Kerala Road Lines Vs. Commissioner of Income Tax,
Cochin  INSC 427 (12
Ashok Bhan & J.M.Panchal
Civil Appeal No. 5308-5309
of 2002 Ashok Bhan, J.
These two appeals have been filed by the appellant-assessee (hereinafter
referred to as 'the assessee') with the leave of the Court against a common
judgment dated 13th day of November, 2001 passed by the High Court of Kerala at
Ernakulam in Income Tax Reference Nos.234 of 1997 and 310 of 1999.
The following two questions were referred by the Income Tax Appellate
Tribunal, Cochin to the High Court at the instance of the revenue in ITR No.234
of 1997 for its opinion:
"1. Whether, on the facts and in the circumstances of the case, the
Tribunal is right in law and fact in holding that the assessee is entitled to
deduct the entire amount of interest as revenue expenditure under Section 37 of
the Income-tax Act?
2. Whether, on the facts and in the circumstances of the case and also on an
interpretation of the agreement dated 27.9.1993, the Tribunal is right in
holding that the assessee would not only to forfeit the advances but also stand
exposed to civil and criminal action and in that sense allowing the payment of
interest as contractual obligation? The following two questions were referred
by the Income Tax Appellate Tribunal, Cochin to the High Court at the instance
of the assessee in ITR No.310 of 1999 for its opinion:
"1. Whether the Tribunal was right in rectifying the order passed under
Section 256(1) on the ground that there was a mistake apparent from record?
2. Whether the Tribunal was right in holding that it has inherent power for
rectifying the order under Section 256(1) for rendering justice? The questions
referred to the High Court in ITR No.310 of 1999 at the instance of the
assessee were answered in favour of the revenue and against the assessee
relying upon its own earlier decision dated 31.10.2001 passed in ITR
Nos.61/1997, 275/1999 and O.P.No.20583 of 1996. It is brought to our notice
that against the relied on judgment dated 31.10.2001 passed in ITR Nos.61/1997,
275/1999 and O.P.No.20583 of 1996, assessee filed special leave petitions in
this Court which were dismissed by this Court in limini. Since, the special
leave petitions against the relied on judgment were dismissed by this Court, we
are not inclined to interfere with the order passed by the High Court insofar
as questions referred in ITR 310 of 1999 at the instance of the assessee are
concerned. Accordingly Civil Appeal No.5308 of 2002 filed against ITR No.310 of
1999 is dismissed.
To decide Civil Appeal No.5309 of 2002 in which merits of the dispute have
been challenged, it would be necessary to refer to few facts to understand the
dispute which are as under:
Assessee entered into an agreement with M/s. Peirce Leslie (India) Ltd. on
27.9.1983 for purchase of an extent of 466 cents of land with buildings thereon
at Calicut. It was agreed that the sale deed will either be got executed in
favour of the assessee or its nominees. As per agreement, if the purchase price
was not paid within the specified time, assessee was liable to pay interest at
the rate of 18% per annum. The buildings standing on the lands were demolished
and the scrap materials were sold for Rs.5,88,001/-. This income was treated as
business income. Under the agreement, the assessee had to pay an interest of
Rs.4 lacs for the delayed payment of purchase consideration. The assessee
claimed this amount as a revenue expenditure.
The assessing authority disallowed the claim of the assessee on the ground
that the payment of interest on the purchase of the property would be in the
nature of a capital expenditure and not as revenue expenditure. This order of
assessing authority was confirmed by the Commissioner of Income Tax(Appeals).
It was held that the intention of the assessee was to enter into an adventure
in the nature of trade and ultimately the assessee had retained only 65.57
cents of land with it and the remaining land was purchased by the sister
concerns of the assessee in small pieces. It was held that since the assessee
was only an intermediary for the other sister concerns, the part of interest
referable to the lands sold to the sister concerns could not be allowed as
revenue expenditure. Thus, Commissioner of Income Tax gave part relief and
allowed the interest referable to 65.57 cents of land retained by the assessee.
Assessee, being aggrieved, filed an appeal before the Income Tax Appellate
Tribunal, Cochin Bench (for short 'the Tribunal'). The Tribunal accepted the
appeal, set aside the order passed by the CIT(Appeals). It was held that the
assessee had entered into an agreement to purchase the entire property
including buildings standing thereon. The building was demolished and structure
standing thereon was sold as scrap material for Rs.5,88,001/-.
This sum was offered for assessment as business income and assessed as such.
The payment of interest of Rs.4 lacs for the delayed payment of purchase
consideration has been provided in the agreement and thus, the payment of
interest was a contractual obligation. It was held by the Tribunal that the
payment of interest was to be viewed as an expenditure under Section 37 of the
Income Tax Act, 1961 (for short 'the Act'), especially when the sale proceeds
of the scrap materials from the demolished structures have been treated as
business income and ultimately allowed the claim of the assessee for deduction
of interest. Aggrieved against the said order, the assessee as well as revenue filed
reference application under Section 256(1) of the Act. Accordingly, two
questions each, as quoted above, were referred at the instance of the assessee
as well as revenue. Insofar as questions referred at the instance of the assessee in Civil
Appeal No.5308 of 2002 are concerned, we have already held that since the
special leave petitions against the relied on judgment dated 31.10.2001 passed
in ITR Nos.61/1997, 275/1999 and O.P.No.20583 of 1996 were dismissed by this
Court, we are not inclined to interfere in the present appeal as well. The
appeal is dismissed accordingly. Insofar as dispute on merits is concerned, we find some substance in the
argument raised by the counsel appearing for the assessee. The High Court
without answering the question as to whether the expenditure is capital or
revenue in nature reversed the decision of the Tribunal by holding that
assessee was not doing the business in real estate; that the business of the
assessee was transport only and, therefore, the expenditure would not be
covered by the provisions of Section 37(1) of the Act. Counsel for the parties have been heard.
Tribunal in its order has categorically recorded that the sale proceeds in
the sum of Rs.5,88,001/- of the scrap material after demolishing the structures
standing on the land was treated as business income of the assessee. If that be
so, the Tribunal was right in observing that the payment of interest which was
the contractual obligation would also be a business expenditure. The High Court
has erred in recording a finding to the contrary. Once the revenue has accepted
the sum of Rs.5,88,001/- as business income as sale proceeds from the scrap
material of the structures standing on the lands then correspondingly assessee
would be entitled to claim a sum of Rs.4 lacs as revenue expenditure paid as
interest on the delayed payment of the purchase consideration.
For the foregoing reasons, we set aside the order passed by the High Court
and restore that of the Tribunal treating the income of Rs.4 lacs as revenue
expenditure. Accordingly, question No.1 is answered in favour of the assessee
and against the revenue and correspondingly question No.2 is answered in favour
of the assessee and against the revenue.
The Appeal is allowed accordingly.