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TMI Blog2011 (9) TMI 1140X X X X Extracts X X X X X X X X Extracts X X X X ..... egapode Airlines Ltd. the lessee without appreciating that the payment is not an expense allowable under s. 48(i) of the IT Act. 2. The assessee is a company. It is engaged in the business of rendering travel related services and other professional services. One M/s Mafatlal Finance Co. Ltd. (MFL) owned an aircraft. By a lease agreement dt. 30th Dec., 1994 MFL leased the aircraft to M/s Megapode Airlines Ltd. (MAL) for a period of 7 years from 30th Dec., 1994 with an option to renew the lease for an indefinite period of time. The relevant clause in the lease agreement reads as follows : Period of lease : The lessee shall take the equipment for its use on lease for the terms specified in the lease summary schedule hereunder written. The lessee shall have the option to renew the lease of the equipment for further periods as may be decided upon by the lessee subject, however, to the proviso that such further extension of the lease period shall not have any one renewal exceed 5 years at a time. Such periods for which the lease is renewed are hereinafter referred to as secondary lease period(s). The lessee shall pay to the lessor lease rentals at the rate applicable to the secon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t it was likely to lose profits in case premature termination of lease and quantified the same at ₹ 5.19 crores (quantification calculation enclosed along with the letter) and in case the said sum is paid it was agreeable to foreclosure of the lease. MAL also demanded the sum of ₹ 3.18 crores it spent on refurbishment of the aircraft. 7. The assessee by its letter dt. 9th Feb., 2002 offered to give ₹ 4.7 crores as compensation for premature closure of the lease agreement provided possession of the aircraft is handed over without waiting for 3 months' notice period. By letter dt.11th Feb., 2002 MAL agreed to the termination of lease agreement subject to payment of ₹ 4.70 crores as compensation. MAL also agreed to deliver the aircraft in good working condition on or before 6th May, 2002. 8. Though there was an agreement between the assessee and MAL to foreclose the lease and surrender possession of aircraft on payment of compensation of ₹ 4.70 crores for premature termination of lease, by lease agreement dt. 25th Feb., 2002 between the assessee as owner and lessor of the aircraft and MAL as the lessee, the lease period of the aircraft to MAL wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to the AO if MAL had acquired the aircraft from MFL and eventually sold it, the difference between the sale consideration and cost + cost of improvement would have been taxed as profit on sale of asset. 2. According to the AO the assessee and MAL belonged to the same group of companies. The assessee therefore bought the aircraft, paid for the improvement expenses and the surplus received was its profits. According to the AO, MAL had huge carried forward losses and therefore the assessee shifted part of the profit it gained on sale of the aircraft to MAL instead retaining the entire profits for itself. Had the assessee retained the entire profits, those profits would have suffered tax at the hands of the assessee. 3. The transaction was not a genuine business transaction, because the termination of the lease of MAL by the assessee was on 6th Feb., 2002, whereas the renewal lease agreement with MAL was entered into only on 25th Feb., 2002 and even this lease agreement did not contain clauses for termination of the lease and the monetary compensation quantified and agreed between the parties. 4. In a nutshell, the group has accommodated Mafatlal Finance and also decided to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen the landlord pays tenant money for surrender of tenancy right that cannot be regarded as expenditure incurred in connection with transfer. 13. For the above reasons the AO rejected the claim of the assessee for deduction of a sum of ₹ 4,70,00,000 paid to MAL as compensation for premature termination of lease was claimed as a deduction under s. 48(i) of the Act, as expenditure incurred wholly and exclusively in connection with transfer of the capital asset, while computing capital gain. 14. Before CIT(A), the assessee submitted as follows : 1. On the allegation of the AO that if MAL had acquired the aircraft from MFL and eventually sold it, the difference between the sale consideration and cost + cost of improvement would have been taxed as profit on sale of asset, the assessee gave a computation of income of the assessee and MAL after removing the effect of the aforementioned transaction. The same is annexed as annexure to this order. The assessee submitted that the Revenue would be worse off, if the situation as contemplated by the AO had happened. 