Madras H.C : The amount paid by the appellant engaged in the business of construction and sale of flats for acquiring unfinished civil works, work-in-progress and inventories is allowable as a revenue expenditure

High Court Of Madras

Alacrity Housing Ltd. vs. CIT

Assessment Year : 1995-96

Section : 37(1)

Mrs. Chitra Venkataraman And M. Jaichandren, JJ.

Tax Case (Appeal) No. 73 Of 2005

August 10, 2011

JUDGMENT

Mrs. Chitra Venkataraman, J. – The tax case appeal is filed by the assessee against the order of the Income-tax Appellate Tribunal, Chennai “A” Bench in I.T.A. No. 2272 of 1997 dated August 31, 2004, relating to the assessment year 1993-94 raising the following substantial questions of law :

“1. Whether in law the amount paid by the appellant engaged in the business of construction and sale of flats for acquiring unfinished civil works, work-in-progress and inventories is allowable as a revenue expenditure ?

2. Whether in law the appellant had obtained only an enduring advantage by taking over the unfinished civil work, work-in-progress and the inventories and whether such advantage is only in the revenue field ?

3. Whether in law the appellant had acquired any capital asset under the agreement dated July 1, 1992 ?”

2. The assessee herein entered into an agreement of business transfer with M/s. Alacrity Foundations (P) Ltd. (hereinafter referred to as “AFPL”) on July 1, 1992, who were carrying on the business of promoting residential complexes. Under the terms of the agreement, apart from its assets and liabilities, AFPL transferred its all ongoing pending projects/contracts/work-in-progress remaining to be completed by AFPL along with future projects/proposals, wherefor negotiations had been finalised and agreement were to be entered into by AFPL. The parties agreed on the total consideration of Rs. 3,20,00,000, to be satisfied by the assessee by

  1. Allotment to AFPL of 16,00,000 fully paid up equity shares of Rs. 10 each at par from the authorised unissued share capital of AHL, of the face value Rs. 1,60,00,000 (rupees one crore sixty lakhs only) ; and

2. Cheque/cash Rs. 1,60,00,000 (rupees one crore sixty lakhs only) ; and AHL had accepted the said proposal by a resolution of its board of directors on 30th June, 1992, duly authorising its director, Sri R. Ramakrishna, to execute necessary agreement therefor. The agreement also transferred the transferor company’s liabilities as well as assets as given under schedules 1 and 2. Schedule 1 relates to the assets transferred as on June 30, 1992, and schedule 2 relates to current liabilities as on June 30, 1992. The agreement also provided that the assessee-company could carry on its business from the requisite space taken on lease by AFPL wherefrom it was carrying on its business. The assessee could also hire for use/utilisation of the office equipment therein. In terms of such understanding, having regard to the substantial investment made in the said premises and amenities by AFPL, the assessee agreed to deposit Rs. 1 crore, subject to the transferor repaying the said amount by monthly adjustments of rent and hire charges due. The said amount was to carry interest at the rate of 21 per cent per annum. Quite apart, it was also pointed out that in respect of the liability of the transferor-company to the tune of Rs. 1,57,55,932.80, the assessee-company agreed to discharge the loans on or before December 31, 1992. Thus, while, the assessee-company agreed to issue 16,00,000 fully paid equity shares of Rs. 10 each on the face value of Rs. 1,60,00,000 to the transferor, the cash consideration of Rs. 1,60,00,000 was to be adjusted against net liability, viz., the difference between the totals of schedules 1 and 2, which worked out to Rs. 4,17,55,932.80. Thus, adjusting Rs. 1,60,00,000, the balance of Rs. 2,57,55,932.80 was met by the assessee-company, one by way of advance on the space to be occupied as per clause 8 of the agreement to be adjusted by way of rental and the balance of Rs. 1,57,55,932.80, met by the assessee. It is stated that the said amount of Rs. 1,57,55,932.80 was stated to have been repaid by the transferor company to the assessee. Going by the understanding between the parties, the assessee arrived at the profit of Rs. 20,13,256. The assessee claimed the payment of Rs. 3,20,00,000 as revenue expenditure and arrived at a loss of Rs. 2,19,73,197. The assessee took the stand that as the assessee contemplated transfer of the ongoing projects also, there was no permanent benefit in the project. Hence, the expenditure was only a revenue expenditure and that it was only stock-in-trade.

3. The assessing authority, however, viewed that the claim of the assessee could not be treated as business expenditure, since the assessee had acquired all the assets and liabilities, as mentioned in schedules I and II and that the assessee had undertaken to clear all the liabilities. Hence, being purchase of the business from the transferor company, the question of treating the expenditure incurred thereon by the assessee-company as business expenditure did not arise. Referring to the liabilities of the transferor company which the assessee had undertaken to discharge, the Assessing Officer held that it was clear that what was acquired by the assessee was the business of the transferor company and, hence, the claim of the assessee could not be allowed. Aggrieved by the same, the assessee went on appeal before the Commissioner of Income-tax (Appeals), who agreed with the assessee.

