THE ITO 3(3)(3), MUMBAI v. M/S. TAJ SERVICES P. LTD, MUMBAI

ITA 3884/MUM/2008 | 2003-2004
Pronouncement Date: 16-09-2011 | Result: Dismissed

Appeal Details

RSA Number 388419914 RSA 2008
Assessee PAN AAACT4287F
Bench Mumbai
Appeal Number ITA 3884/MUM/2008
Duration Of Justice 3 year(s) 3 month(s) 13 day(s)
Appellant THE ITO 3(3)(3), MUMBAI
Respondent M/S. TAJ SERVICES P. LTD, MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 16-09-2011
Appeal Filed By Department
Order Result Dismissed
Bench Allotted E
Tribunal Order Date 16-09-2011
Date Of Final Hearing 22-06-2011
Next Hearing Date 22-06-2011
Assessment Year 2003-2004
Appeal Filed On 03-06-2008
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH E MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI R.K.PANDA (A .M) ITA NO.3884/MUM/2008(A.Y.2003-04) THE ITO 3(3)(3) ROOM NO.672 6 TH FLOOR AAYKAR BHAVAN MK ROAD MUMBAI 20. (APPELLANT) VS. M/S. TAJ SERVICES PVT. LTD. MADLIK ROAD COLABA MUMBAI 400 001. PAN: AAACT 4287F (RESPONDENT) ITA NO.3933/MUM/2008(A.Y. 2003-04) M/S.INDITRAVEL PVT. LTD. (ERSTWHILE TAJ SERVICES PVT. LTD.) MANDLIK HOUSE MADLIK ROAD COLABA MUMBAI 400 001. PAN: AAACT 4287F (APPELLANT) VS. THE DCIT- 3(3) AAYKAR BHAVAN MK ROAD MUMBAI 20. (RESPONDENT) ASSESSEE BY : SHRI DISNESH VYAS RREVENUE BY : SHRI B.JAYAKUMAR DATE OF HEARING : 07/09/2011 DATE OF PRONOUNCEMENT : 16/0 9/2011 ORDER PER N.V.VASUDEVAN J.M ITA NO.3884/MUM/08 IS AN APPEAL BY THE REVENUE. IT A NO.3933/MUM/08 IS AN APPEAL BY THE ASSESSEE. BOTH THESE APPEALS ARE DIRECTED AGAINST THE ORDER DATED 29.02.2008 OF CIT( A)-XXXIX MUMBAI RELATING TO AY 03-04. FIRST WE SHALL TAKE UP ITA N O.3884/MUM/08 FOR CONSIDERATION. GROUND NO. 1 AND 2 RAISED BY THE RE VENUE READS AS FOLLOWS: ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) 2 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LD. CIT(A) ERRED IN ALLOWING AMOUNT OF RS.4 70 00 0 00/- BEING THE SUM PAID BY THE ASSESSEE COMPANY TO M/S. MEGAPODE AIRLI NES LTD. THE LESSEE WITHOUT APPRECIATING THAT THE PAYMENT WAS N OT ENVISAGED IN THE LEASE AGREEMENT 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LD. CIT(A) ERRED IN ALLOWING AMOUNT OF RS.4 70 00 0 00/- BEING THE SUM PAID BY THE ASSESSEE COMPANY TO M/S. MEGAPODE AIRLI NES LTD. THE LESSEE WITHOUT APPRECIATING THAT THE PAYMENT IS NOT AN EXPENSE ALLOWABLE U/S. 48(1) OF THE IT ACT. 2. THE ASSESSEE IS A COMPANY. IT IS ENGAGED IN THE BUSINESS OF RENDERING TRAVEL RELATED SERVICES AND OTHER PROFESSIONAL SERV ICES. ONE M/S.MAFATLAL FINANCE CO. LTD. (MFL) OWNED AN AIRCRAFT. BY A LEA SE AGREEMENT DATED 30.12.1994 MFL LEASED THE AIRCRAFT TO M/S.MEGAPODE AIRLINES LTD. (MAL) FOR A PERIOD OF 7 YEARS FROM 30.12.1994 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 EQUI PMENT FOR ITS USE ON LEASE FOR THE TERMS SPECIFIED IN THE LEASE SUMMARY SCHEDULE HEREUNDER WRITTEN. THE LESSEE SHALL HAVE THE OPTIO N TO RENEW THE LEASE OF THE EQUIPMENT FOR FURTHER PERIODS AS MAY B E DECIDED UPON BY THE LESSEE SUBJECT HOWEVER TO THE PROVISO THAT SU CH 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 LESS EE SHALL PAY TO THE LESSOR LEASE RENTALS AT THE RATE APPLICABLE TO THE SECONDARY LEASE PERIOD(S) SPECIFIED IN THE LEASE SUMMARY SCHEDULE H EREINWRITTEN THE OTHER TERMS AND CONDITIONS FO THE RENEWED LEASE REM AINING THE SAME AS CONTAINED IN THIS AGREEMENT FOR THE SECONDARY LE ASE PERIOD(S) ALSO. THE LEASE SUMMARY SCHEDULE IN COLUMN 5 GIVES THE TE NURE OF LEASE AS 7 YEARS. COLUMN 10 OF THE LEASE SUMMARY SCHEDULE DES CRIBES RENEWAL OPTION BUT THE DESCRIPTION OPPOSITE TO THAT SAYS N.A.. ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) 3 3. BY LETTER DT. 28.12.2001 MFL INFORMED THE ASS ESSEE THAT IT WAS AGREEABLE TO SELL THE AIRCRAFT TO THE ASSESSEE SUBJ ECT TO THE RIGHTS OF THE LESSEE MAL UNDER THE LEASE AGREEMENT DATED 30.12.19 94 AND IN PARTICULAR THE RIGHT OF MAL TO AN EXTENSION OF THE TENURE OF T HE LEASE. THE CONSIDERATION AGREED BETWEEN THE PARTIES FOR SALE O F THE AIRCRAFT WAS A SUM OF RS.43 75 000 TO BE PAID BY THE ASSESSEE TO MFL. MF L ALSO INFORMED THE ASSESSEE THAT MAL HAD REFURBISHED THE AIRCRAFT AT A COST OF RS.3.18 CRORES TO MAKE IT AIRWORTHY AND THAT THIS SUM HAS TO BE REIMB URSED TO THEM BY THE ASSESSEE. THE ASSESSEE AGREED TO THE PROPOSAL OF S ALE OF AIRCRAFT BY MFL TO IT. 4. ON 15.1.2002 MFL RAISED AN INVOICE ON THE ASSE SSEE FOR SALE OF THE AIRCRAFT. ON 1.3.2002 THE DIRECTORATE GENERAL OF C IVIL AVIATION ISSUED A CERTIFICATE OF REGISTRATION REGISTERING ASSESSEE A S THE OWNER OF THE AIRCRAFT. THE CERTIFICATE ALSO RECOGNISES THAT THE OPERATOR O F THE AIRCRAFT IS MAL. 5. THE ORIGINAL PERIOD OF LEASE UNDER THE LEASE AG REEMENT DATED 30.12.1994 WAS A PERIOD OF 7 YEARS. THE ORIGINAL PERIOD OF LE ASE WOULD THUS COME TO AN END ON 29.12.2001. THE DATE OF SALE OF THE AIRCRAF T BY MFL TO THE ASSESSEE ACCORDING TO THE ASSESSEE WAS ON 28.12.2001. BY LE TTER DT. 6.2.2002 THE ASSESSEE INFORMED MAL THAT IT WAS PROPOSING TO SELL THE AIRCRAFT TO AN OVERSEAS BUYER FREE FROM ALL ENCUMBRANCES AND NEGOT IATIONS ARE IN AN ADVANCED STAGE. SINCE THE AIRCRAFT WAS PROPOSED TO BE SOLD FREE OF ENCUMBRANCES THE ASSESSEE PROPOSED TO FORECLOSE TH E LEASE ARRANGEMENT AND REQUESTED MAL TO HANDOVER THE AIRCRAFT. THE AS SESSEE GAVE THREE MONTHS NOTICE OF TERMINATION AND INFORMED MAL THAT THE TERMINATION WOULD BE EFFECTIVE 6.5.2002. 6. BY LETTER DATED 7.2.2002 MAL INFORMED THE ASSE SSEE THAT IT WAS NOT AGREEABLE TO SURRENDER OF LEASEHOLD RIGHTS AS THEY HAD NOT VIOLATED TERMS OF ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) 4 THE LEASE AGREEMENT. MAL MADE A COUNTER OFFER IN T HIS LETTER THAT IT WAS LIKELY TO LOSE PROFITS IN CASE PREMATURE TERMINATIO N OF LEASE AND QUANTIFIED THE SAME AT RS.5.19 CRORES (QUANTIFICATION CALCULAT ION ENCLOSED ALONG WITH THE LETTER) AND IN CASE THE SAID SUM IS PAID IT WAS AGREEABLE TO FORECLOSURE THE LEASE. MAL ALSO DEMANDED THE SUM OF RS.3.18 CR ORES IT SPENT ON REFURBISHMENT OF THE AIRCRAFT. 7. THE ASSESSEE BY ITS LETTER DATED 9.2.2002 OFFERE D TO GIVE RS.4.7 CRORES AS COMPENSATION FOR PREMATURE CLOSURE OF THE LEASE AGREEMENT PROVIDED POSSESSION OF THE AIRCRAFT IS HANDED OVER WITHOUT W AITING FOR 3 MONTHS NOTICE PERIOD. BY LETTER DT.11.2.2002 MAL AGREED TO THE T ERMINATION OF LEASE AGREEMENT SUBJECT TO PAYMENT OF RS.4.70 CRORES AS C OMPENSATION. MAL ALSO AGREED TO DELIVER THE AIRCRAFT IN GOOD WORKING COND ITION ON OR BEFORE 6.5.2002. 