MIDDLE EAST ESTATE BUILDERS P.TLD. vs. COMMISSIONER OF INCOME TAX DELHI IV

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ITA/408/2008HC DelhiDLHC01019890200810 November 2008Author: HON'BLE MR. JUSTICE BADAR DURREZ AHMED,HON'BLE MR. JUSTICE RAJIV SHAKDHER6 pages
AI SummaryPartly Allowed

What did the High Court hold?

The High Court answered questions 1, 2, and 3 in the negative, in favour of the Assessee, relying on its own decision in the Assessee's case for AY 1994-95. Question 4 was also answered in the negative, in favour of the Assessee, based on an order passed in ITA No. 407/2009. Question 5 was answered in favour of the Assessee, referencing a prior order in ITA No. 407/2009 for AY 1997-98. Regarding Question 6, concerning the surplus on the sale of the American Universal Division (AUD), the Court held that prior to April 1, 2000, there were no computation provisions for taxing capital gains on a slump sale. The Court relied on the Supreme Court's decision in PNB Finance v. CIT and its own prior ruling in CIT v. Ece Industries, affirmed by the Supreme Court. Thus, the question was answered in the negative, favouring the Assessee. For Question 7, concerning the non-compete agreement, the Court noted that Section 28(v)(a) was inserted effective April 1, 2003, and prior to that, consideration for such agreements was not taxable. This was supported by the Supreme Court's decision in Guffic Chem Pvt. Ltd. v. CIT. Consequently, Question 7 was also answered in the negative, in favour of the Assessee. The appeal was disposed of in terms of these answers.

What were the facts?

This appeal by the Revenue under Section 260A of the Income Tax Act, 1961, challenges the ITAT's order dated June 6, 2008, for Assessment Year 1996-97. The High Court admitted the appeal and framed seven questions of law. The case involves the assessee, DLF Ltd., and the Revenue. The dispute pertains to additions made by the Assessing Officer (AO) and subsequent deletions by the Commissioner of Income Tax (Appeals) (CIT(A)) and the ITAT. Several issues were decided based on prior High Court judgments for the same assessee and related assessment years, as well as Supreme Court precedents.

What were the issues?

The High Court had to decide seven questions of law. 1. Whether the ITAT was correct in holding that the AO was not justified in invoking the First Proviso to Section 145(1) of the Act, given the assessee's accounting method accepted in prior years. (Assessee argued the method was accepted; Revenue likely argued it prevented correct income detection). 2. Whether the ITAT was correct in deleting the addition made by the AO on account of the sale price of constructed properties. (Assessee likely argued for deletion; Revenue for addition). 3. Whether the AO and CIT(A) were correct in re-working the cost of land at an average purchase price, considering saleable area including community spaces. (Assessee likely argued against this re-working; Revenue for it). 4. Whether the CIT(A) erred in allowing depreciation on the self-occupied portion of DLF Centre. (Assessee argued for depreciation; Revenue against). 5. Whether the CIT(A) erred in directing the AO to assess rent receipts from DLF Centre, including air conditioning charges, as 'Income from House Property'. (Assessee argued for this classification; Revenue against). 6. Whether the CIT(A) erred in deleting an addition of Rs. 9.18 crore on account of surplus on the sale of the American Universal Division undertaking. (Assessee argued for deletion; Revenue for addition). 7. Whether the CIT(A) erred in deleting an addition of Rs. 4.89 crore made on account of a non-compete agreement with General Electric Company. (Assessee argued for deletion; Revenue for addition).

Which sections of the Income-tax Act were involved?

Section 260A,Section 145(1),Section 50B,Section 28(v)(a)

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
ITA 408/2009 Page 1 of 6 $~20 * IN THE HIGH COURT OF DELHI AT NEW DELHI + ITA No. 408/2008 COMMISSIONER OF INCOME TAX, DELHI-IV ..... Appellant Through: Mr. Rahul Chaudhary, Senior Standing Counsel with Mr. Sanjay Kumar, Advocate. versus DLF LTD. (EARLIER DLF UNIVERSAL LTD.) ..... Respondent Through: Mr. Ajay Vohra, Senior Advocate with Ms. Kavita Jha & Ms. Roopali Gupta, Advocates CORAM: JUSTICE S. MURALIDHAR JUSTICE PRATHIBA M. SINGH

O R D E R % 05.09.2017

1.

This is an appeal under Section 260A of the Income Tax Act, 1961 (‘the Act’) by the Revenue against the order dated 6th June 2008 passed by the Income Tax Appellate Tribunal (‘ITAT’) in ITA No. 3377/Del/2000 for the Assessment Year (‘AY’) 1996-97. 2. While admitting this appeal on 30th November 2011, the following questions were framed for consideration:

“1. Whether the Income Tax Appellate Tribunal was correct in law in setting aside the Commissioner of Income Tax (Appeals) order wherein it was held that the method of accounting followed by the assessee in past and accepted in earlier assessment years is such that correct income cannot be properly detected from the accounts and the Assessing Officer was justified in invoking the provisions of First Proviso to Section 145(1) of the Income Tax Act, 1961? 2. Whether the Income Tax Appellate Tribunal was correct in law in deletion addition made by assessing officer on account of sale price in respect of constructed/built up properties?

3.

Whether the Assessing Officer and the Commissioner of Income Tax (Appeals) were correct in law in re-working the cost of land at the average purchase price of land in Qutub Enclave Complex now known as DLF city by dividing the end of the year by saleable area including lands earmarked for schools, hospitals, clubs and other community building, in each phase?

4.

Whether the Commissioner of Income Tax (Appeals) erred in law in allowing the depreciation on DLF Centre amounting to Rs.45,95,038/- in respect of its self occupied portion?

