DCIT, CIRCLE - 11, KOLKATA, KOLKATA vs. M/S. EVEREADY INDUSTRIES INDIA LTD., KOLKATA

Per Shri N.V.Vasudevan, JM This is an appeal by the Revenue against the order dated 7.10.2011 of CIT(A)- XII, Kolkata, relating to AY 2005-06.

encashment was estimated and debited in the profit and loss account under the head “Provision for leave encashment payable”. In those years in which provision was created in the preceding years no deduction was claimed in the computation of total income in income tax assessment nor allowed in the regular assessments in those years. The assessee submitted that in the matter of assessment of total income under the Act, liability on account of leave encashment was allowed only on payment basis as mandated under section 43B of the Income Tax Act, 1961 (Act).

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pointed out that by virtue of the credit in the profit and loss account of Rs.31.76 lacs, income to that extent is not chargeable to tax u/s 41(1) of the Act for provision written back of Rs.31.76 lakhs, because the provision when it was created by debit to the profit and loss account was not allowed as deduction in computing total income of the Assessee in income tax assessment for the earlier assessment years in view of the amendment to Section 43B(f) of the Act, which provides that liability on account of leave encashment can be allowed as a deduction only on actual payment or incurring of the expenditure and not on the basis of a provision which is only an estimate. The Assessee pointed out that to bring to tax a sum u/s.41(1) of the Act, the sum credited or received by the Assessee during a previous year ought to have been allowed as deduction either in the same Assessment year or in an earlier Assessment year and the Assessee should receive in the previous year benefit in the form of remission or cessation of the liability which was earlier claimed and allowed as deduction in an earlier Assessment year. The Assessee therefore claimed that the provision for leave encashment written back had to be allowed as a deduction in the computation of total income of the Assessee.

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company to provide in the accounts; liabilities accruing during the relevant reporting period, in respect of benefits and emoluments to be provided at the time of retirement, superannuation or termination of service. Leave encashment· benefit; to which employees become entitled for the services provided during the reporting period are therefore required to be provided in the accounts. As per the accounting policy consistently followed, the Assessee provides leave encashment liability on the basis of actuarial valuation. Such liabilities were provided annually by debiting it to the Profit & Loss A/c. The Assessee further submitted that according to Income Tax department, the Provision for leave encashment constituted provision for a contingent liability and therefore not permissible as deduction because such liability was not actually discharged during the year of reporting. The Supreme Court in its decision in the case of Bharat Earth Movers Ltd Vs CIT (245 ITR 428) however held that merely because the liability for leave encashment was actually discharged at a future date, for that reason the liability did not constitute a contingent liability because the employees became entitled for leave encashment for the services performed during the relevant previous year. The Supreme Court further held that if the liability accruing during the relevant previous year can be ascertained on any scientific basis then the deduction for the provision for leave encashment would be allowed. To over-come the said decision of the Supreme Court, allowing deduction for leave encashment on accrual basis, Sec. 43B was amended and Clause (f) was enacted under which the deduction for leave encashment was made allowable in the year of actual payment. As per the consistent accounting practice followed by the Assessee it had provided liability for leave encashment in its accounts in the past years. Liability for Leave Encashment provided in the accounts and which remained outstanding as on 31st March 2004 was RS.398.17 Lakhs. In the Income Tax Returns filed for the assessment years for an upto A. Y.2004-05 the provision for leave encashment, not actually paid was disallowed by the appellant in computation of business income. The provision for leave encashment debited in the accounts of the earlier years, was added back so as to confirm with provisions of Sec. 43B(f) of the Act. The other facts as set out in para-3 & 4 of this order were reiterated by the Assessee.

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ended 31.03.2005. The CIT(A) also found that the assessee had suo-moto disallowed provision for leave encashment debited in the profit & loss accounts in arriving at taxable business profits of A.Ys 2003-04 & 2004-05. Accordingly no deduction was allowed by the AO for the leave encashment provision in those years even though as per mercantile system regularly followed, liability therefore had accrued. Out of the provision for leave encashment debited to the profit & loss accounts of the earlier years assessee wrote back sum of Rs.31.7 6 lacs by crediting it to profit & loss account of F.Y. 2004-05. The CIT(A) taking note of the above circumstances was of the view that when out of the very same provision Rs.31.7 6 lacs was credited in the profit & loss account of F.Y, 2004-05, the AO could not assess the amount so written back in the taxable income of the assessee. for A.Y. 2005-06. The CIT(A) therefore found on facts that there was merit in the submissions of the Assessee and that the inclusion of Rs.31.76Iacs in the assessed income of the Assessee for A.Y. 2005-06 resulted in double taxation of same sum.

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entry therefore is made in the assessee's books. The CIT(A) held that in order to invoke deeming provisions of Sec 41 (1) it is necessary for the AO to prove that in respect of the trading liability, for which the cessation or remission is allowed, assessee was allowed deduction in computing its business income of any year. The CIT(A) found that in the case of the Assessee, admittedly in AY. 2003-04 & 2004-05 when the assessee created provision for leave encashment, no deduction was allowed because of the embargo placed by Sec 43B(f) of the I T Act. The CIT(A) held that in this factual background when out of the provision for leave encashment created in the earlier years; Rs.31.76 lacs was written back by the assessee; the same did not constitute income of appellant of A,Y. 2005-06 ; the year in which the liability was written back. The addition made by the AO was thus deleted by the CIT(A).

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statement. When the Assessee files return of income for any Assessment year, he has to add back the provision for leave encashment and declare income from business for the purpose of determining total income, because it is not actual liability but contingent. If the Assessee in an Assessment year adds back provision for leave encashment of say Rs.100 when filing return of income, his total income to that extent stands increased. When later, when actual liability is incurred by the Assessee on account of leave encashment and it is realized that the Provision that ought to have been made was only Rs.85, than the excess provision which was made earlier and had gone to increase the profit of the Assessee, had to be neutralized and Rs.15 should be removed from the income in the Assessment Year in which the Assessee based on actual liability discovers that excess provision made in the earlier years. The Assessee has not claimed any deduction while determining its profit from business on account of Provision for leave encashment but has claimed such deduction only on the basis of actual incurring of liability which is paid in accordance with Sec.43B(f) of the Act. That has got nothing to do with the write back off excess provision for leave encashment. The CIT(A) has clearly brought out these aspects in his order. We are of the view that the factual conclusions and the legal inference based on those conclusions drawn by the CIT(A) are just and proper. We therefore confirm the order of the CIT(A) and dismiss ground No.1 raised by the Revenue.

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amounts were restated at the exchange rate prevailing on the Balance Sheet date. The loss on restatement of liability was claimed as expenditure. The Assessee also pointed out that in AY 2003-04 & 2004-05 there was gain on restatement of liability and such gain was offered to tax as income. The AO however held that the loss arising on repayment of loan raised in foreign currency due to fluctuation of exchange rate constituted capital expenditure. He also held that the restatement of liability as on the last date of the Balance Sheet was only notional and the real liability can be known only when the loans are repaid and not on the Balance Sheet date i.e., the last date of the previous year. The loss according to the AO was therefore contingent. He therefore disallowed loss of Rs.256.32 lacs claimed as deduction by the Assessee.

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the Hon’ble Supreme Court and the decision of the Tribunal in Assessee’s own case on identical issue and keeping in mind the fact that the liability in question is on revenue account, the order of the CIT(A) does not call for any interference. Accordingly, ground No.2 raised by the Revenue is dismissed.

