ORDER
U.T. Shah, Vice-President
1. The only point involved in this appeal pertains to the assessee’s claim for deduction of Rs. 43,00,000 under Section 48(i) of the Act, in computing the long-term capital gain chargeable to tax.
2. The assessee is a company engaged in dealing with various types of papers on agency basis. The assessment year is 1984-85 and the relevant previous year is the calendar year 1983.
3. The facts leading up to the dispute are:
(1) the assessee was incorporated and had commenced its business in 1973;
(2) the assessee was a member of Majithia Commercial Premises Co-operative Society Limited, which owned property known as Majithia Chambers, 276, Dr. D.N. Road, Fort, Bombay;
(3) the assessee owned ten fully paid shares of the said society, by virtue of which it owned the first floor of Majithia Chambers, admeasuring 3,200 sq. ft.;
(4) by an agreement dt. 1-11-1974 entered into between the assessee and M/s. Chimanlal Paper Co. (C.P.C.), the assessee allotted 2,200 sq. ft. of the first floor to C.P.C. for a period of five years with effect from 1-5-1974. In consideration thereof C.P.C., which had agencies of number of well known paper mills, agreed to pay compensation to the assessee by way of rebate/commission at the rate of 5% on the value of the net sales;
(5) by another leave and licence agreement dt. 24-4-1975 entered into between the assessee and M/s. Chimanlal Pvt. Ltd. (CPL), the assessee allotted 400 sq. ft. of the first floor to CPL for a period of 5 years with effect from 1-11-1974. In consideration thereof CPL agreed to pay compensation of Rs. 1,500 per month and a deposit of Rs. 3,00,000 with the assessee as security for due performanc/observance of the terms/conditions of the licence;
(6) sometime during the relevant previous year the assessee had thought of transferring the first floor to the Trustees of eight trusts, viz.,-
(i) Chandiwala Trusts;
(ii) Furniturewala Trusts;
(iii) Jehangir Trusts;
(iv) NazirTrusts;
(v) Zainab Trusts;
(vi) Roshan Trusts;
(vii) Mohamed Trust; and
(viii) Ahmed Trusts.
The Trustees of these Trusts insisted on having vacant possession of the first floor and agreed to pay Rs. 55,00,000 in this regard;
(7) by an agreement dated 10-5-1983 entered into between the assessee and CPC, it was agreed that CPC would vacate 2,200 sq. ft. of the first floor allotted to it under the agreement dt. 1-11-1974 in consideration of Rs. 37,00,000 by way of compensation;
(8) similarly, through their Solicitor’s (M/s. Kanga & Co.) letter dated 30-5-1983 CPL agreed to vacate 400 sq. ft. of the first floor allotted to it under the leave and licence agreement dt. 24-4-1975 in consideration of Rs. 6 lakhs by way of compensation or providing appropriate alternate accommodation;
(9) by an agreement dt. 16-5-1983 entered into between the assessee and the Trustees of the aforesaid 8 Trusts, the assessee sold and transferred the first floor to the Trustees of the aforesaid 8 Trusts for a consideration of Rs. 55 lakhs. The 10 shares owned by the assessee in the aforesaid society were also transferred and registered in the names of the Trustees of the aforesaid 8 Trusts in the register of the aforesaid Society.
4. On the aforesaid facts the assessee worked out long term capital gain as under:
Sale Price Rs. 55,00,000
Less: Compensation paid to
the partnership concern
of CPL 43,00,000
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12,00,000
Less: Original cost Rs. 6,42,000
Addition 2,51,970 8,92,970
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3,07,030
Less: Brokerage Rs. 30,000
Solicitors 55,000 85,000
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Rs. 2,22,030
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5. After making following observation in his assessment order:
The assessee was asked to explain the necessity and circumstances under which the said claim is made. From the details before me, it is seen that these parties are sister concerns of the assessee Co. This group is inter-connected. From this fact and very close reading of the agreements, dt. 1-11-74 and 24-4-1975 filed before me allowing the said two parties to use premises. It is clear and beyond doubt that the assessee merely allowed them to use the premises and no right to them in any form was transferred. Thus there was no enforceable right for those parties in respect of the premises in any form. Thus the assessee’s claim for payment of compensation is not used on any reason. It can only be construed as a device or adjustment to reduce the tax liability. The recipient can claim an exemption for such receipts in their hands. Under these circumstances, I hold that the assessee’s claim of the payments of compensation as detailed above is out of place and is not allowable. The capital gain arising out of the sale is computed accordingly.
