1999 P T D 2088

[226 I T R 680]

[Madras High Court (India)]

Before K.A. Swami C.J. and A.R. Lakshmanan, J

KUMUDAM PRINTERS PVT. LTD

Versus

COMMISSIONER OF INCOME-TAX

Tax Case No.633 of 1983 (Reference No.334 of 1983), decided, on 21st June, 1996.

Income-tax-

----Depreciation---Business expenditure---Actual cost -Land and building purchased by assesses---Acquisition proceedings instituted against property-- Agreement between vendor and revenue whereby vendor agreed to pay extra capital gains tax on enhanced value as estimated by revenue---Assesses voluntarily paying such tax---Liability was not that of assesses---Amount paid was not includible in the cost of asset for depreciation purposes-- Amount was not deductible as business expenditure---Indian Income Tax Act, 1961, Ss.32 & 37.

The assessee, a private limited company, purchased land and building owned by JP under a registered sale-deed, dated November 30, 1972, for RB.I 1 lakh . The Income-tax Department being of the opinion that the fair market value of the said property was Rs.16.94 lakhs and hence the purchase consideration was undervalued in the sale-deed, initiated proceedings under Chapter XX-A of the Income Tax Act, 1961. Thereafter, discussions were held between the vendor and the Department as a result of which the vendor agreed to pay the capital gains tax that would arise in respect of this transaction on the basis that the sale consideration was Rs.16.94 lakhs. The additional capital gains tax that was payable by the vendor on the basis of this agreement with the Department was Rs.1.75 lakhs. The assesses-company agreed to pay the sum of Rs.1.75 lakhs on behalf of the vendor in order to avoid the acquisition proceedings. The assesses-company paid this amount during the account year ending June 30, 1974, and claimed the same as a deduction in its business for the assessment year 1975-76. The assessing authority disallowed this claim. The assessee company appealed against this order to the Commissioner of Income-tax (Appeals) raising two grounds viz., (a) that the payment of the sum of Rs.1.75 lakhs should be allowed as a revenue expenditure; and (b) that alternatively, the said amount should be treated as additional cost for acquiring the property and depreciation granted on this amount as well. The Commissioner of Income-tax (Appeals) upheld the disallowance in the view that the liability to pay the capital gains tax was clearly a statutory liability of a third party as far as the assesses-company was concerned. The alternative claim was also rejected by the appellate authority. The Tribunal upheld the order. On a reference:

Held, (i) that the assesses-company had already become the owner of the property and there was no obligation on the part of the assessee company to make the payment. The mere fact that the assesses-company undertook to voluntarily pay the liability of the vendor could not justify its claim that the same would go to increase its actual cost for the purpose of grant of depreciation.

Valliammal (S.) v. CIT (1981) 127 ITR 713 (Mad.); applied.

(ii) that the liability to pay Rs.1.75 lakhs was not that of the assessee company and the assesses-company did not have anything to do with the said liability of the vendor. The payment of the amount by the assessee-company was only a voluntary and gratuitous payment of the liability of a third party, viz., the vendor in this case. Further, in view of the assessee-company having become the owner of the property on the registration of the sale-deed, its title was complete and perfect. In such circumstances, the question of treating the payment of the liability of a third party as an expenditure of the assessee-company, muchless for the purpose of its business, could not arise. The amount was not deductible as business expenditure.

Arvind Mills Ltd. v. CIT (1978) 112 ITR 64 (Guj.); Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 167 (SC); CIT v. Balakrishnan (L.G.) and Bros. (P.) Ltd. (1974) 95 ITR 284 (Mad.); CIT v. Cochin Refineries Ltd. (1988) 173 ITR 461 (Ker.); CIT v. Great Eastern Shipping Co. Ltd. (1979) 118 ITR 772 (Bom.); CIT v. Indira (V.) (1979) 119 ITR 837 (Mad.); CIT v. J.M.A. Industries Ltd. (1981) 129 ITR 373 (Delhi); CIT v. Nirlon Synthetic Fibres and Chemicals Ltd. (1982) 137 ITR 1 (Bom.); CIT v. Saurashtra Cement and Chemical Industries Ltd. (1981) 127 ITR 47 (Guj.); CIT v. Simco Meters Ltd. (1978) 111 ITR 113 (Mad.); CIT v. Tata Mills Ltd. (1979) 118 ITR 496 (Bom.); Habib Hussain v. CIT (1963) 48 ITR 859 (Bom.) and Kapur Sons & Co. v. CIT (1986) 157 ITR 382 (Delhi) ref.

