Karvy Consultants Limited V. Deputy Commissioner of Income Tax, Range-2, Hyderabad

ITTA/76/2007

AI Insights

The case involves Karvy Consultants Limited, the appellant, who leased two windmills to Renewable Energy Systems Limited (RESL). The lease was terminated prematurely, and Karvy paid Rs. 40,22,000 as compensation to RESL. The dispute arose over whether this payment should be considered as a business expenditure or capital expenditure, which would allow for deductions under the Income Tax Act. The ITAT ruled that the payment was neither a capital expenditure nor a business expenditure, leading to the appeal in the High Court. The High Court agreed with the ITAT's decision, emphasizing that the payment was made voluntarily under a written agreement and did not relate directly to the business activities of the appellant.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 796342 (HC-ANDHRA_PRADESH)
• Appeal Type: Others
• Pronouncement Date: 20-12-2013
• Assessment Year: misc
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Keywords: Business expenditure; Capital expenditure; Compensation payment; Lease Termination; Windmills
• Section: 37

Judgement Text

"IN THE HIGH COURT OF JUDICATURE, ANDHRA PRADESH AT HYDERABAD FRIDAY, THE TWENTIETH DAY OF DECEMBER TWO THOUSAND AND THIRTEEN PRESENT THE HON’BLE THE CHIEF JUSTICE SRI KALYAN JYOTI SEN GUPTA AND THE HON'BLE SRI JUSTICE SANJAY KUMAR I.T.T.A. No. 76 OF 2007 Between: Karvy Consultants Limited, Hyderabad. ..... Appellant AND Deputy Commissioner of Income Tax, Range-2, Hyderabad, (Formerly Central Circle III, Hyderabad. ) .....Respondent The Court made the following : JUDGMENT: (per the Hon’ble the Chief Justice Sri K.J. Sengupta) This appeal is sought to be preferred against the judgment and order of the learned Tribunal dated 27.02.2006. This appeal was kept pending from 2007 onwards and it is sought to be admitted on the following suggested questions of law: 1. Whether, on the facts and circumstances of the case, the ITAT is justified in holding that the sum of Rs.40,22,000/- paid to RESL does not constitute actual cost of the assets to the assessee? 2. Whether, on the facts and circumstances of the case, the ITAT is justified in holding that the sum of Rs.40,22,000/- paid for termination of the Lease Agreement and repossession of the two windmills is neither the cost of acquisition of an asset nor an improvement thereof? 3. Whether, on the facts and circumstances of the case, the ITAT is justified in holding that the sum of Rs.40,22,000/- cannot be considered as an expenditure incurred in the revenue field and not allowable under Section 37 of the Income Tax Act, 1961? Upon reading the aforesaid questions, it appears to us that the dispute centers around on the disallowance that is claimed on revenue expenditure a sum of Rs.40,22,000/- on the following relevant facts. The assessee before us is a lessee who leased out two windmills to M/s. Renewable Energy Systems Limited (hereinafter referred as RESL). The lease was for a certain limited period and the rental for the leased goods was also provided in the lease deed. However, upon mutual understanding between the lessor namely the assessee herein and RESL, lease was prematurely terminated and on account of this termination of the lease, the assessee had paid the aforesaid amount as and by way of compensation to the lessee. In this background, learned counsel for the appellant submits that the aforesaid payment should be construed to be an expenditure incurred on account of the capital assets and alteast on that count deduction should have been allowed. Even if it is not possible, then the aforesaid payment of compensation, obviously is relatable to the business carried on by the appellant and it should be treated as business expenditure and the said amount should have been deducted from the assessable income and the learned Tribunal committed legal mistake while not doing so. The learned Tribunal recorded on fact that the aforesaid payment of compensation has not been reflected in the books of account as business expenditure or revenue expenditure. Inspite of that the appellant wants that this should be treated as business expenditure. We shall examine this aspect first. Business expenditure, as a settled law, must be relatable to the business carried on meaning thereby, it should have direct nexus and connection with the business activity. The aforesaid amount was paid as compensation for premature deprivation of use of windmills. The business of the assessee is letting out of windmills to the respective customers and upon being let out, rental is earned. The payment was made in order to get back possession of the two windmills not in furtherance of letting out business. The lessee could have used the windmills for the entire period and in that process the lessor namely the assessee would have been deprived of future utilization of the windmills, had there been no premature termination of lease. In order to compensate the deprivation to the lessee, the aforesaid payment was made. Therefore, this cannot be said to be relating to the business. This was towards payment of compensation for the loss admitted to have been suffered by the lessee on account of premature rental. Moreover, had it been so, the assessee would have shown in the books of account the amount as expenditure, but it was not done so, as recorded by the learned Tribunal. Unless it is shown in the books of account that have been relied on by the revenue official, nothing can be taken note of outside the books of account. According to us, the learned Tribunal has rightly held so. Learned counsel for the appellant says that if it is not a business expenditure and if the payment is in order to get possession of the windmills, it is capital assets, then it should have been the expenditure on the capital assets. In the context of this submission, we examine, whether it is a capital expenditure. Capital expenditure, in our view, would be when payment is made on acquiring right, title and interest of enduring nature in any assets. Here the assessee had not paid anything to acquire on right, title and interest of this nature. It paid for taking possession of windmills as a measure of compensation on agreed terms. Both the assessee and the lessee are benefited by this arrangement, as the assessee got possession of the two windmills before expiry of the lease period to enable it to use and enjoy the same. No new or additional right, title and interest of enduring character has been acquired with this expenditure. Thus we are of the view that the appellant cannot term it to be a capital expenditure. When the assessee itself had not intended to term the same to be expenditure in the Books of account, the revenue authorities cannot accept on mere oral assertion of the assessee later on. Payment of expenditure is always involuntary and under compulsion it is paid. Here, the payment is made voluntarily on written agreement. Under these circumstances, we feel that the learned Tribunal is justified in what it has concluded. We do not find any element of law involved in this matter to decide, for which we need to admit the appeal. Accordingly, we dismiss the appeal. No order as to costs. As a sequel to the dismissal of the appeal, all the pending interim applications shall stand closed. ______________________ Kalyan Jyoti Sengupta, CJ. ______________ Sanjay Kumar, J. December 20, 2013 MAS` "