POLYCONE PAPER LTD, MUMBAI V. ITO 7(1)(3), MUMBAI

ITA 4887/MUM/2010

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 100751 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 2 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 20-01-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 11-06-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PERMANAND J
• Keywords: Capital asset; Cost of acquisition
• Section: 143(3)

Judgement Text

POLYCONE PAPER LTD. ITA 48 8 7 /M/20 1 0 1 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH C , MUMBAI . . , , BEFORE SHRI B R BASKARAN , ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA , J UDICIAL MEMBER ITA NO. : 48 8 7 /MUM/20 1 0 (ASSESSMENT YEAR: 200 6 - 0 7 ) POLYCONE PAPER LTD. , 213, UDYOG MANDIR NO. 1, 7/C PITAMBER LANE, MAHIM, MUMBAI - 400 016 .: PAN : AA CCP 1918 P VS IT O - 7 ( 1 ) ( 3 ) , MUMBAI (APPELLANT) (RE SPONDENT) APPELLANT BY : SHRI SURENDRA NIJSURE RESPONDENT BY : SHRI PERMANAND J /DATE OF HEARING : 24 - 0 6 - 2015 / DATE OF PRONOUNCEMENT : 28 - 08 - 2015 ORDER , . . : PER AMIT SHUKLA, J M : TH E AFORESAID APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST IMPUGNED ORDER DATED 04.01.2010 PASSED BY CIT(A) - 14 , MUMBAI FOR QUANTUM OF ASSESSMENT PASSED U/S 143(3) FOR THE ASSESSMENT YEAR 200 6 - 07 . 2. IN GROUND NO. 1, 2 & 3, THE ASSESSEE HAS MAINLY CHALLENGED THE DISALLOWANCE OF DEDUCTION OF COMPENSATION PAID TO THE TENANT AGAINST CAPITAL GAIN WITHIN THE AMBIT OF SECTION 48 , AMOUNTING TO RS. 38,45,000/ - . IN THE GROUND NO. 4, THE ASSESSEE HAS CHALLENGED THE DISAL LOWANCE OF INTEREST OF RS. 7,46,108/ - . 3. BRIEF FACTS ARE THAT, THE ASSESSEE IN THE COMPUTATION OF CAPITAL GAIN HAS CLAIMED AN AMOUNT OF RS. 38,45,000/ - ON ACCOUNT POLYCONE PAPER LTD. ITA 48 8 7 /M/20 1 0 2 OF COMPENSATION PAID TO TENANT AS COST OF TRANSFER OF CAPITAL ASSET. ON THE VERIFICATION OF THE DETAILS FILED BY THE ASSESSEE, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS GIVEN ITS FACTORY BUILDING ALONG WITH PLANT AND MACHINERY TO A COMPANY NAMED AS , M/S TEX - TUBE MFG. CO. PVT LTD TO RUN THE FACTORY ON A CONDUCTORSHIP BASIS. THE ASSESSIN G OFFICER FURTHER NOTED THAT IN THE INDENTURE OF CONDUCTORSHIP , THERE WAS NO CLAUSE FOR COMPENSATION WHICH WAS REQUIRED TO BE PAID TO THE TENANT ON EARLIER TERMINATION OF INDENTURE. FURTHER, ONE OF THE DIRECTOR OF THE ASSESSEE COMPANY NAMELY , P T SHAH WA S ALSO THE DIRECTOR IN M/S TEX - TUBE MFG. CO. PVT LTD. FURTHER WHICH SHOWS THAT THE RELATION BETWEEN THE TWO