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Income Tax Appellate Tribunal, MUMBAI BENCHES “A”, MUMBAI
Before: SHRI G.S. PANNU & SHRI RAVISH SOOD
5.3 The learned DR on the other hand relied on the order of authorities below to support the action of the Assessing Officer in denying the reduction of liabilities and bank guarantee amount while computing the Long Term Capital Gain.
5.4 We have heard the rival submissions. The short controversy in this case relates to the manner in which Long Term Capital Gain is to be computed under section 50B of the Act. More precisely, the area of difference between the assessee and the Revenue is on the calculation of ‘Total Consideration’ for the purpose of computation of Long Term Capital Gain in terms of section 50B of the Act. The Assessing Officer while calculating the ‘Total Consideration’ has not made adjustments by way of reducing the total debts of the undertaking and amount of bank guarantee as stipulated in the Master Agreement primarily on the ground that the details with respect to the same were not available with him.
On the other hand, as per the assessee, such liabilities which are primarily towards the bank loan, and the amount of bank guarantee given in favour of the purchaser for the indemnifying losses are admissible as an adjustment against the consideration received, for the purpose of computing Long Term Capital Gain.
5.5 On perusal of the Master Agreement dated 31.07.2010, it is clear that the Clause no. 3.2 of the Agreement clearly provides for the manner of determination
8 ITA.No. 1464/Mum/2018 of the total consideration for the sale of undertaking, which fact is not disputed by the Assessing Officer. The said clause provides for certain adjustment to be made to the consideration of Rs. 78,98,20,000/- stated in the Agreement to arrive at the amount of ‘Total Consideration’. Admittedly, the Assessing Officer has not made those adjustments and has directlytaken consideration at Rs. 78,98,20,000/-.As can be seen from the assessment order, even Assessing Officer states that certain adjustments were in fact required to be made as per the agreement, however in absence of details and explanation with respect to those adjustments he has not carried out the same. The CIT(A) has also confirmed the action of the Assessing Officer and further held that no adjustment to the amount of consideration is permissible in terms of section 50B of the Act.
Before us, the learned representative for the assessee explained the adjustments carried out by the assessee while arriving at the amount of total consideration along with the supporting documents, which are placed in the Paper Book. Thus, limited issue before us is whether assessee is justified in carrying out the adjustments as per the Master Agreement while arriving at the amount of total consideration from sale of undertaking.
5.6 In our considered view, when the Agreement itself provides for the manner of computing ‘Total Consideration’ for transfer of undertaking, the same should govern the manner of adopting ‘Total Consideration’ and no other method should be substituted for the same. The consideration is the amount that is determined to be payable by the buyer to the seller and is agreed upon by the seller, as such. The manner of determination of the consideration is mutually decided by the buyer and seller and stated in the Agreement and once it is 9 ITA.No. 1464/Mum/2018 adopted by the assessee, the same cannot be faulted by the income tax authorities. In fact, it is not the case of the Assessing Officer that assessee has made adjustments to ‘Total Consideration’ over and above what is provided for in the Agreement. In any case, the observation of the CIT(A) that no adjustment to ‘Total Consideration’ is permissible in terms of section 50B of the Act is not relevant in deciding the present controversy. Before us, the Ld. Representative for the assessee furnished documents in the form of Master Agreement dated 31.07.2010, financial statements of the assessee for Financial Year 2010-11 and Financial Year 2011-12, Bank guarantee, letter for invocation of bank guarantee, etc. to support the claim of adjustments stipulated in the Master Agreement. We, thus, hold that assessee has correctly reduced the secured liabilities and bank guarantee, which was invoked by the purchaser, while arriving at total consideration for the purpose of computation of capital gains in terms of section 50B of the Act. Thus, we set-aside the orders of the lower authorities in this aspect. Thus, assessee succeeds on this ground, as above.
