Delhi High Court

Cit vs Eagle Theatres on 21 December, 2011

Author: Sanjiv Khanna

$~1.
*    IN THE HIGH COURT OF DELHI AT NEW DELHI


+    ITA 1287/2011


     CIT                                        ..... Appellant
                        Through Mr. Abhishek Maratha, Sr.
                        Standing Counsel & Ms. Anshul Sharma,
                        Advocate.

                 Versus


     EAGLE THEATRES                      ..... Respondent
                 Through Mr. Salil Aggaral, Mr. Ravi
                 Pratap Mall & Mr. Prakash Yadav,
                 Advocates.

      CORAM:
      HON'BLE MR. JUSTICE SANJIV KHANNA
      HON'BLE MR. JUSTICE R.V.EASWAR

              ORDER

%             21.12.2011

     CM No. 22762/2011

This is an application for condonation of delay of one day

in filing the appeal. Learned counsel for the respondent-

assessee, who is present on advance notice, states that he has

no objection if the application is allowed and the delay is

condoned. Accordingly the application is allowed.

The application stands disposed of.

ITA No. 1287/2011 The Revenue by the present appeal under Section 260A

of the Income Tax Act, 1961 (Act, for short) impugns order dated

31st January, 2011 passed by the Income Tax Appellate Tribunal

(tribunal, for short) on three grounds.

(i) Reduction of valuation of scrap from Rs.32,70,000/- to

Rs.16,35,000/-.

(ii) Inclusion of Rs.1.48 crores paid to the tenant/licensee for

vacation for computation of long term capital gains.

(iii) Direction of remit on the question of payment made to

employees on closure of the cinema hall at Mumbai.

2. The respondent-assessee sold a cinema hall in Mumbai in

the period relevant to the assessment year 2007-08 for

Rs.27,70,00,000/-. In the sale deed it was mentioned that

Rs.15,00,000/- was attributable to furniture, fixture, equipment

and AC plant. This figure was not disputed or interfered with by

the Assessing Officer. The Assessing Officer, however, felt that

the building or the superstructure was sold and was required to

be valued and the gain treated as short-term capital gain. This

was necessary as the building was part of the block of the asset

on which depreciation had been claimed. The Assessing Officer

accepted that the building/superstructure was to be valued as

scrap or salvage as the building was to be demolished and re- constructed. The respondent-assessee had submitted that the

salvage value of the building/super structure should be valued at

Rs.1,00,000/-. This was rejected by the Assessing Officer, who

valued the salvage of superstructure/building at Rs.100/- per

square feet and accordingly computed the salvage along with all

the superstructure/building at Rs.32,70,000/-. The Assessing

Officer further noticed that the depreciated value of the

building/superstructure as per the block of assets was

Rs.70,085/-. He accordingly assessed the short-term capital

gain on the building/superstructure as Rs.31,99,915/-.

3. The CIT (Appeals) did not interfere with the order passed

by the Assessing Officer. On further appeal, the tribunal after

examining the facts of the case held that the scrap or salvage

cannot be valued at Rs.1,00,000/-. Looking at the facts and

circumstances of the case, it was held that the salvage value

should be taken at Rs.50/- per square feet and accordingly

estimated the scrap value of the building/superstructure at

Rs.16,35,000/-.

4. From the facts stated above, it is apparent that the

Assessing Officer had treated the scrap or salvage value of the

superstructure/building at Rs.100/- per square feet, without

making any reference to material or justifying the basis of the said calculation. In these circumstances, the tribunal had no

option but to apply a thumb rule but had accordingly treated the

scrap/salvage value of the building/superstructure as

Rs.16,35,000/-. It may be noted that the plant, machinery and

furniture in the building have been separately valued at

Rs.15,00,000/- and accordingly on the said amount the

respondent assessee was liable to pay short-term capital gains.

In view of the fact that the Assessing Officer did not himself

make any factual analysis or study or state the basis for

computing the scrap/salvage value, we are not inclined to

interfere with the order passed by the tribunal.

