DCIT, Circle - 11, Kolkata, Kolkata V. M/s. Eveready Industries India Ltd., Kolkata

ITA 94/KOL/2012

• Counselvise Citation: [2016] 121 COUNSELVISE.COM (IT) 3163 (ITAT-KOLKATA)
• Duration Of Justice: 4 year(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-02-2016
• Appeal Filed By: Department
• Bench Allotted: B
• Next Hearing Date: 18-08-2014
• Assessment Year: 2005-2006
• Appeal Filed On: 17-01-2012
• Court: TRIBUNAL
• Department Lawyers: MD GHAYAS UDDIN
• Assessee Lawyers: D S DAMLE
• Keywords: Capital asset; Business income; Business expenditure; Rule of consistency; Cost of acquisition; Fair market value; Bad and doubtful debts; Valuation report; Revised return; Revenue expenditure; Capital expenditure
• Section: 43B; 143(3); 37(1); 37; 12

Judgement Text

ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 1 IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH B, KO LKATA [BEFORE HONBLE SHRI N.V.VASUDEVAN, JM & SHRI M. BALAGANESH, AM] ITA NO.94/KOL/2012 ASSESSMENT YEAR : 2005-06 D.C.I.T., CIRCLE-11, .-VERSUS- M/S.EVEREADY INDUS TRIES INDIA LTD. KOLKATA KOLKATA (PAN:AAACE 5778N) (APPELLANT ) (RESPONDENT) FOR THE APPELLANT : MD.GHAYAS UDDIN, JCIT, SR.DR FOR THE RESPONDENT SHRI D.S.DAMLE, FCA DATE OF HEARING : 19.01.2016. DATE OF PRONOUNCEMENT : 3.2.2016. ORDER PER SHRI N.V.VASUDEVAN, JM THIS IS AN APPEAL BY THE REVENUE AGAINST THE ORDER DATED 7.10.2011 OF CIT(A)- XII, KOLKATA, RELATING TO AY 2005-06. 2. GROUND NO.1 AS MODIFIED BY THE REVENUE IN THE MO DIFIED FIRST GROUND FILED BEFORE THE TRIBUNAL READS AS FOLLOWS: 1. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) IS CORRECT IN DELETING THE DISALLOWANCE OF RS.31.76 LAKH MADE BY THE AO U/S 43B ON ACCOUNT OF PROVISION 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. BESIDE S MANUFACTURE AND SALE OF TEA. IN THE COURSE OF ASSESSMENT PROCEEDINGS THE AO NOTICED THA T IN THE COMPUTATION OF TOTAL INCOME FILED WITH THE RETURN, THE ASSESSEE HAD CLAI MED EXCLUSION OF RS.31.76 LACS FROM ITS PROFIT AS PER THE PROFIT AND LOSS ACCOUNT ON ACCOUNT OF PROVISION FOR LEAVE ENCASHMENT PAYABLE BY THE ASSESSEE TO ITS EMPLOYEE S. THE ASSESSEE EXPLAINED BEFORE THE AO THAT LIABILITY OF THE ASSESSEE TO PAY ITS EMPLOYEES AMOUNT TOWARDS LEAVE ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 2 ENCASHMENT WAS ESTIMATED AND DEBITED IN THE PROFIT AND LOSS ACCOUNT UNDER THE HEAD PROVISION FOR LEAVE ENCASHMENT PAYABLE. IN THOSE YEARS IN WHICH PROVISION WAS CREATED IN THE PRECEDING YEARS NO DEDUCTION WAS CLA IMED IN THE COMPUTATION OF TOTAL INCOME IN INCOME TAX ASSESSMENT NOR ALLOWED IN THE REGULAR ASSESSMENTS IN THOSE YEARS. THE ASSESSEE SUBMITTED THAT IN THE MATTER OF ASSESSMENT OF TOTAL INCOME UNDER THE ACT, LIABILITY ON ACCOUNT OF LEAVE ENCASHMENT W AS 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 RS.398.17 LAKHS STOOD IN THE PROVISION OF LEAVE ENCASHMENT ACCOUNT. A SUM OF RS . 68.17 LAKHS OUT OF THE SUM OF RS.398.17 LAKHS WAS TRANSFERRED TO TEA DIVISION CO NSEQUENT TO DEMERGER OF THE TEA DIVISION, IN ACCORDANCE WITH THE SCHEME OF ARRANGEM ENT APPROVED BY THE HIGH COURT AND THESE DETAILS ARE SET OUT IN PARA 2.1 OF SCHEDU LE 19 OF THE PRINTED ACCOUNTS. OUT OF THE REMAINING BALANCE OF RS.330 LAKHS (RS.398. 17 - RS.68. 17) AN AMOUNT OF RS.31.76 LAKHS WAS WRITTEN BACK OUT OF THE PROVISIONS MADE I N THE EARLIER YEARS. GENERALLY PROVISION FOR LEAVE ENCASHMENT IS MADE IN THE BOOKS OF ACCOUNTS ON THE BASIS OF ACTUARIAL VALUATION DONE BY ACTURIAL VALUERS. THE ACTUAL LIABILITY THAT IS INCURRED TOWARDS LEAVE ENCASHMENT MAY TURN OUT TO BE EITHER LESS OR MORE THAN THE PROVISION FOR LEAVE ENCASHMENT DEBITED IN THE BOOKS OF ACCOUNTS O F THE ASSESSEE. THE ACTUAL LIABILITY OF THE ASSESSEE TURNED OUT TO BE LESS BY RS.31.76 LACS THAN THE PROVISION THAT WAS CREATED IN THE BOOKS OF ACCOUNTS OF THE ASSESSE E. THEREFORE TO THE EXTENT THE PROFIT AND LOSS ACCOUNT WAS DEBITED IN EXCESS IN TH E PAST BY A SUM OF RS.31.76 LACS. THE SAME NEEDED TO BE OFFSET BY A CORRESPONDING CRE DIT IN THE PROFIT AND LOSS ACCOUNT. THIS IS WHAT THE ASSESSEE DID IN THE COMPUTATION OF TOTAL INCOME BY EXCLUDING RS.31.76 LACS FROM THE PROFIT AS PER PROFIT AND LOS S ACCOUNT TOWARDS WRITE BACK OF PROVISION FOR LEAVE ENCASHMENT. THE ASSESSEE POI NTED OUT THAT A PROVISION FOR LEAVE ENCASHMENT WHICH WAS CREATED IN THE BOOKS OF ACCOUN TS WAS VALID ONLY FOR DRAWING OF FINANCIAL STATEMENTS FOR THE ENTERPRISE. WHEN IT C OMES TO FILING OF INCOME TAX RETURNS THE PROFIT AS PER THE FINANCIAL STATEMENTS HAD TO B E ADJUSTED TO REFLECT THE CORRECT INCOME AS PER THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE. THE ASSESSEE ALSO ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 3 POINTED OUT THAT BY VIRTUE OF THE CREDIT IN THE PRO FIT AND LOSS ACCOUNT OF RS.31.76 LACS, INCOME TO THAT EXTENT IS NOT CHARGEABLE TO TAX U/S 41(1) OF THE ACT FOR PROVISION WRITTEN BACK OF RS.31.76 LAKHS, BECAUSE THE PROVISION WHEN IT WAS CREATED BY DEBIT TO THE PROFIT AND LOSS ACCOUNT WAS NOT ALLOWED AS DEDUCTI ON IN COMPUTING TOTAL INCOME OF THE ASSESSEE IN INCOME TAX ASSESSMENT FOR THE EARLIER A SSESSMENT YEARS IN VIEW OF THE AMENDMENT TO SECTION 43B(F) OF THE ACT, WHICH PROVI DES THAT LIABILITY ON ACCOUNT OF LEAVE ENCASHMENT CAN BE ALLOWED AS A DEDUCTION ONLY ON ACTUAL PAYMENT OR INCURRING OF THE EXPENDITURE AND NOT ON THE BASIS OF A PROVIS ION WHICH IS ONLY AN ESTIMATE. THE ASSESSEE POINTED OUT THAT TO BRING TO TAX A SUM U/S .41(1) OF THE ACT, THE SUM CREDITED OR RECEIVED BY THE ASSESSEE DURING A PREVIOUS YEAR OUGHT TO HAVE BEEN ALLOWED AS DEDUCTION EITHER IN THE SAME ASSESSMENT YEAR OR IN AN EARLIER ASSESSMENT YEAR AND THE ASSESSEE SHOULD RECEIVE IN THE PREVIOUS YEAR BENEFI T IN THE FORM OF REMISSION OR CESSATION OF THE LIABILITY WHICH WAS EARLIER CLAIME D AND ALLOWED AS DEDUCTION IN AN EARLIER ASSESSMENT YEAR. THE ASSESSEE THEREFORE C LAIMED THAT THE PROVISION FOR LEAVE ENCASHMENT WRITTEN BACK HAD TO BE ALLOWED AS A DEDU CTION IN THE COMPUTATION OF TOTAL INCOME OF THE ASSESSEE. 5. THE AO HOWEVER HELD THAT SECTION 43B OF THE INCO ME TAX ACT, 1961 SPECIFICALLY STATES THAT DEDUCTION SHALL BE ALLOWED IN COMPUTING THE TOTAL INCOME WHEN SUCH SUM IS ACTUALLY PAID. THE PROVISIONS OF SECTION 43B O F THE ACT, ALLOWS DEDUCTION ON PAYMENT BASIS AND THE TERM 'ACTUALLY PAID' IS THE C RITERIA TO CLAIM SUCH DEDUCTION. CLAUSE (F) OF SECTION 438 OF THE ACT STATES THAT SU M WILL BE ALLOWED ONLY ON ACTUAL PAYMENT. ACCORDING TO THE AO, THE LEAVE ENCASHMENT WAS NOT ACTUALLY PAID BY THE ASSESSEE BUT THE LIABILITY WAS WRITTEN BACK. ANY WA IVER OR WRITE BACK OR ALLOWING BENEFIT TO THE PARTY COULD NOT BE CALLED PAYMENT. THE CLAIM OF REDUCTION FROM THE COMPUTATION OF INCOME TOWARDS WRITE BACK OF PROVISI ON FOR LEAVE ENCASHMENT OF RS.31,76,000/- WAS NOT ALLOWED BY THE AO. 6. BEFORE CIT(A), THE ASSESSEE POINTED THAT ACCOUN TING STANDARD 15 (AS 15) PRESCRIBED BY THE INSTITUTE OF CHARTERED ACCOUNTANT S' OF INDIA REQUIRES EVERY EMPLOYER ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 4 COMPANY TO PROVIDE IN THE ACCOUNTS; LIABILITIES ACC RUING DURING THE RELEVANT REPORTING PERIOD, IN RESPECT OF BENEFITS AND EMOLUMENTS TO BE PROVIDED AT THE TIME OF RETIREMENT, SUPERANNUATION OR TERMINATION OF SERVICE. LEAVE ENC ASHMENT BENEFIT; TO WHICH EMPLOYEES BECOME ENTITLED FOR THE SERVICES PROVIDED DURING THE REPORTING PERIOD ARE THEREFORE REQUIRED TO BE PROVIDED IN THE ACCOUNTS. AS PER THE ACCOUNTING POLICY CONSISTENTLY FOLLOWED, THE ASSESSEE PROVIDES LEAVE ENCASHMENT LIABILITY ON THE BASIS OF ACTUARIAL VALUATION. SUCH LIABILITIES WERE PROVIDED ANNUALLY BY DEBITING IT TO THE PROFIT & LOSS A/C. THE ASSESSEE FURTHER SUBMITTED THAT A CCORDING TO INCOME TAX DEPARTMENT, THE PROVISION FOR LEAVE ENCASHMENT CONS TITUTED PROVISION FOR A CONTINGENT LIABILITY AND THEREFORE NOT PERMISSIBLE AS DEDUCTIO N BECAUSE SUCH LIABILITY WAS NOT ACTUALLY DISCHARGED DURING THE YEAR OF REPORTING. T HE 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 ACTU ALLY DISCHARGED AT A FUTURE DATE, FOR THAT REASON THE LIABILITY DID NOT CONSTITUTE A CONT INGENT LIABILITY BECAUSE THE EMPLOYEES BECAME ENTITLED FOR LEAVE ENCASHMENT FOR THE SERVIC ES PERFORMED DURING THE RELEVANT PREVIOUS YEAR. THE SUPREME COURT FURTHER HELD THAT IF THE LIABILITY ACCRUING DURING THE RELEVANT PREVIOUS YEAR CAN BE ASCERTAINED ON ANY SC IENTIFIC BASIS THEN THE DEDUCTION FOR THE PROVISION FOR LEAVE ENCASHMENT WOULD BE ALLOWED . TO OVER-COME THE SAID DECISION OF THE SUPREME COURT, ALLOWING DEDUCTION F OR LEAVE ENCASHMENT ON ACCRUAL BASIS, SEC. 43B WAS AMENDED AND CLAUSE (F) WAS ENAC TED 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 ASSE SSEE 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 OUTSTAN DING AS ON 31 ST MARCH 2004 WAS RS.398.17 LAKHS. IN THE INCOME TAX RETURNS FILED FO R THE ASSESSMENT YEARS FOR AN UPTO A. Y.2004-05 THE PROVISION FOR LEAVE ENCASHMEN T, NOT ACTUALLY PAID WAS DISALLOWED BY THE APPELLANT IN COMPUTATION OF BUSIN ESS INCOME. THE PROVISION FOR LEAVE ENCASHMENT DEBITED IN THE ACCOUNTS OF THE EAR LIER YEARS, WAS ADDED BACK SO AS TO CONFIRM WITH PROVISIONS OF SEC. 43B(F) OF THE ACT. THE OTHER FACTS AS SET OUT IN PARA-3 & 4 OF THIS ORDER WERE REITERATED BY THE ASSESSEE. ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 5 7. THE CIT(A) ON A CONSIDERATION OF THE ABOVE SUBM ISSIONS WAS OF THE VIEW THAT IF IT IS ESTABLISHED THAT THE AMOUNT WRITTEN BACK ORIGINA TED FROM THE PROVISION MADE EARLIER AND FOR WHICH DEDUCTION WAS NOT ALLOWED, THAN THE D EDUCTION CLAIMED HAD TO BE ALLOWED. CIT(A) FOUND FROM THE INFORMATION AND CLAR IFICATIONS PLACED BEFORE HIM THAT THE ASSESSEE HAS CONSISTENTLY FOLLOWED ACCOUNTING S TANDARD 15 IN TERMS OF WHICH THE ASSESSEE MADE PROVISION IN ITS ACCOUNTS FOR THE EMP LOYEE BENEFITS PAYABLE ON OR POST RETIREMENT OF EMPLOYEES. THE EMPLOYEE BENEFITS INTE R ALIA INCLUDED LEAVE ENCASHMENT TO WHICH EMPLOYEES WERE ENTITLED EITHER AT THE TIME OF RETIREMENT OR ON TERMINATION OF CONTRACT OF EMPLOYMENT. FOR MAKING PROVISION FOR LE AVE ENCASHMENT, ASSESSEE REGULARLY OBTAINED ACTUARIAL VALUATION OF THE SAID LIABILITY. COPIES OF THE ACTUARIAL VALUATION REPORTS WERE FURNISHED. IN THE FINANCIAL 'ACCOUNTS FOR THE YEAR ENDED 31 .03.2004 AND EARLIER; ASSESSEE DEBITED ITS PROFIT & LOSS ACCOUNT WITH EACH YEAR'S INCREMENTAL LEAVE ENCASHMENT LIABILITY ASCERTAINED ON THE BASIS OF ACTUARIAL VALUATION CERTIFICATES. FROM THE DOCUMENTS 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 1 43(3) FOR A.YS 2003-04 & 2004- 05 THE INCREMENTAL LIABILITIES DEBITED IN THE PROFI T & LOSS ACCOUNTS BUT REMAINING UNPAID TO THE EXTENT OF RS.39,39,082/- & RS.64,96,8 751- WERE HOWEVER DISALLOWED, U/S 43B(F) OF THE ACT. LIABILITY FOR LEAVE ENCASHME NT OUTSTANDING IN THE ASSESSEE'S BOOKS AS ON 31.03.2004, INCLUDED SAID TWO SUMS DISA LLOWED IN A.Y. 2003-04 & 2004- 05 WHICH AGGREGATED TO RS.1,04,35,957/-. THE CIT(A ) FURTHER FOUND THAT THE ASSESSEE FOLLOWED A CONSISTENT PRACTICE WHEREBY IT OBTAINED ACTUARIAL VALUATION REPORT FOR ASCERTAINING THE INCREMENTAL LEAVE ENCASHMENT LIABI LITY ACCRUED DURING F.Y. 2004-05. AS PER THE VALUATION REPORT OF THE ACTUARY, SAID LI ABILITY AS ON 31.03.2005 WAS HOWEVER ASCERTAINED AT RS.2,98,24,103/- WHEREAS THE LIABILI TY ALREADY PROVIDED IN THE ASSESSEE'S BOOKS UPTO 31.03.2004 WAS RS.3,30,00,,000/- . IT WA S 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 YE AR, PROVISION OF RS.31.7 6 LACS WAS WITHDRAWN BY CREDITING THE SAID SUM TO APPELLANT'S PROFIT & LOSS ACCOUNT FOR YEAR ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 6 ENDED 31.03.2005. THE CIT(A) ALSO FOUND THAT THE ASSESSEE HAD SUO-MOTO DISALLOWED PROVISION FOR LEAVE ENCASHMENT DEBITED IN THE PROFI T & LOSS ACCOUNTS IN ARRIVING AT TAXABLE BUSINESS PROFITS OF A.YS 2003-04 & 2004-05. ACCORDINGLY NO DEDUCTION WAS ALLOWED BY THE AO FOR THE LEAVE ENCASHMENT PROVISIO N IN THOSE YEARS EVEN THOUGH AS PER MERCANTILE SYSTEM REGULARLY FOLLOWED, LIABILITY THEREFORE HAD ACCRUED. OUT OF THE PROVISION FOR LEAVE ENCASHMENT DEBITED TO THE PROFI T & LOSS ACCOUNTS OF THE EARLIER YEARS ASSESSEE WROTE BACK SUM OF RS.