M/s. Eagle Theatres, New Delhi V. DCIT, New Delhi

ITA 1051/DEL/2014

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 7143 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 10 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-01-2017
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 04-01-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 24-02-2014
• Court: TRIBUNAL
• Assessee Lawyers: BALJEET SINGH
• Keywords: Capital asset; Business income; Business expenditure
• Section: 143(3); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH B, NEW DELHI BEFORE SHRI L. P. SAHU, ACCOUNTANT MEMBER AND SMT. BEENA A. PILLAI, JUDICIAL MEMBER APPELLANT BY : SH. BALJEET SINGH, CA RESPONDENT BY : SH. ANIL KUMAR SHARMA, SR. DR. DATE OF HEARING : 04.01.2017 DATE OF PRONOUNCEMENT: 06.01.2017 ORDER PER BEENA A. PILLAI, JM: 1. THE PRESENT APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER DATED 26.03.2013 PASSED BY CIT (A) 16, NE W DELHI FOR ASSESSMENT YEAR 2007-08 ON THE FOLLOWING GROUNDS OF APPEAL: 1. ON THE FACTS OF THE CASE, THE HON'BLE CIT(A) HAD ERRED IN UPHOLDING THE ACTION OF LD. AO IN MAKING AN ADDIT ION ON ACCOUNT OF PAYMENT MADE TO EMPLOYEES AS RETRENCHMENT COMPENSATION AMOUNTING TO RS. 48,35,98 6. 2. THE HON'BLE CIT(A) HAD ERRED IN DISMISSING ASSE SSEE'S ALTERNATE PLEA TO ALLOW THE AMOUNT PAID FOR RETRENCH MENT I.T.A. NO. 1051/DEL/2014 (ASSESSMENT YEAR 2007-08) EAGLE THEATERS LTD. H-10, PLAZA CINEMA BUILDING, CONNAUGHT CIRCUS, NEW DELHI GIR/PAN : AAAFE2646N (APPELLANT) VS. DCIT CENTRAL CIRCLE-31(1) NEW DELHI. (RESPONDENT) ITA NO. 1051/DEL/2014 PAGE 2 OF 6 AS 'COST OF IMPROVEMENT', TO BE ALLOWED AS DEDUCTION FROM THE CAPITAL GAIN ON THE SALE OF THE MINERVA CI NEMA. 3. THE ORDER OF THE LD. AO IS BAD IN LAW AND ON TH E FACTS OF THE CASE. 2. THE APPELLANT PRAYS THAT ADDITION BE DELETED. 3. THE BRIEF FACTS OF THE CASE ARE AS UNDER ASSESSEE FILED ITS RETURN OF INCOME DECLARING A TOTAL INCOME OF RS. 23 ,54,57,786/- ON 30.10.2007 WHICH WAS PROCESSED UNDER SECTION 143(1) AND SUBSEQUENTLY THE CASE WAS SELECTED FOR SCRUTINY. AC CORDINGLY, NOTICES UNDER SECTION 143(2) WERE ISSUED TO THE ASS ESSEE ALONGWITH THE QUESTION. THE ORIGINAL ASSESSMENT WAS COMPLETED ON INCOME OF RS. 25,19,49,650/- UNDER SECTION 143(3) O N 31.12.2009 AGAINST WHICH THE ASSESSEE PREFERRED AN APPEAL BEFO RE THE LD. CIT(A). THE FIRST APPELLATE AUTHORITY AT THAT STAGE DELETED CERTAIN ADDITIONS. ASSESSEE THEN FURTHER PREFERRED APPEAL B EFORE THIS TRIBUNAL WHERE CERTAIN RELIEFS WERE ALLOWED. THIS T RIBUNAL SET ASIDE THE ISSUE RELATING TO BUSINESS EXPENSES CLAIM ED BY THE ASSESSEE FOR FRESH ADJUDICATION WITH CERTAIN DIRECT IONS IN PARA 23 TO 26 THEREIN WIDE ORDER DATED 31.01.2011. THE ISSU E THAT WAS SENT BACK FOR CONSIDERATION BY LD. AO, WAS WHETHER OR NOT EXPENSES OF RS. 66,88,679/- PAID TOWARDS RETRENCHME NT COMPENSATION TO ITS EMPLOYEES IS ALLOWABLE WHILE CO MPUTING THE BUSINESS INCOME. 