The first aspect which the AO noticed was that the aforesaid claim for total sum of Rs.13,01,74,691/-was not routed through profit & loss account nor claimed as deduction out of profit, but claimed as deduction in the revised computation of income filed with revised return as revenue expenditure written off as per provision of IT Act. ITA No.94/Kol/2012-M/s.Eveready Inds.India Ltd.-A.Y.2005-06 10

In Ground No.3 to 5, we are concerned with the all the aforesaid items set out above, except deduction on account of irrecovberable and Bad Debts written off.

17.2. The AO however disallowed the claim of the Assessee for deduction for the reason that no provision or write off for such obsolete stock, has been made in profit & loss Account by the assessee, therefore claim of current Assets outside the P&L Account could not be considered. Hence the claim for deduction of Rs3,30,99,581/- in the revised return of income was denied. Expenses for shifting of Chennai Plant: 17.3. As far as the aforesaid expenditure is concerned, the Assessee pointed out that it had two manufacturing plants in Chennai city, one at 1075, Triuvottiyur High Road, Chennai-600 019 and another at Developed Plot No.l, Industrial Estate, Guindy, Chennai-600 032. The Assessee submitted that because of multi-locational manufacturing operations, the Assessee was not enjoying economies of scale and there were duplication of many costs. It was also not possible to have effective control over operations. The assessee, therefore, decided to merge manufacturing operations at one

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place so that the management could exercise greater unified control, increase efficiency and improve productivity & profitability by avoiding duplication of cost. For this reason the assessee decided to shift its manufacturing operation from Developed Plot No.l, Industrial Estate, Guindy to 1075, Triuvottiyur High Road. The Assessee claimed that the aforesaid item of expenditure was incurred for merging of manufacturing operations at one place so management could exercise greater unified control, increase efficiency and improve productivity profitability by avoiding duplication of cost. The expenditure was incurred in the course of business and for improving the efficiency and increase profitability, therefore revenue in nature. The Assessee relied on the decision of Hon’ble Madras High Court in the case of CIT vs. Madura Coats Ltd. [reported in ITR 253 (62)], wherein the Madras High Court held that Expenditure incurred for shifting of office is a Revenue Expenditure. Reliance was also placed on the decision of the Hon’ble Supreme Court in the case of Bombay Dyeing and Manufacturing Co. Ltd. [reported in 219 ITR(521)] wherein the Hon’ble Supreme Court held that expenditure incurred for amalgamation of business is allowable as business expenditure. Details of shifting expenses were submitted by the assessee.

17.4. The AO however held that the object of assessee to shift plant was not for reducing expenditure or increase of profit, but to develop the property at Guindy for construction of commercial complex for new business adventure. He also held that shifting plant from one place to another and cost incurred for such shifting were in the nature of Capital Expenditure. He also held that the expenditure was not claimed as revenue expenditure in profit & Loss Account, but the same was adjusted through revaluation reserve and thereby claim in computation as revenue expense is not in accordance to law. Hence this claim of Rs.l,57,42,006/- in the revised return of income was denied.

Upfront fees paid to ICICI Bank:

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17.5. The assessee had paid Upfront fee to ICICI Bank for conversion of Rupee Loan into Foreign Currency Loan. ICICI Bank claimed upfront fee of Rs.25 crores vide their letter No.CE/2016 dated 29.09.2001. The same fee was negotiated and brought down to Rs.20 crores as confirmed vide the assessee's letter dated 13.11.2001. Fee of Rs.20 crores was amortised in 59 equal monthly instalments of Rs.33.89 lakhs per month. The reason for such conversion was that interest on rupee loan is linked to the Bank’s Prime Lending Rate (BPLR) whereas if the very same loan is converted into foreign currency loan than the interest on such foreign currency loan will be linked to LIBOR (London inter-bank Official rate). Because of LIBOR the interest burden of the Assessee got reduced by 9% to 10% and that was reason that the Assessee resorted to such conversion of rupee loan into foreign currency loan. The Assessee claimed that the said fee was paid by the assessee for reducing the burden of interest cost every year and was an allowable revenue expenditure while computing total income.

17.6. The AO however rejected the claim of the Assessee for deduction on the ground that the Assessee has not charged the upfront fees as part of interest and debited into profit & los account, but the same was claimed in reserve account and claimed as deduction in computation of income, which is not in accordance to law, Hence claim of Rs.4,06,77,996/- as deduction was denied.

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of the relevant previous year so as to be eligible for deduction. Writing off the loss or expenditure in the Profit & Loss A/c has not been made as a condition precedent by the Act; for claiming deduction or allowance or loss. In absence of any such specific condition prescribed in the Act, the AO could not read into statue a condition not prescribed by the legislature. It was further submitted that Chapter-IV D of the Income Tax Act prescribes the conditions to be fulfilled by an assessee for claiming deductions, allowances or loss. Sec. 37 (1) permits deduction for any expenditure if it is incurred wholly and exclusively for the purposes of business and which is not in the nature of capital or personal expenditure. Any loss which accrues or arises in the course of carrying on business is held to be allowable u/s 37(1) of the Act. Sec 37( 1) nowhere prescribes a condition or stipulates that the expenditure or loss has to be debited to the Profit & Loss A/c of the relevant previous year. The Act allows deduction for any expenditure or loss once the conditions prescribed in Sec. 37 are fulfilled. In case of an assessee which maintains its accounts on mercantile basis; deduction is permissible once the assessee establishes that a liability or loss accrued during the relevant year. In this regard reference was made to observation of the Supreme Court in the case of, Sutlej Cotton Mills Ltd Vs CIT (116 ITR 1):-

"It is now well settled that the way in which entries are made by an assessee in his books of account are not determinative of the question whether the asesseee has earned profit or suffered any loss. The assessee may by making entries which are not in accordance with proper principle of accounting conceal profit or show loss and entries made by him cannot therefore be regarded as conclusive one way or the other. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee.”

It was pointed that in the present case the Assessing Officer has not disputed that the Assessee did suffer loss due to damage or obsolescence in stock of raw-materials, packing materials & finished goods. The fact that the relevant particulars of said loss were furnished by the Assessee was also not disputed. The AO also did not find any infirmity either in the details furnished or the explanations in support thereof. The disallowance was however made only on the ground that the said loss was not debited ITA No.94/Kol/2012-M/s.Eveready Inds.India Ltd.-A.Y.2005-06 14

in the Profit & Loss A/c. In other words, the AO having accepted the admissibility of the claim; disallowance was made for not complying with a condition not prescribed or provided by the legislature in the Act. As regards admissibility of the loss suffered on detection of damaged, obsolete and non-moving stock: reliance was placed on the decision of ITAT-Cuttack Bench in the case of the National Aluminum Co. Ltd. V. Dy.CIT-10l TTJ 948. In this case there was depletion in cost of stores and spares which had deteriorated in value on account of storage. The loss in value of stores and spares was disallowed by AO and CIT(A). On further appeal the Tribunal accepted the assesses submission that loss on account of diminution in value of stock in trade is a revenue loss. The, Tribunal held that obsolete and non moving spare parts went on losing their va1ue and thereby distorting the true profits and therefore AO was directed to allow claim at loss on account of value of non- moving stock of stores and spares. It was submitted that the aforesaid decision was squarely applicable. The Assessee prayed that the AO be directed to allow the deduction for RS.3,30, 99,581/- being obsolete stocks written off.