8. THOUGH THERE WAS AN AGREEMENT BETWEEN THE ASSES SEE AND MAL TO FORECLOSE THE LEASE AND SURRENDER POSSESSION OF AIR CRAFT ON PAYMENT OF COMPENSATION OF RS.4 70 CRORES FOR PREMATURE TERMIN ATION OF LEASE BY LEASE AGREEMENT DATED 25.2.2002 BETWEEN THE ASSESSEE AS O WNER AND LESSOR OF THE AIRCRAFT AND MAL AS THE LESSEE THE LEASE PERIOD O F THE AIRCRAFT TO MAL WAS EXTENDED BY 5 YEARS EFFECTIVE FROM 30 TH DEC.2001. 9. ON 15.4.2002 THE ASSESSEE SOLD THE AIRCRAFT TO ONE M/S.CONAIR JET SALES INC. FOR A SALE CONSIDERATION OF RS.8 92 87 147. S INCE THE TRANSFER BY WAY OF SALE OF THE AIRCRAFT TOOK PLACE ON 15.4.2004 FALLIN G WITHIN THE PREVIOUS YEAR RELEVANT TO AY 03-04 THE CAPITAL GAIN ON SUCH TRAN SFER WAS OFFERED TO TAX BY THE ASSESSEE IN ITS RETURN OF INCOME FOR AY 03-04. THE FOLLOWING WAS THE COMPUTATION OF SHORT TERM CAPITAL GAIN ON SALE OF T HE AIRCRAFT. SALE CONSIDERATION RECEIVED ON SALE OF AIRCRAFT RS.8 92 87 147 LESS: COST OF ACQUISITION (WRITTEN DOWN VALUE) RS . 34 66 920 ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) 5 COST OF IMPROVEMENT (REFURBISHMENT) RS. 3 18 09 045 EXPENSES ON TRANSFER (COMPENSATION PAID FOR PREMATURE TERMINATION OF LEASE RIGHTS) RS.4 70 00 0 00 RS.8 22 75 965 SHORT TERM CAPITAL GAIN RS. 70 11 182 --------------------- 10. AS CAN BE SEEN FROM THE ABOVE COMPUTATION OF S HORT TERM CAPITAL GAIN THE SUM OF RS.4 70 00 000/- PAID TO MAL AS COMPENSA TION FOR PREMATURE TERMINATION OF LEASE WAS CLAIMED AS A DEDUCTION U/S .48(I) OF THE ACT AS EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY IN CONN ECTION WITH TRANSFER OF THE CAPITAL ASSET. THE DISPUTE RAISED BY THE REVE NUE IN GROUND NO.1 AND 2 IS REGARDING THE CORRECTNESS OF THE ORDER OF THE CI T(A) IN ALLOWING THE SAME AS DEDUCTION WHILE COMPUTING CAPITAL GAIN AS EXPENDITU RE INCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH TRANSFER OF THE CAPI TAL ASSET. 11. THE AO REJECTED THE CLAIM OF THE ASSESSSEE FOR DEDUCTION ON ACCOUNT OF COMPENSATION PAID TO MAL AS EXPENDITURE INCURRED IN CONNECTION WITH THE TRANSFER WHILE COMPUTING CAPITAL GAINS FOR THE FOL LOWING REASONS: 1. MFL HAD RECEIVED A SUM OF RS.17.51 CRORES AS LEASE RENTALS FROM MAL TILL SALE OF THE AIRCRAFT TO THE ASSESSEE. THUS ON SALE OF THE AIRCRAFT FOR RS.43.75 LACS TO THE ASSESSEE AND THE LEASE RENTALS EARNED ON LEASE OF THE AIRCRAFT TO MAL MFL HAD RECOVERED THE ENTIRE C OST. THEREFORE IT WAS A GOOD SOUND BUSINESS PROPOSAL FOR MFL TO SELL THE AIRCRAFT FOR RS.43.75 LACS. IT WOULD SELL THE AIRCRAFT TO ANY P ERSON EITHER THE ASSESSEE OR MAL. ACCORDING TO THE AO IF MAL HAD A CQUIRED THE AIRCRAFT FROM MFL AND EVENTUALLY SOLD IT THE DIFFE RENCE BETWEEN THE SALE CONSIDERATION AND COST + COST OF IMPROVEMENT W OULD HAVE BEEN TAXED AS PROFIT ON SALE OF ASSET. 2. ACCORDING TO THE AO THE ASSESSEE AND MAL BELONGED T O THE SAME GROUP OF COMPANIES. THE ASSESSEE THEREFORE BOUGHT THE AIRCRAFT PAID FOR THE IMPROVEMENT EXPENSES AND THE SURPLUS RECEIV ED WAS ITS PROFITS. ACCORDING TO THE AO MAL HAD HUGE CARRIED FORWARD L OSSES AND THEREFORE THE ASSESSEE SHIFTED PART OF THE PROFIT I T GAINED ON SALE OF THE ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) 6 AIRCRAFT TO MAL INSTEAD RETAINING THE ENTIRE PROFIT S 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 TRANSACT ION BECAUSE THE TERMINATION OF THE LEASE OF MAL BY THE ASSESSEE WAS ON 6.2.02 WHEREAS THE RENEWAL LEASE AGREEMENT WITH MAL WAS EN TERED INTO ONLY ON 25.2.2002 AND EVEN THIS LEASE AGREEMENT DID NOT CONTAIN CLAUSES FOR TERMINATION OF THE LEASE AND THE MONETARY COMPE NSATION QUANTIFIED AND AGREED BETWEEN THE PARTIES. 4. IN A NUTSHELL THE GROUP HAS ACCOMMODATED MAFATLAL FINANCE AND ALSO DECIDED TO SELL OFF THE AIRCRAFT. IT COULD VERY WE LL BE THAT M/S. MAFATLAL FINANCE COULD HAVE BROKERED THE SALE OF THE AIRCRAF T IN A MUTUALLY BENEFICIAL WAY SO AS TO ALSO AVOID TAXATION. THIS CAN BE SAFELY PRESUMED AS M/S. MAFTLAL FINANCE AGREED TO TRANSFER THE AIRCRAFT ON 28/12/01 AND ALSO DECIDED TO TERMINATE THE LEASE WI TH MAL ON 06/02/2002 WHICH WAS EVEN BEFORE THE ASSESSEE ACQU IRING THE AIRCRAFT ON 31/3/2002 FROM M/S. MAFATLAL FINANCE. MOREOVER MAL IN ITS ACCOUNTING YEAR 2002-03 RELEVANT TO A.Y 2003-04 HAS DECLARED A LOSS AS PER PROFIT AND LOSS ACCOUNT OF RS.82 00 000 /- EVEN AFTER INCLUSION OF COMPENSATION FOR SURRENDER OF LEASE RI GHTS RECEIVED FROM THE ASSESSEE COMPANY. EVENTUALLY A NET LOSS OF RS. 9.87 LACS HAS BEEN COMPUTED IN THE COMPUTATION OF INCOME. THUS IT IS SEEN THAT THE PROFIT ON SALE OF AIRCRAFT HAS BEEN CONVENIENTLY DIVERTED TO MAL WHICH AS DISCUSSED ABOVE HAS SUFFERED HUGE LOSSES THEREBY AV OIDING PAYMENT OF LEGITIMATE TAXES ON THE PROFIT ARISING TO THE GROUP OUT OF THE SALE OF THE AIRCRAFT. ON THE ABOVE OBSERVATIONS AT POINT 4 ABOVE WE HAVE TO STATE THAT THERE ARE FACTUAL INACCURACIES. FIRSTLY THE PROPOSED TERMIN ATION OF LEASE BY MFL WAS BY ITS LETTER DATED 7.12.2000 WHEN IT GOT A PROPOSA L FOR PURCHASE OF AIRCRAFT BY ONE MILES AVIATION LTD. IN THAT LETTER MFL HAD OFFERED RS.5.50 CRORES AS ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) 7 COMPENSATION FOR PREMATURE TERMINATION OF THE LEASE . THIS OFFER DID NOT FRUCTIFY. ON 28.12.2001 THE PROPOSAL FOR SALE OF THE AIRCRAFT BY MFL TO THE ASSESSEE WAS MADE AND THE SAME WAS ACCEPTED AND ACT ED UPON. ON 15.1.2001 MFL RAISED AN INVOICE FOR SALE OF THE AIR CRAFT. THE AO SAYS THAT THE AIRCRAFT WAS SOLD ONLY ON 31.3.2002. THIS CONC LUSION IS BASED ON THE CERTIFICATION OF REGISTRATION OF OWNERSHIP OF THE A IRCRAFT ISSUED BY THE DIRECTOR OF CIVIL AVIATION DATED 1.3.2002 BUT WRONGLY REFERR ED TO AS 31.3.2002 BY THE AO. THUS THE SALE OF THE AIRCRAFT WAS COMPLETED MU CH EARLIER TO 31.3.2002 AND THE CONCLUSION OF THE AO IN THIS REGARD ARE ERR ONEOUS. 