Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME-TAX CENTRAL, CALCUTTA & ANR.
Vs.
RESPONDENT:
AMALGAMATED DEVELOPMENT, LTD.
DATE OF JUDGMENT:
23/03/1967
BENCH:
RAMASWAMI, V.
BENCH:
RAMASWAMI, V.
SHAH, J.C.
SIKRI, S.M.
CITATION:
1967 AIR 1475 1967 SCR (3) 263
CITATOR INFO :
F 1972 SC2090 (1)
ACT:
Income-tax Act, 1922-s. 10(2)(xv)-company purchasing assets
and liabilities of firm-liabilities including obligation to
complete development work on plots sold by firm-Whether
expenditure on such development deductible expenditure.
Income-assessee company selling plots for part cash and
balance secured by mortgage-whether balance tantamount to
loan to purchaser therefore whether liable to be regarded as
constructive receipt of income.
HEADNOTE:
Under a sale deed executed on July 7, 1948, the respondent
company purchased the assets and liabilities of a firm,, M &
Co. At the time the firm had sold a number of plots for
which part of the consideration money had been realized and
for the balance mortgage bonds had been executed by the
purchasers, Thereafter, the respondent company itself sold
some plots on similar terms. In respect of these plots,
there was an undertaking to lay out roads, etc., and to
complete certain development work and as the respondent
company had taken over the debts as well as the liabilities
of the firm, it was required to complete such work also in
respect of the plots previously sold by the firm. For its
assessment to Income-tax for the years 1950-’51 and 1951-’52
although the respondent company claimed to be treated on the
basis that it maintained its accounts on the cash system,
the Income-tax Officer computed the income on the mercantile
basis. Furthermore, he allowed only the expenses incurred
in respect of ’the lands sold by the company itself but
disallowed the expenditure in connection with the land
previously sold by the firm. He also held that although
only a part of the sale price of the plots sold was realised
in cash by the company and the balance was left outstanding
and secured by a mortgage on the plots, the entire amount of
the sale price was to be credited as income. In the appeal
to the Appellate Assistant Commissioner and the Tribunal,
the view taken by the Income-tax Officer on both the points
was substantially upheld. However, upon a reference, the
High Court held in favour of lie respondent company.
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In the appeal to this Court it was contended on behalf of
the Incometax Department that (i) the expenditure incurred
in connection with the development of plots previously sold
by the firm was not deductible under s. 10(2)(xv) as the
lands already sold by the firm were not stock-in-trade of
the respondent company; and that furthermore, it was likely
that the price paid ’by the respondent company under the
contract of sale dated July 7, 1948 to the firm for taking
over the assets and liabilities of the firm had been fixed
after taking into account the obligation for the development
of such plots; the expenses incurred in discharge of these
obligation must therefore be attributed to the capital
structure of the respondent company’s business and could not
be considered an obligation incurred in connection with the
carrying on of its business ; (ii) part of the consideration
money not received in cash from those who had bought the
plots was treated as a loan to the purchaser for
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which the plot sold was mortgaged in favour of the
respondent company and as such should be treated as a
constructive receipt liable to be included in the profits of
the respondent company derived during the respective
accounting years.
HELD:Dismissing the appeal,
(i)It is not a right approach to examine the question as
if all revenue expenditure must be equated with expenditure
in connection with stock-in-trade. In the present case,
the sale deed dated July 7, 1948 showed that therespondent
company purchased from the firm a whole running businesswith
all its goodwill and stock-in-trade and including its
liabilities. It could not be said that the respondent
company had nothing to do with the lands already sold which
did not form part of its stock-in-trade. The development of
the entire land sold in plots was an integrated process and
could not be sub-divided into water-tight compartment or
related to any Particular piece of land. Furthermore, the
entire expenditure was required to be incurred as a matter
of commercial expediency., [269A-E]
Eastern Investments, Ltd. v. C.I. T. 20 I.T.R. 1; Cooke
(H.M. Inspector of Taxes) v. Quick Shoe Repair Service, 30
T.C. 460; referred to.
There was nothing to show that the obligation under the sale
deed to complete the development work on the plots sold by
the firm was quantified and formed part of the total
consideration paid by the respondent company. [270G]
Royal Insurance Company v. Watson (Surveyor of Taxes) 3 T.C.
500 distinguished.
Commissioner of Income-tax (Central), Calcutta. v. Mugneeram
Bangur & Co. (Land Department) 57 I.T.R. 299; referred to.