P.P.S. Janarthana Raja for Subbaraya Ayyar and Padmanabhan for the Assessee.

S.V. Subramaniam for C.V. Rajan for the Commissioner

JUDGMENT

A.R. LAKSHMANAN, J.---The assessee, a private limited company, purchased certain land and building owned by one A. Jawahar Palaniappan under a registered sale-deed, dated November 30, 1972, for Rs.l l lakhs. The Income-tax Department, being of the opinion that the fair market value of the said property was Rs.16.94 lakhs and hence the purchase consideration was undervalued in the sale-deed, initiated proceedings under Chapter XX-A of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), and issued notice for acquisition of the property. The vendor received the said notice on October 3, 1973. Thereafter, discussions were held between the vendor and the Department as a result of which the vendor agreed to pay the capital gains tax that would arise in respect of this transaction on the basis that the sale consideration was Rs.16.94 lakhs. The additional capital gains tax that was payable by the vendor on the basis of this agreement with the Department was Rs.1.75 lakhs. The assessee company agreed to pay the sum of Rs.1.75 lakhs on behalf of the vendor in order to avoid the acquisition proceedings.

The assessee-company paid this amount during the account year ending June 30, 1974, and claimed the same as a deduction in its business for the assessment year 1975-76. The assessing authority disallowed this claim on the ground that the expenditure was not one incurred in the course of the business for the assessee-company or for the purpose of earning income from its business relating to the year ended June 30, 1974, and also because it was in the nature of a capital expenditure. The assessing authority also held that the liability to pay the additional capital gains tax of Rs.1.75 lakhs arose only to the vendor and that too long after the sate transaction between the vendor and the assessee-company.

The assessee-company appealed against this order to the Commissioner of Income-tax (Appeals) raising two grounds, viz., (a) the payment of the sum of Rs.1.75 lakhs should be allowed as a revenue expenditure; and (b) alternatively, the said amount should be treated as additional cost for acquiring the property and depreciation granted on this amount as well.

The Commissioner of Income-tax (Appeals) upheld the disallowance in the view that the liability to pay the capital gains tax was clearly a statutory liability of a third party as far as the assessee-company was concerned, and further, there was no contract at the time of sale so as to bind the assessee-company with this liability. According to the appellate authority, the payment was made by the assessee-company perhaps because of the interest, which the persons in management had in the seller. The alternative claim of the assessee was also rejected by the appellate authority applying the ratio of the decision of this Court in CIT v. Indira (1979) 119 ITR 837.

In the further appeal before the Tribunal, though the assessee raised both the above grounds, the Tribunal observed that counsel for the assessee did not press the first claim, though he did not give it up. The Tribunal held that the liability to pay the capital gains tax was a statutory liability of the vendor and not of the assessee-company and hence as far as the assessee company was concerned, the liability was that of a third party. The Tribunal also held that there was no stipulation at the time of the sale to bind the assessee-company towards the tax liability of the vendor. The Tribunal agreed with the finding of the appellate authority that in all probability, the payment was made because of the interest which the persons in management of the assessee-company had in the vendor and not because of any liability or threatened liability which had come upon the assessee-company and which the assessee tried to evade or avoid by agreeing to bear the liability. The Tribunal also held that the assessee never treated this payment as a capital expenditure but wrote off the amount in its profit and loss account as a revenue expenditure and hence the amount cannot be treated to go to enhance the cost of the asset and accordingly the question of grant of depreciation on this amount would not arise. According to the Tribunal, the payment was purely and simply a gratuitous payment as there was no evidence to show how the assessee had agreed to pay the amount and the payment had been made long after the purchase of the property and hence cannot be treated as an increase to the cost of the property warranting grant of depreciation thereon.

