 5 relates to the disallowance of Rs. 45,000, being the insurance (sicenterance) fees paid to Bombay Gymkhana for admission of the executive vice-president as member of the club. The assessees claim for deduction has been denied by the Revenue authorities. The CIT(A) has opined that the lump sum expenditure results in a benefit of long and enduring nature because having been allowed entrance in the club as a member against a one-time payment, the employee shall be entitled to use the club all along in future from year to year. He also observed that one-time payment cannot be said to have been incurred only for the purposes of the assessees business for the year under appeal only but it relates to all the future years resulting in a long and enduring benefit and, therefore, the same has to be treated as capital expenditure.
27. In the appeal before us, the learned counsel for the assessee has admitted that the payment was made for individual membership of the executive vice-president of the company and it was not a corporate membership. However, to support the stand that the deduction is allowable, reliance was placed on the following decisions :
(1) Adarsh Chemicals & Fertilisers Ltd. vs. ITO (1982) 13 TTJ (Ahd) 143 (2) Otis Elevator Co. (India) Ltd. vs. CIT (1992) 195 ITR 682 (Bom).
28. The submissions of the assessee have been opposed by the learned Departmental Representative.
29. Having considered the rival submissions, we are of the view that the assessees claim had been rightly denied because in the instant case the membership was obtained by the individual concerned and not by the assessee-company. Nothing could be shown as to how the assessee stands benefited by the individual membership of the executive vice-president. We, therefore, confirm the disallowance.
30. Ground No. 6 relates to the computation of deduction claimed under s. 80HHC. The Revenue authorities have added the following amounts to the figure of "total turnover" for the purpose of computation of deduction under the said section :
Rs.
(i) Excise duty 5,80,11,331
(ii) Sales Tax 96,79,522
31. Assailing the findings of the Revenue authorities, the learned counsel for the assessee has contended that, according to the scheme of the provisions contained in s. 80 HHC, the above additions are not warranted. He has pointed out that the expression "export turnover" has been defined in cl. (b) of Explanation appended below sub-s. (4A) of s. 80 HHC. He has further pointed out that the expression "total turnover" has been defined in cl. (ba), which reads as under :
"total turnover shall not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962) :
Provided that in relation to any assessment year commencing on or after the 1st day of April, 1991, the expression total turnover shall have effect as if it also excluded any sum referred to in cls. (iiia), (iiib) and (iiic) of s. 28."
32. The learned counsel has also referred to the decision of the Tribunal in Chloride India Ltd. vs. Dy. CIT (1995) 53 ITD 180 (Cal) wherein, while dealing with s. 80HHC, the Tribunal has observed that the numerator and the denominator in a particular formula should be of the same category or should comprise of the same ingredients. Otherwise, there would be no uniformity or harmony. The Tribunal went on to observe that the interpretation suggested by the Department with regard to the expression total turnover as including even octroi, sales-tax and excise duty would result in disharmony because the export turnover did not, admittedly, include these three ingredients. This would pull down the proportion of export profit to the total profit. If these three items were included in the total turnover which was the denominator in the formula, the proportion would automatically get reduced. This method of interpretation would not reflect the policy of the legislature. Thus, having regard to the objectives of the enactment, the expression total turnover could not include the octroi, sales-tax and excise duty since the expression expert turnover did not admittedly include these ingredients.
