2011 (8) TMI 846 - HC - Income Tax

Capital or revenue expenditure - the amount paid by the appellant engaged in the business of construction and sale of flats for acquiring unfinished civil works, work-in-progress and inventories - The assessee entered into the agreement with AFPL on 1st July, 1992, to take over by assignment and complete all the pending projects/contracts/ work-in-progress remaining to be completed by the transferor company and in future, take up by itself, housing projects - Clauses 8 and 9 of the agreement touches on the assessee-company being permitted by the transferor company to carry on its business from the space taken on lease by the transferor company and to make use of all the infrastructure facilities available therein - Held that there is absolutely no clause therein, which brought a closure of the building divi- sion of the transferor company by the transfer agreement to contend that what had been transferred to the assessee was a capital asset - Held that what was transferred under the agreement was in the nature of stock-in-trade and not the entire build- ing division of the transferor company and there are no clauses to lead to the inference that with the transfer of the ongoing projects and projects awaiting agreements to be signed, the transferor company had transferred its entire business - Decided in favor of the assessee

Summary

Issues Involved:
1. Whether the amount paid by the appellant for acquiring unfinished civil works, work-in-progress, and inventories is allowable as revenue expenditure.
2. Whether the appellant obtained only an enduring advantage by taking over the unfinished civil work, work-in-progress, and inventories, and whether such advantage is only in the revenue field.
3. Whether the appellant acquired any capital asset under the agreement dated July 1, 1992.

Issue-wise Detailed Analysis:

1. Revenue Expenditure Allowability:
The appellant entered into a business transfer agreement with AFPL, which included the transfer of ongoing projects, work-in-progress, and future projects. The total consideration was Rs. 3.20 crores, satisfied through equity shares and cash. The appellant claimed this amount as revenue expenditure, arguing that the projects were stock-in-trade and did not confer any permanent benefit. The assessing authority rejected this claim, treating the expenditure as capital in nature, since the appellant acquired all assets and liabilities of AFPL. The Commissioner of Income-tax (Appeals) sided with the appellant, viewing the expenditure as transfer of stock-in-trade. However, the Tribunal reversed this, treating the expenditure as capital, arguing that the appellant acquired a going concern and thus a source of income.

2. Enduring Advantage:
The Tribunal held that the appellant acquired an enduring advantage by taking over the business of AFPL, including the right to use AFPL's logo and office space. This indicated a capital expenditure as it changed the profit-earning capacity of the appellant. The Tribunal inferred that the excess payment over the asset value indicated the transfer of goodwill, a capital asset. The appellant contended that the agreement did not support the view of a complete business transfer or closure of AFPL's building division, emphasizing that only ongoing and negotiated projects were transferred, not the entire business.

3. Acquisition of Capital Asset:
The Tribunal's view was that the appellant acquired a capital asset by taking over the business division of AFPL. However, the appellant argued that the agreement did not indicate the transfer of the entire business or its closure, and only the work-in-progress and contracts were transferred. The High Court found no clause in the agreement suggesting the closure of AFPL's building division. The Court held that the agreement's terms justified the appellant's claim that only stock-in-trade was transferred, not a capital asset.

Judgment:
The High Court concluded that the Tribunal's decision lacked material support and was not justified by the agreement's terms. The Court held that the expenditure incurred by the appellant was not capital expenditure but revenue in nature, as it involved the transfer of stock-in-trade and not the entire business of AFPL. The substantial questions of law were answered in favor of the appellant, and the tax case appeal was allowed. The Tribunal's order was set aside, and no costs were awarded.