5.

Whether Commissioner of Income Tax (Appeals) erred in law in directing the Assessing Officer to assess the rent receipts form DLF Centre which also includes air conditioning charges as ‘Income from House Property’?

6.

Whether the Commissioner of Income Tax (Appeals) erred in law in deleting addition of Rs.9.18 crore on account of surplus on sale undertaking known as American Universal Division?

7.

Whether the Commissioner of Income Tax (Appeals) erred in law in deleting addition of Rs.4.89 crore made on account of non-compete agreement with General Electric Company?”

3.

As far as Question Nos. 1, 2 and 3 above are concerned, they stand answered in the negative, i.e. in favour of the Assessee and against the Revenue by the decision dated 21st December 2016 passed by this Court in the Assessee’s own case for AY 1994-95 in ITA No. 159/2010. The questions are answered accordingly.

4.

As far as Question No. 4 is concerned, in view of the order passed today in ITA No. 407/2009, the aforesaid question is answered in the negative, i.e. in favour of the Assessee and against the Revenue.

5.

As far as Question No.5 is concerned, it stands answered in favour of the Assessee and against the Revenue in view of the order dated 18th May 2017 passed by this Court in ITA No. 407/2009 for the AY 1997-98. 6. As far as Question No. 6 is concerned, the Assessee has been carrying on business, inter alia, of manufacturing electric motors, fans and domestic pumps at its undertaking known as American Universal Division (‘AUD’) located at Faridabad, Haryana. The said undertaking was given by the Assessee, on ‘leave and licence’ basis, to DLF Industries Ltd. (a 100% subsidiary of the Assessee company) with effect from 1st April 1992 for a period of three years. The period of leave and licence expired on 1st April 1995, but was extended up to 31st May 1995. Thereafter, the said undertaking, with all its assets and liabilities, reverted to the Assessee.

7.

Under an agreement dated 29th May 1995, the Assessee transferred AUD to a new company known as DLF Motors (India) Pvt. Ltd. which was a joint venture in which General Electric Company of the USA and the Assessee had 50% equity shares each. Later, the joint venture company was known as GE Motors (India) Ltd. It is stated that the transfer of AUD to the above mentioned company was made as a going concern inclusive of all its assets and liabilities as they stood on 31st May 1995, but excluding the land and building. In other words, while the land and building of the undertaking was retained by the Assessee and given on lease to the transferee company under a separate lease agreement, the movable and immovable property of the undertaking, its tangible and intangible assets, plant and machinery, tools, stores, stock of finished and semi-finished goods, raw materials, work in progress, book debts, sundry debtors, trademarks, patents, brand names, and benefits of the contracts and agreements pertaining to the undertaking were not transferred. In the said transfer, the Assessee was paid by the transferee company a lump sum of Rs.1177.50 lacs. In the books of accounts of the Assessee, the book value of the assets of the AUD, net of liabilities, as on 31st May 1995, stood at Rs. 2,59,25,879/-.

8.

The Assessing Officer (‘AO’) took into consideration, in addition to the above agreement, a non-competition agreement which was entered into on 1st June 1995 with General Electric Company. It was to be effective for a period of 15 years till 1st April 2010. In consideration for the above agreement, General Electric Company agreed to pay to the Assessee Rs. 4,69,65,000/-.

9.

The Assessing Officer held that the entire consideration received by the Assessee under both the above agreements was a taxable surplus and after taking the book value of the assets as on 31st May, 1995, the AO added Rs.1387.89 lakhs to the book value (less liability). In effect, the AO treated the surplus as the business income of the Assessee.

10.

The question, that arose for consideration before the CIT(A), was whether the addition of the above surplus amount was justified in law. The contention of the Assessee was that in the absence of any machinery provision, and in light of the fact that AUD was sold as a going concern it would have to be treated as a business expenditure. In other words, since it was neither possible to compute the cost of acquisition of the undertaking nor the date of acquisition of business as a capital asset, no capital gains could arise from the said sale. It was pointed out that, only with effect from 1st April 2000, Section 50B has been inserted into the Act for the purposes of concession on capital gains in the case of slump sale. The CIT(A) accepted this submission and deleted the addition. The Revenue’s appeal, on this issue before the ITAT, was dismissed concurring with the decision of the CIT(A).

11.

Having heard the learned counsel for the parties, the Court is satisfied that the ITAT was not in error in confirming the order of the CIT(A) on this issue.

12.

The Court has perused the judgment of the Supreme Court in PNB Finance v. CIT [2008] 307 ITR 75 (SC), where the Supreme Court observed that prior to 1st April, 2000 there were no computation provisions that could be brought to tax as capital gains the consideration received in slump sale. It is further noticed that this Court has in CIT v. Ece Industries [2012] 344 ITR 382 (Delhi), held likewise and that order of this Court has been affirmed by the Supreme Court by dismissal of Revenue’s Special Leave Petition against it. Consequently, the question framed is answered in the negative, i.e. in favour of the Assessee and against the Revenue.

13.

Question No. 7 again concerns the deletion of the addition of Rs. 4.89 crores on account of a non-compete of agreement with General Electric Company.Here again, it is noticed that the relevant provision, Section 28(v)(a), was inserted in the Act with effect from 1st April, 2003. Prior to that any consideration received pursuant to a non complete agreement was not amenable to tax. This position has been affirmed by the Supreme Court in Guffic Chem Pvt. Ltd. v. CIT [2011] 332 ITR 602 (SC). Consequently, the question is answered in the negative, i.e. in favour of the Assessee and against the Revenue.

14.

The appeal stands disposed of in the above terms. S. MURALIDHAR, J. PRATHIBA M. SINGH, J. SEPTEMBER 05, 2017 rd/srb

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