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PETITIONER: COMMISSIONER OF INCOME-TAX CENTRAL, CALCUTTA & ANR.

       Vs.

RESPONDENT: AMALGAMATED DEVELOPMENT, LTD.

DATE OF JUDGMENT: 23/03/1967

BENCH: RAMASWAMI, V. BENCH: RAMASWAMI, V. SHAH, J.C. SIKRI, S.M.

CITATION:  1967 AIR 1475            1967 SCR  (3) 263  CITATOR INFO :  F          1972 SC2090  (1)

ACT: Income-tax Act, 1922-s. 10(2)(xv)-company purchasing  assets and liabilities of firm-liabilities including obligation  to complete  development  work on plots  sold  by  firm-Whether expenditure on such development deductible expenditure. Income-assessee  company  selling plots for  part  cash  and balance  secured by mortgage-whether balance  tantamount  to loan to purchaser therefore whether liable to be regarded as constructive receipt of income.

HEADNOTE: Under  a sale deed executed on July 7, 1948, the  respondent company purchased the assets and liabilities of a firm,, M & Co.  At  the time the firm had sold a number  of  plots  for which part of the consideration money had been realized  and for  the  balance mortgage bonds had been  executed  by  the purchasers,  Thereafter, the respondent company itself  sold some  plots  on similar terms.  In respect of  these  plots, there  was  an undertaking to lay out roads,  etc.,  and  to complete  certain  development work and  as  the  respondent company had taken over the debts as well as the  liabilities of  the firm, it was required to complete such work also  in respect  of the plots previously sold by the firm.  For  its assessment to Income-tax for the years 1950-’51 and 1951-’52 although the respondent company claimed to be treated on the basis  that it maintained its accounts on the  cash  system, the Income-tax Officer computed the income on the mercantile basis.   Furthermore, he allowed only the expenses  incurred in  respect  of ’the lands sold by the  company  itself  but disallowed  the  expenditure  in connection  with  the  land previously  sold  by the firm.  He also held  that  although only a part of the sale price of the plots sold was realised in cash by the company and the balance was left  outstanding and secured by a mortgage on the plots, the entire amount of the sale price was to be credited as income.  In the  appeal to  the Appellate Assistant Commissioner and  the  Tribunal, the view taken by the Income-tax Officer on both the  points was  substantially upheld.  However, upon a  reference,  the High Court held in favour of lie respondent company.

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In  the appeal to this Court it was contended on  behalf  of the  Incometax Department that (i) the expenditure  incurred in connection with the development of plots previously  sold by  the  firm was not deductible under s. 10(2)(xv)  as  the lands  already sold by the firm were not  stock-in-trade  of the respondent company; and that furthermore, it was  likely that  the  price paid ’by the respondent company  under  the contract  of sale dated July 7, 1948 to the firm for  taking over  the assets and liabilities of the firm had been  fixed after taking into account the obligation for the development of  such plots; the expenses incurred in discharge of  these obligation  must  therefore  be attributed  to  the  capital structure of the respondent company’s business and could not be considered an obligation incurred in connection with  the carrying on of its business ; (ii) part of the consideration money  not  received in cash from those who had  bought  the plots was treated as a loan to the purchaser for 264 which  the  plot  sold  was  mortgaged  in  favour  of   the respondent  company  and  as such should  be  treated  as  a constructive receipt liable to be included in the profits of the   respondent  company  derived  during  the   respective accounting years. HELD:Dismissing the appeal, (i)It  is not a right approach to examine the question  as if all revenue expenditure must be equated with  expenditure in connection with stock-in-trade. In the present case, the sale deed dated July 7, 1948 showed that therespondent company purchased from the firm a whole running businesswith all  its  goodwill  and  stock-in-trade  and  including  its liabilities. It  could  not be said  that  the  respondent company had nothing to do with the lands already sold  which did not form part of its stock-in-trade.  The development of the entire land sold in plots was an integrated process  and could  not  be sub-divided into water-tight  compartment  or related  to any Particular piece of land.  Furthermore,  the entire  expenditure was required to be incurred as a  matter of commercial expediency., [269A-E] Eastern  Investments,  Ltd. v. C.I. T. 20  I.T.R.  1;  Cooke (H.M.  Inspector of Taxes) v. Quick Shoe Repair Service,  30 T.C. 460; referred to. There was nothing to show that the obligation under the sale deed  to complete the development work on the plots sold  by the  firm  was  quantified  and formed  part  of  the  total consideration paid by the respondent company. [270G] Royal Insurance Company v. Watson (Surveyor of Taxes) 3 T.C. 500 distinguished. Commissioner of Income-tax (Central), Calcutta. v. Mugneeram Bangur & Co. (Land Department) 57 I.T.R. 299; referred to. (ii)The  execution of the mortgage deeds by the  purchasers of  plots  in respect of the balance  of  the  consideration money could not be treated as equivalent to payment of cash. It  cannot be said that the mere giving of security for  the debt by the purchaser was tantamount to payment.  The amount of  consideration  not  received and  which  the  purchasers agreed  to pay in future for which plots were  mortgaged  in favour  of  the respondent company, could not  therefore  be considered  to be taxable income for the assessment  periods in question. [271D-F] Commissioner    of   Income-tax,   Bihar   &    Orissa    v. Maharajadhiraja of Darbhanga, 60 I.A. 146; referred to.

