Commissioner of Income Tax vs Bhupindera Flour Mills (P) Ltd.

Ajay Kumar Mittal, J.—This order shall dispose of IT Appeal Nos. 563 of 2005 and 421 of 2006 as the issues involved in both the appeals are common. For brevity, the facts are being taken from IT Appeal No. 563 of 2005.

This appeal has been preferred by the revenue u/s 260A of the IT Act, 1961 (in short "the Act") against the order dt. 13-6-2005 passed by the income tax Appellate Tribunal, Amritsar Bench, Amritsar (hereinafter referred to as "the Tribunal") in ITA No. 320/Asr/2000, for the asst. yr. 1995-96, claiming the following substantial questions of law :

(i) Whether the Tribunal, Amritsar Bench, Amritsar is right in confirming the action of the learned CIT(A) adopting the value of the land at Rs. 330 per sq. yard as against Rs. 60 per sq. yard applied by the AO in view of the allotment made by the improvement trust, Bathinda in the year 1981-82 in respect of adjoining land ?

(ii) Whether the Hon''ble Bench is right in treating the demolishing charges and repair expenses as revenue expenditure when no business activity was carried out after these expenses were incurred ?

Briefly stated, the facts necessary for adjudication as narrated in the appeal are that the assessee-company filed its return on 28-11-1995 for the asst. yr. 1995-96 declaring a loss of Rs. 12,62,170. The case was taken up for scrutiny and notice u/s 143(2) of the Act was issued. In response thereto, the assessee filed a revised return on 31-1-1997 reducing the loss to Rs. 2,53,089 excluding Rs. 10,09,077 the amount of TDS on the interest payment. The assessment was completed on 11th March, 1998. Addition of Rs. 3,31,645 was made under the head "Demolishing charges" as these expenses were not allowable u/s 37 of the Act. Further, addition of Rs. 2,13,094 was also made under the head'''' "Repair'''' of'''' building"'''' as'''' these'''' expenses'''' were'''' incurred'''' on construction of boundary wall and being of capital nature, the same were disallowed u/s 37(1) of the Act. The assessment was completed at an income of Rs. 4,41,098 which was other than long-term capital gain. The AO determined the long-term capital gains at Rs. 11,36,520 by taking the fair market value of the capital asset at Rs. 60 per sq. yard as on 1-4-1981 as against Rs. 350 per sq. yard claimed by the assessee. Feeling aggrieved, the assessee filed an appeal before the Commissioner of income tax (Appeals) [in short "the CIT(A)"]. The CIT(A) vide order dt. 1-3-2000 estimated the rate of the land for the purpose of capital gains at Rs. 330 per sq. yard as on 1-4-1981 and thereby reduced the addition to Rs. 62,160 by allowing the relief to the turie of Rs. 8,39,160 to the assessee... The CIT(A) also deleted additions of Rs. 3,31,645 and Rs. 2,13,094 made under the heads "Demolition charges" and "Repair of building", respectively. Being dissatisfied, the revenue preferred an appeal before the Tribunal who vide order dt. 13th June, 2005 upheld the order of the CITfA) and dismissed the appeal. Hence, the present appeal by the revenue.

We have heard learned counsel for the parties.

The appeal raises two issues. First issue relates to the valuation of the plot as on 1-4-1981 and secondly, whether the expenses incurred as "demolition charges" and "repairs of building" were revenue expenditure.

Taking up first issue, it may be noticed that the assessee had sold a plot measuring 1,200 sq. yards for which fair market value as on 1-4-1981 was required to be taken for calculating cost of indexation for arriving at long-term capital gains. The assessee had taken the value of the plot at Rs. 350 per square yard as on 1-4-1981, whereas the AO had projected that it should be Rs. 60 per sq. yard on the basis of allotment made by the improvement trust, Bathinda, in the year as it was the rate prevailing in the adjoining land. The Tribunal while rejecting the contention of the Department in para 4 of its order had recorded as under :