(ii)The execution of the mortgage deeds by the purchasers
of plots in respect of the balance of the consideration
money could not be treated as equivalent to payment of cash.
It cannot be said that the mere giving of security for the
debt by the purchaser was tantamount to payment. The amount
of consideration not received and which the purchasers
agreed to pay in future for which plots were mortgaged in
favour of the respondent company, could not therefore be
considered to be taxable income for the assessment periods
in question. [271D-F]
Commissioner of Income-tax, Bihar & Orissa v.
Maharajadhiraja of Darbhanga, 60 I.A. 146; referred to.
JUDGMENT:
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CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 169 and
170 of 1966.
Appeal from the judgment and order dated December 4, 1962 of
the Calcutta High Court in Income-tax Reference No. 57 of
1958.
S.K. Mitra, S. K. Aiyar, S. P. Nayyar for R. N. Sachthey,
for the appellants (in both the appeals).
A.K. Sen and B. P. Maheshwari, for the respondents (in
both the appeals).
265
The Judgment of the Court was delivered by
Ramaswami, J. These appeals are brought, by certificate,
from the judgment of the Calcutta High Court dated December
4, 1962 in Income-Tax Reference No. 57 of 1958.
The respondent company purchased the assets and liabilities
of the firm, Mugneeram Bangur & Co., (Land Department),
hereinafter referred to as the ’firm’, on July 7, 1948 for a
consideration of Rs. 34,99,300/-. The consideration was
paid by the issue of shares to the vendor or its nominees in
the share capital of the respondent company. The assets
included land at cost, Rs. 12,68,268/- as also goodwill and
certain other assets subject to certain liabilities incurred
by the firm. By the time the respondent company took over
the land, the firm had sold a number of plots in respect of
which part of the consideration money had been realised and
for the balance Mortgage Bonds had been executed by the
purchaser. In respect of those plots there was an
undertaking to lay out roads, etc. The respondent company
took over the debts as well as the liabilities. After the
purchase, the respondent company itself sold certain other
plots. The purchaser paid a percentage of the price in cash
and undertook to pay the balance with interest at a
specified rate in annual instalments which was secured by
creating a charge on the land purchased. The sales made by
the respondent company were in all material respects similar
to the sales made by’ the firm. A specimen copy of the sale
deeds executed by the firm of the respondent company is
Annexure ’A’ to the Statement of the Case. The relevant
provisions of the sale deed are as follows :
" And whereas the said Vendor hath agreed
with the Purchaser to sell him the said
land .... hereunder written at the rate of
price or sum of Rs. 3,000/- per cotta free
from all encumbrances. And Whereas the total
amount of price payable in respect of the said
plot.... at the rate aforesaid amounts to Rs.
8,708-5-6. And Whereas at the treaty for sale
it was agreed by and between the parties
hereto that one-third or thereabout of the
total price will be paid at the time of
execution of these presents and the payment of
the balance will be secured in the manner
hereinafter appearing. Now This Indenture
Witnesseth that in pursuance of the said
Agreement and in consideration of the sum of
Rs, 8,708-5-6 whereof the sum of Rs. 2,908-5-6
of lawful money of India to the said Vendor in
hand well and truly paid by the Purchaser at
or before the execution of these presents (the
receipt whereof the said Vendor doth hereby as
well as by receipt hereunder written admit and
acknowledge) and the payment of the balance
namely the
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sum of Rs. 5,800/- being secured under a security deed of
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even date with these presents and executed by the Purchaser
in favour of the Vendor creating First Charge upon the said
land ....
