Brief of the Case: In the case of Sandvik Asia Limited vs. DCIT, Bombay High Court held that the payment made by the Appellant in its nature is different from a payment made to protect the property. In fact, Supreme Court in the case of Assam Bengal Cement Co. Ltd. v/s. CIT 27 ITR 34 while laying down the criteria to decide/ determine whether the payment is of capital or revenue nature has observed that the aim and object of the expenditure would determine the character of the payment. In the present facts, as pointed out above, the entire aim and object of the payment was not only that the certainty of acquisition is aborted but enduring benefit as pointed out above is obtained by the Appellant. This would conclusively determine that the payment in this case was capital in nature in the capital field.
Facts of the Case: The Appellant is engaged in the business of manufacturing of cutting tools at its factory. The Appellant owned another area of land other than the land on which factory is situated, admeasuring 47,296 sq. mtrs (the said land) which was vacant at village Aundh in District Pune. In 1976, the Urban Land (Ceiling and Regulation) Act, 1976 (ULCA) was enacted. On 14th January, 1981, the Appellant applied to the Competent Authority under ULCA for exempting an area of 10,462 sq.mtr. (exempted land) out of the said land under Section 20 of ULCA. Pending consideration of its application for exemption, the State Government issued a notification under Section 41 of the Maharashtra Housing & Area Development Act, 1976 (MHADA) on 3rd December, 1987, seeking to acquire the said land. Consequent to the above, on 30th May, 1988, the Appellant made a representation to the State Government and prayed that the proposed acquisition of the said land and the issue of notification under Section 41 of the MHADA be withdrawn. It appears that the State Government treated the Appellant’s representation as an application for exemption under Section 20 of the ULCA and consequently by an order dated 29th November, 1989, granted exemption to a portion of the said land i.e. the area of 10,462 sq. mtrs, in the aggregate (exempted land). This was with an obligation to construct hostel, training centre and guest house on an area of 6,767 sq. mtrs and also to construct tenements of 50 to 80 sq. mtrs. each for housing to be given to the State Government. The aforesaid exemption to the exempted land was on further payment of consideration of Rs.23.35 lakhs. The Appellant paid the aforesaid amount and also carried out its obligation under the order dated 29th November, 1989, for availing the exemption granted under Section 20 of ULCA. It is the aforesaid payment of Rs.23.35 lakhs to the State Government that is claimed by the Appellant as the revenue expenditure while arriving at its profit for the A. Y. 199091. The Assessing Officer did not accept the Appellant’s claim that the aforesaid payment of Rs.23.35 lakhs was revenue expenditure and held that payment was in the nature of capital expenditure on the following grounds:
(1) The exempted land was not being used for the purpose of business. Thus, the acquisition would not have had any immediate effect on the Appellant’s carrying on business;
(2) The amount of Rs.23.35 lakhs was paid by the Appellant only for perfecting and protecting its title over the exempted land; and
(3) The benefit obtained by making the payment of Rs.23.35 lakhs was a benefit of an enduring nature in respect of the exempted land.
Being aggrieved, the Appellant carried the above issue to the CIT(A), who dismissed the appeal by holding that the payment of Rs.23.35 lakh was revenue expenditure.
Being aggrieved, the Appellant preferred a further appeal to the ITAT, which was also dismissed.
The Assessee preferred appeal to the High Court questioning the correctness of the view taken by the ITAT. The question of law arose for consideration was
“(a) Whether on the facts and in the circumstances of the case and in law, the Tribunal was right in holding that the assessee was not entitled to a deduction of Rs.23,34,615/ when computing its income chargeable to tax?
(b) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in rejecting the claim of the assessee for depreciation on the expenditure of Rs.23,34,615/ which goes to increase the cost of the building?”
Contention of the Revenue:
a) Revenue contended that the exempted land i.e. 10,462 sq. mtrs, was not land being used by the Assessee for carrying on its business. This asset in the form of land was available for future exploitation. Consequently, payment made to thwards the acquisition of 10,462 sq. mtrs was not made for the purpose of carrying on its business as the business of manufacturing cutting tools would continue whether or not the exempted land was acquired under ULCA. Therefore, in the above facts, the expenditure of Rs.23.35 lakh cannot be considered on revenue account. The amount of Rs.23.35 lakhs was paid by the Assessee to the State Government so as to continue to have possession of the land for indeterminate period. Thus ownership became complete and the benefit obtained by making the payment being enduring in nature can only be on capital account as correctly held by the impugned order; and Attention was drawn to Section 3 of the ULCA which prohibits any person from holding any vacant land in excess of ceiling limit. Admittedly, the subject land including 10,462 sq. mtr. of and which was exempted under Section 20 of the ULCA was vacant land in excess of ceiling limit and the Appellant could not have held the same. It is by virtue of an exemption granted to the Appellant on conditions of constructing building on the land and payment of Rs.23.35 lakhs that an area of 10,462 sq. mtr. of land exempted. Therefore, the payment made was in the nature of capital expenditure for excluding the operation of ULCA in respect of 10.462 sq. mtrs. of land. In view of the above, it was submitted that no interference with the order of the Tribunal is called for to the extent it holds that the payment of Rs.23.35 lakhs was in the nature of capital expenditure.
b) Revenue submits that the payment of Rs.23.35 lakhs was made in respect of land. Therefore, no occasion to add the same as the cost of constructing the building, can arise.