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 R S.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 SUBMISS IONS OF THE ASSESSEE AND THAT THE INCLUSION OF RS.31.76IACS IN THE ASSESSED INCOME OF THE ASSESSEE FOR A.Y. 2005-06 RESULTED IN DOUBLE TAXATION OF SAME SUM. 8. THE CIT(A) ALSO HELD THAT THE AO TOTALLY MISUND ERSTOOD THE FUNDAMENTAL LEGAL AND ACCOUNTING PRINCIPLES ON WHICH ASSESSEE CLAIMED EXC LUSION OF RS.31.7 6 LACS FROM ITS TOTAL INCOME IN AY. 2005-06. THE CIT(A) HELD THAT T HE FUNDAMENTAL PRINCIPLE ON WHICH ASSESSEE'S CLAIM WAS BASED WAS THAT SINCE THE PROVISION FOR LEAVE ENCASHMENT WAS DISALLOWED IN THE ASSESSMENTS OF THE EARLIER YE ARS 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 BROUG HT TO TAX U/S.41(1) OF THE ACT, THE FIRST ASPECT TO BE NOTICED IS THAT IT WAS NOT THE C ASE 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 WRITE BACK OF A TRADING LIABIL ITY ON ACCOUNT OF ITS CESSATION OR REMISSION DOES NOT CONSTITUTE INCOME. HOWEVER SEC 4 1 (1) OF THE I T ACT SPECIFICALLY CREATES A DEEMING FICTION UNDER WHICH CESSATION OR REMISSION OF A TRADING LIABILITY IS CONSIDERED TO BE BUSINESS INCOME OF THE ASSESSEE. S EC 41 (1) PROVIDES THAT EVEN UNILATERAL WRITE BACK OF A LIABILITY CONSTITUTES AC CRUAL OF INCOME OF THE YEAR IN WHICH ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 7 ENTRY THEREFORE IS MADE IN THE ASSESSEE'S BOOKS. TH E CIT(A) HELD THAT IN ORDER TO INVOKE DEEMING PROVISIONS OF SEC 41 (1) IT IS NECES SARY FOR THE AO TO PROVE THAT IN RESPECT OF THE TRADING LIABILITY, FOR WHICH THE CES SATION OR REMISSION IS ALLOWED, ASSESSEE WAS ALLOWED DEDUCTION IN COMPUTING ITS BUS INESS INCOME OF ANY YEAR. THE CIT(A) FOUND THAT IN THE CASE OF THE ASSESSEE, ADM ITTEDLY IN AY. 2003-04 & 2004-05 WHEN THE ASSESSEE CREATED PROVISION FOR LEAVE ENCAS HMENT, 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 FACTUAL BACKGROUND WHEN OUT OF THE PROVISION F OR LEAVE ENCASHMENT CREATED IN THE EARLIER YEARS; RS.31.76 LACS WAS WRITTEN BACK BY TH E ASSESSEE; THE SAME DID NOT CONSTITUTE INCOME OF APPELLANT OF A,Y. 2005-06 ; TH E YEAR IN WHICH THE LIABILITY WAS WRITTEN BACK. THE ADDITION MADE BY THE AO WAS THUS DELETED BY THE CIT(A). 9. AGGRIEVED BY THE ORDER OF THE CIT(A), THE REVEN UE HAS RAISED GR.NO.1 BEFORE THE TRIBUNAL. WE HAVE HEARD THE SUBMISSION OF THE LEAR NED DR WHO RELIED ON THE ORDER OF THE AO. THE LEARNED COUNSEL FOR THE ASSESSEE REITE RATED 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 INTE RFERENCE. THE FUNDAMENTAL ASPECT WHICH NEEDS TO BE KEPT IN MIND IS THAT THE FINANCIA L 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 OF ENTERPRISES IN ACCORDANCE WITH ANY SPECIAL LAW APPLICABLE TO THEM OR BY FOLLOWING ACCOUNTING STANDARDS OF INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) ARE NOT RE LEVANT WHEN IT COMES TO DETERMINING TOTAL INCOME WHICH IS BROUGHT TO TAX U/ S.4 OF THE ACT. THE COMPUTATION OF TOTAL INCOME HAS TO BE DONE IN ACCORDANCE WITH T HE ACT. GENERALLY A PROVISION IS A LIABILITY WHICH IS CONTINGENT IN NATURE. LIABILITY WHICH IS CONTINGENT IN NATURE AND WHICH HAS NOT CRYSTALIZED INTO ACTUAL LIABILITY WIL L NOT BE ALLOWED AS DEDUCTION WHILE COMPUTING TOTAL INCOME. WHEN PROVISION FOR LEAVE E NCASHMENT IS CREATED AND DEBITED IN THE PROFIT AND LOSS ACCOUNT IT GOES TO R EDUCE THE PROFIT AS PER THE FINANCIAL ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 8 STATEMENT. WHEN THE ASSESSEE FILES RETURN OF INCOM E 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 SAY RS.100 WHEN FILING RETURN OF INCO ME, HIS TOTAL INCOME TO THAT EXTENT STANDS INCREASED. WHEN LATER, WHEN ACTUAL LIABILIT Y IS INCURRED BY THE ASSESSEE ON ACCOUNT OF LEAVE ENCASHMENT AND IT IS REALIZED THAT THE PROVISION THAT OUGHT TO HAVE BEEN MADE WAS ONLY RS.85, THAN THE EXCESS PROVISION WHICH WAS MADE EARLIER AND HAD GONE TO INCREASE THE PROFIT OF THE ASSESSEE, HAD TO BE NEUTRALIZED AND RS.15 SHOULD BE REMOVED FROM THE INCOME IN THE ASSESSMENT YEAR IN W HICH THE ASSESSEE BASED ON ACTUAL LIABILITY DISCOVERS THAT EXCESS PROVISION MA DE IN THE EARLIER YEARS. THE ASSESSEE HAS NOT CLAIMED ANY DEDUCTION WHILE DETERM INING ITS PROFIT FROM BUSINESS ON ACCOUNT OF PROVISION FOR LEAVE ENCASHMENT BUT HAS C LAIMED SUCH DEDUCTION ONLY ON THE BASIS OF ACTUAL INCURRING OF LIABILITY WHICH IS PAI D IN ACCORDANCE WITH SEC.43B(F) OF THE ACT. THAT HAS GOT NOTHING TO DO WITH THE WRITE BAC K OFF EXCESS PROVISION FOR LEAVE ENCASHMENT. THE CIT(A) HAS CLEARLY BROUGHT OUT THE SE ASPECTS IN HIS ORDER. WE ARE OF THE VIEW THAT THE FACTUAL CONCLUSIONS AND THE LEGAL INFERENCE BASED ON THOSE CONCLUSIONS DRAWN BY THE CIT(A) ARE JUST AND PROPER . WE THEREFORE CONFIRM THE ORDER OF THE CIT(A) AND DISMISS GROUND NO.1 RAISED BY THE REVENUE. 11. GROUND NO.2 RAISED BY THE REVENUE READS AS FOL LOWS: 2. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) IS CORRECT IN DELETING THE DISALLOWANCE OF RS.256.32 LAKH ON A CCOUNT OF LOSS IN FOREIGN EXCHANGE FLUCTUATION, A CONTINGENT LIABILITY WITHOUT CONSIDE RING TEH JUDGEMENT IN CASE OF ATLAS CYCLE IND VS. CIT (2004) 270 ITR 108 (P&H) AND MIHI R TEXTILE LTD., VS. CIT(1997) 225 ITR 327(GUJ). 12. THE ASSESSEE HAD TAKEN WORKING CAPITAL LOANS I N FOREIGN CURRENCY. THESE LOANS WERE REPAYABLE IN FOREIGN CURRENCY. DUE TO FLUCTUA TION IN VALUE OF INDIAN CURRENCY VIS--VIS THE FOREIGN CURRENCY THE AMOUNT REPAYABLE BY THE ASSESSEE WAS MORE IN TERMS OF INDIAN CURRENCY. THERE WAS THUS A LOSS ON ACCOUNT OF ADVERSE FLUCTUATION OF INDIAN CURRENCY VIS--VIS THE FOREIGN CURRENCY. IN THE ACCOUNTS THE OUTSTANDING LOAN ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 9 AMOUNTS WERE RESTATED AT THE EXCHANGE RATE PREVAILI NG ON THE BALANCE SHEET DATE. THE LOSS ON RESTATEMENT OF LIABILITY WAS CLAIMED AS EXP ENDITURE. THE ASSESSEE ALSO POINTED OUT THAT IN AY 2003-04 & 2004-05 THERE WAS GAIN ON RESTATEMENT OF LIABILITY AND SUCH GAIN WAS OFFERED TO TAX AS INCOME. THE AO HOWEVER HELD THAT THE LOSS ARISING ON REPAYMENT OF LOAN 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 AN D THE REAL LIABILITY CAN BE KNOWN ONLY WHEN THE LOANS ARE REPAID AND NOT ON THE BALAN CE SHEET DATE I.E., THE LAST DATE OF THE PREVIOUS YEAR. THE LOSS ACCORDING TO THE AO WA S THEREFORE CONTINGENT. HE THEREFORE DISALLOWED LOSS OF RS.256.32 LACS CLAIMED AS DEDUCTION BY THE ASSESSEE. 13. ON APPEAL BY THE ASSESSEE, THE CIT(A) HELD THA T THE LOSS WAS TO ALLOWED AS A DEDUCTION. IN COMING TO THE ABOVE CONCLUSION THE C IT(A) FIRSTLY FOUND THAT THE LOSS IN QUESTION AROSE OUT OF FOREIGN CURRENCY LOANS AVAIL ED FOR MEETING WORKING CAPITAL REQUIREMENTS OF THE ASSESSEE AND THEREFORE THE LOSS OR GAIN ON EXCHANGE FLUCTUATION WAS TO BE REGARDED AS REVENUE EXPENDITURE WHICH WAS TO BE ALLOWED AS A DEDUCTION. WITH REGARD TO THE QUESTION WHETHER THE LOSS IN QUE STION CAN BE CONSIDERED AS CONTINGENT IN NATURE, THE CIT(A) RELIED ON THE DECI SION OF THE HONBLE 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 AVA ILED ON REVENUE ACCOUNT. THE CIT(A) ALSO FOUND THAT ASSESSEES OWN CASE FOR AY 98-99 IN ITA NO.455/KOL.2003 ORDER DATED 12.1.2007 & 1099/KOL/2005 FOR AY 2000-01 ORDE R DATED 29.6.2007, THE TRIBUNAL HAD ALLOWED SIMILAR DEDUCTION CLAIMED BY T HE ASSESSEE. THE ADDITION MADE BY THE AO WAS THUS DELETED BY THE CIT(A). AGGRIEVE D BY THE ORDER OF THE CIT(A), THE REVENUE HAS RAISED GR.NO.2 BEFORE THE TRIBUNAL. 14. WE HAVE HEARD THE RIVAL SUBMISSIONS. WE ARE O F THE VIEW THAT IN THE LIGHT OF THE JUDICIAL PRONOUNCEMENT IN THE CASE OF WOODWARD GOVE RNOR INDIA PVT.LTD. (SUPRA) BY ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 10 THE HONBLE SUPREME COURT AND THE DECISION OF THE T RIBUNAL IN ASSESSEES OWN CASE ON IDENTICAL ISSUE AND KEEPING IN MIND THE FACT THA T THE LIABILITY IN QUESTION IS ON REVENUE ACCOUNT, THE ORDER OF THE CIT(A) DOES NOT C ALL FOR ANY INTERFERENCE. ACCORDINGLY, GROUND NO.2 RAISED BY THE REVENUE IS D ISMISSED. 15. GR.NO.3 TO 5, RAISED BY THE REVENUE READS AS F OLLOWS: 3. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE, THE LD. C!T(A) IS CORRECT IN DELETING THE DISALLOWANCE OF OBSOLETE STOCK WRIT TEN OFF IN SPITE OF THE FACT THAT THE ASSESSEE NEITHER MADE PROVISION NOT WRITTEN OFF SUC H STOCK IN P& L ACCOUNT. 4. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) IS CORRECT IN DELETING THE DISALLOWANCE OF EXPENSES FOR SHIFTING OF CHENNAI PLANT THOUGH THE SAME WAS NOT CLAIMED AS REVENUE EXPENDITURE IN P& L ACCOUNT BUT ONLY ADJUSTED THROUGH REVALUATION RESERVE. 5. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE' LD. CIT(A) IS CORRECT IN DELETING THE DISALLOWANCE ON ACCOUNT OF UPFRONT FEES PAID TO ICICI BANK MERELY ON THE GROUND THAT THE SAME WAS ALLOWED IN EARLIER YEA R THOUGH THERE HAD BEEN NO CONSISTENCY IN THE ACCOUNTING PROCEDURES FOLLOWED B Y THE ASSESSEE. 16. THE FACTS AND CIRCUMSTANCES UNDER WHICH THE AF ORESAID GROUND OF APPEAL ARISE FOR CONSIDERATION ARE IDENTICAL AND THEREFORE THESE GRO UNDS 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 REVALUATI ON RESERVE IN THE BALANCE SHEET. THESE EXPENDITURE WERE HOWEVER CLAIMED AS DEDUCTION WHILE COMPUTING TOTAL INCOME. IN THE REVISED RETURN, THE ASSESSEE CLAIMED DEDUCTI ON FOR FOLLOWING AMOUNTS WHICH WERE CHARGED OFF TO REVALUATION RESERVE. THE DETAIL S OF SUCH EXPENDITURES WAS AS FOLLOWS : . (A) OBSOLETE STOCKS WRITTEN OFF RS.33,099,581 (B) EXPENSES FOR SHIFTING CHENNAI PLANT RS.15,742 ,006 (C) IRRECOVERABLE & BAD DEBTS WRITTEN OFF RS.40,65 5,108 (D) UPFRONT FEES PAID TO ICICI BANK RS.40,677,996 THE FIRST ASPECT WHICH THE AO NOTICED WAS THAT THE AFORESAID CLAIM FOR TOTAL SUM OF RS.13,01,74,691/-WAS NOT ROUTED THROUGH PROFIT & LO SS ACCOUNT NOR CLAIMED AS DEDUCTION OUT OF PROFIT, BUT CLAIMED AS DEDUCTION I N THE REVISED COMPUTATION OF INCOME FILED WITH REVISED RETURN AS REVENUE EXPENDITURE WR ITTEN OFF AS PER PROVISION OF IT ACT. ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 11 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 B AD DEBTS WRITTEN OFF. 17. THE CLAIM FOR DEDUCTION WAS DISALLOWED BY THE AO FOR THE FOLLOWING REASONS:- OBSOLETE STOCKS WRITTEN OFF: 17.1. THE ASSESSEE SUBMITTED BEFORE THE AO A LIST OF THE ITEMS WITH QUANTITY AND VALUE WHICH WERE WRITTEN OFF ALONG WITH JUSTIFICATION FOR WRITE OFF OF THE SAID GOODS. THE ASSESSEE CLAIMED THAT IT WAS CARRYING IN ITS BOOKS STOCK OF RAW MATERIALS AND FINISHED GOODS WHICH HAD BECOME OBSOLETE AND/ OR DAMAGED, HA VING NO REALIZABLE VALUE. THESE STOCKS WERE LYING AT PLANTS AND DEPOTS SITUATED AT DIFFERENT FACTORIES/ DEPOTS ACROSS THE COUNTRY. THE ASSESSEE SUBMITTED THAT DURING THE PRE VIOUS YEAR PARTICULARS OF SUCH OBSOLETE, NON-SERVICEABLE & USELESS STOCKS WERE OBT AINED FROM THE FACTORIES/DEPOTS AND THE SAME WERE WRITTEN OFF FROM REVALUATION RESE RVE ACCOUNT. THE SAME WERE LYING IN STOCK AND HAD ALREADY BEEN OFFERED FOR TAX ATION IN THE RESPECTIVE YEARS. SINCE THE OBSOLETE, NON-SERVICEABLE & USELESS STOCKS HAVE BEEN WRITTEN OFF THE SAME WAS CLAIMED AS BUSINESS EXPENDITURE FOR THE YEAR. 17.2. THE AO HOWEVER DISALLOWED THE CLAIM OF THE A SSESSEE FOR DEDUCTION FOR THE REASON THAT NO PROVISION OR WRITE OFF FOR SUCH OBSO LETE STOCK, HAS BEEN MADE IN PROFIT & LOSS ACCOUNT BY THE ASSESSEE, THEREFORE CLAIM OF CURRENT ASSETS OUTSIDE THE P&L ACCOUNT COULD NOT BE CONSIDERED. HENCE THE CLAIM FO R DEDUCTION OF RS3,30,99,581/- IN THE REVISED RETURN OF INCOME WAS DENIED. EXPENSES FOR SHIFTING OF CHENNAI PLANT: 17.3. AS FAR AS THE AFORESAID EXPENDITURE IS CONCE RNED, THE ASSESSEE POINTED OUT THAT IT HAD TWO MANUFACTURING PLANTS IN CHENNAI CITY, ONE A T 1075, TRIUVOTTIYUR HIGH ROAD, CHENNAI-600 019 AND ANOTHER AT DEVELOPED PLOT NO.L, INDUSTRIAL ESTATE, GUINDY, CHENNAI-600 032. THE ASSESSEE SUBMITTED THAT BECAUS E OF MULTI-LOCATIONAL MANUFACTURING OPERATIONS, THE ASSESSEE WAS NOT ENJO YING ECONOMIES OF SCALE AND THERE WERE DUPLICATION OF MANY COSTS. IT WAS ALSO NOT POS SIBLE TO HAVE EFFECTIVE CONTROL OVER OPERATIONS. THE ASSESSEE, THEREFORE, DECIDED TO MER GE MANUFACTURING OPERATIONS AT ONE ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 12 PLACE SO THAT THE MANAGEMENT COULD EXERCISE GREATER UNIFIED CONTROL, INCREASE EFFICIENCY AND IMPROVE PRODUCTIVITY & PROFITABILITY BY AVOIDING DUPLICATION OF COST. FOR THIS REASON THE ASSESSEE DECIDED TO SHIFT ITS M ANUFACTURING OPERATION FROM DEVELOPED PLOT NO.L, INDUSTRIAL ESTATE, GUINDY TO 1 075, TRIUVOTTIYUR HIGH ROAD. THE ASSESSEE CLAIMED THAT THE AFORESAID ITEM OF EXPENDI TURE WAS INCURRED FOR MERGING OF MANUFACTURING OPERATIONS AT ONE PLACE SO MANAGEMENT COULD EXERCISE GREATER UNIFIED CONTROL, INCREASE EFFICIENCY AND IMPROVE PRODUCTIVI TY PROFITABILITY BY AVOIDING DUPLICATION OF COST. THE EXPENDITURE WAS INCURRED I N THE COURSE OF BUSINESS AND FOR IMPROVING THE EFFICIENCY AND INCREASE PROFITABILITY , THEREFORE REVENUE IN NATURE. THE ASSESSEE RELIED ON THE DECISION OF HONBLE MADRAS H IGH COURT IN THE CASE OF CIT VS. MADURA COATS LTD. [REPORTED IN ITR 253 (62)], WHERE IN THE MADRAS HIGH COURT HELD THAT EXPENDITURE INCURRED FOR SHIFTING OF OFFICE IS A REVENUE EXPENDITURE. RELIANCE WAS ALSO PLACED ON THE DECISION OF THE HONBLE SUPR EME COURT IN THE CASE OF BOMBAY DYEING AND MANUFACTURING CO. LTD. [REPORTED IN 219 ITR(521)] WHEREIN THE HONBLE SUPREME COURT HELD THAT EXPENDITURE INCURRED FOR AM ALGAMATION OF BUSINESS IS ALLOWABLE AS BUSINESS EXPENDITURE. DETAILS OF SHIFT ING EXPENSES WERE SUBMITTED BY THE ASSESSEE. 17.4. THE AO HOWEVER HELD THAT THE OBJECT OF ASSESS EE TO SHIFT PLANT WAS NOT FOR REDUCING EXPENDITURE OR INCREASE OF PROFIT, BUT TO DEVELOP 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 I NCURRED FOR SUCH SHIFTING WERE IN THE NATURE OF CAPITAL EXPENDITURE. HE ALSO HELD THAT TH E EXPENDITURE WAS NOT CLAIMED AS REVENUE EXPENDITURE IN PROFIT & LOSS ACCOUNT, BUT T HE SAME WAS ADJUSTED THROUGH REVALUATION RESERVE AND THEREBY CLAIM IN COMPUTATIO N AS REVENUE EXPENSE IS NOT IN ACCORDANCE TO LAW. HENCE THIS CLAIM OF RS.L,57,42,0 06/- IN THE REVISED RETURN OF INCOME WAS DENIED. UPFRONT FEES PAID TO ICICI BANK: ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 13 17.5. THE ASSESSEE HAD PAID UPFRONT FEE TO ICICI BA NK FOR CONVERSION OF RUPEE LOAN INTO FOREIGN CURRENCY LOAN. ICICI BANK CLAIMED UPFR ONT FEE OF RS.25 CRORES VIDE THEIR LETTER NO.CE/2016 DATED 29.09.2001. THE SAME FEE WAS NEGOTIATED AND BROUGHT DOWN TO RS.20 CRORES AS CONFIRMED VIDE THE ASSESSEE 'S LETTER DATED 13.11.2001. FEE OF RS.20 CRORES WAS AMORTISED IN 59 EQUAL MONTHLY INST ALMENTS OF RS.33.89 LAKHS PER MONTH. THE REASON FOR SUCH CONVERSION WAS THAT INTE REST ON RUPEE LOAN IS LINKED TO THE BANKS PRIME LENDING RATE (BPLR) WHEREAS IF THE VER Y SAME LOAN IS CONVERTED INTO FOREIGN CURRENCY LOAN THAN THE INTEREST ON SUCH FOR EIGN CURRENCY LOAN WILL BE LINKED TO LIBOR (LONDON INTER-BANK OFFICIAL RATE). BECAUSE O F 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 CURRE NCY LOAN. THE ASSESSEE CLAIMED THAT THE SAID FEE WAS PAID BY THE ASSESSEE FOR REDU CING THE BURDEN OF INTEREST COST EVERY YEAR AND WAS AN ALLOWABLE REVENUE EXPENDITURE WHILE COMPUTING TOTAL INCOME. 17.6. THE AO HOWEVER REJECTED THE CLAIM OF THE ASS ESSEE FOR DEDUCTION ON THE GROUND THAT THE ASSESSEE HAS NOT CHARGED THE UPFRONT FEES AS PART OF INTEREST AND DEBITED INTO PROFIT & LOS ACCOUNT, BUT THE SAME WAS CLAIMED IN R ESERVE ACCOUNT AND CLAIMED AS DEDUCTION IN COMPUTATION OF INCOME, WHICH IS NOT IN ACCORDANCE TO LAW, HENCE CLAIM OF RS.4,06,77,996/- AS DEDUCTION WAS DENIED. 18. BEFORE CIT(A), ON DISALLOWANCE OF DEDUCTION O N 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 A ND 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 SU CH OBSOLETE STOCK, HAS BEEN MADE IN PROFIT & LOSS ACCOUNT BY THE ASSESSEE, THEREFORE CL AIM OF CURRENT ASSETS OUTSIDE THE P& L A/C. COULD NOT BE CONSIDERED. HENCE THE CLAIM FOR DEDUCTION WAS DISALLOWED BY THE AO. IT WAS FURTHER SUBMITTED, CHAPTER IV D OF INCOME TAX ACT WHICH CONTAINS COMPUTATION PROVISIONS FOR BUSINESS INCOME NOWHERE PROVIDES THAT LOSS ARISING OR EXPENDITURE INCURRED IN ANY PREVIOUS YEAR SHOULD BE DEBITED TO THE PROFIT & LOSS A/C ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 14 OF THE RELEVANT PREVIOUS YEAR SO AS TO BE ELIGIBLE FOR DEDUCTION. WRITING OFF THE LOSS OR EXPENDITURE IN THE PROFIT & LOSS A/C HAS NOT BEEN M ADE AS A CONDITION PRECEDENT BY THE ACT; FOR CLAIMING DEDUCTION OR ALLOWANCE OR LOS S. IN ABSENCE OF ANY SUCH SPECIFIC CONDITION PRESCRIBED IN THE ACT, THE AO COULD NOT R EAD INTO STATUE A CONDITION NOT PRESCRIBED BY THE LEGISLATURE. IT WAS FURTHER SUBMI TTED THAT CHAPTER-IV D OF THE INCOME TAX ACT PRESCRIBES THE CONDITIONS TO BE FULFILLED B Y AN ASSESSEE FOR CLAIMING DEDUCTIONS, ALLOWANCES OR LOSS. SEC. 37 (1) PERMITS DEDUCTION FOR ANY EXPENDITURE IF IT IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS AND WHICH IS NOT IN THE NATURE OF CAPITAL OR PERSONAL EXPENDITURE. ANY LOSS WHICH ACCRUES OR ARISES IN THE COURSE OF CARRYING ON BUSINESS IS HELD TO BE ALLOWA BLE U/S 37(1) OF THE ACT. SEC 37( 1) NOWHERE PRESCRIBES A CONDITION OR STIPULATES THAT T HE EXPENDITURE OR LOSS HAS TO BE DEBITED TO THE PROFIT & LOSS A/C OF THE RELEVANT PR EVIOUS YEAR. THE ACT ALLOWS DEDUCTION FOR ANY EXPENDITURE OR LOSS ONCE THE COND ITIONS PRESCRIBED IN SEC. 37 ARE FULFILLED. IN CASE OF AN ASSESSEE WHICH MAINTAINS I TS ACCOUNTS ON MERCANTILE BASIS; DEDUCTION IS PERMISSIBLE ONCE THE ASSESSEE ESTABLIS HES 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 L TD VS CIT (116 ITR 1):- 'IT IS NOW WELL SETTLED THAT THE WAY IN WHICH ENTRI ES ARE MADE BY AN ASSESSEE IN HIS BOOKS OF ACCOUNT ARE NOT DETERMINATIVE OF THE Q UESTION WHETHER THE ASESSEEE HAS EARNED PROFIT OR SUFFERED ANY LOSS. THE ASSESSE E MAY BY MAKING ENTRIES WHICH ARE NOT IN ACCORDANCE WITH PROPER PRINCIPLE O F ACCOUNTING CONCEAL PROFIT OR SHOW LOSS AND ENTRIES MADE BY HIM CANNOT THEREFO RE BE REGARDED AS CONCLUSIVE ONE WAY OR THE OTHER. WHAT IS NECESSARY TO BE CONSIDERED IS THE TRUE NATURE OF THE TRANSACTION AND WHETHER IN FACT IT HA S RESULTED IN PROFIT OR LOSS TO THE ASSESSEE. IT WAS POINTED THAT IN THE PRESENT CASE THE ASSESSI NG OFFICER HAS NOT DISPUTED THAT THE ASSESSEE DID SUFFER LOSS DUE TO DAMAGE OR OBSOLESCE NCE IN STOCK OF RAW-MATERIALS, PACKING MATERIALS & FINISHED GOODS. THE FACT THAT T HE RELEVANT PARTICULARS OF SAID LOSS WERE FURNISHED BY THE ASSESSEE WAS ALSO NOT DISPUTE D. THE AO ALSO DID NOT FIND ANY INFIRMITY EITHER IN THE DETAILS FURNISHED OR THE EX PLANATIONS IN SUPPORT THEREOF. THE DISALLOWANCE WAS HOWEVER MADE ONLY ON THE GROUND TH AT THE SAID LOSS WAS NOT DEBITED ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 15 IN THE PROFIT & LOSS A/C. IN OTHER WORDS, THE AO HA VING ACCEPTED THE ADMISSIBILITY OF THE CLAIM; DISALLOWANCE WAS MADE FOR NOT COMPLYING WITH A CONDITION NOT PRESCRIBED OR PROVIDED BY THE LEGISLATURE IN THE ACT. AS REGAR DS ADMISSIBILITY OF THE LOSS SUFFERED ON DETECTION OF DAMAGED, OBSOLETE AND NON-MOVING ST OCK: RELIANCE WAS PLACED ON THE DECISION OF ITAT-CUTTACK BENCH IN THE CASE OF THE N ATIONAL ALUMINUM CO. LTD. V. DY.CIT-10L TTJ 948. IN THIS CASE THERE WAS DEPLETIO N IN COST OF STORES AND SPARES WHICH HAD DETERIORATED IN VALUE ON ACCOUNT OF STORA GE. 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 DIMINU TION 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 AFORESAID DECISIO N WAS SQUARELY APPLICABLE. THE ASSESSEE PRAYED THAT THE AO BE DIRECTED TO ALLOW TH E DEDUCTION FOR RS.3,30, 99,581/- BEING OBSOLETE STOCKS WRITTEN OFF. 18.1. THE CIT(A) AGREED WITH THE SUBMISSION OF THE ASSESSEE AND DIRECTED THE DEDUCTION TO BE ALLOWED. THE FOLLOWING WERE THE RE LEVANT OBSERVATIONS OF THE CIT(A): 5.2 I HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE DETAILS OF THE OBSOLETE STOCK WRITTEN OFF AS FURNISHED BEFORE THE AO. FROM PERUSAL OF THE IMPUGNED ORDER I FIND THAT THE AO PER SE NEVER DISP UTED THAT DURING THE RELEVANT YEAR APPELLANT HAD CONDUCTED PHYSICAL VERIFICATION OF STOCK OF RAW MATERIALS, PACKING MATERIALS AND FINISHED GOODS LYING AT MANUF ACTURING 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 CORRECTNES S OF THESE REPORTS NOR THE AO POINTED ANY SPECIFIC INFIRMITIES IN THE STOCK/INSPE CTION REPORTS FURNISHED BEFORE HIM. THE ONLY GROUND ON WHICH THE AO REJECTED THE A PPELLANT'S CLAIM WAS THAT THE ASSESSEE DID NOT WRITE OFF THE OBSOLETE STOCK BY DE BITING ITS PROFIT AND LOSS ACCOUNT BUT MERELY REDUCED 'THE VALUE OF CURRENT AS SETS IN THE BALANCE SHEET. 5.3. I AM UNABLE TO AGREE WITH AOS REASONING FOR R EJECTING THE APPELLANTS CLAIM. THE JUDICIAL AUTHORITIES HAVE TIME AND AGAIN HELD T HAT THE MANNER IN WHICH ENTRIES ARE MADE BY AN ASSESSEE IN HIS BOOKS OF ACCOUNTS AR E NOT DETERMATIVE OF THE QUESTION AS WHETHER AN ASSESSEE HAS EARNED PROFIT O R SUFFERED LOSS. THE PARTICULAR ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 16 MANNER IN WHICH THE ENTRIES ARE MADE IN BOOKS OF AC COUNT OR ABSENCE OF AN ENTRY IN THE BOOKS BY ITSELF CANNOT BE CONSIDERED TO BE C ONCLUSIVE 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 LO SS TO THE ASSESSEE. IN .THE APPELLANT'S CASE IT IS NOT DENIED BY THE AO THAT IT REGULARLY FOLLOWED THE ACCOUNTING PRINCIPLE OF 'LOWER OF THE COST OR MARKE T VALUE' FOR VALUING ITS INVENTORY. IT IS ALSO NOT DISPUTED BY THE AO THAT I N THE COURSE.OF BUSINESS OF MANUFACTURE AND MARKETING OF DRY CELLS, BATTERIES, TORCHES, PACKET TEA ETC THE APPELLANT REGULARLY CARRIED IN ITS STOCK SUBSTANTIA L QUANTITY OF RAW MATERIAL, PACKING MATERIALS AND FINISHED PRODUCTS. IT IS ALSO NOT DENIED OR DISPUTED BY AO THAT DURING THE RELEVANT YEAR THE APPELLANT CONDUCT ED PHYSICAL INSPECTION OF ITS STOCKS UPON WHICH OBSOLETE, NON MOVING AND DAMAGED STOCKS WERE IDENTIFIED HAVING NO REALIZABLE VALUE. COPIES OF THE STOCK INS PECTION 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 INS PECTION OF INVENTORY ESTABLISHED THAT CERTAIN ITEMS OF ROW MATERIAL, PAC KING MATERIALS AND FINISHED GOODS WHICH WERE EARLIER VALUED 'AT COST' DID NOT H AVE ANY REALIZABLE VALUE, THE APPELLANT RIGHTLY VALUED THE SAME AT NIL VALUE. IN ITS BALANCE SHEET THE ASSESSE VALUED ITS INVENTORY BY TAKING VALUE OF THE IDENTIF IED ITEMS OF OBSOLETE AND DAMAGED STOCK AT NIL. MERELY BECAUSE SUCH LOSS WAS NOT DEBITED IN PROFIT & LOSS ACCOUNT BUT THE SAME WAS CHARGED OFF TO REVALUATION RESERVE ACCOUNT DID NOT IN ANY MANNER AFFECT THE APPELLANT'S ENTITLEMENT TO CL AIM DEDUCTION FOR STOCK WRITE OFF WHICH WAS ASCERTAINED ON SCIENTIFIC BASIS AND A CCOUNTED IN THE BOOKS IN CONFORMITY WITH GENERALLY ACCEPTED PRINCIPLES OF AC COUNTING. 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 D IRECTED TO ALLOW THE DEDUCTION IN RESPECT OF OBSOLETE STOCK WRITTEN OFF AMOUNTING TO RS.3,30,99,581/-. GROUND NO. 5 IS ALLOWED. 18.2. AGGRIEVED BY THE ORDER OF THE CIT(A), THE REV ENUE HAS RAISED GROUND NO.3 BEFORE THE TRIBUNAL. 