5. The second question relates to payment of Rs.1.48 crores,

which was paid by the assessee to the tenant/licensee, who was

running a canteen/refreshment stall in the cinema hall. The

CIT(Appeals) and the ITAT have given a categorical finding that

payment of this Rs.1.48 crores to the stall owner under the

agreement dated 25th April, 2006 is related to the subsequent

sale transaction, which the respondent-assessee had entered

into with the third party on 6th July, 2006. They have rejected

the contention of the Assessing Officer that there was no link or

connection between the same. With regard to the date of

tenancy also, the CIT(Appeals) and the ITAT have recorded a finding that the stall owner was given rights way back in 1971.

They have referred to the material on record including the

balance sheet etc. to prove and establish the said factum. The

Assessing Officer did not dispute the actual payment of Rs.1.48

crores by the respondent-assessee to the said stall owner.

6. The findings recorded by the tribunal, read as under:

"13. We have carefully considered the rival submissions in the light of the material placed before us. It is true that when a person proposes to sell some property, then, the intended buyer will prefer for unencumbered property. The property which is already occupied by tenants would not fetch market rate as there will always be a fear in the mind of the intended buyer that the tenant may or may not vacate the property. Before arriving at a settled price, it will be ensured by the intended buyer that he got the vacant and peaceful possession of the property. It cannot be disputed that Minerva Refreshments Stall were running stalls in the premises of the assessee. Though the Assessing Officer has disputed the date of commencement of the tenancy as copy of agreement dated 12-12-1971 has not been produced, but it has been brought on record by the assessee that it has been running stalls in the premises of the assessee since long. If the Assessing Officer had any doubt about such fact, he could have conducted inquiries in that regard. No material has been brought on record to suggest that the facts were contrary to the contentions raised by the assessee. Moreover, the capital gain tax at the same rate has also been paid by M/s Minerva Refreshments Stall on the amount received by them on account of vacancy of the property. The Ld. CIT(A) has also taken into consideration the floor situation in the Mumbai to support the contention of the assessee that the agreement dated 12-12- 1971 may have lost in those circumstances. Thus, keeping in view all these facts, learned CIT(A) has arrived at a conclusion that payment made by the assessee for vacancy of the property had a link with the sale of property and, therefore, was entitled for set off against sale consideration. We find no infirmity in such findings recorded by the CIT(A). Hence, we decline to interfered(sic) in the deletion made by him and this ground of the revenue is dismissed."

7. Learned counsel for the Revenue submitted that payment

to the stall owner for vacating/relinquishing his right to operate

and manage the canteen/refreshment stall cannot be regarded

as "cost of improvement". He relies upon V.S.M.R.

Jagadishchandran versus Commissioner of Income Tax,

[1997] 227 ITR 240 (SC). In the said case, the assessee had

sold a house and plots in the assessment year 1975-76. The

house which was sold was mortgaged by the assessee, which

was repaid/discharged by the buyer out of the sale proceeds.

Therefore, the amount payable by the buyer to the mortgagee

was treated as a part of the sale consideration. The assessee

claimed that the mortgage debt should be treated as cost of

acquisition or cost of improvement. This contention was rejected. The mortgage was not for purchase or for making

improvements in the said property. The mortgage was created

after the house was purchased by the assessee himself and was

for purposes unrelated and unconnected the utilization of the

property. It was not for perfecting the title or improving the

house. In RM. Arunachalam vs. Commissioner of Income

Tax, (1997) 227 ITR 222, it was held that the discharge of the

mortgaged debt by payment which was created by previous

owner is an expense or cost incurred for acquisition or perfecting

an imperfect title. Thus when an assessee inherits/purchases a

property which is already mortgaged and incurs an expense to

redeem the mortgage and improves his title, which was

incomplete and imperfect, the cost incurred is treated as cost of

acquisition itself.