12. THE ASSESSEES PLEA BEFORE THE AO WAS THAT THE PAYMENT MADE TO MAL FOR SURRENDER OF LEASE RIGHTS OVER THE AIRCRAFT WAS AKIN TO SURRENDER OF TENANCY RIGHTS BY A TENANT WHEN THE PROPERTY IS SOL D BY THE OWNER AND SUCH PAYMENTS ARE ALLOWED AS DEDUCTION U/S.48(I) WHILE C OMPUTING CAPITAL GAIN. THE AO HOWEVER REJECTED THE ABOVE PLEA AND HE HELD THAT WHEN THE LANDLORD PAYS TENANT MONEY FOR SURRENDER OF TENANCY RIGHT TH AT 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 RS.4 70 00 000/- PAID TO MAL AS COMPENSATION FOR PREMATURE TERMINATION OF LEASE WAS CLAIMED AS A DED UCTION U/S.48(I) OF THE ACT AS EXPENDITURE INCURRED WHOLLY AND EXCLUSIVEL Y IN CONNECTION WITH TRANSFER OF THE CAPITAL ASSET WHILE COMPUTING CAPI TAL GAIN. 14. BEFORE CIT(A) THE ASSESSEE SUBMITTED AS FOLLO WS: 1. ON THE ALLEGATION OF THE AO THAT IF MAL HAD ACQUIRE D 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 COM PUTATION OF INCOME OF THE ASSESSEE AND MAL AFTER REMOVING THE EFFECT OF T HE AFOREMENTIONED ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) 8 TRANSACTION. THE SAME IS ANNEXED AS ANNEXURE TO THI S 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 RS .8 92 87 147/- AS PRICE ON SALE OF AIRCRAFT ONLY BECAUSE THE LEASE OF MAL WAS TERMINATED AND POSSESSION OF THE AIRCRAFT GIVEN TO THE PURCHAS ER AND THEREFORE THE COMPENSATION PAID TO MAL WAS REASONABLE AND FAIR. 3. ON THE LEGAL ISSUE OF ALLOWABILITY OF THE AMOUNT PA ID TO MAL AS DEDUCTION U/S.48(1) OF THE ACT THE ASSESSEE SUBMIT TED THAT THE AO HAS ALSO POINTED OUT THAT THERE IS NO CLAUSE IN THE LEASE AGREEMENT BETWEEN THE ASSESSEE AND MAL PROVIDING FOR TERMINAT ION OF LEASE AND SPECIFIC VALUE FOR THE SAME. HOWEVER TAKING SUCH OBSERVATION OF THE AO TO ITS LOGICAL CONCLUSION IT WOULD MEAN THAT TH E SAID LEASE AGREEMENT WAS A WATER TIGHT AGREEMENT AND ANY PARTY WANTING TO DEVIATE THERE FROM WOULD HAVE TO COMPENSATE THE OTH ER FOR LOSSES SUFFERED. MERELY BECAUSE THERE IS NO CLAUSE FOR PR E-MATURE TERMINATION IT DOES NOT MEAN THAT NONE OF THE PART IES CAN MAKE EFFORTS TO COME OUT OF THE SHACKLES OF THE AGREEMENT. TH IS IS DEFINITELY POSSIBLE SUBJECT HOWEVER TO MUTUAL UNDERSTANDING AND CONCURRENCE OF THE INVOLVED PARTIES. 15. THE CIT(A) CALLED FOR A REMAND REPORT FROM THE AO ON THE SUBMISSIONS AND ALTERNATIVE TAX CALCULATION SUBMITTED BEFORE HI M. THE AO REITERATED HIS STAND AS REFLECTED IN THE ORDER OF ASSESSMENT. TH E CIT(A) ON A CONSIDERATION OF THE SUBMISSIONS AS WELL AS THE REMAND REPORT OF THE AO HELD AS FOLLOWS: (1) UNDER CLAUSE 4.2 OF THE AIRCRAFT SALE AGREEMENT DT. 15.4.2002 BY WHICH THE ASSESSEE SOLD THE AIRCRAFT TO CONAIR JET INC. IT WAS CLEAR THAT THE TRANSFEREE DEMANDED THE AIRCRAFT FREE OF A NY ENCUMBRANCE. ACCORDINGLY THE ASSESSEE WAS UNDER A CONTRACTUAL O BLIGATION TO DETACH THE PRE-EXISTING RIGHT OF MAL IN ORDER TO TR ANSFER THE AIRCRAFT FREE OF ANY LIEN ENCUMBRANCES ETC. THE CIT(A) THE REFORE HELD THAT THE ASSESSEE HAD TO PAY COMPENSATION TO MAL FOR SUR RENDERING ITS RIGHTS AS THE LESSEE OF THE AIRCRAFT. HAD THE APP ELLANT NOT PAID THE COMPENSATION TO MAL IT WOULD NOT HAVE BEEN ABLE T O CONCLUDE THE TRANSACTION WITH THE TRANSFEREE. ACCORDINGLY THE COMPENSATION ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) 9 PAID TO MAL FOR SURRENDERING ITS PRE-EXISTING RIGHT S AS THE LESSEE IS INEXTRICABLY CONNECTED TO THE TRANSFER OF THE AIRCR AFT. (2) THE CIT(A) ALSO HELD THAT THE DECISION RELIED UPON BY THE AO IN REJECTING THE CLAIM OF THE ASSESSEE VIZ. CIT VS. R.RANGA SETTY 159 ITR 797(KAR) AND CIT VS. T. SRINIVASA RAO 166 ITR 5 93 (AP) WERE DISTINGUISHABLE. THE CIT(A) FOUND THAT IN THOSE CA SES THE ASSESSEE HAD PAID COMPENSATION TO ITS TENANTS FOR VACANT TH E POSSESSION OF THE LAND CONSEQUENT TO COMPULSORY ACQUISITION OF L AND BY THE GOVERNMENT. THUS THERE WAS NO STATUTORY OR CONTRA CTUAL 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 N OT ALLOWED. HE HELD THAT IN THE CASE OF THE ASSESSEE AS PER CLA USE 4.2 OF THE AIRCRAFT SALE AGREEMENT THERE WAS A CONTRACTUAL OB LIGATION ON THE ASSESSEE TO TRANSFER THE AIRCRAFT FREE OF ANY ENCUM BRANCES LIEN ETC. THE CIT(A) ALSO FOUND THAT THE FOLLOWING DECISIONS RELIED UPON BY THE ASSESSEE SUPPORTED THE CLAIM OF THE ASSESSEE: V IZ. - CIT VS. C.V.SOUNDARARAJAN & ANR. [150 ITR 80(MAD)] - NAOZAR CHENOY VS. CIT [234 ITR 95 (AP) ] - CIT VS. A. VENKATARAMAN & ORS. [137 ITR 846(MAD)] - CI VS. SHAKUNTALA RAHESHWAR [160 ITR 840(DEL)] IN ALL THE ABOVE CASES THE EXPENSES INCURRED OR CO MPENSATION PAID TO THE TENANT FOR VACATING AND HANDING OVER POSSESSION WAS HELD TO BE EXPENSES INCIDENTAL TO THE TRANSFER IN ORDER FOR TH E ASSESSEE TO TRANSFER THE LAND FREE OF ANY ENCUMBRANCES. ACCORDINGLY FO LLOWING THE RATIO LAID DOWN IN THOSE DECISIONS THE CIT(A) WAS OF THE VIEW THAT COMPENSATION PAID BY THE ASSESSEE TO MAL WAS TO BE ALLOWED AS DEDUCTION UNDER SECTION 48(I) OF THE ACT. (3) THE CIT(A) ALSO FOUND THAT ALL FLYING LICENSES AND PERMISSIONS WERE WITH MAL. THE COMPENSATION RECEIVED BY MAL WAS REFL ECTED AS BUSINESS INCOME IN THE HANDS OF MAL. (4) IF THE AIRCRAFT WAS DIRECTLY PURCHASED BY MAL AND S UBSEQUENTLY SOLD TO CONAIR JET INC. THE TAX TREATMENT WOULD HAVE BEEN MORE BENEFICIAL TO THE ASSESSEE OR OTHER GROUP COMPANIES. IN THIS REG ARD THE CIT(A) PERUSED THE ALTERNATIVE COMPUTATION OF INCOME (COI) FURNISHED BY ASSESSEE. UPON PERUSAL OF THE SAME WAS OF THE VIE W THAT IF THE CONTENTIONS OF THE AO WERE TO BE ACCEPTED (ABOUT PU RCHASING OF AIRCRAFT DIRECTLY BY MAL AND SUBSEQUENTLY SELLING I T) THEN NOT ONLY THERE WOULD NOT HAVE BEEN ANY ADDITIONAL TAX LIABIL ITY IN THE HANDS OF MAL BUT ALSO THE SUM OF RS. 70 11 182/- PRESENTLY O FFERED TO TAX AS SHORT TERM CAPITAL GAINS BY THE ASSESSEE WOULD HAVE NOT BEEN SUBJECT TO ANY TAX. ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) 10 (5) IRRESPECTIVE OF THESE CONSIDERATIONS THE CIT(A) WA S OF THE VIEW THAT ONCE IT IS ESTABLISHED THAT THE ASSESSEE WAS UNDER A CONTRACTUAL OBLIGATION TO PROVIDE THE AIRCRAFT FREE OF ANY ENCU MBRANCES FOR WHICH IT HAD PAID COMPENSATION TO MAL SUCH COMPENSATION IS INEXTRICABLY INCIDENTAL TO THE TRANSFER AND HENCE ALLOWABLE AS DEDUCTION UNDER SECTION 48(I) OF THE ACT. (6) THE CIT(A) ALSO HELD THAT THE OBJECTION OF THE AO I N HIS REMAND REPORT THAT THE ALTERNATIVE COI PROVIDED DURING THE COURSE OF APPELLATE PROCEEDINGS IS ADDITIONAL EVIDENCE WHICH IS NOT PER MITTED TO BE ADMITTED UNDER RULE 46A OF THE INCOME TAX RULES 19 62 WAS UNACCEPTABLE. THE CIT(A) HELD THAT THE ALTERNATIVE COI WAS FILED IN ORDER TO REFUTE AOS CONTENTION THAT IF MAL HAD ACQ UIRED THE AIRCRAFT FROM MFL AND EVENTUALLY SOLD IT OFF THE DIFFERENCE BETWEEN THE COST + COST OF IMPROVEMENT AND THE SALE PRICE WOULD HAVE B EEN TAXED AS PROFIT ON SALE OF ASSET. THE CIT(A) ALSO HELD THAT SUCH A LTERNATIVE COI WAS SUBMITTED FOR THE FIRST TIME BEFORE CIT(A) BECAUSE THE AO HAD NEVER CONFRONTED THE ASSESSEE ABOUT THE TAX EFFECT IN THE COURSE OF ASSESSMENT PROCEEDINGS. 