ENTITIES WAS VERY PROXIMATE. T HIS COMPANY IN ITS COMPUTATION OF INCOME HAS ADJUSTED TH IS ENTIRE AMOUNT OF RS. 38,45,000/ - CLAIMED AS COMPENSATION R EVENUE AGAINST BUSINESS LOSS. IN THIS HOWEVER ASSESSEE HAS REDUCED ITS TAX LIABILITY AND OTHER RELATED ENTITY HAS SET OFF AGAINST LOSSES, HENCE NO TAXES PAID. IN RESPONSE TO THE SHOW CAUSE NOTICE AS TO WHY THE COMPENSATION CLAIMED SHOULD NOT BE DISALLOW ED, THE ASSESSEE SUBMITTED AS UNDER : - THE INDENTURE OF CONDUCTORSHIP WAS IN FORCE TILL 30.11.2010 AND M/S TAX TUBE WAS REQUESTED TO VACATE THE PREMISES BUT THEY REFUSED TO DO SO UNLESS THE COMPENSATION WAS PAID TO THEM. WE WERE GETTING THE LUCRATIVE OF FERS FROM THE PROSPECTIVE BUYERS FOR THIS PROPERTY AND INTEND TO TAKE ADVANTAGE OF THE OFFERS. THE PROSPECTIVE BUYERS HAD INSISTED ON VACANT POSSESSION OF THE PREMISES BEFORE ENTERING THE SALE DEED. AS WE REALIZED THAT WITHOUT PAYING COMPENSATION THE VACAN T POSSESSION WOULD NOT HAVE BEEN RECEIVED, IT WAS DECIDED NOT TO LOOSE THE OFFER FROM THE BUYER AND PAY THE AMOUNT OF COMPENSATION. 4 . THE ASSESSING OFFICER HELD THAT THERE WAS NO NEED TO PAY SUCH A HUGE AMOUNT OF COMPENSATION WHEN MONTHLY RENT WAS ONL Y RS. 9,000/ - (RS. 9,500/ - ). FURTHER, THERE WAS A COMMON DIRECTOR POLYCONE PAPER LTD. ITA 48 8 7 /M/20 1 0 3 WHO WAS SIGNING THE BALANCE SHEET OF BOTH THE COMPANY AND ASSESSEE WAS ALSO SHARING ITS OFFICE WITH M/S TEX - TUBE AND ALSO SHARED COMMON EXPENSES IN THE PROFIT & LOSS ACCOUNT. THE INCOME - TAX I NSPECTOR, WHO WAS SENT TO MAKE LOCAL ENQUIRY REGARDING PLACE OF WORKING OF BOTH THE ENTITY, SUBMITTED HIS REPORT THAT THEY RUN THERE BUSINESS FROM SAME PREMISE. THUS, HE HELD THAT UNDER THESE FACTS AND CIRCUMSTANCES , THE PAYMENT OF COMPENSATION CANNOT BE A LLOWED AS DEDUCTION AND IS COLOURABLE DEVI C E TO EVADE TAX. 5. THE LD. CIT(A), NOTED DOWN THE SEQUENCE OF VARIOUS EVENTS AND DECIDED THE ISSUE IN THE FOLLOWING MANNER : - IT IS IMPORTANT TO HIGHLIGHT THE SEQUENCE OF VARIOUS EVENTS, IN THIS REGARD, I. DA TE OF CANCELLATION OF THE TENANCY AGREEMENT WITH M/S TEX - TUBE MFG. CO. P. LTD. UNDER WHICH COMPENSATION OF RS. 38,45,000/ - WAS GIVEN. (THE PROPERTY WAS ALLEGEDLY GIVEN ON RENT TO M/S TEX - TUBE MFG. CO. P. LTD. VIDE INDENTURE OF CONDUCTORSHIP DATED 1.12.1 995 AND RENEWED ON 20.11.2000 TILL 30.11.2010. DATED 18 - 2 - 2005 II. AGREEMENT FOR SALE WITH M/S. PRAVIN WIPERS & ANCILIARIES P LTD. DATED 1 - 5 - 2005 III. CONVEYANCE DEED WITH M/S PRAVIN WIPERS & ANCILIARIES P. LTD. DATED 7 - 10 - 2005 THE AFORESAID