TMI Blog2009 (8) TMI 1166X X X X Extracts X X X X X X X X Extracts X X X X ..... e the owners of the land and building situate at 34, Nesbit Road, Mazgaon, Mumbai. By an agreement dt. 15th Sept., 1969, the said trust permitted the assessee firm to continue as tenants at the said property and further gave wide power to the assessee over the said property including liberty to repair, renovate, demolish, construct or reconstruct and to sublet, sub-lease grant on leave and licence or otherwise part with the possession of the said premises to any other person. Subsequently, on 5th May, 1999 the assessee entered into a leave and licence agreement with Concord Motors Ltd., a subsidiary of Tata Motors Ltd. Both the parties filed consent terms in the Bombay High Court on 7th May, 1999. The leave and licence agreement entered into on 5th May, 1999 was for a period of two terms of three years each, viz. from 1st Nov., 1998 to 31st Oct., 2001 and from 1st Nov., 2001 to 31st Oct., 2004. A lock-in-period of five years and six months was provided as per cl. 3 of the leave and licence agreement, i.e. upto 30th April, 2004. M/s Concord Motors Ltd. terminated the agreement on 31st Dec, 2004 prematurely. The, period of premature termination is from 1st Jan., 2003 to 30th April, 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain disallowances on account of postage, telegram and telephone expenses claimed, repairs and maintenance and motor car expenses. 5. Aggrieved, the assessee carried the matter in appeal. The first appellate authority granted part relief. On the issue of taxability of forfeiture of security deposit and receipt of damages, the first appellate authority upheld the order of the AO and distinguished the decision of the Tribunal 'F' Bench of the Mumbai Tribunal in the case of Dilip H. Udani in ITA No. 7906(Mum)1993 relied upon by the assessee. In the process he has also examined the specific terms of the agreement. On the other issues, the claim of the assessee was allowed. Aggrieved, both the assessee as well as the Revenue are in cross-appeals. 6. We have heard Shri Sanjay Agrawal, the learned Departmental Representative and Shri Piyush H. Baxi, chartered accountant, on behalf of the assessee. Submissions : 7. The learned counsel for the assessee filed a paper book running into 83 pages and further filed another paper book consisting of copies of case law relied upon by him. The learned counsel submitted that the assessee received a sum of ₹ 1.50 crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid for the loss in revenues. He further argued that as the assessee has received back the premises, the amount cannot be termed as rent or licence fee received. He pointed out that forfeiture has not been provided for in the security agreement and the nature of receipt should be identified from the termination agreement. He further submitted that there is no sterilization of income-bearing assets, no right or lien of licence over the period thereafter and the assessee had got full freedom to exploit the asset and thus, it cannot be said that it is a compensation for loss of income. He submitted that the assessee has done nothing to earn the aforesaid two amounts and it was only a passive spectator to unfolding events. He pointed out that the transactions were between unrelated parties and was with a reputed business house such as Tatas and alleging collusion does not arise. He submitted that the premature vacation of the premises is the unilateral act and licencee and the assessee has no role in the same. The learned counsel submitted that the AO admits that the asset in question is a business asset. He submitted that there are two types of business assets, i.e. fixed asset and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ations cannot turn them into trading receipts. He invited our attention to this particular passage - It seems to me that the quality and nature of a receipt for income-tax purpose is fixed once and for all when it is received. What the partners did in this case, as I have said, was to decide among themselves that what they had previously regarded as a liability of the firm they would not, for practical reasons, regard as a liability; but that does not mean that at that moment they received something, nor does it mean that at that moment they imprinted upon some existing asset a quality different from what it had possessed before'. The learned counsel has, also relied upon the judgment of Hon'ble Supreme Court in the case of K.M.S. Lakshmanier Sons. v. CIT/CEPT [1953] 23 ITR 202 (SC) and argued that the security deposit in question had all the essential elements of a contract of loan and the deposit received constituted borrowed money. He also pointed out that the Hon'ble Supreme Court at para 9 of the order held as follows : 'The fact that one of the conditions is that it is to be adjusted against a claim arising out of a possible default of the depositor cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s taken as deposit which in fact is equal to an amount of sales-tax leviable under the Central Sales-tax Act on inter-State trading and consequently it forms part of the price which was charged. How the trade will disburse the amount received from the customer is immaterial, because the price of the goods insofar as the customer is concerned includes all those amounts which he pays. There is in fact in this case no evidence except the statement of the assessee, to show that he was going to return the amount. But even assuming that it was returnable, it is part of the price and hence a trading receipt. Even though it is shown as a deposit, these amounts are part of every transaction and are consequently trading receipts. We are clear in our mind that the IT authorities were right in their conclusions in dealing with these as trading receipts. 