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2016 (3) TMI 449 - ITAT KOLKATA

2016 (3) TMI 449 - ITAT KOLKATA - TMI - Disallowance u/s 43B on account of Provision for Leave Encashment written back - CIT(A) deleted the disallowance - Held that:- When the Assessee files return of income for any Assessment year, he has to add back the provision for leave encashment and declare income from business for the purpose of determining total income, because it is not actual liability but contingent. If the Assessee in an Assessment year adds back provision for leave encashment of sa .....

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n actual liability discovers that excess provision made in the earlier years. The Assessee has not claimed any deduction while determining its profit from business on account of Provision for leave encashment but has claimed such deduction only on the basis of actual incurring of liability which is paid in accordance with Sec.43B(f) of the Act. That has got nothing to do with the write back off excess provision for leave encashment. The CIT(A) has clearly brought out these aspects in his order. .....

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n account of foreign exchange fluctuation as on the last date of the accounting year has to be allowed as a deduction u/s.37(1) of the Act on accrual basis, if such loss in account of loans availed on revenue account and the decision of the Tribunal in Assessee’s own case on identical issue and keeping in mind the fact that the liability in question is on revenue account, the order of the CIT(A) does not call for any interference - Decided against revenue

Disallowance of obsolete stoc .....

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whether a claim for deduction has to be allowed or not. The created a value for its brand "Eveready” and disclosed in the Asset side of the Balance Sheet and reduced therefrom the value of obsolete stock instead of reducing from the profit and loss account. Such presentation in the books of accounts will not in any way affect the claim of the Assessee for deduction of legitimate revenue expenditure. Write off in the profit and loss account of the previous year is not a condition for allowing de .....

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ational Aluminium Co. Ltd. Vs. DCIT (2005 (11) TMI 483 - ITAT CUTTACK) - Decided in favour of assessee

Disallowance of expenses for shifting of Chennai Plant - Acquisition of new asset or deriving of any enduring benefit - Held that:- The reasons for shifting the Guindy Plant to Tiruvottiyur Plant was a business decision and taken keeping in view four factors, viz., completion from Chinese battery makers as a result of free economy, Centralizing operations with a view to reduce costs .....

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deriving of any enduring benefit to the Assessee. Nor can it be said that the expenditure in question was not for the purpose of business but for the purpose of selling the land over which Guindy Plant was located - Decided against assessee

disallowance on account of upfront fees paid to ICICI Bank - Held that:- Similar expenditure had been allowed in the past and there can be no other reason not to allow the expenditure in question as deduction while computing income from business - .....

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ant factor which has been highlighted. On facts and circumstances of the present case, we are of the view that the Assessee never intended to plunge into the waters of trade. We therefore uphold the order of the CIT(A) whereby he held that the income from sale of the property by the Assessees was to be assessed under the head "Capital Gain” - Decided in favour of assessee - ITA No. 94/Kol/2012 - Dated:- 3-2-2016 - N. V. Vasudevan, JM And M. Balaganesh, AM For the Petitioner : MD Ghayas Uddin, JC .....

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ion for Leave Encashment written back." 3. The Assessee is a company. It is engaged in the business of Manufacture and sale of dry cell batteries, flashlights etc. besides manufacture and sale of tea. In the course of assessment proceedings the AO noticed that in the computation of total income filed with the return, the Assessee had claimed exclusion of ₹ 31.76 lacs from its profit as per the profit and loss account on account of "Provision for leave encashment"payable by t .....

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mitted that in the matter of assessment of total income under the Act, liability on account of leave encashment was allowed only on payment basis as mandated under section 43B of the Income Tax Act, 1961 (Act). 4. The Assessee pointed out that as on 1.4.2004 a sum of ₹ 398.17 lakhs stood in the Provision of Leave encashment account. A sum of ₹ 68.17 lakhs out of the sum of ₹ 398.17 lakhs was transferred to Tea Division consequent to demerger of the tea division, in accordance w .....

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leave encashment may turn out to be either less or more than the provision for leave encashment debited in the books of accounts of the Assessee. The actual liability of the Assessee turned out to be less by ₹ 31.76 lacs than the provision that was created in the books of accounts of the Assessee. Therefore to the extent the Profit and Loss Account was debited in excess in the past by a sum of ₹ 31.76 lacs. The same needed to be offset by a corresponding credit in the profit and loss .....

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ect the correct income as per the method of accounting followed by the Assessee. The assessee alsopointed out that by virtue of the credit in the profit and loss account of ₹ 31.76 lacs, income to that extent is not chargeable to tax u/s 41(1) of the Act for provision written back of ₹ 31.76 lakhs, because the provision when it was created by debit to the profit and loss account was not allowed as deduction in computing total income of the Assessee in income tax assessment for the ea .....

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ear or in an earlier Assessment year and the Assessee should receive in the previous year benefit in the form of remission or cessation of the liability which was earlier claimed and allowed as deduction in an earlier Assessment year. The Assessee therefore claimed that the provision for leave encashment written back had to be allowed as a deduction in the computation of total income of the Assessee. 5. The AO however held that Section 43B of the Income Tax Act, 1961 specifically states that ded .....

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to the party could not be called payment. The claim of reduction from the computation of income towards write back of Provision for leave encashment of ₹ 31,76,000/- was not allowed by the AO. 6. Before CIT(A), the Assessee pointed that Accounting Standard 15 (AS 15) prescribed by the Institute of Chartered Accountants' of India requires every employer company to provide in the accounts; liabilities accruing during the relevant reporting period, in respect of benefits and emoluments t .....

