COMMISSIONER OF INCOME TAX Vs. DHINGRA AND SONS B L
LAWS(DLH)-1983-11-10
HIGH COURT OF DELHI
Decided on November 17,1983

COMMISSIONER OF INCOME TAX Appellant
VERSUS
B.L.DHINGRA Respondents


Referred Judgements :-

V JAGANMOHAN RAO VS. COMMISSIONER OF INCOME TAX [REFERRED TO]


JUDGEMENT

CHADHA, J. - (1.)THIS reference under s. 256(1) of the IT Act, 1961 (hereinafter referred to as "the Act"), at the instance of the Department has posed the following question :
"Whether, on the facts and in the circumstances of the case and the construction of cl. 20 of the agreements of sale dt. March 9, 1968, and April 15, 1968, the Tribunal was justified in allowing the payment of Rs. 35,000 as a deduction for the asst. yr. 1969-70 ?"

(2.)THE facts briefly are these. THE assessee is a registered firm of three partners carrying on business under the name and style of M/s B. L. Dhingra and Sons. THE assessment year is 1969-70 and the relevant previous year followed by the assessee ended on October 10, 1968. THE assessee entered into an agreement of sale dt. March 8, 1968, for acquisition of the property of a cinema house known as Vivek Cinema for a consideration of Rs. 27 lakhs. Out of the consideration of Rs. 27 lakhs, a sum of Rs. 11,10,000 was paid by the assessee and received by the vendors in part payment, as mentioned in the agreement, to sell and the balance payment of Rs. 15,90,000 was to be made by the assessee to the vendors in the manner mentioned in the agreement to sell. It was partly payable before the Sub-Registrar at the time of registration of the sale deed and partly by instalments with insterest @10 1/2per cent per annum. By cl. 20 of the agreement to sell, it was agreed, inter alia, that the purchaser shall pay to the vendors a sum of Rs. 3,000 a month for the period between the signing of the agreement to sell and the registration of the sale deed in order to compensate the vendors during the intervening period. Subsequently, a supplementary agreement was executed on April 15, 1968, by which cl. 20 of the original agreement was modified. It provided that the purchaser would pay to the vendors a sum of Rs. 10,000 per month for the first two months only, i.e., from March 8, 1968, to May 7, 1968, and for the remaining period as before a sum of Rs. 3,000 per month up to the date of the signing of the sale deed. In pursuance of these agreements, the assessee paid Rs. 10,000 per month for the period of two months and paid a further sum of Rs. 15,000 for the remaining five months, in all Rs. 35,000, till the registration of the sale deed. THE dispute relates to this payment of Rs. 35,000 by the assessee to the vendors.
The ITO took the view that the above sum of Rs. 35,000 was a part of the purchase price and not licence fee or hire charges as claimed by the assessee and added back the same to the assessee's income. The assessee appealed to the AAC and contended that the payment of Rs. 35,000 represented the enhanced rent or hire charges for the cinema property and not any purchase consideration alleged to have been increased by virtue of the supplementary agreement. The AAC observed that the assessee's main purpose was not to allow the transaction to fall through and so it paid Rs. 35,000 extra which could only be taken as a part of the purchase consideration. In this view of the matter, the addition was held as justified.

The assessee went up in second appeal before the Tribunal (for short called "the Tribunal"). The Tribunal considered the provisions of the agreement to sell dt. March 8,1968, and the modifications made in the agreement dt. April 15, 1968, and opined that after the purchaser was put in possession of the cinema property in part performance of the agreement to sell, he could defend his title and the only remedy of the vendors was to recover the unpaid sale price. The Tribunal held that there was no question of any licence fee or rent being paid to the vendors. The Tribunal took the view that the payment of Rs. 35,000 was compensation for the user of the balance sale price of Rs. 15,90,000 kept back by the purchaser till the registration of the sale deed. It also took the view that the user of the amount of Rs. 15,90,000 would be an act incidental to the assessee's business and it would not be creating any asset or advantage of enduring nature and that the payment was necessitated for the user of the money for the limited purpose. The Tribunal held that the payment of Rs. 35,000 was incidental to the assessee's business and was, therefore, revenue in nature.

Mr. G. C. Lalwani, the learned counsel for the Department, invites our attention to the various clauses of the agreement to sell dt. March 8, 1968, and the supplementary agreement dt. April 15, 1968, making certain clarifications and modifications to the original agreement dt. March 8, 1968. He submits that the sum of Rs. 35,000 paid by the assessee was in pursuance of the clauses contained in the agreement to sell and was towards the purchase price and forms part of the sale consideration. The submission is that such an expenditure is of a capital nature as consideration is paid by the assessee to perfect his title. Reliance is placed on V. Jaganmohan Rao vs. CIT (1970) 75 ITR 373 (SC), wherein it was held that where money is paid to perfect a title or as consideration for getting rid of a defect in the title or a threat of litigation, the payment would be a capital payment and not a revenue payment and that money paid in consideration for the acquisition of a source of profit or income is capital expenditure.

