1996 (6) TMI 46 - HC - Income Tax

Court rules capital gains tax payment not deductible as business expenditure or asset cost enhancement.

Kumudam Printers Pvt. Limited Versus Commissioner Of Income-Tax

Kumudam Printers Pvt. Limited Versus Commissioner Of Income-Tax - [1997] 226 ITR 680, 140 CTR 384, 92 TAXMANN 372 Issues Involved:1. Whether the amount paid as capital gains tax is allowable as revenue expenditure.2. Whether the payment enhances the cost of the asset, thereby allowing depreciation.Issue-wise Detailed Analysis:1. Revenue Expenditure:The assessee, a private limited company, purchased land and a building for Rs. 11 lakhs. The Income-tax Department assessed the fair market value at Rs. 16.94 lakhs, suspecting undervaluation. To avoid acquisition proceedings under Chapter XX-A of the Income-tax Act, 1961, the vendor agreed to pay capital gains tax based on Rs. 16.94 lakhs, amounting to Rs. 1.75 lakhs, which the assessee paid on the vendor's behalf. The assessee claimed this payment as a deduction in its business for the assessment year 1975-76. The assessing authority disallowed the claim, considering it neither incurred in the course of business nor for earning income, and deemed it capital expenditure. The Commissioner of Income-tax (Appeals) upheld this disallowance, stating the liability was the vendor's statutory obligation, and there was no binding contract at the time of sale. The Tribunal agreed, noting the payment was likely due to the management's interest in the vendor and not a business liability. The Tribunal concluded the payment was gratuitous and did not enhance the asset's cost. The court affirmed this, ruling the payment was a voluntary, gratuitous act, not a business expenditure, and the title was already perfect upon purchase.2. Cost of the Asset and Depreciation:The assessee alternatively claimed the Rs. 1.75 lakhs should be treated as an additional acquisition cost, allowing depreciation. The Tribunal rejected this, noting the assessee wrote off the amount as revenue expenditure and did not treat it as capital expenditure. The court agreed, emphasizing the payment was voluntary and unrelated to the asset's acquisition cost. The court referenced the Full Bench decision in S. Valliammal v. CIT, where estate duty paid by heirs was not considered part of the asset's cost for capital gains tax, affirming that the liability to pay capital gains tax was the vendor's, not the assessee's. The court concluded the payment did not enhance the asset's cost, and depreciation was not allowable.Conclusion:Both questions were answered in the affirmative, against the assessee and in favor of the Department. The court held that the Rs. 1.75 lakhs paid as capital gains tax was not allowable as revenue expenditure nor did it enhance the cost of the asset for depreciation purposes.