2. It was possible for the assessee to get a sum of ₹ 8,92,87,147 as price on sale of aircraft only becau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpensation to its tenants for vacant possession of the land consequent to compulsory acquisition of land by the Government. Thus, there was no statutory or contractual obligation to deliver vacant possession of the land. Accordingly, the intention behind making such compensation was more of a gratuitous nature and therefore the deduction was not allowed. He held that in the case of the assessee, as per cl. 4.2 of the aircraft sale agreement, there was a contractual obligation on the assessee to transfer the aircraft free of any encumbrances, lien etc. The CIT(A) also found that the following decisions relied upon by the assessee supported the claim of the assessee viz. : (i) CIT v. C.V. Soundararajan [1984] 150 ITR 80 (Mad.); ii) Naozar Chenoy v. CIT [1998] 234 ITR 95 (AP); (iii) CIT v. A. Venkataraman [1982] 137 ITR 846 (Mad.); (iv) CIT v. Smt. Shakuntala Rajeshwar [1986] 160 ITR 840 (Delhi). In all the above cases, the expenses incurred or compensation paid to the tenant for vacating and handing over possession were held to be expenses incidental to the transfer in order for the assessee to transfer the land free of any encumbrances. Accordingly, following the rati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epartmental Representative reiterated the stand of the AO as reflected in the order of assessment. He also took us through the various clauses of the lease agreement and submitted that the sum of ₹ 4.70 crores fixed as compensation for surrender of lease rights was without any basis and was arbitrary. 17. The learned counsel for the assessee reiterated the stand of the assessee as put forth before the CIT(A) and relied on the order of the CIT(A). With regard to the allegation of MAL and the assessee belonging to the same group, he pointed out that MAL changed hands from Wadia's Bombay Dyeing Group to Tata Group of companies in the year 1998. He drew our attention to the shareholding pattern in MAL before the aforesaid transfer and after the transfer (p. 61 of the paper book). He also gave a shareholding pattern in assessee (p. 62 of the paper book). He submitted that many companies holding shares in the assessee are public limited companies or companies in which the owners of the palaces which have been converted into hotels have stake. According to him there is no common management or control, so as to draw any adverse inference regarding any ulterior motive for carry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raft. In the following cases it has been held that expenses incurred or compensation paid to the tenant for vacating and handing over possession was held to be expenses incidental to the transfer in order for the assessee to transfer the land free of any encumbrances and was to be allowed as deduction under s. 48(i) of the Act : (i) C.V. Soundararajan (supra); (ii) Naozar Chenoy (supra); (iii) A. Venkataraman (supra); (iv) Shakuntala Rajeshwar (supra). We are also in agreement with the conclusion of the CIT(A) that the compensation paid to MAL for surrendering its pre-existing rights as the lessee is inextricably connected to the transfer of the aircraft as one of the conditions for sale of the aircraft by the assessee was surrender of possession to the purchaser free of all encumbrances. The CIT(A) has rightly distinguished the decisions relied upon by the AO. We are also of the view that the alternative computation of income filed by the assessee before CIT(A) clearly demolishes the case of the AO that there was any motive to avoid tax. We therefore do not find any grounds to interfere with the order of the CIT(A). Consequently, ground Nos. 1 and 2 raised by the Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... union and the concerned workmen an undertaking inter alia to the effect that in the event of any new contract being awarded for car hire operations in future, the assessee would insert a clause in such fresh contract to ensure that the new operators shall grant employment in their services to the concerned workmen. On the basis of the said undertaking and other assurances set out in the purshis, the Union unconditionally withdrew the said Complaint (ULP) No. 540 of 1998 and these facts are recorded by the Hon'ble Court in its order dt. 19th Dec., 1998. 21. In keeping with the spirit of the settlement, and upon cancellation of the contract with D.V. Transport and Unity, the assessee continued with the same set of drivers under its new operators M/s Ramniranjan Kedia Finance (P) Ltd. ('RNK') and M/s Sanjay Auto Services ('Sanjay'). However, the requirement of continuous employment had put a considerable recurring burden on the assessee. In a competitive market, it was not feasible for the assessee to provide employment to these drivers and incur huge cost on an ongoing basis. Hence, during the year under reference, in order to tide over this annual recurring c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before the Hon'ble Labour Court are ignored, since the assessee had ultimate control over the drivers the said drivers are in reality employees of the appellant. The assessee placed reliance on the decision of the Hon'ble Gujarat High Court in the case of CIT v. Prithviraj Bhoorchand [2006] 280 ITR 94 wherein it has been held that where the labourers engaged on a contract basis under control of the assessee, they were deemed to be the assessee's employees. 24. Thus it was submitted that the drivers retrenched by the assessee were its own drivers and the payment of compensation to them is in the nature of retrenchment compensation paid to its own employees. The assessee, therefore, claimed the retrenchment compensation of ₹ 2,41,00,000 paid to its drivers as deductible revenue expenditure. 