BOMBAY BENCH WESTERN INDIA TENTH INCOME TAX WAREHOUSING v. OFFICER CORPORATION May 25, 1987 JUDGMENT K.C. SRIVASTAVA, A.M. This appeal by assessee is directed against order of CIT (A) and relates to asst. yr. 1977-78. appeal is late by 6 days. assessee has applied for condonation of delay. We have perused application for condonation and we are satisfied that explanation given is reasonable. delay is, therefore, condoned and we proceed to decide appeal on merits. main dispute to decide in this appeal relates to disallowance of Rs. 7,73,981 paid by assessee to Official Liquidator of landlord- company, M/s Elphinstone Dye Works Pvt. Ltd. basic facts in present case are that present business undertaking in name of M/s Western India Warehousing Corporation had been acquired by trustees of Shri Cithaldas Madhavji Khakhar & Seth Tapulal Chakubhai Bhammar Trust. Before acquisition of this business activity by trusts, it belonged to partnership firm consisting of Chandrakant Kumudchandra Cheeda, and Snehalata Ratilal Chotalia. They had taken as tenants immovable property belonging to above company Elphinstone Dye Works Pvt. Ltd. in Old Prabhadevi Road, Bombay. Later on, when Western India Warehousing Corporation activities was assigned to trust which acquired it as going concern together with its goodwill and beneficial advantage, trust incurred certain expenses and started earning some income from warehouse which was given to Customs Department. Company went into liquidation and was represented by Official Liquidator. Though in beginning Official Liquidator was receiving rent @ Rs. 3,000 per month on behalf of company, later on, old arrangement was challenged by him in Court of law. According to him, agreement between M/s Western India Warehousing Corporation and latter assignment by firm in favour of trust was stated to be void and it was claimed that it should not be held binding on Official Liquidator. relief sought was that vacant possession of above premises should be given to Official Liquidator. Meanwhile one of settlors of trust, Muktaben B. Khakhar, took transfer of mortgage created by company in liquidation in favour of Mharashtra State Financial Corporation. agreement regarding tenancy was for period of 50 years. trust invested certain sums of money before letting it out to Customs authorities on monthly rent of Rs. 57,920. Official Liquidator realised that company was getting only Rs. 3,000 per month, whereas trust was deriving income of Rs. 57,000 or more from customs Department. As against legal action taken by Official Liqudator seeking declaration of agreement and assignment of 1972 and 1974 as void, trustees made application to High Court seeking permission to sue Official Liquidator and for declaring that trustees were lawful tenants. position is stated by assessee before CIT (A) as under: "Finding that title of Trust as to tenancy in respect of said premises under serious challenge, one of Settlors Muktaben Khakhar paid mortgage dues of said Maharshtra State Finance Corporation for transfer of mortgage from Maharshtra State Finance Corporation in her favour, who had already filed petition under provisions of Maharashtra State Finance Corporation Act, 1951, against company for several breaches of mortgage deed including non-payment of dues". "On 2nd Oct., 1975 Muktaben B. Khakhar got in her favour transfer of mortgage executed by Maharashtra State Finance Corporation by paying to Maharashtra State Finance Corporation its mortgage debt and costs amounting to Rs. 3,50,500.66 due by Company under aforesaid Deed of Mortgage dt. 13th Oct., 1965 executed by Company in favour or mortgagee. trustees, however, agreed to reimburse Muktaben B. Khakhar any cost, charges, expenses, loss of damages or shortfall that she may sustain in connection with or in respect of or as result of such transfer of mortgage, since she procured assignment of mortgage security in her favour with view to protect title of Trust as tenant of said premises." "The said Muktaben as Transferee/Mortgagee put up Company's property for sale without intervention of Court under power of sale reserved to her under original Deed of Mortgage dt. 13th Oct., 1965. Official Liquidator naturally became apprehensive at this step of Muktaben that if Company's property is sold away by auction sale, Official Liquidator will lose chance of recovering said sum of Rs. 57,920 every month. He thereupon took out Company Judge's Summons, being Company application No. 206 of 1975 against said Muktaben and obtained ad interim injunction of 13th Dec., 1975 preventing her from exercising power of sale. Official Liquidator categorically contended that Muktaben's taking over transfer to mortgage was only with view to protect tenancy of Trustees in respect of said premises." "It is relevant to mention several dates in order to appreciate further facts. original agreement of tenancy was dt. 7th April,1972 entered into between Company on one hand and partner of Western India Warehousing Corporation on other hand. relevant winding up petition was filed on 17th April, 1973 Official Liquidator was appointed provisional Liquidator in said petition by order dt. 10th Sep., 1975. Final order for winding up was made by Bombay High Court. Sometime in June, 1974. trust got assignment in its favour executed by partners of Western India Warehousing Corporation on 7th Jan., 1974. There were claims and counter-claims before Court but ultimately there was settlement between Official Liquidator and assessee trust. According to settlement, trust was to pay to Official Liquidator sum of Rs. 7,73,981 so as to settle once for all challenge to tenancy by Official Liquidator. terms of 'Consent' signed on 24th Nov., 1976 were as under: Consent Terms between Applicant and Respondent Nos. 3, 3A, 3B and 4: (1) Official Liquidator accepts respondent Nos. 3, 3A,3B and 4, Trustees of Vithaldas Madhavji Khakhar and Tapulal Chakubhai Bhammer Trust as tenants of premises more particularly described in Deed of Assignment dt. 7th Jan., 1974, at monthly rent of Rs. 3,000. (2) Respondent Nos. 3,3A,3B and 4 agree and undertake to pay all arrears of rent from 1st April, 1975 upto date to applicant at rate of Rs. 3,000 per month within four weeks from date hereof and applicant to accept such rent and issue rent receipts for payment of such rent. (3) applicant agrees not to terminate tenancy of Respondent Nos. 