Commissioner Of Income Tax-Vii Chennai v. M/S Vijay Constructions Chennai

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 31.07.2007 CORAM THE HONOURABLE MR.JUSTICE D.MURUGESANANDTHE HONOURABLE MR.JUSTICE P.P.S.JANARTHANA RAJA Tax Case (Appeal) No.307 of 2004 Commissioner of Income Tax-VIIChennai ..Appellant Vs.M/s Vijay ConstructionsChennai..Respondent Appeal under Section 260A of the Income-tax Act, 1961 against theorder of the Income Tax Appellate Tribunal, Chennai Bench 'A', Chennai inI.T.A. No.2442/Mds/94 dated 21.10.2003 for the assessment year 1991-92 andagainst the order of the Commissioner of Income Tax Appeal, dated29.8.1994, made in ITA.No.151/94-95 and against the order of theAsst.Commissioner of Income Tax City Circle VII (2) Madras-34 in TheAssessment order of 1991-1992, dated 28.3.1994, and made inPNA/GIR.No.2313-V. This appeal is filed under Section 260A of the Income Tax Act, 1961by the Revenue, against the order of the Income Tax Appellate Tribunal,Chennai Bench 'A', Chennai in I.T.A. No.2442/Mds/94 dated 21.10.2003. On23.06.2004, this Court admitted the appeal and formulated the followingsubstantial questions of law:-https://hcservices.ecourts.gov.in/hcservices/ "1. Whether in the facts and circumstances of the case,the Tribunal was right in holding that the compensationamount paid by the assessee to the land owners towardsthe undivided share of land which was not sold is to betreated as a business expenditure? 2. Whether in the facts and circumstances of the case,the Tribunal had enough material to hold and was rightin holding that the agreement with the land owners forpayment of the compensation was among the seizeddocuments? 3. Whether in the facts and circumstances of the case,the Tribunal was right in accepting the assessee'sversion that the documents were with the department,and allowing the appeal, without giving an opportunityto the assessing officer?" 2. The facts leading to the above substantial questions of law are asunder:- The assessee is a partnership firm and is engaged in the business ofconstruction of flats and commercial building. The relevant assessmentyear is 1991-92 and the corresponding accounting year ended on 31.03.1991.The assessee firm filed its Return of income on 24.04.1992 admitting atotal income of Rs.58,130/-. The return was processed under Section 143(1)(a) of the Income-tax Act ("Act" in short) accepting the total incomereturned. Subsequently notice under Section 143(2) of the Act was issued.The Assessing Officer completed the assessment on 28.03.1994 under Section143(3) of the Act determining the total income at Rs.7,15,130/-. Whilecomputing the assessment, the Assessing Officer held that the amount ofRs.6,57,000/- debited to the Profit and Loss account towards compensationis not related to the business and hence the same was disallowed.Aggrieved by the order, the assessee filed an appeal to the Commissionerof Income-tax (Appeals). The C.I.T.(A) directed the Assessing Officer totreat the said expenses as business expenditure and deleted the additionof Rs.6,57,000/- and allowed the appeal. Aggrieved, the Revenue filed anappeal to the Income-tax Appellate Tribunal ("Tribunal" in short). TheTribunal dismissed the appeal filed by the Revenue and confirmed the orderof the C.I.T.(A). Hence the present tax case by the Revenue. 3.Learned Senior Standing Counsel appearing for the Revenuesubmitted that the amount paid by the assessee is not in the course ofbusiness and hence the Assessing Officer rightly refused to treat thecompensation as business expenditure. 4.In spite of the notice served on the respondent, there is norepresentation on behalf of the respondent. 5.Heard the counsel. The assessee entered into an agreement withhttps://hcservices.ecourts.gov.in/hcservices/the land owners, who are ten in number, for developing the land byconstructing flats at 18, Halls Road, Kilpauk, Chennai. It was agreedupon to develop their shares of land at an agreed amount. However, on 4.In spite of the notice served on the respondent, there is norepresentation on behalf of the respondent. 5.Heard the counsel. The assessee entered into an agreement withhttps://hcservices.ecourts.gov.in/hcservices/the land owners, who are ten in number, for developing the land byconstructing flats at 18, Halls Road, Kilpauk, Chennai. It was agreedupon to develop their shares of land at an agreed amount. However, on completion of the project, it was found that the land belonging to theland owners have not been transferred in full and payment made to themfell short of the agreed amount. Their undivided shares of land could notbe transferred to anybody else as the building had been already completed.On compromise between the land owners and the assessee firm, the landowners were given compensation for the shortfall in the payment due tothem. The said compensation amount has been declared by the land ownersas income in their income-tax returns. The assessee obtained permissionfrom the Government of Tamil Nadu in G.O.Ms.No.91, Housing and UrbanDevelopment Department, dated 29.01.1988 for construction of the buildingexceeding 20 metres floor area, abutting road width, height of thebuilding etc. In other words, the exemption was given to go for morefloors by violating the guidelines given by Madras MetropolitanDevelopment Authority. After obtaining the exemption there was hue andcry in the public and the matter was taken to the press. There was a newsitem in "Indian Express" on 13.07.1989 with the caption "when publicsafety takes a back seat". In that news it was stated that about 100applications for building plans (including 50 for multi-storeyedbuildings) were ratified and approved