". . . And the said Vendor shall at all costs complete the
construction of the said twenty-five feet wide road on the
North of the said plot No. 35A and will also lay out the
said surface drains by the side of the said road within a
year from the date hereof and will maintain the said road
and drains in proper state or repairs and shall arrange for
lighting the said roads with electric light till
the same are taken over by Tollygunge Municipality
Memo of Consideration
By amount paid as earnest money
on 5th August, 1948 Rs.501.0.0
By Cheque (part) No. 6985706
on The Bank of India Ltd., on
30th January, 1949. Rs. 2,407.5.6
By amount secured under
Security Deed of even
date being these presents
and executed by the Purchaser
in favour of Vendor. Rs. 5,800.0.0
Rs. 8,708.5.6"
A specimen copy of the mortgage deeds is Annexure ’B’ to the
Statement of the Case. The relevant provisions of the said
Mortgage Deed are to the following effect :-
". . and by the said Indenture of Conveyance
it was provided that the payment of the
balance of the consideration money, namely,
the sum of Rs. 5,800/owing by the said
mortgagor to the said mortgagee should be
secured by an Indenture of Security Deed of
even date being these presents to be executed
by the said mortgagor in favour of the said
mortgagee immediately after the execution of
Conveyance now in recital. Now this Indenture
Witnesseth and declares as follows :-(1) In
consideration of the said premises the said
mortgagor doth hereby covenant with the said
mortgagee that the said mortgagor will pay to
the said mortgagee the said sum of Rs. 5,800/-
within ten years to be computed from the date
of these presents together with interest
thereon
267
at the rate of 8 % per annum calculated from
the date of these presents upto the date of
payment payable monthly. . . . "
We are concerned in this case with the assessment of the
respondent company for two periods. The first period is the
accounting year ending June 30, 1949 corresponding to the
assessment year 1950-51 and the second period is the
accounting year ending June 30, 1950 corresponding to
assessment year 1951-52. For the assessment year 1950-51,
the respondent company was maintaining its accounts in the
mercantile system. According to this system, the value of
the land sold was credited at Rs. 373,375/against which the
unpaid balance was debited in the debtors’ account and shown
under the heading "book debts considered good-secured
against mortgage of land". Against this sale, there was an
item of expenses aggregating to Rs. 2,77,047/- of which the
actual expenses paid out in cash -was Rs. 1,12,577/- and the
estimated expenses against future development was Rs.
1,44,470/-. Out of the actual expenses paid out in cash
amounting to Rs. 1,12,577/-, a sum of Rs. 48,238/- was
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expended for lands sold by the respondent company and a sum
of Rs. 64,340/- for expenses incurred by the, respondent
company on account of land already sold by the vendor. As
already stated, the accounts, were kept in the account books
of the respondent company on a mercantile system, for this
period. Later on, the respondent company adjusted its
accounts on a cash system and submitted a revised return
showing a loss of Rs. 11,583/-. The Income-tax Officer, in
assessing the income for the assessment year 1950-51,
originally accepted the cash basis and computed the income.
On appeal, the assessment was set aside and the case was
remitted to the Income-tax Officer for a fresh assessment.
In this fresh assessment, the Income-tax Officer adopted the
mercantile basis on which the books of the respondent
company had actually been kept. Thereafter, the Income-tax
Officer allowed the sum of Rs. 48,238/which was the expenses
actually incurred by the respondent company in respect of
the lands sold by it but disallowed the sum of Rs. 64,340/-
which was the expenditure in respect of the lands which had
already been sold by the firm before the respondent
company’s purchase. With regard to the sale price of the
plots, the Income-tax Officer held that the entire amount of
consideration was to be treated as income, though only a
portion of the consideration was realised in cash and the
other portion was left outstanding after taking a mortgage
on the plots sold from the purchaser as security. With
regard to the next assessment year, 1951-52, the respondent
company kept its accounts on the cash system and not on
mercantile system. The Income-tax Officer however held that
for this assessment year also the amount of unrealised
purchase price for the plots sold should be treated as
268
income. As regards expenses, the Income-tax Officer allowed
a sum of Rs. 56,953/- being the expenditure in respect of
the lands actually sold by the respondent company but
disallowed the amount of Rs. 87,517/- being the expenses
incurred in respect of the lands already sold by the firm
when the respondent company took over. Against the orders
of the Income-tax Officer the respondent company preferred
appeals to the Appellate Assistant Commissioner who
dismissed the appeals by a consolidated order dated November
7, 1956. The respondent company thereafter took the matter
in appeal before the Appellate Tribunal. The view taken by
the Appellate Tribunal was that the Income-tax Officer
should have made the assessment on the basis of cash system
for the year 1951-52 and for that year only the cash
receipts and disbursements should be considered. With
regard to the question of unrealised consideration-money,
the Appellate Tribunal held that for both the assessment
years the unrealised consideration should be treated as
income. With regard to expenses incurred, the Appellate
Tribunal upheld the finding of the Income-tax Officer. In
other words, for both the assessment years it was held that
the expenses incurred in respect of lands already sold
before the respondent company took over should be
disallowed. At the instance of the respondent company the
Appellate Tribunal stated a case to the High Court on the
following questions of law :
"1. Whether on the facts and circumstances of
the case the entire sums of Rs. 1,12,577/- and
Rs. 3,43,155/- for the assessment years 1950-
51 and 195152 respectively spent in carrying
out the obligations subject to which lands
were sold by the assessee were allowable in
computing the assessee’s profits from the land
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business.