8. The Bombay High Court in Commissioner of Income-tax

v. Miss Piroja C. Patel [2000] 242 ITR 582 (Bom) had

examined the question whether payment made to hutment

dwellers for vacating land would constitute cost of improvement

under section 48(ii). It was held as under:

"The short point which arises for consideration in the present matter is whether compensation paid by the assessee and other co-owners to the hutment dwellers for vacating the land was an allowable expenditure within the meaning of section 48 read with section 55 of the Income-tax Act, 1961. The answer to this question will depend on whether the expenses incurred by the assessee and other co-owners constitute cost of improvement under section 48(ii). The said point is covered by the judgment of the Division Bench of this court in the case of CIT v. Shakuntala Kantilal [1991] 190 ITR 56 and the judgment of the Division Bench of this court in the case of Hardiallia Chemicals Ltd. v. CIT [1996] 218 ITR 598. On eviction of the hutment dwellers from the land in question, the value of the land increases and, therefore, the expenditure incurred for having the land vacated would certainly amount to cost of improvement. Accordingly, the above question is answered in the affirmative, i.e., in favour of the assessee and against the Department. The reference accordingly stands disposed of with no order as to costs. Issuance of certified copy expedited."

9. Similarly, the Karnataka High Court in Mrs. June Perrett

v. Income-tax Officer, (2008) 298 ITR 268(Kar), has held that

payment to execute an order of eviction and to evict an

unauthorized occupant can be treated as cost of improvement,

inter alia, observing as under:

"Then the last question to be considered by us is, whether the amount spent by the executors to secure an order of eviction to evict unauthorised occupant has to be treated as expenditure in connection with the transfer of property ?

The executors could have sold the property even without evicting the unauthorised occupant. If such an attempt were to be made by the executors, no man of prudence would have come to buy the property, since the unauthorised occupant were claiming adverse possession of the property. In order to clear the cloud cast on the property, the executors were required to file a civil suit. Any expenses incurred in connection with such suit has to be treated as expenditure in order to transfer the property. Our view is supported by the judgment of the Bombay High Court in the case of CIT v.

Miss Piroja C. Patel reported in [2000] 242 ITR 582. In the aforesaid case, certain eviction proceedings were initiated to evict the unauthorised occupant from the land. Due to eviction of the unauthorised occupant from the house, the value of the property was increased and the expenditure incurred for vacating the land has been treated as cost of improvement. Similarly, in this case also, if the unauthorised occupant had not been evicted, the value of the property would have been decreased instead of increasing. Therefore, we have to treat the expenditure incurred by the executors to evict the unauthorised occupant as an amount spent towards cost of improvement of the property. In the circumstances, we have to answer the question of law framed in favour of the assessee."

10. In the present case, as per the facts found by the tribunal

and the CIT (Appeals), there was a canteen/refreshment stall in

the cinema hall which was in occupation of a tenant/licensee

since 1971. The property was to be sold. In order to procure

and get proper value and effectuate the sale, the respondent

assessee paid Rs.1.48 crores to the tenant/licensee to vacate

the property. These are the factual findings recorded by the

tribunal and have been noticed above. We fail to understand

why the said sum cannot be set of from the sale consideration

as it was incurred solely and exclusively in connection with the

transfer. We, therefore, need not examine and go into the

question whether the amount paid was towards "cost of

improvement". The said amount has to be allowed because it

was incurred in view of facts found, wholly and exclusively

connected and linked with transfer/sale. In similar

circumstances, the Andhra High Court in Naozar Chenoy v.

Commissioner of Income-tax [1998] 234 ITR 95 (AP) has

observed as under:

"As regards the expenditure incurred by the assessee towards payment of the amount to the tenants for vacating the premises, which is the subject-matter of the sale transaction, we are of the view that it has nexus with the transaction as without the tenants vacating the premises, the building cannot be sold. Therefore we are of the view that the said expenditure was incurred for effecting the transaction and therefore he is entitled for deduction of the amounts incurred towards vacation of the tenants, in computing the capital gain of the building sold."

The stand of the Revenue cannot be accepted on the

second contention.

11. The last issue pertains to payment of Rs.66,88,679/- to the

employees. The tribunal has passed an order of remit to the

Assessing Officer to re-examine the said issue after recording

several aspects including the contradictory findings of the

Assessing Officer. It was noticed that the Assessing Officer had

proceeded in haste and the respondent-assessee was denied

fair and full opportunity. The respondent has a cinema theatre in

Delhi which it continues to operate and from which the

respondent continues to earn business income. Further, the

business operations in the cinema hall in Mumbai continued