THE COMMISSIONER OF INCOME TAX,COCHIN vs. 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 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 14-08-2008 APPELLANT/S: THE COMMISSIONER OF INCOME TAX COCHIN COCHIN. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT/S: SOUTH INDIA CORPORATION LTD,.,KOCHI KOCHI. BY ADVS. SRI.K.ANAND (SR.) SMT.LATHA ANAND S.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:

ITA Nos.52/2009 & Con. Cases - 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 of I.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 ANAND S.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:

ITA Nos.52/2009 & Con. Cases - 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 of I.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 ANAND S.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:

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 arise from an identical issue on the claim of revenue expenditure made by the assessee in the assessment years 2000-01 and 2001-02. 2. Shorn of the details, the assessee obtained a right to manage JD-1 Berth in the Chennai Port. The said right had its source in an agreement entered into by one other Company with the Government of India; which, later entered into an agreement of transfer of such right with a sister concern of the assessee-Company. It is from that sister concern of the assessee-Company that the right accrued to the assessee;

the

consideration

which

was Rs.1,75,00,000/-. The right acquired was also for operating the said Berth for a period of twenty years. 3. The assessee having paid up the total amounts for the entire period, sought to split up the same into the twenty years for which the right was

ITA Nos.52/2009 & Con. Cases - 5 - obtained. For the first year, being the assessment year 2000-01, the assessee claimed Rs.8,75,000/- as revenue expenditure. The Assessing Officer [for brevity "AO"] declined the claim and treated it as a capital expenditure. The assessee was in appeal before the first appellate authority; who allowed the claim of the assessee relying on the decision of the Hon'ble Supreme Court 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 Revenue was in appeal before the Tribunal, which considered the issue along with the appeals arising from the next year. 4. Admittedly, in the next year, ie: assessment year 2001-02, the assessee lost the right insofar as the Government of India having cancelled the right of management of the Berth and requisitioned the same for other purposes. The assessee, hence, claimed the balance amounts, being Rs.1,66,25,000/- as revenue expenditure. The AO disallowed the claim of revenue expenditure and the first appellate authority allowed

ITA Nos.52/2009 & Con. Cases - 6 - it as a short term capital loss. Both the assessee and Revenue were in appeal before the Tribunal. The Tribunal, relying on C.I.T. v. Mrs.Grace Collis [(2001) 248 ITR 323 (SC)], found that the decision of the first appellate authority that the claim be treated as short term capital loss has to be upheld. The Tribunal dismissed the Revenue's appeal. In the very same order, the Tribunal, while considering the appeal of the assessee, found that it was only proper for the assessee to treat it as a revenue expenditure for the subject assessment year. 5. The learned Standing Counsel for Government of India (Taxes) would contend that there is an anomaly insofar as the Tribunal having upheld the decision of the Commissioner of Appeals, but having also allowed the claim made before the AO as revenue expenditure. We do not see any apparent conflict in the decision of the Tribunal; but, we observe that the appeals could have been considered together and this would have avoided a contention raised of a conflict having been occasioned. We, hence, frame the following questions of law as

ITA Nos.52/2009 & Con. Cases - 7 - arising in the respective years: (i) Whether the Tribunal was right in having affirmed the view of the first appellate authority that for the assessment year 2000-01 that Rs.8,75,000/- could be treated as revenue expenditure on the ground of deferred liability for the twenty years, fully paid in that assessment year? (ii) Whether the Tribunal was correct in having found the claim of Rs.1,66,25,000/-, being the loss suffered on account of the cancellation of the agreement of right to transfer, for the assessment year 2001-02, as allowable revenue expenditure? 6. The learned Counsel for the assessee asserts that there is absolutely no conflict in the decision of the Tribunal. It is pointed out that in paragraphs 11 and 12 of the order of the Tribunal, the Tribunal had merely considered the ground taken by the first appellate authority and found that even for argument sake, if it is treated as capital loss, then the same has to be taken as a short term capital loss. The further finding in the assesse's appeal is clearly of the same being a revenue expenditure. It is also

ITA Nos.52/2009 & Con. Cases - 8 - pointed out that the assessee was never the licensee of the GoI and their name did not appear in the agreement between the GoI and the original licensee. The right to manage the Berth was received from the original licensee and there was no acquisition of a capital; nor was there a transfer of such capital. 7.Madras Industrial Investment Corporation Ltd., was with respect to the liability of a discount, granted at the time of issuance of debentures, which was liable to be paid by the Company on the date of redemption. The Company had issued debentures at a discount incurring a liability to pay a larger amount than that was received; including amount of discount. The Hon'ble Supreme Court found that the liability to pay the discounted amount over and above the amount received for the debentures is the liability which has been incurred by the Company for the purposes of its business, in order to generate funds for its business activities. The amounts so used by the Company for the purpose of its business was held to be an expenditure. Section 37(1), requires that the

ITA Nos.52/2009 & Con. Cases - 9 - expenditure should not be of a capital nature. On the question of a decision on whether an expenditure is a revenue expenditure or capital expenditure, the Supreme Court found that it has to be determined on a consideration of all the facts and circumstances and the application of the principles of commercial trading. “The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on or conduct of the business, then it may be regarded as an integral part of the profit making process and not for acquisition of an asset or a right of a permanent character; the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as a revenue expenditure” (sic para 13). On the question of spreading over it was found that normally when the assessee has incurred the liability in a particular year, it cannot be spread over a number of years. However, there could be instances where the facts justify the spreading over of the expenditure in the years to which the liability can