On these facts, the following two questions had been referred to this Court at the instance of the assessee.

"(1) Whether the Tribunal was right in holding that the amount paid as capital gains tax is not allowable as revenue expenditure?

(2) Whether the Tribunal was right 'in holding that in the alternative, the payment does not go to enhance the cost of the asset, and hence, depreciation is not allowable?"

We have heard the arguments of Mr. P.P.S. Janarthanaraja, for the assessee, and Mr. S.V. Subramaniam, for the Department.

On the first question Mr. P.P.S. Janarthanaraja made the following submission on behalf of the assessee:

There was a threat of the property that had- been purchased being lost in view of the notice for taking acquisition proceedings under Chapter XXA of the Act and hence the assessee, in order to save the property from being acquired, undertook to make payment of Rs.1.75 lakhs, being the capital gains tax payable by the vendor in regard to the sale of the property. The payment was made only in order to perfect the title of the assessee- company to the property and prevent it from being acquired by the Department so that the assessee can continue to carry on its business. Hence, the payment was really for the purpose of saving the property and as such was a revenue expenditure.

On the second question, the following is his submission

The amount was paid in addition to the consideration paid for the purchase of the property and hence, so far as the assessee was concerned, this payment only went to increase the cost of acquisition of the property. Depreciation is granted under section 32 of the Act on the actual cost of the asset to the assessee. "Actual cost" has been defined in section 43(1) of the Act as meaning "the actual cost of the asset to the assessee. " As the amount of Rs.1. 75 lakhs is really paid towards the cost of the property that had been purchased, which will really go to increase the actual cost of the property to the assessee, depreciation should be granted on this amount as well.

Learned counsel for the assessee relied on the passages at page 505 of Volume I of Law and Practice of Income-tax by Kanga and Palkhivala, 8th edition, to show that the word "cost" is not synonymous with the word "price" and the word "actual cost" should be construed in a commercial sense to include all expenditure necessary to bring the assets into existence and to put them in working condition. The passages relied on by learned counsel for the assessee run thus:

"The word 'cost' is not synonymous with 'price'. As the Supreme Court held in Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 167, the expression 'actual cost' should be construed in a commercial sense and in accordance with the normal rules of accountancy; it includes, all expenditure necessary to bring the assets into existence and to put them in working condition. Fees and charges paid to the State, insurance premia and travelling expenses of trips within and outside India may be treated as part of the actual cost of capital assets (CIT v. Balakrishnan (L.G.) and Bros. (1974) 95 ITR 284 (Mad)). The actual cost of a cinema theatre includes any payment made to a third party for assistance in preparing plans for the construction, and for securing permits, priorities, import licences and foreign exchange for the materials (Habib Hussain v. CIT (1963) 48 ITR 859 (Bom.), but not ground rent and corporation tax which are payable whether or not the theatre is built (Kapur Sons and Co. v. CIT (1986) 157 ITR 382 (Delhi)).

The actual cost of a ship would include travelling expenses for buying, negotiating the price and taking delivery, and expenses in connection with the launching of the ship (CIT v. Great Eastern Shipping Co. Ltd. (1979) 118 ITR 772 (Bom)). The actual cost of a plant would include special fees paid to auditors (CIT v. J.M.A. Industries Ltd. (1981) 129 ITR 373 (Delhi)), the expenditure incurred on the ceremony of laying the foundation stone of a factory (CIT v. Nirlon Synthetic Fibres and Chemicals Ltd. (1982) 137 ITR 1 (Bom)), fees paid to the foreign collaborator for technical know show for the erection of the plant and the expenditure incurred in training technical staff in the erection and working of the plant.(CIT v. Simco Meters Ltd. (1978) 111 ITR 113 (Mad), the expenditure incurred on the trial run of the plant (CIT v. Saurashtra Cement and Chemical Industries Ltd. (1991) 127 ITR 47 (Guj.) and other pre-commissioning expenditure (CIT v. Cochin Refineres Ltd. (1988) 173 ITR 461 (Ker)), and the additional expenditure incurred on the devaluation of the rupee in relation to repayment of the loan in a foreign currency (Arvind Mills Ltd. v. CIT (1978) 112 ITR 64 (Guj)). The actual cost of spindles installed by a mill would include the price paid by it for purchasing the 'surplus spindle capacity' (under-Government regulations) of another mill---CIT v. Tata Mills Ltd. (1979) 118 ITR 496 (Bom.)."

