TaxTMI 
TaxTMI 
2012 (9) TMI 804
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....pproximately 1713 sq.mtrs. and by a development agreement entered into with M/s Dipti Builders, the development rights therein were agreed to be sold by the assessee for consideration of Rs.16.11 crores. M/s Dipti Builders had also agreed to construct 18000 sq.ft. of carpet area for the benefit of the assessee on plot No. 256 which was admeasuring 3899.4 sq.mtrs. In the return of income filed for the year under consideration, capital gain arising from sale of plot No. 257 was computed and offered by the assessee by taking into account the consideration of Rs.16.11 crores. The constructed area of 18,000 sq.ft. was not taken into account while offering the capital gain. During the course of assessment proceedings, the assessee was called upon by the AO to explain why the market value of the constructed area of 18,000 sq.ft. should not be taken as part of consideration for sale of plot. In reply, it was submitted on behalf of the assessee that before M/s Dipti Builders could start the development/construction work, the entire property comprising of plot No. 256 and 257 was sold to a third party M/s Financial Technologies Ltd. by a tripartite conveyance deed executed on 5th July, 2007 ....
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....e was no question of taking into account the said consideration not received by the assessee for the purpose of computing capital gain. It was submitted that immediately within the period of 13 months from the development agreement entered into with M/s Dipti Builders, a tripartite conveyance deed was executed on 5th July, 2007 between the assessee, M/s Dipti Builders and M/s Financial Technologies Ltd. whereby entire property comprising of plot Nos. 256 and 257 was sold and conveyed to M/s Financial Technologies Ltd. for total consideration of Rs.29.11 crores. It was contended that the additional consideration received by the assessee in the monetary terms as a result of the said transfer of property was duly offered by the assessee to tax in assessment year 2008-09. It was contended that the net effect of this subsequent conveyance deed executed on 5th July, 2007 is that the earlier development agreement dated 16th June. 2006 stood modified and the consideration in the form of free of cost construction of 18,000 sq..ft. was cancelled. It was contended that no income on account of the said consideration thus accrued or arose to the assessee in real terms. It was also contended tha....
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.... had not accrued in the year under consideration. Relying on the decision of Hon'ble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia (supra), he held that there was a transfer of property i.e. plot No. 257 as a result of development agreement entered into by the assessee with M/s Dipti Builders giving rise to capital gain. He held that the said development agreement was not only executed but also acted upon by both the parties and, therefore, the consideration as agreed in terms of the said development agreement was chargeable to tax in the year under consideration in which there was a transfer of property. He held that constructed area of 18,000 sq.ft. to be built by M/s Dipti Builders for the benefit of the assessee free of cost was integral part of the said consideration. He, however, agreed with the alternative plea of the assessee that only the cost of construction of 18,000 sq.ft. should be taken as consideration and not the market value of 18,000 sq.ft. as taken by the AO on the basis of ready reckoner rates meant for stamp duty purposes. Accordingly, relying on the report of the Government approved valuer, he adopted the cost of construction of 18,000 sq.ft. a....
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....ssessee the consideration was modified voluntarily without any such compulsion. 9. The learned DR relied on the decision of Hon'ble Calcutta High Court in the case of CIT v. Smt. Bharati C. Kothari 244 ITR 352 as well as that of Mumbai Bench of ITAT in the case of ACIT v. Vidhata Textile (P) Ltd. 70 ITD 357 to contend that consideration modified subsequently will not have any bearing on computation of capital gain. He also relied on the decision of Hon'ble Delhi High court in the case of Saraswati Insurance Co. Ltd. v. CIT 252 ITR 430 to contend that subsequent events are not relevant to ascertain the accrual of income. The learned DR submitted that capital gain in the present case had arisen in the year under consideration as a result of transfer of plot No. 257 by the assessee to M/s Dipti Builders on execution of development agreement as held by Hon'ble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia (supra) and the same was required to be computed on the basis of consideration agreed upon in terms of the said development agreement as rightly held by the AO as well as by the learned CIT(Appeals). 10. We have considered the rival submissions and also perused t....