JUDGMENT:

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CIVIL  APPELLATE JURISDICTION : Civil Appeals Nos.  169  and 170 of 1966. Appeal from the judgment and order dated December 4, 1962 of the  Calcutta High Court in Income-tax Reference No.  57  of 1958. S.K. Mitra, S. K. Aiyar, S. P. Nayyar for R. N. Sachthey, for the appellants (in both the appeals). A.K.  Sen and B. P. Maheshwari, for the  respondents  (in both the appeals).  265 The Judgment of the Court was delivered by Ramaswami,  J.  These appeals are brought,  by  certificate, from the judgment of the Calcutta High Court dated  December 4, 1962 in Income-Tax Reference No. 57 of 1958. The respondent company purchased the assets and  liabilities of  the  firm, Mugneeram Bangur &  Co.,  (Land  Department), hereinafter referred to as the ’firm’, on July 7, 1948 for a consideration  of  Rs. 34,99,300/-.  The  consideration  was paid by the issue of shares to the vendor or its nominees in the  share  capital of the respondent company.   The  assets included land at cost, Rs. 12,68,268/- as also goodwill  and certain other assets subject to certain liabilities incurred by  the firm.  By the time the respondent company took  over the land, the firm had sold a number of plots in respect  of which part of the consideration money had been realised  and for  the  balance Mortgage Bonds had been  executed  by  the purchaser.    In  respect  of  those  plots  there  was   an undertaking  to lay out roads, etc.  The respondent  company took  over the debts as well as the liabilities.  After  the purchase,  the respondent company itself sold certain  other plots.  The purchaser paid a percentage of the price in cash and  undertook  to  pay  the  balance  with  interest  at  a specified  rate in annual instalments which was  secured  by creating a charge on the land purchased.  The sales made  by the respondent company were in all material respects similar to the sales made by’ the firm.  A specimen copy of the sale deeds  executed  by the firm of the  respondent  company  is Annexure  ’A’  to the Statement of the Case.   The  relevant provisions of the sale deed are as follows :                "  And  whereas the said Vendor  hath  agreed               with  the  Purchaser  to  sell  him  the  said               land  ....  hereunder written at the  rate  of               price  or  sum of Rs. 3,000/- per  cotta  free               from all encumbrances.  And Whereas the  total               amount of price payable in respect of the said               plot.... at the rate aforesaid amounts to  Rs.               8,708-5-6.  And Whereas at the treaty for sale               it  was  agreed  by and  between  the  parties               hereto  that  one-third or thereabout  of  the               total  price  will  be paid  at  the  time  of               execution of these presents and the payment of               the  balance  will be secured  in  the  manner               hereinafter  appearing.   Now  This  Indenture               Witnesseth  that  in  pursuance  of  the  said               Agreement  and in consideration of the sum  of               Rs, 8,708-5-6 whereof the sum of Rs. 2,908-5-6               of lawful money of India to the said Vendor in               hand  well and truly paid by the Purchaser  at               or before the execution of these presents (the               receipt whereof the said Vendor doth hereby as               well as by receipt hereunder written admit and               acknowledge)  and the payment of  the  balance               namely the               266 sum  of Rs. 5,800/- being secured under a security  deed  of

