Itta/76/2007 Of Karvy Consultants Ltd v. The Deputy Commissioner Of Income Tax

IN THE HIGH COURT OF JUDICATURE, ANDHRAPRADESH AT HYDERABAD FRIDAY, THE TWENTIETH DAY OF DECEMBERTWO THOUSAND AND THIRTEEN PRESENT THE HON’BLE THE CHIEF JUSTICESRI KALYAN JYOTI SEN GUPTA AND THE HON'BLE SRI JUSTICE SANJAY KUMAR I.T.T.A. No.76 OF 2007 Between: Karvy Consultants Limited, Hyderabad. ..... Appellant AND Deputy Commissioner of Income Tax, Range-2, Hyderabad, (Formerly Central Circle III, Hyderabad. ) .....Respondent The Court made the following : JUDGMENT:(per the Hon’ble the Chief Justice Sri K.J. Sengupta) This appeal is sought to be preferred against thejudgment and order of the learned Tribunal dated27.02.2006. This appeal was kept pending from 2007 onwards and it is sought to be admitted on the following suggested questions of law: 1.Whether, on the facts and circumstances of the case,the ITAT is justified in holding that the sum ofRs.40,22,000/- paid to RESL does not constitute actualcost of the assets to the assessee?the ITAT is justified in holding that the sum ofRs.40,22,000/- paid to RESL does not constitute actualcost of the assets to the assessee? 2.Whether, on the facts and circumstances of the case,the ITAT is justified in holding that the sum ofRs.40,22,000/- paid for termination of the LeaseAgreement and repossession of the two windmills isneither the cost of acquisition of an asset nor animprovement thereof?the ITAT is justified in holding that the sum ofRs.40,22,000/- paid for termination of the LeaseAgreement and repossession of the two windmills isneither the cost of acquisition of an asset nor animprovement thereof? 3.Whether, on the facts and circumstances of the case,the ITAT is justified in holding that the sum ofRs.40,22,000/- cannot be considered as an expenditureincurred in the revenue field and not allowable underSection 37 of the Income Tax Act, 1961?the ITAT is justified in holding that the sum ofRs.40,22,000/- cannot be considered as an expenditureincurred in the revenue field and not allowable underSection 37 of the Income Tax Act, 1961? Upon reading the aforesaid questions, it appears tous that the dispute centers around on the disallowancethat is claimed on revenue expenditure a sum ofRs.40,22,000/- on the following relevant facts. The assessee before us is a lessee who leased outtwo windmills to M/s. Renewable Energy Systems Limited(hereinafter referred as RESL). The lease was for acertain limited period and the rental for the leased goodswas also provided in the lease deed. However, uponmutual understanding between the lessor namely theassessee herein and RESL, lease was prematurelyterminated and on account of this termination of the lease,the assessee had paid the aforesaid amount as and byway of compensation to the lessee. In this background, learned counsel for the appellant submits that theaforesaid payment should be construed to be anexpenditure incurred on account of the capital assets andalteast on that count deduction should have beenallowed. Even if it is not possible, then the aforesaidpayment of compensation, obviously is relatable to thebusiness carried on by the appellant and it should betreated as business expenditure and the said amountshould have been deducted from the assessable incomeand the learned Tribunal committed legal mistake whilenot doing so. The learned Tribunal recorded on fact that theaforesaid payment of compensation has not beenreflected in the books of account as business expenditureor revenue expenditure. Inspite of that the appellant wantsthat this should be treated as business expenditure. Weshall examine this aspect first. The learned Tribunal recorded on fact that theaforesaid payment of compensation has not beenreflected in the books of account as business expenditureor revenue expenditure. Inspite of that the appellant wantsthat this should be treated as business expenditure. Weshall examine this aspect first. Business expenditure, as a settled law, must berelatable to the business carried on meaning thereby, itshould have direct nexus and connection with thebusiness activity. The aforesaid amount was paid ascompensation for premature deprivation of use ofwindmills. The business of the assessee is letting out ofwindmills to the respective customers and upon being letout, rental is earned. The payment was made in order toget back possession of the two windmills not in furtherance of letting out business. The lessee could haveused the windmills for the entire period and in that processthe lessor namely the assessee would have beendeprived of future utilization of the windmills, had therebeen no premature termination of lease. In order tocompensate the deprivation to the lessee, the aforesaidpayment was made. Therefore, this cannot be said to berelating to the business. This was towards payment ofcompensation for the loss admitted to have been sufferedby the lessee on account of premature rental. Moreover,had it been so, the assessee would have shown in thebooks of account the amount as expenditure, but it wasnot done so, as recorded by the learned Tribunal. Unlessit is shown in the books of account that have been reliedon by the revenue official, nothing can be taken note ofoutside the books of account. According to us, the learnedTribunal has rightly held so. Learned counsel for the appellant says that if it is nota business expenditure and if the payment is in order toget possession of the windmills, it is capital assets, then itshould have been the expenditure on the capital assets. In the context of this submission, we examine,whether it is a capital expenditure. Capital expenditure, inour view, would be when payment is made on acquiringright, title and interest of enduring nature in any assets.Here the assessee had not paid anything to acquire on right, title and interest of this nature. It paid for takingpossession of windmills as a measure of compensationon agreed terms. Both the assessee and the lessee arebenefited by this arrangement, as the assessee gotpossession of the two windmills before expiry of the leaseperiod to enable it to use and enjoy the same. No new oradditional right, title and interest of enduring character hasbeen acquired with this expenditure. Thus we are of theview that the appellant cannot term it to be a capitalexpenditure. When the assessee itself had not intended to termthe same to be expenditure in the Books of account, therevenue authorities cannot accept on mere oral assertionof the assessee later on. Payment of expenditure isalways involuntary and under compulsion it is paid. Here,the payment is made voluntarily on written agreement.Under these circumstances, we feel that the learnedTribunal is justified in what it has concluded. We do notfind any element of law involved in this matter to decide,for which we need to admit the appeal. Accordingly, wedismiss the appeal. No order as to costs. As a sequel to the dismissal of the appeal, all thepending interim applications shall stand closed. ______________________ Kalyan Jyoti Sengupta, CJ. December 20, 2013MAS` ______________ Sanjay Kumar, J.