4. THE ASSESSEE OWNED TWO PROPERTIES DURING THE YEAR UNDER CONSIDERATION NAMELY, PLAZA CINEMA, NEW DELHI AND M INERVA CINEMA, MUMBAI. UNDISPUTEDLY THE BOOKS OF ACCOUNT O F THESE TWO ESTABLISHMENTS WERE SEPARATE. ASSESSEE DERIVED BUSI NESS INCOME ITA NO. 1051/DEL/2014 PAGE 3 OF 6 FROM EXHIBITION OF FILMS IN MUMBAI. THE PLAZA CINEM A, NEW DELHI WAS LET OUT TO PVR ON MONTHLY RENT AND THE INCOME D ERIVED FROM LETTING OUT WAS SHOWN AS INCOME FROM HOUSE PROPERTY . DURING THE YEAR UNDER CONSIDERATION MINERVA CINEMA, MUMBAI WAS SOLD BY THE ASSESSEE ON 06.07.2006. THEREAFTER ASSESSEE ENT ERED INTO CONTRACT WITH THE PURCHASER TO RUN THE CINEMA UPTO DECEMBER 2006. ASSESSEE PAID ONE-TIME COMPENSATION, GRATITUT Y AND LEAVE ENCASHMENT AGAINST RETRENCHMENT OF STAFF AFTER SALE OF THE MINERVA CINEMA, MUMBAI WHICH WAS CLAIMED AS BUSINESS EXPENS ES. THE LD. AO DISALLOWED THE EXPENSES CLAIMED BY THE ASSES SEE AND ADDED BACK TO THE BUSINESS INCOME. 5. AGGRIEVED BY THE ORDER OF LD. AO ASSESSEE PREFERRE D AN APPEAL BEFORE LD. CIT (A) WHO UPHELD THE DISALLOWAN CE MADE BY THE LD. AO. 6. AGGRIEVED BY THE ORDER OF THE LD. AO, THE ASSESSEE IS IN APPEAL BEFORE US. 7. LD. AR SUBMITTED THAT ASSESSEE WAS RUNNING TO THEA TRES NAMELY MINERVA CINEMA, MUMBAI AND PLAZA CINEMA, NEW DELHI. THE MUMBAI DIVISION WAS SOLD WHILE PLAZA CINEMA WAS STILL RUNNING. HE SUBMITTED THAT MINERVA CINEMA WAS SOLD AS A GOING CONCERN AND ASSESSEE HAD MADE FINAL SETTLEMENT ITS EMPLOYEES, ASSESSEE CONTINUED ITS BUSINESS OF RUNNING CINEMA H ALL AT MINERVA, MUMBAI TILL DECEMBER 2006, BY ENTERING INT O A CONTRACT. IT IS SUBMITTED THAT EXPENSES INCURRED TOWARDS RETR ENCHMENT PAID TO EMPLOYEES AS ONE-TIME COMPENSATION ARE NORMAL BU SINESS EXPENSES AND IS AKIN TO BE ALLOWED UNDER SECTION 37 (I) OF THE ACT, BEING INCURRED WHOLLY FOR THE PURPOSE OF BUSINESS O F THE ASSESSEE. ITA NO. 1051/DEL/2014 PAGE 4 OF 6 HE SUBMITTED THAT AS THE ASSESSEE WAS RUNNING AN ID ENTICAL CINEMA HALL AT DELHI THE RETRENCHMENT PAID MUST BE ALLOWED AS BUSINESS EXPENDITURE. THE LD. AR ALSO SUBMITTED THA T EVEN THOUGH THE INCOME EARNED FROM PLAZA CINEMA WAS TAXE D UNDER THE HEAD INCOME FROM HIS HOUSE PROPERTY, SALARY TO EMPL OYEES IS ONE OF THE MOST IMPORTANT INGREDIENT OF ANY BUSINESS AN D PAYMENT OF SALARY AND ALL OTHER BENEFIT IS DEFINITELY AN EXPEN SES, WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS. HE SUBMIT TED THAT AS THE ASSESSEE HAD ENTERED INTO A CONTRACT WITH THE BUYER SUBSEQUENT TO THE SALE OF MINERVA CINEMA THERE IS A CONTINUATION OF BUSINESS ACTIVITY. 8. ON THE CONTRARY, THE LD. DR RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT AS THE ASSESSE E HAD SOLD ITS BUSINESS, IT CANNOT BE HELD THAT THE THERE WAS A CO NTINUATION OF THE BUSINESS SUBSEQUENTLY. HE SUBMITTED THAT THE DI SALLOWANCE MADE BY THE AUTHORITIES BELOW NEEDS TO BE UPHELD. 