19. BEFORE CIT(A) THE ASSESSEE SUBMITTED ON THE DI SALLOWANCE OF EXPENDITURE IN SHIFTING OF PLANT AS UNJUSTIFIED. THE ASSESSEE IN THIS REGARD POINTED OUT THAT IT HAD 2 MANUFACTURING PLANTS IN CHENNAI ONE AT TIRUVOTTIYUR HIGH ROAD, CHENNAI (TIRVOTTIYUR PLANT) AND ANOTHER AT PLOT NO.1 INDUSTRIAL ESTATE, GUINDY, CHENNAI (GUINDY PLANT). THE ASSESSEE FOUND THAT DUE TO MULTI-LOCATIONAL MAN UFACTURING OPERATIONS THE ASSESSEE WAS NOT ENJOYING ECONOMIES OF SCALE AND TH ERE WERE DUPLICATION OF MANY COSTS. THE ASSESSEE THEREFORE DECIDED TO MERGE MAN UFACTURING OPERATIONS AT ONE PLACE ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 17 SO THAT THE MANAGEMENT COULD EXERCISE GREATER UNIFI ED CONTROL, INCREASE EFFICIENCY AND IMPROVE PRODUCTIVITY AND PROFITABILITY BY AVOIDING DUPLICATION OF COST. HENCE, THE MANUFACTURING OPERATIONS IN GUINDY PLANT WAS SHIFTE D TO TIRUVOTTIYUR PLANT. THE EXPENDITURE WAS THEREFORE CLAIMED TO HAVE BEEN INCU RRED IN THE COURSE OF BUSINESS AND FOR IMPROVING THE EFFICIENCY AND INCREASE PROFITABI LITY AND WAS THEREFORE REVENUE IN NATURE AND HAD TO BE ALLOWED AS DEDUCTION. RELIANC E WAS PLACED ON THE FOLLOWING DECISIONS IN THIS REGARD CIT VS. MADURA COATS LTD. 253 ITR 62 (MAD) AND BOMBAY DYEING AND MANUFACTURING CO. LTD. 219 ITR 521 (SC). THE ASSESSEE ALSO POINTED OUT THAT ON OPENING UP OF INDIAN ECONOMY, IN 1990S LIB ERALIZED IMPORTS OF DRY CELL BATTERIES WERE PERMITTED BY THE GOVERNMENT. AS A R ESULT CHINESE COMPANIES STARTED DUMPING CHEAP DRY CELL BATTERIES IN INDIAN MARKET W HICH PUT HUGE PRESSURE ON THE ASSESSEES MARKET SHARE AND PROFITABILITY. THIS WA S 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 ENVIRON MENTAL ISSUES TO BE DEALT WITH BECAUSE OF THE CONSUMPTION OF ZINC ALLOTS, ELECTROD ES, ELECTROLYTIC MANGANESE DIOXIDE ETC. IN THE MANUFACTURE OF BATTERIES AND THE INDUST RIAL WASTE THAT WOULD BE GENERATED IF MANUFACTURE WAS TO CONTINUE IN A PREDOMINANTLY RESI DENTIAL AREA. THESE WERE THE REASONS THAT PROMPTED SHIFTING OF GUINDY PLANT OPER ATIONS ALSO TO TIRUVOTTIYUR PLANT. THE ASSESSEE THUS CLAIMED THAT BY SHIFTING OF GUIND Y PLANT THERE WAS NO INCREASE IN THE OVERALL PRODUCTION CAPACITY BUT WAS A DECISION TO REDUCE COSTS, IMPROVE PRODUCTIVITY AND PROFITABILITY AND ELIMINATE DUPLIC ATION OF PROCESSES AND COSTS BESIDES ENVIRONMENTAL CONSIDERATIONS. THE ASSESSEE POINTED OUT THAT BY INCURRING THESE EXPENSES NO NEW ASSET CAME INTO EXISTENCE NOR ANY E NDURING BENEFIT WAS DERIVED BY THE ASSESSEE TO CHARACTERIZE THE EXPENDITURE IN QUE STION 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 H ELD THAT SHIFTING OF MACHINERY FROM ONE UNIT TO ANOTHER UNIT FOR EFFICIENT UTILIZA TION OF MACHINERY WAS REVENUE EXPENDITURE. THE ASSESSEE ALSO POINTED OUT THAT TH E FACT THAT THE EXPENDITURE IN ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 18 QUESTION WAS WRITTEN OFF AGAINST REVALUATION RESERV E AND NOT CHARGED TO PROFIT AND LOSS ACCOUNT CANNOT BE THE BASIS TO DISALLOW A LEGITIMAT E REVENUE EXPENDITURE AND THAT ENTRIES IN THE BOOKS OF ACCOUNTS ARE NOT ALWAYS CON CLUSIVE IN THE MATTER OF DECIDING WHETHER A CLAIM FOR DEDUCTION HAS TO BE ALLOWED OR NOT AND IN THIS REGARD PLACED RELIANCE ON THE DECISION OF THE HONBLE SUPREME COU RT IN THE CASE OF SUTLEJ COTTON MILLS LTD. VS. CIT 116 ITR 1 (SC). THE ASSESSEE PO INTED 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 EX PENSES IN SHIFTING PLANT FROM ONE PLACE TO ANOTHER INSTEAD OF REDUCING FROM THE PROFI T AND LOSS ACCOUNT. SUCH PRESENTATION IN THE BOOKS OF ACCOUNTS WILL NOT IN A NY WAY AFFECT THE CLAIM OF THE ASSESSEE FOR DEDUCTION OF LEGITIMATE REVENUE EXPEND ITURE. 19.1. THE CIT(A) AGREED WITH THE SUBMISSIONS OF TH E ASSESSEE AND ALLOWED THE CLAIM OF THE ASSESSEE FOR DEDUCTION. THE FOLLOWING WERE THE CONCLUSIONS OF THE CIT(A) ON THE ISSUE: 6.2 I HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. IT IS NOT IN DISPUTE THAT IN THE COURSE OF ASSESSMENT THE APPELLANT HAD FURNISHE D DETAILS OF EXPENSES INCURRED ON SHIFTING OF PLANT & MACHINERY FROM APPELLANT'S F ACTORY AT GUINDY TO THIRUVATTIYUR. IT APPEARED FROM THE EXPLANATIONS WH ICH WERE ON RECORD THAT THE 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 PREDOMINANT LY INDUSTRIAL AREA. BOTH THE FACTORIES WERE MANUFACTURING DRY CELL BATTERIES USI NG SAME PRODUCTION TECHNIQUES. AFTER OPENING UP OF THE INDIAN ECONOMY, CHINESE DRY CELL MANUFACTURERS RESORTED TO EXPORT OF DRY CELL BATTER IES AT VERY CHEAP RATES WHICH NECESSITATED THE ASSESSEE TO UNDERTAKE EXTENSIVE CO ST CUTTING MEASURES TO RETAIN ITS MARKET SHARE AND PROFITABILITY. THE WORK STUDIES CO NDUCTED BY THE ASSESSEE OF ITS MANUFACTURING OPERATIONS SHOWED THAT TO IMPROVE PRO DUCTIVITY AND REDUCE COSTS IT WAS NECESSARY TO ELIMINATE DUPLICATION OF CERTAIN B ASIC PROCESSES & THEREFORE IT WAS FOUND ADVISABLE TO HAVE A SINGLE PRODUCTION FAC ILITY AT CHENNAI. IN ORDER TO ELIMINATE DUPLICATION OF COST, IMPROVE PRODUCTIVITY AND EFFICIENCY AND INCREASE PROFITABILITY THE ASSESSEE DECIDED TO CENTRALIZE IT S MANUFACTURING OPERATIONS ONLY ET ONE LOCATION IN CHENNAI. THE RAW-MATERIALS CONSU MED IN MANUFACTURE OF, DRY CELL BATTERIES INTER-ALIA INCLUDED CERTAIN CHEMICAL S WHICH GENERATED ENVIRONMENTALLY HAZARDOUS INDUSTRIAL WASTE. DISPOSA L OF SUCH INDUSTRIAL WASTE POSED ENVIRONMENTAL PROBLEMS. THERE WERE RESIDENTIA L SETTLEMENTS AROUND ASSESSEE'S GUINDY FACTORY AND THEREFORE DISPOSAL OF INDUSTRIAL WASTE WAS CAUSING SERIOUS ENVIRONMENTAL ISSUES. TAKING INTO ACCOUNT T HESE FACTORS THE APPELLANT ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 19 DECIDED TO CONSOLIDATE ITS MANUFACTURING OPERATIONS AT THIRUVATTIYUR ROAD, CHENNAI AS IT WAS PREDOMINANTLY AN INDUSTRIAL AREA. DURING THE FINANCIAL YEAR 2004-0,5 THE. APPELLANT ACCORDINGLY SHIFTED ITS MAC HINERIES FROM GUINDY TO THIRUVATTIYUR ROAD. 6.3 BY TRANSFERRING EXISTING PLANT & MACHINERIES THE ASSESSEE DID NOT CREATE OR ACQUIRE NEW CAPITAL ASSETS NOR. APPELLANT'S EXISTIN G PRODUCTION CAPACITIES GOT INCREASED. BY SHIFTING MACHINERIES FROM ONE FACTORY TO ANOTHER THE ASSESSEE ONLY ATTEMPTED TO ELIMINATE DUPLICATION OF CERTAIN PROCE SSES AND THEREBY ELIMINATED DUPLICATION OF COSTS. THE, ,EXERCISE WAS AIMED AT I MPROVING ASSESSEE'S PRODUCTIVITY, EFFICIENCY AND PROFITABILITY. THE EXP ENDITURE 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 F ACTORY FROM GUINDY TO THIRUVATTIYUR WAS TAKEN PRIOR TO ITS DECISION TO SE LL FACTORY LAND AT GUINDY. IT WAS NOT A CASE WHERE HAVING DECIDED TO SELL THE GUINDY FACTORY LAND THE ASSESSEE DECIDED TO SHIFT ITS MACHINERIES TO THIRUVATTIYUR. THE AO'S FINDING IN THIS REGARD DOES NOT APPEAR TO BE FOUNDED ON ANY EVIDENCE. 6.4 THE DECISION OF THE MADRAS HIGH COURT IN THE CA SE OF CIT VS MADURA COATS LTD (253 ITR 62) SUPPORTS THE APPELLANT'S CONTENTIO N THAT THE EXPENDITURE ON SHIFTING OF MACHINERIES WAS REVENUE IN NATURE. IN T HE CASE BEFORE THE MADRAS HIGH COURT THE ASSESSEE HAD INCURRED EXPENDITURE ON SHIFTING OF ITS REGD. OFFICE WHICH WAS DISALLOWED BY THE AO ON THE GROUND OF BEI NG CAPITAL EXPENDITURE BUT ON APPEAL THE TRIBUNAL AND THE HIGH COURT HELD THAT THE EXPENDITURE WAS ALLOWABLE AS REVENUE EXPENDITURE. A SIMILAR VIEW WA S 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. I TC LTD HAD SHIFTED PLANT & MACHINERY FROM ONE UNIT TO ANOTHER. THE PURPOSE FOR SHIFTING OF MACHINERY TO ANOTHER UNIT WAS EFFICIENT UTILIZATION OF THE PLANT . TRIBUNAL FOUND THAT THE SHIFTING OF THE PLANT DID NOT RESULT IN ACQUISITION OF NEW A SSETS. THE AO DISALLOWED THE SHIFTING EXPENDITURE HOLDING IT TO BE CAPITAL IN NA TURE. ON APPEAL THE SPECIAL BENCH OF THE ITAT HOWEVER HELD THAT THE EXPENDITURE ON SHIFTING OF THE PLANT AND REINSTALLATION OF THE MACHINERY WAS O' REVENUE EXPE NDITURE AS NO NEW CAPITAL ASSET WAS ACQUIRED BY THE ASSESSEE BUT IT ONLY FACILITATE D 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 INVOLVE D 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 E XPENSES OF RS.1,57,42,006/- IN COMPUTING APPELLANT'S INCOME UNDER THE HEAD 'PROFIT S & GAINS OF BUSINESS'. IN VIEW OF THIS FINDING, APPELLANT'S ALTERNATE PLEA FO R ALLOWING DEDUCTION FOR THE EXPENSES IN COMPUTING INCOME UNDER THE HEAD 'CAPITA L GAINS' IS REJECTED. ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 20 19.2. AGGRIEVED BY THE ORDER OF THE CIT(A), THE RE VENUE HAS RAISED GR.NO.3 BEFORE THE TRIBUNAL. 20. ON THE DISALLOWANCE OF DEDUCTION OF UPFRONT FE E PAID TO ICICI BANK FOR CONVERSION OF RUPEE LOAN INTO FOREIGN CURRENCY LOAN , THE ASSESSEE SUBMITTED BEFORE CIT(A) THAT IT HAD AVAILED A RUPEE TERM LOAN FROM I CICI BANK WHICH WAS ALLOWED TO BE CONVERTED TO FOREIGN CURRENCY LOAN IN 2001 AGAIN ST PAYMENT OF UPFRONT FEES OF RS.20 CRORES. THE LOAN WAS REPAYABLE TILL OCTOBER, 2006. THE ASSESSEE THEREFORE DECIDED TO WRITE OFF THE SAID UPFRONT FEES DURING T HE UNEXPIRED PERIOD OF LOAN. ACCORDINGLY THE ASSESSEE WROTE OFF THE UPFRONT FEES OF RS.20 CRORES IN 59 EQUAL MONTHLY INSTALMENTS OF RS.33.89 LACS STARTING FROM DECEMBER, 2001 TILL OCTOBER, 2006. THE WRITE OFF IN AY 2002-03, 2003-04 & 2004- 05 OF RS.135.59 LACS, RS.406.78 LACS AND RS.406.78 LACS RESPECTIVELY WAS ALLOWED IN ASSESSMENTS COMPLETED U/S.143(3) OF THE ACT. THE ASSESSEE ALSO POINTED O UT THAT THE FACT THAT THE EXPENDITURE IN QUESTION WAS WRITTEN OFF AGAINST REVALUATION RES ERVE AND NOT CHARGED TO PROFIT AND LOSS ACCOUNT CANNOT BE THE BASIS TO DISALLOW A LEGI TIMATE REVENUE EXPENDITURE AND THAT ENTRIES IN THE BOOKS OF ACCOUNTS ARE NOT ALWAYS CON CLUSIVE IN THE MATTER OF DECIDING WHETHER A CLAIM FOR DEDUCTION HAS TO BE ALLOWED OR NOT AND IN THIS REGARD PLACED RELIANCE ON THE DECISION OF THE HONBLE SUPREME COU RT IN THE CASE OF SUTLEJ COTTON MILLS LTD. VS. CIT 116 ITR 1 (SC). THE ASSESSEE PO INTED 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 AM ORTIZATION OF UPFRONT FEE PAID INSTEAD OF REDUCING FROM THE PROFIT AND LOSS ACCOUN T. SUCH PRESENTATION IN THE BOOKS OF ACCOUNTS WILL NOT IN ANY WAY AFFECT THE CLAIM OF THE ASSESSEE FOR DEDUCTION OF LEGITIMATE REVENUE EXPENDITURE. 20.1. THE CIT(A) AGREED WITH THE SUBMISSION OF THE ASSESSEE AND HELD THAT THE DEDUCTION CLAIMED HAD TO BE ALLOWED. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE CIT(A): ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 21 8.2 I HAVE CAREFULLY CONSIDERED RIVAL SUBMISSIONS AND PERUSED THE DETAILS OF THE AMOUNT WRITTEN OFF. FROM THE FACTS ON RECORD I FIND THAT THE ASSESSEE HAD ORIGINALLY TAKEN RUPEE TERM LOAN FROM ICLCI BANK. I N 2001 SAID RUPEE TERM LOAN WAS CONVERTED TO FOREIGN CURRENCY LOAN ON PAYM ENT OF UPFRONT FEES OF RS.20 CRS. THE ORIGINAL LOAN WAS REPAYABLE IN OCTOB ER 2006. IN ITS BOOKS OF ACCOUNT THE APPELLANT CHOSE TO WRITE OFF UPFRONT F EES PAID TO ICLCI BANK; OVER THE UNEXPIRED LOAN PERIOD WHICH AT THE TIME OF CONV ERSION WAS 59 MONTHS I.E. FROM DECEMBER 2001 TO OCTOBER 2006. IN THE FINANCIA L ACCOUNTS OF THE F.YS. 2001-02, 2002-03 & 2003-04 THE ASSESSEE WROTE OFF P RO-RATA UPFRONT FEES OF RS.135.59 LACS, RS.406.78 LEES & RS.406.78 LACS RES PECTIVELY AND THE DEDUCTIONS THEREFORE WERE CLAIMED IN AYS. 2002-03, 2003-04 & 2004-05 RESPECTIVELY. IN THE ASSESSMENTS U/S 143{3) OF THES E 3 YEARS, DEDUCTION FOR UPFRONT FEES PAID TO ICLCI BANK WAS ALSO ALLOWED BY THE AO IN COMPUTING BUSINESS INCOME. IN THE F.Y. 2004-05 THE ASSESSEE I NSTEAD OF WRITING OFF THE UPFRONT FEES TO ITS PROFIT & LOSS A/C; DEBITED IT T O REVALUATION RESERVE. A/C. ACCORDING TO AO THE ASSESSEE'S ACT OF CHARGING UPFR ONT FEES TO REVALUATION RESERVE A/C AS OPPOSED TO PROFIT & LOSS A/C WAS FA TAL 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 O F ALLOWABILITY OF THE EXPENDITURE. THIS PROPOSITION FIND SUPPORT IN THE D ECISION OF THE SUPREME COURT IN THE CASE OF CIT VS SUTLEJ COTTON MILLS LTD (SUPR A). THE BASIC FACTS CONCERNING THE DEDUCTION CLAIMED FOR UPFRONT FEES P AID TO ICLCI BANK HAVE NOT BEEN DISPUTED BY THE AO. IN THE ASSESSMENT ORDERS U /S 143(3) FOR THE EARLIER YEARS THE AO; IN PRINCIPLE; ACCEPTED THE APPELLANT S CLAIM FOR DEDUCTION OF FEES PAID TO ICICI BANK FOR CONVERTING RUPEE TERM LOAN I N CONVERTIBLE FOREIGN CURRENCY. IN THE REGULAR ASSESSMENT OF EARLIER YEAR S; THE PRO-RATA WRITE OFF OF UPFRONT FEES WAS ALLOWED AS BUSINESS EXPENDITURE BY THE AO ON BEING SATISFIED THAT THE EXPENDITURE WAS INCURRED OR LAID OUT WHOLL Y AND EXCLUSIVELY FOR BUSINESS PURPOSES AND THE DEDUCTION WAS TO BE ALLOW ED ON PRO-RATA BASIS OVER THE UNEXPIRED PERIOD OF LOAN AND NOT IN THE VEER IN WHICH UPFRONT FEES WERE PAID. ONCE THE APPELLANT'S METHOD OF CLAIMING DEDUC TION FOR UPFRONT FEES PAID OVER THE UNEXPIRED PERIOD OF LOAN WAS ACCEPTED BY T HE AO THEN HE WAS NOT JUSTIFIED IN DENYING THE DEDUCTION FOR PRO-RATA UPF RONT FEES PAID IN THE ASSESSMENT FOR THE A.Y. 2005-06 ON THE PLEA THAT TH E ASSESSEE DID NOT CHARGE THE SAID AMOUNT OF ITS PROFIT & LOSS A/C BUT TO REV ALUATION RESERVE A/C. ONCE THE AO IN PRINCIPLE ACCEPTED THE ASSESSEE'S METHOD OF CLAIMING DEDUCTION FOR UPFRONT FEES PAID ON PRO-RATA BASIS OVER THE UNEXPI RED PERIOD OF LOAN THEN FOR ALLOWING THE DEDUCTION FOR SAID EXPENDITURE IT WAS WHOLLY IMMATERIAL THE MANNER IN WHICH THE WRITE OFF WAS ACCOUNTED IN THE APPELLANT'S BOOKS. THE PRINCIPLE OF CONSISTENCY REQUIRED THE AO TO FOLLOW THE CONSISTENT APPROACH IN ALLOWING DEDUCTION FOR UPFRONT FEES PAID SINCE THE EXPENDITURE WAS INCURRED AND LAID OUT WHOLLY AND EXCLUSIVELY FOR ASSESSEE'S BUSINESS PURPOSES. I THEREFORE DIRECT THE AO TO ALLOW DEDUCTION FOR RS.4 ,06,77,996/- WHICH ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 22 REPRESENTED PRO-RATA UPFRONT FEES PAID TO ICLCI BAN K. GROUND NOS. 12 & 13 ARE ACCORDINGLY ALLOWED. 20.2. AGGRIEVED BY THE ORDER OF THE CIT(A) THE REV ENUE 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 O F THE AO. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON THE ORDER OF THE CIT(A). 22. WE HAVE GIVEN A VERY CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS. AS FAR AS GROUND NO.3 IS CONCERNED, THE AO HAS NOT DISPUTED T HE FACT THAT THE ASSESSEE CONDUCTED PHYSICAL INSPECTION OF ITS STOCK UPON WHI CH OBSOLETE, NON-MOVING AND DAMAGED STOCKS WERE IDENTIFIED HAVING NO REALIZABLE VALUE. THE FACT THAT THE EXPENDITURE IN QUESTION WAS WRITTEN OFF AGAINST REV ALUATION RESERVE AND NOT CHARGED TO PROFIT AND LOSS ACCOUNT CANNOT BE THE BASIS TO DISA LLOW A LEGITIMATE REVENUE EXPENDITURE AND THAT ENTRIES IN THE BOOKS OF ACCOUN TS ARE NOT ALWAYS CONCLUSIVE IN THE MATTER OF DECIDING WHETHER A CLAIM FOR DEDUCTION HA S TO BE ALLOWED OR NOT. THE CREATED A VALUE FOR ITS BRAND EVEREADY AND DISCLO SED IN THE ASSET SIDE OF THE BALANCE SHEET AND REDUCED THEREFROM THE VALUE OF OBSOLETE S TOCK 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 PRE VIOUS YEAR IS NOT A CONDITION FOR ALLOWING DEDUCTION UNDER CHAPTER IV D OF THE INCOME TAX ACT, 1961 (ACT). ANY EXPENDITURE WHICH IS OTHERWISE TO BE ALLOWED IN COM PUTING INCOME FROM BUSINESS UNDER SEC.28 TO 43 HAS TO BE ALLOWED AS A DEDUCTION . AS HELD BY THE HONBLE SUPREME COURT IN THE CASE OF SUTLEJ COTTON MILLS LTD. (SUPR A) ENTRIES IN THE BOOKS OF ACCOUNTS IS NOT DECISIVE OR DETERMINATIVE OF THE QUESTION WHETH ER THE ASSESSEE IS ENTITLED TO A DEDUCTION OR NOT WHILE COMPUTING INCOME FROM BUSINE SS. THE DEDUCTION ON ACCOUNT OF WRITE OF OBSOLETE STOCK IS ALSO ALLOWABLE AS HEL D BY THE CUTTACK BENCH OF THE ITAT ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 23 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 REASO NS FOR NOT ROUTING THE EXPENDITURE THROUGH THE PROFIT & LOSS ACCOUNT AS GIVEN WHILE DE CIDING GR.NO.3 WILL APPLY TO THIS GROUND ALSO. BESIDES THE ABOVE, THE REASONS FOR SH IFTING THE GUINDY PLANT TO TIRUVOTTIYUR PLANT WAS A BUSINESS DECISION AND TAKE N KEEPING IN VIEW FOUR FACTORS, VIZ., COMPLETION FROM CHINESE BATTERY MAKERS AS A R ESULT OF FREE ECONOMY, CENTRALIZING OPERATIONS WITH A VIEW TO REDUCE COSTS AND BETTER CONTROL AND LOCATION OF THE PLANT BEING IN A RESIDENTIAL AREA AND THE INDUS TRIAL WASTE IN THE PROCESS OF MANUFACTURE CREATING ENVIRONMENTAL ISSUES FOR THE A SSESSEE. BY SHIFTING OF GUINDY PLANT THERE WAS NO INCREASE IN THE OVERALL PRODUCTI ON CAPACITY BUT IT WAS A DECISION TO REDUCE COSTS, IMPROVE PRODUCTIVITY AND PROFITABILIT Y AND ELIMINATE DUPLICATION OF PROCESSES AND COSTS BESIDES ENVIRONMENTAL CONSIDERA TIONS. HENCE, IT CANNOT BE SAID THAT EITHER THERE WAS ACQUISITION OF NEW ASSET OR D ERIVING 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 R AISED BY THE ASSESSEE. 24. AS FAR AS GR.NO.5 IS CONCERNED, THE SAME REASO NS FOR NOT ROUTING THE EXPENDITURE THROUGH THE PROFIT & LOSS ACCOUNT AS GIVEN WHILE DE CIDING GR.NO.3 WILL APPLY TO THIS GROUND ALSO. BESIDES THE ABOVE, SIMILAR EXPENDITUR E HAD BEEN ALLOWED IN THE PAST AND THERE CAN BE NO OTHER REASON NOT TO ALLOW THE EXPEN DITURE IN QUESTION AS DEDUCTION WHILE COMPUTING INCOME FROM BUSINESS. WE THEREFORE DO NOT FIND ANY GROUNDS TO INTERFERE WITH THE ORDER OF THE CIT(A). HENCE, GR. NO.5 IS ALSO DISMISSED. 25. GROUND NO.6 RAISED BY THE REVENUE READS AS FOL LOWS: 6. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE, THE LD. CIT(A) IS CORRECT IN HOLDING THAT SALE OF FACTORY LAND AT GUINDY, CHE NNAI GAVE RISE TO CAPITAL GAIN AND NOT TO BUSINESS PROFIT IN SPITE OF THE FACT THAT TH E TRANSACTION ENTERED INTO BY THE ASSESSEE AN ADVENTURE IN THE NATURE OF TRADE. ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 24 26. WE HAVE ALREADY SEEN WHILE DECIDING GR.NO.4 T HAT THE ASSESSEE HAD TWO PLANTS IN THE CITY OF CHENNAI ONE AT GUINDY AND THE OTHER AT THIRUVOTTIYUR. THE PLANT AT GUINDY WAS CLOSED AND SHIFTED TO TIRUVOTTIYUR. IN RESPECT OF THE LAND OVER WHICH THE GUINDY PLANT WAS LOCATED, THE ASSESSEE HAD ENTERED INTO A JOINT DEVELOPMENT AGREEMENT WITH A BUILDER. IN THE RETURN OF INCOME FILED FOR THE A .Y.2005-06 THE ASSESSEE CLAIMED THAT INCOME FROM TRANSFER OF THE LAND AT GUINDY, CHENNAI GAVE RAISE TO INCOME CHARGEABLE TO TAX UNDER THE HEAD CAPITAL GAIN. THE REVENUE HOWEVER CLAIMS THAT THE INCOME IN QUESTION GAVE RAISE TO INCOME UNDER THE HEAD INCOM E FROM BUSINESS AS THE ASSESSEE BY ENTERING INTO A DEVELOPMENT AGREEMENT WITH THE D EVELOPER HAD CARRIED OUT AN ADVENTURE IN THE NATURE OF TRADE. THIS IS THE DISP UTE 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 A SSESSEE IN TERMS OF AN INDENTURE EXECUTED BY THE GOVERNOR OF MADRAS DATED 30.11.1971 . IN TERMS OF THE SAID INDENTURE, THE GOVERNMENT OF MADRAS ASSIGNED THE SAID LAND FOR AN AGGREGATE CONSIDERATION OF RS.4,61,450/-. THE SAID LAND WAS SITUATED IN THE IN DUSTRIAL ESTATE SET UP BY THE THEN GOVERNMENT OF MADRAS. AS PER THE DECISION TAKEN BY THE GOVERNMENT OF TAMILNADU, THE SAID INDUSTRIAL ESTATE WAS TRANSFERRED TO TAMIL NADU SMALL INDUSTRIES DEVELOPMENT CORPORATION LIMITED. THE SAID TAMIL NADU SMALL INDU STRIES DEVELOPMENT CORPORATION LIMITED THEREAFTER EXECUTED DEED OF SALE IN FAVOUR OF THE ASSESSEE BY REGISTERED DEED DATED 08.02.1989. NO SEPARATE / ADDITIONAL CONSIDER ATION 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 GOVERNMEN T OF MADRAS IN 1971. THE ASSESSEE WAS PUT IN POSSESSION OF THE SAID LAND IN 1971. 27.1. THE ASSESSEE CONSTRUCTED FACTORY BUILDINGS TH ERE ON AND THE FACTORY WAS ENGAGED IN MANUFACTURE OF DRY CELL BATTERIES AND ITS COMPON ENTS TILL F.Y.2004-05. THE ASSESSEE HAD ANOTHER FACTORY AT 1075, THIRUVOTTIYUR HIGH ROAD, CHENNAI WHICH IS ALSO ENGAGED IN MANUFACTURE OF DRY CELL BATTERIES. SINCE BOTH THE FACTORIES WERE ENGAGED IN MANUFACTURE OF DRY CELL BATTERIES, THESE FACTORI ES PERFORMED MORE OR LESS SIMILAR ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 25 FUNCTIONS AND THEREFORE TO ACHIEVE ECONOMIES OF SCA LE AND TO HAVE BETTER UNIFIED CONTROL OVER THE MANUFACTURING OPERATIONS THE ASSES SEE DECIDED TO CONCENTRATE MANUFACTURING OPERATION AT ONE LOCATION IN CHENNAI AT 1075, THIRUVOTTIYUR HIGH ROAD. PURSUANT TO THIS DECISION, THE ASSESSEE FOUND THE F ACTORY 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; TH E 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 TRAN SFERRED 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 THE TRANSFER OF P ROPERTY ACT, 1882 READ WITH SECTION 2(47)(IV) OF THE INCOME-TAX ACT, 1961. IN R ESPECT OF THE REMAINING AREA OF 7.29 ACRES THE ASSESSEE ENTERED INTO AN AGREEMENT ON 07. 12.2004 WITH MESSRS. KHIVRAJ TECH PARK PVT. LTD., GRANTING IT RIGHTS OF DEVELOPM ENT AND CONSTRUCTION OF NEW BUILDINGS AT A CONSIDERATION AND ON THE TERMS AND C ONDITIONS SPECIFIED THEREIN. AS PER ARTICLE III OF THE SAID AGREEMENT DATED 07.12.2004, THE OBLIGATION TO DEVELOP THE SAID LAND BY CONSTRUCTING BUILDINGS THEREON WAS SOLELY O N 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 ASSE SSEE WAS NOT OBLIGED TO INCUR ANY COST OF CONSTRUCTION NOR WAS THE ASSESSEE OBLIGED T O 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 C ONSTRUCTED BY THE DEVELOPER SOLELY AT DEVELOPER'S OWN COST. THE ASSESSEE HAD, NO OBLIG ATION OF ANY NATURE TO PERFORM ANY ACT, DEED OR THING FOR DEVELOPMENT AND CONSTRUCTION OF THE NEW BUILDINGS. CLAUSE 9.1 OF THE SAID AGREEMENT CATEGORICALLY PROVIDED THAT N OTHING CONTAINED IN THE AGREEMENT CONSTRUED THAT THERE WAS A PARTNERSHIP BUSINESS BET WEEN THE ASSESSEE AND THE SAID DEVELOPER OR SUCH AGREEMENT IN ANY MANNER CONSTITUT ED AN ASSOCIATION OF PERSON. THE SAID CLAUSE 9.1, CATEGORICALLY ESTABLISHED THAT THE RE WAS NO JV BETWEEN THE ASSESSEE AND THE DEVELOPER IN RESPECT OF THE DEVELOPMENT' OF THE SAID PROPERTY. IN TERMS OF THE ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 26 SAID AGREEMENT THE ASSESSEE AND M/S. KHIVRAJ TECH P ARK PVT. LTD. WERE TO OWN HOLD, ENJOY AND EXPLOIT THEIR RESPECTIVE ALLOCATIONS IN T HE NEW BUILDINGS IN THEIR OWN RIGHT AND TO THE EXCLUSION OF EACH OTHER. THE ASSESSEE WA S NOT TO SHARE ANY PROFIT OR LOSS ARISING FROM THE DEVELOPMENT AND CONSTRUCTION ACTIV ITY WHICH WAS TO BE SOLELY FUNDED, UNDERTAKEN AND EXECUTED BY M/S. KHIVRAJ TECH PARK P VT. LTD. ON IT'S OWN ACCOUNT AND PROFIT OR LOSS FROM THE SAID VENTURE WAS ENTIRELY T O THE ACCOUNT OF THE SAID DEVELOPER. AS PER PARA 3.2 ALL COSTS, CHARGES, EXPENSES FOR PR EPARATION AND SUBMISSION OF THE BUILDING PLANS AND ALL COSTS, CHARGES, EXPENSES AND OUTGOINGS FOR CONSTRUCTION, ERECTION AND COMPLETION OF THE SAID BUILDING WERE T O BE BORNE AND PAID FOR SOLELY BY THE DEVELOPER. IN ADDITION TO INCURRING THE COST OF DEVELOPMENT AND CONSTRUCTION OF THE NEW BUILDINGS, THE DEVELOPER WAS OBLIGED TO PAY RS.25 CRORES AND FURTHER PROVIDE 20% OF THE CONSTRUCTED AREA IN THE PROPOSED NEW BUI LDING TO THE ASSESSEE. IN CONSIDERATION OF UNDERTAKING AND PERFORMING THESE O BLIGATIONS, THE DEVELOPER WAS ENTITLED TO 80% OF THE CONSTRUCTED AREA IN THE PROP OSED NEW BUILDINGS TO BE CONSTRUCTED BY THE DEVELOPER. THE AGREEMENT DATED 0 7.12.2004 ENVISAGED BARTER OR EXCHANGE.. THE SALE CONSIDERATION WAS TAKEN BY THE ASSESSEE AT RS.25 CRORE PLUS ESTIMATED COST OF CONSTRUCTION OF 218,500 SQ. FT. O F THE CONSTRUCTED AREA IN THE PROPOSED NEW BUILDING. THE ESTIMATED COST OF CONSTR UCTION OF 218,500 SQ. FT. OFTHE CONSTRUCTED AREA IN THE PROPOSED NEW BUILDING WAS V ALUED BY A REGISTERED VALUER VIDE ITS VALUATION REPORT DATED 18.03.2005 WHICH COMES R S.1 050 PER SQ. FT. THE PROPERTY WAS ACQUIRED BY THE COMPANY PRIOR TO 01.04.1981 AND THEREFORE THE FAIR MARKET VALUE OF THE PROPERTY AS ON 01.04.1981 WAS TAKEN AS COST OF ACQUISITION U/S 55 OF THE ACT. THE SAME HAD BEEN VALUED BY A REGISTERED VALUER VID E HIS REPORT DATED 16.10.2004. 