The ITO worked out the capital gain at Rs. 45,22,030 as under:
II. Capital Gains: Rs. Rs.
Sale price 55,00,000
Less: Original cost 641000
Addition made 251970 8,92,970
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46,07,030
Less: Brokerage 30000
Solicitors 55000 85,000
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Capital Gain 45,22,030
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6. In appeal before the CIT(A), the assessee strongly argued that the ITO ought to have accepted its claim for deduction of Rs. 43 lakhs paid to CPC and CPL on the ground that:
(a) The occupants were in actual possession of the premises.
(b) The occupants regularly paid the consideration as agreed.
(c) The appellant was required to give vacant possession of entire premises to the buyer.
(d) It was impossible to sell the premises for a price of Rs. 55 lakhs without giving the buyer vacant possession of the entire area of 3,200 sq. ft.
(e) The removal of occupant was not possible as the due process of Law would have involved long drawn litigation.
(f) the only alternative for a timely solution was payment of compensation by the appellant company to occupants.
In support of its claim the assessee relied on the decision in the cases of CIT v. A. Venkataraman [1982] 137 ITR 846 (Mad.), CIT v. C.V. Soundararajan [1984] 150 ITR 80/19 Taxman 381 (Mad.) and Orient Paper Mills Ltd. v. CIT [1978] 113 ITR 550 (Cal.).
7. After adverting to certain clauses of the agreements dt. 1-11 -1974 and 24-4-1975, the CIT(A) upheld the action of the ITO as under :
In view of the wordings contained in the Clauses 12 & 13 of the agreement with Chimanlal Paper Co. and Clauses 6 & 7 of the agreement with Chimanlal Pvt. Ltd., the ITO was fully justified to conclude that the assessee merely allowed the two occupants to use the premises and no right to them in any form was transferred. The ITO was also fully justified that there was no enforceable right of these parties in respect of the premises in any form. In the circumstances, the contention put forth in appeal that the said agreement would constitute an agreement of tenancy does not have any basis. The reference to the agreement dated 10-5-1983 with Chimanlal Paper Co., to pay Rs. 37 lakhs in consideration of their vacating the area occupied by them does not entitle the appellant to claim the sum as a deduction for computing the capital gains on the sale of the office premises. Similar is the position with regard to letter dated 30-5-1983 of the other occupier, i.e., Chimanlal Pvt. Ltd., for payment of compensation of Rs. 6 lakhs. The ITO’s conclusion in denying the claim of the appellant is also based on the facts that the said two concerns are closely inter-connected with the appellant company and the payment of compensation was clearly a device to reduce the tax liability. In view of the discussion above, I am in full agreement with the conclusion so arrived at by the ITO since admittedly the concerns are closely inter-connected and legally there was no enforceable right of the occupiers to claim for compensation for vacating the premises owned by the appellant company.
Further, the CIT(A) was of the view that the reported decisions relied on behalf of the assessee would not be of much help to it, as the facts and circumstances obtaining in those cases are clearly distinguishable from the one obtaining in the case of the assessee.
8. Being aggrieved by the order of the CIT(A), the assessee has come up in appeal before the Tribunal. The learned Counsel for the assessee reiterated the submissions, which were made before the income-tax authorities and strongly urged that they should have accepted the assessee’s contention that the compensation of Rs. 43 lakhs paid to CPC and CPL should be deducted from Rs. 55 lakhs in working out the capital gain. In this connection, he invited the attention of the Tribunal to the relevant clauses of the agreements dated 1-11-1974 and 24-4-1975 to urge that over the years CPC and CPL had acquired right to the property as the licensee which could not have been terminated without long drawn process of litigation and uncertainty. Since the assessee had agreed with the Trustees of the aforesaid 8 Trusts to give vacant possession of the first floor, it had no choice but to agree to share Rs. 55 lakhs with the licensees in order to vacate the space occupied by them in a peaceful manner. In this connection, he stated that the IT authorities have failed to appreciate the difference between the right to the property and the right in the property. The former is applicable in the case of leave and licence arrangement, while the latter is applicable in the case of tenancy. However, in both the cases it is not possible to obtain vacant possession of the property without undertaking tortuous process of litigation. In this connection, he further went on to argue that now-a-days it is not possible even to evict a mere trespasser who would rather drag the owner of a property to litigation instead of vacating the space occupied by him unless and until he is suitably compensated for vacating the possession. He further submitted that if the assessee had incurred litigation expenditure in order to obtain vacant possession from the CPC and CPL and in such litigation if the assessee had to pay compensation to CPC and CPL, the same would have been eligible for deduction Under Section 48(i) of the Act. Instead of that the assessee, CPC and CPL have entered into arrangements to have the first floor free from any encumbrances which could be transferred to the Trustees of the aforesaid 8 Trusts. The learned Counsel for the assessee also placed before the Tribunal the names of the Directors, Shareholders and their shareholding in the assessee-company as well as in CPL as also the names of the partners of the CPC to impress upon it that even though they may be sister concerns, one has to decide the issue involved objectively as if the entire dealing had taken place at arms length. Viewed in this context, it is of no consequence that the period of leave and licence had expired or that CPC and CPL had no vested right in the space occupied by them. According to the learned Counsel for the assessee, if the facts and circumstances obtaining in the instant case are appreciated in proper perspective, there is no doubt that in computing the capital gain the assessee would be entitled to the deduction of Rs. 43,00,000 out of the consideration of Rs. 55 lakhs received from the Trustees of the aforesaid 8 Trusts. He once again relied on the aforesaid two decisions in A. Venkataraman’s case (supra) and C.V. Soundarara-jan’s case (supra) which, according to him, directly support the stand taken up by the assessee. In the later case, the amount was paid to the mother for vacating the premises which was a case of much more close relationship than that obtaining in the instant case. He also relied on the order of the Tribunal, Madras Bench ‘C in the case of ITO v. C. Thangavel Gounder 1981 12 TTJ 273, wherein on identical facts/circumstances obtaining in that case the Tribunal was pleased to accept similar deductions claimed by the assessee. He, therefore, urged that we should likewise accept the assessee’s claim for deduction of Rs. 43 lakhs in the present case also.
