Ita/52/2009 Of The Commissioner Of Income Tax Cochin v. South India Corporation Ltd,.,Kochi

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON MONDAY ,THE 07TH DAY OF JANUARY 2019 / 17TH POUSHA, 1940 ITA.No. 52 of 2009 AGAINST THE ORDER/JUDGMENT IN ITA 453/2006 ofI.T.A.TRIBUNAL,COCHIN BENCH DATED 14-08-2008 APPELLANT/S: THE COMMISSIONER OF INCOME TAX COCHINCOCHIN. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT/S: SOUTH INDIA CORPORATION LTD,.,KOCHIKOCHI. BY ADVS.SRI.K.ANAND (SR.)SMT.LATHA ANANDS.SRIDHAR THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 07.01.2019, ALONG WITH ITA.65/2009, ITA.79/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: 07.01.2019, ALONG WITH ITA.65/2009, ITA.79/2009, THE COURT - 2 - IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON MONDAY ,THE 07TH DAY OF JANUARY 2019 / 17TH POUSHA, 1940 ITA.No. 65 of 2009 AGAINST THE ORDER/JUDGMENT IN ITA 333/2005 ofI.T.A.TRIBUNAL,COCHIN BENCH DATED 14-08-2008 APPELLANT/S: THE COMMISSIONER OF INCOME TAX,COCHIN BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT/S: SOUTH INDIA CORPORATION LTD.RANI MEYYAMMAI BUILDING,, K.P.K.MENON ROAD,W.ISLAND,, COCHIN-03. BY ADVS.SRI.K.ANAND (SR.)SMT.LATHA ANANDS.SRIDHAR THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 07.01.2019, ALONG WITH ITA.79/2009, ITA.52/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: 07.01.2019, ALONG WITH ITA.79/2009, ITA.52/2009, THE COURT - 3 - IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON MONDAY ,THE 07TH DAY OF JANUARY 2019 / 17TH POUSHA, 1940 ITA.No. 79 of 2009 AGAINST THE ORDER/JUDGMENT IN ITA 405/2005 ofI.T.A.TRIBUNAL,COCHIN BENCH DATED 14-08-2008 APPELLANT/S: THE COMMISSIONER OF INCOME TAX,COCHIN BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT/S: SOUTH INDIA CORPORATION LTD., KOCHI BY ADVS.SRI.K.ANAND (SR.)SMT.LATHA ANANDS.SRIDHAR THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 07.01.2019, ALONG WITH ITA.65/2009, ITA.52/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: 07.01.2019, ALONG WITH ITA.65/2009, ITA.52/2009, THE COURT ITA Nos.52/2009 & Con. Cases - 4 - JUDGMENT [ ITA 52/2009 ,ITA.65/2009 ,ITA.79/2009 ]Vinod Chandran, J The questions raised in the above appeals arisefrom an identical issue on the claim of revenueexpenditure made by the assessee in the assessmentyears 2000-01 and 2001-02. 2. Shorn of the details, the assessee obtaineda right to manage JD-1 Berth in the Chennai Port. Thesaid right had its source in an agreement entered intoby one other Company with the Government of India;which, later entered into an agreement of transfer ofsuch right with a sister concern of theassessee-Company. It is from that sister concern of theassessee-Company that the right accrued to theassessee;theconsiderationofwhichwasRs.1,75,00,000/-. The right acquired was also foroperating the said Berth for a period of twenty years. 3. The assessee having paid up the totalamounts for the entire period, sought to split up thesame into the twenty years for which the right was obtained. For the first year, being the assessment year2000-01, the assessee claimed Rs.8,75,000/- as revenueexpenditure. The Assessing Officer [for brevity "AO"]declined the claim and treated it as a capitalexpenditure. The assessee was in appeal before thefirst appellate authority; who allowed the claim of theassessee relying on the decision of the Hon'ble SupremeCourt in Madras Industrial Investment Corporation Ltd.v . C.I.T. [ (1997) 225 ITR 802 (SC)]and Empire Jute Co.Ltd.v . C.I.T. [ (1980) 124 ITR 1 (SC)]. The Revenuewas in appeal before the Tribunal, which considered theissue along with the appeals arising from the nextyear. obtained. For the first year, being the assessment year2000-01, the assessee claimed Rs.8,75,000/- as revenueexpenditure. The Assessing Officer [for brevity "AO"]declined the claim and treated it as a capitalexpenditure. The assessee was in appeal before thefirst appellate authority; who allowed the claim of theassessee relying on the decision of the Hon'ble SupremeCourt in Madras Industrial Investment Corporation Ltd.v . C.I.T. [ (1997) 225 ITR 802 (SC)]and Empire Jute Co.Ltd.v . C.I.T. [ (1980) 124 ITR 1 (SC)]. The Revenuewas in appeal before the Tribunal, which considered theissue along with the appeals arising from the nextyear. 