27.3. THE AO CALLED UPON THE ASSESSEE TO EXPLAIN O N 27.11.2007 AS TO WHY THIS SHOULD NOT BE TREATED AS BUSINESS TRANSACTION INSTE AD OF INVESTMENT. THE ASSESSEE SUBMITTED ON 05.12.2007 & 12.12.2007 THAT THE EXPRE SSION 'BUSINESS', THOUGH WIDER IN IT'S CONNOTATION; REQUIRES AN ASSESSEE'S ACTIVE PARTICIPATION IN ANY ORGANISED AND SYSTEMATIC ACTIVITY. THE EXPRESSION BUSINESS OR ADV ENTURE IN THE NATURE OF TRADE, PRESUPPOSES THAT THE ASSESSEE HAS UNDERTAKEN A VENT URE WHOSE OUTCOME IS NOT KNOWN ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 27 AND INVOLVES TAKING OF RISK. THE EXPRESSION 'VENTUR E' CONNOTATES CHANCE PLUS RISK. UNCERTAINTY ABOUT THE RETURN TO BE RECEIVED FROM TH E INVESTMENT MADE AND FACING MANY IMPONDERABLES AND EVEN THE RISK OF LOSING CAPI TAL ARE INHERENT IN THE ACTIVITY CALLED AS 'BUSINESS'. ON THE CONTRARY SAFETY OF THE PRINCIPAL AND REGULARITY OF THE RETURN ARE THE PRINCIPAL ATTRIBUTES OF INVESTMENT. THE ASSESSEE POINTED OUT THAT SINCE 1971-72, THE FACTORY LAND AT' GUINDY APPEARED IN TH E 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 SAI D 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 BUSI NESS OF PROPERTY DEALINGS NOR THE ASSESSEE HAS EVER CARRIED ON CONSTRUCTION AND DEVEL OPMENT OF REAL ESTATE AS ITS BUSINESS. IN NONE OF THE PAST ASSESSMENTS ANY INCOM E HAS BEEN ASSESSED FROM REAL ESTATE DEVELOPMENT ACTIVITY AS ASSESSEE'S BUSINESS INCOME. THE PROPERTY AT GUINDY WAS ASSIGNED IN 1971 SPECIFICALLY FOR THE PURPOSE O F SETTING UP A MANUFACTURING UNIT. ALL ALONG SINCE 1971 TILL THE LAND WAS HANDED OVER TO THE DEVELOPER, THE LAND. WAS USED ONLY FOR THE PURPOSE OF CARRYING ON MANUFACTUR ING OPERATIONS. THE ASSESSEE NEVER DEALT WITH SAID LAND AS A DEALER. THE AGREEME NT WITH 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. UNDE R 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 ANY GAIN OR LOSS FROM THE BUSINESS OF DEVELOPMENT AND CONSTRUCT ION OF THE NEW BUILDINGS, THE ASSESSEE DID NOT HAVE ANY SHARE IN PROFIT OR LOSS O F THE PROJECT DEVELOPMENT WORK BUT WAS ENTITLED TO A DEFINED CONSIDERATION. NONE OF TH E ATTRIBUTES ASSOCIATED WITH THE EXPRESSION 'BUSINESS' OR 'AN ADVENTURE IN THE NATUR E OF TRADE' WERE ASSOCIATED IN THE COMPANY'S SAID TRANSACTION WITH THE DEVELOPER. THE ASSESSEE ALSO SUBMITTED THAT UNDER THE AGREEMENT DATED 07.12.2004 THE ASSESSEE HAD ONL Y GRANTED RIGHTS OF DEVELOPMENT AND CONSTRUCTION TO THE DEVELOPER. THE DEVELOPER DI D NOT, HOWEVER, UNDERTAKE THE ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 28 CONSTRUCTION OF THE BUILDINGS DURING THE RELEVANT Y EAR 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 GAINS CA N BE ASSESSED WITH REFERENCE TO THE AGREEMENT DATED 07.12.2004 WHICH WAS TO BE PERF ORMED SUBSTANTIALLY BY THE DEVELOPER IN FUTURE. ACCORDINGLY NO BUSINESS INCOME CAN BE ASSESSED TILL THE AGREEMENT WAS PERFORMED. THE DEFINITION OF THE WORD 'TRANSFER' IN SEC 2(47) IS WIDER IN ITS CONNATION. THE DEFINITION OF 'TRANSFER' U/S 2(47) INCLUDES IN ITS AMBIT EVEN THE TRANSACTIONS WHICH UNDER GENERAL LAW DO NOT AMOUNT TO 'TRANSFER' OR 'SALE'. IN COMPUTING INCOME UNDER THE HEAD 'PROFIT & GAINS FRO M BUSINESS OR PROFESSION' THE 'SALE' HAS TO BE UNDERSTOOD IN THE CONTEXT OF GENER AL LAW. IN ASSESSING BUSINESS INCOME DEFINITION OF 'TRANSFER' AS USED IN SEC. 2(47) CANN OT BE INVOKED. ON REFERENCE TO SEC.2( 47) OF THE ACT, THE SAID DEFINITION IS APPLI CABLE ONLY IN RELATION TO A 'CAPITAL ASSET' AND THEREFORE CAN BE INVOKED ONLY WHEN INCOM E IS ASSESSED UNDER THE HEAD 'CAPITAL GAINS'. THE ASSESSEE POINTED THAT IN CASE OF DEVELOPMENT AGREEMENT ARISING DUE TO TRANSFER OF CAPITAL ASSET, THE SAME WOULD BE COVERED UNDER THE PROVISIONS OF SUB CLAUSES (V) & (VI) OF SECTION 2(4 7) OF THE I.T.ACT, 1961. 27.4. THE AO ON A CONSIDERATION OF THE ABOVE SUBMI SSIONS, HOWEVER REFERRED TO CLAUSE 4.5 OF THE AGREEMENT WHICH PROVIDES AS FOLLO WS: 'THE OWNER AGREES TO HAND OVER PEACEFUL AND VACANT POSSESSION OF THE SAID LAND TOGETHER WITH THE EXISTING STRUCTURES TO THE D EVELOPER ON OR BEFORE JANUARY, 31, 2005' AND CLAUSE 6.7 STATES THAT 'IN A DDITION TO THE OWNER'S ALLOCATION, THE DEVELOPER SHALL PAY A SUM OF RS.25, 00, 00, 000/- (RUPEES TWENTY FIVE CRORES ONLY) TO {HE OWNER IN THE MANNER FOLLOWING: (A) A SUM OF RS. 4, 00, 00, 000/- (RUPEES FOUR CROR ES ONLY) ALREADY PAID THE RECEIPT OF WHICH SUM THE OWNER DOTH HEREBY ADMIT AN D ACKNOWLEDGE (B) THE BALANCE SUM OF RS.21, 00, 00,0001- (RUPEES TWENTY ONE CRORE ONLY) AT THE TIME OF THE OWNER HANDING OVER VACANT AND PEACE FUL POSSESSION OF THE SAID. LAND TO THE DEVELOPER IN ACCORDANCE WITH CLAUSE 4. 5 ABOVE FREE FROM ANY ENCUMBRANCE. ' ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 29 ACCORDING TO THE AO FROM THE PERUSAL OF THIS AGREEM ENT, IT WAS CLEAR THAT THE OWNER WILL GET RS.25 CRORES AND 20% SHARE IN THE CONSTRUC TED PROPERTY AND THE CONSIDERATION FOR SUCH TRANSFER SHALL INCLUDE THE COST INCURRED B Y THE DEVELOPER ON THE CONSTRUCTION OF OWNER'S ALLOCATION ALONG WITH THE LAND WHICH THE OW NER HAS PURCHASED. THE OWNER SHALL BE FREE TO TRANSFER THE LAND AND SHALL BE ENT ITLED TO ENTER INTO SEPARATE AGREEMENTS FOR TRANSFER IN RESPECT OF THEIR RESPECTIVE ALLOCAT ION. ACCORDING TO THE AO FROM THE ABOVE AGREEMENT, IT WAS CLEAR THAT THE ASSESSEE WIL L GET RS.25 CRORES AND 20% CONSTRUCTED AREA AS ITS SHARE IN RETURN FOR THE TRA NSFER OF ITS LAND. ACCORDING TO THE AO, THE ASSESSEE TRANSFERRED ITS PROPERTY FOR DEVEL OPMENT OF NEW VENTURE FOR COMMERCIAL PURPOSES AND THEREBY RECEIVED SUM OF RS. 25 CRORES AS PART PAYMENT IN COURSE OF NEW BUSINESS VENTURE AND BALANCE 20% CONS TRUCTED AREA WOULD BE RECEIVED AFTER COMPLETION OF PROJECT. THE AO ALSO NOTICED THAT OWNERS SHARE IN THE VENTURE WAS ALSO SOLD BY ASSESSEE IN NEXT FINANCIAL YEAR. ACCORDING TO THE AO, THE ARGUMENT OF THE ASSESSEE THAT THERE WAS NO TRANSFER OF LAND AS IS KNOWN IN GENERAL LAW AND THEREFORE NO COMMERCIAL GAINS CAN BE ASSESSED WITH REFERENCE TO THE AGREEMENT DATED 07.12.2004 WHICH WAS TO BE PERFORMED SUBSTANTIALLY BY THE DEVELOPER IN FUTURE WAS DEVOID OF FACTS. THE AO THEREFORE REFERRED TO SEVER AL DECISIONS IN WHICH THE PROPOSITIONS LAID DOWN WERE AS FOLLOWS: (I) IF, LAND IS PURCHASED WITH THE OBJECTIVE OF DIVIDIN G 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 NAT URE OF TRADE. SMT. INDRAMANI BAI & ANR. VS. ADDL. CIT 200 ITR 594 (SC) (II) 'THE QUESTION WHETHER THE TRANSACTION IS AN ADVENTU RE IN THE NATURE OF TRADE MUST BE DECIDED ON A CONSIDERATION OF ALL THE RELEVANT FACTS AND CIRCUMSTANCES WHICH ARE PROVED IN THE PARTICULAR CA SE. THE ANSWER TO THE QUESTION DOES NOT DEPEND UPON THE APPLICATION OF AN Y ABSTRACT RULE, PRINCIPLE OR FORMULA BUT MUST DEPEND UPON THE TOTAL IMPRESSION AND EFFECT OF ALL THE RELEVANT FACTS AND CIRCUMSTANCES ESTABLISHED IN THE PARTICULAR CASE.' THEREFORE, FACTS WHICH ARE NOT ES TABLISHED CANNOT BE TAKEN AS THE BASIS NOR CAN ONE IGNORE THE FACTS ACT UALLY FOUND TO DECIDE THE ISSUE BASED ON THE PRINCIPLES LAID DOWN IN OTHE R CASES. P.M. MOHAMMED MEERAKHAN VS. CIT 73 ITR 735 (SC). ACCORD ING TO THE AO, THE ASSESSEE ENTERED INTO A SOLITARY OR ISOLATE D TRANSACTION AND CONVERTED LAND INTO CONSTRUCTED COMMERCIAL UNIT AND THEN SOLD IT TO OUTSIDE PARTIES AND THEREFORE INDULGED IN AN ADVENT URE IN THE NATURE OF TRADE. ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 30 (III) CIT VS. G. VENKATASWAMI NAIDU 35 ITR 594 (SC) WHERE IN IT WAS OBSERVED THAT: 'IT IS IMPOSSIBLE TO EVOLVE ANY FORMULA WHICH CAN B E APPLIED IN DETERMINING THE CHARACTER OF ISOLATED TRANSACTION W HICH COME BEFORE THE COURTS IN TAX PROCEEDINGS. IT WOULD BESIDES BE INEX PEDIENT TO MAKE ANY ATTEMPT TO EVOLVE SUCH A RULE OR FORMULA. GENERALLY SPEAKING, IT WOULD NOT BE DIFFICULT TO DECIDE WHETHER A GIVEN TRANSACT ION IS AN ADVENTURE IN THE NATURE OF TRADE OR NOT. IT IS THE CASES ON THE BORDER LINE THAT CAUSE DIFFICULTY. IF A PERSON INVESTS MONEY IN LAND INTEN DING TO HOLD IT, ENJOYS ITS INCOME FOR SOME TIME, AND THEN SELLS IT AT A PR OFIT, IT WOULD BE A CLEAR CASE OF CAPITAL ACCRETION AND NOT PROFIT DERIVED FR OM AN ADVENTURE IN THE NATURE OF TRADE. CASES OF REALISATION OF INVESTMENT S 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 RELEVAN T. WAS THE PURCHASER A TRADER AND WERE THE PURCHASE OF THE COMMODITY AND I TS RESALE ALLIED TO HIS USUAL TRADE OR BUSINESS OR INCIDENTAL TO IT ? A FFIRMATIVE ANSWERS TO THESE QUESTIONS MAY FURNISH RELEVANT DATA FOR DETER MINING THE CHARACTER OF THE TRANSACTION. WHAT IS THE NATURE OF THE COMMO DITY PURCHASED AND RESOLD AND IN WHAT QUANTITY WAS IT PURCHASED AND RE SOLD? IF THE COMMODITY PURCHASED IS GENERALLY THE SUBJECT-MATTER OF TRADE, AND IF IT IS PURCHASED IN VERY LARGE QUANTITIES, IT WOULD TEND T O ELIMINATE THE POSSIBILITY OF INVESTMENT FOR PERSONAL USE, POSSESS ION OR ENJOYMENT. DID THE PURCHASER BY ANY ACT SUBSEQUENT TO THE PURCHASE IMPROVE THE QUALITY OF THE COMMODITY PURCHASED AND THEREBY MADE IT MORE READILY RESALEABLE ? WHAT WERE THE INCIDENTS ASSOCIATED WITH THE PURCH ASE AND RESALE? WERE THEY SIMILAR TO THE OPERATIONS USUALLY ASSOCIA TED 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 SOM E TIME AND IF A PROFITABLE OFFER IS RECEIVED MAY SELL IT. DURING TH E TIME THAT THE PURCHASER HAD ITS POSSESSION HE MAY BE ABLE TO CLAI M PRIDE OF POSSESSION AND AESTHETIC SATISFACTION; AND IF SUCH A CLAIM IS UPHELD THAT WOULD BE A FACTOR AGAINST THE CONTENTION THAT THE TRANSACTION IS IN THE NATURE OF TRADE. THESE AND OTHER CONSIDERATIONS ARE SET OUT AND DISC USSED IN JUDICIAL DECISIONS WHICH DEAL WITH THE CHARACTER OF TRANSACT IONS ALLEGED TO BE IN THE NATURE OF TRADE. IN CONSIDERING THESE DECISIONS IT WOULD BE NECESSARY TO REMEMBER THAT THEY DO NOT PURPORT TO LAY DOWN AN Y GENERAL OR UNIVERSAL TEST. THE PRESENCE OF ALL THE RELEVANT CI RCUMSTANCES 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 THEI R DISTINCTIVE CHARACTER. IN EACH CASE, IT IS THE TOTAL EFFECT OF ALL RELEVAN T FACTORS AND ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 31 CIRCUMSTANCES THAT DETERMINES THE CHARACTER OF THE TRANSACTION; AND SO, THOUGH WE MAY ATTEMPT TO DERIVE SOME ASSISTANCE FRO M DECISIONS BEARING ON THIS POINT, WE CANNOT SEEK TO DEDUCE ANY RULE FROM THEM AND MECHANICALLY APPLY IT TO THE FACTS BEFORE US. IN TH IS CONNECTION IT WOULD BE RELEVANT TO REFER TO ANOTHER TEST WHICH IS SOMET IMES APPLIED IN DETERMINING THE CHARACTER OF THE TRANSACTION. WAS T HE PURCHASE MADE WITH THE INTENTION TO RESELL IT AT A PROFIT? IT IS OFTEN SAID THAT A TRANSACTION OF PURCHASE FOLLOWED BY RESALE CAN EITHER BE AN INV ESTMENT OR AN ADVENTURE IN THE NATURE OF TRADE. THERE IS NO MIDDL E COURSE AND NO HALF- WAY HOUSE. THIS STATEMENT MAY BE BROADLY TRUE ; AND SO SOME JUDICIAL DECISIONS APPLY THE TEST OF THE INITIAL INTENTION T O RESELL IN DISTINGUISHING ADVENTURES IN THE NATURE OF TRADE FROM TRANSACTIONS OF INVESTMENT. EVEN IN THE APPLICATION OF THIS TEST, DISTINCTION WILL H AVE TO BE MADE BETWEEN INITIAL INTENTION TO RESELL AT A PROFIT WHICH IS PR ESENT BUT NOT DOMINANT OR SOLE; IN OTHER WORDS, CASES DO OFTEN ARISE WHERE TH E PURCHASER MAY BE WILLING AND MAY INTEND TO SELL THE PROPERTY PURCHAS ED AT PROFIT, BUT HE WOULD ALSO INTEND AND BE WILLING TO HOLD AND ENJOY IT IF A REALLY HIGH PRICE IS NOT OFFERED. THE INTENTION TO RESELL MAY I N SUCH CASES BE COUPLED WITH THE INTENTION TO HOLD THE PROPERTY. CASES MAY, HOWEVER, ARISE WHERE THE PURCHASE HAS BEEN MADE SOLELY AND EXCLUSIVELY W ITH THE INTENTION TO RESELL AT A PROFIT AND THE PURCHASER HAS