4. On going through the various clauses of the agreement, the first appellate authority pointed out that the expenditure incurred towards purchase of the unfinished projects really amounted to transfer of stock-in-trade in the business or the transferor company. Hence, the expenditure was in the revenue field. He further pointed out that the consideration paid under the agreement was to the tune of Rs. 3.20 crores and nothing more. Thus, the assessee was entitled to claim the same as business expenditure. Aggrieved by the order of the Commissioner of Income-tax (Appeals), the Revenue preferred an appeal before the Income-tax Appellate Tribunal.

5. After perusing the various clauses in the agreement, the Tribunal held that the assessee had incurred the expenditure for acquisition of the going concern. The assessee had not bought any asset item-wise. By acquiring the whole of the business of the building division of AFPL as a going concern, the assessee had acquired a source of income. The assessee had paid a sum of Rs. 3.20 crores whereas the liability of the transferor company was much more than the current assets. Viewing that no prudent businessman would offer to pay excess over the asset, the Tribunal felt that more assets should have been transferred than what was shown in the agreement and this could be the goodwill of the business, which amounted to capital expenditure. After explaining in detail what is capital and revenue expenditure, the Tribunal held that the expenditure was incurred for acquiring a going concern. Thus, by acquiring the whole business of building division of AFPL, the profit earning capacity of the assessee had changed. The agreement also contemplated that the assessee acquired the right to use the logo of AFPL, which clearly pointed out that the assessee had carried on the enduring advantage. Since the assessee was permitted to use the office building of the transferor, it was clear that what was transferred was a capital asset. In the light of the above, the Tribunal held that the expenditure incurred was a capital expenditure. Thus, the Revenue’s appeal was allowed. Aggrieved by the same, the assessee has preferred the present tax case appeal.

6. Taking us through the various clauses of the agreement, learned counsel for the assessee submitted that there is hardly anything in the agreement, which supported the view of the Revenue that AFPL had transferred the entire business or divested its source of income earning apparatus. The parties entered into the agreement to transfer the ongoing projects, which are stock-in-trade as far as the transferor is concerned. The incidental fact that the assessee shared the rented premises with the transferor company and that the transferor company allowed the assessee to use its logo does not mean that the transferor company had transferred its entire business in the building division. Referring to various clauses, particularly clause 8 of the agreement read with schedules 1 and 2, learned counsel pointed out that when the agreement specifically states that the consideration was with reference to the ongoing projects and that the transferee, viz., the assessee-company had undertaken to discharge the liability of the transferor company, which was adjusted in the form of rent payable by the assessee with interest at 21 per cent and that the liability of the transferor company to the tune of Rs. 1,57,55,932.80 settled by the assessee was later on repaid by the transferor company, the consideration could not be anything more than Rs. 3,20,00,000. In such circumstances, the Tribunal committed a serious error in reading more into the agreement. There were no materials, which would support the view of the Tribunal that the expenditure was capital in nature. He pointed out that the Tribunal presumed that the agreement contemplated closure of the building division of AFPL. He submitted that there is hardly any clause in the agreement, which pointed out to the closure of the building division of AFPL on the transfer of the ongoing projects and projects where the contracts were yet to be signed or were there materials to support this view. In the circumstances, he submitted that the reasoning thereon is totally perverse, unsupported by any material to reach a conclusion that the expenditure was capital in nature. Hence, he prayed for setting aside the order of the Tribunal.

7. Per contra, learned standing counsel appearing for the Revenue supported the order of the Tribunal. Going through the agreement, he submitted that with the transfer of the entire building division of the transferor company, the assessee earned the business of enduring nature. Thus, the claim of the assessee treating the expenditure as business expenditure has to be rejected and to be treated as capital expenditure only.

8. Heard learned counsel appearing for the assessee and the learned standing counsel appearing for the Revenue and perused the materials available on record.