Mr. S.V. Subramaniam, learned senior counsel appearing for the Department, in his reply to the argument of learned counsel for the assessee, submitted as follows:

On the first question, the following is his submission: The sale-deed in the instant case was registered on November 30, 1972, and the assessee company became the owner of the property from that date. Any liability to pay capital gains tax on the sold property is only on the seller and not on the assessee-company, which is the purchaser. Chapter XX-A of the Act consists of 19 sections (section 269-A to section 269-S), which was inserted in the Act by the Taxation Laws (Amendment) Act, 1972, with effect from November 15, 1972. They provide for the acquisition of immovable property in certain cases of transfer to counteract evasion of tax. Chapter XX-A was in force in regard to transfers effected up to September 30, 1986, and in regard to transfers made with effect from October 1, 1986, Chapter XX-C providing for pre-emptive purchase of property, which was inserted by the Finance Act of 1986, was made applicable. Section 269-RR of the Act, which was inserted in Chapter XX-A by the Finance Act of 1986, specifically provides that the provisions of Chapter XX-A will not apply to any transfers made after September 30, 1986. While Chapter XX-A applied only in respect of cases where the property had already been transferred, Chapter XX-C was made applicable in respect of cases of intended transfers. In cases where Chapter XX-C applied, the parties who intend to transfer any immovable property at a value over the stipulated price will have to enter into an agreement for transfer and file the same .with the appropriate authority in Form No.37-1 to enable the appropriate authority to take a decision as to whether the property should be acquired for the Central Government at the price stated in the agreement. While in the case of acquisition of property under Chapter XX-A the amount payable for the property that was acquired was 15 per cent. over the price stated in the instrument of transfer, in cases of pre-emptive purchase of property under Chapter XX-C, the amount payable was the same amount that was stated in the agreement of transfer subject to certain discount. Since the transfer in this case had been effected on November 30, 1972, in our view, it is Chapter XX-A which will be applicable.

Section 269-C of Chapter XX-A of the Act as far as relevant for the present case, as it stood at the relevant time, reads as under:

"269-C. Immovable property in respect of which proceedings for acquisition may be taken.---(1) Where the competent authority has reason to believe that any immovable property of a fair market value exceeding twenty-five thousand rupees has been transferred by a person (hereafter in this Chapter referred to as the transferor) to another person (hereafter in this Chapter referred to as the transferee) for an apparent consideration which is less than the fair market value of the property and that the consideration for such transfer as agreed to between the parties has not been truly stated in the instrument of transfer with the object of---

(a) facilitating the reduction or evasion of the liability of the transferor to pay tax under this Act in respect of any income arising from the transfer; or

(b) facilitating the concealment of any income or any moneys or other assets which have not been or which ought to be disclosed by the transferee for the purposes of the Indian Income Tax Act, 1922 (11 of 1922), or this Act or the Wealth Tax Act, 1957 (27 of 1957),

the competent authority may, subject to the provisions of this Chapter, initiate proceedings for the acquisition of such property under this Chapter:

Provided that before initiating such proceedings, the competent authority shall record his reasons for doing so:

Provided further that no such proceedings shall be initiated unless the competent authority has reason to believe that the fair market value of the property exceeds the apparent consideration therefore by more than fifteen per cent. of such apparent consideration."

"Apparent consideration" in relation to arty immovable property transferred, being immovable property of the nature referred to in sub-clause (i) of clause (e) has been defined in section 269-A(a) of the Act as meaning "the consideration for such transfer as specified in the instrument of transfer".

"Immovable property" referred to in sub-clause (i) of clause (e) of section 269-A of the Act is defined to mean "any land or any building or part of a building, and includes, where any land or any building or part of a building is transferred together with any machinery, plant, furniture, fittings or other , things, such machinery, plant, furniture, fittings or other things also".

"Fair market value" in relation to any immovable property transferred by way of sale being immovable property of the nature referred to in sub-clause (i) of clause (e), has been defined in section 269-A(d) of the Act as meaning, "the price that the immovable property would ordinarily fetch on sale in the open market on the date of execution of the instrument of transfer of such property". Section 269-D of the AM provides for issue of a preliminary notice for the purpose of acquisition under Chapter XX-A. Section 269-E of the Act provides for filing of objections. Section 269-F(1) of the Act provides for the hearing of objections. Section 269-F(6) provides for the making of an order of acquisition, while section 269-F(7) of the Act provides for the passing of an order declaring that the property will not be acquired. Section 269-G of the Act provides for the filing of appeal against the order of acquisition. Section 269-I of the Act provides for the vesting of the property in the Central Government after the order of acquisition becomes final.

In the case on hand, the consideration for the transfer as specified in the instrument of transfer, dated November 30, 1972, being Rs.11 lakhs, it has to be taken as the apparent consideration. The fair market value of the property in the instant case was determined at Rs.16.94 lakhs by the Income tax Department. It may be relevant to point out that the parties to the transaction did not question the fair market value of Rs.16.94 lakhs as determined by the Department. Accordingly, proceedings for acquisition of property were initiated. It was at that stage that the vendor of the property, who had an obligation to pay the capital gains tax arising on the transaction, had discussion and deliberations with the Income-tax Department and agreed to pay the capital gains tax on the transfer on the basis that the consideration for the transfer will be Rs.16.94 lakhs, being the fair market value as determined by the Department. In view of the acquisition of the property being only in cases where there was likely to be reduction or evasion of the liability of the transferor to pay the capital gains tax arising on the transfer, and in view of the transferor in the instant case agreeing to pay the capital gains tax arising on the transfer on the basis that the consideration 'for the transfer will be Rs.16.94 lakhs, which was the fair market value determined by the Department, the Department agreed to drop the acquisition proceedings.

From the above discussion it may be noticed that at the stage of discussion between the vendor and the Department, pursuant to which the vendor agreed to pay the capital gains tax on the transaction on the basis that the property had been transferred for the fair market value of Rs.16.94 lakhs as determined by the Department, admittedly, the assessee-company was never in the picture. It was only later that the assessee-company agreed with the vendor, a close relative of the purchaser, to effect payment of the said sum of Rs.1.75 lakhs. The finding of the lower authorities is that the assessee-company agreed to effect this payment because of its close relationship with the vendor. Whatever may be the reason for the assessee- company agreeing to effect payment of the capital gains tax of the vendor, the fact remains that the liability is not that of the assessee-company and the assessee-company did not have anything to do with the said liability of the vendor. If the assesses;-company had not agreed to effect the payment, the vendor should have to effect the payment in view of his agreement with the Department. In our opinion, the payment of the amount by the purchaser/assessee-company was only a voluntary and gratuitous payment of the liability of a third party, viz., the vendor in this case. Further, in view of the assessee-company having become the owner of the property on the registration of the sale-deed, its title was complete and perfect and as the Tribunal has observed, the assessee's title to the property was never questioned by any one. In such circumstances, we are of the opinion that the. question of treating the payment of the liability of a third party (in this case, the vendor) as an expenditure of the assessee-company, much less for the purpose of its business, cannot at all arise. In our view, the Tribunal is right in its conclusion that the said payment of Rs.1.75 lakhs cannot be allowed as cost of the asset.