In order to appreciate this contention, it is necessary to make a reference to certain clauses of the aforesaid two agreements which form part of the statement of case. The vendors had agreed to sell or to transfer to the assessee the cinema property for a sum of Rs. 27 lakhs. The sale consideration is, therefore, determined and fixed in the agreement to sell. The assessee made a part payment of Rs. 11,10,000. In consideration of the part payment by the assessee to the vendors, the assessee was put in possession. Clause 14 of the agreement to sell dt. March 8, 1968, reads as follows :

"That in consideration of the payment by the purchaser to the vendors of the sum of Rs. 11,10,000, as mentioned in paras 2 and 3 above, the receipt whereof the vendors hereby acknowledge, the vendors have in part performance of this agreement to sell handed over today to the purchaser the vacant possession of the entire cinema building, machinery apparatus, furniture, fittings, fixtures and air-conditioning plant, canteen, restaurant and the cycle stand, etc., and all other things connected therewith or concerned therewith along with the land underneath and attached to the cinema house. The vendors have also given a separate letter to the purchaser showing the fact of handing over the possession of the cinema building, etc. As from today, the date of handing over of the possession of the cinema house, etc., as aforesaid, the purchaser would be entitled to run, control and manage the cinema, etc., and bear the necessary expenses for running the cinema, etc., in the same way as the vendors would do the same, and that, as such, the purchaser would be entitled to appropriate to himself the income or profits arising from the running of the cinema, etc."

This contract between the assessee and the vendors has to be read in the light of the rights conferred by s. 53A of the Transfer of Property Act. Sec. 53A of the Transfer of Property Act creates certain rights which were not in existence before the enactment was passed. These rights to retain possession rest on the express provisions of the statute. One of the rights conferred is a right to the assessee to protect his possession. The vendors or their successors-in-interest are debarred from enforcing any right or interest expressly provided by the agreement to sell under which the assessee is put in possession. Therefore, from the date of handing over of the possession of the cinema property, the assessee was entitled to run and manage the cinema and enjoy the profits and in come from the said business. The only right of the vendors thus left was to receive the balance of the sale consideration.

The balance of the sale consideration of Rs. 15,90,000 remained unpaid. Clause 20 of the original agreement to sell dt. March 8, 1968, provides as follows:

"That the purchaser shall pay to the vendors a sum of Rs. 3,000 (rupees three thousand only) a month for the period between the signing of this agreement to sell and the registration of the sale deed in order to compensate the vendors during the said intervening period."

Clause 9 of the supplementary agreement to sell dt. April 15, 1968, provides as follows:

"It has been provided in cl. 20 of the agreement dt. March 8, 1968, that the purchaser shall pay to the vendors a sum of Rs. 3,000 a month for the period between the date of the signing of the agreement, viz., March 8, 1968, until the date of the registration of the sale deed. Now, the purchaser has agreed to pay to the vendors a sum of Rs. 10,000 per month for the first two months only i.e., from March 8, 1968, to May 7, 1968. Clause 19 will remain as it is with the above exception."

The true nature of the payment to be made by the assessee to the vendors is reflected in cl. 20. The payment is made in order to compensate the vendors during the intervening period, namely, from the date of the handing over of the cinema property to the assessee and up to the registration of the sale deed. This compensation is in respect of the non-payment of the balance of the sale consideration. The payment is made to procure extension of time for performance of the complete agreement to sell and payment of the balance consideration. If the requisite amount of consideration of Rs. 15,90,000 had been borrowed by the assessee from a stranger, then interest paid thereon would have been permissible. An expenditure is allowable when it is incurred in the assessee's character as a trader. The compensation payment of Rs. 35,000 is incidental to the running of the cinema from the date of possession by the assessee and till the date of registration of the sale deed. The assessee retained a sum of Rs. 15,90,000 and utilised it for its business. For the unpaid purchase price, the vendors were compensated by these payments of Rs. 35,000 mentioned in the two agreements. By making this payment of Rs. 35,000, the assessee has not acquired any advantage for the enduring benefit of the trade. The value of the asset has not been enhanced by this payment of Rs. 35,000. By this payment of Rs. 35,000, no new asset has been brought into existence. The case of Jaganmohan Rao (supra) has no application to the facts of this case. That was a case where money was laid out for the improvement of a fixed capital asset. The assessee there purchased a capital asset with the knowledge of defect in title and later had perfected or improved it by further payment. It is on those facts that it was held attributable to capital. In the case before us, the item of expenditure is laid out for the purpose of business in the terms of the written contract between the assessee and the vendors. On a proper construction of the terms of the two, deeds, this payment of Rs. 35,000 is a revenue disbursement. The payment is calculated to effect from a practical and business point of view a small expenditure as against the retention of the balance of the sale consideration after being put into possession of the entire cinema property. The Tribunal, therefore, rightly held that this payment of Rs. 35,000 was relatable to the use of the money of Rs. 15,90,000 kept by the assessee. It is in the nature of an interest or compensation on the money not paid by the assessee for the intervening period. For the above reasons, the reference is answered against the Department but with no order as to costs.

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