2015 (2) TMI 863 - HC - Income Tax

Development agreement - whether capital gains can be said to have arisen in the subject assessment year to the extent of the value of 18,000 sq.feet of constructed area to be provided by the developer even though the same was not provided for? - Held that - The income accrued and earned under the subsequent agreement dated 6.7.2002 was offered as capital gains in the subsequent years. Therefore, on the application of the real income theory, the Tribunal held that on these facts there would be neither accrual nor receipt of income to warrant bringing to tax to the constructed area of 18,000 sq.ft which has not been received by the respondent-assessee. No occasion to tax the same can arise. The Tribunal on consideration of facts has reached a finding of fact that no income in respect of 18000 sq.ft of constructed area has been accrued or received. This finding cannot be said to be perverse or arbitrary. - Decided in favour of assessee. Purchase and subsequent cancellation of the shares belonging to an estranged brother of the person in the management of the company - whether is in the nature of revenue expenditure or not? - Held that - Tribunal records a finding of fact that in view of the dispute between the two warring groups of shareholders the business of respondent assessee had suffered. It records that the total sales of the respondent-assessee which was in the range of ₹ 20 to 25 crores per annaum during the predispute period had come down to around ₹ 9 crores in the financial year 1999-2000 when dispute arose and remained in the range of ₹ 10 to 14 crores during the period of litigation between its two groups of shareholders spanning over six years. It also records that after the settlement of dispute in the financial year 2005-06 there was a substantial increase in the sales touching nearly ₹ 18 crores per annum. The impugned order of the Tribunal also notes that after settlement of the dispute new products were launched by the respondent assessee company. All this was evidence of the fact that the dispute between two groups of shareholders had affected the business of the company. The amounts which were paid by the respondent assessee for the purpose of purchase of its shares, to its shareholder for subsequent cancellation was an expenditure incurred only to enable smooth running of the business. Thus, the expenditure was incurred for carrying on its business smoothly and therefore, was a deductible expenditure. Thus, the impugned order of the Tribunal is essentially a finding of fact. - Decided in favour of assessee.

Summary

Issues:
1. Whether the Tribunal was justified in holding that income in the form of 18,000 sq. feet did not accrue to the company under a development agreement.
2. Whether the Tribunal was right in concluding that no capital gains arose during the year.
3. Whether the expenditure spent in acquiring a shareholding in a group is revenue expenditure.
4. Whether the expenditure incurred on a family settlement is revenue or capital expenditure.
5. Whether the Tribunal's finding on the expenditure for a family settlement was correct.

Analysis:

Issue 1 & 2:
The first issue revolves around a development agreement where the company agreed to construct 18,000 sq. feet of built-up area. The Tribunal held that no income accrued or was received regarding this area due to subsequent agreements. The Tribunal relied on real income theory and precedent cases to support its decision. The Court found the Tribunal's decision reasonable, dismissing the revenue's appeal on these questions.

Issue 3:
Regarding the nature of expenditure in acquiring a shareholding, the Tribunal found that the expenditure was necessary for the smooth running of the business, especially considering the adverse effects of a shareholder dispute on the company's operations. The Tribunal concluded that the expenditure was revenue in nature, essential for business continuity, and not capital expenditure. The Court upheld the Tribunal's decision on this issue.

Issue 4 & 5:
The dispute on whether the expenditure on a family settlement was revenue or capital in nature was analyzed. The Tribunal found that the expenditure was incurred to maintain business operations smoothly amidst shareholder conflicts, leading to a deduction as revenue expenditure. The Court agreed with the Tribunal's factual findings, emphasizing the necessity of the expenditure for business continuity. As a result, the Court dismissed the appeal on these questions as well.

In conclusion, the Court upheld the Tribunal's decisions on all issues, emphasizing the importance of factual findings and the application of legal principles in determining the nature of income and expenditure in the context of business operations.