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even date with these presents and executed by the  Purchaser in favour of the Vendor creating First Charge upon the  said land .... ".  . . And the said Vendor shall at all costs complete  the construction  of the said twenty-five feet wide road on  the North  of  the said plot No. 35A and will also lay  out  the said  surface drains by the side of the said road  within  a year  from the date hereof and will maintain the  said  road and drains in proper state or repairs and shall arrange  for lighting the said roads with electric light till the same are taken over by Tollygunge Municipality                                        Memo of Consideration      By amount paid as earnest money      on 5th August, 1948                         Rs.501.0.0      By Cheque (part) No. 6985706      on The Bank of India Ltd., on      30th January, 1949.                      Rs. 2,407.5.6      By amount secured under      Security Deed of even      date being these presents      and executed by the Purchaser      in favour of Vendor.                    Rs.  5,800.0.0                                              Rs.  8,708.5.6" A specimen copy of the mortgage deeds is Annexure ’B’ to the Statement of the Case.  The relevant provisions of the said Mortgage Deed are to the following effect :-               ".  . and by the said Indenture of  Conveyance               it  was  provided  that  the  payment  of  the               balance  of the consideration  money,  namely,               the  sum  of  Rs.  5,800/owing  by  the   said               mortgagor  to  the said  mortgagee  should  be               secured  by an Indenture of Security  Deed  of               even date being these presents to be  executed               by  the said mortgagor in favour of  the  said               mortgagee  immediately after the execution  of               Conveyance now in recital.  Now this Indenture               Witnesseth  and declares as follows  :-(1)  In               consideration  of the said premises  the  said               mortgagor  doth hereby covenant with the  said               mortgagee that the said mortgagor will pay  to               the said mortgagee the said sum of Rs. 5,800/-               within ten years to be computed from the  date               of  these  presents  together  with   interest               thereon                267               at  the rate of 8 % per annum calculated  from               the  date of these presents upto the  date  of               payment payable monthly. . . . " We  are  concerned in this case with the assessment  of  the respondent company for two periods.  The first period is the accounting  year ending June 30, 1949 corresponding  to  the assessment  year  1950-51  and  the  second  period  is  the accounting  year  ending  June  30,  1950  corresponding  to assessment  year 1951-52.  For the assessment year  1950-51, the  respondent company was maintaining its accounts in  the mercantile  system.  According to this system, the value  of the land sold was credited at Rs. 373,375/against which  the unpaid balance was debited in the debtors’ account and shown under  the  heading  "book  debts  considered   good-secured against mortgage of land".  Against this sale, there was  an item of expenses aggregating to Rs. 2,77,047/- of which  the actual expenses paid out in cash -was Rs. 1,12,577/- and the estimated  expenses  against  future  development  was   Rs. 1,44,470/-.   Out  of the actual expenses paid out  in  cash amounting  to  Rs.  1,12,577/-, a sum of  Rs.  48,238/-  was

