TMI Blog2012 (9) TMI 804X X X X Extracts X X X X X X X X Extracts X X X X ..... ion in the form of constructed area of 18,000 sq.ft. as agreed in terms of the development agreement was not actually accrued to the assessee as a result of subsequent developments/events going by the doctrine of real income and the same, therefore, cannot be taken into account for the purpose of computation of capital gain arising from transfer of capital asset as pet the development agreement. It is also worthwhile to note here that the total consideration actually received by the assessee from transfer of its entire property comprising of plot No. 256 and 257 as per the tripartite conveyance deed was Rs.29.11 crores and the same having been entirely offered to tax in AYs 2007-08 and 2008-09, there is no loss to the Revenue on this count as rightly contended by assessee. Addition made is therefore deleted - Decided in favor of assessee. Expenditure incurred by the assessee company on payment of premium for purchase of its own shares from warring group of shareholders - revenue or capital expenditure - Held that:- Tribunal in case of Echjay Industries (P) Ltd (1987 (12) TMI 68 - ITAT BOMBAY-D) has held that even if it is assumed that an enduring benefit has been obtained, such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon by the AO to explain why the market value of the constructed area of 18,000 sq.ft. should not be taken as part of consideration for sale of plot. In reply, it was submitted on behalf of the assessee that before M/s Dipti Builders could start the development/construction work, the entire property comprising of plot No. 256 and 257 was sold to a third party M/s Financial Technologies Ltd. by a tripartite conveyance deed executed on 5th July, 2007 for a total consideration of Rs.29.11 crores. It was submitted that the assessee thus never received the constructed area of 18,000 sq.ft. and whatever was received as additional consideration of Rs.13 crores (29.11 crores - 16.11 crores) was offered to tax in assessment year 2008-09 as capital gain arising as a result of conveyance deed executed on 5th July, 2007. It was contended that the constructed area of 18,000 sq.ft. thus could not be considered as part of sale consideration for computing the capital gain chargeable to tax in assessment year 2007-08 as the same was not actually received by the assessee. 4. The explanation offered by the assessee on this issue was not found acceptable by the AO. According to him, as a result of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax in assessment year 2008-09. It was contended that the net effect of this subsequent conveyance deed executed on 5th July, 2007 is that the earlier development agreement dated 16th June. 2006 stood modified and the consideration in the form of free of cost construction of 18,000 sq..ft. was cancelled. It was contended that no income on account of the said consideration thus accrued or arose to the assessee in real terms. It was also contended that the entire consideration finally received by the assessee on transfer of its property i.e. plot No. 256 and 257, in any case, was offered to tax in assessment years 2007-08 and 2008-09 resulting no loss to the Revenue on this count. Without prejudice to this main contention and as an alternative, it was also submitted on behalf of the assessee that the market value of 18,000 sq.ft. constructed area adopted by the AO at Rs.9.51 crores on the basis of ready reckoner rates was not correct as the construction of 18,000 sq.ft. was to be made by M/s Dipti Builders on plot No. 256 which was belonging to the assessee. It was contended that the role of the developer in so far as the construction of this area is concerned, was that of a mere cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration. He, however, agreed with the alternative plea of the assessee that only the cost of construction of 18,000 sq.ft. should be taken as consideration and not the market value of 18,000 sq.ft. as taken by the AO on the basis of ready reckoner rates meant for stamp duty purposes. Accordingly, relying on the report of the Government approved valuer, he adopted the cost of construction of 18,000 sq.ft. at Rs.2,17,88,000/- and restricted the addition made by the AO on this issue to the income of the assessee to Rs.2,17,88,000/-. 7. The learned counsel for the assessee submitted that the constructed area of 18,000 sq.ft. as agreed to be given by M/s Dipti Builders as per the development agreement was never received by the assessee as a result of subsequent events that took place. He contended that consideration to that extent thus did not accrue to the assessee as a result subsequent events culminating into tripartite conveyance deed executed in July, 2007. He contended that the said conveyance deed executed subsequently modified the consideration originally agreed and this modification has to be taken into account to ascertain the income accrued to the assessee on account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee to M/s Dipti Builders on execution of development agreement as held by Hon'ble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia (supra) and the same was required to be computed on the basis of consideration agreed upon in terms of the said development agreement as rightly held by the AO as well as by the learned CIT(Appeals). 