Sri S.M. Dayanand V. The Deputy Commissioner Income Tax, Circle 1(1) Bangalore

ITA/1357/2006

AI Insights

The case involves Sri S.M. Dayanand, the appellant, who purchased a running hotel business, Ceaser's Restaurant, from Mr. Lawrence D'Souza. The purchase included various assets and rights, with a significant portion of the payment (Rs. 55,00,000) allocated to unexpired tenancy rights. The Income Tax Department treated this expenditure as capital in nature, denying the appellant deductions claimed under revenue expenditure. The appellant contested this decision through various levels of appeal, including the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal, both of which upheld the initial assessment. The High Court of Karnataka, upon reviewing the case, found that the expenditure was indeed revenue in nature, leading to the setting aside of the Tribunal's order.

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 804606 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 04-09-2012
• Assessment Year: misc
• Other Referred Cases: COMMISSIONER OF INCOME TAX v/s H.M.T. LTD., CIT v/s ASSOCIATED CEMENT Cos. LTD
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: G KAMALADHAR
• Assessee Lawyers: S PARTHASARATHI
• Keywords: Assessment years; Capital expenditure; Income Tax; Revenue expenditure; Tenancy rights
• Section: 142(1); 143(2); 260A

Judgement Text

"1 IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 04TH DAY OF SEPTEMBER 2012 PRESENT THE HON’BLE MR.JUSTICE K.SREEDHAR RAO AND THE HON’BLE MR.JUSTICE B. MANOHAR I.T.A.NO.1357/2006 BETWEEN: SRI S.M.DAYANAND AGED ABOUT 52 YEARS S/O.SRI.MADIVAL SANKAPPA PROP. CEASER’S RESTAURANT 9/1, MAHALAKSHMI CHAMBERS M.G.ROAD, BANGALORE. … APPELLANT (BY SRI.S.PARTHASARATHI, ADV) AND: THE DEPUTY COMMISSIONER INCOME TAX, CIRCLE 1(1) BANGALORE. …RESPONDENT (BY SRI.G.KAMALADHAR, ADV) THIS ITA IS FILED U/S 260A OF THE INCOME TAX ACT, 1961 PRAYING TO ALLOW THE APPEAL AND SET ASIDE THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL BEARING ITA NOs.1210 & 1211/Bang/2003 DATED 27-04-2006 AND ETC. THIS ITA IS COMING ON FOR HEARING THIS DAY, B.MANOHAR J., DELIVERED THE FOLLOWING: 2 J U D G M E N T The assessee filed this appeal under Section 260A of the Income Tax Act, 1961 (‘the Act’ for short) being aggrieved by the order dated 27-4-2006 made in ITA Nos.1210 & 1211 (Bang)/ 2003 passed by the Income Tax Appellate Tribunal (‘the Appellate Tribunal’ for short), Bangalore Bench ‘A’, dismissing the appeal filed by the assessee confirming the order passed by the Assessing Authority for the assessment years 1997-98 and 1998-99. 2. The facts of the case are as follows: Mr.Lawrence D’Souza is running a Hotel business under the name and style Ceaser’s Restaurant at Mahalakshmi Chambers, 9/1, M.G.Road, Bangalore in rented premises. The assessee purchased the said restaurant for a sale consideration of Rs.70,00,000/-. The agreement to sell was executed on 21-06-1995 between the assessee and Mr.Lawrence D’Souza. As per the agreement to sell, all the assets including kitchenware, furniture and fixtures, kitchen equipment, air-conditioners, electrical fittings, telephone connections, musical system, Bar license and Hotel license were agreed to be sold except name and goodwill of Ceaser’s Restaurant. Subsequently, a supplementary agreement was entered into on 11-3-1996. Under the said agreement, the consideration of Rs.70,00,000/- was split up, viz., Rs.12,50,000/- towards the improvement of the building, 3 Rs.2,00,000/- towards furniture, kitchenware and other equipment, Rs.55,00,000/- towards unexpired tenancy right and Rs.50,000/- towards benefit of license and permission. Further, as per Clause 3 of the Supplementary agreement, the purchaser was allowed to use the name of Ceaser’s Restaurant for a period of 12 months or such other period as mutually agreed between the parties. 