2. Whether on the facts and circumstances
of the case the assessee was liable to be
taxed only on the actual realisation of sales
in cash subject to the allowances admissible
under the Indian Income-tax Act ?"
By its judgment dated December 4, 1962 the High Court
answered both the questions in favour of the respondent
company.
With respect to the first question it was submitted by Mr.
Mitra that only the expenditure incurred in the relevant
accounting year in connection with the lands sold by the
respondent company should have been allowed and not the
expenditure incurred in connection with the lands sold by
the vendor-firm previously. It was not disputed by Mr.
Mitra that under the terms of the contract between the
vendor-firm and the respondent company the latter was bound
to meet the obligations of the development of land
previously sold by the firm, but the contention was that the
lands already sold by the firm were not stock-in-trade of
the respondent company. I
269
was said that expenditure not incurred in connection with
stock-in-trade of the business of the respondent-company is
not deductible under s. 10(2)(xv) of the Income-tax Act. We
are unable to accept this argument as correct. It is not,
in our opinion, a right approach to examine the question as
if all revenue expenditure must be equated with expenditure
in connection with the stockin-trade. In the present case,
the sale deed dated July 7, 1948 shows that the respondent-
company purchased from the firm a whole running business
with all its goodwill and stock-in-trade and including its
liabilities. The respondent-company had taken over
undeveloped land and the idea was to develop the same by
making roads, installing a drainage system, street lighting,
etc., and then selling the same in small plots at a profit.
The principal inducement therefore for the purchasers was
that the respondent-company would develop the land and the
purchasers would be able to pay by instalments spread over a
number of years. At the time the respondent-company took
over the lands a portion thereof had already been sold by
the firm but the development had not been completed and in
the sale deeds entered into by the respondentcompany with
the subsequent purchasers the respondent-company expressly
undertook the liability to complete the development within a
reasonable time. The argument that the respondent-company
had nothing to do with the lands already sold which did not
form part of its stock-in-trade is not correct. In the
present case, the development of the entire land is an
integrated process and cannot be sub-divided into water-
tight compartments as the making of the roads and the
provisions for drainage and street lighting, etc., cannot be
related to any particular piece of land but the development
has to be made as a whole as a complete and unified scheme.
It is a case of commercial expediency and, as pointed out by
this Court in Eastern Investments Ltd. v. C.I.T.(1) :
"A sum of money expended, not of necessity and
with a view to a direct and immediate benefit
to the trade, but voluntarily and on the
grounds of commercial expediency and in order
indirectly to facilitate the carrying on of
the business, may yet be expended wholly and
exclusively for the purposes of the trade."
(approving the dictum of Viscount Cave, L.C.
in Atherton v. British Insulated & Helsby
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Cables Ltd. (10 T.C. 155, 191).
The same test has been applied in Cooke (H.M. Inspector of
Taxes v. Quick Shoe Repair Service(2), in which the
agreement by which the respondent firm purchased a shoe,
repair business provided that the vendor should discharge
all liabilities of the business outstanding at the date of
sale. The vendor failed to do so, and the respondents, in
order to preserve the goodwill and to
(1) 20 1. T. R. 1. (2) 30
T. C. 460.
in discharge of the vendor’s liabilities. It was held by
Croom Johnson, J. that the sums so paid by the respondent
firm were wholly and exclusively laid out for the purposes
of its business and were not capital expenditure and were,
therefore, allowable deductions for income-tax purposes.