The second Ground of appeal relates to disallowance of repairs and maintenance expenses of Rs. 94,11,574/- claimed by the assessee. The Assessing Officer noticed that during the year under consideration assessee has not carried out any business activity. The Assessing Officer further noticed that in the immediately preceding year, when the company was fully operational, the amount debited under the head “repairs and maintenance” was only Rs. 9.19 lacs. Further, as per the details of repairs and maintenance expenses submitted by the assessee, the Assessing Officer noted that these expenses are one time expenditures, the benefit of which is not restricted to one year. The Assessing
10 ITA.No. 1464/Mum/2018 Officer, thus, treated these expenses to be capital in nature and disallowed the same under section 37(1) of the Act. It was explained that during the year assessee was engaged in the warehousing business; the godown was in a dilapidated condition, the same was got repaired and was brought to a condition acceptable to the lessee i.e. Laffans Fine Chemicals Pvt. Ltd. During the year under consideration, the assessee has declared income from warehousing of Rs. 45,50,000/-, which is offered as business income and thus, corresponding business expenses should be allowed. So it cannot be said that assesse has not carried out any business activities. Before CIT(A), assessee reiterated the submission made before the Assessing Officer, however same did not find any favour with the assessee.
6.1 Before us, the learned representative for the assessee pointed out that the assessee has entered into logistic agreement with the resulting company, M/s. Laffans Fine Chemicals Pvt. Ltd. Pursuant to the said agreement, the assessee is to provide warehousing and transportation services to M/s. Laffans Fine Chemicals Pvt. Ltd. To fulfil its commitments under the said agreement, the assessee incurred huge repairs and maintenance expenses which should be allowed as revenue expenses. It was also pointed out that assessee has also offered income from providing logistic services to the tune of Rs. 86,20,998/-.
6.2 The learned DR on the other hand relied on the findings of the lower authorities to state that expenditure incurred by the assessee are capital in nature.
11 ITA.No. 1464/Mum/2018 6.3 We have heard the rival contentions. The relevant section which requires consideration here is section 37(1) of the Act. As per section 37(1) of the Act, deduction for expenditure of capital nature is not allowed. The capital expenditure are the expenditures, which provide benefit of enduring nature and which is not confined to one year.The details of the work for which repairs and maintenance expenses wereincurred by the assessee is listed by the Assessing Officer at para 5.2 of the assessment order. As can been from the assessment order, payments were made for carrying out following work: i) J.C.B. excavation of foundation, providing and PCCP FPR Mix 1.3.6 for foundation including compaction curing etc., PCC below plinth beam, etc. ii) Providing dray trap rubble solting in position including ramming. iii) Providing and dressing and clyiding stone wall, providing bank filling, flooring PCC etc. iv) Professional fees for project carried out at LPL, GIDC,Panoli., etc.
The main argument of the Assessing Officer was that assessee has not carried out any business activity during the year under consideration. Further, the Assessing Officer was driven by the fact that repair expenses of the current year were substantial as compared to previous year. On perusal of the Logistic Agreement entered into by the assessee with M/s. Laffans Fine Chemicals Pvt. Ltd and Profit and Loss Account of the assessee, it can be seen that assessee has in fact carried out business activities and earned income from warehousing services. Pursuant to the Logistic Agreement entered into by the assessee,it was required to provide warehousing services to M/s. Laffans Fine Chemicals Pvt. Ltd. The assessee was required to carry out various repairs work at its godown, which was in dilapidated conditions to make it acceptable to the lessee.
