RUSTOM SPINNERS LTD Vs. INCOME TAX OFFICER
LAWS(IT)-1989-10-1
INCOME TAX APPELLATE TRIBUNAL
Decided on October 13,1989

Appellant
VERSUS
Respondents

JUDGEMENT

Per Shri K.R.Dixit, Judicial Member - This is an interesting case where the assessees claim is that (a) it acquired free of cost a right to buy a textile mill for Rs. 2,75,00,000 or (b) it got as much as Rs. 9 lakhs for the assignment of this right which according to the assessee was worthless. - (1.)
(2.)It is relevant to note that all this is supposed to have taken place in business dealing where nothing is to be had for nothing. How this is supposed to have come about we shall presentaly see.
The assessee entered into an agreement on the 12th of August, 1980 with one New Commercial Mills Co. Ltd. (hereinafter referred to as the vendor) to buy the textile machinery for a total sum of Rs. 2,75,00,000 and gave by way of deposit or earnest money an amount of Rs. 5 lakhs by cheque which the solicitor of the vendor was to hold as stake holder. By another agreement dated 19-8-1980 the assessee also acquired the right to use the trade marks of the vendor and for that the assessee was to pay royalty at a percentage fixed in the agreement.

(3.)THE Honble Gujarat High Court vide its order dated 12th August, 1980 on a winding up petition against the vendor restrained it from dealing with its properties including the amount received as earnest money or encashing the cheque for the earnest money. This order was continued on the 14th of August and thereafter on the 3rd of November, 1980 the Honble Gujarat High Court passed another order dismissing the winding up petition as withdrawn and vacated the interim order. However, between the 14th August, 1980 and 3rd of November 1980 i.e. between the continuance of the interim order and the order vacating it, on the 14th October, 1980 the assessee entered into an agreement with on New Bharat Vijay Mills (hereinafter referred to as the assignee) for a sum of Rs. 9 lakhs assinging the benefits, advantages and obligations relating to the above agreement between the assessee and the vendor. In this agreement the vendor was the confirming party. THE assessee incurred an expediture of Rs. 2,05,768 by way of service charges expenses, legal and professional charges and miscellaneous expenses for acquiring the above rights and their assignment. THE vendor returned the cheque of Rs. 5 lakhs to the assessee. Before the Income-tax Officer it claimed that the receipt of Rs. 9 lakhs was not a taxable receipt as the assessee had not incurred any cost for acquiring this right because the cheque was returned unencashed and the net surplus of Rs. 6,94,232 realised by the assessee was not chargeable to capital gains tax. THE Income-tax Officer however, held that so far as the assessee was concerned as soon as the cheque of Rs. 5 lakhs was handed over it became earnest money paid by the assessee. He also observed that the assessee had incurred the sain expense of Rs. 2,05,768 which was also the cost of acquiring the rights and assigning them. THErefore, according to the Income-tax Officer the Supreme Court decesion in the case of CIT v. B. C. Srinivas Setty [1981] 128 ITR 294 on which the assessee had inter alia was not applicable. THE Income-tax Officer added up the said amount of Rs. 5 lakhs to the amount of Rs. 9 lakhs and from the total of Rs. 14 lakhs deducted a total of the said amounts of Rs. 5 lakhs and Rs. 2,05,768 i.e. Rs. 7,05,768 holding the balance to be taxable as short-term capital gain. THE Commissioner has confirmed the Income-tax Officers order observing that the Supreme Court decision in the case of B. C. Srinivasa Setty (supra) was not applicable because it could not be said that the value of the right transferred was nil and the said case related to transfer of goodwill or import entitlement etc.


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