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ther submitted that according to Income Tax department, the Provision for leave encashment constituted provision for a contingent liability and therefore not permissible as deduction because such liability was not actually discharged during the year of reporting. The Supreme Court in its decision in the case of Bharat Earth Movers Ltd Vs CIT (245 ITR 428) however held that merely because the liability for leave encashment was actually discharged at a future date, for that reason the liability di .....

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amended and Clause (f) was enacted under which the deduction for leave encashment was made allowable in the year of actual payment. As per the consistent accounting practice followed by the Assessee it had provided liability for leave encashment in its accounts in the past years. Liability for Leave Encashment provided in the accounts and which remained outstanding as on 31st March 2004 was ₹ 398.17 Lakhs. In the Income Tax Returns filed for the assessment years for an upto A. Y.2004-05 th .....

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inated from the provision made earlier and for which deduction was not allowed, than the deduction claimed had to be allowed. CIT(A) found from the information and clarifications placed before him that the Assessee has consistently followed Accounting Standard 15 in terms of which the Assessee made provision in its accounts for the Employee Benefits payable on or post retirement of employees. The employee benefits inter alia included leave encashment to which employees were entitled either at th .....

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placed before the CIT(A), the CIT(A) was of the view that in the audited accounts of the immediate preceding 2 years Assessee had made provision for leave encashment for incremental liability accruing during F.Ys 2002-03 & 2003-04. In the regular assessments u/s 143(3) for A.Ys 2003-04 & 2004- 05 the incremental liabilities debited in the profit & loss accounts but remaining unpaid to the extent of ₹ 39,39,082/- & ₹ 64,96,8751- were however disallowed, u/s 43B(f) of .....

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ver ascertained at ₹ 2,98,24,103/- whereas the liability already provided in the Assessee's books upto 31.03.2004 was ₹ 3,30,00,,000/- . It was therefore noted by the assessee that excess provision was made in its accounts upto 31.03.2004 and accordingly out of the provision created in the immediate preceding year, provision of ₹ 31.7 6 lacs was withdrawn by crediting the said sum to appellant's profit & loss account for year ended 31.03.2005. The CIT(A) also found .....

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m of ₹ 31.7 6 lacs by crediting it to profit & loss account of F.Y. 2004-05. The CIT(A) taking note of the above circumstances was of the view that when out of the very same provision ₹ 31.7 6 lacs was credited in the profit & loss account of F.Y, 2004-05, the AO could not assess the amount so written back in the taxable income of the assessee. for A.Y. 2005-06. The CIT(A) therefore found on facts that there was merit in the submissions of the Assessee and that the inclusion .....

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arlier years then in the year in which part of such provision was written back, the same could not again suffer taxation. On the question whether the sum in question could be brought to tax u/s.41(1) of the Act, the first aspect to be noticed is that it was not the case of the AO that the sum in question should be brought to tax u/s.41(1) of the Act. It was only a submission made by the Assessee that the sum in question cannot be brought to tax. The CIT(A) on this aspect held that ordinarily wri .....

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ng provisions of Sec 41 (1) it is necessary for the AO to prove that in respect of the trading liability, for which the cessation or remission is allowed, assessee was allowed deduction in computing its business income of any year. The CIT(A) found that in the case of the Assessee, admittedly in AY. 2003-04 & 2004-05 when the assessee created provision for leave encashment, no deduction was allowed because of the embargo placed by Sec 43B(f) of the I T Act. The CIT(A) held that in this factu .....

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earned counsel for the Assessee reiterated submissions made before CIT(A) and relied on the order of the CIT(A). 10. We have considered the rival submissions. We are of the view that the order of the CIT(A) on this issue does not call for any interference. The fundamental aspect which needs to be kept in mind is that the financial statements drawn by an Assessee in compliance with the other statutory requirements like Companies Act in the case of an Assessee which is a company or by other forms .....

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not be allowed as deduction while computing Total Income. When Provision for leave encashment is created and debited in the profit and loss account it goes to reduce the profit as per the financial statement. When the Assessee files return of income for any Assessment year, he has to add back the provision for leave encashment and declare income from business for the purpose of determining total income, because it is not actual liability but contingent. If the Assessee in an Assessment year add .....

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sessment Year in which the Assessee based on actual liability discovers that excess provision made in the earlier years. The Assessee has not claimed any deduction while determining its profit from business on account of Provision for leave encashment but has claimed such deduction only on the basis of actual incurring of liability which is paid in accordance with Sec.43B(f) of the Act. That has got nothing to do with the write back off excess provision for leave encashment. The CIT(A) has clear .....

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oreign Exchange Fluctuation, a contingent liability without considering teh Judgement in case of Atlas Cycle Ind Vs. CIT (2004) 270 ITR 108 (P&H) and Mihir Textile Ltd., vs. CIT(1997) 225 ITR 327(Guj)." 12. The Assessee had taken working capital loans in foreign currency. These loans were repayable in foreign currency. Due to fluctuation in value of Indian currency vis-à-vis the foreign currency the amount repayable by the Assessee was more in terms of Indian currency. There was .....

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raised in foreign currency due to fluctuation of exchange rate constituted capital expenditure. He also held that the restatement of liability as on the last date of the Balance Sheet was only notional and the real liability can be known only when the loans are repaid and not on the Balance Sheet date i.e., the last date of the previous year. The loss according to the AO was therefore contingent. He therefore disallowed loss of ₹ 256.32 lacs claimed as deduction by the Assessee. 13. On app .....