12 ITA.No. 1464/Mum/2018 6.4 It is pertinent here to refer to the decision of the Hon’ble Bombay High court in the case of CIT v. Chowgule& Co. Pvt. Ltd. (1995) 214 ITR 523 (Bom) wherein court has considered the expression ‘current’ preceding ‘repairs’ as under :–
“(i) The amount should be paid on account of repairs. (ii) ‘Current repairs’ means repairs undertaken in the normal course of user for the purpose of preservation maintenance or proper utilization or for restoring it to its original condition. (iii) ‘Current repairs’ do not mean only petty repairs or repairs necessitated by wear and tear during the particular year. (iv) Such repairs should not bring into existence nor obtain a new or different advantage. (v) The quantum of expenditure nor the fact that in the process of repairs, there was substantial replacement of the parts of machine or ship is decisive of the true nature of the expenditure. (vi) The original cost of the asset is not at all relevant of or ascertainment of the true nature of the expenditure on repairs. (vii) The replacement cost of the asset may however, at times may be used as indicator of the true character of the expenditure. If the expenditure on repairs added to the written down value or disposal value exceeds the replacement cost of the asset, a presumption is possible that it is not a revenue expenditure but expenditure of capital nature. Such presumption, of course, would be rebuttable. (viii) The expression ‘current’ preceding ‘repairs’ appears to have been used by the legislature with a view to restricting the allowance to expenditure incurred for preservation and maintenance thereof in its current state in contradiction to that incurred on any improvement or an addition thereto.
13 ITA.No. 1464/Mum/2018 Admittedly, it is not the case of the Assessing Officer that the impugned expenditure has resulted into creation of a new asset. The quantum of expenditure cannot be the guiding factor to decide whether the expenditure is in the nature of capital expenditure or revenue expenditure. The expenditure incurred by the assessee is towards maintenance of the existing godown and was thus in the nature of current repair. Further more, the benefit to the assessee is in the revenue field in as much as assessee is earning income which is being assessed as business income. We, thus, set-aside the order of the CIT(A) and allow the assessee’s claim of repairs and maintenance expenses. In result, this Ground of the appeal is allowed.
The third ground relates to the disallowance of depreciation of Rs. 4,06,641/- on motor car purchased during the year in the name of Director and expenses incurred by the assessee on motor car. The Assessing Officer pointed out that during the year under consideration assessee purchased car in the name of its director,which is reflected as addition to Fixed Assets of the assessee, and claimed deprecation on the same in the hands of the company.
For claiming depreciation u/s 32 of the Act, assessee should be the owner of the assets.Further, assessee has not provided the RC book, date of put to use of the asset. Since, assessee is not the owner of asset, the Assessing Officer disallowed entire depreciation of Rs.4,06,641/-. The Assessing Officer further disallowed 50% of the motor car expenses of Rs. 4,11,910/- claimed by the assessee, holding the same to be related to the motor car purchased during the year in the name of director and thus not wholly and exclusively incurred for the purpose of business of the assessee company. The assessee explained that 14 ITA.No. 1464/Mum/2018 though the car was purchased in the name of the director, payment for the same was made by the assessee and the car was used for the purpose of business.The assessee also relied on the decision of Hon’ble Bombay High Court in the case of CIT vs. Dilip Singh Sardar singh Bagga [1993] 201 ITR 995 (Bombay), decision of coordinate bench in the case of Kisan Ratilal Choksey Shares & Securities P. Ltd. vs. ACIT [2015] 41 ITR(1) 114 (Mumbai- Trib) and various other decisions. On appeal to CIT(A), CIT(A) agreed with the contention of the assessee that the depreciation cannot be disallowed merely on the ground that the asset is in the name of the director. However, CIT(A) stated that the assessee has not submitted the details such as RC book, date on which car was put to use and has not established that it was used for the purpose of assessee’s business. The CIT(A), thus, disallowed the claim of depreciation.
7.1 Before us, the learned representative for the assessee reiterated the submission made before CIT(A) and Assessing Officer.
7.2 We have heard the rival submissions. It is a well settled proposition that merely because the asset is purchased in the name of director, the company cannot be denied depreciation on the same, if the asset is otherwise found to be used for the purpose of business. The decision relied upon by the assessee in the case of CIT vs. Dilip Singh Sardarsingh Bagga [1993] 201 ITR 995 (Bombay) clearly supports the stand of the assessee. We, thus, set aside the order of CIT(A) and direct the Assessing Officer to allow depreciation on the motor vehicle and related expenses on motor vehicle. Accordingly, this Ground of appeal is also treated as allowed.
15 ITA.No. 1464/Mum/2018
In the result, appeal of the assessee is party allowed.
Order pronounced in the open court on 29th May, 2019.