4. Admittedly, in the next year, ie:assessment year 2001-02, the assessee lost the rightinsofar as the Government of India having cancelled theright of management of the Berth and requisitioned thesame for other purposes. The assessee, hence, claimedthe balance amounts, being Rs.1,66,25,000/- as revenueexpenditure. The AO disallowed the claim of revenueexpenditure and the first appellate authority allowed it as a short term capital loss. Both the assessee andRevenue were in appeal before the Tribunal. TheTribunal, relying onC.I.T.v.Mrs.Grace Collis[(2001) 248 ITR 323 (SC)], found that the decision ofthe first appellate authority that the claim be treatedas short term capital loss has to be upheld. TheTribunal dismissed the Revenue's appeal. In the verysame order, the Tribunal, while considering the appealof the assessee, found that it was only proper for theassessee to treat it as a revenue expenditure for thesubject assessment year.5. The learned Standing Counsel for Governmentof India (Taxes) would contend that there is an anomalyinsofar as the Tribunal having upheld the decision ofthe Commissioner of Appeals, but having also allowedthe claim made before the AO as revenue expenditure. Wedo not see any apparent conflict in the decision of theTribunal; but, we observe that the appeals could havebeen considered together and this would have avoided acontention raised of a conflict having been occasioned.We, hence, frame the following questions of law as ITA Nos.52/2009 & Con. Cases arising in the respective years: (i) Whether the Tribunal was right in having affirmed the view of the first appellateauthority that for the assessment year 2000-01that Rs.8,75,000/- could be treated as revenueexpenditure on the ground of deferred liabilityfor the twenty years, fully paid in thatassessment year? (ii) Whether the Tribunal was correct in having foundthe claim of Rs.1,66,25,000/-, being the losssuffered on account of the cancellation of theagreement of right to transfer, for theassessment year 2001-02, as allowable revenueexpenditure? 6. The learned Counsel for the assesseeasserts that there is absolutely no conflict in thedecision of the Tribunal. It is pointed out that inparagraphs 11 and 12 of the order of the Tribunal, theTribunal had merely considered the ground taken by thefirst appellate authority and found that even forargument sake, if it is treated as capital loss, thenthe same has to be taken as a short term capital loss.The further finding in the assesse's appeal is clearlyof the same being a revenue expenditure. It is also pointed out that the assessee was never the licensee ofthe GoI and their name did not appear in the agreementbetween the GoI and the original licensee. The right tomanage the Berth was received from the originallicensee and there was no acquisition of a capital; norwas there a transfer of such capital. pointed out that the assessee was never the licensee ofthe GoI and their name did not appear in the agreementbetween the GoI and the original licensee. The right tomanage the Berth was received from the originallicensee and there was no acquisition of a capital; norwas there a transfer of such capital. 7.Madras Industrial Investment CorporationLtd., was with respect to the liability of a discount,granted at the time of issuance of debentures, whichwas liable to be paid by the Company on the date ofredemption. The Company had issued debentures at adiscount incurring a liability to pay a larger amountthan that was received; including amount of discount.The Hon'ble Supreme Court found that the liability topay the discounted amount over and above the amountreceived for the debentures is the liability which hasbeen incurred by the Company for the purposes of itsbusiness, in order to generate funds for its businessactivities. The amounts so used by the Company forthe purpose of its business was held to be anexpenditure. Section 37(1), requires that the - 9 - expenditure should not be of a capital nature. On thequestion of a decision on whether an expenditure is arevenue expenditure or capital expenditure, the SupremeCourt found that it has to be determined on aconsideration of all the facts and circumstances andthe application of the principles of commercialtrading. “The question must be viewed in the largercontext of business necessity or expediency. If theoutgoing or expenditure is so related to the carryingon or conduct of the business, then it may be regardedas an integral part of the profit making process andnot for acquisition of an asset or a right of apermanent character; the possession of which is acondition of the carrying on of the business, theexpenditure may