18.1. The CIT(A) agreed with the submission of the Assessee and directed the deduction to be allowed. The following were the relevant observations of the CIT(A): “5.2 I have considered the rival submissions and perused the details of the obsolete stock written off as furnished before the AO. From perusal of the impugned order I find that the AO per se never disputed that during the relevant year appellant had conducted physical verification of stock of raw materials, packing materials and finished goods lying at manufacturing locations and sale depots. On physical verification obsolete, damaged and non moving items of stocks were identified which were reportedly having no realizable value. The evidence in support of physical stock taking having taken place was furnished before the AO and the AO did not dispute correctness of these reports nor the AO pointed any specific infirmities in the stock/inspection reports furnished before him. The only ground on which the AO rejected the appellant's claim was that the assessee did not write off the obsolete stock by debiting its profit and loss account but merely reduced 'the value of current assets in the Balance Sheet.

5.3. I am unable to agree with AO’s reasoning for rejecting the appellant’s claim. The judicial authorities have time and again held that the manner in which entries are made by an assessee in his books of accounts are not determative of the question as whether an assessee has earned profit or suffered loss. The particular ITA No.94/Kol/2012-M/s.Eveready Inds.India Ltd.-A.Y.2005-06 15

manner in which the entries are made in books of account or absence of an entry in the books by itself cannot be considered to be conclusive one way or other. What is necessary to be considered by the AO is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee. In .the appellant's case it is not denied by the AO that it regularly followed the accounting principle of "lower of the cost or market value" for valuing its inventory. It is also not disputed by the AO that in the course.of business of manufacture and marketing of dry cells, batteries, torches, packet tea etc the appellant regularly carried in its stock substantial quantity of raw material, packing materials and finished products. It is also not denied or disputed by AO that during the relevant year the appellant conducted physical inspection of its stocks upon which obsolete, non moving and damaged stocks were identified having no realizable value. Copies of the stock inspection reports were furnished before the AO and no infirmity or falsity in these reports was established by him. Since the assessee regularly followed lower of the cost or market value principle for valuing its inventory and when the physical inspection of inventory established that certain items of row material, packing materials and finished goods which were earlier valued "at cost" did not have any realizable value, the appellant rightly valued the same at nil value. In its Balance sheet the assesse valued its inventory by taking value of the identified Items of obsolete and damaged stock at nil. Merely because such loss was not debited in profit & loss account but the same was charged off to revaluation reserve account did not in any manner affect the appellant's entitlement to claim deduction for stock write off which was ascertained on scientific basis and accounted in the books in conformity with generally accepted principles of accounting. The appellants claim for stock write off is also supported by the decision of the ITAT Cuttack Bench reported in 101 DJ 948. The AO is therefore directed to allow the deduction In respect of obsolete stock written off amounting to Rs.3,30,99,581/-. Ground No. 5 is allowed.”

18.2. Aggrieved by the order of the CIT(A), the Revenue has raised ground No.3 before the Tribunal.

so that the management could exercise greater unified control, increase efficiency and improve productivity and profitability by avoiding duplication of cost. Hence, the manufacturing operations in Guindy Plant was shifted to Tiruvottiyur Plant. The expenditure was therefore claimed to have been incurred in the course of business and for improving the efficiency and increase profitability and was therefore revenue in nature and had to be allowed as deduction. Reliance was placed on the following decisions in this regard CIT Vs. Madura Coats Ltd. 253 ITR 62 (Mad) and Bombay dyeing and Manufacturing Co. Ltd. 219 ITR 521 (SC). The Assessee also pointed out that on opening up of Indian Economy, in 1990’s liberalized imports of dry cell batteries were permitted by the Government. As a result Chinese companies started dumping cheap dry cell batteries in Indian market which put huge pressure on the Assessee’s market share and profitability. This was another reason for centralizing operations at Tiruvottiyur Plant instead of in two plants in the same city. The Assessee also pointed out that the Guindy Plant was in the vicinity of the city and with growing city population the area where guindy plant was located became a predominantly residential area. There were environmental issues to be dealt with because of the consumption of zinc allots, electrodes, electrolytic manganese dioxide etc. in the manufacture of batteries and the industrial waste that would be generated if manufacture was to continue in a predominantly residential area. These were the reasons that prompted shifting of Guindy Plant operations also to Tiruvottiyur Plant. The Assessee thus claimed that by shifting of Guindy plant there was no increase in the overall production capacity but was a decision to reduce costs, improve productivity and profitability and eliminate duplication of processes and costs besides environmental considerations. The Assessee pointed out that by incurring these expenses no new asset came into existence nor any enduring benefit was derived by the Assessee to characterize the expenditure in question as a capital expenditure. The Assessee also relied on the decision of the Special Bench ITAT in the case of JCIT Vs. ITR Ltd. 112 ITR 57 (Kol) (SB) wherein it was held that shifting of machinery from one unit to another unit for efficient utilization of machinery was revenue expenditure. The Assessee also pointed out that the fact that the expenditure in

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question was written off against revaluation reserve and not charged to profit and loss account cannot be the basis to disallow a legitimate revenue expenditure and that entries in the books of accounts are not always conclusive in the matter of deciding whether a claim for deduction has to be allowed or not and in this regard placed reliance on the decision of the Hon’ble Supreme Court in the case of Sutlej Cotton Mills Ltd. Vs. CIT 116 ITR 1 (SC). The Assessee pointed out that it created a value for its brand “Eveready” and disclosed in the Asset side of the Balance Sheet and reduced therefrom the expenditure in the form of expenses in shifting plant from one place to another instead of reducing from the profit and loss account. Such presentation in the books of accounts will not in any way affect the claim of the Assessee for deduction of legitimate revenue expenditure.

19.1. The CIT(A) agreed with the submissions of the Assessee and allowed the claim of the Assessee for deduction. The following were the conclusions of the CIT(A) on the issue: “6.2 I have carefully considered the rival submissions. It is not in dispute that in the course of assessment the appellant had furnished details of expenses incurred on shifting of Plant & Machinery from appellant's factory at Guindy to Thiruvattiyur. It appeared from the explanations which were on record that the appellant had 2 factories in Chennai; manufacturing same products i.e. Batteries and Dry Cells. The factory at Guindy was set up in 1971 whereas the factory at Thiruvattiyur was set up in 1989 within predominantly industrial area. Both the factories were manufacturing Dry Cell Batteries using same production techniques. After opening up of the Indian Economy, Chinese Dry Cell Manufacturers resorted to export of dry cell batteries at very cheap rates which necessitated the assessee to undertake extensive cost cutting measures to retain its market share and profitability. The work studies conducted by the assessee of its manufacturing operations showed that to improve productivity and reduce costs it was necessary to eliminate duplication of certain basic processes & therefore it was found advisable to have a single production facility at Chennai. In order to eliminate duplication of cost, improve productivity and efficiency and increase profitability the assessee decided to centralize its manufacturing operations only et one location in Chennai. The raw-materials consumed in manufacture of, Dry Cell Batteries inter-alia included certain chemicals which generated environmentally hazardous industrial waste. Disposal of such industrial waste posed environmental problems. There were residential settlements around assessee's Guindy Factory and therefore disposal of industrial waste was causing serious environmental issues. Taking into account these factors the appellant ITA No.94/Kol/2012-M/s.Eveready Inds.India Ltd.-A.Y.2005-06 18

decided to consolidate its manufacturing operations at Thiruvattiyur Road, Chennai as it was predominantly an Industrial Area. During the financial year 2004-0,5 the. Appellant accordingly shifted its machineries from Guindy to Thiruvattiyur Road.