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....adia (supra). A perusal of the judgment of Hon'ble Bombay High Court in the said case, however, shows that the issue involved therein was whether the assessee had transferred the property owned by him during the relevant previous year as a result of development agreement whereby complete control over the property was transferred by the assessee in favour of the developer giving rise to capital gains chargeable to tax. In the present case, the issue involved, however, is different inasmuch as the assessee has not disputed at any stage that there was a transfer of property as a result of development agreement entered into with M/s Dipti Builders giving rise to capital gain chargeable to tax in the year under consideration. As a matter of fact, the assessee has offered such capital gain to tax in the return of income filed for the year under consideration and the only dispute is relating to the exact quantum of sale consideration that is to be taken for the purpose of computing such capital gain. According to the assessee, although the total consideration as agreed in terms of development agreement was Rs.16.11 crores in monetary terms and constructed area of 18,000 sq.ft. free of cos....
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....o the assessee by M/s Dipti Builders in terms of the agreement had accrued to the assessee in the year under consideration and the same, therefore, was to be taken into account for computing the capital gains irrespective of the subsequent events/developments which are not relevant in this context. 13. In support of the stand of the Revenue, the learned DR has placed reliance mainly on the decision of Hon'ble Delhi High Court in the case of Saraswati Insurance Co. Ltd. v. CIT 252 ITR 430. It is, however, observed that the issue involved in the said case was relating to accrual of interest income and since the interest income accrues periodically when it falls due, the Hon'ble Delhi High Court held that interest had already accrued to the assessee on the due dates and waiver of such interest subsequently was not relevant in this context. Similarly in the case of CIT v. Bharati C. Kothari 244 ITR 352 cited by the learned DR, the decision was rendered by the Hon'ble Calcutta High Court in the context of accrual of interest income and keeping in view that such income had accrued to the assessee on day to day basis, it was held that modification of interest rate subsequently would no....
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....ng into reduction of consideration has any bearing on the accrual of consideration and on this aspect of the matter, the decision of Ahmedabad Bench of ITAT in the case of Bio Pharma (supra), in our opinion, fully supports the case of the assessee. 15. Before the learned CIT(Appeals) as well as before us, the doctrine of real income has been pressed into service on behalf of the assessee in support of its contention that there cannot be accrual of income that has never been received by the assessee in the real sense. In support of this contention, reliance has been placed by the learned counsel for the assessee on the decision of Hon'ble Bombay High Court in the case of CIT v. Shivsagar Estates (AOP) reported in 204 ITR 1. In the said case, the assessee had leased a plot on rent and had made certain advances on interest to M under an agreement. M was to construct a hotel on the said plot which he was unable to do. A fresh agreement, therefore, was entered into between the assessee and M subsequently under which the assessee waived rent and interest and received back the plot. In these facts and circumstances, doctrine of real income was held to be applicable by the Hon'ble Bomba....
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....f the said expenditure, it was explained by the assessee company that there were two groups holding the shares of the assessee company. One group headed by Samir Shah was owning 66% shares while the other group headed by his brother Umesh Shah was owning 34% shares. Owing to difference between these two groups there were lot of problems and the dispute reached the Company Law Board as well as to the Hon'ble Supreme Court thereafter. In order to settle these disputes, a family settlement was finally arrived at and taking note thereof, the Company Law Board directed the assessee company to buy 34% shareholding of Umesh Shah group. Since the disputes arising as a result of differences between two group of shareholders had adversely affected its business, sales, status, income etc. for a period of more than six years, the assessee company purchased 8398 shares held by Umesh Shah group for a total consideration of Rs.6.90 crores as against their face value of Rs.8,39,800/- and the difference of Rs.6,80,60,200/- was claimed by it as expenditure incurred wholly and exclusively for the purpose of running its business. According to the AO, the said expenditure, however, was incurred as a pa....
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.... in a smooth and efficient manner which resulted in continued business losses, erosion of the capital, enforcement by legal proceedings by Banks to recover the loans by filing cases in the Debt Recovery Tribunal. It was contended that the assessee company thus had left with no choice but to settle the disputes and purchase the shares owned by Umesh Shah group at premium as per the final order dated 17th May, 2006 passed by the Company Law Board. Accordingly, the shares of Umesh Shah group were purchased and cancelled by the assessee company and the premium of Rs.6,81,60,200/- paid was claimed as expenditure incurred wholly and exclusively for the purpose of business as the same was to enable the assessee company to carry on this business smoothly, efficiently and profitably. It was pointed out that after incurring the said expenditure on purchase of shares and settlement of dispute, the turnover of the assessee company started showing sign of recovery and it improved substantially in the latter years. The assessee company also started making profits from the year under consideration as against the losses incurred consistently in the earlier years in which there was dispute. It was ....