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expended for lands sold by the respondent company and a  sum of  Rs.  64,340/- for expenses incurred by  the,  respondent company  on account of land already sold by the vendor.   As already stated, the accounts, were kept in the account books of  the respondent company on a mercantile system, for  this period.   Later  on,  the respondent  company  adjusted  its accounts  on  a cash system and submitted a  revised  return showing a loss of Rs. 11,583/-.  The Income-tax Officer,  in assessing  the  income  for  the  assessment  year  1950-51, originally accepted the cash basis and computed the  income. On  appeal,  the assessment was set aside and the  case  was remitted  to the Income-tax Officer for a fresh  assessment. In this fresh assessment, the Income-tax Officer adopted the mercantile  basis  on  which the  books  of  the  respondent company had actually been kept.  Thereafter, the  Income-tax Officer allowed the sum of Rs. 48,238/which was the expenses actually  incurred by the respondent company in  respect  of the lands sold by it but disallowed the sum of Rs.  64,340/- which was the expenditure in respect of the lands which  had already  been  sold  by  the  firm  before  the   respondent company’s  purchase.  With regard to the sale price  of  the plots, the Income-tax Officer held that the entire amount of consideration  was  to be treated as income, though  only  a portion  of the consideration was realised in cash  and  the other  portion was left outstanding after taking a  mortgage on  the  plots sold from the purchaser  as  security.   With regard to the next assessment year, 1951-52, the  respondent company  kept  its accounts on the cash system  and  not  on mercantile system.  The Income-tax Officer however held that for  this  assessment  year also the  amount  of  unrealised purchase price for the plots sold should be treated as 268 income.  As regards expenses, the Income-tax Officer allowed a  sum of Rs. 56,953/- being the expenditure in  respect  of the  lands  actually  sold by  the  respondent  company  but disallowed  the  amount of Rs. 87,517/- being  the  expenses incurred  in respect of the lands already sold by  the  firm when  the respondent company took over.  Against the  orders of  the Income-tax Officer the respondent company  preferred appeals   to  the  Appellate  Assistant   Commissioner   who dismissed the appeals by a consolidated order dated November 7, 1956.  The respondent company thereafter took the  matter in appeal before the Appellate Tribunal.  The view taken  by the  Appellate  Tribunal  was that  the  Income-tax  Officer should have made the assessment on the basis of cash  system for  the  year  1951-52  and for that  year  only  the  cash receipts  and  disbursements  should  be  considered.   With regard  to the question of  unrealised  consideration-money, the  Appellate  Tribunal held that for both  the  assessment years  the  unrealised consideration should  be  treated  as income.   With  regard to expenses incurred,  the  Appellate Tribunal  upheld the finding of the Income-tax Officer.   In other words, for both the assessment years it was held  that the  expenses  incurred  in respect of  lands  already  sold before   the   respondent  company  took  over   should   be disallowed.   At the instance of the respondent company  the Appellate  Tribunal stated a case to the High Court  on  the following questions of law :               "1. Whether on the facts and circumstances  of               the case the entire sums of Rs. 1,12,577/- and               Rs. 3,43,155/- for the assessment years  1950-               51  and 195152 respectively spent in  carrying               out  the  obligations subject to  which  lands               were  sold by the assessee were  allowable  in               computing the assessee’s profits from the land