12. The learned counsel further relied on the decision in the case of CIT v. Sandersons Morgans [1970] 75 ITR 433 (Cal.) wherein the assessee a firm of solicitors had collected certain monies from their clients and later as the clients had not claimed these amounts back, they were transferred to the P L a/c and the Court held that this d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee is in the business of warehousing and property leasing in addition to trading in chemicals and textile auxiliaries. He referred to the order of the AO specifically to p. 3 at para 4.3 and submitted that the security deposit in question has been accepted by the assessee during the course of his business of warehousing and property leasing. Thus, he argues it is a trading receipt. He submitted that the test to be applied is as to why the assessee has received this amount both initially and also subsequently on forfeiture. He contended that there was no loss whatsoever to the profit-earning apparatus and thus the receipt in question cannot be held to be in the capital field. He vehemently contended that the forfeiture in question is in the normal course of the business of the assessee and hence the receipt is in the revenue field. He referred to p. 5 of the CIT(A) order and pointed out that the case of the assessee is distinguishable from the order of 'F Bench of the Tribunal in the case of Dilip H. Udani (supra ) which was relied upon by the assessee and the points of difference were depleted (sic) by the CIT(A) in his order. He further submits that the first appellate autho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Plast Industries (P.) Ltd. v. Asstt. CIT [2004] 86 TTJ (Mumbai) 260 : [2002] 82 ITD 315 (Mumbai) wherein the assesses in that case appropriated a certain amount out of the security deposit towards settlement of dispute and this was held to be in the revenue field. He further relied on the decision of the Hon'ble-Supreme Court in the case of CIT v. Karam Chand Thappar [1996] 135 CTR (SC) 443 : [1996] 222 ITR 112 (SC) and submitted that the judgment of the Privy Council in the case of Morley (Inspector of Taxes) v. Tattersall (supra) was discussed at length and ultimately it was held that the income in question in that case was in the revenue field. He pointed out that in that case also, the surplus was treated as a trading receipt of the year when the same was not claimed by the concerned parties. He submitted that in this case it is held by the Court that it cannot be laid down as a matter of law, that any amount which is not initially received as a trading receipt can never become a trading receipt. Thus, he submitted that the proposition of law relied upon by the learned counsel for the assessee does not hold water in view of the decision of the Supreme Court in the case of C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he distinguished the other case law relied upon by the assessee and submitted that in the case of TV Sunderam Iyengar Sons (supra ) as well as in the case of Karam Chand Thappar (supra ) also the forfeiture of security deposit was held as a revenue receipt and taxed as such. 20. Coming to the issue of damages being treated as income, the learned counsel supported the order of the first appellate, authority and submitted that the damages were paid in lieu of rental income and are taxable as such. On the issue of disallowance of postage, telegram and telephone expenditure as well as motor car depreciation he submitted that the disallowance is reasonable and has to be upheld. 21. On the Revenue appeal the learned Departmental Representative submitted that the first appellate authority was wrong in deleting the disallowance of ₹ 9.67 lakhs made out of repair expenses on the ground that it is in the capital field and not in the revenue field. He relied on the order of the AO. 22. Rival contentions heard. On a careful consideration of the facts and circumstances of the case and on a perusal of the papers on record and the orders of authorities below as well as the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a capital receipt and is treated as such from the year 1999 both by the assessee and by the Revenue. The deposit is not in the nature of advance for goods or services nor could it be qualified as in relation to the rental component. It is in the nature of loan. For arriving at this conclusion, we draw strength from the decision of the Hon'ble Supreme Court in the case of K.M.S. Lakshmanier Sons v. CIT/CEPT [1953] 23 ITR 202 (SC) wherein on p. 210 para 2 it is stated as follows : Jenkins L.J., who delivered the leading judgment, observed : 'If the agent's deposit had in truth been a payment in advance to be applied by the company in discharging the sums from time to time due from the agent in respect of petroleum products transferred to the agent and sold by him the case might well be different and might well fall within the ratio decidendi of Landes Bros. v. Simpson [1934] 19 Tax Cases 62 and Imperial Tobacco Co. v. Kelley [1943] 25 Tax Cases 292. But that is not the character of the deposits here in question. The intention manifested by the terms of the agreement is that the deposit should be retained by the company, carrying interest for the benefit of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the leave and licence agreement by the licensee in spite of the lock-in-period of 5 years and 6 months, the licensor shall forfeit the interest-free security deposit of ₹ 1,50,00,000 (Rupees one crore fifty lakhs only) deposited by the licensee with the licensor under the security agreement dt. 5th May, 1999 and licensee shall not be entitled at any time to claim the refund of the said security deposit. (ii) The licensor shall also forfeit interest-free security deposit of ₹ 5,00,000 (Rupees five lakhs only) deposited by the licence with the licensor in accordance with el. 8(d) of the leave and licence agreement dt. 5th May, 1999. (iii) In view of the hardships and inconvenience suffered by the licensor because of the premature termination of the said leave and licence agreement dt. 5th May, 1999, the licensee shall pay a lump sum compensation of ₹ 24,37,500 (Rupees twenty-four lakhs thirty-seven thousand five hundred only) by way of damages to the licensor on or before the execution of this agreement. The reasons for the termination of the agreement are given at p. 3, cl. (i) of the agreement which reads as follows : (i) Due to certai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the considered opinion that the burden of proof has not been discharged by Revenue and what was admittedly a capital receipt, is not proved to have become a trading receipt on termination of an agreement. 