33. The learned counsel for the assessee had also submitted that the expression turnover has ambiguous meaning and, therefore, it should take its colour from the setting in which it has been used. In nutshell it was contended that the Revenue authorities have erred in including the items of excise duty and sales-tax in the total turnover for the purpose of computation of deduction under s. 80HHC. On the other hand, the learned Departmental Representative has supported the findings of the CIT(A). He has pointed out that similar stand of the assessee was rejected by the CIT(A) in the order pertaining to the asst. yr. 1991-92 and the reasons given in that order have been followed by the CIT(A). Referring to the decision of the Honble Supreme Court in George Oakes vs. State of Madras AIR 1962 SC 1352 and the Law Lexicon by Venkataramaiah, it was argued that in calculating the total turnover, there is nothing wrong in treating the tax as part of the turnover, because turnover means the amount of money, which is turned over in business. It was also argued that the decision rendered by the Tribunal in the case of Chloride India Ltd. (supra) pertains to the asst. yr. 1986-87 and at that time the expression "total turnover" was not defined in the Act. Now the said expression has been defined in the Act and what has to be excluded from the total turnover has been specified. According to him, the term "total turnover" cannot be said to be ambiguous. To give strength to his submissions, the learned Departmental Representative had also made reference to the following decisions :
(1) McDowell & Co. Ltd. vs. CTO (1985) 154 ITR 148 (SC);
(2) Gwalior Rayon Silk Manufacturing (Wvg.) Co. Ltd. vs. CIT (1983) 143 ITR 590 (MP);
(3) CIT vs. Boots Company (I) Ltd. (1995) 214 ITR 175 (Bom);
(4) CIT vs. Lokmat Newspapers (P) Ltd. (1995) 216 ITR 199 (Bom) and (5) M. H. Daryani vs. CIT (1993) 202 ITR 731 (Bom).
34. Having considered the rival submissions, we find considerable force in what has been contended on behalf of the Revenue. The assessment year involved is 1992-93. The expression "total turnover" has been defined in the Act. Applying the ratio of the decision cited on behalf of the Revenue and taking into consideration the definition of the term turnover, which is not ambiguous, we have no hesitation in holding that the amount of excise duty and sales-tax has been rightly included by the Revenue authorities in the figure of total turnover.
35. Ground No. 7 relates to the quantum of interest charged under ss. 234B and 234C. The learned counsel for the assessee has submitted that the interest has not been rightly calculated. We find that the CIT(A) has observed that the assessee is free to press the matter with regard to calculation of interest under s. 234C under s. 154 of the Act before the AO. As regards interest under s. 234B, he has observed that it would have to be recalculated having regard to the income to be computed while giving effect to the appellate order. In case the interest has been incorrectly calculated, the assessee should, in our view, approach the AO in the matter.
36. The last ground relates to the receipt of Rs. 1,70,50,000 treated as short-term capital gains. Briefly stated, on 18th April, 1981, the assessee had agreed to purchase an immovable property from Kothari Medical Centre (KMC in short) and an agreement was executed. The assessee was delivered possession of the property in part-performance of the contract. By another agreement dt. 30th March, 1991, the assessee had agreed to give up its rights under the said agreement for a consideration of Rs. 1,70,50,000 upon certain terms and conditions, one of which was that the assessee would handover possession of the property to KMC by 31st March, 1992. The assessee had agreed to pay to KMC compensation for use and occupation of the property for the period from 1st April, 1991, till it continues in occupation of the property @ Rs. 12 per sq. ft. The agreement dt. 30th March, 1991 was acted upon and the assessee had received the sum of Rs. 1,70,50,000 in lieu of its rights to get the premises transferred in pursuance of the agreement dt. 18th April, 1981. To record that fact, an agreement dt. 24th March, 1992, was executed. These facts have been noted by the CIT(A) in his order as under :
"In terms of the agreement dt. 18th April, 1981, KMC agreed to sell and assign to the assessee-company and the assessee-company agreed to purchase from KMC, the office premises described in the Schedule thereto, at such price and upon such terms and conditions as set out therein. As stipulated, KMC was not required to complete the sale before 31st March, 1991. It was also agreed that KMC would put the assessee-company in possession of the premises immediately and that the assessee-company would be entitled to use and occupy the same pending the completion of the transfer of the premises and was put in possession of the premises accordingly. By their letter dt. 17th December, 1990, the assessee-company informed KMC amongst other things that they were ready and willing to complete the transaction even before the stipulated date of 31st March, 1991, and requested KMC to inform whether they were ready and willing to complete the sale before 31st December, 1990. Thereupon, KMC requested the assessee-company not to insist on enforcing their right for the transfer of the premises to them pursuant to the agreement of 18th April, 1981. The assessee-company agreed to the said request of KMC, subject to certain terms and conditions, which were, after discussions/ negotiations, reduced to writing and recorded in the agreement dt. 30th March, 1991. In the said agreement of 30th March, 1991, it was provided that at the time of vacating the premises KMC shall pay to the assessee-company a sum of Rs. 1,70,50,000 being the mutually agreed compensation for cancellation of the agreement dt. 18th April, 1981. In the agreement of 30th March, 1991, it was further provided that the assessee-company would be entitled to continue in possession of the said premises for a period upto 31st March, 1991, or earlier, as the case may be, on payment of the agreed monthly compensation. The assessee-company handed over vacant possession of the premises to KMC and KMC against receipt of such vacant possession made payment to the assessee-company of the agreed compensation of Rs. 1,70,50,000 as acknowledged and recorded in the third agreement."