6.3 By transferring existing Plant & Machineries the assessee did not create or acquire new capital assets nor. appellant's existing production capacities got increased. By shifting machineries from one factory to another the assessee only attempted to eliminate duplication of certain processes and thereby eliminated duplication of costs. The, ,exercise was aimed at improving assessee's productivity, efficiency and profitability. The expenditure incurred on shifting machinery facilitated the assessee to carry on its existing manufacturing business more efficiently and profitably without increasing over all production capacities. I also find that assessee's decision to shift the factory from Guindy to Thiruvattiyur was taken prior to its decision to sell factory land at Guindy. It was not a case where having decided to sell the Guindy factory land the assessee decided to shift its machineries to Thiruvattiyur. The AO's finding in this regard does not appear to be founded on any evidence.

6.4 The decision of the Madras High Court in the case of CIT Vs Madura Coats Ltd (253 ITR 62) supports the appellant's contention that the expenditure on shifting of machineries was revenue in nature. In the case before the Madras High Court the assessee had incurred expenditure on shifting of its Regd. Office which was disallowed by the AO on the ground of being capital expenditure but on appeal the Tribunal and the High Court held that the expenditure was allowable as revenue expenditure. A similar view was taken by the Special Bench of the ITAT Kolkata in the case of ITC Limited (112 ITD 57). The facts of this case were pare-materia with the appellant's case. ITC Ltd had shifted Plant & Machinery from one unit to another. The purpose for shifting of machinery to another unit was efficient utilization of the plant. Tribunal found that the shifting of the plant did not result in acquisition of new assets. The AO disallowed the shifting expenditure holding it to be capital in nature. On appeal the Special Bench of the ITAT however held that the expenditure on shifting of the plant and reinstallation of the machinery was o' revenue expenditure as no new capital asset was acquired by the assessee but it only facilitated the assessee in carrying on its existing business more efficiently and profitably. In my opinion the facts of the appellant's case are identical to the facts involved in the case of ITC Ltd. Respectfully following the decision of the Special Bench of the ITAT Kolkata I direct the AO to allow the deduction for shifting expenses of RS.1,57,42,006/- in computing appellant's income under the head "Profits & Gains of Business". In view of this finding, appellant's alternate plea for allowing deduction for the expenses in computing income under the head "Capital Gains" is rejected.”

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19.2. Aggrieved by the order of the CIT(A), the Revenue has raised Gr.No.3 before the Tribunal.

20.1. The CIT(A) agreed with the submission of the Assessee and held that the deduction claimed had to be allowed. The following were the relevant observations of the CIT(A):

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“8.2 I have carefully considered rival submissions and perused the details of the amount written off. From the facts on record I find that the assessee had originally taken Rupee Term Loan from IClCI Bank. In 2001 said Rupee Term Loan was converted to Foreign Currency Loan on payment of upfront fees of RS.20 Crs. The original loan was repayable in October 2006. In its books of account the appellant chose to write off upfront fees paid to IClCI Bank; over the unexpired loan period which at the time of conversion was 59 months i.e. from December 2001 to October 2006. In the financial accounts of the F.Ys. 2001-02, 2002-03 & 2003-04 the assessee wrote off pro-rata upfront fees of Rs.135.59 Lacs, Rs.406.78 Lees & Rs.406.78 Lacs respectively and the deductions therefore were claimed in AYs. 2002-03, 2003-04 & 2004-05 respectively. In the assessments u/s 143{3) of these 3 years, deduction for upfront fees paid to IClCI Bank was also allowed by the AO in computing business income. In the F.Y. 2004-05 the assessee instead of writing off the upfront fees to its profit & loss a/c; debited it to Revaluation Reserve. A/c. According to AO the assessee's act of charging upfront fees to Revaluation Reserve A/c as opposed to profit & loss A/c was fatal and for that reason the deduction was denied.

8.3 In my opinion the manner in which assessee made entry in his books of account was not material in deciding the question of allowability of the expenditure. This proposition find support in the decision of the Supreme Court in the case of CIT Vs Sutlej Cotton Mills Ltd (supra). The basic facts concerning the deduction claimed for upfront fees paid to IClCI Bank have not been disputed by the AO. In the assessment orders u/s 143(3) for the earlier years the AO; in principle; accepted the appellant’s claim for deduction of fees paid to ICICI Bank for converting rupee term loan in convertible foreign currency. In the regular assessment of earlier years; the pro-rata write off of upfront fees was allowed as business expenditure by the AO on being satisfied that the expenditure was incurred or laid out wholly and exclusively for business purposes and the deduction was to be allowed on pro-rata basis over the unexpired period of loan and not in the veer in which upfront fees were paid. Once the appellant's method of claiming deduction for upfront fees paid over the unexpired period of loan was accepted by the AO then he was not justified in denying the deduction for pro-rata upfront fees paid in the assessment for the A.Y. 2005-06 on the plea that the assessee did not charge the said amount of its profit & loss a/c but to Revaluation Reserve A/c. Once the AO in principle accepted the assessee's method of claiming deduction for upfront fees paid on pro-rata basis over the unexpired period of loan then for allowing the deduction for said expenditure it was wholly immaterial the manner in which the write off was accounted in the appellant's books. The principle of consistency required the AO to follow the consistent approach in allowing deduction for upfront fees paid since the expenditure was incurred and laid out wholly and exclusively for assessee's business purposes. I therefore direct the AO to allow deduction for Rs.4,06,77,996/- which ITA No.94/Kol/2012-M/s.Eveready Inds.India Ltd.-A.Y.2005-06 21

represented pro-rata upfront fees paid to IClCI Bank. Ground Nos. 12 & 13 are accordingly allowed.”

20.2. Aggrieved by the order of the CIT(A) the Revenue has raised Gr.No.4 before the Tribunal.

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in the case of National Aluminium Co. Ltd. Vs. DCIT 101 TTJ 948 (Cuttack). We therefore do not find any grounds to interfere with the order of the CIT(A).

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27.1. The Assessee constructed factory buildings there on and the factory was engaged in manufacture of Dry Cell Batteries and its components till F.Y.2004-05. The Assessee had another factory at 1075, Thiruvottiyur High Road, Chennai which is also engaged in manufacture of Dry Cell Batteries. Since both the factories were engaged in manufacture of Dry Cell Batteries, these factories performed more or less similar

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functions and therefore to achieve economies of scale and to have better unified control over the manufacturing operations the Assessee decided to concentrate manufacturing operation at one location in Chennai at 1075, Thiruvottiyur High Road. Pursuant to this decision, the Assessee found the factory land at Guindy as surplus asset and therefore decided to utilise the surplus asset on the most economically advantageous terms.