NO INTENTI ON OF HOLDING THE PROPERTY FOR HIMSELF OR OTHERWISE ENJOYING OR USING IT. THE PRESENCE OF SUCH AN INTENTION IS NO DOUBT A RELEVANT FACTOR AND UNLESS IT IS OFFSET BY THE PRESENCE OF OTHER FACTORS IT WOULD RAISE A STRO NG 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 T HE CASE, THE COURT MAY, DESPITE THE SAID INITIAL INTENTION, BE INCLINE D TO HOLD THAT THE TRANSACTION WAS NOT AN ADVENTURE IN THE NATURE OF T RADE. WE THUS COME BACK TO THE SAME POSITION AND THAT IS THAT THE DECI SION ABOUT THE CHARACTER OF A TRANSACTION IN THE CONTEXT CANNOT BE BASED SOLELY ON THE APPLICATION OF ANY ABSTRACT RULE, PRINCIPLE OR TEST AND MUST IN EVERY CASE DEPEND UPON ALL THE RELEVANT FACTS AND CIRCUMTSANCE S.' ACCORDING TO THE AO, THE ASSESSEE WAS TAKING A RISK BY HANDING OVER A VENTURE TO A DEVELOPER. THE ASSESSEE COULD HAVE SO LD THE PROPERTY DIRECTLY IF IT WAS NOT INTERESTED IN TAKING RISK AS PER THE MARKET PRICE PREVALENT ON THE DATE OF HANDING OVER. (IV) DALMIA CEMENT LTD. VS. CIT 105 ITR 633 (SC) WHEREIN IT WAS HELD THAT WHERE THE INTENTION OF THE RESALE WAS THERE ALMOST FROM THE BEGINNING, AND WAS THE DOMINANT INTENTION FOR THE PURCHASE, TR ANSACTION IS AN ADVENTURE IN THE NATURE OF TRADE. (V) RAJA BAHADUR KAMKHAYA NARAIN SINGH VS. CIT 77 ITR 2 53 (SC) WHEREIN IT WAS HELD THAT WHERE A TRANSACTION IS NOT MERE REALIZATION OF ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 32 INVESTMENTS BUT ACT OF MAKING PROFIT THEN THE SAME IS A TRADING VENTURE. ACCORDING TO THE AO, THE ASSESSEE BY HANDING OVER P OSSESSION TO A DEVELOPER WAS TO GET CONSTRUCTED AREA INSTEAD OF OP EN LAND. THE ASSESSEE WANTED TO MAKE GAIN ON SALE OF LAND AND TH EREFORE HAD INDULGED IN AN ADVENTURE IN THE NATURE OF TRADE. (VI) CIT VS. S.P.BALASUBRAMANIAM 250 ITR 127 (MAD.) WHER EIN IT WAS HELD THAT EVEN A SINGLE ADVENTURE IN THE NATURE OF TRADE WAS SUFFICIENT TO CONSTITUTE TRADE OR BUSINESS AND IT WAS NOT NECESSA RY THAT THERE SHOULD BE A SERIES OF TRANSACTIONS BEFORE THE ACTIVITIES ARE CHARACTERIZED AS A TRADE OR BUSINESS. THE AO FINALLY CONCLUDED THAT IN VIEW OF THE AFORES AID DISCUSSION, IT IS HELD THAT THE INCOME FROM SALE OF LAND AND DEVELOPMENT RIGHT OF T HE ASSESSEE IS NOTHING BUT AN ADVENTURE IN THE NATURE OF TRADE AND THE INCOME FRO M 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 DEVE LOPMENT AGREEMENT; CONDUCT OF THE ASSESSEE BEFORE AND AFTER THE AGREEMENT; APP LICABLE LEGAL PROVISIONS AND CASE LAWS AVAILABLE ON SUBJECT, I AM NOT IN AGREEME NT WITH AO'S CONCLUSION. IN MY OPINION THE AO APPLIED ENTIRELY WRONG CRITERIA'S IN DECIDING APPROPRIATE HEAD OF INCOME. IT IS NO DOUBT TRUE THAT THE COURTS HAVE HELD THAT EVEN A SINGLE PLUNGE IN THE WATERS OF TRADE BY AN ASSESSEE MAY BE SUFFICIENT TO CONSTITUTE THE SAME AS AN ADVENTURE IN NATURE OF TRADE. IT IS HOWE VER REQUIRED TO BE DEMONSTRATED BY THE AO FROM THE CONDUCT OF THE ASSE SSEE THAT. THE PLUNGE IN THE WATERS OF TRADE WAS TAKEN BY THE .ASSESSEE HIMS ELF AND NOT BY SOMEBODY ELSE, IN DECIDING APPROPRIATE' HEAD OF INCOME FOR A SSESSMENT OF PROFIT ACCRUING .ON SALE OF LAND; IT IS NECESSARY TO ANALYZE THE CO NDUCT AND OBJECT OF THE ASSESSEE AT THE TIME OF ITS PURCHASE AND HIS SUBSEQ UENT DEALING WITH THE PROPERTY TILL ITS SALE. THE DETERMINATIVE OR THE DE CISIVE FACTOR IS HOWEVER NOT THE ASSESSEE'S INTENTION OR CONDUCT AT THE TIME OF 'SAL E' OF ASSET OR THEREAFTER. THE MOST IMPORTANT FACTOR IN DECIDING THE ISSUE IS THE INTENT AND OBJECT OF THE ASSESSEE AT THE TIME OF PURCHASE OF THE ASSET. IN THE PRESENT CASE PROFIT ACCRUED OR AROSE TO THE ASSESSEE NOT ON SALE OF CONSTRUCTIO N SPACES IN THE BUILDINGS WHICH WERE PROPOSED TO BE CONSTRUCTED BY THE DEVELO PER. THE PROFIT OR GAIN IN THE PRESENT CASE ACCRUED TO THE ASSESSEE ON TRANSFE R OF ASSESSEE'S ENTIRE FACTORY LAND AT GUINDY ADMEASURING 7.1 ACRES. IN DECIDING T HE APPROPRIATE HEAD OF ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 33 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 DEVELOP ER IN TERMS OF AGREEMENT DATED 07.12.2004. 9.5 FROM THE DOCUMENTS ON RECORD IT APPEARED THAT T HE INDUSTRIAL LAND IN GUINDY WAS ACQUIRED BY THE ASSESSEE FROM THE GOVT OF MADRA S IN 1971 FOR THE PURPOSE OF SETTING UP A FACTORY FOR MANUFACTURE OF DRY CELL BATTERIES. AFTER ITS ACQUISITION; THE APPELLANT DID SET UP A FACTORY WHI CH WAS OPERATIONAL TILL 2005. IT THEREFORE APPEARED THAT THE ASSESSEE USED THE LAND IN QUESTION FOR ABOUT 34 YEARS FOR CONDUCTING ITS MANUFACTURING OPERATIONS T HEREON. DURING THIS PERIOD, STARTING FROM 1971, THE LAND IN QUESTION ALWAYS APP EARED IN APPELLANT'S BOOKS AS ITS FIXED ASSET AND NOT AS STOCK IN TRADE. DURING T HE PERIOD OF 34 YEARS WHEN THE ASSESSEE WAS OWNER OF THE IMPUGNED LAND AT GUINDY, THE ASSESSEE USED THE SAID LAND FOR THE PURPOSE OF CARRYING ON MANUFACTURING B USINESS. THE CONDUCT OF THE ASSESSEE OVER LONG PERIOD EXCEEDING 30 YEARS THEREF ORE 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 TH E 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 DEVEL OPMENT. NEITHER IN THE PAST ASSESSMENTS NOR IN THE SUBSEQUENT ASSESSMENTS ANY I NCOME UNDER THE HEAD PROFITS & GAINS OF BUSINESS WAS ASSESSED IN RESPECT OF ASSESSEE'S BUSINESS OF REAL ESTATE DEVELOPMENT. THESE FACTS THEREFORE ESTA BLISHED THAT THE OBJECT AND INTENT OF THE ASSESSEE AT THE TIME OF PURCHASE OF T HE LAND IN 1971 WAS TO UTILIZE THE SAME IN THE COURSE AND FOR THE PURPOSE OF ITS M ANUFACTURING BUSINESS. SAVE AND EXCEPT CONDUCTING MANUFACTURING BUSINESS ON THE SAID LAND FOR MORE THAN 30 YEARS THE ASSESSEE DID NOT UTILIZE THE LAND FOR ANY OTHER PURPOSE. THERE WAS NO EVIDENCE ON RECORD WHICH IN ANY MANNER ESTABLISH ED THAT THE ASSESSEE HAD INTENTION OR OBJECT TO DEAL WITH THE SAID LAND TREA TING IT TO BE STOCK IN TRADE OF ITS BUSINESS OF REAL ESTATE DEVELOPMENT. IN FACT NO MAT ERIAL 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 E NGAGED IN BUSINESS OF REAL ESTATE DEVELOPMENT. THESE FACTS THEREFORE ESTABLISH ED THAT APPELLANT'S OBJECT PURPOSE AND INTENT AT THE TIME OF PURCHASE OF GUIND Y LAND WAS TO OWN, HOLD, ENJOY AND UTILIZE IT FOR CARRYING ON ITS MANUFACTUR ING BUSINESS. THE VERY FACT THAT FOR MORE THAN 30 YEARS THE APPELLANT CARRIED O N MANUFACTURING BUSINESS ON THE FACTORY LAND AT GUINDY AND IN THE AUDITED ACCOU NTS THE LAND APPEARED IN THE BALANCE SHEET AS 'FIXED ASSET' CLEARLY ESTABLISHED THAT THE APPELLANT NEVER ENTERTAINED ANY DESIRE OR INTENTION TO DEAL WITH TH E SAID PROPERTY AS STOCK IN TRADE OF ITS REAL ESTATE DEVELOPMENT BUSINESS AND T HEREFORE THE LAND IN QUESTION COULD NOT BE CONSIDERED BY THE AO TO BE PART OF APP ELLANT'S CIRCULATING CAPITAL SO AS TO GIVE RISE TO BUSINESS PROFIT ON TRANSFER T HEREOF. 9.6 EVEN WITH REFERENCE TO APPELLANT'S DEALING WI TH THE LAND AFTER ITS POSSESSION WAS HANDED OVER TO THE DEVELOPER, I FIND THAT THERE WAS NO MATERIAL ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 34 CHANGE IN THE APPELLANT'S DEALING WITH THE LAND. UN DER THE AGREEMENT DATED 07.12.2004 THE APPELLANT HAD ONLY OBLIGATION TO HAN D OVER VACANT POSSESSION OF LAND, FREE FROM ALL ENCUMBRANCES TO ENABLE THE DEVE LOPER TO CARRY ON CONSTRUCTION OF THE NEW BUILDING. THE TERMS OF THE AGREEMENT ESTABLISHED BEYOND ANY DOUBT THAT THE APPELLANT HAD NO ACTIVE I ROLE IN DEVELOPMENT AND CONSTRUCTION OF THE PROPOSED BUILDING. THE AGREEMEN T SPECIFICALLY PROVIDED THAT ALL COSTS, CHARGES, EXPENSES RELATING TO CONSTRUCTI ON OF THE NEW BUILDING WERE TO BE SOLELY BORNE BY THE DEVELOPER. THE APPELLANT BEI NG OWNER OF THE LAND HAD NO OBLIGATION TO MEET ANY PART OF SUCH COST. ALL LIAB LITIES, RESPONSIBILITIES AND OBLIGATIONS ARISING OR PERTAINING TO DEVELOPMENT AN D CONSTRUCTION OF THE PROPOSED BUILDINGS WERE TO BE DISCHARGED BY THE DEV ELOPER ALONE. 9.7. UNDER THE AGREEMENT DATED 07.12.2004, THE APPE LLANT WAS ENTITLED TO RECEIVE ONLY THE CONSIDERATION SPECIFIED IN THE AGR EEMENT WHICH WAS PARTLY IN CASH AND PARTLY IN KIND. THE APPELLANT'S ENTITLEMEN T TO RECEIVE THE DEFINED CONSIDERATION WAS NOT DEPENDANT ON FACT AS TO WHETH ER THE DEVELOPER MADE ANY PROFIT OR SUFFERED LOSS FROM DEVELOPMENT AND CONSTR UCTION OF THE NEW BUILDINGS. NO PART OF THE PROFITS THAT WOULD ACCRUE TO THE DEVELOPER FROM DEVELOPMENT OF THE FACTORY LAND WAS TO BE SHARED BY HIM WITH THE APPELLANT. I THEREFORE FIND FULL FORCE IN THE SUBMISSIONS OF THE AIR THAT THE APPELLANT BEING OWNER OF LAND WAS ENTITLED TO RECEIVE ONLY DEFINED AND DEFINITE CONSIDERATION FOR TRANSFER OF DEVELOPMENT RIGHTS. THE ASSESSEE PE R SE DID NOT PARTICIPATE IN THE BUSINESS VENTURE OF DEVELOPING THE GUINDY LAND BECA USE THE AGREEMENT BETWEEN THE PARTIES DID NOT ENVISAGE ANY ACTIVE ROL E FOR THE LAND OWNER IN THE MATTER OF CARRYING OUT DEVELOPMENT, AND CONSTRUCTIO N ON THE SAID LAND. 9.8. THE RELIANCE PLACED BY 'THE AIR ON THE DECISIO N 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 GUJAR AT HIGH COURT HAD CONSIDERED THE JUDGMENT OF APEX COURT IN THE CASE OF G.VENKATA SWAMI NAIDU & CO. V CIT (35 ITR 594) WHEREIN THE APEX COURT HAD HELD TH AT NORMALLY PURCHASE OF LAND REPRESENTS INVESTMENTS OF MONEY AND NOT AS A B USINESS VENTURE. THE GUJARAT HIGH COURT HELD THAT! IF THERE IS NO SAFETY OF CAPITAL INVESTED AND NO CERTAINTY OF REGULAR RETURN THEN IT WOULD BE DIFFIC ULT TO SAY THAT SUCH TRANSACTION IS AN INVESTMENT. IN THE APPELLANT'S CASE HOWEVER T HE TRANSACTION WITH DEVELOPER DID NOT INVOLVE ANY RISK BEING TAKEN BY T HE ASSESSEE. IRRESPECTIVE WHETHER THE DEVELOPER MADE PROFIT OR INCURRED LOSS THE APPELLANT'S ENTITLEMENT TO RECEIVE CONSIDERATION WAS DEFINED AND FIXED. THE SE 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 ST OCK 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 COMMERCIAL RISK WAS TAKEN BY ASSESSEE BECAUSE I RRESPECTIVE OF THE COMMERCIAL RESULT OF DEVELOPER'S DEVELOPMENT VENTU RE ASSESSEE WAS TO RECEIVE ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 35 DEFINITE CONSIDERATION AND DID NOT HAVE SHARE IN PR OFIT OR LOSS IN THE VENTURE, WHICH SOLELY BELONG TO THE DEVELOPER. 9.9. ON THE FACTS INVOLVED IN THE PRESENT CASE I FIND THAT NONE OF THE JUDICIAL DECISIONS ON WHICH THE AO RELIED WERE APPLICABLE TO THE APPELLANT'S CASE SO AS TO ENABLE HIM TO REACH CONCLUSION THAT THE PROFIT O N TRANSFER OF DEVELOPMENT 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 CELEBR ATED JUDGMENT OF THE SUPREME COURT IN G.VENKATASWAMI NAIDU & CO. VS. CIT (35 ILR 594) ON WHICH THE AO RELIE8 ISO HEAVILY, THE COURT HAD HELD THE ASSESSEE THEREIN TO BE DEALER IN LAND ONLY BECAUSE OF THE PECULIAR FACTS INVOLVED. AFTER ANALYZING THE FACTS FOUND BY THE TRIBUNAL THE APEX COURT IN THAT CASE HELD THAT THE ASSESSEE'S INTENTION RIGHT. AT THE TIME OF PURCHASE OF LAND WAS TO SELL IT TO , TH E MANAGED COMPANY WHENEVER IT THOUGHT PROFITABLE SO TO DO. THE COURT NOTED THA T THE ASSESSEE'S INTENTION AT THE TIME OF PURCHASE OF LAND ITSELF WAS TO TURN IT OVER AT A PROFIT TO THE MANAGED COMPANY AND THEREFORE THE COURT HELD THAT EVEN THOU GH IT WAS A SOLITARV TRANSACTION YET IT WAS AN ADVENTURE IN NATURE OF TR ADE. 