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ure, the CIT(A) relied on the decision of the Hon ble Supreme Court in the case of Woodward Governor India Pvt.Ltd. 312 ITR 254 (SC) for the proposition that loss or gain on account of foreign exchange fluctuation as on the last date of the accounting year has to be allowed as a deduction u/s.37(1) of the Act on accrual basis, if such loss in account of loans availed on revenue account. The CIT(A) also found that Assessee s own case for AY 98-99 in ITA No.455/Kol.2003 order dated 12.1.2007 & .....

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Assessee s own case on identical issue and keeping in mind the fact that the liability in question is on revenue account, the order of the CIT(A) does not call for any interference. Accordingly, ground No.2 raised by the Revenue is dismissed. 15. Gr.No.3 to 5, raised by the Revenue reads as follows: "3. Whether on the facts and in the circumstances of the case, the Ld. C!T(A) is correct in deleting the disallowance of obsolete stock written off in spite of the fact that the assessee neither .....

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o ICICI Bank merely on the ground that the same was allowed in earlier year though there had been no consistency in the accounting procedures followed by the assessee." 16. The facts and circumstances under which the aforesaid ground of appeal arise for consideration are identical and therefore these grounds are taken up for consideration together. All the aforesaid expenditure were not debited to the Profit & Loss Account by the Assessee but were written off from Revaluation Reserve in .....

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,996 The first aspect which the AO noticed was that the aforesaid claim for total sum of ₹ 13,01,74,691/-was not routed through profit & loss account nor claimed as deduction out of profit, but claimed as deduction in the revised computation of income filed with revised return as revenue expenditure written off as per provision of IT Act. In Ground No.3 to 5, we are concerned with the all the aforesaid items set out above, except deduction on account of irrecovberable and Bad Debts wri .....

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situated at different factories/ depots across the country. The Assessee submitted that during the previous year particulars of such obsolete, non-serviceable & useless stocks were obtained from the factories/depots and the same were written off from Revaluation Reserve account. The same were lying in stock and had already been offered for taxation in the respective years. Since the obsolete, non-serviceable & useless stocks have been written off the same was claimed as business expendi .....

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ed, the Assessee pointed out that it had two manufacturing plants in Chennai city, one at 1075, Triuvottiyur High Road, Chennai-600 019 and another at Developed Plot No.l, Industrial Estate, Guindy, Chennai-600 032. The Assessee submitted that because of multi-locational manufacturing operations, the Assessee was not enjoying economies of scale and there were duplication of many costs. It was also not possible to have effective control over operations. The assessee, therefore, decided to merge m .....

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ld exercise greater unified control, increase efficiency and improve productivity profitability by avoiding duplication of cost. The expenditure was incurred in the course of business and for improving the efficiency and increase profitability, therefore revenue in nature. The Assessee relied on the decision of Hon ble Madras High Court in the case of CIT vs. Madura Coats Ltd. [reported in ITR 253 (62)], wherein the Madras High Court held that Expenditure incurred for shifting of office is a Rev .....

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lop the property at Guindy for construction of commercial complex for new business adventure. He also held that shifting plant from one place to another and cost incurred for such shifting were in the nature of Capital Expenditure. He also held that the expenditure was not claimed as revenue expenditure in profit & Loss Account, but the same was adjusted through revaluation reserve and thereby claim in computation as revenue expense is not in accordance to law. Hence this claim of Rs.l,57,42 .....

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77; 33.89 lakhs per month. The reason for such conversion was that interest on rupee loan is linked to the Bank s Prime Lending Rate (BPLR) whereas if the very same loan is converted into foreign currency loan than the interest on such foreign currency loan will be linked to LIBOR (London inter-bank Official rate). Because of LIBOR the interest burden of the Assessee got reduced by 9% to 10% and that was reason that the Assessee resorted to such conversion of rupee loan into foreign currency loa .....

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ccordance to law, Hence claim of ₹ 4,06,77,996/- as deduction was denied. 18. Before CIT(A), on disallowance of deduction on account of obsolete stock written off, the Assessee submitted that the fact that the obsolete stock written off in the books of accounts had in fact become obsolete and useless had not been denied by the AO. The only ground on which the AO disallowed the claim of the Assessee for deduction was that no provision or write off for such obsolete stock, has been made in p .....

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ff the loss or expenditure in the Profit & Loss A/c has not been made as a condition precedent by the Act; for claiming deduction or allowance or loss. In absence of any such specific condition prescribed in the Act, the AO could not read into statue a condition not prescribed by the legislature. It was further submitted that Chapter-IV D of the Income Tax Act prescribes the conditions to be fulfilled by an assessee for claiming deductions, allowances or loss. Sec. 37 (1) permits deduction f .....

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nditions prescribed in Sec. 37 are fulfilled. In case of an assessee which maintains its accounts on mercantile basis; deduction is permissible once the assessee establishes that a liability or loss accrued during the relevant year. In this regard reference was made to observation of the Supreme Court in the case of, Sutlej Cotton Mills Ltd Vs CIT (116 ITR 1):- "It is now well settled that the way in which entries are made by an assessee in his books of account are not determinative of the .....

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disputed that the Assessee did suffer loss due to damage or obsolescence in stock of raw-materials, packing materials & finished goods. The fact that the relevant particulars of said loss were furnished by the Assessee was also not disputed. The AO also did not find any infirmity either in the details furnished or the explanations in support thereof. The disallowance was however made only on the ground that the said loss was not debitedin the Profit & Loss A/c. In other words, the AO hav .....