37. During the assessment proceedings, it was claimed that the compensation received by the assessee does not attract capital gains. In the alternative, it was contended that the entire amount of compensation received by the assessee has been invested in IDBI capital bonds on 31st March, 1992, and as such no capital gains is chargeable by virtue of s. 54E(i)(a) of the IT Act. The submissions of the assessee did not find favour with the AO. He rejected the stand of the assessee that the agreement dt. 30th March, 1991, was in continuation or in pursuance of the agreement dt. 18th April, 1981. It was held by him that the agreement dt. 30th March, 1991, was independent of the agreement dt. 18th April, 1981. It was also held by him that the premises remained in possession and use of the assessee for a period of one year ending on 31st March, 1992 by virtue of the agreement dt. 30th March, 1991. Thus the period of holding of the asset by the assessee was less than 36 months and as such the capital gain will be short-term capital gain and not long term capital gain as claimed by the assessee. The AO also observed that possession and tenancy rights are some of the ingredients and components of compendium of various rights, which collectively become the ownership rights. The tenancy rights of the assessee on account of occupation of the property were valued by him at Rs. 62 lakhs. Therefore, deducting that amount, the short-term capital gains were computed by him at Rs. 1,08,50,000. The assessee appealed before the CIT(A). The CIT(A) agreed with the finding of the AO that the relinquishment of the rights by the assessee amounts to transfer of a capital asset within a period of 36 months giving rise to short-term capital gain. He also held that the entire compensation received by the assessee has to be treated as short-term capital gain and as such the assessment was enhanced.
38. The learned counsel for the assessee has argued that by agreement dt. 18th April, 1981, the assessee did not acquire any asset but it had acquired only a right to purchase immovable property. The right to purchase the property acquired under the agreement dt. 18th April, 1981, stands extinguished by agreement dt. 30th March, 1991, and as such no transfer of asset is involved and so the transaction does not give rise to any capital gains. It was further submitted that in case of relinquishment property must exist and since in the instant case the assessee had given up its right to purchase the property, the right to purchase the property came to an end did not exist after execution of the agreement dt. 30th March, 1991 and for that reason the compensation received by the assessee cannot be brought to tax. In that connection, reference was made to the undernoted two decisions :
(1) Vania Silk Mills (P) Ltd. vs. CIT (1991) 191 ITR 647 (SC) and (2) CIT vs. Rasiklal Maneklal (HUF) (1989) 177 ITR 198 (SC)
39. In the alternative, it was argued that agreement to purchase is a capital asset. In that connection, reference was made to the undernoted decisions :
(1) CIT vs. Tata Services Ltd. (1980) 122 ITR 594 (Bom);
(2) CIT vs. Sterling Investment Corporation Ltd. (1980) 123 ITR 441 (Bom) and (3) CIT vs. Vijay Flexible Containers (1990) 186 ITR 693 (Bom).