9. The assessee entered into the agreement with AFPL on 1st July, 1992, to take over by assignment and complete all the pending projects/contracts/work-in-progress remaining to be completed by the transferor company and in future, take up by itself, housing projects. Apart from those projects, the agreement also contemplated take over of all future projects/proposals, wherefor negotiations have been finalised but agreements/contracts remained to be entered into by the building division of AFPL. It is seen from the terms of the agreement that the transferor company promoted residential complexes, besides having business in power electronics, health care and education. The agreement stated the consideration as a sum of Rs. 3.20 crores made up of cash payment to the tune of Rs. 1,60,00,000 and allotment of 16,00,000 fully paid equity shares of a sum of Rs. 1,60,00,000. Clause 2 of the agreement deals with the manner of payment of this Rs. 3,20,00,000, which reads as follows :

“2. AHL shall pay to AFPL the consideration for such transfer, By. A. Allotting 16,00,000 fully paid equity shares, of Rs. 10 each at par from its authorised unissued capital, value thereof amounting to Rs. 1,60,00,000 (rupees one crore sixty lakhs only) and B. Cheque/cash Rs. 1,60,00,000 (rupees one crore sixty lakhs only) ; In all Rs. 3,20,00,000 (rupees three crores twenty lakhs only) ; provided that any excess of current liabilities over current assets and preliminary and miscellaneous expenditure taken over, shall be set off/adjusted against, said cash dues ; and, provided further that after setting off the cash consideration of Rs. 1,60,00,000 against the Net Liability (namely, the difference between the totals of schedules 1 and 2) Rs. 4,17,55, 932.80 a sum of Rs. 2,57,55,932.80 payable to AHL by AFPL is agreed to be discharged to the extent of Rs. 1,57,55,932.80 on or before 31st December, 1992, settling the balance Rs. 1 crore in terms of clause 9.

The parties agree that, a separate agreement for share allotment, shall be entered into relative to clause 2A.”

Clause 3 speaks about the assessee undertaking to satisfy and discharge all the debts and liabilities listed in schedule 2 connected with the transferred assets.

10. Clauses 8 and 9 of the agreement touches on the assessee-company being permitted by the transferor company to carry on its business from the space taken on lease by the transferor company and to make use of all the infrastructure facilities available therein. As against the rent to be paid by the assessee, it was agreed that the assessee shall deposit Rs. 1 crore with the transferor company, which was to be treated as a deposit, to carry interest at 21 per cent. per annum. The agreement further pointed out that the said deposit would be adjusted by way of monthly rent and hire charge due from the assessee. Thus, out of the balance worked out from schedules 1 and 2, the said current liability of Rs. 4,17,55,932.80 paise was a liability, which the transferor company has to meet. The said amount was adjusted from and out of the cash payment of Rs. 1,60,00,000 and Rs. 1,00,00,000 towards the lease advance and the balance of Rs. 1,57,55,932.80 met by the assessee to discharge the liabilities of AFPL, which, according to the assessee, the transferor had settled back thereafter. A reading of the agreement thus shows that what was contemplated as the subject-matter of sale, was transfer of work-in-progress, which included contracts, which were already negotiated but intended to be entered into by way of formal agreement. A perusal of the various clauses reveals that the assessee was permitted to use the logo of the transferor company and there was no transfer of logo as such to the assessee-company under the agreement. We find that there is absolutely no clause therein, which brought a closure of the building division of the transferor company by the transfer agreement to contend that what had been transferred to the assessee was a capital asset. Given the fact that the agreement thus contains no such negative clause, it is difficult to hold that by the agreement, the transferor company’s building division had come to a close.

11. We do not find any ground to uphold the order of the Tribunal holding that the assessee-company had received a business of enduring nature. A reading of the agreement shows that what was transferred to the company of the assessee was only the work-in-progress and the contract to be signed. Although learned standing counsel appearing for the Revenue stated that future projects were also transferred, a reading of the clause therein shows that what was contemplated as future projects was with reference to those projects in respect of which, negotiations had already been finalised, for which formal agreement was yet to be entered into. Thus, on a cumulative reading of the entire agreement, we have no hesitation in accepting the plea of the assessee that what was transferred under the agreement was in the nature of stock-in-trade and not the entire building division of the transferor company and there are no clauses to lead to the inference that with the transfer of the ongoing projects and projects awaiting agreements to be signed, the transferor company had transferred its entire business. We find that the order of the Tribunal rejecting the assessee’s case is without any material and not supported by the terms of the agreement. We find that there is no material to uphold the view of the Income-tax Appellate Tribunal that the parties contemplated transfer of goodwill of the transferor company. As already pointed out, even as regards the use of the logo, the agreement merely contemplated the assessee having permissive use of the trade name of the transferor company. When the agreement, as such, had not been disputed or doubted, the mere financial adjustment given by the assessee-company, by itself, would not bring the case of the Revenue to contend that the building/business division of AFPL had come to a close by reason of the agreement entered into between the parties. We hold that the terms of the agreement are clear to justify the contention of the assessee that the agreement contemplated only transfer of stock-in-trade and not the entire business of the transferor company. Thus, on going through the various clauses, we have no hesitation in accepting the case of the assessee that the expenditure incurred is not a capital expenditure. In the circumstances, we set aside the order of the Income-tax Appellate Tribunal and allow the tax case. Accordingly, the substantial questions of law are answered in favour of the assessee. The tax case appeal stands allowed. No costs.

[Citation : 341 ITR 264]

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