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rage. The loss in value of stores and spares was disallowed by AO and CIT(A). On further appeal the Tribunal accepted the assesses submission that loss on account of diminution in value of stock in trade is a revenue loss. The, Tribunal held that obsolete and non moving spare parts went on losing their va1ue and thereby distorting the true profits and therefore AO was directed to allow claim at loss on account of value of non- moving stock of stores and spares. It was submitted that the aforesai .....

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find that the AO per se never disputed that during the relevant year appellant had conducted physical verification of stock of raw materials, packing materials and finished goods lying at manufacturing locations and sale depots. On physical verification obsolete, damaged and non moving items of stocks were identified which were reportedly having no realizable value. The evidence in support of physical stock taking having taken place was furnished before the AO and the AO did not dispute correctn .....

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manner in which entries are made by an assessee in his books of accounts are not determative of the question as whether an assessee has earned profit or suffered loss. The particular manner in which the entries are made in books of account or absence of an entry in the books by itself cannot be considered to be conclusive one way or other. What is necessary to be considered by the AO is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee. In .....

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he relevant year the appellant conducted physical inspection of its stocks upon which obsolete, non moving and damaged stocks were identified having no realizable value. Copies of the stock inspection reports were furnished before the AO and no infirmity or falsity in these reports was established by him. Since the assessee regularly followed lower of the cost or market value principle for valuing its inventory and when the physical inspection of inventory established that certain items of row m .....

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to claim deduction for stock write off which was ascertained on scientific basis and accounted in the books in conformity with generally accepted principles of accounting. The appellants claim for stock write off is also supported by the decision of the ITAT Cuttack Bench reported in 101 DJ 948. The AO is therefore directed to allow the deduction In respect of obsolete stock written off amounting to ₹ 3,30,99,581/-. Ground No. 5 is allowed. 18.2. Aggrieved by the order of the CIT(A), the .....

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f scale and there were duplication of many costs. The Assessee therefore decided to merge manufacturing operations at one place so that the management could exercise greater unified control, increase efficiency and improve productivity and profitability by avoiding duplication of cost. Hence, the manufacturing operations in Guindy Plant was shifted to Tiruvottiyur Plant. The expenditure was therefore claimed to have been incurred in the course of business and for improving the efficiency and inc .....

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t which put huge pressure on the Assessee s market share and profitability. This was another reason for centralizing operations at Tiruvottiyur Plant instead of in two plants in the same city. The Assessee also pointed out that the Guindy Plant was in the vicinity of the city and with growing city population the area where guindy plant was located became a predominantly residential area. There were environmental issues to be dealt with because of the consumption of zinc allots, electrodes, elect .....

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processes and costs besides environmental considerations. The Assessee pointed out that by incurring these expenses no new asset came into existence nor any enduring benefit was derived by the Assessee to characterize the expenditure in question as a capital expenditure. The Assessee also relied on the decision of the Special Bench ITAT in the case of JCIT Vs. ITR Ltd. 112 ITR 57 (Kol) (SB) wherein it was held that shifting of machinery from one unit to another unit for efficient utilization of .....

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case of Sutlej Cotton Mills Ltd. Vs. CIT 116 ITR 1 (SC). The Assessee pointed out that it created a value for its brand "Eveready and disclosed in the Asset side of the Balance Sheet and reduced therefrom the expenditure in the form of expenses in shifting plant from one place to another instead of reducing from the profit and loss account. Such presentation in the books of accounts will not in any way affect the claim of the Assessee for deduction of legitimate revenue expenditure. 19.1. .....

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appellant had 2 factories in Chennai; manufacturing same products i.e. Batteries and Dry Cells. The factory at Guindy was set up in 1971 whereas the factory at Thiruvattiyur was set up in 1989 within predominantly industrial area. Both the factories were manufacturing Dry Cell Batteries using same production techniques. After opening up of the Indian Economy, Chinese Dry Cell Manufacturers resorted to export of dry cell batteries at very cheap rates which necessitated the assessee to undertake .....

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ize its manufacturing operations only et one location in Chennai. The raw-materials consumed in manufacture of, Dry Cell Batteries inter-alia included certain chemicals which generated environmentally hazardous industrial waste. Disposal of such industrial waste posed environmental problems. There were residential settlements around assessee's Guindy Factory and therefore disposal of industrial waste was causing serious environmental issues. Taking into account these factors the appellantdec .....

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ed to eliminate duplication of certain processes and thereby eliminated duplication of costs. The, ,exercise was aimed at improving assessee's productivity, efficiency and profitability. The expenditure incurred on shifting machinery facilitated the assessee to carry on its existing manufacturing business more efficiently and profitably without increasing over all production capacities. I also find that assessee's decision to shift the factory from Guindy to Thiruvattiyur was taken prior .....

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s High Court the assessee had incurred expenditure on shifting of its Regd. Office which was disallowed by the AO on the ground of being capital expenditure but on appeal the Tribunal and the High Court held that the expenditure was allowable as revenue expenditure. A similar view was taken by the Special Bench of the ITAT Kolkata in the case of ITC Limited (112 ITD 57) The facts of this case were pare-materia with the appellant's case. ITC Ltd had shifted Plant & Machinery from one unit .....

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it only facilitated the assessee in carrying on its existing business more efficiently and profitably. In my opinion the facts of the appellant's case are identical to the facts involved in the case of ITC Ltd. Respectfully following the decision of the Special Bench of the ITAT Kolkata I direct the AO to allow the deduction for shifting expenses of ₹ 1,57,42,006/- in computing appellant's income under the head "Profits & Gains of Business". In view of this finding, a .....