40. Referring to the three agreements in question, copies of which have been placed on record, it was argued that the right to purchase the property was acquired by the assessee on 18th April, 1981 and that right was given up vide agreement dt. 30th March, 1991 and thus the asset was held by the assessee for more than three years and as such the capital gain has to be treated as long-term capital gain and the Revenue authorities have erred in treating the gain as short-term capital gain. He has highlighted the point that in the return of income the receipt was shown as long term capital gain and exemption under s. 54E was claimed because the entire amount was invested in IDBI capital bonds. In support of the proposition that the compensation received by the assessee should be treated as long-term capital gains, reference was made to the following decisions :
(1) CIT vs. Vimal Lalchand Mutha (1991) 187 ITR 613 (Bom) and (2) CIT vs. Ved Prakash Sons (HUF) (1994) 207 ITR 148 (P&H)
41. Opposing the submissions of the assessee, the learned representative for the Revenue has supported the findings of the CIT(A). He has also argued that there was no extinguishment of property and the right to purchase the property was given back to the owner. Referring to the agreement dt. 30th March, 1991, it was argued that the assessee had received compensation for (1) vacating the premises, and (2) cancellation of the agreement dt. 18th April, 1981. According to the learned Departmental Representative, the compensation received for vacation of the property is a casual and unanticipated income and is liable to be taxed as per the ratio laid down by the Special Bench of the Tribunal in Cadell Wvg. Mill Co. (P) Ltd. vs. Asstt. CIT (1995) 53 TTJ (Bom) (SB) 538 : (1995) 55 ITD 137 (Bom) (SB).
42. We have considered the rival submissions as also the decisions cited before us. The contention of the assessee that no transfer is involved and as such the amount received by the assessee cannot be brought to tax cannot be accepted. The decisions in (1991) 191 ITR 647 (SC) and (1989) 177 ITR 198 (SC) (supra) by the assessee are not at all relevant to the facts of the case in hand. In CIT vs. Tata Services Ltd. (supra), it has been held by the Bombay High Court that the right to obtain conveyance of immovable property is a capital asset and assignment of such right is a transfer and the gains arising on such assignment are assessable as capital gains. The same view was affirmed in CIT vs. Sterling Investment Corporation Ltd. (supra). In a later decision in (1990) 186 ITR 693 (Bom) (supra), it was held by the same High Court that giving up of the right to obtain conveyance of immovable property amounts to transfer of the capital asset and the consideration received on that account is assessable as capital gains. In view of these decisions of the jurisdictional High Court, the amount received by the assessee in lieu of giving up of the rights under the agreement of purchase has to be assessed as capital gain.
43. The stand of the Revenue that the amount received by the assessee includes the consideration for surrender of tenancy rights or vacation of the premises is not acceptable. In fact, no tenancy was ever created in assessees favour. The agreement dt. 18th April, 1981, specifically provides that the assessee was put into possession of the property in part-performance of the agreement. The right to purchase the property was given up by agreement dt. 30th March, 1991. Since the right to purchase the property was given up by the assessee, it was under an obligation to deliver possession of the property to the seller. The assessee was allowed time to vacate the premises by 31st March, 1992, and for the period of occupation the assessee had agreed to pay compensation for use and occupation to the seller at an agreed rate. The continuance of possession up to 31st March, 1992, and payment of compensation for such use and occupation does not amount to creation of tenancy in favour of the assessee. Besides this, the agreement dt. 30th March, 1991, categorically states that the sum of Rs. 1,70,50,000 was paid to the assessee in lieu of giving up of the rights under the agreement dt. 18th April, 1981. It is thus evident that no part of the said amount consists of any payment for vacation of the property or for surrender of tenancy rights.
44. Now the question that arise for determination is whether the amount received by the assessee is a short-term capital or a long-term capital gain. Admittedly, the right to purchase property was acquired by the assessee on 18th April, 1981. That right was given up by agreement dt. 30th March, 1991. Thus the assessee remained in possession of the asset for more than three years and as such the consideration received cancellation of the agreement of sale has to be treated as long-term capital gain. We stand fortified in this view from the decision of the Bombay High Court in 187 ITR 613 (supra). In that case, the assessee had entered into an agreement for the purchase of a flat in November, 1977, and the formal agreement was executed in December, 1978. The assessee had transferred her right, title and interest in the said flat by an agreement executed in April, 1983. On these facts, it was held that the rights under the agreement had been held by the assessee for more than 36 months and that the gains arising from the transfer of her rights in the agreement constituted long-term capital gains. We, therefore, hold that the sum of Rs. 1,70,50,000 received by the assessee has to be treated as long-term capital gain. Consequently, we direct the AO to examine the assessees claim for exemption under s. 54E of the Act and grant the exemption claimed if the necessary conditions have been satisfied.
45. In the result, the appeal stands partly allowed.