2011 (9) TMI 1140 - AT - Income Tax

Summary

Issues Involved:
1. Deduction of Rs. 4,70,00,000 paid as compensation for premature termination of lease.
2. Deduction of Rs. 2,41,00,000 paid to drivers as retrenchment compensation.
3. Deduction of Rs. 36,89,659 incurred on printing and electroplating activities.

Issue-wise Detailed Analysis:

1. Deduction of Rs. 4,70,00,000 Paid as Compensation for Premature Termination of Lease:

The Revenue challenged the deduction of Rs. 4,70,00,000 paid by the assessee to M/s Megapode Airlines Ltd. (MAL) for premature termination of a lease agreement. The CIT(A) allowed this deduction, but the Revenue argued that the payment was not envisaged in the lease agreement and was not an allowable expense under Section 48(i) of the IT Act.

The assessee, engaged in travel-related services, purchased an aircraft from Mafatlal Finance Co. Ltd. (MFL) subject to MAL's lease rights. The assessee intended to sell the aircraft to an overseas buyer free from encumbrances, necessitating the termination of MAL's lease. MAL demanded Rs. 5.19 crores for premature termination, but the parties settled at Rs. 4.70 crores. The assessee claimed this amount as a deduction under Section 48(i) as an expenditure incurred wholly and exclusively in connection with the transfer of the capital asset.

The AO disallowed the claim, arguing that the transaction was not genuine and was intended to shift profits to MAL, which had carried forward losses. The CIT(A), however, found that the payment was necessary to transfer the aircraft free of encumbrances and was inextricably connected to the transfer. The CIT(A) distinguished the case from precedents where payments to tenants were not allowed as deductions because those payments were gratuitous.

The Tribunal upheld the CIT(A)'s decision, agreeing that the compensation was necessary for the transfer and was not excessive. The Tribunal cited several cases where compensation paid to tenants for vacating premises was allowed as a deduction under Section 48(i). Consequently, the Tribunal dismissed the Revenue's appeal on this ground.

2. Deduction of Rs. 2,41,00,000 Paid to Drivers as Retrenchment Compensation:

The Revenue contested the deduction of Rs. 2,41,00,000 paid by the assessee to drivers as retrenchment compensation. The assessee, providing car services to the Taj Group of Hotels, had engaged drivers through third-party operators. Upon termination of these contracts, the drivers, represented by a union, claimed to be de facto employees of the assessee and filed a complaint of unfair labour practices.

To resolve the dispute, the assessee agreed to pay compensation to the drivers in lieu of their right to employment. The AO disallowed the claim, arguing that the drivers were not employees of the assessee and the expenditure was not incidental to its business. The AO also contended that the expenditure was related to unfair labour practices and was disallowable under Explanation to Section 37(1) of the Act.

The CIT(A) reversed the AO's decision, holding that the drivers were effectively employees of the assessee, as evidenced by the Labour Court's order and the settlement agreements. The CIT(A) found that the payment was made to reduce future wage costs and was thus a revenue expenditure. The CIT(A) also rejected the AO's argument regarding unfair labour practices, noting that the settlement did not involve any illegal payments.

The Tribunal upheld the CIT(A)'s decision, agreeing that the payment was a legitimate business expenditure. The Tribunal cited the Supreme Court's decision in Sassoon J. David & Co. (P) Ltd. v. CIT, which held that voluntary business expenditures incurred for promoting business and earning profits are deductible. The Tribunal dismissed the Revenue's appeal on this ground.

3. Deduction of Rs. 36,89,659 Incurred on Printing and Electroplating Activities:

The assessee challenged the disallowance of Rs. 36,89,659 incurred on its discontinued printing and electroplating activities. The assessee, a multi-activity company, argued that these activities were part of its composite business. The AO disallowed the expenses, stating they were related to a closed business.

The CIT(A) upheld the AO's decision, but the Tribunal noted that in the assessee's own case for the previous assessment year, the Tribunal had held that the printing and electroplating activities were part of the composite business. The Tribunal found that the expenses were incurred for the purpose of business and were not capital expenditures.

The Tribunal followed its earlier decision and directed the AO to allow the deduction, thus allowing the assessee's appeal on this ground.

Conclusion:

The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal, upholding the deductions for compensation paid for premature termination of the lease and retrenchment compensation to drivers, and allowing the deduction for expenses incurred on discontinued printing and electroplating activities.