Commissioner Of Income-Tax Central, Calcutta & Anr v. Amalgamated Development, Ltd

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AMALGAMATED DEVELOPMENT, LTD. March 23, 1967 [J. C. SHAH, S. M. SIKRI AND V. RAMASWAMI, JJ.] Income-tax Act,. 1922-s. 10(2)(xv)-company purchasing assets and liabilities of firm-liabilities including obligation to complete deve· lopment work 011 plots sold by firm-Whether expenditure on such deve-lopmem deductible expenditure. Jnco1n~ssessee conzpany selling plots for part cash and balance secured by mortgage-whether balance tantamount to loan to purcliaser-therefore whether liable to be regarded as constructive receipt of income. Under a sale deed executed on July 7, 1948, the respondent company purchased the assets and liabilities of a firm,. M & Co. At the time the firm had sold a number of plots for which part of the consideration money had been realized and for the balance mortgage bonds had been executed by the purchasers. Thereafter, the respondent company itself sold some plots on similar terms. In respect of these plots, there was an undertaking to lay out roads, etc., and to complete certain develop-ment work and as the respondent company had taken over the debts as well as the liabilities of the firm, it was required to complete 'Such work also in respect of the plots previously sold by the firm. For its assess-ment to Income-tax for the years 1950-'51 and 1951-'52 alth"Ough the respondent company claimed to be treated on the basis that it maintain-ed its accounts on the cash system, the Income-tax Officer computed the income on the mercantile basis. Furthermore, he allowed only the expenses incurred in· respect of the lands sold by the company itself but disallowed the expenditure in connection with the land previously sold by the firm. He also held that although only a part of the sale price of the plots sol~ was realised in cash by the company and the balance was left outstandmg and secured by a mortgage on the plots the entire amount of the sale i;>rice was to. b~ c·redited as income. I~ the appeal to the Appellate Asststant CommtsSIOner and the Tribunal, the view taken by the Income-tax Officer on both the points was substantially ·ipheld However, upon a reference, the High Court held in favour of tl1e res: pondent company. G 1 development of plots previously sold b ax I~ epartment that the appeal to this (i) Court it the expenditure incur d · was contended on ·behalf of the Income th fi re m connectio". with the · · -s. J0(2)(xv) as the lands already s~d b [h' w~s not deductible under trade of the respondent com an . d · Y e rm w.ere not. stock-1n-thc price paid by the rcsp~nd~· tan that furthermore, It was hkely that dated July 7 1948 to the fi n company under the contract of sale 0of the firm had been fixed ~e{;a~akm~ over the assets and liabilities the development of such lots· th mg mto ac~ount the obligation for H these obligation must therefore •be e tt ~~pt"'des incurred . in discharge of the respondent company's b . a n ~ e to the capital structure of o~ligation incurred in connecti~~n~lth a~h could . not be considered an (n) part of the consideration e car'l'.mg ?n of its business; who had bought the plots money not received m cash from those was treated as a loan to the purchase·r for which the plot sold was mortgaged in favour of the respondent company and as such should be treated as a constructive receipt liable to be in· cluded in the profits of the respondent company derived during the respective accounting years. HELD: Dismissing the appeal, 264 (i) It is not a right approach to examine the question as if all reve· nue expenditure must be equated with expenditure in connection with stock-in-trade. In the present case, the sale deed dated July 7, 1948 showed that the respondent company purchased from the firm a whole running business with all its goodwill and stock-in-trade and including its liabilities. It could not be said that the respondent company had nothing to do with the lands already sold which did not form part of its stock-in-trade. The development of the entire land sold in plots was an integrated process and could not be sub-divided into water-tight com· partment or related to any !?articular piece of land. Furthermore, the entire expenditure was required to be incurred as a matter of com-mercial expediency.. [269A-EJ Eastern Investments Ltd. v. C.l.T. 20 l.T.R. I; Cooke (H.M. Ins-pector of Taxes) v. Quick Shoe Repair Service, 30 T.C. 460; referred to. referred There was nothing to show that the obligation under the sale deed to complete the development work on the plots sold by the firm was quantified and formed part of the total consideration paid by the res· pondent company. [2700) Royal Insurance Company v. Watson (Surveyor of Taxes) 3 T.C. 500 distinguished. Con1n1issioner of lncon1e-tax (Central), Calcutta. v. Bangur & Co. (Land Department) 51 l.T.R. 299; referred to. Mugneera1n (ii) The execution of the mortgage deeds by the purchasers of plots in respect of the balance of the consideration money could not be treated as equivalent to payment of cash. It cannot be said that the mere giving of security for the debt by the purchaser was tantamount to payment. The amount of consideration not received and which the purchasers agreed to pay in future for which plots were mortgaged in favour. of the respondent company, could not therefore be considered to be taxable income for the assessment periods in question. [271D·Fl to be taxable income for the assessment periods in question. [271D·Fl Co1n1nis.fioner of Jnco1ne-tax, Bi/Jar & Orissa v. Maharojadhiraja of Darbhanga, 60 I.A. 146; referred to. CIVIL AP PELLA TE JURISDICTION : Civil Appeals Nos. and 170 of 1966. 