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gn currency loan in 2001 against payment of upfront fees of ₹ 20 crores. The loan was repayable till October, 2006. The Assessee therefore decided to write off the said upfront fees during the unexpired period of loan. Accordingly the Assessee wrote off the upfront fees of ₹ 20 crores in 59 equal monthly instalments of ₹ 33.89 lacs starting from December, 2001 till October, 2006. The write off in AY 2002-03, 2003-04 & 2004-05 of ₹ 135.59 lacs, ₹ 406.78 lacs and .....

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iance on the decision of the Hon ble Supreme Court in the case of Sutlej Cotton Mills Ltd. Vs. CIT 116 ITR 1 (SC) The Assessee pointed out that it created a value for its brand "Eveready and disclosed in the Asset side of the Balance Sheet and reduced therefrom the expenditure in the form of amortization of upfront fee paid instead of reducing from the profit and loss account. Such presentation in the books of accounts will not in any way affect the claim of the Assessee for deduction of le .....

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front fees of ₹ 20 Crs. The original loan was repayable in October 2006. In its books of account the appellant chose to write off upfront fees paid to IClCI Bank; over the unexpired loan period which at the time of conversion was 59 months i.e. from December 2001 to October 2006. In the financial accounts of the F.Ys. 2001-02, 2002-03 & 2003-04 the assessee wrote off pro-rata upfront fees of ₹ 135.59 Lacs, ₹ 406.78 Lees & ₹ 406.78 Lacs respectively and the deducti .....

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was fatal and for that reason the deduction was denied. 8.3 In my opinion the manner in which assessee made entry in his books of account was not material in deciding the question of allowability of the expenditure. This proposition find support in the decision of the Supreme Court in the case of CIT Vs Sutlej Cotton Mills Ltd (supra). The basic facts concerning the deduction claimed for upfront fees paid to IClCI Bank have not been disputed by the AO. In the assessment orders u/s 143(3) for th .....

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and not in the veer in which upfront fees were paid. Once the appellant's method of claiming deduction for upfront fees paid over the unexpired period of loan was accepted by the AO then he was not justified in denying the deduction for pro-rata upfront fees paid in the assessment for the A.Y. 2005-06 on the plea that the assessee did not charge the said amount of its profit & loss a/c but to Revaluation Reserve A/c. Once the AO in principle accepted the assessee's method of claimin .....

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to allow deduction for ₹ 4,06,77,996/- whichrepresented pro-rata upfront fees paid to IClCI Bank. Ground Nos. 12 & 13 are accordingly allowed. 20.2. Aggrieved by the order of the CIT(A) the Revenue has raised Gr.No.4 before the Tribunal. 21. We have heard the learned DR on Ground No.3 to 5 and the learned counsel for the Assessee. The learned DR relied on the order of the AO. The learned counsel for the Assessee relied on the order of the CIT(A). 22. We have given a very careful consid .....

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ot always conclusive in the matter of deciding whether a claim for deduction has to be allowed or not. The created a value for its brand "Eveready and disclosed in the Asset side of the Balance Sheet and reduced therefrom the value of obsolete stock instead of reducing from the profit and loss account. Such presentation in the books of accounts will not in any way affect the claim of the Assessee for deduction of legitimate revenue expenditure. Write off in the profit and loss account of th .....

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siness. The deduction on account of write of obsolete stock is also allowable as held by the Cuttack Bench of the ITAT in the case of National Aluminium Co. Ltd. Vs. DCIT 101 TTJ 948 (Cuttack). We therefore do not find any grounds to interfere with the order of the CIT(A). 23. As far as Gr.No.4 is concerned, the same reasons for not routing the expenditure through the Profit & Loss Account as given while deciding Gr.No.3 will apply to this ground also. Besides the above, the reasons for shif .....

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t was a decision to reduce costs, improve productivity and profitability and eliminate duplication of processes and costs besides environmental considerations. Hence, it cannot be said that either there was acquisition of new asset or deriving of any enduring benefit to the Assessee. Nor can it be said that the expenditure in question was not for the purpose of business but for the purpose of selling the land over which Guindy Plant was located. Hence, we find no merits in ground No.4 raised by .....

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smissed. 25. Ground No.6 raised by the Revenue reads as follows: "6. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) is correct in holding that sale of factory land at Guindy, Chennai gave rise to Capital Gain and not to business profit in spite of the fact that the transaction entered into by the assessee an adventure in the nature of trade. 26. We have already seen while deciding Gr.No.4 that the Assessee had two plants in the city of Chennai one at Guindy and th .....

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come under the head "Income from Business as the Assessee by entering into a development agreement with the developer had carried out an adventure in the nature of trade. This is the dispute in Gr.No.6 raised by the Revenue. 27. The details of the transfer of land at guindy, Chennai was that land admeasuring 8.39 acres at Guindy, Chennai was acquired by the Assessee in terms of an indenture executed by the Governor of Madras dated 30.11.1971. In terms of the said Indenture, the Government o .....

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02.1989. No separate / additional consideration was paid by the Assessee at the time of execution of Deed of Sale in 1989. The Deed of Sale was executed for the same consideration as was received by the Government of Madras in 1971. The Assessee was put in possession of the said land in 1971. 27.1. The Assessee constructed factory buildings there on and the factory was engaged in manufacture of Dry Cell Batteries and its components till F.Y.2004-05. The Assessee had another factory at 1075, Thir .....

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d the factory land at Guindy as surplus asset and therefore decided to utilise the surplus asset on the most economically advantageous terms. 27.2. Out of the total land area of 8.39 acres; the Assessee entered into an agreement for sale of land admeasuring 1.10 acres with Messrs Khivraj Motor Limited. The physical possession of the said 1.10 acres was transferred in F.Y.2003-04 and the gain arising there from was reported in the return for A.Y.2004-05 under the head "Capital Gains"in .....

