Bombay H.C : Whether, on the facts and in the circumstances of the case, the assessee was entitled to deduction of expenses incurred on the sale of building and lift from the sale proceeds thereof while computing the income under s. 41(2) of the IT Act on the sale of the said assets ?

Counsel Appeared

Munim & S.J. Mehta, for the Assessee : G.S. Jetly, Mrs. Manjula Singh & K.C. Sidhwa, for the Revenue

P. BHARUCHA, J.:

The assessee is a limited company. It was carrying on a business in manufacture during a part of the previous year relevant to the asst. yr. 1972-73, which ended on June 30, 1971. Towards the end of that previous year, the assessee sold its factory along with machinery, plant and fittings. The price realised was allocated by it to the various assets according to what had been stated in the sale deed. In connection with the sale, the assessee had incurred expenditure in an aggregate sum of Rs. 1,60,661, the predominant part whereof was for registration and stamp fees in the sum of Rs. 1,29,425 and solicitors’ fees in the sum of Rs. 28,926. The expenditure was proportionately allocated by the assessee to the various assets. In doing so, a sum of Rs. 1,15,267 was allocated to the factory building and Rs. 474 to the lift. The sale price in respect of the factory building and the lift was less than the cost thereof so that there was no capital gain. However, having regard to s. 41(2) of the IT Act, 1961, the difference between the price realised for the factory building and the lift and their written down value was required to be included in the assessee’s total income. The assessee claimed that the sums of Rs. 1,15,267 and Rs. 474, respectively, allocated to the factory building and the lift ought to be deducted for the purposes of working out the profit includible in the total income under s. 41(2). The ITO declined to permit this. The AAC, in the assessee’s appeal, accepted the assessee’s contention. The Revenue filed an appeal against his order to theTribunal. The Tribunal allowed the Revenue’s appeal upon its interpretation of s. 41(2).

2. From out of the Tribunal’s order arise the questions we are required to answer. They read thus:

“(1) Whether, on the facts and in the circumstances of the case, the assessee was entitled to deduction of expenses incurred on the sale of building and lift from the sale proceeds thereof while computing the income under s. 41(2) of the IT Act on the sale of the said assets ?

(2) Whether, on the facts and in the circumstances of the case, the sale expenses could be allowed either under s. 37(1) or under s. 28 r/w s. 29, as a deduction from the profits worked out under s. 41(2) of the Act ?

(3) Whether, on the facts and in the circumstances of the case, the assessee was entitled to set off the sale expenses in regard to building and lift, against capital gains arising on the sale of the other fixed assets, being plant and machinery, electrical fittings, furniture and fittings, under s. 70(2)(ii) of the IT Act, 1961?”

3. Sec. 41(2) reads thus : “41(2) Where any building, machinery, plant or furniture which is owned by the assessee and which was or has been used for the purposes of business or profession is sold, discarded, demolished or destroyed and the moneys payable in respect of such building, machinery, plant or furniture, as the case may be, together with the amount of scrap value, if any, exceed the written down value, so much of the excess as does not exceed the difference between the actual cost and the written down value shall be chargeable to income-tax as income of the business or profession of the previous year in which the moneys payable for the building, machinery, plant or furniture became due: Provided …” Explanation.—…” (The proviso and Explanation, being not relevant to the issue before us, are not reproduced.) The words “moneys payable in respect of . . . building, machinery, plant or furniture” include, where the building, machinery, plant or furniture is sold, the price for which it is sold (see s. 32).

Mr. Munim, learned counsel for the assessee, drew our attention to the judgment of this Court in CIT vs. Bharat Lines Ltd. (1985) 47 CTR (Bom) 344 : (1986) 159 ITR 541 (Bom) (to which one of us, Bharucha, J., was a party). The question there related to the amount of Rs. 1 lakh odd paid on account of brokerage in connection with the sale of certain ships and of Rs. 7,000 and odd on account of travelling expenses for arranging delivery of one of the ships. The assessee claimed that it was entitled to deduct from the sale price of the ships these amounts for the purposes of computation of the profit under s. 41(2). This Court took note of the judgment of this Court in Akola Electric Supply Co. (P) Ltd. vs. CIT 1977 CTR (Bom) 757 : (1978) 113 ITR 265 (upon which reliance was placed before us by learned counsel for the Revenue). The Court noted that it was there said that a legal fiction had to be limited to the purpose for which it had been created and could not be extended beyond that legitimate frame. Under the legal fiction enacted in s. 41(2), a business was deemed to be in existence only for the purpose of bringing the balancing charge to tax and for no other purpose. It could not be extended so as to permit deduction of expenses incurred in the business. The Court noted that the expenses involved in Akola Electric Supply Co. Pvt. Ltd.’s case (supra) did not pertain to amounts expended for obtaining the sale price which was to be taxed under the fiction but were expenses by way of establishment expenses, salaries and allowances. The assessee before the Court in Bharat Lines Ltd.’s case (supra) was not claiming to set off expenses of that type. The brokerage and travelling expenses which it was claiming to set off against the balancing charge realised by the sale of the ships were directly referable to and related to the sale. The Court observed that there was no reason why the fiction should not be extended to cover expenses directly referable to the realisation of the sale price. Now, the expenses that the assessee before us claims relate, mainly, to the registration and stamp fees and solicitors’ fees incurred in connection with the sale. They are directly relatable to the sale and upon the ratio of the judgment in Bharat Lines’ case (supra), the sale price must be reduced by the amount thereof. Mr. Munim drew our attention to a circular issued by the CBDT in connection with whether commission paid on the sale of assets was deductible from the gross sale proceeds for arriving at the taxable balancing charge. The circular stated that it had been decided that expenditure of the nature of brokerage or commission was admissible as expenditure incurred wholly and exclusively in connection with the transfer of the capital asset under s. 41(2). (Taxman’s Direct Taxes Circulars, 1985 Edn., Vol. 1, Item 248). Expenditure in the nature of brokerage or commission incurred in connection with the transfer of a capital asset being admissible for the purposes of s. 41(2), it follows that expenditure incurred on registration and stamp fees and solicitors’ fees in connection with the sale of the capital asset must also be admissible as expenditure that must reduce the sale price for the purposes of s. 41(2).

Our attention was drawn by Mr. Jetley, learned counsel for the Revenue, to the judgment of the Supreme Court in CIT vs. Bipinchandra Maganlal & Co. Ltd. (1961) 41 ITR 290 (SC). The judgment sets out the reason for the introduction of the self-same fiction in s. 10(2)(vii), second proviso, of the Indian IT Act, 1922. The Supreme Court said that where, in the previous years, by reason of depreciation allowance, taxable income had been reduced and, ultimately, the concerned assets had been sold for an amount exceeding the written down value, i.e., the original cost less depreciation allowance, the Revenue was justified in taking back what it had allowed against wear and tear because, in fact, depreciation had not resulted.

It is difficult to see how this statement of the reasons for the balancing charge supports the case put forward by the Revenue. The rationale of the balancing charge is the taking back of that which the assessee had not suffered. The implication is that the balancing charge must be restricted to what the assessee has in fact received by way of the sale of the capital asset. In other words, the sale price must be reduced by such expenses as are directly relatable to the sale, such as commission or brokerage, registration and stamp fees and legal costs.

In the result, we answer the first question in the affirmative and in favour of the assessee. Having regard to that answer, it is not necessary to answer the second and third questions. No order as to costs.

[Citation :182 ITR 75]