SEQUENCE OF EVENTS CLEARLY SHOWS THAT VACANT POSSESSION HAD ALREADY BEEN RECEIVED BY THE APPELLANT FROM M/S TEX - TUBE MFG. CO. P. LTD. BEFORE THE AGREEMENT FOR SALE DATED 1 - 5 - 05/CONVEYANCE DEED DATED 7 - 10 - 05. THE APPELLANT ALREADY HAD THE VACANT POSSESSION OF THE P REMISES BEFORE THE AGREEMENT FOR SALE DATED 1 - 5 - 05/CONVEYANCE DEED DATED 7 - 10 - 05 ENTERED INTO WITH M/S PRAVIN WIPERS & ANCILIARIES P LTD. THE APPELLANT HAD SHOWN THE AMOUNT OF RS. 38,45,000/ - AS COST OF IMPROVEMENT AS ON 31 - 03 - 2005. THE SAME IS NOT COST OF IMPROVEMENT OF THE ASSET BUT A CAPITAL LOSS. POLYCONE PAPER LTD. ITA 48 8 7 /M/20 1 0 4 THE AGREEMENT FOR SALE/CONVEYANCE DEED WERE ENTERED INTO SUBSEQUENTLY WHEN THE APPELLANT ALREADY HAD THE VACANT POSSESSION OF THE PREMISES. AS SUCH, THE AMOUNT OF RS. 38,45,000/ - PAID BY THE APPELLANT TO M/S TEX - TUBE MFG. CO. P. LTD. CANT BE TERMED AS COST OF TRANSFER FOR PURPOSES OF CAPITAL GAIN ON SALE OF LAND & BUILDING. THE APPELLANT ALREADY HAD THE VACANT POSSESSION OF THE PREMISES ON THE DATE ON WHICH THE AGREEMENT FOR SALE DATED 1 - 5 - 05/CONVEYANC E DEED DATED 7 - 10 - 05 TOOK PLACE. ACCORDINGLY, THE AMOUNT OF RS. 38,45,000/ - CLAIMED BY APPELLANT AS COST OF TRANSFER AND DISALLOWED BY AO IS UPHELD. THE APPELLANT HAS CLAIMED THAT THE MAINTENANCE EXPENSES OF THE PROPERTY SHOULD HAVE BEEN ALLOWED TOWARDS THE COST OF TRANSFER FOR PURPOSE OF CAPITAL GAIN ON SALE OF LAND & BUILDING IS NOT MAINTAINABLE. SECTION 48 WHICH PRESCRIBES THE MODE OF COMPUTATION OF CAPITAL GAINS ALLOWS ONLY THE FOLLOWING EXPENDITURE TO BE DEDUCTED FROM FULL VALUE OF CONSIDERATION AS R ECEIVED OR ACCRUED AS A RESULT OF TRANSFER OF CAPITAL ASSET, VIZ. (I) EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH SUCH TRANSFER AND (II) THE COST OF ACQUISITION OF THE ASSET AND THE COST OF IMPROVEMENT THERETO. THE MAINTENANCE EXPENSES ARE NOT IN NATURE OF COST OF IMPROVEMENT/WHOLLY AND EXCLUSIVELY IN CONNECTION WITH TRANSFER THE SAME ARE NOT ALLOWABLE. 6. BEFORE US, THE LD. COUNSEL SUBMITTED THAT THERE IS ONLY ONE COMMON DIRECTOR BETWEEN THE TWO COMPANIES AND VERY FEW SHAREHOLDERS HAVE A COMMON SHARE HOLDING. THIS HE DEMONSTRATED THROUGH LIST OF SHAREHOLDERS OF BOTH THE COMPANIES A S GIVEN IN THE PAPER BOOK. HE ALSO DREW OUR ATTENTION TO THE DEED OF CANCELLATION BETWEEN THE ASSESSEE AND M/S TEX - TUBE MFG. CO. P. LTD. DATED 18 TH FEBRU ARY, 2005 WHEREIN, IT HAS BEEN CLEARLY STATED THAT THE POLYCONE PAPER LTD. ITA 48 8 7 /M/20 1 0 5 ASSESSEE HAS NEGOTIATED SALE OF