16. AGGRIEVED BY THE ORDER OF THE CIT(A) THE REVEN UE HAS RAISED GROUND NO.1 AND 2 BEFORE THE TRIBUNAL. WE HAVE HEARD THE SUBMISSIONS OF THE LEARNED D.R. AND THE LEARNED COUNSEL FOR THE ASSESS EE. THE LEARNED D.R. REITERATED THE STAND OF THE AO AS REFLECTED IN THE ORDER OF ASSESSMENT. HE ALSO TOOK US THROUGH THE VARIOUS CLAUSES OF THE LEA SE AGREEMENT AND SUBMITTED THAT THE SUM OF RS.4.70 CRORES FIXED AS C OMPENSATION 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 ASSESS EE BELONGING TO THE SAME GROUP HE POINTED OUT THAT MAL CHANGED HANDS FROM W ADIAS 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(PAGE 61 OF THE PAPER BOOK). HE ALSO GAVE A SHAREHOLDING PATTERN IN ASSESSEE(PAGE-62 OF THE PAP ER BOOK). HE SUBMITTED THAT MANY COMPANIES HOLDING SHARES IN THE ASSESSEE ARE PUBLIC LIMITED ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) 11 COMPANIES OR COMPANIES IN WHICH THE OWNERS OF THE P ALACES WHICH HAVE BEEN CONVERTED INTO HOTELS HAVE STAKE. ACCORDING TO HIM THERE IS NO COMMON MANAGEMENT OR CONTROL SO AS TO DRAW ANY ADVERSE IN FERENCE REGARDING ANY ULTERIOR MOTIVE FOR CARRYING OUT THE IMPUGNED TRANS ACTION. IN SHORT HIS SUBMISSION WAS THAT THE AO PROCEEDED ON SURMISES AN D CONJECTURES. THE AO CANNOT REWRITE BUSINESS TRANSACTION. THE AO HAS NOT ALLEGED ANY MALAFIDES OR LACK OF BONAFIDES. HE ALSO RELIED ON THE COMPUTATION OF INCOME HAD THE SALE OF THE AIRCRAFT BEEN MADE TO MAL BY MF L AND RESOLD BY MAL AS FILED BEFORE CIT(A) AND THE FINDINGS OF THE CIT(A) ON SUCH REVISED COMPUTATION OF INCOME WHICH PROVES BEYOND DOUBT THA T THERE WAS NO TAX PLANNING OR AVOIDANCE INVOLVED. 18. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE PROVISION OF SECTION 48 OF THE ACT READS AS UNDER: 48. THE INCOME UNDER THE HEAD CAPITAL GAINS SHA LL BE COMPUTED BY DEDUCTING FROM THE FULL VALUE OF THE CO NSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER OF THE CAPITAL ASSET THE FOLLOWING AMOUNTS NAMELY:- (I) EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH THE TRANSFER; (II).. FROM THE ADMITTED FACTS WHICH WE HAVE NARRATED ABOV E IT IS CLEAR THAT MAL HAD A RIGHT TO RENEW THE LEASE AGREEMENT WITH MFL A ND COULD RETAIN POSSESSION OF THE AIRCRAFT. THE ASSESSEE PURCHASED THE AIRCRAFT FROM MFL SUBJECT TO THE RIGHTS OF MAL UNDER THE LEASE AGREEM ENT BETWEEN MFL AND MAL. THE ASSESSEE WAS THEREFORE UNDER AN OBLIGATIO N IF MAL HAD DEMANDED EXTENSION OF THE LEASE TO ACCEDE TO SUCH DEMAND. I T IS ALSO CLEAR THAT THERE WAS BARGAIN BETWEEN THE ASSESSEE AND MAL BEFORE ULT IMATELY THE SUM OF RS.4.70 CRORES WAS DECIDED AS COMPENSATION TO BE PA ID TO MAL FOR TERMINATION OF ITS LEASEHOLD RIGHTS AND SURRENDERIN G POSSESSION OF THE ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) 12 AIRCRAFT TO THE PURCHASER OF THE AIRCRAFT FROM THE ASSESSEE. THE BARGAIN WAS COMPLETED ON 11.2.2002 WHEN MAL AGREED TO DELIVER POSSESSION OF THE AIRCRAFT BY 6.5.2002. IT IS FOR THIS REASON THAT T HE RENEWAL OF THE LEASE HAD TO BE SIGNED BETWEEN THE ASSESSEE AND MAL ON 25.2.2002 SO THAT POSSESSION OF THE AIRCRAFT BY MAL TILL DELIVERY TO THE PURCHASER IS MADE REMAINS LAWFUL. WE ARE ALSO OF THE VIEW THAT THERE CAN BE NO COMPLAINT REGARDING COMPENSATION PAID TO MAL BEING EXCESSIVE. IT IS FOR THE PARTIES TO THE AGREEMENT TO DECIDE ON THE RIGHTFUL COMPENSATION. THERE IS NO MATERIAL AVAILABLE ON RECORD TO SHOW THAT THERE WAS ANY ULTERIOR MOTIVE IN PAYING T HE SUM OF RS.4.70 CRORES AS COMPENSATION BY THE ASSESSEE TO MAL FOR SURRENDE RING LEASEHOLD RIGHTS AND DELIVERING POSSESSION OF THE AIRCRAFT. 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 UN DER SECTION 48(I) OF THE ACT. - CIT VS. C.V.SOUNDARARAJAN & ANR. [150 ITR 80(MAD)] - NAOZAR CHENOY VS. CIT [234 ITR 95 (AP) ] - CIT VS. A. VENKATARAMAN & ORS. [137 ITR 846(MAD)] - CI VS. SHAKUNTALA RAHESHWAR [160 ITR 840(DEL)] WE ARE ALSO IN AGREEMENT WITH THE CONCLUSION OF THE CIT(A) THAT THE COMPENSATION PAID TO MAL FOR SURRENDERING ITS PRE-E XISTING RIGHTS AS THE LESSEE IS INEXTRICABLY CONNECTED TO THE TRANSFER OF THE AIRCRAFT AS ONE OF THE CONDITION 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 T HERE WAS ANY MOTIVE TO AVOID TAX. WE THEREFORE DO NOT FIND ANY GROUNDS TO INTERFERE WITH THE ORDER OF ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) 13 THE CIT(A). CONSEQUENTLY GR.NO.1 AND 2 RAISED BY THE REVENUE ARE DISMISSED. 19. GROUND NO.3 RAISED BY THE REVENUE READ AS FOLLO WS: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) ERRED IN DELETING AMOUNT OF RS. 2 41 00 000/ - BEING THE SUM PAID TO DRIVERS OF THIRD PARTY WITHOUT APPRECIATING THAT THE DRIVERS WERE NOT EMPLOYEES OF THE COMPANY AND HENCE IT WAS A NON BUSINESS EXPENDITURE. 20. THE ASSESSEE AS PART OF ITS BUSINESS OF RENDERI NG SERVICES PROVIDES CARS TO THE TAJ GROUP OF HOTELS AND IN THE COURSE THERE OF HAD ENGAGED THE SERVICES OF VARIOUS OPERATORS AT DIFFERENT POINTS O F TIME FOR PROVIDING HIGH QUALITY VEHICLES ALONGWITH DRIVERS. DURING THE P ERIOD 1998 TO 1999 THE ASSESSEE HAD ENGAGED THE SERVICES OF M/S. D.V. TRAN SPORT CONSULTANTS & OPERATORS (D.V.TRANSPORT) AND M/S. UNITY TRAVELS ( UNITY). UPON CANCELLATION OF THE CONTRACT WITH THE AFORESAID OPE RATORS BY THE ASSESSEE THESE OPERATORS IN TURN TERMINATED THE EMPLOYMENT OF THE CONCERNED DRIVERS. AKHIL BHARATIYA MATHADI & GENERAL KAMGAR UNION(HEREINAFTER REFERRED TO AS THE UNION) WHO FORMERLY REPRESENTE D THE SAID WORKMAN FILED A COMPLAINT OF ALLEGED UNFAIR LABOUR PRACTICES BE ING COMPLAINT (ULP) NO.540 OF 1998 IN THE V LABOUR COURT MUMBAI AGAI NST THE PREVIOUS EMPLOYER OF THE WORKMAN AND M/S. TAJ SERVICES PVT. LTD. AS WELL AS TAJ MAHAL HOTEL INTER ALIA DEMANDING THAT THE SEVERAL W ORKMEN LISTED THEREIN INCLUDING THE WORKMAN BE TREATED AS EMPLOYEES OF T AJ MAHAL HOTEL OR IN THE ALTERNATIVE AS EMPLOYEES OF M/S. TAJ SERVICES PVT.LTD. AND OBTAINED AN EXPARTE ORDER OF STATUS QUO FROM THE LABOUR COURT ON 25/9/1998. ACCORDING TO THESE DRIVERS IT WAS THE ASSESSEE WHO WAS THEIR DE-FACTO EMPLOYER AND NOT OF D.V. TRANSPORT OR UNITY BECAUS E IT WAS THE ASSESSEE WHO HAD ULTIMATE CONTROL OVER THE DRIVERS THEIR WO RKING HOURS TERMS AND ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) 14 CONDITIONS UNIFORM ETC. DURING THE PENDENCY OF T HE PROCEEDINGS IN COMPLAINT (ULP) NO.540 OF 1998 WITH A VIEW TO AMIC ABLY RESOLVE THE DISPUTE THE PREVIOUS EMPLOYER OF THE WORKMAN AND THE UNION AS WELL AS THE ASSESSEE FILED A JOINT PURSHIS IN THE LABOUR COURT IN THE SAID COMPLAINT WHEREBY THE UNION AND THE WORKMAN ACCEPTED THAT THE WORKMAN AS WELL AS OTHER DRIVERS CONCERNED THEREIN WERE NOT EMPLOYEES OF THE ASSESSEE OR INDIAN HOTELS COMPANY LIMITED OR TAJ MAHAL HOTEL AND HAD NO CLAIM WHATSOEVER AGAINST ANY OF THE SAID ENTITIES. THE ASSESSEE IN TURN GAVE TO THE UNION AND THE CONCERNED WORKMEN AN UNDERTAKING INTER ALIA TO THE EFFECT THAT IN THE EVENT OF ANY NEW CONTRACT BEING AWARDED FOR CAR HIR E OPERATIONS IN FUTURE THE ASSESSEE WOULD INSERT A CLAUSE IN SUCH FRESH CO NTRACT TO ENSURE THAT THE NEW OPERATORS SHALL GRANT EMPLOYMENT IN THEIR SERVI CES TO THE CONCERNED WORKMEN. ON THE BASIS OF THE SAID UNDERTAKING AND OTHER ASSURANCES SET OUT IN THE PURSHIS THE UNION UNCONDITIONALLY WITHD REW THE SAID COMPALINT (ULP) NO.540 OF 1998 AND THESE FACTS ARE RECORDED B Y THE HONBLE COURT IN ITS ORDER DATED 19.12.1998. 