Even if gains have accrued on execution of the development agreement, the subsequent modification/ supercession of the agreement means that gains are not taxable as per real income theory.

CIT vs. Chemosyn Ltd (Bombay High Court)

ISSUE :

1. Even if gains have accrued on execution of the development agreement as per Chaturbhuj Dwarkadas, the subsequent modification/ supercession of the agreement means that gains are not taxable as per real income theory.

2. expenditure on buy-back of shares of warring shareholders is business expenditure.

FACTS OF THE CASE

(a) The assessee entered into a development agreement with Dipti Builders to develop a plot owned by the assessee for a consideration of Rs.16.11 crores and construction of 18,000 sq.ft of built up area free of cost. This was rescinded by a tripartite agreement dated was entered into between Dipti Builders, a new buyer and the assessee under which the plots were transferred to the new buyer For a total consideration of Rs.29.11 crores. The assessee offered only Rs.16.11 crore to tax as capital gains. It contended that the consideration in the form of constructed area of 18000 sq.feet was neither received nor had accrued and no occasion to bring it to tax could arise. However, the AO & CIT(A) rejected the contention by relying on Chatrubhuj Dwarkadas Kapadia vs. CIT 260 ITR 491 (Bom) and held that capital gains accrued on the execution of the development agreement. This was reversed by the Tribunal by relying on Kalpataru Construction Overseas 13 SOT 194 (Mum) and CIT vs. Shivsagar Estates 204 ITR 1 (Bom);

(b) There was a dispute between brothers who together owned the assessee company. As a consequence of differences between the two groups, the dispute reached the Company Law Board as well as the Supreme Court. Thereafter, a settlement was arrived at between the two warring groups of shareholders and as per directions of the Company Law Board the assessee was directed to buy 34% shareholding of one of the warring group and cancel the same. The assessee claimed the amount of Rs.6.81 crores (being the difference between consideration paid and face value of the shares acquired for cancellation) as revenue expenditure. This on the basis that in view of the dispute between its shareholders, the business was adversely affected and therefore, the payment was expected to be incurred for purposes of business. However, the AO & CIT(A) did not accept the same and held the expenditure to be of capital nature. However, the Tribunal allowed the claim by relying on Echjay Industries Ltd vs. DCIT 88 TTJ (Mumbai) 1089.

DECISION

(i) In Chaturbhuj Dwarkadas Kapadia, the issue was to determine the year in which the property was transferred for the purpose of capital gains. In this case the issue is what is the consideration received for the transfer of an asset. No income is accrued or received of the value of 18000 sq.feet of constructed area under the development agreement because the said agreement was not acted upon as it came to be uperseded/modified by the Tripartite agreement. This was the position when the return of income was filed. On the application of the real income theory, there would be neither accrual nor receipt of income to warrant bringing to tax to the constructed area of 18,000 sq.ft which has not been received by the assessee (CIT vs. Shoorji Vallabhdas 46 ITR 144 (SC) followed);

(ii) The Tribunal has recorded the finding of fact that in view of the dispute between the two warring groups of shareholders the business of the assessee had suffered. After the settlement of the dispute there was a substantial increase in the sales. After settlement of the dispute new products were launched by the assessee-company. All this was evidence of the fact that the dispute between two groups of shareholders had affected the business of the company. The amount paid by the assessee for the purchase of its shares for subsequent cancellation was an expenditure incurred only to enable smooth running of the business. Thus, the expenditure was incurred for carrying on its business smoothly and was a deductible expenditure.

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