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nstructing buildings thereon was solely on the Developer. As per Para 3.0 the developer was liable to construct the building at its own cost and expenses; in accordance with sanctioned building plan. The Assessee was not obliged to incur any cost of construction nor was the Assessee obliged to perform any work in relation to development and construction. The constructed area allotted to the Assessee, as part of owner's allocation in the new building, was to be constructed by the developer so .....

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en the Assessee and the developer in respect of the development' of the said property. In terms of the said agreement the Assessee and M/s. Khivraj Tech Park Pvt. Ltd. were to own hold, enjoy and exploit their respective allocations in the new buildings in their own right and to the exclusion of each other. The Assessee was not to share any profit or loss arising from the development and construction activity which was to be solely funded, undertaken and executed by M/s. Khivraj Tech Park Pv .....

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to pay ₹ 25 crores and further provide 20% of the constructed area in the proposed new building to the Assessee. In consideration of undertaking and performing these obligations, the Developer was entitled to 80% of the constructed area in the proposed new buildings to be constructed by the Developer. The agreement dated 07.12.2004 envisaged barter or exchange.. The sale consideration was taken by the assessee at ₹ 25 crore plus estimated cost of construction of 218,500 sq. ft. of t .....

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vide his report dated 16.10.2004. 27.3. The AO called upon the Assessee to explain on 27.11.2007 as to why this should not be treated as business transaction instead of investment. The assessee submitted on 05.12.2007 & 12.12.2007 that the expression "business", though wider in it's connotation; requires an assessee's active participation in any organised and systematic activity. The expression business or adventure in the nature of trade, presupposes that the assessee has .....

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actory land at' Guindy appeared in the Assessee's Balance Sheet as its "Fixed 'Asset"and not as "Current Asset . The said land never constituted Assessee's stock-in-trade. The Assessee never dealt in the said land or any part thereof as a dealer or a property developer. The Assessee also pointed that it can be seen from the past records that the Assessee has never carried on business of property dealings nor the Assessee has ever carried on construction and develop .....

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h the Developer dated 07.12.2004 did not envisage active participation by the Assessee in the project execution. The company was not liable or obliged to undertake any risk attached with development and construction of new buildings. Under the said agreement the company was entitled only for defined consideration which was partly in cash and partly in kind. The Assessee did not stand to gain or lose more than what was agreed to be received under the agreement. Whether or not the developer made a .....

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had only granted rights of development and construction to the Developer. The developer did not, however, undertake the construction of the buildings during the relevant year and the constructed area was not delivered. The agreement dated 07.12.2004 only set out terms and conditions which the developer was obliged to perform in future and during the F.Y. 2004-05 these conditions were not performed and fulfilled. There was no transfer of land as is known in general law and therefore no commercial .....

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e under the head "Profit & Gains from business or profession"the "sale"has to be understood in the context of general law. In assessing business income definition of "transfer"as used in Sec. 2(47) cannot be invoked. On reference to Sec.2( 47) of the Act, the said definition is applicable only in relation to a "Capital Asset"and therefore can be invoked only when income is assessed under the head "Capital Gains". The Assessee pointed that in .....

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clause 6.7 states that "In addition to the Owner's allocation, the Developer shall pay a sum of ₹ 25,00, 00, 000/- (Rupees Twenty five crores only) to {he Owner in the manner following: (a) A sum of ₹ 4, 00, 00, 000/- (Rupees Four Crores only) already paid the receipt of which sum the Owner doth hereby admit and acknowledge (b) The balance sum of ₹ 21, 00, 00,0001- (Rupees Twenty one crore only) at the time of the Owner handing over vacant and peaceful possession of th .....

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titled to enter into separate agreements for transfer in respect of their respective allocation. According to the AO from the above agreement, it was clear that the assessee will get ₹ 25 crores and 20% constructed area as its share in return for the transfer of its land. According to the AO, the assessee transferred its property for development of new venture for commercial purposes and thereby received sum of ₹ 25 Crores as part payment in course of new business venture and balance .....

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several decisions in which the propositions laid down were as follows: (i) If, land is purchased with the objective of dividing the same into plots and thereafter selling at a profit, the transaction of purchase and sale would come within the ambit of adventure in the nature of trade. Smt. Indramani Bai & Anr. vs. Addl. CIT 200 ITR 594 (SC) (ii) "the question whether the transaction is an adventure in the nature of trade must be decided on a consideration of all the relevant facts and c .....

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eerakhan vs. CIT 73 ITR 735 (SC) According to the AO, the Assessee entered into a solitary or isolated transaction and converted land into constructed commercial unit and then sold it to outside parties and therefore indulged in an adventure in the nature of trade. (iii) CIT Vs. G. Venkataswami Naidu 35 ITR 594 (SC) wherein it was observed that: "it is impossible to evolve any formula which can be applied in determining the character of isolated transaction which come before the Courts in t .....

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the nature of trade. Cases of realisation of investments consisting of purchase and resale, though profitable are clearly outside the domain of adventures in the nature of trade. In deciding the character of such transactions several factors are treated as relevant. Was the purchaser a trader and were the purchase of the commodity and its resale allied to his usual trade or business or incidental to it ? Affirmative answers to these questions may furnish relevant data for determining the charac .....

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at were the incidents associated with the purchase and resale? Were they similar to the operations usually associated with trade or business? Are the transactions of purchase and sale repeated ? In regard to the purchase of the commodity and its subsequent possession by the purchaser, does the element of pride of possession come into picture? A person may purchase a piece of art, hold it for some time and if a profitable offer is received may sell it. During the time that the purchaser had its p .....