25. However, the AO disallowed the claim of the assessee of the aforesaid payment as deductible revenue expenditure on the following grounds : (a) The expenditure is not incidental to the assessee's business, which is that of hiring cars for the Taj Business Hotels. The payment is not incidental to earning the receipts/income for the asst. yr. 2003-04. (b) There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere paid lump sum consideration and whose contracts were terminated. It was submitted that allegation of the AO that the expenditure has been incurred in connection with allegations of unfair labour practices and is not allowable as per the provisions of the Explanation to s. 37(1) of the Act was not correct. In this regard it was pointed out that the complaint was withdrawn by the union of workmen as settled out of Court and there is no finding of any unfair labour practice either by the Court or in the settlement arrived at between the parties. It was submitted that intention behind insertion of Explanation to s. 37(1) of the Act was something different. This is evident from the Memorandum Explaining the Provisions in Finance (No. 2) Bill, 1998 wherein it has been stated as under : It is proposed to insert an Explanation after sub-s. (1) of Sec. 37 to clarify that no allowance shall be made in respect of expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law. This proposed amendment will result in disallowance of the claim made by certain taxpayers of payments on account of protection money, extortion, Hafta, bribes, etc. as busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been laid down : (i) CIT v. Madras Auto Service (P) Ltd. [1998] 233 ITR 468 (SC); (ii) Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC); (iii) CIT v. Bhor Industries Ltd. [2003] 264 ITR 180 (Bom); (iv) Life Insurance Corpn. of India v. CIT [1979] 119 ITR 900 (Bom.); (v) CIT v. Assam Oil Co. Ltd. [1985] 154 ITR 647 (Cal.); (vi) Overseas Sanmar Financial Ltd. v. Jt. CIT [2003] 86 ITD 602 (Chennai). (c) With regard to the allegation of the AO that the expenditure has been incurred in connection with allegations of unfair labour practices, the CIT(A) held that subsequent to settlement of the dispute, the assessee provided continuous employment to the drivers from 1999 through 2002. The retrenchment compensation was completely separate and distinct from the earlier settlement. (d) With regard to the allegation of the AO that the expenditure can also not (sic) be disallowed under Explanation to s. 37(1) of the Act, the CIT(A) held that the compensation has been paid under a contractual settlement with the drivers which by no means can be treated as payment made in violation of any law. The CIT(A) also held that the intention of the legislature in bringing Expla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e direct control and supervision of the assessee. They in fact got an interim order to maintain status quo pending disposal of the dispute before the labour Court. The subsequent settlement of the dispute and the agreement by which the assessee made payment to the individual workman clearly show that there was a legal obligation on the part of the assessee to make payment in question. In this regard, the decision of the Hon'ble Supreme Court in the case of Sassoon J. David Co. (P.) Ltd. (supra) is relevant. It has been laid down in the aforesaid decision that the expression wholly and exclusively used in s. 10(2)(xv) of the Indian IT Act, 1922 [corresponding to s. 37(1) of the Act] does not mean necessarily . Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under s. 10(2)(xv) of the Act even though there was no compelling necessity to incur such expenditure. The fact that somebody other than the assessee is also benefited by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and that the balance of ₹ 1,27,511 paid to the employees and a director was not allowable as a deduction since the expenditure had not been incurred by the company for commercial reasons. On appeal by the appellant to the Supreme Court, (it was) held that on the facts, that, even assuming that the motive behind the payment of the compensation was that the terms of the agreement between the Davids and the Tatas for the sale of the shares should be satisfied, as long as the amount of ₹ 1,27,511 was laid out wholly and exclusively for the purpose of the business of the appellant there was no reason for denying the benefit of s. 10(2)(xv). The appellant company continued to function even after its control passed on to the Tatas and the expenditure in question was laid out for the purpose of the company's own trade and not for the trade of the Tatas who were only its shareholders. As a result of the expenditure, the appellant company was in fact benefited by reduction in its wage bill. It could not be said that the Tatas were in any way benefited financially because of the deduction in the consideration payable by them for the shares. The sum of ₹ 1,27,511 was exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in the nature of day-to-day expenses incurred on the business establishment. The assessee submitted that it has been a company existing since 19th Feb., 1981. Since its inception it has been engaged in a composite business of multiple activities such as rendering travel related services, professional services, leasing, printing, electroplating etc. It has a common board of directors who controls and manages all its activities. All the activities were carried on through common management, common funds, etc. Even the office premises, general staff, etc. are common. All the activities are controlled and managed by the same board of directors. Common funds and resources are deployed for day-to-day running of these activities . These facts have never been challenged by the IT Department in the history of the company. In all the past years, the assessments have been completed, accepting the above position. It was further submitted that the printing and electroplating activities of the assessee are part of one composite business activity carried on by the assessee. Although the business is carried on in various geographical regions, there is common management and control and the entire ..... X X X X Extracts X X X X X X X X Extracts X X X X
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