21. IN KEEPING WITH THE SPIRIT OF THE SETTLEMENT A ND UPON CANCELLATION OF THE CONTRACT WITH D.V TRANSPORT AND UNITY THE ASSE SSEE CONTINUED WITH THE SAME SET OF DRIVERS UNDER ITS NEW OPERATORS M/S. RA MNIRANJAN KEDIA FINANCE PVT. LTD. (RNK) AND M/S. SANJAY AUTO SERV ICES (SUNJAY). HOWEVER THE REQUIREMENT OF CONTINUOUS EMPLOYMENT HAD PUT A CONSIDERABLE RECURRING BURDEN ON THE ASSESSEE. IN A COMPETITIVE MARKET I T 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 REFERE NCE IN ORDER TO TIDE OVER THIS ANNUAL RECURRING COST AND BRING ABOUT BETTER P ROFESSIONALISM THE ASSESSEE ENTERED INTO A SETTLEMENT WITH ITS DRIVERS PROVIDING FOR PAYMENT OF CERTAIN COMPENSATION TO THEM IN LIEU OF THEIR GIVIN G UP THEIR RIGHT TO EMPLOYMENT AND OTHER RIGHTS. THE INDIVIDUAL AGREEM ENTS WITH WORKERS WERE ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) 15 DULY RECORDED IN ACCORDANCE WITH THE APPLICABLE LAW IN THE REQUIRED FORM. THUS THE AUTHENTICITY OF THESE AGREEMENTS IN ACCORD ANCE WITH THE PROVISIONS OF THE RELEVANT LAW APPLICABLE IS NOT IN DISPUTE. ACCORDING TO THE ASSESSEE SUCH LUMPSUM EXPENDITURE BENEFITED THE ASSESSEE IN THE FOLLOWING WAYS: A) THE COMPANY GOT RID OF OLD DRIVERS WHO WERE HIG HLY PAID. B) THE COMPANY ACHIEVED SUBSTANTIAL COST SAVING IN FUTURE SALARY AND OTHER INCIDENTAL COST OF DRIVERS. C) THE COMPANY INCURRED THIS EXPENDITURE PURELY TO REDUCE ITS WAGE BILL IN FUTURE YEARS AND SUCH EXPENDITURE WAS INCURRED IN T HE COURSE OF BUSINESS ONLY. D) THE OPERATOR REDUCED THE CAR HIRE CHARGES RESUL TING IN SAVING OF OVER RS.3 PER KM. 22. ACCORDINGLY THE ASSESSEE PAID A SUM OF RS.2.4 1 CRORES TO VARIOUS WORKMEN IN FULL AND FINAL SETTLEMENT OF THEIR CLAIM S UNDER THE PURSIS WHICH WAS MADE RULE OF THE HONBLE LABOUR COURT. THE AMO UNT PAYABLE OF RS. 2.41 CRORES WAS DULY DISCHARGED BY THE ASSESSEE AND CLAI MED AS BUSINESS EXPENSE. THE ASSESSEE ALSO POINTED OUT THAT AS PER ITS UNDERSTANDING WITH THE NEW OPERATORS VIZ. RNK AND SANJAY IT WAS AGR EED THAT PURSUANT TO SETTLEMENT OF THESE DRIVERS THE COST OF OPERATING V EHICLES WOULD GET REDUCED IN THE HANDS OF RNK AND SANJAY AND THAT SUCH SAVING WOULD BE PASSED OVER TO THE ASSESSEE IN THE FORM OF REDUCED OPERATING RA TES THEREAFTER. THE ASSESSEE ALSO FURNISHED A CALCULATION BASED ON PAST UTILIZATION AND ARRIVED AT A PAYBACK PERIOD OF AROUND 3 YEARS WITHIN WHICH THE UPFRONT EXPENDITURE INCURRED BY THE ASSESSEE IN SETTLING THE DRIVERS C LAIM WOULD GET RECOUPED OUT OF REDUCED CAR HIRE CHARGES PAYABLE TO RNK AND SANJ AY. 23. THE ASSESSEE SUBMITTED THAT THE PAYMENT OF RS. 2 41 00 000/- IS IN THE NATURE OF COMPENSATION PAID BY THE ASSESSEE TO ITS OWN DRIVERS SINCE BY VIRTUE OF THE PROCEEDINGS BEFORE THE HONBLE LABOUR COURT THE CONCERNED ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) 16 DRIVERS HAD BECOME EMPLOYEES OF THE ASSESSEE AND TH E ASSESSEE WAS REQUIRED TO PROVIDE THEM CONTINUOUS EMPLOYMENT. THUS THEIR RELATIONSHIP WITH RNK AND SANJAY CEASED TO EXIST IN THE EYES OF LAW. EVE N IF THE PROCEEDINGS BEFORE THE HONBLE LABOUR COURT ARE IGNORED SINCE THE ASS ESSEE HAD ULTIMATE CONTROL OVER THE DRIVERS THE SAID DRIVERS ARE IN RE ALITY EMPLOYEES OF THE APPELLANT. THE ASSESSEE PLACED RELIANCE ON THE DEC ISION OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. PRITHVIRA J BHOORCHAND (280 ITR 94) WHEREIN IT HAS BEEN HELD THAT WHERE THE LABOURERS E NGAGED ON A CONTRACT BASIS UNDER CONTROL OF THE ASSESSEE THEY WERE DEEM ED TO BE THE ASSESSEES EMPLOYEES. 24. THUS IT WAS SUBMITTED THAT THE DRIVERS RETRENC HED 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 RS. 2 41 00 000/- PAID TO ITS DRIVERS AS DEDUCTIBLE REVENUE EXPENDITURE. 25. HOWEVER THE AO DISALLOWED THE CLAIM OF THE AS SESSEE OF THE AFORESAID PAYMENT AS DEDUCTIBLE REVENUE EXPENDITURE ON THE FO LLOWING GROUNDS: A) THE EXPENDITURE IS NOT INCIDENTAL TO THE ASSESSEES BUSINESS WHICH IS THAT OF HIRING CARS FROM THE TAJ BUSINESS HOTELS. THE PAYMENT IS NOT INCIDENTAL TO EARNING THE RECEIPTS / INCOME FOR THE ASSESSMENT YEAR 2003-04. B) THERE IS NO BASIS FOR THE REVISED REDUCED RATES QUO TED BY RNK AND SANJAY. C) THE DRIVERS HAD SOUGHT SETTLEMENT AND IT DID NOT MA TTER WHETHER RNK PAID FOR THE SAME OR THE ASSESSEE. THUS THERE WAS NO OBLIGATION ON THE ASSESSEE TO PAY. ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) 17 D) SINCE THE ASSESSEE HAD CONTESTED THE MATTER BEFORE THE HONBLE LABOUR COURT THERE WAS NO INTENTION ON ITS PART TO ENTERT AIN THE DRIVERS EMPLOYED BY RNK AND SANJAY. E) THE EXPENDITURE HAS BEEN INCURRED IN CONNECTION WIT H ALLEGATIONS OF UNFAIR LABOUR PRACTICES AND IS NOT ALLOWABLE AS PE R THE PROVISIONS OF THE EXPLANATION TO SECTION 37(1) OF THE ACT. F) DECISIONS RELIED UPON BY THE ASSESSEE PERTAIN TO FA CTS WHEREIN THE EMPLOYER HAD TERMINATED THE SERVICES OF ITS OWN EM PLOYEES; HOWEVER IN THE PRESENT CASE THE COMPENSATION HAS BEEN PAID TO SOMEBODY ELSES EMPLOYEES. 26. BEFORE CIT(A) THE ASSESSEE REITERATED ITS STAN D THAT THE EXPENDITURE HAS BEEN INCURRED TO RETRENCH OLD DRIVERS WHO HAVE BEEN HELD TO BE PERMANENT EMPLOYEES OF THE APPELLANT BY THE HONBL E LABOUR COURT AND EVEN OTHERWISE THEY ARE ITS EMPLOYEES IN VIEW OF TH E DECISION OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF PRITHVIRAJ BHOORC HAND (SUPRA). IT WAS SUBMITTED UPON RETRENCHMENT OF THE OLD DRIVERS BY P AYMENT OF ONE TIME LUMPSUM COMPENSATION THE ASSESSEET HAS BENEFITED I N THE FOLLOWING WAYS: A) THE COMPANY GOT RID OF OLD DRIVERS WHO WERE HIGHLY PAID. B) THE COMPANY ACHIEVED SUBSTANTIAL COST SAVINGS IN FU TURE SALARY AND OTHER INCIDENTAL COST OF DRIVERS. C) THE COMPANY INCURRED THIS EXPENDITURE PURELY TO RED UCE ITS WAGE BILL IN FUTURE YEARS AND SUCH EXPENDITURE WAS INCUR RED IN THE COURSE OF BUSINESS ONLY. IT WAS ARGUED THAT A LUMPSUM EXPENDITURE INCURRED I N LIEU OF RECURRING REVENUE BUSINESS EXPENDITURE SHALL BE ALLOWABLE AS A REVENUE DEDUCTION AS LAID DOWN IN SEVERAL