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             business.               2.    Whether  on the facts and  circumstances               of  the  case the assessee was  liable  to  be               taxed only on the actual realisation of  sales               in  cash subject to the allowances  admissible               under the Indian Income-tax Act ?" By  its  judgment  dated December 4,  1962  the  High  Court answered  both  the questions in favour  of  the  respondent company. With  respect to the first question it was submitted by  Mr. Mitra  that  only the expenditure incurred in  the  relevant accounting  year  in connection with the lands sold  by  the respondent  company  should have been allowed  and  not  the expenditure  incurred in connection with the lands  sold  by the  vendor-firm  previously.  It was not  disputed  by  Mr. Mitra  that  under  the terms of the  contract  between  the vendor-firm and the respondent company the latter was  bound to   meet  the  obligations  of  the  development  of   land previously sold by the firm, but the contention was that the lands  already sold by the firm were not  stock-in-trade  of the respondent company.  I  269 was  said that expenditure not incurred in  connection  with stock-in-trade of the business of the respondent-company  is not deductible under s. 10(2)(xv) of the Income-tax Act.  We are  unable to accept this argument as correct.  It is  not, in our opinion, a right approach to examine the question  as if all revenue expenditure must be equated with  expenditure in connection with the stockin-trade.  In the present  case, the sale deed dated July 7, 1948 shows that the  respondent- company  purchased  from the firm a whole  running  business with  all its goodwill and stock-in-trade and including  its liabilities.    The   respondent-company  had   taken   over undeveloped  land  and the idea was to develop the  same  by making roads, installing a drainage system, street lighting, etc., and then selling the same in small plots at a  profit. The  principal inducement therefore for the  purchasers  was that  the respondent-company would develop the land and  the purchasers would be able to pay by instalments spread over a number  of years.  At the time the  respondent-company  took over  the lands a portion thereof had already been  sold  by the  firm but the development had not been completed and  in the  sale deeds entered into by the  respondentcompany  with the  subsequent purchasers the respondent-company  expressly undertook the liability to complete the development within a reasonable  time.  The argument that the  respondent-company had nothing to do with the lands already sold which did  not form  part  of its stock-in-trade is not  correct.   In  the present  case,  the  development of the entire  land  is  an integrated  process  and cannot be sub-divided  into  water- tight  compartments  as  the making of  the  roads  and  the provisions for drainage and street lighting, etc., cannot be related to any particular piece of land but the  development has to be made as a whole as a complete and unified  scheme. It is a case of commercial expediency and, as pointed out by this Court in Eastern Investments Ltd. v. C.I.T.(1) :               "A sum of money expended, not of necessity and               with a view to a direct and immediate  benefit               to  the  trade,  but voluntarily  and  on  the               grounds of commercial expediency and in  order               indirectly  to facilitate the carrying  on  of               the  business, may yet be expended wholly  and               exclusively  for the purposes of  the  trade."               (approving  the dictum of Viscount Cave,  L.C.               in  Atherton  v. British  Insulated  &  Helsby

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             Cables Ltd. (10 T.C. 155, 191). The  same test has been applied in Cooke (H.M. Inspector  of Taxes  v.  Quick  Shoe  Repair  Service(2),  in  which   the agreement  by  which the respondent firm purchased  a  shoe, repair  business provided that the vendor  should  discharge all  liabilities of the business outstanding at the date  of sale.   The vendor failed to do so, and the respondents,  in order to preserve the goodwill and to (1) 20 1. T. R. 1.                                    (2) 30 T. C. 460. in  discharge of the vendor’s liabilities.  It was  held  by Croom  Johnson, J. that the sums so paid by  the  respondent firm  were wholly and exclusively laid out for the  purposes of  its business and were not capital expenditure and  were, therefore, allowable deductions for income-tax purposes. It  was  also  contended by Mr. Mitra that  so  far  as  the expenditure incurred in development of plots already sold by the firm is concerned, it was likely that the price paid  by the respondent-company in the contract of sale dated July 7, 1948 to the firm for taking over the assets and  liabilities of  the  firm had been fixed after taking into  account  the obligation  for  the  development of such  plots.   On  this assumption it was submitted by Mr. Mitra that the  discharge of this obligation must be attributed to the capital  struc- ture  of  the respondent-company’s business  and  cannot  be considered as an obligation incurred in connection with  the carrying  on  of  its business.  It  was  argued  that  such expenditure must be regarded as capital in character and not debatable  to  the revenue account  of  relevant  accounting years.   In support of this proposition Counsel relied  upon the decision in Royal Insurance Company v. Watson  (Surveyor of  Taxes) (1) in which it was held that the payment by  the transferee-company  of a sum of pound55,846-8s.-5d.  to  the manager  in  commutation of his annual  salary  was  capital expenditure   since   the  payment  formed   part   of   the consideration for the transfer of the business and therefore could not be deducted.  On behalf of the  respondent-company Mr.  Asoke  Sen ’referred to the decision of this  Court  in Commissioner of Income-Tax (Central), Calcutta v.  Mugneeram Bangur  & Co. (Land Department) ( 2 ) and to the:  terms  of the  sale deed dated July 7, 1 948 and the Schedule  thereto and   argued  that  there  was  no  quantification  of   the obligations taken over by the respondent-company under cl. 5 of  the sale deed.  It was stated by Mr. Asoke Sen that  the obligations  were not computed and did not form part of  the consideration  of  Rs. 34 lakhs and odd arrived  at  in  the Schedule.   In  our opinion, there is justification  in  the argument  put forward by Mr. Asoke Sen and the principle  of the decision in Royal Insurance Company v. Watson(1) has  no application  to the present case.  There is nothing to  show in the present case that the obligation incurred under cl. 5 of  the  sale  deed was quantified and formed  part  of  the consideration amounting to Rs. 34 lakhs and odd mentioned in the  sale  deed  as  paid  by  the  respondent-company.   We accordingly reject the argument put forward by Mr. Mitra  on behalf of the appellants on this aspect of the case. We  next proceed to consider the question whether  the  full price  as  recited in the sale deed should  be  regarded  as having been rea- (1)  3 T.C. 500.                                     (2)  57 I.T.R. 299.  271 lised by the respondent-company for the relevant  accounting years,   mid  not  merely  the  actual  cash  paid  by   the purchasers.   The  recital  in  the  sale  deed  showed  the