10. We have considered the rival submissions and also perused the relevant material on record. It is observed that the development rights in the property i.e. plot of land No. 257 owned by the assessee were agreed to be sold to M/s Dipti Builders as per the development agreement dated 16-06-2006 for a total consideration of Rs.16.11 crores and construction of 18,000 sq.ft. free of cost. The said construction was to be done by M/s Dipti Builders on another plot of land bearing No. 256 owned by the assessee. In the return of income filed for the year under consideration, capital gain arising from this transaction was offered by the assessee by taking into consideration the sale consideration of Rs.16.11 crores only and the area of 18,000 sq.ft. to be constructed by M/s Dipti Developers free of cost was not taken into account on the ground tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gain to tax in the return of income filed for the year under consideration and the only dispute is relating to the exact quantum of sale consideration that is to be taken for the purpose of computing such capital gain. According to the assessee, although the total consideration as agreed in terms of development agreement was Rs.16.11 crores in monetary terms and constructed area of 18,000 sq.ft. free of cost, what has been finally received by it is only the monetary consideration to the tune of Rs.16.11 crores. The balance consideration in the form of constructed area of 18,000 sq.ft. was never actually received by it as a result of subsequent developments/events whereby the entire property owned by the assessee comprising of plot No. 256 and 257 was sold to a third party. The question, therefore, is what exactly is the consideration to be taken into account while computing the capital gain arising as a result of transfer of property of the assessee by way of development agreement entered into with M/s Dipti Builders in the year under consideration. 12. The provisions relating to computation of income from capital gains are contained in Chapter IV of the Income-tax Act, 1961. Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch interest subsequently was not relevant in this context. Similarly in the case of CIT v. Bharati C. Kothari 244 ITR 352 cited by the learned DR, the decision was rendered by the Hon'ble Calcutta High Court in the context of accrual of interest income and keeping in view that such income had accrued to the assessee on day to day basis, it was held that modification of interest rate subsequently would not be relevant. In the present case, the issue, however, is in the context of computation of capital gain and the question is relating to accrual of the consideration as a result of the transfer of capital asset for the purpose of computing capital gains. In this regard, we find that the decision of coordinate bench of this Tribunal in the case of Kalpataru Construction Overseas P. Ltd. v. DCIT 13SOT 194 (Mum.) is directly relevant. In the said case, the assessee had agreed to sale its subsidiary by selling its entire equity shares therein for a consideration of Rs.1.25. The amount of consideration, however, was finally settled at Rs. 1 crore and it was held by the Tribunal that such a subsequent event settling finally the consideration at Rs.1 crore would relate back to the assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd had made certain advances on interest to M under an agreement. M was to construct a hotel on the said plot which he was unable to do. A fresh agreement, therefore, was entered into between the assessee and M subsequently under which the assessee waived rent and interest and received back the plot. In these facts and circumstances, doctrine of real income was held to be applicable by the Hon'ble Bombay High Court holding that no rental or interest income could be charged in the hands of the assessee on the basis of earlier agreement with M. For this conclusion, the Hon'ble Bombay High Court relied on the decision of Hon'ble Supreme Court in the case of CIT v. Shoorji Vallabhdas Co. 46 ITR 144 wherein it was held that income-tax is a levy of income and although Income-tax Act takes into account the accrual of the income also as the point of time at which the liability to tax is attracted, the substance of the matter is the income. It was held that if income does not result at all, there cannot be a tax and where the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income. 16. Keeping in view the legal position emanating from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riod of more than six years, the assessee company purchased 8398 shares held by Umesh Shah group for a total consideration of Rs.6.90 crores as against their face value of Rs.8,39,800/- and the difference of Rs.6,80,60,200/- was claimed by it as expenditure incurred wholly and exclusively for the purpose of running its business. According to the AO, the said expenditure, however, was incurred as a part of the family dispute settlement and the same, therefore, could not be attributed to the business of the assessee company. He also held that the said expenditure even otherwise was a capital expenditure as the same was incurred for the acquisition of capital asset or a right of permanent character or a benefit or advantage of enduring nature. He, therefore, disallowed the expenditure incurred by the assessee on purchase of its own shares and made an addition of Rs.6,81,60,200/- to the total income of the assessee. 