It was also contended by Mr. Mitra that so far as the
expenditure incurred in development of plots already sold by
the firm is concerned, it was likely that the price paid by
the respondent-company in the contract of sale dated July 7,
1948 to the firm for taking over the assets and liabilities
of the firm had been fixed after taking into account the
obligation for the development of such plots. On this
assumption it was submitted by Mr. Mitra that the discharge
of this obligation must be attributed to the capital struc-
ture of the respondent-company’s business and cannot be
considered as an obligation incurred in connection with the
carrying on of its business. It was argued that such
expenditure must be regarded as capital in character and not
debatable to the revenue account of relevant accounting
years. In support of this proposition Counsel relied upon
the decision in Royal Insurance Company v. Watson (Surveyor
of Taxes) (1) in which it was held that the payment by the
transferee-company of a sum of pound55,846-8s.-5d. to the
manager in commutation of his annual salary was capital
expenditure since the payment formed part of the
consideration for the transfer of the business and therefore
could not be deducted. On behalf of the respondent-company
Mr. Asoke Sen ’referred to the decision of this Court in
Commissioner of Income-Tax (Central), Calcutta v. Mugneeram
Bangur & Co. (Land Department) ( 2 ) and to the: terms of
the sale deed dated July 7, 1 948 and the Schedule thereto
and argued that there was no quantification of the
obligations taken over by the respondent-company under cl. 5
of the sale deed. It was stated by Mr. Asoke Sen that the
obligations were not computed and did not form part of the
consideration of Rs. 34 lakhs and odd arrived at in the
Schedule. In our opinion, there is justification in the
argument put forward by Mr. Asoke Sen and the principle of
the decision in Royal Insurance Company v. Watson(1) has no
application to the present case. There is nothing to show
in the present case that the obligation incurred under cl. 5
of the sale deed was quantified and formed part of the
consideration amounting to Rs. 34 lakhs and odd mentioned in
the sale deed as paid by the respondent-company. We
accordingly reject the argument put forward by Mr. Mitra on
behalf of the appellants on this aspect of the case.
We next proceed to consider the question whether the full
price as recited in the sale deed should be regarded as
having been rea-
(1) 3 T.C. 500. (2) 57
I.T.R. 299.
271
lised by the respondent-company for the relevant accounting
years, mid not merely the actual cash paid by the
purchasers. The recital in the sale deed showed the
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consideration for the transfer of the property, that part of
the consideration was paid in cash and the balance was
secured by a mortgage executed by the purchasers on the;
same date. It was argued by Mr. Mitra that the amounts of
the consideration money not received in cash but which were
treated as a loan to -the purchasers and for which the lands
sold were mortgaged in favour of the respondent-company,
should be treated as constructive receipt of the money by
the respondent-company and therefore liable to be included
in the profits of the respondentcompany derived during the
respective accounting years. We are unable to accept this
argument as correct. The Memo of Consideration in the sale
deed reproduced above shows that there was cash payment of
the earnest money on August 5, 1948 (Rs. 501/-) and a cheque
was paid as part of the consideration on January 30, 1.949
for a sum of Rs. 2,407/5/6 and the balance of the amount
"secured under Security Deed of even date". It is therefore
impossible to hold in this case that there was any cash
payment by the purchasers to the respondent-company on the
date of the execution of the sale deed and the execution of
the mortgage deed on the same date by the purchasers cannot
be treated as equivalent to payment of cash. In the
circumstances found in the present case it cannot be said
that the mere giving of security for the debt by the
purchaser was tantamount to payment. We accordingly hold
that, in the circumstances of this case, the amount of
consideration not received and which the purchasers agreed
to pay in future for which lands were mortgaged in favour of
the respondent-company, cannot be considered to be taxable
income for the assessment periods in question. The view
that we have expressed is home out by the decision of the
Judicial Committee in Commissioner of Income-Tax, Bihar &
Orissa v. Maharajadhiraia of Darbhanga(1). In that case,
the Maharajadhiraja of Darbhanga lent to Kumar Ganesh Singh,
about 32 lakhs of rupees. In the assessment year in
question, the Kumar owed to Maharaja six lakhs of rupees as
interest. This he did not pay in cash, but entered into an
arrangement whereby the assessee took over various items of
property in lieu of principal and interest. One of the
items so taken over consisted of promissory notes executed
by the Kumar in favour of the Maharaja. The question was
whether this was income received by the Maharaja. In the
course of his judgment,, Lord Macmillan stated at page 161
of the Report as follows:
debtor’s own promissory notes, was clearly not
the equivalent of cash. A debtor who gives
his creditor a promissory note for the sum he
owes can in no sense be
(1) 60 I. A. 146.
272
said to pay his creditor; he merely gives him
a document or voucher of debt possessing
certain legal attributes. So far then as this
item...... is concerned the assessee did not
receive payment of any taxable income from his
debtor or indeed any payment at all. In so
holding their Lordships find themselves in
agreement with the learned judges of the High
Court who differed on this point from the
commissioner."
For the reasons already expressed, we hold
that both the questions referred to the High
Court have been rightly answered by it in
favour of the assessee and these appeals are
without merit and should be dismissed with
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costs. One set of hearing fee.
R.K.P.S.
Appeals dismissed.
273