In this context, the principle enunciated by a Full Bench of this Court in the decision in S. Valliammal v. CIT (1981) 127 ITR 713, was relied on by learned senior counsel for the Department. In the said case, the claim for treating the estate duty payable on the property taken by the heirs of the deceased as the cost of asset for the purpose of capital gains tax on the sale of the said property was negatived by the Full Bench. The Full Bench held as under (headnote):

"The assessees got the entire right, title and interest in the respect of the properties taken by them along with the liability to pay the estate duty and the discharge of this liability will not amount to acquisition of any interest in the assets which had already been acquired by them. The earlier acquisition cannot be said to be something short of the full right, title and interest in the properties. Non-payment of estate duty did not result in their getting an imperfect or incomplete title in the property. Only when the title is defective, incomplete or imperfect, the cost of making the title complete and perfect can be treated as the cost of acquisition. Accordingly, estate duty paid cannot be treated as part of the cost of acquisition as defined in section 55(2) of the Income Tax Act, 1961.

Though section 74(1) of the Estate Duty Act, 1953, creates a charge on the immovable properties passing on death for the payment of estate duty, the assessee's title to the immovable properties acquired cannot be said to be incomplete or imperfect in any way. They had become full owners of the assets even before the payment of estate duty and on payment of the same they had not acquired any new rights, tangible or intangible, in the asset or the assets had not been physically or otherwise improved to any extent. Accordingly, estate duty paid cannot be taken to be an expenditure of a capital nature incurred for perfecting an imperfect or incomplete title to the asset nor can it be treated as an expenditure incurred, for making an addition to the asset as contemplated by section 55(1)(b) of the Income-tax Act. "

In our opinion, the ratio laid down in the above Full Bench decision will squarely apply to the present case. It may be pointed out that in the above cited case, the payment was of estate duty, which is a liability of the accountable persons who inherited the properties. When the Full Bench had held that the payment of estate duty, even though the liability of the accountable persons, cannot go to increase the cost of the assets to them, in the present case, the liability to pay the capital gains tax on the transaction is not at all that of the asses see-company and hence the question of treating the said payment of Rs.1.75 lakhs by the assessee-company as going to increase the cost of the property of the assessee for the grant of depreciation will not be justified.

The passage in the Law and Practice of Income-tax by Kanga and Palkhivala, relied on by Mr. P.P.S. Janarthanaraja, appearing for the assessee-company, in our opinion, is of no relevance for the present case as the assessee-company had already become the owner of the property and there was no obligation on the part of the assessee-company to make the payment. The mere fact that the assessee-company undertook to voluntarily pay the liability of the vendor cannot justify its claim that the same will go to increase its actual cost for the purpose of grant of depreciation.

The Tribunal was, therefore, right in its conclusion that the payment of Rs.1.75 lakhs cannot go to increase the cost of the property to the assessee. Hence, the question of grant of depreciation on the said amount cannot arise.

On the second question, learned senior counsel appearing for the Department addressed the Court as follows:

The assessee-company itself had written off this amount in its profit and loss account and hence the question of treating this amount as going to increase the cost of the property would not arise. Further, the consideration for the transfer of the property as stated in the instrument of transfer was Rs.l l lakhs. The payment of Rs.1.75 lakhs was not for any improvement to the property in order to justify the statement that it went to increase the consideration for the transfer. The mere fact that the assessee-company chose to pay the liability of a third party, which it was under no obligation to pay, cannot justify the claim that the amount would go to increase the cost of the property to the assessee.

When the matter came up before the Tribunal, the first claim made on behalf of the assessee was given up laying stress only on the alternative and second contention, viz., the allowance of depreciation. Though the first claim was not pressed, certain arguments were advanced before us stating that this amount should be regarded as having been paid towards perfecting the title to the property. We are unable to agree.

In view of our above conclusion, both the questions of law that have been referred to the Court will have to be answered in the affirmative, against the assessee and in favour of the Department. It is answered accordingly.

M.B.A./1955/FCReference answered.