ITA Nos.52/2009 & Con. Cases - 10 - be related to, especially when expenditure claimed in a particular year gives a distorted picture of profit earned in that particular year. Therein the amount received as dividend was held to be a continuing benefit to the business of the Company, over the entire period in which the dividend is not redeemed. The discounted amounts though arising as a liability on the maturity of the dividends the enduring benefit of the receipt and retention of the amounts being spread over the years, the liability also could be proportionately spread over the years was the categorical finding. 8. Empire Jute Company Ltd., was in the circumstances of a restriction made by the Jute manufacturers to the operation of looms in the respective factories of their members, each being allotted a time of few hours. One of the members purchased the loom hours from four other mills for augmentation of production in its own mill. A consideration was paid for the same which was claimed as revenue expenditure. The allotment of loom hours was held to be a self restriction imposed and the purchase

ITA Nos.52/2009 & Con. Cases - 11 - of such loom hours by one of the members from other members was found to be a measure adopted to increase the profitability of the business and hence was held to be a revenue expenditure. 9. Applying the aforesaid principles for the assessment year 2000-2001, we have to find that the spreading over of the amounts, paid as license fees for the purpose of managing a berth in the Port, was perfectly justified, especially looking at the fact that the liability incurred was for the purpose of retaining such rights over a period of 20 years. In the subject year, the assessee had a reasonable expectation of continuing the right obtained for a period of 20 years and hence the spreading over of the liability incurred in that year, to the 20 years in which the right would have been retained by the assessee was proper and is a revenue expenditure. 10. As has been found in Madras Industrial Investment Corporation Ltd., there can be no dispute that there is an expenditure insofar as the liability incurred. What has to be looked at is as to whether

ITA Nos.52/2009 & Con. Cases - 12 - there is a capital expenditure. We do not find any capital having been acquired and the expenditure incurred was for obtaining the rights to manage the berth for a specific period and nothing more. We hence uphold the order of the Tribunal answering the question of law framed for the assessment year 2000-01 in favour of the assessee and against the Revenue. We reject ITA No.52/2009. 11. On the other question, as pointed out by the learned Counsel for the assessee, we do not discern any conflict though we have to observe that the order could have been better worded and the appeals of the revenue and the department considered together. The appeal of the assessee if allowed, then revenues appeal could have been dismissed as unnecessary. Be that as it may, the question arising is as to whether the loss incurred by the assesee, has to be treated as one incurred on capital or on revenue. The facts need not be repeated. The liability which was paid up in the earlier years had crystallized into a loss, in the subject assessment year 2001-02, for reason the rights

ITA Nos.52/2009 & Con. Cases - 13 - acquired by the assessee in the earlier year for 20 years having stood extinguished. The learned Counsel for the revenue has relied on Mrs. Grace Collis and Vania Silk Mills P.Ltd., v. CIT [(1991) 191 ITR 647]. We need not refer to the decision in Vania Silk Mills P.Ltd., since the declaration made therein by a two Judge Bench has been disapproved by the three Judge Bench in Mrs.Grace Collis.

ITA Nos.52/2009 & Con. Cases - 14 - The Assessing Officer treated the same as capital gains which was upheld by the Hon'ble Supreme Court. The reliance placed on the aforesaid decision is to bring home the point as to the word 'transfer'; used in Section 2(47), taking within its fold an extinguishment of rights in a capital asset. The Hon'ble Supreme Court held, disapproving the view taken in Vania Silk Mills P.Ltd.: “In our view the definition clearly contemplate extinguishment of rights in a capital asset distinct and independent of such extinguishment consequent upon the transfer thereon.”(sic) 13. Mrs.Grace Collis however, does not have any application insofar as the facts and circumstances of the instant case. Herein though there was an extinguishment of right there was no such extinguishment of a right created in a capital asset. In fact, the earlier year also when the assessee had acquired rights for 20 years and the liability for the entire years was met by the assessee in that particular year, we found the assessee entitled to claim the same as 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 of the liability in the 20 years in which the right to operate in favour of the assessee was available. Having found that there was no acquisition of capital asset there would also be no transfer or extinguishment of such right created in a capital asset. We hence uphold the order of the Tribunal for the assessment year 2001-02 answering the question of law in favour of the assessee and against the Revenue. ITA Nos.65/2009 and 79/2009, filed by the Revenue against the orders passed in the appeals by both parties before the Tribunal would stand rejected. The parties shall suffer their respective costs. Sd/- K.Vinod Chandran, Judge Sd/- Ashok Menon, Judge jma

ITA Nos.52/2009 & Con. Cases - 16 - APPENDIX OF ITA 52/2009 PETITIONER'S/S EXHIBITS: ANNEXURE-A COPY OF REASSESSMENT ORDER DATED 12/01/2006 FOR THE ASSESSMENT YEAR 2000-2001. ANNEXURE-B COPY OF ORDER DATED 10/05/2006 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.453/COCH/2006. ANNEXURE-D COPY OF BOARD'S INSTRUCTION NO.5/2008 DATED 15/05/2008.

ITA Nos.52/2009 & Con. Cases - 17 - 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-B COPY 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.

ITA Nos.52/2009 & Con. Cases - 18 - 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-B COPY 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.