Sandvik Asia Limited vs. DCIT (Bombay High Court)

DATE: August 11, 2015 (Date of pronouncement)
DATE: August 22, 2015 (Date of publication)
AY: 1990-91
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S. 37(1): Law on when expenditure towards property can be termed as being for protection of the property or for curing a defect and whether that is capital or revenue explained

(i) In the circumstances, the payment of Rs.23.35 lakhs paid by the Appellant was not with a view to protect the property per se but to ensure that the proceedings under ULCA do not result in the entire property being taken over by the State Government, which was otherwise a fait accompli. As a consequence, inter alia, of making a payment of Rs.23.35 lakhs, the Appellant received a benefit of enduring nature inasmuch as 10,462 sq. mtr of land came out of the clutches of ULCA and an area of 6767 sq. mtr was available for all times to be used by the Appellant including the power to sell of the land along with the structures thereon. In the above facts, the payment of Rs.23.35 lakhs from a businessman’s point of view is a payment made to stop/stall the acquisition of land which a businessman was able to foresee. Therefore, the adoption of the entire process of exemption to ensure that the land is available to the Appellant for indeterminate period albiet with the constructed hostel, training centre and guest house on the same. The exemption itself only prohibits the Appellant from disposing of land in favour of any third party till such time as the construction on the land is complete in terms of the conditions of the exemption. Thereafter, there is no prohibition to transfer the structure along with the land. Thus a right to transfer, unfettered in any manner became available to the Appellant after construction of the building on the land. This right was not available to the Appellant prior to the grant of the exemption as the disposition was fettered because of the certain acquisition of land as even according to the Appellant, vacant land was in excess of the ceiling limit under ULCA. This payment made by the Appellant in its nature is different from a payment made to protect the property. In fact, Supreme Court in the case of Assam Bengal Cement Co. Ltd. v/s. CIT 27 ITR 34 while laying down the criteria to decide/ determine whether the payment is of capital or revenue nature has observed that the aim and object of the expenditure would determine the character of the payment. In the present facts, as pointed out above, the entire aim and object of the payment was not only that the certainty of acquisition is aborted but enduring benefit as pointed out above is obtained by the Appellant. This would conclusively determine that the payment in this case was capital in nature in the capital field.

(ii) It was also contended that the title to the exempted land in respect of which the payment was made, was at all times with the Appellant. Therefore, it could not be a case of acquisition of asset or curing a defect in the title so as to become an expenditure which is capital in nature. It is a settled position that a title is an evidence of ownership to the property. Ownership as such constitutes a bundle of rights over a land or thing i.e. right to possession, right to use and enjoy, right to consume, destroy or transfer and all the above rights are indeterminate in time. The ownership of the exempted land is affected inasmuch as the right to consume and/or transfer the excess vacant land is affected/fettered by virtue of the enactment of ULCA. Thus, by obtaining exemption from ULCA inter alia on payment of Rs.23.34 lakhs, the fetter / encumbrance/impediment is removed in the ownership of the land. Therefore, the title which is evidence of ownership in the present facts was not complete ownership as the same was fettered by the provisions of ULCA. This removal of a fetter by making payment completes the ownership of the land which was otherwise imperfect and would be reflected in the title on grant of exemption, the title to the exempted land is no longer encumbered by the provisions of ULCA. Therefore, we do not accept the Appellant’s contention that the payment was revenue in nature. As observed by the Apex Court in Dalmia Jain & Co., v/s. CIT 82 ITR 754 if the expenditure is incurred to create, cure or complete the title, then the expenditure is capital in nature. In this case, the payment cures and/or completes the title by removing the fetter/ encumbrance of ULCA being invoked in respect of the exempted land. In fact, the authorities were correct in applying the test laid down in the Apex Court’s decision in V. Jagmohan Rao v/s. CIT 75 ITR 375 that to determine an expenditure to be a capital expenditure, it must be incurred in getting rid of a defect in title or a threat to litigation. Moreover, in this case, the threat to a certain acquisition would be on a higher footing then a threat to litigation. Therefore, it has been correctly held to be capital in nature on both counts i.e. getting rid of a defect and avoiding a certain acquisition.

(iii) The expenditure of Rs.23.35 lakhs has been incurred so as to complete the title/ ownership of the land. Therefore, the above expenditure cannot be attributed to the construction of the building. The construction of the building mandated by the exemption order under Section 20 of ULCA is only on consequence of the title/ ownership becoming complete.

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