ENTIRE PROPERTY INCLUDING THE PREMISES OCCUPIE D BY THE M/S TEX - TUBE AND, THEREFORE, TO VACAT E THE PREMISE, THE ASSESSEE HAS TO PAY AN AMOUNT OF RS. 38,45,000/ - TO THE M/ S TEX - TUBE. THIS PAYMENT OF COMPENSATION IS THUS FLOWING FROM THE DEED OF CANCELLATION. THE TRANSACTION HAS TO BE SEEN BETWEEN THE TWO INDEPENDENT ENTITIES ; ONE WHO WANTED THE PREMISES TO BE VACATED AND OTHER WHO WAS OCCUPYING THE PREMISES AS A TENANT WH O WAS RUNNING ITS BUSINESS THERE AND HAS TO VACATE. THIS DAMAGE TO THE TENANT IS IN THE FORM OF COMPENSATION FOR VACATING THE PREMISE. THUS, SUCH A DEDUCTION WHILE COMPUTING THE CAPITAL GAIN HAS TO BE ALLOWED. IN SUPPORT OF HIS CONTENTION, HE RELIED UPON T HE FOLLOWING DECISIONS : - SR.NO. CA S E LAW CITATION 1 NITA A PATEL VS ITO 128 ITD 24 (MUM) 2 CIT V MISS PIROJA PATEL 122 TAXMAN 752(BOM) 3 CHIRNALAL PAPER CO.(P) LTD. VS ITO 35 ITD 285 (BOM) 4 KETAN BOLINJKAR VS ASST. CIT 2 SOT 868 (MUM) 5 CIT VS PI TTY BROS P LTD. 1 TAXMAN 252 (BOM) 7. REGARDING ISSUE RAISED IN GROUND NO. 4, WITH REGARD TO DISALLOWANCE OF CLAIM OF DEDUCTION OF OFFICE AND ADMINISTRATIVE EXPENDITURE AMOUNTING TO RS. 7,46,108/ - , IT IS SEEN THAT, AUTHORITIES BELOW HAVE NOTED THAT THE ASSESSEES ONLY SOURCE OF INCOME WAS CAPITAL GAIN AND INTEREST INCOME AND NO BUSINESS WAS CARRIED OUT BY THE ASSESSEE FOR LAST SEVERAL YEARS. THE SURPLUS FUNDS HAVE BEEN INVESTED FOR EARNING OF INTEREST INCOME AND NO BUSINESS ACTIVITY AS SUCH WAS CARRIED O UT. THE ASSESSING OFFICER HAS ALREADY ALLOWED CERTAIN EXPENSES, WHICH HAVE NEXUS WITH TH E EARNING OF INTEREST INCOME . TH US, THE ASSESSING OFFICER HAS ALREADY ALLOWED CERTAIN EXPENSES WHICH HAVE DIRECT NEXUS WITH THE EARNING OF INTEREST INCOME TAXABLE UND ER THE HEAD INCOME FROM OTHER SOURCES LIKE LOCAL AND PROFESSIONAL FEES, AUDIT FEES, PROFESSIONAL TAX ETC. AGGREGATING TO RS. 38,526/ - . HOWEVER, ALL OTHER EXPENSES WERE DISALLOWED WHICH HAS BEEN CONFIRMED BY THE CIT(A) . THE LD. COUNSEL REGARDING THIS ISSU E SUBMITTED THAT THESE EXPENSES NEED TO BE ALLOWED, BECAUSE ASSES S EE HAD TO INCUR CERTAIN POLYCONE PAPER LTD. ITA 48 8 7 /M/20 1 0 6 EXPENSES FOR MAINTAINING ITS CORPORATE STATUS AND THEREFORE , SAME IS ALLOWABLE EVEN UNDER INCOME FROM OTHER SOURCES ALSO. 8. ON THE OTHER HAND, LD. DR STRONGLY REL Y ING UPON ON THE ORDER OF THE CIT(A) ON BOTH THE COUNTS , SUBMITTED THAT ENTIRE SURROUNDING FACTS/ CIRCUMSTANCES HAS TO BE SEEN IN THE CASE OF THE ASSESSEE LIKE , THERE W AS HUGE LOSSES IN OTHER CONCERN AND HAVING COMMON DIRECTOR. SUCH A HUGE COMPENSATION OF A MOUNT WHEN THE ANNUAL RENTAL INCOME WA S MER ELY RS. 1,08,000/ - SEEMS TO BE MAKE - BELIEF - ARRANGEMENT. HENCE SUCH A COMPENSATION HAS RIGHTLY BEEN HELD TO BE NOT ALLOWABLE AS DEDUCTION. 9. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT FINDING GI VEN IN THE IMPUGNED ORDER. THE ASSESSEE HAS SOLD ITS LAND AND FACTORY BUILDING FOR RS. 2,88,00,000/ - . W HILE COMPUTING THE LONG - TERM - CAPITAL - GAIN, THE ASSESSEE HAS CLAIMED THE DEDUCTION AS A COST U/S 48 FOR A SUM OF RS. 38,45,000/ - PAID TO M/S TEX - TUBE MFG. CO. P. LTD. AS A COMPENSATION FOR VACATING THE PREMISE. THE ASSES S EE HAD GIVEN ITS FACTORY BUILDING ALONG WITH THE MACHINERY TO M/S TEX - TUBE MFG. CO. P. LTD. TO RUN THE FACTORY ON CONDUCTORSHIP BASIS AS PER THE I NDENTURE OF C ONDUCTORSHIP DATED 01.12.199 5 FOR THE PERIOD OF FIVE YEARS. THIS AGREEMENT WAS UPTIL 20.11.2000. THEREAFTER, IT I S NOT BORNE OUT FROM THE RECORD S AS TO WHETHER THIS INDENTURE OF CONDUCTORSHIP WAS CONTINUED OR RENEWED FURTHER ON PAPER . THEREAFTER, ON 18.02.2005, THE ASSESSEE HA D ENTER ED INTO CANCELLATION OF TENANCY AGREEMENT DATED 18.02.2005, WHEREIN, THE ASSES S EE AGREED TO PAY RS. 38,45,000/ - FOR VACATING THE PREMISE. THEREAFTER, THE ASSESSEE ENTERED INTO C ONVEYANCE DEED WITH M/S PRAVIN WIPERS AND ANCILARY PVT LTD. FOR TRANSFERRING THE PROPERTY WHEREBY A CONSIDERATION OF RS. 2,88,00,000/ - ( WHICH CONSIST S OF RS. 2.5 CRORES FOR LAND AND REMAINING RS. 38 LAKHS FOR BUILDING ) . FOR CLAIM ING DEDUCTION ON ACCOUNT OF COMPENSATION FOR VACATING THE PREMISE, IT HAS TO BE ESTABLISHED THAT EITHER THERE IS AN ADVERSE POSSESSION BY THE TENANT WHO GOT SOME VESTED INTEREST OR RIGHT, WHICH WILL TAKE LONG POLYCONE PAPER LTD. ITA 48 8 7 /M/20 1 0 7 DRAWN PROCESS TO VACATE PEACEFULLY; OR IT IS VERY DIFFICULT TO TERMINATE THE TENANCY ; OR THERE IS SOME CONTRACTUAL OBLIGATION FOR WHICH THE PREMISES CA NNOT BE TERMINATED ; OR TERMINATION OF TENANCY CAN LEAD TO HUGE LOSS TO THE TENANT WHICH NEEDS TO BE COMPENSATED . HERE, IN THIS CASE, THE INDENTURE OF CONDUCTORSHIP FOR RUNNING A FACTORY BUILDING WAS ONLY UPTIL THE PERIOD OF 30 TH NOVEMBER, 2000 ON MONTHLY R ENT OF RS. 9,500/ - . THERE WAS CLEAR CUT CLAUSE IN THE AGREEMENT THAT ON 30 TH NOVEMBER, 2000, THE TENANT WILL HAND OVER THE BUSINESS ASS E T TO THE ASSESSEE . IT HAS NOT BEEN SHOWN BEFORE US THAT THE ASSESSEE HAD ENTERED INTO A FURTHER SUCH AGREEMENT OR SUCH A N AGREEMENT SUBSISTED AT THE TIME OF SELLING OF THE PROPERTY. AS NOTED BY THE CIT(A) BEFORE