Itxa/253/2012 Of The Commissioner Of Income Tax - 3 v. M/S. Inditravel Pvt. Ltd

sbw *1* IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.253 OF 2012 Commissioner of Income Tax-3-Versus-M/s. Inditravel Pvt. Ltd. ..Appellant ..Respondent ........... Mr. A. R. Malhotra with N. A. Kazi for the Appellant.Mr. Ajit Shah i/b. Srihari M. Iyer for the Respondent. ........... CORAM: S.C. DHARMADHIKARIAND B.P. COLABAWALLA, JJ. DATE :- 11[th] June, 2014 P.C.: 1]This appeal is directed against the order passed by the Income Tax Appellate Tribunal, Mumbai Bench, dated 16[th] September, 2011. The Income Tax Appellate Tribunal delivered the common order in two appeals and related to the assessment year 2003-04. 2]The assessee's appeal was directed against the order of the Commissioner of Income Tax (Appeals) dated 29[th] February, 2008. In fact, both appeals namely that of the revenue and the assessee were directed against this order. 1/7 3]In the revenue's appeal, Income Tax Appeal No.3884/MUM/2008, the ground Nos.1, 2 and 3 raised by the revenue are under consideration before us. 4]Mr. Malhotra appearing in support of this appeal submits that the Tribunal should have appreciated that in so far as the ground Nos.1 and 2 were concerned, they pertain to the disallowance of Rs.4,70,00,000/-. That was stated to be a sum paid by the assessee company to one M/s. Megapode Airlines Ltd. That Airlines was a lessee. The amount was paid allegedly as consideration for surrender of the lease. However, that was not envisaged in any manner in the lease agreement. In such circumstances, an Assessing Officer was right in disallowing the claim. 5]We have, with the assistance of Mr. Malhotra perused the ground Nos.1 and 2 raised by the revenue and which are stated to be the substantial question of law. The facts pertaining to ground Nos.1 and 2 overlap to great extent. In relation to that, the Tribunal noted the admitted facts. The admitted facts were that one Mafatlal Finance Co. Ltd. was the owner of the Aircraft. It had leased this Aircraft to one M/s. Megapode Airlines Ltd. initially for a period of 7 years from 30[th ]December, 1994 with an option to renew the lease for an indefinite period of time. Prior to the said lease coming to an end and in fact a day prior *3* 12.itxa253.12 thereto, the leased Aircraft was agreed to be sold to the assessee. However, that was sold subject to the lease in favour of M/s. Megapode Airlines Ltd. The assessee initially was not inclined to renew the agreement as it was negotiating for sale of the Aircraft with a third party. However, finding that the lease agreement could not be put to an end and the same was renewed, the discussions, then, continued with the lessee and for surrender of the lease or mutual termination thereof. Eventually, the negotiations succeeded and on receipt of a sum of Rs.4,70,00,000/- the lessee gave up its rights enabling the assessee to dispose of the Aircraft to one M/s. Conair Jet Sale Inc. The capital gain on such transfer was offered to tax in the return of income for assessment year 2003-04. The computation of short term capital gain excludes the sum of Rs.4,70,00,000/- paid to the said Megapode Airlines Ltd. as compensation for premature termination of lease. That was claimed as deduction under section 48(i) as expenditure incurred wholly and exclusively in connection with transfer of the capital asset. 6]The argument of Mr. Malhotra is that the Tribunal erred in holding that the provision as invoked has no application. The obtaining of premature termination of the lease by payment of the sum of Rs.4,70,00,000/- cannot be said to be an expenditure incurred wholly and exclusively in connection with transfer of the capital asset. 6]The argument of Mr. Malhotra is that the Tribunal erred in holding that the provision as invoked has no application. The obtaining of premature termination of the lease by payment of the sum of Rs.4,70,00,000/- cannot be said to be an expenditure incurred wholly and exclusively in connection with transfer of the capital asset. 7]We are unable to agree because the Tribunal found from the admitted facts that MAL had a right to renew the lease agreement with the original owner M/s. Mafatlal and could retain possession of the Aircraft. The assessee purchased the Aircraft from M/s. Mafatlal subject to the rights of MAL under the lease agreement between MFL and MAL. In these circumstances, the assessee found itself unable to meet a situation of reimbursing of the increasing expenditure incurred on the Aircraft against lower receipt by way of lease premium or rent. In such circumstances, either the lease could have been terminated in accordance with law or the Assessee accedes to the request to renew the lease. It is in these circumstances that the Tribunal held that this was an expense or expenditure incidental to the transfer. If the transfer was to enable the assessee to sell