9. The learned representative for the department, on the other hand, supported the action of the I.T. authorities. In this connection, he stressed the point that C.P.C. and C.P.L. were licensees, that the period of leave and licence had expired long back, that legally they had to vacate the occupancy and that all the three parties were closely connected sister concerns where the scope of litigation could not be imagined. He also invited the attention of the Tribunal to the relevant clauses contained in various agreements. According to him, the agreement dt. 10-5-1983 entered into between the assessee and C.P.C. or the Solicitor’s tetter dated 30-5-1983 of C.P.L. were nothing but self-serving documents which should not be taken into account for deciding the issue involved. In this connection, he placed reliance on the decision in the case of CIT v. Durga Prasad More [1971] 82 ITR 540 (SC). He also submitted that the facts/circumstances obtaining in the aforesaid two reported decisions as well as in the case of C. Thangavel Gounder (supra) were clearly distinguishable from the one obtaining in the instant case. He, therefore, urged that the Tribunal must uphold the action of the I.T. authorities.
10. We have carefully considered the rival submissions as well as the material placed on record to which our attention was drawn by the parties and are of the considered opinion that the assessee should succeed in this appeal. At the outset, we would like to observe that the fact that the assessee, C.P.C. and C.P.L. are closely connected parties should not detract our mind in deciding the point at issue. It is a common knowledge that in such cases of close relationship there is more litigation resulting on waste of time, money and energy. The long process of uncertain litigation has ruined many prosperous concerns. With a view to avoid precisely such situation, the assessee entered into arrangements with C.P.C. and C.P.L. to obtain vacant possession of the first floor in a peaceful manner. Surely, such arrangement arrived at cannot be dubbed as “self-serving” arrangement only with a view to deny the assessee its claim for deduction of Rs. 43 lakhs Under Section 48(i) of the Act for working out capital gain. On the facts narrated above, it cannot be denied that over the years CPC and CPL had acquired right – whether legally supportable or not – over the area occupied by them which could not be terminated without the help of costly litigation, which could drag on for years and years. The assessee had already arrived at some sort of understanding with the Trustees of the aforesaid eight Trusts for transferring vacant possession of the first floor. In fact, the time was the essence of such understanding. Under the circumstances, the assessee had no alternative but to arrive at certain arrangements with CPC and CPL to obtain vacant possession of the first floor in a peaceful and orderly manner. Again it is not in dispute that the payments made to CPC and CPL were fair and reasonable, as Rs. 55 lakhs were shared by the assessee, CPC and CPL according to the area occupied/utilised by them. Therefore, it is difficult to concur with the conclusion arrived at by the IT authorities that “the payment of compensation was clearly a device to reduce the tax liability”. In our view, the ratio laid down in the cases of A. Venkataraman (supra) and C. V. Soundararajan (supra), clearly supports the stand taken up by the assessee. Again, the order of the Tribunal in the case of C. Thangavel Gounder (supra) with which we fully concur, helps the assessee in contending that it was entitled to deduction of Rs. 43 lakhs Under Section48(i)ofthe Act. Respectfully following the ratio laid down in the said two reported decisions as well as following the order of the Tribunal in the case of C. Thangavel Gounder (supra), we hold that the assessee is entitled to deduction of Rs. 43 lakhs Under Section 48(i) of the Act for the purpose of computing capital gain. We, therefore, direct the ITO to accept the assessee’s claim in this regard and modify the assessment accordingly.
11. In the result, the appeal is allowed.