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. The presence of all the relevant circumstances mentioned in any of them may help the Court to draw a similar inference ; but it is not a matter of merely counting the number of facts and circumstances pro and con ; what is important to consider is their distinctive character. In each case, it is the total effect of all relevant factors and circumstances that determines the character of the transaction; and so, though we may attempt to derive some assistance from decisions bearing on this point .....

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t may be broadly true ; and so some judicial decisions apply the test of the initial intention to resell in distinguishing adventures in the nature of trade from transactions of investment. Even in the application of this test, distinction will have to be made between initial intention to resell at a profit which is present but not dominant or sole; in other words, cases do often arise where the purchaser may be willing and may intend to sell the property purchased at profit, but he would also i .....

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resence of other factors it would raise a strong presumption that the transaction is an adventure in the nature of trade. Even so, the presumption is not conclusive ; and it is conceivable that, on considering all the facts and circumstances in the case, the Court may, despite the said initial intention, be inclined to hold that the transaction was not an adventure in the nature of trade. We thus come back to the same position and that is that the decision about the character of a transaction in .....

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where the intention of the resale was there almost from the beginning, and was the dominant intention for the purchase, transaction is an adventure in the nature of trade. (v) Raja Bahadur Kamkhaya Narain Singh Vs. CIT 77 ITR 253 (SC) wherein it was held that where a transaction is not mere realization of investments but act of making profit then the same is a trading venture. According to the AO, the Assessee by handing over possession to a developer was to get constructed area instead of open .....

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held that the income from sale of land and development right of the Assessee is nothing but an adventure in the nature of trade and the income from which is to be assessed as income from business. 28. On appeal by the Assessee, the CIT(A) deleted the addition made by the AO and held that the income in question had to be assessed under the head "Capital Gain . The following were the relevant observations of the CIT(A): "9.4 After due consideration of terms of development agreement; con .....

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AO from the conduct of the assessee that. the plunge in the waters of trade was taken by the .assessee himself and not by somebody else, In deciding appropriate' head of income for assessment of profit accruing .on sale of land; it is necessary to analyze the conduct and object of the assessee at the time of its purchase and his subsequent dealing with the property till its sale. The determinative or the decisive factor is however not the assessee's intention or conduct at the time of &q .....

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he appropriate head of income the decisive factor or criteria should have been examine the assessee's conduct and its dealing with .the said land at the time of its purchase and thereafter till land was handed over to the developer in terms of agreement dated 07.12.2004. 9.5 From the documents on record it appeared that the industrial land in Guindy was acquired by the assessee from the Govt of Madras in 1971 for the purpose of setting up a factory for manufacture of dry cell batteries. Afte .....

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he purpose of carrying on manufacturing business. The conduct of the assessee over long period exceeding 30 years therefore established that appellant had never had any intention to deal with the said land treating it to be stock in trade of its real estate business. From the assessment order also it appeared that no finding was recorded by the AO to the effect that the appellant was in the business of real estate development. Neither in the past assessments nor in the subsequent assessments any .....

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was no evidence on record which in any manner established that the assessee had intention or object to deal with the said land treating it to be stock in trade of its business of real estate development. In fact no material was brought on record I do by the AO which in any manner' established that any time in the past or in subsequent years the appellant!, WGJS found to be engaged in business of real estate development. These facts therefore established that appellant's object purpose a .....

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pment business and therefore the land in question could not be considered by the AO to be part of appellant's circulating capital so as to give rise to business profit on transfer thereof. 9.6 Even with reference to appellant's dealing with the land after its possession was handed over to the Developer, I find that there was no material change in the appellant's dealing with the land. Under the agreement dated 07.12.2004 the appellant had only obligation to hand over vacant possessio .....

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cost. All liablities, responsibilities and obligations arising or pertaining to development and construction of the proposed buildings were to be discharged by the Developer alone. 9.7. Under the Agreement dated 07.12.2004, the appellant was entitled to receive only the consideration specified in the Agreement which was partly in cash and partly in kind. The appellant's entitlement to receive the defined consideration was not dependant on fact as to whether the Developer made any profit or s .....

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ecause the agreement between the parties did not envisage any active role for the land owner in the matter of carrying out development, and construction on the said land. 9.8. The Reliance placed by 'the AIR on the decision of Gujarat High Court in the case of CIT Vs. Smt. Minal Ramchandra (167 ITR 507) appeared to be relevant in this regard. In this judgment the Gujarat High Court had considered the judgment of Apex Court in the case of G.Venkataswami Naidu & Co. V CIT (35 ITR 594) wher .....

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llant's entitlement to receive consideration was defined and fixed. These facts , therefore showed that neither at the time of purchase of the factory land in 1971 the assessee had objective of dealing with the property by way of stock in trade nor the assessee had any objective or intent to commercially exploit the land in question by undertaking an organized activity for developing it for deriving commercial gains. Even the terms of Agreement dated 07.12.2004 proved that no business or com .....

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t rights was assessable by way of profits & gains of business. On the contrary if the facts involved in each of the decided cases are analyzed and the ratio laid down in these judgment is carefully considered then I find that these decisions in fact further the appellant's case. In the celebrated judgment of the Supreme Court in G.Venkataswami Naidu & Co. Vs. CIT (35 ITR 594) on which the AO relie8 ISO heavily, the Court had held the assessee therein to be dealer in land only because .....