THE DATE OF THE AGREEMENT OF SALE WITH THE THIRD PARTY, THE ASSESSEE ALREADY ENTERED INTO A CANCELLATION OF TENANCY AGREEMENT AND PAID THE AMOUNT OF COMPENSATION. T HIS AMOUNT OF COMPENSATION IS DEFINITELY FAR HIGH AND EXCESSIVE WITHOUT BRINGING ANY MATERIAL ON RECORD TO SHOW THAT HOW THE TENANT HAS BEEN PUT TO ADVERSE SITUATION OR A HUGE LOSS HAVE SUFFERED TO THE TENANT OR TENANT COULD HAVE DICTATED THE TERM FOR SEEK ING SUCH A HUGE COMPENSATION FOR VACATING THE PREMISE. THIS IS MORE SO HERE IN THIS CASE WHEN THE MAIN DIRECTOR OF BOTH THE COMPANIES IS COMMON. UNDER FACTS AND CIRCUMSTANCES AS NOTED BY THE AO & CIT(A), WE FIND THAT SUCH A COMPENSATION AMOUNT PAID BY THE ASSESSEE CANNOT BE CLAIMED AS DEDUCTION WHILE COMPUTING THE LONG - TERM - CAPITAL - GAIN, THEREFORE, FINDING GIVEN BY THE CIT(A) IS CONFIRMED AND ACCORDINGLY GROUND NO. 1, 2 & 3 RAISED BY THE ASSESSEE ARE DISMISSED. 10. REGARDING SECOND ISSUE, WE FIND THAT THE ASSES S EES INTEREST INCOME HAS ALREADY BEEN HELD TO BE TAXABLE UNDER THE HEAD INCOME FROM OTHER SOURCES AND WHATEVER AMOUNT WHICH ARE ATTRIBUTABLE OR IS HAVING DIRECT NEXUS FOR EARNING OF INTEREST INCOME HAS BEEN ALLOWED BY THE ASSESSING OFFICER. OVER AN D ABOVE, WE ARE OF THE OPINION THAT SO FAR AS OFFICE EXPENSES, TELEPHONE EXPENSES AND OTHER EXPENSES WHICH ARE NECESSARY FOR MAINTAINING OF POLYCONE PAPER LTD. ITA 48 8 7 /M/20 1 0 8 CORPORATE OFFICE, THE SAME CAN BE HELD TO BE ALLOWABLE . L OOKING TO THE FACT THAT OVERALL INTEREST INCOME IS LESS AS COMPARED TO THE EXPENDITURES CLAIMED, THEREFORE, IN THE INTEREST OF JUSTICE, WE FEEL THAT OUT OF THE BALANCE ADMINISTRATIVE EXPENSES ( AFTER THE DISALLOWANCE BY THE ASSESSING OFFICER AS WELL AS CIT(A) AT RS. 7,48,108/ - ) , WE FURTHER ALLOW THE EXPENSES OF RS. 2 LAKHS, WHICH CAN BE HELD TO BE SUFFICIENT FOR THE EARNING OF THE INTEREST INCOME. ACCORDINGLY, T HE BALANCE AMOUNT OF EXPENSES OF RS. 5,46,000/ - IS CONFIRMED. THUS, GROUND NO. 4 IS PARTLY ALLOWED. 11. GROUND NO. 5 IS RELATED TO GROUND NO. 1, 2 & 3 ONLY, THEREFORE , THE SAME IS TREATED AS DISMISSED. 12. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH AUGUST , 2015. SD/ - SD/ - ( . . ) ( ) (B R BASKARAN ) ( AMIT SHUKLA ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATE: 28 TH AUGUST , 2015 / COPY TO: - 1) / THE APPELLANT. 2) / THE RESPONDENT. 3) THE CIT (A) - 13 , MUMBAI 4) THE CIT 7 , MUMBAI . 5) , , / THE D.R . C BENCH, MUMBAI. 6) COPY TO GUARD FILE. / BY ORDER / , DY. / ASSTT. REGISTRAR I.T.A.T., MUMBAI * . . *CHAVAN, SR.PS