by the Government, overriding theobjections of the Madras Metropolitan Development Authority. Theassessee's site was mentioned as a typical example. It was alleged that nomulti-storeyed building could be permitted since the abutting roads areonly 12 metres and 19.15 metres wide, but this standard was done awaywith. It was also mentioned in the news item that it would cause greatinconvenience to the other residents and would also pose a danger to theoccupants. A similar news was also published in Malai Malar dated13.07.1989. At that time, there was a change in Government and hence theassessee thought it proper to restrict the construction to the guidelinesof the Madras Metropolitan Development Authority. By that time, theagreements were already entered into with the flat owners regarding theprice of the land and the price of the building and hence no extra amountcould be charged to them. In this case, the assessee planned to construct24 flats by obtaining the exemption from the Government by dividing theland cost among the 24 flat owners and accordingly agreements were madewith them. Subsequently, due to the objection from the public, theassessee constructed only 16 flats. But the land owners have to get thefull price. The share of the land price contributed by 16 land ownerswould yet fall short of the total consideration to be paid to the landowners. Under these peculiar circumstances, the assessee had no other gothan to suffer the loss and also there is no other way than to take theloss on to itself. The agreement was entered with the land owners to givethem a particular price for the land. Also, the assessee was not in aposition to collect the total price from the flat owners. Hence loss wasincurred for the purpose of carrying on the business and it is onlyrelated to the business. In the case of Commissioner of Income-tax, KeralaVs. Malayalam Plantations Ltd. [1964] 53 ITR 140 (SC), the Supreme Courtconsidered the scope of the phrase "for the purpose of the business" andheld at Page No.150, as follows:- "The aforesaid discussion leads to the followingresult: The expression "for the purpose of thebusiness" is wider in scope than the expression "forthe purpose of earning profits". Its range is wide: ithttps://hcservices.ecourts.gov.in/hcservices/may take in not only the day to day running of abusiness but also the rationalization of itsadministration and modernization of its machinery; it may include measures for the preservation of thebusiness and for the protection of its assets andproperty from expropriation, coercive process orassertion of hostile title; it may also comprehendpayment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on of a business;it may comprehend many other acts incidental to thecarrying on of a business. However wide the meaning ofthe expression may be, its limits are implicit in it.The purpose shall be for the purpose of the business,that is to say, the expenditure incurred shall be forthe carrying on of the business and the assessee shallincur it in his capacity as a person carrying on thebusiness." In the case of S.A. Builders Ltd. Vs. Commissioner of Income-tax (Appeals)and Another, [2007] 288 ITR 1 (SC), the Supreme Court had given certainguidelines as to how the Revenue should consider and allow certainexpenditure as business expenditure, and held at Page No.9, as follows:- "We agree with the view taken by the Delhi HighCourt in CIT v. Dalmia Cement (B.) Ltd. [2002] 254 ITR377 that once it is established that there was nexusbetween the expenditure and the purpose of the business(which need not necessarily be the business of theassessee itself), the Revenue cannot justifiably claimto put itself in the arm-chair of the businessman or inthe position of the board of directors and assume therole to decide how much is reasonable expenditurehaving regard to the circumstances of the case. Nobusinessman can be compelled to maximize his profit.The income-tax authorities must put themselves in theshoes of the assessee and see how a prudent businessmanwould act. The authorities must not look at the matterfrom their own view point but that of a prudentbusinessman. As already stated above, we have to seethe transfer of the borrowed funds to a sister concernfrom the point of view of commercial expediency and notfrom the point of view whether the amount was advancedfor earning profits." Applying the above principles in the present case, we are of the view thatthe expenses incurred by the assessee is for the purpose of the businessand hence the same is an allowable deduction in computing the income ofthe assessee. Both the first appellate authority as well as the Tribunalhave given a concurrent finding that it is an expenditure which wasincurred for the purpose of the business, and the order of the Tribunal isnot a perverse one. The finding given by the authorities below is basedon valid materials and evidence and we find no error or illegality in theorder of the Tribunal so as to warrant interference. 6. Under the circumstances, we answer the first question in favour ofthe assessee and against the Revenue. As we answered the first question,it is unnecessary to consider the second and third questions as they areconsequential in nature. Accordingly, the tax case is dismissed. Nocosts. ss/km To 1. The Assistant Registrar, Income-tax Appellate Tribunal, Chennai Bench "A", Rajaji Bhavan, Besant Nagar, Chennai. 2. The Commissioner of Income-tax (Appeals)-VI, Madras. Madras. 3. The Assistant Commissioner of Income-tax, City Circle VII (2), Madras-34. 4. The Commissioner of Income Tax VII, Chennai. +1 cc to M/s.Pushya Sitaraman, Advocate Sr.No.48147. VRK(CO)dcp/13.8 T.C.(A)No.307 of 2004