be regarded as a revenue expenditure”(sic para 13). On the question of spreading over itwas found that normally when the assessee has incurredthe liability in a particular year, it cannot be spreadover a number of years. However, there could beinstances where the facts justify the spreading over ofthe expenditure in the years to which the liability can ITA Nos.52/2009 & Con. Cases be related to, especially when expenditure claimed in aparticular year gives a distorted picture of profitearned in that particular year. Therein the amountreceived as dividend was held to be a continuingbenefit to the business of the Company, over the entireperiod in which the dividend is not redeemed. Thediscounted amounts though arising as a liability on thematurity of the dividends the enduring benefit of thereceipt and retention of the amounts being spread overthe years, the liability also could be proportionatelyspread over the years was the categorical finding. 8. Empire Jute Company Ltd., was in thecircumstances of a restriction made by the Jutemanufacturers to the operation of looms in therespective factories of their members, each beingallotted a time of few hours. One of the memberspurchased the loom hours from four other mills foraugmentation of production in its own mill. Aconsideration was paid for the same which was claimedas revenue expenditure. The allotment of loom hours washeld to be a self restriction imposed and the purchase of such loom hours by one of the members from othermembers was found to be a measure adopted to increasethe profitability of the business and hence was heldto be a revenue expenditure. 8. Empire Jute Company Ltd., was in thecircumstances of a restriction made by the Jutemanufacturers to the operation of looms in therespective factories of their members, each beingallotted a time of few hours. One of the memberspurchased the loom hours from four other mills foraugmentation of production in its own mill. Aconsideration was paid for the same which was claimedas revenue expenditure. The allotment of loom hours washeld to be a self restriction imposed and the purchase of such loom hours by one of the members from othermembers was found to be a measure adopted to increasethe profitability of the business and hence was heldto be a revenue expenditure. 9. Applying the aforesaid principles for theassessment year 2000-2001, we have to find that thespreading over of the amounts, paid as license fees forthe purpose of managing a berth in the Port, wasperfectly justified, especially looking at the factthat the liability incurred was for the purpose ofretaining such rights over a period of 20 years. Inthe subject year, the assessee had a reasonableexpectation of continuing the right obtained for aperiod of 20 years and hence the spreading over of theliability incurred in that year, to the 20 years inwhich the right would have been retained by theassessee was proper and is a revenue expenditure. 10. As has been found in Madras IndustrialInvestment Corporation Ltd., there can be no disputethat there is an expenditure insofar as the liabilityincurred. What has to be looked at is as to whether ITA Nos.52/2009 & Con. Cases there is a capital expenditure. We do not find anycapital having been acquired and the expenditureincurred was for obtaining the rights to manage theberth for a specific period and nothing more. We henceuphold the order of the Tribunal answering the questionof law framed for the assessment year 2000-01 in favourof the assessee and against the Revenue. We reject ITANo.52/2009. 11. On the other question, as pointed out bythe learned Counsel for the assessee, we do not discernany conflict though we have to observe that the ordercould have been better worded and the appeals of therevenue and the department considered together. Theappeal of the assessee if allowed, then revenuesappeal could have been dismissed as unnecessary. Bethat as it may, the question arising is as to whetherthe loss incurred by the assesee, has to be treated asone incurred on capital or on revenue. The facts neednot be repeated. The liability which was paid up in theearlier years had crystallized into a loss, in thesubject assessment year 2001-02, for reason the rights ITA Nos.52/2009 & Con. Cases acquired by the assessee in the earlier year for 20years having stood extinguished. The learned Counselfor the revenue has relied onMrs. Grace Collis andVania Silk Mills P.Ltd., v. CIT [(1991) 191 ITR 647].We need not refer to the decision in Vania Silk MillsP.Ltd.,since the declaration made therein by a twoJudge Bench has been disapproved by the three JudgeBench inMrs.Grace Collis. 