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consideration for the transfer of the property, that part of the  consideration  was  paid in cash and  the  balance  was secured  by  a mortgage executed by the purchasers  on  the; same  date.  It was argued by Mr. Mitra that the amounts  of the consideration money not received in cash but which  were treated as a loan to -the purchasers and for which the lands sold  were  mortgaged in favour of  the  respondent-company, should  be treated as constructive receipt of the  money  by the  respondent-company and therefore liable to be  included in  the profits of the respondentcompany derived during  the respective  accounting years.  We are unable to accept  this argument as correct.  The Memo of Consideration in the  sale deed  reproduced above shows that there was cash payment  of the earnest money on August 5, 1948 (Rs. 501/-) and a cheque was  paid as part of the consideration on January 30,  1.949 for  a  sum of Rs. 2,407/5/6 and the balance of  the  amount "secured under Security Deed of even date".  It is therefore impossible  to  hold in this case that there  was  any  cash payment  by the purchasers to the respondent-company on  the date of the execution of the sale deed and the execution  of the mortgage deed on the same date by the purchasers  cannot be  treated  as  equivalent  to payment  of  cash.   In  the circumstances  found in the present case it cannot  be  said that  the  mere  giving  of security for  the  debt  by  the purchaser  was tantamount to payment.  We  accordingly  hold that,  in  the  circumstances of this case,  the  amount  of consideration  not received and which the purchasers  agreed to pay in future for which lands were mortgaged in favour of the  respondent-company, cannot be considered to be  taxable income  for  the assessment periods in question.   The  view that  we have expressed is home out by the decision  of  the Judicial  Committee in Commissioner of Income-Tax,  Bihar  & Orissa  v. Maharajadhiraia of Darbhanga(1).  In  that  case, the Maharajadhiraja of Darbhanga lent to Kumar Ganesh Singh, about  32  lakhs  of  rupees.  In  the  assessment  year  in question, the Kumar owed to Maharaja six lakhs of rupees  as interest.  This he did not pay in cash, but entered into  an arrangement whereby the assessee took over various items  of property  in  lieu of principal and interest.   One  of  the items  so taken over consisted of promissory notes  executed by  the Kumar in favour of the Maharaja.  The  question  was whether  this was income received by the Maharaja.   In  the course  of his judgment,, Lord Macmillan stated at page  161 of the Report as follows:               debtor’s own promissory notes, was clearly not               the  equivalent of cash.  A debtor  who  gives               his creditor a promissory note for the sum  he               owes can in no sense be               (1)   60 I. A. 146.               272               said to pay his creditor; he merely gives  him               a  document  or  voucher  of  debt  possessing               certain legal attributes.  So far then as this               item......  is concerned the assessee did  not               receive payment of any taxable income from his               debtor  or indeed any payment at all.   In  so               holding  their  Lordships find  themselves  in               agreement with the learned judges of the  High               Court  who  differed on this  point  from  the               commissioner."               For  the  reasons already expressed,  we  hold               that  both the questions referred to the  High               Court  have  been rightly answered  by  it  in               favour  of the assessee and these appeals  are               without  merit  and should be  dismissed  with

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             costs.  One set of hearing fee.               R.K.P.S.               Appeals dismissed. 273