27.2. Out of the total land area of 8.39 acres; the Assessee entered into an agreement for sale of land admeasuring 1.10 acres with Messrs Khivraj Motor Limited. The physical possession of the said 1.10 acres was transferred in F.Y.2003-04 and the gain arising there from was reported in the return for A.Y.2004-05 under the head "Capital Gains" in terms of Section 53A of the Transfer of Property Act, 1882 read with Section 2(47)(iv) of the Income-tax Act, 1961. In respect of the remaining area of 7.29 acres the Assessee entered into an Agreement on 07.12.2004 with Messrs. Khivraj Tech Park Pvt. Ltd., granting it rights of development and construction of new buildings at a consideration and on the terms and conditions specified therein. As per Article III of the said Agreement dated 07.12.2004, the obligation to develop the said land by constructing buildings thereon was solely on the Developer. As per Para 3.0 the developer was liable to construct the building at its own cost and expenses; in accordance with sanctioned building plan. The Assessee was not obliged to incur any cost of construction nor was the Assessee obliged to perform any work in relation to development and construction. The constructed area allotted to the Assessee, as part of owner's allocation in the new building, was to be constructed by the developer solely at developer's own cost. The Assessee had, no obligation of any nature to perform any act, deed or thing for development and construction of the new buildings. Clause 9.1 of the said Agreement categorically provided that nothing contained in the agreement construed that there was a partnership business between the Assessee and the said developer or such agreement in any manner constituted an Association of Person. The said clause 9.1, categorically established that there was no JV between the Assessee and the developer in respect of the development' of the said property. In terms of the

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said agreement the Assessee and M/s. Khivraj Tech Park Pvt. Ltd. were to own hold, enjoy and exploit their respective allocations in the new buildings in their own right and to the exclusion of each other. The Assessee was not to share any profit or loss arising from the development and construction activity which was to be solely funded, undertaken and executed by M/s. Khivraj Tech Park Pvt. Ltd. on it's own account and profit or loss from the said venture was entirely to the account of the said developer. As per Para 3.2 all costs, charges, expenses for preparation and submission of the building plans and all costs, charges, expenses and outgoings for construction, erection and completion of the said building were to be borne and paid for solely by the Developer. In addition to incurring the cost of development and construction of the new buildings, the Developer was obliged to pay Rs.25 crores and further provide 20% of the constructed area in the proposed new building to the Assessee. In consideration of undertaking and performing these obligations, the Developer was entitled to 80% of the constructed area in the proposed new buildings to be constructed by the Developer. The agreement dated 07.12.2004 envisaged barter or exchange.. The sale consideration was taken by the assessee at Rs.25 crore plus estimated cost of construction of 218,500 sq. ft. of the constructed area in the proposed new building. The estimated cost of construction of 218,500 sq. ft. ofthe constructed area in the proposed new building was valued by a Registered Valuer vide its Valuation Report dated 18.03.2005 which comes Rs.1 050 per sq. ft. The property was acquired by the company prior to 01.04.1981 and therefore the fair market value of the property as on 01.04.1981 was taken as cost of acquisition u/s 55 of the Act. The same had been valued by a registered valuer vide his report dated 16.10.2004.

27.3. The AO called upon the Assessee to explain on 27.11.2007 as to why this should not be treated as business transaction instead of investment. The assessee submitted on 05.12.2007 & 12.12.2007 that the expression "business", though wider in it's connotation; requires an assessee's active participation in any organised and systematic activity. The expression business or adventure in the nature of trade, presupposes that the assessee has undertaken a venture whose outcome is not known

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and involves taking of risk. The expression "venture' connotates chance plus risk. Uncertainty about the return to be received from the investment made and facing many imponderables and even the risk of losing capital are inherent in the activity called as "business". On the contrary safety of the principal and regularity of the return are the principal attributes of Investment. The Assessee pointed out that since 1971-72, the factory land at' Guindy appeared in the Assessee's Balance Sheet as its "Fixed 'Asset" and not as “Current Asset”. The said land never constituted Assessee's stock-in-trade. The Assessee never dealt in the said land or any part thereof as a dealer or a property developer. The Assessee also pointed that it can be seen from the past records that the Assessee has never carried on business of property dealings nor the Assessee has ever carried on construction and development of Real Estate as its business. In none of the past assessments any income has been assessed from Real Estate development activity as Assessee's business income. The property at Guindy was assigned in 1971 specifically for the purpose of setting up a manufacturing unit. All along since 1971 till the land was handed over to the Developer, the land. was used only for the purpose of carrying on manufacturing operations. The Assessee never dealt with said land as a dealer. The agreement with the Developer dated 07.12.2004 did not envisage active participation by the Assessee in the project execution. The company was not liable or obliged to undertake any risk attached with development and construction of new buildings. Under the said agreement the company was entitled only for defined consideration which was partly in cash and partly in kind. The Assessee did not stand to gain or lose more than what was agreed to be received under the agreement. Whether or not the developer made any gain or loss from the business of development and construction of the new buildings, the Assessee did not have any share in Profit or Loss of the project development work but was entitled to a defined consideration. None of the attributes associated with the expression "business" or "an adventure in the nature of trade" were associated in the company's said transaction with the Developer. The assessee also submitted that under the agreement dated 07.12.2004 the Assessee had only granted rights of development and construction to the Developer. The developer did not, however, undertake the

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construction of the buildings during the relevant year and the constructed area was not delivered. The agreement dated 07.12.2004 only set out terms and conditions which the developer was obliged to perform in future and during the F.Y. 2004-05 these conditions were not performed and fulfilled. There was no transfer of land as is known in general law and therefore no commercial gains can be assessed with reference to the Agreement dated 07.12.2004 which was to be performed substantially by the developer in future. Accordingly no business income can be assessed till the agreement was performed. The definition of the word "transfer" in Sec 2(47) is wider in its connation. The definition of "transfer" U/S 2(47) includes in its ambit even the transactions which under general law do not amount to "transfer" or "sale". In computing income under the head "Profit & Gains from business or profession" the "sale" has to be understood in the context of general law. In assessing business income definition of "transfer" as used in Sec. 2(47) cannot be invoked. On reference to Sec.2( 47) of the Act, the said definition is applicable only in relation to a "Capital Asset" and therefore can be invoked only when income is assessed under the head "Capital Gains". The Assessee pointed that in case of Development Agreement arising due to transfer of capital asset, the same would be covered under the provisions of sub clauses (v) & (vi) of section 2(47) of the I.T.Act, 1961.

27.4. The AO on a consideration of the above submissions, however referred to Clause 4.5 of the Agreement which provides as follows: "The owner agrees to hand over peaceful and vacant possession of the said Land together with the existing structures to the Developer on or before January, 31, 2005" and clause 6.7 states that "In addition to the Owner's allocation, the Developer shall pay a sum of Rs.25,00, 00, 000/- (Rupees Twenty five crores only) to {he Owner in the manner following: (a) A sum of Rs. 4, 00, 00, 000/- (Rupees Four Crores only) already paid the receipt of which sum the Owner doth hereby admit and acknowledge (b) The balance sum of Rs.21, 00, 00,0001- (Rupees Twenty one crore only) at the time of the Owner handing over vacant and peaceful possession of the said. Land to the Developer in accordance with clause 4. 5 above free from any encumbrance. "

