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TMI Blog2011 (1) TMI 1172X X X X Extracts X X X X X X X X Extracts X X X X ..... m has various immovable properties including lands brought in by the partners towards their capital contribution. The firm entered into a development agreement with M/s Unitech Ltd. on 16th March, 1988 for development of its lands at Shivanahalli and construction of flats in that property. The firm has been converting the immovable properties, one by one, into stock-in-trade. Thus, the firm's business in development of properties was commenced by converting its own properties into stock-in-trade. The firm has a sister concern by name M/s Rudra Industries. The assessee had given its properties as collateral security to the loan borrowed by M/s Rudra Industries from State Bank of Mysore in the year 1975 when M/s Rudra Industries was constituted. The said industry became sick. They were unable to pay the loan borrowed from State Bank of Mysore. A suit came to be filed for recovery of the amount against the said firm. The assessee was also made a party to the said suit. It is on record that the assessee was also dealing in the products manufactured by M/s Rurda Industries and there was an on going relationship between the assessee and the said M/s Rudra Industries. It is because of tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be allowed as a business expenditure and, therefore, the entire sum of Rs. 37.25 lakhs claimed by the assessee was allowed as a revenue expenditure. In assessing the capital gains he held that the index value to be adopted is on the date of sale is 223 and not 161 which was prevailing on the date of conversion of immovable property into stock-in-trade and therefore, he granted the relief to the assessee. 5. Aggrieved by the aforesaid order, the Revenue preferred an appeal to the Tribunal. The Tribunal upheld the order passed by the CIT(A) and dismissed the appeal. Aggrieved by the same, the Revenue is in appeal. 6. Learned counsel for the Revenue assailing the impugned order contended that in the first place, when the loan was not borrowed by the assessee and he had only offered his property as a security to M/s Rudra Industries to enable them to raise a loan, when a suit is filed for nonpayment of the amount by the State Bank of Mysore, the amount paid by the assessee under a compromise in respect of interest, by no stretch of imagination can be said to be a business expenditure. Therefore, both the appellate authority and the Tribunal committed a serious error ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 988 with M/s Unitech Ltd. under which the said company was expected to develop the property, construct flats and give to the assessee their share in the constructed building. The assessee is assessed to income-tax regularly. In the year 1988-89 when this agreement was entered into, the Revenue did not treat it as a transfer and called upon the assessee to pay tax. However, the claim for capital gains is made only when the assessee executed registered sale deeds in favour of the purchaser of the flats in the financial year 1992-93. At that stage, for the purpose of calculating capital gains instead of taking the cost inflation index, they took the index as prevailing in 1988, the date on which the immovable property was converted into stock-in-trade and consequently entered into contract for development of the property. In this regard, the question that arises for consideration is, which is the relevant date to be taken into consideration for the purpose of assessing the capital gains. 10. Sec. 45(2) which is relevant reads as under:- "45. Capital gains:- (1) .......... (2) Notwithstanding anything contained in sub-s. (1) the profits or gains arising ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter concern M/s Rudra Industries. The assessee was dealing with the products of the said sister concern. The businesses of these two firms are connected with each other as is clear from the balance sheet of M/s Rudra Industries where they have shown the amounts due by the assessee to them which fact is not in dispute. The said sister concern became a sick industry. They were unable to discharge the loan. Therefore, the bank filed a suit for recovery of the amount against the principal debtor and the assessee who is the surety. It was likely that a decree could have been passed and to recover the said decretal amount, the bank would have brought the property at Shivanahalli belonging to the assessee for sale in public auction. In respect of the very same property, the assessee has entered into an agreement of development with M/s Unitech Corporation and had undertaken in the agreement to convey a clear and marketable title to the intending purchasers of the flats to be constructed thereon. If the property had been brought to sale, sold in public auction, the agreement entered into between the assessee and M/s Unitech Corporation would have been in jeopardy. They would have committed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions or expediency." 16. The apex Court in the case of S.A. Builders Ltd. vs. CIT(A) (2006) 206 CTR (SC) 631 : (2007) 288 ITR 1 (SC), after reviewing the case law on the point held as under:- "What is relevant is whether the assessee advanced such amount to its sister concern as a measure of commercial expediency. The correct view in our opinion was whether the amount advanced to the subsidiary or associated company or any other party was advanced as a measure of commercial expediency. Once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profit. The IT authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own viewpoint but that of a prudent bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payable thereon and the value of the property which the assessee was to get in the development agreement and to see that the assessee is not accused of a breach of contract. If the assessee thought it fit to discharge the loan to the bank and get the property which is mortgaged, released, thus making good the title in terms of the development agreement and in the process if he had to pay Rs. 37.25 lakhs towards interest, it is an expenditure which is incurred by the assessee in the course of the business. He was under a legal obligation to discharge the debt due to the bank. It is in pursuance of the legal obligation, without giving room for a decree being passed and the property being brought to sale in public auction, he fulfilled the said claim by way of a compromise, paid the money and got. the property released. Therefore as a prudent businessman he incurred this expenditure to discharge a debt borrowed by the sister concern and thus saved the property which he had offered as security and in turn was able to make out a marketable title in terms of the development agreement. It cannot be said that the payment of the said amount does not constitute business expenditure. Both th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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