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n adventure in nature of trade. The Ld. AIR in his written. submissions analyzed apex court's relevant observations with which I fully agree and therefore do not reiterate the same to avoid duplicity. The ratio laid down in 35 ITR 594 if applied to the appellant's case shows that the intent and object of the assessee at the time of purchase of land in 1971 was to use If tor its individual benefit by setting up an industrial undertaking. Pursuant to 'the said object the appellant did .....

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r the purposes of' business of real estate development and therefore the profit realized on its transfer was not chargeable under the head profits & gains of business. 9.10 The decision of the Supreme Court in the case of Janaki Ram Bahadur Ram Vs. CIT (57 ITR 21) also supports the appellant's claim because the appellant was never engaged in business of dealing in land nor it was a case where assessee after purchasing the land; sub divided it into plots and thereafter sold. On the co .....

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T ( 73 ITR 753), Dalmia Cement Ltd Vs. CIT (105 ITR 633 ) & Smt. Indramani Bai Vs. CIT (200 ITR 594) were not applicable. Moreover the decision of the Supreme Court in the case of Raja Bahadur Kamkya Narayan Singh Vs. CIT (77 ITR2S3) supported the appellant's plea because the appellant transaction with Khivraj Tech Park Pvt. Ltd was not in the ordinary line of assessee's business. 9.11 In the assessee's case land was purchased with sole purpose and intent of setting up an industr .....

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ellant's claim for assessment under the head capital gain is found to be supported by the following judicial decisions on which reliance was placed by the Ld. AIR in his written submissions. i) CIT Vs. Mohakampur Ice & Cold Storage (281 ITR 354) (All) (2006) ii) CIT Vs. Smr. Radha Bai 272 ITR 264 (Del) (2005) iii) CIT Vs. Sushila Devijan(259 ITR 671 (P & H) (2003) iv) CIT Vs. Trivedi (V.A) (1721TR 95 (Bom) 1998 29. The CIT(A) also placed reliance on the decision of ITAT Kolkata in IT .....

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apital Gain . The CIT(A) also took note of the fact that in the subsequent year the revenue has accepted the gain in question as giving raise to "Capital gain . 30. For the reasons given above, the CIT(A) directed the AO to treat the gain in question as giving raise to "Capital Gain and not "Income from Business . 31. Aggrieved by the order of the CIT(A), the revenue has raised Gr.No.6 before the Tribunal. We have heard the submissions of the learned DR who relied on the order of .....

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idu & Co. vs. CIT (35 ITR 594) (SC), the Hon ble Supreme Court had to deal with a question as to whether purchase of land adjacent to mills of company and sale of land to company by managing agent of the company would constitute adventure in the nature of trade. The Hon ble Supreme Court observed that the question whether gain made out of purchase and sale of lands, whether it is an accretion to capital or capital profit may depend on particular facts and circumstances. The transaction itsel .....

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it and, when there is appreciation in its value, sell it at an enhanced price. That will not be a trade or an adventure in the nature of trade. In such a case, while buying land, the purchaser may do so in the expectation it may appreciate in value and he could sell it, at a later date, at a profit. But that could hardly make any difference. Such transactions are incidental to ownership of land and there is nothing commercial about them. Sales of land, in those circumstances, are no more than a .....

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nor of Madras dated 30.11.1971. The said land was situated in the Industrial Estate set up by the then Government of Madras. Registered Deed of Sale in favour of the Assessee was executed on 08.02.1989. The Assessee was put in possession of the said land in 1971. (ii) The Assessee constructed factory buildings there on and the factory was engaged in manufacture of Dry Cell Batteries and its components till F.Y.2004-05. (iii) The Assessee had another factory at 1075, Thiruvottiyur High Road, Chen .....

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ndy as surplus asset and therefore decided to utilise the surplus asset on the most economically advantageous terms. (iv) Out of the total land area of 8.39 acres; the Assessee entered into an agreement for sale of land admeasuring 1.10 acres with Messrs Khivraj Motor Limited. The physical possession of the said 1.10 acres was transferred in F.Y.2003-04 and the gain arising there from was reported in the return for A.Y.2004-05 under the head "Capital Gains"in terms of Section 53A of th .....

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hereon was solely on the Developer. As per Para 3.0 the developer was liable to construct the building at its own cost and expenses; in accordance with sanctioned building plan. The Assessee was not obliged to incur any cost of construction nor was the Assessee obliged to perform any work in relation to development and construction. The constructed area allotted to the Assessee, as part of owner's allocation in the new building, was to be constructed by the developer solely at developer' .....

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developer in respect of the development' of the said property. In terms of the said agreement the Assessee and M/s. Khivraj Tech Park Pvt. Ltd. were to own hold, enjoy and exploit their respective allocations in the new buildings in their own right and to the exclusion of each other. The Assessee was not to share any profit or loss arising from the development and construction activity which was to be solely funded, undertaken and executed by M/s. Khivraj Tech Park Pvt. Ltd. on it's own .....

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es and further provide 20% of the constructed area in the proposed new building to the Assessee. In consideration of undertaking and performing these obligations, the Developer was entitled to 80% of the constructed area in the proposed new buildings to be constructed by the Developer. 35. The intention at the time of acquisition was to hold the property as capital asset. In this regard one cannot lose sight of the fact that a factory building was put up over the property and manufacturing activ .....

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the sale deed, the reason for the sale has been mentioned as betterment and other reasons. By entering into the Agreement with the builder it cannot be said that the Assessees took a plunge into waters of trade. It was case where the Assessee wanted the best returns for its investment. Had the property been sold outright, probably the Assessee would not have got the price it got when it sold constructed area. By bargaining for constructed area, it cannot be said that the Assessee plunged into wa .....

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