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According to the AO from the perusal of this agreement, it was clear that the owner will get Rs.25 crores and 20% share in the constructed property and the consideration for such transfer shall include the cost incurred by the developer on the construction of owner's allocation along with the land which the owner has purchased. The owner shall be free to transfer the land and shall be entitled to enter into separate agreements for transfer in respect of their respective allocation. According to the AO from the above agreement, it was clear that the assessee will get Rs.25 crores and 20% constructed area as its share in return for the transfer of its land. According to the AO, the assessee transferred its property for development of new venture for commercial purposes and thereby received sum of Rs. 25 Crores as part payment in course of new business venture and balance 20% constructed area would be received after completion of project. The AO also noticed that owners share in the venture was also sold by assessee in next financial year. According to the AO, the argument of the assessee that there was no transfer of land as is known in general law and therefore no commercial gains can be assessed with reference to the Agreement dated 07.12.2004 which was to be performed substantially by the developer in future was devoid of facts. The AO therefore referred to several decisions in which the propositions laid down were as follows: (i) If, land is purchased with the objective of dividing the same into plots and thereafter selling at a profit, the transaction of purchase and sale would come within the ambit of adventure in the nature of trade. Smt. Indramani Bai & Anr. vs. Addl. CIT 200 ITR 594 (SC) (ii) "the question whether the transaction is an adventure in the nature of trade must be decided on a consideration of all the relevant facts and circumstances which are proved in the particular case. The answer to the question does not depend upon the application of any abstract rule, principle or formula but must depend upon the total impression and effect of all the relevant facts and circumstances established in the particular case." Therefore, facts which are not established cannot be taken as the basis nor can one ignore the facts actually found to decide the issue based on the principles laid down in other cases. P.M. Mohammed Meerakhan vs. CIT 73 ITR 735 (SC). According to the AO, the Assessee entered into a solitary or isolated transaction and converted land into constructed commercial unit and then sold it to outside parties and therefore indulged in an adventure in the nature of trade. ITA No.94/Kol/2012-M/s.Eveready Inds.India Ltd.-A.Y.2005-06 29

(iii) CIT Vs. G. Venkataswami Naidu 35 ITR 594 (SC) wherein it was observed that: "it is impossible to evolve any formula which can be applied in determining the character of isolated transaction which come before the Courts in tax proceedings. It would besides be inexpedient to make any attempt to evolve such a rule or formula. Generally speaking, it would not be difficult to decide whether a given transaction is an adventure in the nature of trade or not. It is the cases on the border line that cause difficulty. If a person invests money in land intending to hold it, enjoys its income for some time, and then sells it at a profit, it would be a clear case of capital accretion and not profit derived from an adventure in the nature of trade. Cases of realisation of investments consisting of purchase and resale, though profitable are clearly outside the domain of adventures in the nature of trade. In deciding the character of such transactions several factors are treated as relevant. Was the purchaser a trader and were the purchase of the commodity and its resale allied to his usual trade or business or incidental to it ? Affirmative answers to these questions may furnish relevant data for determining the character of the transaction. What is the nature of the commodity purchased and resold and in what quantity was it purchased and resold? If the commodity purchased is generally the subject-matter of trade, and if it is purchased in very large quantities, it would tend to eliminate the possibility of investment for personal use, possession or enjoyment. Did the purchaser by any act subsequent to the purchase improve the quality of the commodity purchased and thereby made it more readily resaleable ? What were the incidents associated with the purchase and resale? Were they similar to the operations usually associated with trade or business? Are the transactions of purchase and sale repeated ? In regard to the purchase of the commodity and its subsequent possession by the purchaser, does the element of pride of possession come into picture? A person may purchase a piece of art, hold it for some time and if a profitable offer is received may sell it. During the time that the purchaser had its possession he may be able to claim pride of possession and aesthetic satisfaction; and if such a claim is upheld that would be a factor against the contention that the transaction is in the nature of trade. These and other considerations are set out and discussed in judicial decisions which deal with the character of transactions alleged to be in the nature of trade. In considering these decisions it would be necessary to remember that they do not purport to lay down any general or universal test. The presence of all the relevant circumstances mentioned in any of them may help the Court to draw a similar inference ; but it is not a matter of merely counting the number of facts and circumstances pro and con ; what is important to consider is their distinctive character. In each case, it is the total effect of all relevant factors and ITA No.94/Kol/2012-M/s.Eveready Inds.India Ltd.-A.Y.2005-06 30

circumstances that determines the character of the transaction; and so, though we may attempt to derive some assistance from decisions bearing on this point, we cannot seek to deduce any rule from them and mechanically apply it to the facts before us. In this connection it would be relevant to refer to another test which is sometimes applied in determining the character of the transaction. Was the purchase made with the intention to resell it at a profit? It is often said that a transaction of purchase followed by resale can either be an investment or an adventure in the nature of trade. There is no middle course and no half- way house. This statement may be broadly true ; and so some judicial decisions apply the test of the initial intention to resell in distinguishing adventures in the nature of trade from transactions of investment. Even in the application of this test, distinction will have to be made between initial intention to resell at a profit which is present but not dominant or sole; in other words, cases do often arise where the purchaser may be willing and may intend to sell the property purchased at profit, but he would also intend and be willing to hold and enjoy it if a really high price is not offered. The intention to resell may in such cases be coupled with the intention to hold the property. Cases may, however, arise where the purchase has been made solely and exclusively with the intention to resell at a profit and the purchaser has no intention of holding the property for himself or otherwise enjoying or using it. The presence of such an intention is no doubt a relevant factor and unless it is offset by the presence of other factors it would raise a strong presumption that the transaction is an adventure in the nature of trade.

Even so, the presumption is not conclusive ; and it is conceivable that, on considering all the facts and circumstances in the case, the Court may, despite the said initial intention, be inclined to hold that the transaction was not an adventure in the nature of trade. We thus come back to the same position and that is that the decision about the character of a transaction in the context cannot be based solely on the application of any abstract rule, principle or test and must in every case depend upon all the relevant facts and circumtsances."

According to the AO, the Assessee was taking a risk by handing over a venture to a developer. The Assessee could have sold the property directly if it was not interested in taking risk as per the market price prevalent on the date of handing over. (iv) Dalmia Cement Ltd. Vs. CIT 105 ITR 633 (SC) wherein it was held that where the intention of the resale was there almost from the beginning, and was the dominant intention for the purchase, transaction is an adventure in the nature of trade. (v) Raja Bahadur Kamkhaya Narain Singh Vs. CIT 77 ITR 253 (SC) wherein it was held that where a transaction is not mere realization of ITA No.94/Kol/2012-M/s.Eveready Inds.India Ltd.-A.Y.2005-06 31

investments but act of making profit then the same is a trading venture. According to the AO, the Assessee by handing over possession to a developer was to get constructed area instead of open land. The Assessee wanted to make gain on sale of land and therefore had indulged in an adventure in the nature of trade. (vi) CIT Vs. S.P.Balasubramaniam 250 ITR 127 (Mad.) wherein it was held that even a single adventure in the nature of trade was sufficient to constitute trade or business and it was not necessary that there should be a series of transactions before the activities are characterized as a trade or business.

The AO finally concluded that in view of the aforesaid discussion, it is held that the income from sale of land and development right of the Assessee is nothing but an adventure in the nature of trade and the income from which is to be assessed as income from business.

