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2012 (9) TMI 804 - AT - Income TaxAddition made on account of alleged consideration in the form of constructed area as capital gain - assessee company, owner of two plots of land 256 & 257, sold development rights in respect of plot no 257 to a builder for total consideration of 16.11 crores and construction of 18000 sq.ft. of carpet area for the benefit of the assessee on plot No. 256 for the benefit of the assessee - capital gain arising from sale of plot No. 257 was offered to tax by taking into account the consideration of Rs.16.11 crores and constructed area of 18,000 sq.ft. was not taken into account - assessee contended that before said Builders could start the construction work, the entire property comprising of plot No. 256 and 257 was sold to a third party M/s F Ltd. by a tripartite conveyance deed for a total consideration of Rs.29.11 crores - assessee thus never received the constructed area of 18,000 sq.ft. and whatever was received as additional consideration of Rs.13 crores (29.11 crores - 16.11 crores) was offered to tax in AY 2008-09 as capital gain Held that - Consideration in the form of constructed area of 18,000 sq.ft. as agreed in terms of the development agreement was not actually accrued to the assessee as a result of subsequent developments/events going by the doctrine of real income and the same, therefore, cannot be taken into account for the purpose of computation of capital gain arising from transfer of capital asset as pet the development agreement. It is also worthwhile to note here that the total consideration actually received by the assessee from transfer of its entire property comprising of plot No. 256 and 257 as per the tripartite conveyance deed was Rs.29.11 crores and the same having been entirely offered to tax in AYs 2007-08 and 2008-09, there is no loss to the Revenue on this count as rightly contended by assessee. Addition made is therefore deleted - Decided in favor of assessee. Expenditure incurred by the assessee company on payment of premium for purchase of its own shares from warring group of shareholders - revenue or capital expenditure - Held that - Tribunal in case of Echjay Industries (P) Ltd (1987 (12) TMI 68 - ITAT BOMBAY-D) has held that even if it is assumed that an enduring benefit has been obtained, such enduring benefit is not relatable to fixed capital structure of the assessee company because it has neither increased the assessee s assets nor the assessee company could be said to have acquired any right of income yielding nature. Amount in question was paid to secure peace and harmony and smooth management of the company in the interest of business and the amount paid for this purpose was on revenue account. In view of aforesaid it is held that impugned expenditure is revenue in nature and the same being wholly and exclusively incurred for the purpose of its business, is allowable as deduction. Dis-allowance stands deleted - Decided in favor of assessee
Issues involved:
1. Addition on account of alleged consideration in the form of constructed area as capital gain. 2. Disallowance of expenditure incurred on purchase and cancellation of shares. Issue-wise detailed analysis: 1. Addition on account of alleged consideration in the form of constructed area as capital gain: The primary issue in this case was whether the constructed area of 18,000 sq.ft., agreed to be given by M/s Dipti Builders as per the development agreement, should be considered as part of the sale consideration for computing capital gain. The assessee argued that since the constructed area was never received due to a subsequent tripartite conveyance deed with M/s Financial Technologies Ltd., the consideration in the form of the constructed area did not accrue and should not be included in the capital gains computation. The AO and CIT(A) disagreed, relying on the decision of the Hon'ble Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia, holding that the transfer of property as per the development agreement resulted in capital gain, and the consideration should include the market value of the constructed area. However, the CIT(A) accepted the alternative plea that only the cost of construction, not the market value, should be considered, thus reducing the addition to Rs.2,17,88,000/-. The Tribunal, after considering the real income theory and subsequent events, concluded that the consideration in the form of the constructed area did not actually accrue to the assessee. It was noted that the entire consideration received from the transfer of the property was offered to tax in subsequent years, resulting in no loss to the Revenue. The Tribunal deleted the addition made by the AO and sustained by the CIT(A), allowing the assessee's appeal on this ground. 2. Disallowance of expenditure incurred on purchase and cancellation of shares: The second issue was the disallowance of Rs.6,81,60,200/- incurred by the assessee on purchasing and canceling its own shares. The assessee contended that this expenditure was incurred to resolve disputes between two groups of shareholders, which had adversely affected the business. The expenditure was claimed as a revenue expense necessary for the smooth and efficient running of the business. The AO disallowed the expenditure, viewing it as part of a family dispute settlement and considering it a capital expenditure. The CIT(A) upheld this view, stating that the expenditure was personal in nature and not incurred for business purposes. The Tribunal, however, found that the facts of the case were similar to those in the case of Echjay Industries Ltd., where the expenditure on purchasing shares to resolve shareholder disputes was allowed as a revenue expense. The Tribunal noted that the disputes had indeed affected the business, and the settlement allowed the company to operate smoothly and profitably. The Tribunal held that the expenditure was revenue in nature and allowable as a deduction, thus deleting the disallowance made by the AO and confirmed by the CIT(A). Conclusion: The Tribunal allowed the appeal of the assessee on both grounds, deleting the additions and disallowances made by the AO and sustained by the CIT(A). The decision emphasized the application of the real income theory and the relevance of subsequent events in determining the accrual of income and the nature of expenditure in the context of business operations.
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