JUDICIAL PRONOUNCEMENTS. IT W AS SUBMITTED THAT BY LETTER DATED JANUARY 13 2003 ADDRESSED TO THE APP ELLANT BY RNK IT WAS CLEARLY STATED THAT THE EXISTING RATES STAND REVISE D FROM RS.21.50 PER KM. TO RS.18.39 PER KM. WITH EFFECT FROM THE DATE OF SETTL EMENT OF DRIVERS. THUS BY ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) 18 INCURRING THE EXPENDITURE IN QUESTION SUBSTANTIAL BENEFIT ACCRUED TO THE ASSESSEE. IT WAS ARGUED THAT THE AO HAS HOWEVER N OT BROUGHT ANY EVIDENCE TO PROVE OTHERWISE. IT WAS REITERATED THAT THE SAL ARY PAID TO THE NEW DRIVERS WAS LESS THAN THE ONE PAID TO THE OLD DRIVERS WHO W 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 SECTION 37(1) OF T HE ACT WAS NOT CORRECT. IN THIS REGARD IT WAS POINTED OUT THAT THE COMPLAINT W AS 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 TH E SETTLEMENT ARRIVED AT BETWEEN THE PARTIES. IT WAS SUBMITTED THAT INTENTI ON BEHIND INSERTION OF EXPLANATION TO SEC.37(1) OF THE ACT WAS SOMETHING D IFFERENT. THIS IS EVIDENT FROM THE MEMORANDUM EXPLAINING PROVISIONS IN FINANC E (NO.2) BILL 1998 WHEREIN IT HAS BEEN STATED AS UNDER: IT IS PROPOSED TO INSERT AN EXPLANATION AFTER SUB- SECTION (I) OF SECTION 37 TO CLARIFY THAT NO ALLOWANCE SHALL BE MA DE IN RESPECT OF EXPENDITURE INCURRED BY AN ASSESSEE FOR ANY PURP OSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW. THIS PRO PSED AMENDMENT WILL RESULT IN DISALLOWANCE OF THE CLAIM MADE BY CERTAIN TAX PAYERS OF PAYMENTS ON ACCOUNT OF PROTEC TION MONEY EXTORTION HAFTA BRIBES ETC. AS BUSINESS EXPENDIT URE. IT WAS SUBMITTED THAT THE INTENTION OF THE LEGISLAT URE IN BRINGING EXPLANATION TO SECTION 37(1) ON RECORD WAS TO DISALLOW PROTECTI ON MONEY EXTORTION HAFTA BRIBES AND SUCH OTHER PAYMENTS. PAYMENT OF RETRENC HMENT COMPENSATION CAN IN NO WAY FALL INTO THIS BRACKET. 27. THE CIT(A) DELETED THE ADDITION MADE BY THE AO FOR THE FOLLOWING REASONS: A) THE ASSESSEE HAD PAID RETRENCHMENT COMPENSATIO N TO THE DRIVERS WHO HAVE BEEN CONSIDERED AS THE EMPLOYEES OF THE AS SESSEE BY THE ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) 19 ORDER OF THE LABOUR COURT MUMBAI IN DECEMBER 1998. THE CIT(A) WAS OF THE VIEW THAT ON PERUSAL OF THE AGREEMENT BETWEE N THE INDIVIDUAL EMPLOYEES AND THE ASSESSEE UNDER WHICH LUMPSUM PAYM ENT WAS MADE TO THE EMPLOYEES WHO WERE PARTIES TO THE DISPU TE BEFORE THE LABOUR COURT IT WAS CLEAR THAT IT WAS THE ASSESSEE WHO HAD ULTIMATE CONTROL OVER THE DRIVERS THEIR WORKING HOURS TERM S AND CONDITION OF HIRING AND FIRING UNIFORM ETC. THE CIT(A) RELIED ON THE DECISION OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. P RITHVIRAJ BHOORCHAND (280 ITR 94) WHEREIN IT HAS BEEN HELD T HAT THE ONE WHO HAS THE ULTIMATE CONTROL OVER THE AFFAIRS OF THE W ORKMEN IS TO BE TREATED AS THE ACTUAL EMPLOYER OF THOSE WORKMEN. A CCORDINGLY APPLYING THE RATIO LAID DOWN IN THIS DECISION THE CIT(A) HELD THAT THE DRIVERS ARE TO BE TREATED AS THE EMPLOYEES OF THE A SSESSEE FOR ALL PRACTICAL PURPOSE. THUS THE CIT(A) HELD THAT THE CO NTENTIONS OF THE AO THAT THE ASSESSEE HAS PAID COMPENSATION TO SOMEBODY ELSES EMPLOYEES IS WITHOUT ANY FORCE AND HENCE NOT CORR ECT. B) THE CIT(A) ALSO HELD THAT THE ASSESSEE BENEFITT ED IN THE FORM OF REDUCED RATES IN RESPECT OF CONTRACT FOR HIRING OF CARS FROM NEW CONTRACTORS AND THEREFORE THE PAYMENT IN QUESTION W AS AN EXPENDITURE INCURRED TO SAVE A RECURRING REVENUE EXPENDITURE. IN THIS REGARD THE CIT(A) WAS OF THE VIEW THAT THE LETTER DATED 13/01/ 2003 BY RNK TO THE ASSESSEE WHEREIN IT IS CATEGORICALLY STATED THAT FR OM THE DATE OF SETTLEMENT OF DRIVERS THE RATES SHALL STAND REVIS ED FROM RS. 21.50 PER KM TO RS.18.39 PER KM. CLEARLY PROVED THE BENEFIT T HE ASSESSEE IS LIKELY TO GET IN FUTURE. THE CIT(A) WAS OF THE VIEW THA T IT WAS SETTLED LAW THAT A LUMPSUM CONSIDERATION PAID TO AVOID OR SAVE ON TO FUTURE RECURRING EXPENDITURE IS AN ALLOWABLE DEDUCTION AND IN THIS REGARD RELIED ON THE FOLLOWING DECISIONS WHEREIN THE PROPO SITION AS STATED ABOVE HAS BEEN LAID DOWN. - CIT VS.MADRAS AUTO SERVICES P. LTD. (233 ITR 468) ( SC) - EMPIRE JUTE CO. LTD. VS. CIT (124 ITR 1) (SC) - CIT VS. BHOR INDUSTRIES LTD. (264 ITR 180)(BOM) - LIFE INSURANCE CORPORATION OF INDIA VS. CIT (119 IT R 900)(BOM) - CIT VS. ASSAM OIL CO. LTD. (154 ITR 647 )(CAL) - OVERSEAS SANMAR FINANCIAL LTD. (86 ITD 602) (MAD) C)WITH REGARD TO THE ALLEGATION AO THAT THE EXPENDI TURE HAS BEEN INCURRED IN CONNECTION WITH ALLEGATIONS OF UNFAIR L ABOUR PRACTICES THE CIT(A) HELD THAT SUBSEQUENT TO SETTLEMENT OF THE DI SPUTE THE ASSESSEE PROVIDED CONTINUOUS EMPLOYMENT TO THE DRIVERS FROM 1999 THROUGH 2002. THE RETRENCHMENT COMPENSATION WAS COMPLETELY SEPARATE AND DISTINCT FROM THE EARLIER SETTLEMENT. ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) 20 D)WITH REGARD TO THE ALLEGATION OF THE AO THAT THE EXPENDITURE CAN ALSO NOT BE DISALLOWED UNDER EXPLANATION TO SECTION 37(1 ) OF THE ACT THE CIT(A) HELD THAT THE COMPENSATION HAS BEEN PAID UND ER A CONTRACTUAL SETTLEMENT WITH THE DRIVERS WHICH BY NO MEANS CAN B E TREATED AS PAYMENT MADE IN VIOLATION OF ANY LAW. THE CIT(A) ALSO HELD THAT THE INTENTION OF THE LEGISLATURE IN BRING EXPLANATION T O SECTION 37(1) ON RECORD WAS TO DISALLOW PROTECTION MONEY EXTORTION HAFTA BRIBES AND SUCH OTHER PAYMENTS WHEREIN PAYMENT OF RETRENCHMEN T COMPENSATION CAN IN NO WAY FALL INTO THIS BRACKET. ACCORDINGL Y THIS CONTENTION OF THE AO IS ALSO NOT ACCEPTABLE. 28. AGGRIEVED BY THE ORDER OF THE CIT(A) THE REVEN UE HAS RAISED GROUND NO.3 BEFORE THE TRIBUNAL. THE LEARNED D.R. RELIED ON THE ORDER OF THE AO. IN PARTICULAR IT WAS SUBMITTED BY HIM THAT THE DECISIO N OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. PRITHIVIRAJ BHOOR CHAND (SUPRA) WAS RENDERED IN THE CONTEXT OF FULFILLMENT OF THE NUMBE R OF WORKMEN TO BE EMPLOYED BY AN ENTERPRISE TO CLAIM DEDUCTION U/S.80 -I OF THE ACT AND THAT ANALOGY CANNOT BE APPLIED TO A CASE OF PAYMENT OF C OMPENSATION FOR TERMINATION OF SERVICE OF A PERSON WHO IS NOT IN DI RECT EMPLOYMENT OF THE ASSESSEE. ACCORDING TO THE LEARNED D.R. THERE WAS NO EMPLOYER EMPLOYEE RELATIONSHIP BETWEEN THE ASSESSEE AND THE PERSON TO WHOM COMPENSATION WAS PAID BY THE ASSESSEE AND THEREFORE IT CANNOT BE A LEGITIMATE BUSINESS EXPENDITURE OF THE ASSESSEE. HE ALSO HARPED ON THE POINT THAT THE PAYMENT AT BEST IS A PAYMENT FOR THE ASSESSEE HAVING INDULG ED IN UNFAIR TRADE PRACTICE AND THEREFORE THE SAME WOULD BE HIT BY EXP LANATION TO SECTION 37(1) OF THE ACT. 29. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED SUBMISSIONS AS WERE MADE BEFORE CIT(A) AND RELIED ON THE ORDER OF THE C IT(A). IN PARTICULAR RELIANCE WAS PLACED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF SASOON J DAVID & CO. PVT.LTD. 118 ITR261 (SC). ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) 21 30. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE ARE OF THE VIEW THAT THE ORDER OF THE CIT(A) DOES NOT CALL FOR ANY INTERFERE NCE. THE AO DISALLOWED THE CLAIM FOR DEDUCTION ON THE GROUND THAT THERE WAS NO EMPLOYER EMPLOYEE RELATIONSHIP BETWEEN THE ASSESSEE AND THE PERSON TO WHOM THE ASSESSEE MADE PAYMENT. THIS FINDING OF THE AO IN OUR VIEW W AS RIGHTLY REVERSED BY THE CIT(A). PERUSAL OF THE TERMS OF SETTLEMENT OF DISPUTE BETWEEN THE WORKERS AND THE NEW CONTRACTOR ENGAGED FOR PROVIDIN G CARS ON HIRE TO WHICH THE ASSESSEE WAS ALSO A PARTY IT HAS BEEN CLEARLY ACCEPTED THAT THE ASSESSEE WOULD CONTINUE TO PROVIDE EMPLOYMENT TO THE WORKMEN WHO RAISED DISPUTE BEFORE THE LABOUR COURT. IN FACT THE WORKMEN ALLEG ED THAT THEY WERE EMPLOYEES OF THE ASSESSEE AS THEY WERE UNDER THE DI RECT CONTROL AND SUPERVISION OF THE ASSESSEE. THEY IN FACT GOT AN I NTERIM ORDER TO MAINTAIN STATUS QUO PENDING DISPOSAL OF THE DISPUTE BEFORE T HE LABOUR COURT. THE SUBSEQUENT SETTLEMENT OF THE DISPUTE AND THE AGREEM ENT BY WHICH THE ASSESSEE MADE PAYMENT TO THE INDIVIDUAL WORKMEN CLE ARLY 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 SASOON J.DAVID (SUPRA) IS RELEVANT. IT HAS BEEN LAID DOWN IN THE AFORESAID DECISION THAT THE EXPRESSION 'WHOLLY AND EXCLUSIVELY' USED IN SECTION 10(2)(XV) OF THE INDIAN INCOME-TAX ACT 192 2 (CORRESPONDING TO SEC.37(1) OF THE ACT) DOES NOT MEAN 'NECESSARILY'. ORDINARILY IT IS FOR THE ASSESSEE TO DECIDE WHETHER ANY EXPENDITURE SHOULD B E INCURRED IN THE COURSE OF HIS OR ITS BUSINESS. SUCH EXPENDITURE MAY BE INC URRED VOLUNTARILY AND WITHOUT ANY NECESSITY AND IF IT IS INCURRED FOR PRO MOTING THE BUSINESS AND TO EARN PROFITS THE ASSESSEE CAN CLAIM DEDUCTION UNDE R SECTION 10(2)(XV) OF THE ACT EVEN THOUGH THERE WAS NO COMPELLING NECESSITY T O INCUR SUCH EXPENDITURE. THE FACT THAT SOMEBODY OTHER THAN THE ASSESSEE IS ALSO BENEFITED BY THE EXPENDITURE SHOULD NOT COME IN THE WAY OF AN EXPENDITURE BEING ALLOWED BY WAY OF DEDUCTION UNDER SECTION 10( 2)(XV) OF THE ACT IF IT SATISFIES OTHERWISE THE TESTS LAID DOWN BY LAW. IN THE PRESENT CASE THE ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) 22 NECESSITY FOR INCURRING THE EXPENDITURE ALSO EXISTE D AS WE HAVE SEEN THE COMPROMISE BETWEEN THE PARTIES FILED BEFORE THE LAB OUR COURT. THE FACTS IN THE CASE OF SASOO J.DAVID (SUPRA) WERE AS FOLLOWS: SHARES OF THE APPELLANT AN INVESTMENT COMPANY WERE HELD BY THE DAVIDS. ITS ASSETS WERE WORTH RS. 155 LAKHS AS ON DECEMBER 31 1955. ON DECEMBER 2 1 955 ITS DIRECTORS PROPOSED THAT THE SERVICES OF 22 EMPLOYEES THE MAN AGING DIRECTOR AND A DIRECTOR BE TERMINATED AND THAT THEY BE PAID COMPEN SATION; AND ON JANUARY 25 1956 THE SHAREHOLDERS ACCEPTED THE DIRECTORS' PROPOSAL. UNDER AN AGREEMENT DATED MARCH 23 1956 THE DAVIDS AGREED T O SELL TO THE TATAS ALL THE SHARES IN THE APPELLANT COMPANY FOR RS. 155 LAK HS THE SUM VOTED FOR PAYMENT OF COMPENSATION TO THE EMPLOYEES BEING DEDU CTIBLE THEREFROM. THE AGREEMENT ALSO PROVIDED THAT THE DAVIDS SHOULD ARRA NGE TO TERMINATE THE SERVICES OF ALL EMPLOYEES WITH EFFECT FROM MARCH 31 1956 AND ARRANGE TO HAVE ALL DIRECTORS RESIGN THEIR OFFICES SO THAT THE TATAS WOULD BE ENTITLED TO APPOINT THEIR OWN DIRECTORS OR EMPLOYERS. AFTER THE TAKE OVER THE APPELLANT RE-EMPLOYED 9 OF THE 22 EMPLOYEES. THERE WAS A SUBS TANTIAL REDUCTION IN THE WAGE BILL AS A CONSEQUENCE OF THE RETRENCHMENT. THE APPELLANT PAID RS. 1 64 899 DURING THE CALENDAR YEAR 1956 RELEVANT TO THE ASSESSMENT YEAR 1957-58 WHICH AMOUNT INTER ALIA INCLUDED RS. 16 188 PAID TO THE MANAGING DIRECTOR IN LIEU OF SIX MONTHS' NOTICE RS . 21 200 PAID TOWARDS COMPENSATION FOR TERMINATION OF PENSION ALLOWANCE AND RS. 16 885 THE FIRST OF FIVE ANNUAL PAYMENTS AS COMPENSATION TO THE DIRE CTOR. THE APPELLANT CLAIMED DEDUCTION OF THE SUM OF RS. 1 64 899 AS BUS INESS EXPENDITURE UNDER SECTION 10(2)(XV). THE APPELLATE TRIBUNAL HELD THAT THE EXPENDITURE HAD BEEN INCURRED BY THE APPELLANT NOT FOR THE PURPOSE OF TH E BUSINESS BUT PURELY AS A RESULT OF THE BARGAIN BETWEEN THE DAVIDS AND THE TA TAS AND THAT EVEN ASSUMING THE PAYMENTS WERE BENEFICIAL TO THE APPELL ANT NO DEDUCTION COULD BE ALLOWED SINCE THEY HAD BEEN MADE TO BENEFIT THIR D PARTIES. ON A REFERENCE THE HIGH COURT HELD THAT ONLY THE TWO AMOUNTS OF RS . 21 200 AND RS. 16 188 WERE ALLOWABLE AS DEDUCTIONS AND THAT THE BALANCE O F RS. 1 27 511 PAID TO ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) 23 THE EMPLOYEES AND A DIRECTOR WAS NOT ALLOWABLE AS A DEDUCTION SINCE THE EXPENDITURE HAD NOT BEEN INCURRED BY THE COMPANY FO R COMMERCIAL REASONS. ON APPEAL BY THE APPELLANT TO THE SUPREME COURT HE LD THAT ON THE FACTS THAT EVEN ASSUMING THAT THE MOTIVE BEHIND THE PAYM ENT OF THE COMPENSATION WAS THAT THE TERMS OF THE AGREEMENT BE TWEEN THE DAVIDS AND THE TATAS FOR THE SALE OF THE SHARES SHOULD BE SATI SFIED AS LONG AS THE AMOUNT OF RS. 1 27 511 WAS LAID OUT WHOLLY AND EXCL USIVELY FOR THE PURPOSE OF THE BUSINESS OF THE APPELLANT THERE WAS NO REASO N FOR DENYING THE BENEFIT OF SECTION 10(2)(XV). THE APPELLANT COMPANY CONTINU ED TO FUNCTION EVEN AFTER ITS CONTROL PASSED ON TO THE TATAS AND THE EXPENDIT URE 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 O F THE EXPENDITURE THE APPELLANT COMPANY WAS IN FACT BENEFITED BY REDUCTIO N IN ITS WAGE BILL. IT COULD NOT BE SAID THAT THE TATAS WERE IN ANY WAY BE NEFITED FINANCIALLY BECAUSE OF THE DEDUCTION IN THE CONSIDERATION PAYAB LE BY THE IN FOR THE SHARES. THE SUM OF RS. 1 27 511 WAS EXPENDED BY THE APPELLANT ON THE GROUND OF COMMERCIAL EXPEDIENCY AND IN ORDER INDIRE CTLY TO FACILITATE THE CARRYING ON OF ITS BUSINESS AND WAS THEREFORE AL LOWABLE AS A DEDUCTION. 31. WE ARE ALSO IN AGREEMENT WITH THE FINDINGS OF THE CIT(A) THAT THE ASSESSEE DID DERIVE AN APPARENT ADVANTAGE IN THE FO RM OF REDUCED CAR HIRE CHARGES AND THAT THE EXPENDITURE IS NOT ONE INCURRE D FOR INDULGING IN UNFAIR LABOUR PRACTICE OR ONE INCURRED FOR ANY PURPOSE WHI CH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW FALLING WITHIN THE AMBIT OF EX PLN. TO SEC.37(1) OF THE ACT. FOR THE REASONS GIVEN ABOVE WE DO NOT FIND ANY GRO UNDS WITH THE ORDER OF THE CIT(A). CONSEQUENTLY GR.NO.3 RAISED BY THE RE VENUE IS DISMISSED. 