“9.4 After due consideration of terms of development agreement; conduct of the assessee before and after the agreement; applicable legal provisions and case laws available on subject, I am not in agreement with AO's conclusion. In my opinion the AO applied entirely wrong criteria's in deciding appropriate head of income. It is no doubt true that the Courts have held that even a single plunge in the waters of trade by an assessee may be sufficient to constitute the same as an adventure in nature of trade. It is however required to be demonstrated by the AO from the conduct of the assessee that. the plunge in the waters of trade was taken by the .assessee himself and not by somebody else, In deciding appropriate' head of income for assessment of profit accruing .on sale of land; it is necessary to analyze the conduct and object of the assessee at the time of its purchase and his subsequent dealing with the property till its sale. The determinative or the decisive factor is however not the assessee's intention or conduct at the time of "sale" of asset or thereafter. The most important factor in deciding the issue is the intent and object of the assessee at the time· of purchase of the asset. In the present case profit accrued or arose to the assessee not on sale of construction spaces in the buildings which were proposed to be constructed by the Developer. The profit or gain in the present case accrued to the assessee on transfer of assessee's entire factory land at Guindy admeasuring 7.1 acres. In deciding the appropriate head of ITA No.94/Kol/2012-M/s.Eveready Inds.India Ltd.-A.Y.2005-06 32

income the decisive factor or criteria should have been examine the assessee's conduct and its dealing with .the said land at the time of its purchase and thereafter till land was handed over to the developer in terms of agreement dated 07.12.2004.

9.5 From the documents on record it appeared that the industrial land in Guindy was acquired by the assessee from the Govt of Madras in 1971 for the purpose of setting up a factory for manufacture of dry cell batteries. After its acquisition; the appellant did set up a factory which was operational till 2005. It therefore appeared that the assessee used the land in question for about 34 years for conducting its manufacturing operations thereon. During this period, starting from 1971, the land in question always appeared in appellant's books as its fixed asset and not as stock in trade. During the period of 34 years when the assessee was owner of the impugned land at Guindy, the assessee used the said land for the purpose of carrying on manufacturing business. The conduct of the assessee over long period exceeding 30 years therefore established that appellant had never had any intention to deal with the said land treating it to be stock in trade of its real estate business. From the assessment order also it appeared that no finding was recorded by the AO to the effect that the appellant was in the business of real estate development. Neither in the past assessments nor in the subsequent assessments any income under the head profits & gains of business was assessed in respect of assessee's business of real estate development. These facts therefore established that the object and intent of the assessee at the time of purchase of the land in 1971 was to utilize the same in the course and for the purpose of its manufacturing business. Save and except conducting manufacturing business on the said land for more than 30 years the assessee did not utilize the land for any other purpose. There was no evidence on record which in any manner established that the assessee had intention or object to deal with the said land treating it to be stock in trade of its business of real estate development. In fact no material was brought on record I do by the AO which in any manner' established that any time in the past or in subsequent years the appellant!, WGJS found to be engaged in business of real estate development. These facts therefore established that appellant's object purpose and intent at the time of purchase of Guindy land was to own, hold, enjoy and utilize it for carrying on its manufacturing business. The very fact that for more than 30 years the appellant carried on manufacturing business on the factory land at Guindy and in the audited accounts the land appeared in the Balance Sheet as "fixed asset" clearly established that the appellant never entertained any desire or intention to deal with the said property as stock in trade of its real estate development business and therefore the land in question could not be considered by the AO to be part of appellant's circulating capital so as to give rise to business profit on transfer thereof.

9.6 Even with reference to appellant's dealing with the land after its possession was handed over to the Developer, I find that there was no material ITA No.94/Kol/2012-M/s.Eveready Inds.India Ltd.-A.Y.2005-06 33

change in the appellant's dealing with the land. Under the agreement dated 07.12.2004 the appellant had only obligation to hand over vacant possession of land, free from all encumbrances to enable the Developer to carry on construction of the new building. The terms of the agreement established beyond any doubt that the appellant had no active I role in development and construction of the proposed building. The agreement specifically provided that all costs, charges, expenses relating to construction of the new building were to be solely borne by the Developer. The appellant being owner of the land had no obligation to meet any part of such cost. All liablities, responsibilities and obligations arising or pertaining to development and construction of the proposed buildings were to be discharged by the Developer alone.

9.7. Under the Agreement dated 07.12.2004, the appellant was entitled to receive only the consideration specified in the Agreement which was partly in cash and partly in kind. The appellant's entitlement to receive the defined consideration was not dependant on fact as to whether the Developer made any profit or suffered loss from Development and construction of the new buildings. No part of the profits that would accrue to the Developer from development of the factory land was to be shared by him with the appellant. I therefore find full force in the submissions of the AIR that the appellant being owner of land was entitled to receive only defined and definite consideration for transfer of development rights. The assessee per se did not participate in the business venture of developing the Guindy land because the agreement between the parties did not envisage any active role for the land owner in the matter of carrying out development, and construction on the said land.

9.8. The Reliance placed by 'the AIR on the decision of Gujarat High Court in the case of CIT Vs. Smt. Minal Ramchandra (167 ITR 507) appeared to be relevant in this regard. In this judgment the Gujarat High Court had considered the judgment of Apex Court in the case of G.Venkataswami Naidu & Co. V CIT (35 ITR 594) wherein the apex court had held that normally purchase of land represents Investments of money and not as a business venture. The Gujarat High Court held that! if there is no safety of capital invested and no certainty of regular return then it would be difficult to say that such transaction is an Investment. In the appellant's case however the transaction with Developer did not involve any risk being taken by the assessee. Irrespective whether the Developer made profit or incurred loss the appellant's entitlement to receive consideration was defined and fixed. These facts , therefore showed that neither at the time of purchase of the factory land in 1971 the assessee had objective of dealing with the property by way of stock in trade nor the assessee had any objective or intent to commercially exploit the land in question by undertaking an organized activity for developing it for deriving commercial gains. Even the terms of Agreement dated 07.12.2004 proved that no business or commercial risk was taken by assessee because irrespective of the commercial result of Developer's development venture assessee was to receive ITA No.94/Kol/2012-M/s.Eveready Inds.India Ltd.-A.Y.2005-06 34

definite consideration and did not have share in profit or loss in the venture, which solely belong to the Developer.

9.9. On the facts involved in the present case I find that none of the judicial decisions on which the AO relied were applicable to the appellant's case so as to enable him to reach conclusion that the profit on transfer of development rights was assessable by way of profits & gains of business. On the contrary if the facts involved in each of the decided cases are analyzed and the ratio laid down in these judgment is carefully considered then I find that these decisions in fact further the appellant's case. In the celebrated judgment of the Supreme Court in G.Venkataswami Naidu & Co. Vs. CIT (35 IlR 594) on which the AO relie8 ISO heavily, the Court had held the assessee therein to be dealer in land only because of the peculiar facts involved. After analyzing the facts found by the tribunal the apex court in that case held that the assessee's intention right. at the time of purchase of land was to sell it to , the managed company whenever it thought profitable so to do. The court noted that the assessee's intention at the time of purchase of land itself was to turn it over at a profit to the managed company and therefore the court held that even though it was a solitarv transaction yet it was an adventure in nature of trade. The Ld. AIR in his written. submissions analyzed apex court's relevant observations with which I fully agree and therefore do not reiterate the same to avoid duplicity. The ratio laid down in 35 ITR 594 if applied to the appellant's case shows that the intent and object of the assessee at the time of purchase of land in 1971 was to use If tor its individual benefit by setting up an industrial undertaking. Pursuant to 'the said object the appellant did set up its manufacturing business and carried on the manufacturing operation on the land for more than 30 years. ,During this long period of holding the appellant was not engaged in the business of dealing in land or development of real estate. Even in the subsequent year the appellant was not found by the AO to be dealer in land or engaged in development of real estate. On these facts therefore I find full force in the submissions of the A/R that the appellant did not acquire land at Guindy .for the purposes of' business of real estate development and therefore the profit realized on its transfer was not chargeable under the head profits & gains of business.