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 INDUSTR IAL UNDERTAKING. PURSUANT TO 'THE SAID OBJECT THE APPELLANT DID SET UP ITS MANUF ACTURING BUSINESS AND CARRIED ON THE MANUFACTURING OPERATION ON THE LAND FOR MORE THAN 30 YEARS. ,DURING THIS LONG PERIOD OF HOLDING THE APPELLANT WAS NOT ENGAGE D IN THE BUSINESS OF DEALING IN LAND OR DEVELOPMENT OF REAL ESTATE. EVEN IN THE SUBSEQUENT YEAR THE APPELLANT WAS NOT FOUND BY THE AO TO BE DEALER IN LAND OR ENG AGED IN DEVELOPMENT OF REAL ESTATE. ON THESE FACTS THEREFORE I FIND FULL FORCE IN THE SUBMISSIONS OF THE A/R THAT THE APPELLANT DID NOT ACQUIRE LAND AT GUINDY . FOR THE PURPOSES OF' BUSINESS OF REAL ESTATE DEVELOPMENT AND THEREFORE THE PROF IT 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 DIVID ED IT INTO PLOTS AND THEREAFTER SOLD. ON THE CON /I~RY IN THE PRESENT CASE THE ASSE SSEE PURCHASED THE LAND IN 1971 FOR SETTING,! TIP A FACTORY. AFTER CONDUCTING MANUFACTURING OPERATION FOR MORE THAN 30 YEARS THE APPELLANT DISPOSED OFF THE E NTIRE LAND BY GRANTING DEVELOPMENT RIGHTS IN RESPECT THEREOF FOR A DEFINIT E CONSIDERATION WHICH WAS PARTLY RECEIVABLE IN CASH AND PARTLY IN KIND. ON- T HESE FACTS THEREFORE I AM IN AGREEMENT WITH THE SUBMISSIONS FOR THE AIR THAT THE DECISIONS OF THE SUPREME COURT IN THE CASE OF P.M.MOHAMMED MEERAKHAN VS. CIT ( 73 ITR 753), ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 36 DALMIA CEMENT LTD VS. CIT (105 ITR 633 ) & SMT. IND RAMANI BAI VS. CIT (200 ITR 594) WERE NOT APPLICABLE. MOREOVER THE DEC ISION OF THE SUPREME COURT IN THE CASE OF RAJA BAHADUR KAMKYA NARAYAN SI NGH 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 INDUSTRIAL UNDERTAKING. AFTER ITS PUR CHASE THE APPELLANT USED THE LAND FOR MORE THAN 30 YEARS IN COURSE OF ITS MANUFA CTURING BUSINESS; TREATING IT TO BE FIXED ASSET OF THE SAID BUSINESS. ON THESE FA CTS THEREFORE I AM IN FULL AGREEMENT WITH T.0E' 'APPELLANT'S CONTENTION THAT G UINDY LAND CONSTITUTED APPELLANT'S 'CAPITAL ASSET' AND ON ITS 'TRANSFER' W ITHIN THE MEANING OF SEC 2(47) OF THE ACT, THE RESULTANT GAINS CHARGEABLE UNDER TH E HEAD 'CAPITAL GAINS'. THE APPELLANT'S CLAIM FOR ASS ESSMENT UNDER THE HEAD CAPITAL GAIN IS FOUND TO BE SUPPORTED BY THE FOLLOW ING JUDICIAL DECISIONS ON WHICH RELIANCE WAS PLACED BY THE LD. AIR IN HIS WRI TTEN 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) (2 003) IV) CIT VS. TRIVEDI (V.A) (1721TR 95 (BOM) 1998 29. THE CIT(A) ALSO PLACED RELIANCE ON THE DECISIO N OF ITAT KOLKATA IN ITA NO.92/KOL/2010 DATED 13.4.2011 IN THE CASE OF DCIT VS. MACHINO TECHNO SALES LTD., WHEREIN ON IDENTICAL FACTS THE TRIBUNAL HELD THAT T HE GAIN IN QUESTION WAS TO BE CONSTRUED AS CAPITAL GAIN AND NOT INCOME FROM BU SINESS. THE CIT(A) ALSO TOOK NOTE OF THE FACT THAT THE ACT OF THE ASSESSEE SUBSE QUENTLY OFFERING TO TAX INCOME FROM SALE OF THE AREA WHICH IT RECEIVED AS ITS SHARE FRO M THE DEVELOPER IN AY 2006-07 AS INDICATIVE OF HIS INTENTION TO TREAT THE GAIN FROM SALE OF LAND AS CAPITAL GAIN. THE CIT(A) ALSO TOOK NOTE OF THE FACT THAT IN THE SUBSE QUENT YEAR THE REVENUE HAS ACCEPTED THE GAIN IN QUESTION AS GIVING RAISE TO CAPITAL GA IN. 30. FOR THE REASONS GIVEN ABOVE, THE CIT(A) DIRECT ED 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 REVE NUE HAS RAISED GR.NO.6 BEFORE THE TRIBUNAL. WE HAVE HEARD THE SUBMISSIONS OF THE LEA RNED DR WHO RELIED ON THE ORDER ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 37 OF THE AO. THE LEARNED COUNSEL FOR THE ASSESSEE RE ITERATED SUBMISSIONS MADE BEFORE THE CIT(A) AND RELIED ON THE ORDER OF THE CIT(A). 32. WE HAVE GIVEN A VERY CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS. IN THIS REGARD THE REQUIREMENT OF LAW FOR REGARDING A PERSO N HAVING VENTURED INTO TRADE AS LAID DOWN IN JUDICIAL PRONOUNCEMENTS HAVE TO BE SEEN. T HE LEARNED COUNSEL FOR THE ASSESSEE HAS RELIED ON SEVERAL DECISIONS OF HONBLE HIGH COURTS AND HONBLE SUPREME COURT. IN THE CASE OF G. VENKATASWAMI NAI DU & CO. VS. CIT (35 ITR 594) (SC), THE HONBLE SUPREME COURT HAD TO DEAL WITH A QUESTION AS TO WHETHER PURCHASE OF LAND ADJACENT TO MILLS OF COMPANY AND SALE OF LA ND TO COMPANY BY MANAGING AGENT OF THE COMPANY WOULD CONSTITUTE ADVENTURE IN THE NA TURE OF TRADE. THE HONBLE SUPREME COURT OBSERVED THAT THE QUESTION WHETHER GA IN 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 ITSELF SHO ULD BE LOOKED AT TO SEE IF IT IS ESSENTIALLY OF A COMMERCIAL CHARACTER. A PURCHASE A ND SALE OF LAND MAY BE OF THAT CHARACTER BUT NOT NECESSARILY SO. IF A PERSON IS SY STEMATICALLY ENGAGED IN A SERIES OF TRANSACTIONS OF PURCHASE AND SALE OF LANDS WITH A V IEW TO MAKE PROFIT OUT OF THEM, THAT MAY INDICATE THAT HE IS OCCUPIED IN A TRADING ACTIV ITY. BUT IT IS WELL SETTLED THAT OWNERSHIP OF LAND BY ITSELF IS NOT A TRADE. AND SO A PERSON MAY PURCHASE PROPERTY, HOLD AND ENJOY IT, DERIVE INCOME FROM IT AND, WHEN THERE IS APPRECIATION IN ITS VALUE, SELL IT AT AN ENHANCED PRICE. THAT WILL NOT BE A TR ADE OR AN ADVENTURE IN THE NATURE OF TRADE. IN SUCH A CASE, WHILE BUYING LAND, THE PURCH ASER 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 I NCIDENTAL TO OWNERSHIP OF LAND AND THERE IS NOTHING COMMERCIAL ABOUT THEM. SALES OF LA ND, IN THOSE CIRCUMSTANCES, ARE NO MORE THAN A REALISATION OF CAPITAL OR CONVERSION OF ONE FORM OF IT INTO ANOTHER. 33. THE PRINCIPLE LAID DOWN IN THE AFORESAID DECIS ION IN THE CASE OF VENKATASAMI NAIDU (SUPRA) HAS BEEN FOLLOWED IN SEVERAL DECISION S BASED ON THE FACTS AND CIRCUMSTANCES PREVAILING IN EACH CASE. ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 38 34. LET US EXAMINE THE FACTS AND CIRCUMSTANCES PRE VAILING IN THE CASE OF THE ASSESSEE IN THE PRESENT APPEAL. (I) LAND ADMEASURING 8.39 ACRES AT GUINDY, CHENNAI WAS ACQUIRED BY THE ASSESSEE IN TERMS OF AN INDENTURE EXECUTED BY THE GOVERNOR OF M ADRAS DATED 30.11.1971. THE SAID LAND WAS SITUATED IN THE INDUSTRIAL ESTATE SET UP B Y THE THEN GOVERNMENT OF MADRAS. REGISTERED DEED OF SALE IN FAVOUR OF THE ASSESSEE W AS EXECUTED ON 08.02.1989. THE ASSESSEE WAS PUT IN POSSESSION OF THE SAID LAND IN 1971. (II) THE ASSESSEE CONSTRUCTED FACTORY BUILDINGS TH ERE ON AND THE FACTORY WAS ENGAGED IN MANUFACTURE OF DRY CELL BATTERIES AND ITS COMPON ENTS TILL F.Y.2004-05. (III) THE ASSESSEE HAD ANOTHER FACTORY AT 1075, TH IRUVOTTIYUR HIGH ROAD, CHENNAI WHICH IS ALSO ENGAGED IN MANUFACTURE OF DRY CELL BA TTERIES. SINCE BOTH THE FACTORIES WERE ENGAGED IN MANUFACTURE OF DRY CELL BATTERIES, THESE FACTORIES PERFORMED MORE OR LESS SIMILAR FUNCTIONS AND THEREFORE TO ACHIEVE ECO NOMIES OF SCALE AND TO HAVE BETTER UNIFIED CONTROL OVER THE MANUFACTURING OPERATIONS T HE ASSESSEE DECIDED TO CONCENTRATE MANUFACTURING OPERATION AT ONE LOCATION IN CHENNAI AT 1075, THIRUVOTTIYUR HIGH ROAD. PURSUANT TO THIS DECISION, THE ASSESSEE FOUND THE F ACTORY LAND AT GUINDY 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 TRAN SFERRED 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 THE TRANSFER OF P ROPERTY ACT, 1882 READ WITH SECTION 2(47)(IV) OF THE INCOME-TAX ACT, 1961. ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 39 (V) IN RESPECT OF THE REMAINING AREA OF 7.29 ACRES THE ASSESSEE ENTERED INTO AN AGREEMENT ON 07.12.2004 WITH MESSRS. KHIVRAJ TECH P ARK PVT. LTD., GRANTING IT RIGHTS OF DEVELOPMENT AND CONSTRUCTION OF NEW BUILDINGS AT A CONSIDERATION AND ON THE TERMS AND CONDITIONS SPECIFIED THEREIN. AS PER ARTICLE II I OF THE SAID AGREEMENT DATED 07.12.2004, THE OBLIGATION TO DEVELOP THE SAID LAND BY CONSTRUCTING BUILDINGS THEREON WAS SOLELY ON THE DEVELOPER. AS PER PARA 3.0 THE DE VELOPER WAS LIABLE TO CONSTRUCT THE BUILDING AT ITS OWN COST AND EXPENSES; IN ACCORDANC E WITH SANCTIONED BUILDING PLAN. THE ASSESSEE WAS NOT OBLIGED TO INCUR ANY COST OF C ONSTRUCTION NOR WAS THE ASSESSEE OBLIGED TO PERFORM ANY WORK IN RELATION TO DEVELOPM ENT 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 LELY AT DEVELOPER'S OWN COST. THE ASSESSEE HAD NO OBLIGATION OF ANY NATURE TO PERFORM ANY ACT, DEED OR THING FOR DEVELOPMENT AND CONSTRUCTION OF THE NEW BUILDINGS. CLAUSE 9.1 OF THE SAID AGREEMENT CATEGORICALLY PROVIDED THAT NOTHING CONTAINED IN TH E AGREEMENT CONSTRUED THAT THERE WAS A PARTNERSHIP BUSINESS BETWEEN THE ASSESSEE AND THE SAID DEVELOPER OR SUCH AGREEMENT IN ANY MANNER CONSTITUTED AN ASSOCIATION OF PERSON. THE SAID CLAUSE 9.1, CATEGORICALLY ESTABLISHED THAT THERE WAS NO JV BETW EEN 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 I N THEIR OWN RIGHT AND TO THE EXCLUSION OF EACH OTHER. THE ASSESSEE WAS NOT TO SHARE ANY PR OFIT 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 ACCOUNT AND PROFIT OR LOSS FROM THE SAID VENTURE WAS ENTIRELY TO THE ACCOUNT O F THE SAID DEVELOPER. AS PER PARA 3.2 ALL COSTS, CHARGES, EXPENSES FOR PREPARATION AN D SUBMISSION OF THE BUILDING PLANS AND ALL COSTS, CHARGES, EXPENSES AND OUTGOINGS FOR CONSTRUCTION, ERECTION AND COMPLETION OF THE SAID BUILDING WERE TO BE BORNE AN D PAID FOR SOLELY BY THE DEVELOPER. IN ADDITION TO INCURRING THE COST OF DEVELOPMENT AN D CONSTRUCTION OF THE NEW BUILDINGS, THE DEVELOPER WAS OBLIGED TO PAY RS.25 CRORES AND F URTHER PROVIDE 20% OF THE CONSTRUCTED AREA IN THE PROPOSED NEW BUILDING TO TH E ASSESSEE. IN CONSIDERATION OF ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 40 UNDERTAKING AND PERFORMING THESE OBLIGATIONS, THE D EVELOPER 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 T O HOLD THE PROPERTY AS CAPITAL ASSET. IN THIS REGARD ONE CANNOT LOSE SIGHT OF THE FACT TH AT A FACTORY BUILDING WAS PUT UP OVER THE PROPERTY AND MANUFACTURING ACTIVITIES WERE CARR IED ON FOR OVER 33 YEARS BEFORE ENTERING INTO THE DEVELOPMENT AGREEMENT. THE INTEN TION AT THE TIME OF ENTERING INTO AGREEMENT FOR DEVELOPMENT OF THE PROPERTY WAS ALSO TO HOLD 20% OF BUILT UP AREA AND UNDIVIDED SHARE OF LAND. CONSTRUCTION OVER THE PRO PERTY TOOK PLACE IN THE YEAR 2004- 05 AND 2005-06. THE SALE BY THE ASSESSEES OF THEIR SHARE OF 20% OF BUILT-UP AREA, UNDIVIDED SHARE OF LAND, OPEN TERRACE, CAR PARK ETC ., TOOK PLACE ONLY IN THE PREVIOUS YEAR RELEVANT TO AY 2006-07. IN THE SALE DEED, THE REASON FOR THE SALE HAS BEEN MENTIONED AS BETTERMENT AND OTHER REASONS. BY ENTE RING 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 CONSTRUCT ED AREA, IT CANNOT BE SAID THAT THE ASSESSEE PLUNGED INTO WATERS OF TRADE. THEY HAVE A SSUMED LITTLE OR NO RISK IN THE PROCESS. THEY NEVER INDULGED IN ANY ADVENTURE. TH ERE ARE NO CIRCUMSTANCES OR PAST HISTORY OR FUTURE EVENTS WHICH WOULD INDICATE THAT THE ASSESSEES WANTED TO CARRY OUT BUSINESS OR ADVENTURE IN THE NATURE OF TRADE BY ENT ERING INTO AGREEMENTS FOR PUTTING UP CONSTRUCTIONS. WE FIND THAT THE AO HAS DRAWN INFER ENCE FROM CIRCUMSTANCES WITHOUT FURTHER PROOF OR ENQUIRY. ON THE EXISTING CIRCUMST ANCES THE ASSESSEES CONTENTION THAT THEY NEVER WANTED TO INDULGE IN ANY ADVENTURE IN TH E NATURE OF BUSINESS OR TRADE HAS TO BE ACCEPTED. WHEN FROM SOME CIRCUMSTANCES AN INFER ENCE IS POSSIBLE THAT THE ASSESSEE PLUNGED INTO THE WATERS OF TRADE, CAN THE REVENUE DRAW INFERENCE AGAINST THE ASSESSEE AND IN FAVOUR OF THE REVENUE. IN OUR VIEW , WITHOUT BRINGING ANY MATERIAL ON RECORD MERELY BASED ON SOME REMOTE CIRCUMSTANCES, A N INFERENCE CANNOT BE DRAWN THAT THE ASSESSEES INDULGED IN AN ADVENTURE IN THE NATUR E OF BUSINESS OR TRADE. WE ARE OF ITA NO.94/KOL/2012-M/S.EVEREADY INDS.INDIA LTD.-A.Y .2005-06 41 THE VIEW THAT THE CONCLUSION OF THE AO IN THIS REGA RD CANNOT BE SUSTAINED. WE ALSO FIND THAT EVEN IN THE DECISIONS REFERRED TO BY THE LEARN ED AO, INTENTION IS AN IMPORTANT FACTOR WHICH HAS BEEN HIGHLIGHTED. ON FACTS AND CI RCUMSTANCES 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 ASS ESSED UNDER THE HEAD CAPITAL GAIN. GROUND NO.6 RAISED BY THE REVENUE IS ACCORDI NGLY DISMISSED. 36. IN THE RESULT APPEAL BY THE REVENUE IS DISMISS ED. ORDER PRONOUNCED IN THE COURT ON 03.02.2016. SD/- SD/- [M.BALAGANESH] [N.V.VASUDEVAN] ACCOUNTANT MEMBER JUDICIAL MEMBER DATE: 03.02.2016. R.G.(.P.S.) COPY OF THE ORDER FORWARDED TO: 1. M/S. EVERADY INDUSTRIES INDIA LTD., 1, MIDDLETON STREET, KOLKATA-700071. 2 THE D.C.I.T., CIRCLE-11, KOLKATA. 3. THE CIT-IV, KOLKATA, 4. THE C IT(A)-XII, KOLKATA. 5. DR, KOLKATA BENCHES, KOLKATA TRUE COPY, BY ORDER, DEPUTY /ASST. REGISTRAR , ITAT, KOLKATA BENCHES