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TMI Blog1996 (6) TMI 46X X X X Extracts X X X X X X X X Extracts X X X X ..... t the sale consideration was Rs. 16.94 lakhs. The additional capital gains tax that was payable by the vendor on the basis of this agreement with the Department was Rs. 1.75 lakhs. The assessee-company agreed to pay the sum of Rs. 1.75 lakhs on behalf of the vendor in order to avoid the acquisition proceedings. The assessee-company paid this amount during the account year ending June 30, 1974, and claimed the same as a deduction in its business for the assessment year 1975-76. The assessing authority disallowed this claim on the ground that the expenditure was not one incurred in the course of the business of the assessee-company or for the purpose of earning income from its business relating to the year ended June 30, 1974, and also because it was in the nature of a capital expenditure. The assessing authority also held that the liability to pay the additional capital gains tax of Rs. 1.75 lakhs arose only to the vendor and that too long after the sale transaction between the vendor and the assessee-company. The assessee-company appealed against this order to the Commissioner of Income-tax (Appeals) raising two grounds, viz., (a) the payment of the sum of Rs. 1.75 lakhs should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... property and hence cannot be treated as an increase to the cost of the property warranting grant of depreciation thereon. On these facts, the following two questions had been referred to this court at the instance of the assessee : " 1. Whether the Tribunal was right in holding that the amount paid as capital gains tax is not allowable as revenue expenditure? 2. Whether the Tribunal was right in holding that in the alternative, the payment does not go to enhance the cost of the asset, and hence, depreciation is not allowable ?" We have heard the arguments of Mr. P. P. S. Janarthanaraja, for the assessee, and Mr. S. V. Subramaniam, for the Department. On the first question, Mr. P.. P. S. Janarthanaraja made the following submission on behalf of the assessee : There was a threat of the property that had been purchased being lost in view of the notice for taking acquisition proceedings under Chapter XXA of the Act and hence the assessee, in order to save the property from being acquired, undertook to make payment of Rs. 1.75 lakhs, being the capital gains tax payable by the vendor in regard to the sale of the property. The payment was made only in order to perfect the tit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration tax which are payable whether or not the theatre is built (Kapur Sons and Co. v. CIT [1986] 157 ITR 382 (Delhi)). The actual cost of a ship would include travelling expenses for buying, negotiating the price and taking delivery, and expenses in connection with the launching of the ship (CIT v. Great Eastern Shipping Co. Ltd. [1979] 118 ITR 772 (Bom)). The actual cost of a plant would include special fees paid to auditors (CIT v. J. M. A. Industries Ltd. [1981] 129 ITR 373 (Delhi)), the expenditure incurred on the ceremony of laying the foundation stone of a factory (CIT v. Nirlon Synthetic Fibres and Chemicals Ltd. [1982] 137 ITR 1 (Bom)), fees paid to the foreign collaborator for technical know-how for the erection of the plant and the expenditure incurred in training technical staff in the erection and working of the plant (CIT v. Simco Meters Ltd. [1978] 111 ITR 113 (Mad)), the expenditure incurred on the trial run of the plant (CIT v. Saurashtra Cement and Chemical Industries Ltd. [1991] 127 ITR 47 (Guj)) and other pre-commissioning expenditure (CIT v. Cochin Refineries Ltd. [1988] 173 ITR 461 (Ker)), and the additional expenditure incurred on the devaluation of the ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he instrument of transfer, in cases of pre-emptive purchase of property under Chapter XX-C, the amount payable was the same amount that was stated in the agreement of transfer subject to certain discount. Since the transfer in this case had been effected on November 30, 1972, in our view, it is Chapter XX-A which will be applicable. Section 269C of Chapter XX-A of the Act as far as relevant for the present case, as it stood at the relevant time, reads as under : " 269C. Immovable property in respect of which proceedings for acquisition may be taken. --- (1) Where the competent authority has reason to believe that any immovable property of a fair market value exceeding twenty-five thousand rupees has been transferred by a person (hereafter in this Chapter referred to as the transferor) to another person (hereafter in this Chapter referred to as the transferee) for an apparent consideration which is less than the fair market value of the property and that the consideration for such transfer as agreed to between the parties has not been truly stated in the instrument of transfer with the object of--- (a) facilitating the reduction or evasion of the liability of the transferor to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. Section 269G of the Act provides for the filing of appeal against the order of acquisition. Section 269-I of the Act provides for the vesting of the property in the Central Government after the order of acquisition becomes final. In the case on hand, the consideration for the transfer as specified in the instrument of transfer dated November 30, 19 72, being Rs. 11 lakhs, it has to be taken as the apparent consideration. The fair market value of the property in the instant case was determined at Rs. 16.94 lakhs by the Income-tax Department. It may be relevant to point out that the parties to the transaction did not question the fair market value of Rs. 16.94 lakhs as determined by the Department. Accordingly, proceedings for acquisition of property were initiated. It was at that stage that the vendor of the property, who had an obligation to pay the capital gains tax arising on the transaction, had discussion and deliberations with the Income-tax Department and agreed to pay the capital gains tax on the transfer on the basis that the consideration for the transfer will be Rs. 16.94 lakhs, being the fair market value as determined by the Department. In view of the acquisition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lakhs cannot be allowed as cost of the asset. In this context, the principle enunciated by a Full Bench of this court in the decision in S. Valliammal v. CIT [1981] 127 ITR 713, was relied on by learned senior counsel for the Department. In the said case, the claim for treating the estate duty payable on the property taken by the heirs of the deceased as the cost of asset for the purpose of capital gains tax on the sale of the said property was negatived by the Full Bench. The Full Bench held as under : " The assessees got the entire right, title and interest in respect of the properties taken by them along with the liability to pay the estate duty and the discharge of this liability will not amount to acquisition of any interest in the assets which had already been acquired by them. The earlier acquisition cannot be said to be something short of the full right, title and interest in the properties. Non-payment of estate duty did not result in their getting an imperfect or incomplete title in the property. Only when the title is defective, incomplete or imperfect, the cost of making the title complete and perfect can be treated as the cost of acquisition. Accordingly, estate d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to increase the cost of the property to the assessee. Hence, the question of grant of depreciation on the said amount cannot arise. On the second question, learned senior counsel appearing for the Department addressed the court as follows : The assessee-company itself had written off this amount in its profit and loss account and hence the question of treating this amount as going to increase the cost of the property would not arise. Further, the consideration for the transfer of the property as stated in the instrument of transfer was Rs. 11 lakhs. The payment of Rs. 1.75 lakhs was not for any improvement to the property in order to justify the statement that it went to increase the consideration for the transfer. The mere fact that the assessee-company chose to pay the liability of a third party, which it was under no obligation to pay, cannot justify the claim that the amount would go to increase the cost of the property to the assessee. When the matter came up before the Tribunal, the first claim made on behalf of the assessee was given up laying stress only on the alternative and second contention, viz., the allowance of depreciation. Though the first claim was not press ..... X X X X Extracts X X X X X X X X Extracts X X X X
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