Contention of the Appellant-Assessee:
a) The Appellant-Assessee submitted that it is an admitted position between the parties that the Appellant was entitled to the exempted property at all times. In spite of the above, the impugned order holds that the amount of Rs.23.35 lakhs has been paid to cure a defect in title, therefore holding that the above expenditure is on capital account. The mere enactment of ULCA does not in any manner affect the title of the Appellant to the said land and in particular, 10,462 sq. mtr, of exempted land by virtue of Section 20 of the ULCA. The title of the Appellant on said land would only be lost when notification is issued under Section 10 of the ULCA. Thus, the title to be exempted land always being with the Appellant, the payment of Rs.23.35 lakhs could not have been made to obtain the title and/or complete an incomplete title. Consequently, the impugned order could not have held the payment is on capital account. As the title to the subject property including 10,462 sq. mtr. exempted land was with the Appellant at all time, the payment of Rs.23.35 lakhs was made only so as to protect Appellant’s business asset. It is well settled that payments made to protect the business asset from the threat of acquisition would be on revenue account; and the decision of this Court in C.S.T. v/s. Brihan Maharashtra Sugar Syndicate Ltd.,1 completely concludes the issue in favour of the Appellant wherein it has been held that expenditure incurred on litigation for preserving and preventing a loss of land by virtue of land ceiling enactment, is an expenditure which is revenue in nature. In the above circumstances, it is submitted that the payment of Rs.23.35 lakhs was in the nature of revenue expenditure.
b) Appellant submits that in the alternative, in case the amount of Rs.23.35 lakhs is considered to be capital in nature, then the same must be added to the cost of constructing the building as allowed by the order, granting exemption under Section 20 of ULCA. It is the above expenditure of Rs.23.35 lakhs that allowed the Appellant to construct the buildings. Therefore, this expenditure be added to the cost of constructing the buildings and depreciation be allowed thereon;
Held by CIT (A):
CIT (A) held that
(1) an amount of Rs.23.35 lakhs was paid to the State Government to ensure that the 10,642 sq. mtr. (exempted land) is not acquired under the ULCA;
(2) The payment was made to regain exempted land which would be otherwise lost;
(3) Obtained a benefit of enduring nature in respect of the exempted land; and
(4) The payment was not for the purpose of business but to acquire full ownership of the exempted land.
Thus, the appeal was dismissed on the above account by holding that the payment of Rs.23.35 lakh was revenue expenditure.
Held by ITAT: ITAT held that
a) Payment of Rs. 23.35 lakhs in respect of land is capital expenditure for reasons, as under:
(1) In view of enactment of ULCA, the Appellant was divested of its right to surplus land including the right to alienate and/or deal with it any manner it deems fit;
(2) The payment was made to complete the title in the land which became defective/ imperfect in view of fetter by virtue of ULCA;
(3) Payment not made to avert threat to the running of its business; and
(4) The payment ensured enduring benefit in respect of the exempted land as otherwise the acquisition of the land under the ULCA with nominal compensation.
b) So far the alternative contention that Rs.23.35 lakh be considered a part of the costs of the building and be allowed as depreciation. The Tribunal held that the expenditure of Rs.23.35 lakhs as incurred was to perfect and/or cure the defect in the title of the land, therefore could not be added to the costs of the building. In the above view, the appeal of the Appellant was dismissed.
Held by High Court:
a) High Court observed that the impugned orders of the authorities have reached a correct finding of fact that the land was not being used for the purposes of the Appellant’s business. It was a vacant land to be exploited in the future. The business of the Appellant i.e. of manufacturing of cutting tools continued and the factory land nor its manufacturing activities was affected by the ULCA even remotely. Thus, exemption obtained on payment made was not to protect a running business or business asset of the Appellant. In view of the above, High Court upheld the order of the lower authority that amount of Rs.23.35 lakhs is an expenditure on revenue account.
b) High Court observed that the expenditure of Rs.23.35 lakhs has been incurred so as to complete the title/ ownership of the land. Therefore, the above expenditure cannot be attributed to the construction of the building. The construction of the building mandated by the exemption order under Section 20 of ULCA is only on consequence of the title/ ownership becoming complete. Therefore, High Court upheld the order of the Tribunal negating the plea of the Appellant that the amount of Rs.23.35 lakhs be added to the cost of constructing the buildings so as to avail of depreciation on the same.
Accordingly, Appeal was dismissed.