On this issue, the AO estimated the fair market value of the land at Rs. 60 per sq. yard as on 1-4-1981. It was stated that the AO has erred in stating that the distance between Samrat Hotel and the land sold shall be more than 1 km. and that the AO has erred in not accepting the fact that Shri Amrik Singh Road was a better developed commercial area than the area adjoining Samrat Hotel in 1981. It was also submitted that the AO should have accepted the value of the land @ 350 per sq. yard as on 1-4-1981 as is shown by the assessee. It was submitted before the CIT(A) that the mill caught fire on 23-7-1994 as a result of which 1/3rd of the main mill building, machinery and cielo got burnt and hence the operation of the mill had to be suspended temporarily. The mill was not insured. The total cost of the repair and purchase of new machinery was around Rs. 2 crores which the company could not arrange. To receive the funds the company decided to sell some land of the company. For this purpose land measuring 1,200 sq. yards was sold facing Amrik Singh Road, Bathinda for Rs. 13,23,000 on which capital gain was computed at Rs. 2,35,000 and the cost of land indexation was calculated at Rs. 350 per sq. yard. The AO made the enquiry as regards the land and it was submitted that the valuer of the Government had estimated the cost of the land at Samrat Hotel, Bathinda, at Rs. 300 per sq. yard as on 1-4-1981. There was price hike in the value of real estate in 1980-81 and, therefore, considering it indexation cost had taken at Rs. 350 per sq. yard for the capital gain. However, the AO did not believe the version of the assessee and taken the rate at Rs. 60 per sq. yard for the purpose of capital gain and made the addition of Rs. 9,01,320 [Rs. 11,36,520 (-) Rs. 2,35,200]. The addition was challenged before the CIT(A) and it was submitted that the valuation in the case of Samrat Hotel was taken at Rs. 300 per sq. yards as on 1-4-1981 and the hotel is situated near the land of the assessee. The other details as regards the land sold by the improvement trust on enhanced rate @ Rs. 329.55 were also explained before the CIT(A). It was also explained from purchase deed of the land from the improvement trust on 1-6-1981 that the land was sold at Rs. 809 per sq. yard. The CIT(A) considering the facts and material available on record was of the view that in the case of Samrat Hotel, the Departmental Valuer has valued the land at Rs. 300 per sq. yard and that it is factually correct that the mill of the assessee was located on both the Railway Road as well as Amrik Singh Road and the mill itself was near to Samrat Hotel. The distance is not more than 1 km. The CIT(A) considering the material on record and comparable cases estimated the rates for the purpose of capital gains at Rs. 330 per sq. yard and directed to reduce the addition of Rs. 62,160 and allowed the relief to the assessee in a sum of Rs. 8,39,160.

The. CIT(A) and the Tribunal after noticing that there was transaction of sale of land by the improvement trust on 1-6-1981 and other comparable sale instances had accepted the fair market value of the land at Rs. 330 per sq. yard as on 1-4-1981. Learned counsel for the revenue was unable to point out any error in the aforesaid finding which may warrant interference by this Court.

Now adverting to the second issue, the Tribunal had accepted that the "demolition charges" and the- "repair expenses" incurred by the assessee were revenue in nature. In this regard, the findings recorded by the Tribunal in paras 9 and 12 of its order are to the following effect:

The CIT(A) on the above issues has observed that it is factually position that the mill premises caught fire on 23-7-1994 and this position has not been disputed by the Department. The CIT(A) observed that on having the mill caught fire the assessee had to reconstruct a boundary wall for the safe preservation of the building and the broken or hanging parts of the fallen structure had to be demolished and major repair undertaken. The position with regard to the continuity of the business has not been disputed and the business expenses till 31-3-1995 have been allowed by the AO. The CIT(A) was of the view that it is a settled law that if business is suspended for sometime then the expenses incurred during the suspended period are allowable. It was not in dispute that due to fire the damaged portions were removed and in that process the assessee has to pay demolition charges which is factual position and where the assessee has to change demolished portion by putting MS sheets, the assessee has, therefore, carried out repairs which was necessary for the restart of the business activity of the assessee. In this way no asset has been generated by the assessee. The CIT(A) was also of the view that the repair was made to the building etc. which was necessary for the interest of the business. As such the expenditures were revenue in nature and the CIT(A) accordingly deleted the additions on account of the repair and demolition charges.

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On consideration of the above facts and the material on record, we do not find any justification to interfere in the order of the CIT(A). The fact that the mill of the assessee caught fire is not disputed. It is also not in dispute that due to fire the assessee has to carry out the repair of the demolished portion and has to make repairs in the premises to carry out the business activity. The expenditure spent by the assessee on these items would clearly prove that these were mainly with current repair for the replacement of the demolished portion and as such the assessee has not generated any capital in this way. The expenditures are made only for the purpose of replacement of the demolished items for the restart of the business activity of the assessee. As a result, the expenditures were rightly allowed to be revenue in nature. We accordingly confirm the order of the CIT(A) on this issue and dismiss the appeal of the revenue on these grounds also.

The Tribunal on appreciation of material came to the conclusion that the business of the assessee had continued till 31-3-1995 as the AO himself had allowed business expenses till that date. In the light of the said finding, it was further noticed that the assessee had to spend "demolition charges" in respect of structure that had caught fire and for which major repair was undertaken. Therefore, the "demolition charges" and the "repairing charges", were held to be admissible to the assessee. The said finding is also not shown to be perverse in any manner by the learned counsel for the revenue.

In view of the above, the substantial questions of law are answered against the revenue and in favor of the assessee. Resultantly, the appeals are dismissed.