Karnataka H.C : The appellate authorities were correct in allowing depreciation in respect of a grounded aircraft which had not been used by the assessee and had been admitted in the audit report and not specifically adverted to in the course of orders

High Court Of Karnataka

CIT vs. Mcdowell And Co. Ltd.

Assessment Year : 1998-99

Section : 74

N. Kumar And Mrs. Rathnakala, JJ.

IT Appeal No. 338 Of 2007

November 19, 2013

JUDGMENT

N. Kumar, J. -In this appeal, the appellant has raised the following substantial questions of law :

“1. Whether the appellate authorities were correct in holding that the profit of Rs. 8.36 crores (Rs. 11,41,05,263 – Rs. 3,05,00,846) (sale proceeds – loss on surrender of value) received on the sale of the polymer division shown in its books of account is not liable to tax and the loss of Rs. 2,31,34,120 (Rs. 3,05,00,846 – Rs. 73,66,726) on surrender of land is an allowable deduction ?

2. Whether the appellate authorities were correct in holding that commission payment made to D. C. Johar and Sons and M/s. Windco Sales Pvt. Ltd., of Rs. 70,30,172 was not genuine as held by the Assessing Officer since there was absolutely no proof for having incurred the same in the course of business ?

3. Whether the appellate authorities were correct in allowing the expenses incurred in maintaining aircrafts and the depreciation over the same is allowable despite the assessee not establishing by maintaining any records that these aircrafts were used in the course of the assessee’s business ?

4. Whether the appellate authorities were correct in allowing depreciation in respect of a grounded aircraft which had not been used by the assessee and had been admitted in the audit report and not specifically adverted to in the course of orders ?”

2. The assessee purchased a unit from Hindustan Polymers Ltd., in the year 1978 which is situated in Vizag. For expansion of the polymer business, the assessee-company purchased an industrial land in Gujarat in the financial year 1994-95 for Rs. 2,98,34,120. Subsequently, the assessee-company realized that the polymer business was not a prudent venture and so the manufacturing unit was sold to one M/s. L. G. Polymers India Ltd., on July 10, 1997, as a going concern for a consideration of Rs. 79,86,30,304.00. In the said transaction, they earned a profit of Rs. 11,41,05,203.00. Though the assessee offered the land at Gujarat also to the said purchaser, he was not inclined to take the said land. Therefore, they surrendered the said land to the Government of Gujarat for Rs. 67 lakhs. Thus, they incurred capital loss of Rs. 2,31,34,220.00.

3. The assessing authority was of the view that the land was part of M/s. Hindustan Polymers Ltd. Therefore, though two separate individuals are involved, the transaction is one and the same and, therefore, the loss suffered while surrendering the land had to be set off towards profit earned in the sale of the going concern. Therefore, the assessing authority disallowed the claim of the assessee to carry forward Rs. 2,31,34,220 as capital loss.

4. Aggrieved by the said order, the assessee preferred an appeal to the Commissioner of Income-tax (Appeals).

5. The first appellate authority was of the view that the two transactions, referred to supra, are independent of each other. Therefore, the loss sustained in one transaction cannot be set off against the sale of going concern. Since these two are independent transactions with two independent parties, the loss or profit in each case has to be determined separately and unabsorbed capital gains as per the provisions of the Act. Therefore, the appeal was allowed and the assessing authority was directed to treat the capital loss arising out of the surrender of the industrial land of Rs. 2,31,34,120.00 to be carried forward as a capital loss independently.

6. Aggrieved by the said order, the Revenue preferred an appeal to the Tribunal. The Tribunal on reconsideration of the entire material on record held that the polymer unit was purchased in the year 1978 and sold in the year 1997. The industrial land was acquired in the year 1997 by the Government of Gujarat. When the intention to expand the polymer unit was given up, the assessee surrendered the land to the Government of Gujarat, by which it incurred loss of Rs. 2,31,34,220.00. Thus, no industrial activity was started in that piece of land. The said land was not utilized for the industry and, therefore, in the light of the aforesaid undisputed factual position it held that the order passed by the appellate authority is valid and legal and no case for interference is made out.

7. Aggrieved by the said order, the present appeal is filed.

8. The learned counsel for the Revenue assailing the impugned order contends that admittedly the land in Gujarat was purchased for expanding the polymer unit of the assessee. Their own admission shows that the assessee has spent towards salaries, wages, conveyance, telephone, interest, etc., in connection with the project to be established in the land purchased in Gujarat. Therefore, both these units constitute one business and the loss sustained in one is to be set off against the profit earned and the same cannot be carried forward as capital loss.

9. We do not see any merit in the said contention. From the material on record it is clear that the polymer unit which is at Vizag was acquired in the year 1978. The industrial land in Gujarat was acquired in the year 1997 to set up a polymer unit. Initially, the assessee has spent some money towards salaries, wages, conveyance, telephone, interest, etc., in connection with the land at Gujarat. That by itself would not make the said land the property of the polymer unit. In fact, these properties are separate and distinct. Admittedly, no industrial activity was carried on in the land at Gujarat. It was surrendered when it was of no use for the assessee. Both the transactions are with two distinct persons. Under these circumstances, the first appellant authority as well as the Tribunal was justified in holding that it is not one and the same transaction. As they are two independent transactions, the loss sustained in one transaction cannot be set off against the profit made in the other transaction. Therefore, they were justified in dismissing the appeal.

10. In that view of the matter, we do not see any merit in this appeal. The substantial question of law is answered in favour of the assessee and against the Revenue.

11. In so far as the second substantial question of law is concerned, it was fairly submitted by the learned counsel for the assessee that the said question has been decided by this court in the assessee’s case only on September 15, 2006, in I.T.A. No. 12 of 1999, Dy. CIT v. Mc Dowell & Co. Ltd. [2007] 291 ITR 107 (Kar) where it has been held that the allowance of the commission payment requires interference. Accordingly, for the reasons set out in I. T. A. No. 12 of 1999, the finding recorded by the Tribunal as well as the first appellant authority is hereby set aside. The said allowance is disallowed and the substantial question of law is answered in favour of the Revenue and against the assessee.

12. In so far as third and fourth substantial question of law is concerned, already in the earlier orders the said findings are set aside and the matter is now remanded back to the assessing authority. Accordingly, the finding recorded by the authorities on those issues are hereby set aside and the matter is remanded back to the assessing authority for fresh disposal along with other connected matters in order to avoid conflicting decisions.

Ordered accordingly.

[Citation : 364 ITR 699]