169 Appeal from the judgment and order dated December 4, 1962 of the Calcutta High Court in Income-tax Reference No. 57 of 1958. S. K. Mitra, S. K. Aiyar, S. P. Nayyar for R. N. Sachthey, for the appetlants (in both the appeals). A. K. Sen and B. P. Maheshwari, for the respondents (in both the appeals). c.r.T. v. AMALGAMATED DEVELOPMENT LTD. (Ramaswami, J.) 265 A The Judgment of the Court was delivered by Ramaswami, J. These appeals are brought, by certificate, from the judgment of the Calcutta High Court dated December 4, 1962 in Income-Tax Reference No. 57 of 195 8. The respondent company purchased the assets and liabilities B of the firm, Mugneeram Bangur & Co., (Land Department), here-inafter referred to as the 'firm', on July 7, 1948 for a consideration of Rs. 34,99,300/-. The consideration was paid by the issue of shares to the vendor or its nominees in the share capital of the res-pondent company. The assets included land at cost, Rs. 12,68,268/- as also goodwill and certain other assets subject to c certain liabilities incurred by the firm. By the time the respondent company took over the land, the firm had sold a number of plots in respect of which part of the consideration money had been rea-lised and for the balance Mortgage Bonds had been executed by the purchaser. In respect of those plots there was an undertaking to Jay out roads, etc. The respondent company took over the debts as well as the liabilities. After the purchase, the respondent com-D pany itself sold certain other plots. The purchaser paid a percent-age of the price in cash and undertook to pay the balance with interest at a specified rate in annual instalments which was secured by creating a charge on the land purchased. The sales made by the respondent company were in all material respects similar to the sales made by the firm. A specimen copy of the sale deeds E executed by the firm of the respondent company is Annexure 'A• to the Statement of the Case. The relevant provisions of the sale deed are as follows : " .... And whereas the said Vendor hath agreed with the Purchaser to sell him the said land .... hereunder written at the rate of price or sum of Rs. 3,000/- per F cotta free from all encumbrances. And Whereas the total amount of price payable in respect of the said plot .... at the rate aforesaid amounts to Rs. 8,708-5-6. And Whereas at the treaty for sale it was agreed by and bet-ween the parties hereto that one-third or thereabout of the total, price will be paid at the time of execution of G these presents and the payment of the balance will be secured in the manner hereinafter appearing. Now This Indenture Witnesseth that in pursuance of the said Agree-ment and in consideration of the sum of Rs. 8, 708-5-6 whereof the sum of Rs. 2,908-5-6 of lawful money of India to the said Vendor in hand well and truly paid by H the Purchaser at or before the execution of these pre-sents (the receipt whereof the said Vendor doth hereby as well as by receipt hereunder written admit and ac-knowledge) and the payment of the balance namely the sum of Rs. 5,800/- being secured under a security deed of even date with these presents and executed by the Purchaser in favour of the Vendor creating First Charge upon the said land .... "; " ... And the said Vendor shall at all costs complete the construction of the said twenty-five feet wide road on the North of the said plot No. 35A and will also lay out the said surface drains by the side of the said road within a year from the date hereof and will maintain the said road and drains in proper state or repairs and shall arrange for lighting the said roads with electric light till the same are taken over by Tollygunge Municipality ...... "; and, " Memo of Consideration By amount paid as earnest. money on 5th August, 1948 Rs. 501.0.0 By Cheque (pari) No. 6985706 on The Bank of India Ltd., on 30th January, 1949. Rs. 2,407.5.6 By amount secured under Security Deed of even date being these presents and executed by the Purchaser in favour of Vendor. Rs. 5,800.0.0 Rs. 5,800.0.0 Rs. 8,708.5.6" 268 A specimen copy of the mortgage deeds is Annexure 'B' to the Statement of the Case. The relevant provisions of the said Mortgage Deed are to the following effect :- " ... and by the said Indenture of Conveyance it was provided that the payment of the balance of the consideration money, namely, the sum of Rs. 5,800/-owing by the said mortgagor to the said mortgagee should be secured by an Indenture of Security Deed of even date being these presents to be executed by the said mortgagor in favour of the said mortgagee immediately after the execution of Conveyance now in recital. Now this In-denture Witnesseth and declares as follows :-(!) In consideration of the said premises the said mortgagor doth hereby covenant with the said mortgagee that the said mortgagor will pay to the said mortgagee the said sum of Rs. 5,800/- within ten years to be computed from the date of these presents together with interest thereon C.J.T. v. AMALGAMATED DEVELOPMENT LTD. (Ramaswami, !.) 267 at the rate of 8 % per annum calculated from the date of these presents upto the date of payment payable monthly .... "