9.10 The decision of the Supreme Court in the case of Janaki Ram Bahadur Ram Vs. CIT (57 ITR 21) also supports the appellant's claim because the appellant was never engaged in business of dealing in land nor it was a case where assessee after purchasing the land; sub divided it into plots and thereafter sold. On the con /i~ry in the present case the assessee purchased the land in 1971 for setting,! tip a factory. After conducting manufacturing operation for more than 30 years the appellant disposed off the entire land by granting development rights in respect thereof for a definite consideration which was partly receivable in cash and partly in kind. On- these facts therefore I am in agreement with the submissions for the AIR that the decisions of the Supreme Court in the case of P.M.Mohammed Meerakhan Vs. CIT ( 73 ITR 753), ITA No.94/Kol/2012-M/s.Eveready Inds.India Ltd.-A.Y.2005-06 35

Dalmia Cement Ltd Vs. CIT (105 ITR 633 ) & Smt. Indramani Bai Vs. CIT (200 ITR 594) were not applicable. Moreover the decision of the Supreme Court in the case of Raja Bahadur Kamkya Narayan Singh Vs. CIT (77 ITR2S3); supported the appellant's plea because the appellant transaction with Khivraj Tech Park Pvt. Ltd was not in the ordinary line of assessee's business.

9.11 In the assessee's case land was purchased with sole purpose and intent of setting up an industrial undertaking. After its purchase the appellant used the land for more than 30 years in course of its manufacturing business; treating it to be fixed asset of the said business. On these facts therefore I am in full agreement with t.0e' 'appellant's contention that Guindy land constituted appellant's "capital asset" and on its "transfer" within the meaning of Sec 2(47) of the Act, the resultant gains chargeable under the head "capital gains". The appellant's claim for assessment under the head capital gain is found to be supported by the following judicial decisions on which reliance was placed by the Ld. AIR in his written submissions. i) CIT Vs. Mohakampur Ice & Cold Storage (281 ITR 354) (All) (2006) ii) CIT Vs. Smr. Radha Bai 272 ITR 264 (Del) (2005) iii) CIT Vs. Sushila Devijan(259 ITR 671 (P & H) (2003) iv) CIT Vs. Trivedi (V.A) (1721TR 95 (Bom) 1998”

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of the AO. The learned counsel for the Assessee reiterated submissions made before the CIT(A) and relied on the order of the CIT(A).

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(i) Land admeasuring 8.39 acres at Guindy, Chennai was acquired by the Assessee in terms of an indenture executed by the Governor of Madras dated 30.11.1971. The said land was situated in the Industrial Estate set up by the then Government of Madras. Registered Deed of Sale in favour of the Assessee was executed on 08.02.1989. The Assessee was put in possession of the said land in 1971.

(ii) The Assessee constructed factory buildings there on and the factory was engaged in manufacture of Dry Cell Batteries and its components till F.Y.2004-05.

(iii) The Assessee had another factory at 1075, Thiruvottiyur High Road, Chennai which is also engaged in manufacture of Dry Cell Batteries. Since both the factories were engaged in manufacture of Dry Cell Batteries, these factories performed more or less similar functions and therefore to achieve economies of scale and to have better unified control over the manufacturing operations the Assessee decided to concentrate manufacturing operation at one location in Chennai at 1075, Thiruvottiyur High Road. Pursuant to this decision, the Assessee found the factory land at Guindy as surplus asset and therefore decided to utilise the surplus asset on the most economically advantageous terms.

(iv) Out of the total land area of 8.39 acres; the Assessee entered into an agreement for sale of land admeasuring 1.10 acres with Messrs Khivraj Motor Limited. The physical possession of the said 1.10 acres was transferred in F.Y.2003-04 and the gain arising there from was reported in the return for A.Y.2004-05 under the head "Capital Gains" in terms of Section 53A of the Transfer of Property Act, 1882 read with Section 2(47)(iv) of the Income-tax Act, 1961.

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(v) In respect of the remaining area of 7.29 acres the Assessee entered into an Agreement on 07.12.2004 with Messrs. Khivraj Tech Park Pvt. Ltd., granting it rights of development and construction of new buildings at a consideration and on the terms and conditions specified therein. As per Article III of the said Agreement dated 07.12.2004, the obligation to develop the said land by constructing buildings thereon was solely on the Developer. As per Para 3.0 the developer was liable to construct the building at its own cost and expenses; in accordance with sanctioned building plan. The Assessee was not obliged to incur any cost of construction nor was the Assessee obliged to perform any work in relation to development and construction. The constructed area allotted to the Assessee, as part of owner's allocation in the new building, was to be constructed by the developer solely at developer's own cost. The Assessee had no obligation of any nature to perform any act, deed or thing for development and construction of the new buildings. Clause 9.1 of the said Agreement categorically provided that nothing contained in the agreement construed that there was a partnership business between the Assessee and the said developer or such agreement in any manner constituted an Association of Person. The said clause 9.1, categorically established that there was no JV between the Assessee and the developer in respect of the development' of the said property. In terms of the said agreement the Assessee and M/s. Khivraj Tech Park Pvt. Ltd. were to own hold, enjoy and exploit their respective allocations in the new buildings in their own right and to the exclusion of each other. The Assessee was not to share any profit or loss arising from the development and construction activity which was to be solely funded, undertaken and executed by M/s. Khivraj Tech Park Pvt. Ltd. on it's own account and profit or loss from the said venture was entirely to the account of the said developer. As per Para 3.2 all costs, charges, expenses for preparation and submission of the building plans and all costs, charges, expenses and outgoings for construction, erection and completion of the said building were to be borne and paid for solely by the Developer. In addition to incurring the cost of development and construction of the new buildings, the Developer was obliged to pay Rs.25 crores and further provide 20% of the constructed area in the proposed new building to the Assessee. In consideration of

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undertaking and performing these obligations, the Developer was entitled to 80% of the constructed area in the proposed new buildings to be constructed by the Developer.

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the view that the conclusion of the AO in this regard cannot be sustained. We also find that even in the decisions referred to by the learned AO, intention is an important factor which has been highlighted. On facts and circumstances of the present case, we are of the view that the Assessee never intended to plunge into the waters of trade. We therefore uphold the order of the CIT(A) whereby he held that the income from sale of the property by the Assessees was to be assessed under the head “Capital Gain”. Ground No.6 raised by the Revenue is accordingly dismissed.

Order pronounced in the court on 03.02.2016. Sd/- Sd/- [M.Balaganesh] [N.V.Vasudevan] Accountant Member Judicial Member

Date: 03.02.2016. R.G.(.P.S.) Copy of the order forwarded to:

2 The D.C.I.T., Circle-11, Kolkata. 3. The CIT-IV, Kolkata, 4. The CIT(A)-XII, Kolkata. 5. DR, Kolkata Benches, Kolkata True Copy, By order,

Deputy /Asst. Registrar, ITAT, Kolkata Benches

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