1989 (10) TMI 37 - HC - Income Tax

Summary

Issues:
1. Deduction of expenses incurred on the sale of building and lift while computing income under section 41(2) of the Income-tax Act.
2. Allowance of sale expenses under section 37(1) or under section 28 read with section 29 as a deduction from profits under section 41(2).
3. Entitlement to set off sale expenses against capital gains under section 70(2)(ii) of the Income-tax Act.

Analysis:
The judgment of the High Court of Bombay dealt with the case of an assessee, a limited company, who sold its factory along with machinery, plant, and fittings at the end of the previous year. The assessee incurred expenses in connection with the sale, including registration and stamp fees, and solicitors' fees. The Revenue contended that the expenses should not be deducted while computing income under section 41(2) of the Income-tax Act. The Appellate Assistant Commissioner allowed the deduction, but the Income-tax Appellate Tribunal reversed this decision.

The questions before the court were whether the assessee was entitled to deduct the sale expenses from the sale proceeds of the building and lift under section 41(2), whether the expenses could be allowed under other sections, and whether the assessee could set off the expenses against capital gains from the sale of other fixed assets. The court referred to previous judgments and legal provisions, including section 41(2) of the Income-tax Act, which deals with the treatment of excess sale proceeds over the written down value of assets used for business.

The court considered the expenses incurred by the assessee, mainly registration and stamp fees and solicitors' fees, as directly related to the sale. It relied on previous judgments and a circular issued by the Central Board of Direct Taxes to support the deduction of such expenses from the sale price for the purposes of section 41(2). The court emphasized that expenses directly related to the sale, such as commission, brokerage, and legal costs, should reduce the sale price for calculating the balancing charge.

In conclusion, the court held in favor of the assessee, allowing the deduction of sale expenses from the sale price for computing income under section 41(2). The court found that expenses like registration and stamp fees and solicitors' fees, being directly related to the sale, should be admissible as deductions. The court rejected the Revenue's argument and emphasized the importance of reducing the sale price by expenses directly related to the sale for determining the balancing charge.