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....ooth functioning of the business of the assessee company. He submitted that in order to get over the said problems and to carry on its business smoothly and efficiently, the assessee company purchased the shares of one group as per the Company Law Board's order. He submitted that in the similar facts and circumstances involved in the case of Echjay Industries Ltd. (supra) the Tribunal has held that the expenditure incurred on purchase of shares is deductible as business expenditure being revenue in nature. He submitted that the said decision of the Tribunal which is directly applicable to the facts of the present case has been upheld by the Hon'ble Bombay High Court by dismissing the appeal filed by the Revenue against the said decision by its order dated30th July, 2008 passed in ITA No. 337 of 2004. He has contended that a similar issue thus has been decided in favour of the assessee by the Hon'ble jurisdictional High Court which is binding on this Tribunal. 22. The learned DR, on the other hand, strongly supported the impugned order of the learned CIT(Appeals) on this issue. He submitted that as rightly held by the learned CIT(Appeals) on appreciation of the facts of the asses....
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....e of Echjay Industries Ltd. v. DCIT 88 TTJ (Mumbai) 1089. As mentioned by the learned CIT(Appeals) in his impugned order as well as by the learned DR in the course of his arguments raised before us, the facts involved in the present case, however, are different from the facts involved in the case of Echjay Industries Ltd. (supra). According to the learned CIT(Appeals), the purchase of shares by the assessee company was a result of mutual settlement amongst the family members and the expenditure incurred for this purpose on payment of premium was of personal nature. He held that the Company Law Board had simply accepted this family settlement keeping in view that both the sides were prepared to abide by the said settlement. It is observed from the perusal of the order passed by the coordinate bench of this Tribunal in the case of Echjay Industries Ltd. (supra) that similar fact situation was involved in that case also. As mentioned in paragraph No. 22 of the order of the Tribunal passed in the case of Echjy Industries Ltd. (supra), the assessee company was a private limited company with four brothers and their family members as Directors/Shareholders. Serious disputes broke out betw....
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....whether such settlement is in the interest of the company as well as in public interest and if it is not so, the Court is not bound to accept and record the same. It was noted that proceedings u/s 397 and 398 of the Companies Act are not like a suit between private parties which may be compromised in any manner they choose. The interests of the company are of paramount importance and the Court may accept a compromise which is in the larger interest of the company or in public interest. The Tribunal held that the allegation of the Revenue that the settlement was in the interest of only two warring groups thus was not correct. 25. In his impugned order, the learned CIT(Appeals) has observed that the assessee company could not produce any evidence to show that the group of minority shareholders was actually causing any disturbance in the conduct of the business. Taking cue from this observation of the learned CIT(Appeals), the learned DR has contended that in the case of Echjay Industries Ltd. (supra), undisputedly there was serious dispute amongst the shareholders affecting growth of the assessee company whereas no such case has been made out in the present case showing the distur....
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....s and figures furnished by the assessee are sufficient to show that the disputes between the shareholders had affected the day to day business of the assessee and the settlement of the said dispute certainly helped the assessee to run its business smoothly and effectively enabling it to achieve further growth. 26. As regards the stand of the Revenue that the impugned expenditure incurred by the assessee company on payment of purchase of shares at premium is a capital expenditure, it is observed that a similar stand was taken by the Revenue before the Tribunal in the case of Echjy Industries Ltd. (supra). The Tribunal, however, did not accept the same by holding that by getting rid of the minority shareholders, the company could not be said to have acquired any enduring benefit. It was also observed by the Tribunal in this context that even if it is assumed that an enduring benefit has been obtained, such enduring benefit is not relatable to fixed capital structure of the assessee company because it has neither increased the assessee's assets nor the assessee company could be said to have acquired any right of income yielding nature. It was held that the amount in question was pa....