19. The disallowance of Rs.6,81,60,200/- made by the AO on account of expenditure incurred on purchase of its own shares was challenged by the assessee in an appeal filed before the learned CIT(Appeals). It was submitted on behalf of the assessee before the learned CIT(Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed out that after incurring the said expenditure on purchase of shares and settlement of dispute, the turnover of the assessee company started showing sign of recovery and it improved substantially in the latter years. The assessee company also started making profits from the year under consideration as against the losses incurred consistently in the earlier years in which there was dispute. It was contended that the expenditure incurred on purchase and cancellation of shares thus enabled the assessee in getting rid of trouble making shareholders and for making smooth, efficient and profitable working of the business and the same being a revenue expenditure was allowable as deduction. It was also contended that since the said expenditure was incurred in terms of an order/decree of the Company Law Board, the same could not be disallowed by holding it to be pertaining to the family dispute because the order passed by the Company Law Board is always considered to be in the interest of the company and not in the interest of individual shareholders/family members. In support of its stand on this issue, the assessee relied on the following judicial pronouncements : (i) Echjay Industri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contended that a similar issue thus has been decided in favour of the assessee by the Hon'ble jurisdictional High Court which is binding on this Tribunal. 22. The learned DR, on the other hand, strongly supported the impugned order of the learned CIT(Appeals) on this issue. He submitted that as rightly held by the learned CIT(Appeals) on appreciation of the facts of the assessee's case, the shares were purchased as a result of mutual settlement amongst the family members and the expenditure incurred for this purpose was personal in nature. He contended that no evidence whatsoever has been brought on record by the assessee to show that any serious disturbance was created by the minority shareholders affecting its day to day business. He submitted that in the case of Echjay Industries Ltd. 257 ITR 1 (AT) there was serious dispute amongst the shareholders affecting growth of the assessee company and in the facts and circumstances of that case, the expenditure incurred on purchase of shares by the assessee company was held to be allowable expenditure by the Tribunal. He submitted that similarly in the other cases cited by the learned counsel for the assessee there was a specific fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal in the case of Echjay Industries Ltd. (supra) that similar fact situation was involved in that case also. As mentioned in paragraph No. 22 of the order of the Tribunal passed in the case of Echjy Industries Ltd. (supra), the assessee company was a private limited company with four brothers and their family members as Directors/Shareholders. Serious disputes broke out between them with the result that the functioning of the company and its growth was impeded so much so that the matter was carried to the Court. Two shareholders, namely, Hasmukhdas H. Doshi and Shri Manharlal H. Doshi filed petitions before the Hon'ble Bombay High Court under the provisions of sections 397 and 398 of the Companies Act, 1956 alleging mis-management and oppression of minority and seeking Court's intervention. After a period of over 6 years good sense prevailed between two warring groups and consent terms were drawn by the shareholders. Hon'ble Bombay High court in its order passed on 2nd May, 1991 decreed approving the consent terms, inter alia, giving the direction that the company would purchase the shares of the family members of Shri Maganlal H. Doshi, Shri Hasmukhdas H. Doshi and Shri Manharl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing any disturbance in the conduct of the business. Taking cue from this observation of the learned CIT(Appeals), the learned DR has contended that in the case of Echjay Industries Ltd. (supra), undisputedly there was serious dispute amongst the shareholders affecting growth of the assessee company whereas no such case has been made out in the present case showing the disturbance created by the minority shareholders affecting its business. In this regard, it is observed that in the case of Echjy Industries Ltd., a chart was prepared and furnished by the assessee showing that the profits of the company which was going down during the period of dispute, had improved considerably after the settlement and relying on these facts and figures, the Tribunal held that the impugned expenditure was incurred by the assessee company for the benefit and smooth functioning of the business. In the present case, similar statements have been prepared and furnished by the assessee at paper book page Nos. 265 to 270 and a perusal of the same shows that total sales of the assessee which were in the range of Rs.20 crores to Rs.25 crores per annum during the pre-dispute period had come down to around Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal in this context that even if it is assumed that an enduring benefit has been obtained, such enduring benefit is not relatable to fixed capital structure of the assessee company because it has neither increased the assessee's assets nor the assessee company could be said to have acquired any right of income yielding nature. It was held that the amount in question was paid to secure peace and harmony and smooth management of the company in the interest of business and the amount paid for this purpose was on revenue account. 27. In view of the above discussion, we are of the view that the issue involved in the present case as well as all the material facts relevant thereto are similar to the case of Echjay Industries Ltd. (supra) decided by the Tribunal and respectfully following the said decision of Coordinate Bench of this Tribunal, we hold that the expenditure in question incurred by the assessee company on payment of premium for purchase of its own shares from warring group of shareholders is revenue in nature and the same being wholly and exclusively incurred for the purpose of its business, is allowable as deduction in computing its income under the head "Profits and gai ..... X X X X Extracts X X X X X X X X Extracts X X X X
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