12. The assessee therein, Mrs.Grace Collis,had sold certain shares held in a company to thecompany to which there was an amalgamation. Theassessee held shares in Company A which was theamalgamating company, which were transferred to CompanyC being the amalgamated company. The Assessing Officerin the context of the assessee having not disclosed thecost at which she had acquired shares, took the facevalue of the shares as cost of acquisition. Onamalgamation, as per the terms agreed into between thetwo companies; one share held in the amalgamatingcompany created a right for issuance of 14 equityshares of Rs.100/- each in the amalgamated company. ITA Nos.52/2009 & Con. Cases 12. The assessee therein, Mrs.Grace Collis,had sold certain shares held in a company to thecompany to which there was an amalgamation. Theassessee held shares in Company A which was theamalgamating company, which were transferred to CompanyC being the amalgamated company. The Assessing Officerin the context of the assessee having not disclosed thecost at which she had acquired shares, took the facevalue of the shares as cost of acquisition. Onamalgamation, as per the terms agreed into between thetwo companies; one share held in the amalgamatingcompany created a right for issuance of 14 equityshares of Rs.100/- each in the amalgamated company. ITA Nos.52/2009 & Con. Cases The Assessing Officer treated the same as capital gainswhich was upheld by the Hon'ble Supreme Court. Thereliance placed on the aforesaid decision is to bringhome the point as to the word 'transfer'; used inSection 2(47), taking within its fold an extinguishmentof rights in a capital asset. The Hon'ble Supreme Courtheld, disapproving the view taken in Vania Silk MillsP.Ltd.:“In our view the definition clearly contemplateextinguishment of rights in a capital asset distinctand independent of such extinguishment consequent uponthe transfer thereon.”(sic) 13. Mrs.Grace Collis however, does not haveany application insofar as the facts and circumstancesof the instant case. Herein though there was anextinguishment of right there was no suchextinguishment of a right created in a capital asset.In fact, the earlier year also when the assessee hadacquired rights for 20 years and the liability for theentire years was met by the assessee in that particularyear, we found the assessee entitled to claim the sameas revenue expenditure. There was no acquisition of a ITA Nos.52/2009 & Con. Cases - 15 - capital asset or a right of a permanent character.There was found justification in the spreading over ofthe liability in the 20 years in which the right tooperate in favour of the assessee was available. Havingfound that there was no acquisition of capital assetthere would also be no transfer or extinguishment ofsuch right created in a capital asset. We hence upholdthe order of the Tribunal for the assessment year2001-02 answering the question of law in favour of theassessee and against the Revenue. ITA Nos.65/2009 and 79/2009, filed by theRevenue against the orders passed in the appeals byboth parties before the Tribunal would stand rejected.The parties shall suffer their respective costs. Sd/-K.Vinod Chandran,Judge Sd/- Ashok Menon, Judge APPENDIX OF ITA 52/2009 PETITIONER'S/S EXHIBITS: ANNEXURE-ACOPY OF REASSESSMENT ORDER DATED 12/01/2006 FOR THE ASSESSMENT YEAR 2000-2001. ANNEXURE-BCOPY OF ORDER DATED 10/05/2006 OF THE COMMISSIONER OF INCOME TAX (APPEALS). ANNEXURE-CCOPY OF THE ORDER DATED 14/08/2008 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH IN ITA NO.453/COCH/2006. ANNEXURE-DCOPY OF BOARD'S INSTRUCTION NO.5/2008 DATED 15/05/2008. APPENDIX OF ITA 65/2009 PETITIONER'S/S EXHIBITS: ANNEXURE-A COPY OF ASSESSMENT ORDER DATED 21/01/2004 FOR THE ASSESSMENT YEAR 2001-2002. ANNEXURE-BCOPY OF ORDER DATED 31/12/2004 OF THE COMMISSIONER OF INCOME TAX (APPEALS). ANNEXURE-C COPY OF THE ORDER DATED 14/08/2008 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH IN ITA NO.333/COCH/2005. APPENDIX OF ITA 79/2009 PETITIONER'S/S EXHIBITS: ANNEXURE-A COPY OF ASSESSMENT ORDER DATED 21/01/2004 FOR THE ASSESSMENT YEAR 2001-2002. ANNEXURE-BCOPY OF ORDER DATED 31/12/2004 OF THE COMMISSIONER OF INCOME TAX (APPEALS). ANNEXURE-C COPY OF THE ORDER DATED 14/08/2008 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH IN ITA NO.405/COCH/2005.