3. The assessee submitted the returns of income for the assessment years 1997-98 and 1998-99. In the returns, Rs.55,00,000/- was paid towards unexpired tenancy right as revenue expenditure and write off 1/15th of expenditure every year. The assessment was taken up for scrutiny for issuance of notice under Section 143(2) and 142(1) of the Act. The authorised representative appeared and produced the records. He has contended that as per the supplementary agreement dated 11-3-1996, Rs.55,00,000/- has been spent towards the tenancy right. The assessee is entitled for deduction of 1/15th of the said amount every year. Further, the said Lawrence D’Souza helped the assessee to get the lease period renewed from the landlord for a further period of 15 years subject to payment of rent of Rs.60,000/- p.m. and enhancement of 25% once in five years. Further 10 months rent has to be given in advance. Hence, the assessee is entitled to write off of revenue expenditure to an extent of 1/15th. However, the Assessing Authority without accepting the 4 contention of the authorised representative, disallowed the deductions as per the assessment order dated 10-03-2000 and 15-03-2000 respectively. 4. The assessee being aggrieved by the assessment order passed by the Assessing Authority preferred an appeal before the Commissioner of Income Tax (Appeals)-II, Bangalore contending that the expenditure incurred towards the tenancy is the revenue expenditure and it cannot be treated as capital in nature in view of the condition imposed in the agreement and the denial of deduction is contrary to law. The Appellate Authority without appreciating the contentions raised by the appellant, by its order dated 01-07-2003 dismissed the appeal upholding the order passed by the Assessing Authority. Being aggrieved by the order passed by the Appellate Authority, the assessee preferred an appeal before the Income Tax Appellate Tribunal. The Appellate Tribunal, without appreciating the contention raised by the appellant dismissed the appeal extracting the order passed by the Appellate Authority by its order dated 27-04-2006. Being aggrieved by the said order, the appellant has preferred this appeal. 5. Sri.S.Parthasarathi, learned counsel appearing for the appellant contended that the order passed by the Appellate Tribunal is contrary to law. The appellant has purchased the running business from Mr.Lawrence 5 D’Souza. The Vendor is not the owner, he is only the lessee of the building. The Vendor has agreed to surrender the unexpired period of lease and the appellant was at liberty to execute the fresh agreement with the original owner of the premises. Accordingly, the appellant has executed a lease agreement with the original owner of the premises to run the business for a further period of 15 years with the enhanced rent with certain conditions. As per the conditions of the agreement, the appellant is not supposed to use the name and goodwill of Ceaser’s Restaurant or any other name similar thereto nor claimed to be a successor to the aforesaid business. Further, as per the supplementary agreement dated 11-03-1996, the appellant is permitted to use the name of Ceaser’s Restaurant for a period of 12 months or such other period as mutually agreed between the parties. The purchase amount of Rs.70,00,000/- was split up, Rs.55,00,000/- was given towards tenancy rights. That expenditure has to be treated as revenue expenditure and it cannot be the capital expenditure. The reason assigned by the Appellate Tribunal is contrary to law. He relied upon the judgment reported in (1993) 203 ITR 820 (Karnataka) in the case of COMMISSIONER OF INCOME TAX v/s H.M.T. LTD. 6. On the other hand, Sri. G.Kamaladhar, learned counsel appearing for the respondent contended that the appellant has taken over the Hotel business along with the furniture and fixtures. He was permitted to run the 6 business in the name of Ceaser’s Restaurant. It is the goodwill of the Hotel. Hence, he is not entitled for any deduction. The expenditure incurred is only the capital expenditure. Hence he is not entitled for deduction of 1/15th of the expenditure as claimed by the appellant. The Assessing Authority and the Appellate Authority rightly held that the appellant is not entitled for any deductions. Hence, sought for dismissal of the appeal. 