9. WE HAVE PERUSED THE ORDERS PASSED BY THE AUTHORITI ES BELOW IN THE LIGHT OF THE RECORDS PLACED BEFORE US. 10. THE POINT THAT ARISES FOR CONSIDERATION IS WHETHER RETRENCHMENT COMPENSATION INCURRED BY THE ASSESSEE COULD BE CONSIDERED AS EXPENDITURE UNDER THE HEAD INCOME FR OM BUSINESS. ASSESSEE WAS RUNNING THEATRE AT MUMBAI A ND INCOME EARNED THEREFROM, WAS DECLARED UNDER THE HEAD INCOM E FROM BUSINESS. SIMULTANEOUSLY, THE ASSESSEE ALSO OWNED A ND CINEMA HALL AT DELHI WHICH WAS LET OUT TO PVR FROM WHICH I NCOME EARNED WAS SHOWN UNDER THE HEAD INCOME FROM HOUSE PROPERT Y. ASSESSEE SOLD THE THEATRE AT MUMBAI AS A GOING CONC ERN WITH A ITA NO. 1051/DEL/2014 PAGE 5 OF 6 CONDITION PRECEDENT AND FOR SALE THAT ALL THE WORKE RS AND THE STAFF BE RETRENCHED AND THAT THE PROPERTY SHALL BE HANDED OVER TO THE BUYER WITHOUT ANY ENCUMBRANCE WHATSOEVER. IN ORDER TO SELL THE THEATRE, ASSESSEE COMPLIED WITH THE TERMS OF THE AG REEMENT AND PAID THE IMPUGNED AMOUNT AS RETRENCHMENT COMPENSATI ON TO THE EMPLOYEES WHO WERE IN SERVICE OF THE ASSESSEE. SUBS EQUENT, TO THE SALE THE ASSESSEE ENTERED INTO A CONTRACT WITH BUYE R TO RUN THE THEATRE TILL DECEMBER 2006. IT HAS BEEN CONTENDED T HAT THIS WAS AN EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY IN C ONNECTION WITH THE SALE OF AN ASSET OF BUSINESS. 11. IN OUR CONSIDERED OPINION THAT LIABILITY TO PAY TH E COMPENSATION AROSE IN THE LIGHT OF THE TERMS OF THE AGREEMENT TO SELL AND WAS NOT INCURRED FOR CARRYING ON THE BUSIN ESS. THE LIABILITY TO PAY THE RETRENCHMENT AROSE AT THE TIME OF TRANSFER OF THE BUSINESS AND NOT IN THE PROCESS OF CARRYING ON OF THE BUSINESS. WE ARE THEREFORE NOT INCLINED TO AGREE WITH THE PLE A TAKEN BY THE ASSESSEE REGARDING ALLOWABILITY OF THE EXPENSES AS BUSINESS EXPENSES. 12 . WE ARE UNABLE TO APPRECIATE THE FINDINGS OF LD. C IT (A) IN PARA 5.3 OF HIS ORDER AS HONBLE HIGH COURT HAS SIM PLICITOR UPHELD THE FINDINGS OF THIS TRIBUNAL, WHEREIN THE ISSUE RE LATING TO ALLOWABILITY OF THE RETRENCHMENT EXPENSES WAS SET A SIDE TO THE LD. AO FOR RE-EXAMINATION OF ITS NATURE. THE ASSESSEE H AS TAKEN ALTERNATE PLEA FOR ALLOWING THE EXPENDITURE AS AN I MPROVEMENT COST UNDER SECTION 48. AS THE ASSESSEE HAS INCURRED THE RETRENCHMENT EXPENSES FOR THE PURPOSES OF TRANSFER OF A CAPITAL ASSET WE AGREE WITH THE ALTERNATE PLEA TAKEN AND IN CLINED TO HOLD ITA NO. 1051/DEL/2014 PAGE 6 OF 6 THAT SUCH EXPENDITURE INCURRED IN CONNECTION WITH T HE TRANSFER OF ASSETS AND HENCE THE AMOUNT EXPENDED BY THE ASSESSE E SHOULD BE CONSIDERED WHILE WORKING OUT LONG TERM CAPITAL GAIN S. 13. ACCORDINGLY THE APPEAL FILED BY THE ASSESSEE IS DI SPOSED OFF. ORDER PRONOUNCED IN THE OPEN COURT ON 6 TH JANUARY, 2017. SD/- SD/- (L. P.SAHU) (BEENA A. PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATE: 06.01.2017 @M!T COPY FORWARDED TO:- 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT (A)-, NEW DELHI. 5. THE DR, ITAT, LOKNAYAK BHAWAN, KHAN MARKET, NEW DEL HI. TRUE COPY. BY ORDER (ITAT, NEW DELHI)