the Aircraft free from all encumbrances, then, in the given facts and circumstances, decision of the Tribunal to allow the deduction under section 48(i) of the Act cannot be faulted. Therefore, this ground does not raises any substantial question of law. 8]In so far as the second ground namely ground No.3 is concerned, our attention has been invited by Mr. Malhotra to the explanation below sub section (i) of section 37 of the Income Tax Act, 1961. Mr. Malhotra submits that the deletion of the amount of Rs.2,41,00,000/- being the sum paid to drivers of third party was justified. This was not an expenditure laid out and expended wholly and exclusively for the purposes of business or profession. Further, that was not permissible considering explanation below sub section (i). 9]However, the Tribunal once again referred to the admitted facts. The Taj Group of Hotels were provided with high quality vehicles along with drivers by the assessee. For that purpose the assessee engaged two contractors namely M/s. D.V. Transport and M/s. Unity Travels. After cancellation of the contract with the two operators, the operators terminated the employment of the concerned drivers. One union took up the cause of the drivers and approached the 5[th] Labour Court, Mumbai by filing Complaint (ULP)No.540 of 1998. The complaint alleged unfair labour practices on the part of the Taj Mahal Hotel or M/s. Taj Services Pvt. Ltd. The drivers claimed to be direct employees of these two entities whereas these entities denied the claims of the drivers. The matter was pending adjudication and that is how a compromise was arrived at under which the allegations of unfair labour practice were withdrawn. In turn, the assessee assured the drivers and the union representing them, that in the event of new contract being awarded by the assessee, it would insert in such fresh contract a clause that the new operators employ in their service the concerned workmen/drivers. 10]Assessee later on engaged new operator M/s. Ramniranjan Kedia Finance Pvt. Ltd. and M/s. Sanjay Auto Services. However, the obligation of insertion in the clause to ensure that the drivers had continuous employment was found to be onerous. Finding that in a competitive market it was not possible to provide such continuous employment to these drivers and at a huge cost that the individual agreements with the workers under the applicable laws in the prescribed forms were arrived at and that is how a sum of Rs.2,41,00,000/- was paid in full and final settlement of all their claims in terms of the compromise/consent terms filed in the complaint before the Labour Court. in such fresh contract a clause that the new operators employ in their service the concerned workmen/drivers. 10]Assessee later on engaged new operator M/s. Ramniranjan Kedia Finance Pvt. Ltd. and M/s. Sanjay Auto Services. However, the obligation of insertion in the clause to ensure that the drivers had continuous employment was found to be onerous. Finding that in a competitive market it was not possible to provide such continuous employment to these drivers and at a huge cost that the individual agreements with the workers under the applicable laws in the prescribed forms were arrived at and that is how a sum of Rs.2,41,00,000/- was paid in full and final settlement of all their claims in terms of the compromise/consent terms filed in the complaint before the Labour Court. 11]The argument of Mr. Malhotra cannot be accepted because we do not find that this expenditure incurred by the assessee is for any purpose which is an offence or which is prohibited by law. We have not been shown any material indicating that the assessee committed an act prohibited in law and particularly in making such payment. In these circumstances, the prohibition in the explanation does not come into play. Once it does not come into play and it being undisputed that the business of the assessee was to provide vehicles and drivers to M/s. Taj Mahal Hotel, then, the expenses incurred in settling the claims of the drivers are for the purposes of business. In these circumstances, they clearly fall within the substantive provisions namely sub section (i) of section 37 and the Assessing Officer was in clear error in deleting the same. For the reasons that have been indicated by the Tribunal and with which we concur so also considering the peculiar facts and circumstances that we are of the opinion that even this ground or question cannot be said to be a substantial question of law. The findings of fact by the Tribunal have been rendered consistent with the material placed on record. The order of the Tribunal, therefore, cannot be said to be perverse or vitiated by any error of law apparent on the face of the record. As a result of the above discussion, we do not find any merit in the appeal and it is accordingly dismissed. No costs. (B.P.COLABAWALLA, J.) (S.C. DHARMADHIKARI, J.) wadhwa