32. IN THE RESULT THE APPEAL BY THE REVENUE IS DI SMISSED. ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) 24 ITA NO.3933/MUM/08: ASSESSEES APPEAL: 33. GROUND NOS. 1 TO3 WERE NOT PRESSED AND THEY ARE DISMISSED AS NOT PRESSED. 34. GROUND NO.4 AND 5 RAISED BY THE ASSESSEE READS AS FOLLOWS: 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE THE LEARNED CIT(A) HAS LEGALLY ERRED IN CONFIRMING THE ACTION O F THE LEARNED AO IN DISALLOWING EXPENDITURE OF RS. 36 89 659/- INCURRED BY THE APPELLANT WITH RESPECT TO ITS PRINTING AND ELECTROPLATING ACT IVITIES. IT IS PRAYED THAT THE LEARNED AO BE DIRECTED TO ALL OW THE REVENUE EXPENDITURE OF RS.36 89 659 INCURRED BY THE APPELLA NT. 5. WITHOUT PREJUDICE AND IN ALTERNATIVE TO GROUND NO.4 ABOVE AND ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LEARNED CIT(A) HAS LEGALLY ERRED IN UPHOLDING THE ACTION OF LEARNED AO IN BRINGING TO TAX REVENUES EARNED OUT OF ALLEGED DISCONTINUED ACTIVIT IES. 35. THE ASSESSEE IS A MULTI-ACTIVITY COMPANY CARRY ING ON COMPOSITE BUSINESS MAINLY FROM NEW DELHI AND MUMBAI. ITS BUS INESS ACTIVITIES CONSIST OF PRINTING ELECTROPLATING HOUSING CAR HIRE AND TICKETING. INTER ALIA IT WAS CARRYING ON AT DELHI PRINTING AND ELECTROPLAT ING ACTIVITIES WHICH IT FOUND UNECONOMICAL AND THEREFORE ON MARCH 19 20 01 IT DISCONTINUED ITS PRINTING AND ELECTROPLATING ACTIVITIES BY GIVING NO TICE OF CLOSURE. DURING THE FINANCIAL YEAR 2002-03 RELEVANT TO ASSESSMENT YEAR 2003-04 THE APPELLANT HAD EARNED INCOME OF RS. 71 88 909/- FROM ITS DISCO NTINUED OPERATIONS AND HAD INCURRED EXPENSES OF RS. 45 41 375/- THEREON. INCOME WAS MAINLY ON ACCOUNT OF PROFIT ON SALE OF FIXED ASSETS WHEREAS T HE EXPENSES WERE IN THE NATURE OF DAY-TO-DAY EXPENSES INCURRED ON THE BUSIN ESS ESTABLISHMENT. THE ASSESSEE SUBMITTED THAT IT HAS BEEN A COMPANY EXIST ING SINCE FEBRUARY 19 1981. SINCE ITS INCEPTION IT HAS BEEN ENGAGED IN A COMPOSITE BUSINESS OF MULTIPLE ACTIVITIES SUCH AS RENDERING TRAVEL RELATE D SERVICES PROFESSIONAL SERVICES LEASING PRINTING ELECTROPLATING ETC. I T HAS A COMMON BOARD OF ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) 25 DIRECTORS WHO CONTROLS AND MANAGES ALL ITS ACTIVITI ES. ALL THE ACTIVITIES WERE CARRIED ON THOUGH COMMON MANAGEMENT COMMON FUNDS ETC. EVEN THE OFFICE PREMISES GENERAL STAFF ETC. ARE COMMON. A LL THE ACTIVITIES ARE CONTROLLED AND MANAGED BY THE SAME BOARD OF DIRECTO RS. COMMON FUNDS AND RESOURCES ARE DEPLOYED FOR DAY TO DAY RUNNING O F THESE ACTIVITIES . THESE FACTS HAVE NEVER BEEN CHALLENGED BY THE INCOME-TAX DEPARTMENT IN THE HISTORY OF THE COMPANY. IN ALL THE PAST YEARS THE ASSESSMENT HAVE BEEN COMPLETED ACCEPTING THE ABOVE POSITION. IT WAS FU RTHER SUBMITTED THAT THE PRINTING AND ELECTROPLATING ACTIVITIES OF THE ASSES SEE ARE PART OF ONE COMPOSITE BUSINESS ACTIVITY CARRIED ON BY THE ASSES EE. ALTHOUGH THE BUSINESS IS CARRIED ON IN VARIOUS GEOGRAPHICAL REGI ONS THERE IS COMMON MANAGEMENT AND CONTROL AND THE ENTIRE BUSINESS IS B EING RUN AS ONE SINGLE UNIT. HOWEVER THE AO DISALLOWED THE EXPENSES OF RS.45 41 375/- INCURRED IN CONNECTION WITH SUCH DISCONTINUED ACTIVITY ON TH E GROUND THAT THE EXPENSES WERE INCURRED IN CONNECTION WITH A CLOSED BUSINESS. FURTHER THE AO OBSERVED: EVEN THOUGH THE ASSESSEE HAS A COMPOSITE BUSINESS UNDER HEAD TAJ SERVICES PVT. LTD. SEPARATE PROFIT AND LOSS ACCOUN T IS DRAWN UP AND SEPARATE ACCOUNTS FOR THIS DIVISION ARE MAINTAINED. 36. ON APPEAL BY THE ASSESSEE THE CIT(A) HELD THAT THE ASSESSEE WAS CARRYING ON A COMPOSITE BUSINESS WHICH INCLUDED B USINESS OF PRINTING AND ELECTROPLATING HOUSING CAR HIRING AND TICKETING. HE FOUND THAT THE INCOME ON SALE OF THE FIXED ASSETS WAS EARNED ON SALE OF T HE ASSETS PERTAINING TO THE DISCONTINUED ACTIVITIES OF PRINTING AND ELECTROPLAT ING BUSINESS. THE SAME WAS OFFERED TO TAX AND TAXED BY THE AO. AGAINST TH AT INCOME THE ASSESSEE CLAIMED EXPENDITURE BUT THE SAME WAS DISALLOWED ON THE REASONING THAT THE EXPENSES WERE INCURRED IN CONNECTION WITH CLOSED BU SINESS. IN A.Y 2001-02 ON IDENTICAL ISSUE WHETHER THE PRINTING AND ELECTRO PLATING BUSINESS CONSTITUTE SEPARATE BUSINESS OR NOT THE CIT(A) HELD IN FAVOUR OF THE ASSESSEE. ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) 26 IN THIS YEAR HOWEVER THE CIT(A) TOOK A DIFFERENT V IEW AND CONFIRMED THE ORDER OF THE AO. AGGRIEVED BY THE ORDER OF THE CIT(A) THE ASSESSEE HAS RAISED GROUND NO. 4 & 5 BEFORE THE TRIBUNAL. 37. AT THE TIME OF HEARING THE PARTIES AGREED THAT SIMILAR ISSUE WAS CONSIDERED BY THE TRIBUNAL IN ASSESSEES OWN CASE I N ITA NO.2344/MUM/2005 FOR AY 01-02 AND THIS TRIBUNAL HEL D THAT THE ASSESSEE WAS CARRYING ON ONE COMPOSITE BUSINESS WHICH INCL UDED PRINTING AND ELECTROPLATING DIVISION ALSO. IT WAS ALSO HELD THA T THE PRINTING AND ELECTROPLATING DIVISION AND THE OTHER BUSINESS CONS TITUTE ONE BUSINESS. IT WAS ALSO HELD THAT IT WAS AN EXPENDITURE INCURRED F OR THE PURPOSE OF BUSINESS AND WAS NOT CAPITAL EXPENDITURE. THE TRIB UNAL ALSO FOLLOWED THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CA SE OF BHOR INDUSTRIES LTD. 128 TAXMAN 626 WHEREIN IT WAS HELD THAT AMOU NTS PAID AS RETRENCHMENT COMPENSATION WAS TO BE ALLOWED AS A DE DUCTION. IN THE LIGHT OF THE DECISION OF THE TRIBUNAL REFERRED TO ABOVE WE ARE OF THE VIEW THAT THE DEDUCTION CLAIMED HAS TO BE ALLOWED. SINCE THE FAC TS AND CIRCUMSTANCES AND THE BASIS OF ADDITION MADE BY THE REVENUE AUTHORITI ES ARE IDENTICAL AS IT PREVAILED IN A.Y 2001-02. RESPECTFULLY FOLLOWING T HE DECISION OF THE TRIBUNAL WE DIRECT THE AO TO ALLOW THE CLAIM FOR DEDUCTION A S MADE BY THE ASSESSEE. THUS GROUNDS NO.4 AND 5 RAISED BY THE ASSESSEE ARE ALLOWED. 38. IN THE RESULT THE APPEAL BY THE REVENUE IS DIS MISSED WHILE THE APPEAL BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT O N THE 16 TH DAY OF SEPT. 2011. SD/- SD/- (R.K.PANDA ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI DATED. 16 TH SEPT.2011 ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) 27 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RE BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR I TAT MUMBAI BENCHES MUMBAI. VM. ITA NO.3884 &3933/MUM/2008(A.Y.2003-04) 28 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 8/9/11 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 12/9/11 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DR AFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER