MOUNT STUART TEA ESTATE AND AMAR COFFEE PLANTATION VS COMMISSIONER OF INCOME-TAX
2001 P T D 2717
[239 I T R 489]
[Madras High Court (India)]
Before K. A. Thanikkachalam and K. Gnanaprakasam, JJ
MOUNT STUART TEA ESTATE AND AMAR COFFEE PLANTATION
versus
COMMISSIONER OF INCOME‑TAX
T.C. No.557 of 1986 (Reference No.392 of 1986), decided on 07/08/1997.
Income‑tax‑‑‑
‑‑‑‑Capital gains‑‑‑Income‑‑‑Interest‑‑‑Sale of property‑‑‑Interest on unpaid sale price is not assessable as capital gains‑‑‑Interest is a revenue receipt and assessable as such‑‑‑Indian Income Tax Act, 1961, Ss.45 & 56.
The assessee, a registered partnership firm, sold a tea estate together with a building thereon and machinery, on June 15, 1977 to N and the consideration for sale was Rs.35,00,000. As per the sale‑deed, the assessee received a consideration of Rs. 25,00,000 during the year ended on March 31, 1978 and the balance consideration of Rs.10,00,000 was agreed to be paid alongwith interest thereon at. 18 per cent. per annum from June 1, 1977, till the date of settlement of the outstanding amount. During the year ended with March 31, 1979, relevant for the assessment year 1979‑80, the assessee received a sum of Rs.1,65,596.62 from the said N. The Income‑tax Officer took the view that the entire sum of Rs.1,65,596.62 recejved represented the interest and hence would have to be brought to tax under the head "Other sources". This was upheld by the Commissioner of Income‑tax (Appeals) and the Tribunal. On a reference:
Held, that the interest received was nothing other than interest on the unpaid amount of sale price and, therefore, it could not be taken as cost price of the tea estates sold. The said receipt was not assessable under section 45 of the Income Tax Act, 1961, as it could not be taken as "profits and gains" arising from the transfer of a capital asset. No sooner than the delivery of possession is made by the seller to the purchaser and the purchaser has taken it, the sale is complete and if any part of the sale amount as agreed to is not paid, then the purchaser's non‑payment is nothing else other than a loan by the seller to the purchaser. The interest was a revenue receipt.
CIT v. Union Land and Building Society (Pvt.) Ltd. (1972) 83 ITR 794 (Bom.) and CIT v. Vishnudayal Dwarkadas (1980) 123 ITR 140 (Bom.) ref.
P. P. S. Janarthana Raja for the Assessee.
C. V. Rajan for the Commissioner.
JUDGMENT
K. A. THANIKKACHALAM, J.‑‑‑At the instance of the assessee, the Tribunal referred the following questions for the opinion of this Court under section 256(2) of the Income Tax Act, 1961:
"(1) Whether, on the facts and in the circumstances of the case, interest on unpaid purchase price received as part of consideration of sale is not 'any profit or gains' arising on transfer of a capital asset within the meaning of section 45 of the Income Tax Act, 1961?
(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the unpaid sale consideration was nothing but a loan and the interest accruing thereon was on money lent by the assessee?
(3) Whether, the Appellate Tribunal was right in law in rejecting the contention of the assessee that the receipt of Rs.1,65,596 should be treated as capital receipt as it was in the nature of damages or moneys withheld between the date of sale and date of payment of full consideration?"
The assessee is a registered partnership firm and it sold a tea estate together with a building thereon and machinery on June 15, 1977, to R.M.T. Natesa Pillay &. Company and the consideration for sale was Rs.34,80,000 or RS.35,00,000. As per the sale‑deed, the applicant received a consideration of Rs.25,00,000 during the year ended March 31, 1978, and the balance consideration of Rs.10,00,000 was agreed to be paid alongwith interest thereon at 18 per cent, per annum from June 1, 1977, till the date of settlement of the outstanding amount. During the year ended with March 31, 1979, relevant‑for the assessment year 1979‑80, the applicant received a sum of Rs.1,65,596.62 from the said R.M.T. Natesa Pillay & Co. This sum was part of the consideration for sale of the estate, which took place on June 15, 1977, and as it was in the nature of compensation for deferred payment, it was treated as capital receipt by the applicant. In the books of account, the said amount was first taken into the account of R.M.T. Natesa Pillay & Co. from which it was transferred to the "capital gain account" and subsequently apportioned among the partners as share of capital gains as per the partnership deed, dated April 1, 1974, which was operative at the time of sale on June 15, 1977, as the right to, the consideration of sale arose in that year and it had accrued to each partner then as per the sharing ratio of the deed, dated June 15, 1977.
For the assessment year 1979‑80, the assessee submitted a return declaring a total income of Rs.42,460 being the income as per profit and loss account pertaining to the trading of that year. The Income‑tax Officer noticed that the receipt of Rs.1,65,596 had not been credited to the interest account, but had been adjusted to the partners' respective accounts. He rejected the claim of the assessee that as the said sum was referable to deferred payment of the sale price, it was part of the consideration and hence not assessable as revenue receipt. However, the officer took the view that the entire sum of Rs.1,65,596.62 received represented the interest and hence, would have to be brought to tax under other sources. The Income‑tax Officer passed a draft assessment order, dated March 18, 1982, under section 144B of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), proposing to treat the applicant as an unregistered firm and proposing to tax as interest under other sources the entire sum of Rs.1,65,596.62. As the applicant objected to the sane, the draft assessment was referred to the Inspecting Assistant Commissioner of Income‑tax, before whom, the applicant contended that the said sum being interest paid by the purchaser of the estate from the partnership, as per clause 1(c) of the deed of sale, dated June 15, 1977, was a capital receipt and not a revenue receipt. According to the assessee, the consideration stipulated in the said clause 1(c) of the sale‑deed, namely Rs.10,00,000 plus‑ interest at 18 per cent. per annum from June 1, 1977, was an integrated amount and, as such, the interest was part and parcel of the sale consideration, as evident from the recital thereon and, therefore, it was a capital receipt. The Inspecting Assistant Commissioner, however, rejected the contentions of the assessee and approved the draft proposal of the Income‑tax Officer and considered the interest as revenue in nature.
On appeal by the assessee, the Commissioner of Income‑tax (Appeals) confirmed the view taken by the Assessing Officer. On further appeal to the Tribunal, the Tribunal held as follows:
(1) The said receipt was nothing other than interest on the non‑paid amount of sale price and, therefore, it could not be taken as cost price of the tea estate sold.
(2) The said receipt was not at all the subject‑matter of section 45 of the Act, as it could not be taken as "profits and gains" arising from the transfer of a capital asset.
(3) No sooner than the delivery of possession is made by the seller to the purchaser and the purchaser has taken it, the sale is complete and if any part of the sale amount, as agreed, is not paid, then the purchaser's non‑payment is nothing else other than a loan by the seller to the purchaser.
(4) Therefore, the interest payable to the seller for lending the money which the purchaser failed to pay, as he was required to pay, was to be taxed as revenue receipt.
(5) The purchaser of the tea estate being the debtor, the interest amount in dispute was nothing else than compensation for the use of the moneys of the assessee.
Accordingly, the Tribunal accepted the view taken by the authorities below and dismissed the appeal filed by the assessee.
Before this Court, learned counsel appearing for the assessee submitted that the said interest of Rs.1,65,596 should have been treated as capital receipt, as it was in the nature of damages for the money withheld between the date .of sale and the date of payment of the balance sale consideration. Alternatively it is contended that the said receipt was to be taxed as capital gains, as it was in the nature of "any profits and gains" arising from the transfer assessable under section 45 of the Income Tax Act, 1961, as the payment was for unpaid purchase price stipulated in the sale?deed and as it was the act of transfer, which gave rise to the said receipt. The assessee stressed the word "any" occurring in the words "any profits and gains" in section 45 and contended that the word "any" would take in its fold the sum of Rs.1,65,596 which was receivable by virtue of the sale of a capital asset. Learned counsel for the assessee further submitted that the consideration stipulated in the sale‑deed in clause 1(c), namely Rs.10,00,000 plus interest at 18 per cent. per annum from June 1, 1977, was an inseparable one and the interest was part and parcel of the consideration of sale price, as evident from the recital thereon and, therefore, it was a capital receipt.
On the other hand, learned junior standing counsel for the Department submitted that payment of interest was not part of sale consideration, and the sale consideration as recited in the sale‑deed does not include interest payment and it is outside the sale consideration and, therefore, it cannot be clubbed with the sale consideration, so as to say that the interest is also capital in nature. Therefore, according to learned standing counsel, interest was not the subject‑matter of section 45 of the Act, as it could not be taken as profits and gains arising from the transfer of a capital asset, and, therefore, the payment of interest is revenue in nature and assessable as a revenue receipt.
We have heard learned counsel for the assessee as well as learned standing counsel for the department. In order to support the contentions put forward by learned standing counsel, reliance has been placed upon the decision of the Bombay High Court in CIT v. Vishnudayal Dwarkadas (1980) 123 ITR 140. According to the facts arising in that case., in pursuance of an agreement to sell concluded on May 1, 1958, the assessee executed a sale‑deed for sale of certain agricultural properties to one R. On January 25, 1959, the assessee who was the vendor, had given possession of the agricultural properties to the vendee, and thereafter, as agent of the vendee he carried on agricultural operations on the laud, on behalf of the vendee, until the date of execution of the sale‑deed. Under the sale‑deed, the assessee received the full price, he also received interest at the rate of 6‑3/4 per cent. from May 1, 1958, on the sale price till the date of payment. Certain movables were also sold under the agreement and for the 'said movables, a sum of Rs.53,185.66 was received. By way of interest, an aggregate amount, of Rs.15,083 was received by the assessee from the vendee. In the proceedings for the assessment year 1960‑61, the assessee claimed that the sum of Rs.15,083 was part of the sale consideration and not taxable. On a reference, the Bombay High Court held on the facts, that under the agreement between the parties, the entire price, both for the movable and immovable properties agreed to be sold, was to be paid to the assessee by the vendor on May 1, 1958, and since the purchaser was unable to pay the same on that date and paid it on the execution of the sale‑deed on January 25, 1959, the sum of Rs.15,083 was paid by way of interest and this amount was not part of the purchase price but was a payment by way of interest and constituted a revenue receipt in the hands of the assessee..
Learned counsel for the assessee submitted that the facts arising in the abovesaid decision are different from the facts arising in the present case.
Learned counsel for the assessee, submitted that according to the facts of the said case, interest was paid for the period between the execution of the sale agreement and the execution of the sale‑deed, but in the present case, interest was paid as per. clause contained in the sale‑deed itself on the balance of the unpaid purchase money. Therefore, the abovesaid decision is distinguishable on facts. It has to be seen that when the interest was paid prior to the execution of the Sale‑deed and hence can be considered as part of the sale consideration. In the present case, inasmuch as the interest was paid outside the sale‑deed, especially, after the registration of the sale‑deed, interest amount does not form part of the sale consideration and, therefore, not capital in nature.
Yet another decision relied upon by learned junior standing counsel is CIT v. Union Land and Building Society (Pvt.) Ltd. (1972) 83 ITR 794 (Bom.). According to the facts of that case, the assessee‑company doing the business of construction of bungalows, constructed and sold seven bungalows to various parties, in the income‑tax year relevant to the assessment year 1957‑58, for Rs.6,62,218 and received Rs.5,29,350 leaving a balance of Rs.1,38,868. On and from April 1, 1956, the assessee‑company changed over from the cash system of accounting to the mercantile system. The assessee contended that the amount of Rs.1,38,868 was not receivable in the accounting year but only at future dates and, therefore, could not be included in the assessment year and alternatively that only that part of the amount should be included as represented the then realisable value computed on, an accrual basis. In the books of accounts the assessee‑company continued to credit itself the amount of interest due on the unpaid amount of the sale price consequent upon the purchasers being put in possession prior to the date of actual conveyance. On a reference, the Bombay High Court held that if the assessee is held to be the owner of the bungalows until the sale‑deed were actually executed on August 28, 1956, then the interest credited to the interest account in respect of the various purchasers who had not paid the full consideration was legitimately due to the assessee and could not be excluded from the income of the assessee and that the assessee was entitled to charge he interest and could therefore, be taken into account.
Thus, considering the facts of the present case in the light of the judicial pronouncement cited supra, we hold that the Tribunal was correct in coming to the conclusion that the interest received was nothing other than interest on the non‑paid amount of sale price and, therefore, it could not be taken as cost price of the tea estate sold, that the said receipt was not at all the subject‑matter of section 45 of the Act, as it could not be taken as "profits and gains" arising from the transfer of a capital asset and that no sooner than the delivery of possession is made by the seller to the purchaser and the purchaser has taken it, the sale is complete and if any part of the sale amount as agreed to is not paid, then the purchaser's non‑payment is nothing else other than a loan by the seller to the purchaser. Therefore, the Tribunal concluded that the interest paid to the seller is revenue in nature. Accordingly, we answer question No. l referred us in the affirmative and against the assessee.
In view of the answer given to question No.1, in our opinion, questions Nos.2 and 3 have become redundant. There will be no order as to costs. Counsel's fee is fixed at Rs.1,000 (rupees one thousand only).
M.B.A./241/FC ????????????????????????????????????????????????????????????????????????????????? Order accordingly.