22.3 Coming to the decision of Morely (Inspector of Taxes) v. Tattersall (supra), it is clearly laid down that the quality and nature of receipt for income-tax purpose are fixed once and for all when it is received and that it does not change its character subsequently. This decision has been followed in K.M.S. Lakshmanier Sons (supra ). In fact the proposition in this case applies to the facts on hand. The Court has observed at para 9 that the fact, that one of the conditions is that it is to be adjusted against a claim arising out of a possible default of a depositor cannot alter the character of the transaction or can the fact that the purpose for which the deposit is made is to provide a security for the due performance of a collateral contract, invest the deposit with a different character. It remains a loan of which the repayment in full is conditioned by the due fulfilment of the obligations under the collateral contract. The receipt is not an advance for sale or a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is not a case where security deposit is forfeited. Thus, this case has no application to the facts of the assessee's case for the reason that the receipt in question was not a loan and it was a question of quantification of service charges. 22.6 In the case of Jindal Iron Steel Co. v. Jt. CIT (supra), the Tribunal was dealing with a situation where the assessee had allotted certain shares to suppliers in lieu of certain machinery supplied to them and the share application money was shown as sundry creditors. As the machinery was not of requisite quality further allotment of shares was stopped and in such circumstances, the Tribunal took a view that s. 28(iv) applies. In the case on hand, the facts are different and the forfeiture was governed by an agreement. Further the jurisdictional High Court in the case of Mahindra Mahindra Ltd. v. CIT [2003] 182 CTR (Bom.) 34 : [2003] 261 ITR 501 (Bom.) has considered s. 28(iv) and we discuss the proposition later in this order. 22.7 Coming to the decision of the Hon'ble Supreme Court in the case of CIT v. TV. Sundaram lyenar Sons Ltd. (supra) , the Hon'ble Court was not considering a case of security deposit. In fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... money. The receipts were never adjusted at any point of time as a current account and it is not a case for the balance remaining with the assessee which is not claimed by the customers which was treated as income of the assessee. Thus, in our humble opinion, the decision in the case of T.V. Sundaram Iyengar Sons (supra) does not help the Revenue. 22.8 Coming to the decision of the Hon'ble Supreme Court in the case of CIT v. Karam Chand Thappar Ors. (supra), the Hon'ble Court was considering a case where the assessee received from the colleries, in usual course of business, undercharges or underloading charges' not on its own account but on behalf of unspecified consignees who had not even made any claim. The assessee was receiving from the colleries undercharges or underloading of wagons for which the purchasers had to make payment for the full wagon right to the railways. Such payments received by the assessee from the colleries without any claim from purchasers was his trading receipt. The assessee had to in fact pay the same to the purchasers. As there was no claim, the assessee kept the money. The surplus that remained after paying off the purchases in case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plying the legal principle that if the initial receipts of a business are not trading receipts in the hands of the recipient, subsequent operations cannot turn them into trading receipts by applying the decision of Morely (Inspector of Taxes) v. Tattersall (supra) as followed by the Hon'ble Supreme Court as well as various High Courts in the various decisions referred to by us above, we concur with the decision of the Co-ordinate Bench in the case of Samir N. Bhojwanl v. Asstt. CIT (supra) and uphold the contentions of the assessee. The addition on account of forfeiture of security deposit is hereby deleted. 23. Coming to the payment of lump sum compensation of ₹ 24,37 500 in terms of cl. 2(iii) of the termination agreement dt. 26th Dec, 2002 it is clear that the payment is made in view of the hardship and inconvenience suffered by the licensor due to the premature termination of the leave and licence agreement by way of damages. The issue is whether this amount can be said to have been received in the capital field or in the revenue filed. The assessee has been treating the rental receipt as income from business and this payment in question is in lieu of the rents and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the other issues with respect of disallowance of postage, telegram and telephone amounting to ₹ 62,984 and motor car depreciation amounting to ₹ 30,139, we do not see any force in the grounds raised by the assessee as in our view too, the element of personal use cannot be ruled out in these heads of expenses. The assessee has not lad any evidence to convince us that there is no personal use in these cases. Therefore, we uphold the orders of the authorities below on these issues. Grounds 3 and 4 of the assessee fail. 25. In the result, the appeal of the assessee is allowed in part. 26. Coming to Revenue's appeal, the only issue is disallowance made out of repair expenses relating to building at Mazgaon being capital in nature. The assessee, in the year of accounting has incurred expenses of ₹ 9,67,979 on repairs and maintenance of which ₹ 6,66,815 was incurred on giving a new look to the tenanted premises. The AO held the amount of ₹ 6,66,815 as of capital in nature, as according to him, the amount of expenditure incurred on giving a new look to the tenanted premises gave an enduring benefit to the assessee. The first appellate authority found ..... X X X X Extracts X X X X X X X X Extracts X X X X
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