7. The appeal was admitted to consider the following substantial question of law: (i) Whether the Tribunal was justified in ignoring the submissions of the appellant while upholding the orders of the lower authorities and whether the order of the Tribunal was perverse and unsustainable? (ii) Whether the payment of Rs.55 lakhs made by the appellant to the vendor which resulted in the acquisition of no asset or right would still be a capital expenditure? (iii) Whether the Tribunal was erred in not allowing the entire Rs.55 lakhs paid by the appellant as revenue expenditure in the assessment year 1997-98? (iv) In the alternative whether the Tribunal was right in not allowing 1/15th of the payment of Rs.55 lakhs for the relevant year as originally claimed by the appellant? 7 8. We have carefully considered the arguments addressed by the learned counsel for the parties and perused the orders passed by the Authorities below. 9. It is not in dispute that the appellant has purchased the running Hotel business from one Mr.Lawrence D’Souza with all assets including furniture, fixtures, utensils, Hotel License and Bar License. As per the agreement to sell, the appellant is not supposed to use the name and goodwill of Ceaser’s Restaurant. Further the Vendor shall ensure granting tenancy of the said premises in favour of the purchaser by the landlord of the said premises for a period of 15 years subject to payment of higher rent. Further, the Vendor shall negotiate on behalf of the purchaser with the owner for transfer of unexpired lease in favour of the purchaser. For the said consideration, out of Rs.70,00,000/- paid towards sale consideration, Rs.55,00,000/- has been spent towards tenancy rights which is only the revenue expenditure. While submitting the returns for the assessment years 1997-98 and 1998-99, he has claimed write off of 1/15th of the said expenditure every year. The Assessing Authority has refused to give the write off on the ground that the expenditure incurred by the appellant is only the capital expenditure towards the goodwill. Hence, he is not entitled for deduction. The Appellate Authority as well as the Appellate Tribunal confirmed the said order. The records disclose that the 8 expenditure incurred for getting the said restaurant is revenue expenditure and it cannot be treated as capital expenditure. The appellant has purchased running Hotel business from Mr.Lawrence D’Souza. As per the terms of agreement, it is the responsibility of the Vendor to secure the transfer of lease of the premises in favour of the purchaser. Further, the Vendor has to negotiate on behalf of the purchaser with the owner for transfer of unexpired lease period in favour of the purchaser and also extension of the lease subject to payment of enhanced rent and deposit. The Hon’ble Supreme Court in a judgment reported in (1998) 172ITR 257 (SC) in the case of CIT v/s ASSOCIATED CEMENT Cos. LTD. has held as under: “The question was whether the expenditure incurred by the assessee towards installing water pipelines and accessories outside the factory premises which were to belong to and maintained by the Municipality in return for the assessee being exempted from paying municipal rates and taxes for a period of 15 years, was revenue expenditure. It was held that since the installations and accessories were the assets of the municipality and of the assessee, the expenditure did not result in brining into existence any capital asset for the company. Further, that the advantage secured by the assessee by incurring the expenditure was absolution or immunity from liability to pay municipal rates or taxes for a period of 15 years; if these liabilities had to be paid, the payments would have been on revenue account; and, therefore, the advantage secured was in the field of revenue and not capital.” 9 Hence, at no stretch of imagination, the expenditure incurred by the appellant can be treated as the capital expenditure. The appellant is entitled for deduction towards the tenancy right and the order passed by the Appellate Tribunal is liable to be set aside. The substantial questions of law framed in this appeal are held in favour of the appellant. Accordingly, we pass the following: ORDER The appeal is allowed. The order passed by the Income Tax Appellate Tribunal is set aside. Sd/- JUDGE Sd/- JUDGE mpk/-* "