3,3A, 3B and 4 except on ground of non-payment of rent and not raise any objection on ground that Respondent Nos. 3, 3A, 3B and 4 have given storage facilities to Respondent Nos. 5and 6 (4) Respondent Nos. 5 and 6 are ordered to pay arrears of storage facilities to Respondent Nos. 3, 3A, 3B and 4 for period 1st Aug., 1975 till date and such payment be made to M/s Bhaishanker Kanga and Girdharlal, Attorneys for Respondent Nos. 3,3A, 3B and 4 on their behalf. (5) applicant give sup all remaining claims in judge's summons. Consent Terms in another petition bearing petitions No. 206 of 1975. (1) By Consent respondent No. 1. Is hereby given permission to exercise power of sale pursuant to Indenture of Mortgage dt. 13th Oct., 1965 and Deed of Transfer of Mortgage dt. 2nd Oct., 1975 to sell mortgage property by public auction within six months from date hereof (the terms and conditions whereof will include terms and conditions set out in Schedule hereto) and on conditions set out herein below. Provided however, that power of sale will not exercise till time cl. 3 is complied with. (2) Respondent No. 1 accepts that respondent Nos. 2 to 5 are tenants of mortgaged property in accordance with Deed of Assignment dt. 7th Jan., 1974 and agreement of tenancy dt.7th April, 1972. (3) Respondent Nos. 2 to 5 undertake to pay to applicant sum of Rs. 7,73,931.00 within six weeks from date hereof. (3A) applicant will pay in first instance out of said amount within period of two weeks property tax, water charges, rates, other taxes, charges outgoings, assessments, land revenues and other impositions paid and/or due and payable under cl. 1 of Indenture of Lease dt. 15th Dec., 1943 in respect of mortgaged property for period up to date of these consent terms. (4) Agreed that respondent No. 1 will not be entitled to claim mortgage debt from amount referred to in cl. No. 3. xx xx xx (14) Agreed that said mortgage and transfer of mortgage are valid and subsisting. (15) With in one week from completion of sale Official Liquidator will deliver possession of said property to purchaser by attorning tenancy of Cadell Weaving Mill Company Ltd. and respondent Nos. 3, 3A, 3B, and 4 as co-trustees of Seth Tapulal Madavji Khakar and Seth Tapulal Chakubhai Bhammar Trust' as Assignees of western India Warehousing Corporation who are in occupation of said property." It was in view of above agreement in Court trust paid amount of Rs. 7,73,931 to Official Liquidator. dispute is regarding allowance of amount as deduction in computation of income of assessee. It had been submitted before CIT(A) that assessee was already having tenancy right in above property and Official Liquidator was accepting rent in accordance with agreement of 1972. There was no fresh agreement between assessee trust and Official Liquidator and there was no question of obtaining any new right which was not already there. It was, therefore, contended before CIT(A) that amount had been paid to protect rights which were already there and not for acquiring any new right. Reliance was placed on certain decisions including decision of Bombay High Court in CIT vs. Mohanlal bros. (1982) 133 ITR 642 (Bom). In this case, substenency had been acquired by assessee, Mohanlal brothers in year 1952 and later on, there were any disputes and ultimately compromise was arrived at Consent Degree was passed under which amount of Rs. 50,000 was paid by assessee and was claimed as deduction in year 1965-66. It was held that assessee had become lawful subtenant, further payment of Rs. 50,000 was not paid to acquire substance but only to protect what was allowed as revenue deduction. It had also been contended before CIT(A) that tenancy had been recognised from date of assignment in favour of assessee on basis of original agreement of 1972. working of amount of Rs. 7,73,981 was also given and it was arrived at after deducting amount of mortgage debt and interest thereon to extent of Rs. 3,87,019 from amount demanded by Official Liquidator at Rs. 11,50,000. balance of Rs. 11,000 represented legal costs as demanded by Official Liquidator. CIT(A) considered facts and held that amount paid was 258 times of monthly rent of Rs. 3,000 and he refereed to various claims made by parties before Court. It had been alleged in application by Official Liquidator that assessee was in wrongful occupation of premises since 17th April, 1973 and therefore, they were liable to pay Official Liquidator mesne profit or compensation for such wrongful occupation at rate of Rs. 60,000 per month from 1973. He referred to directions given by IAC who had referred to allegation of frauds as made by Official Liquidator. Relying on affirmation made by Official Liquidator, it was stated that assessee had no title to premises and it could not to be treated to be good title. It was also pointed out that assignment of tenancy in favour of assessee was challenged on ground of invalidity. According to Official Liquidator it had been stated in his petition that assessee was tresspasser and was not occupying property in legal manner. CIT(A) referred to contention of IAC that prior to Consent Degree, assessee trust did not have any existing good title to tenancy of property in question. CIT(A) further quoted from judgement of Bombay High Court where it was stated that Judge was not in favour of compromise being granted as there were allegations of commission of certain offences. Judge sanctioned Consent Degree after making it clear that in case prosecution is launched, it would not be obstructed by agreement between parties. CIT(A) after considering facts felt that claim of assessee could not be allowed as revenue deduction. For this he relied on decision of Supreme Court in case of Dalmia Jain & Co. Ltd vs. CIT (1971) 81 ITR 754 (SC). Though this case was decided in favour of assessee, it was observed by Supreme Court, that where litigation expenses are incurred by assessee for purpose of creating, curing or completing assessee's title to capital, then expenses incurred must be considered as capital expenditure, but if litigation expenses are incurred to protect business of assessee, they must be considered as revenue expenditure. Applying above principles, CIT(A) held that payment was for curing or completing assessee's title to tenancy right if not for creating said title for first time. He held that as result of payment Official Liquidator accepted for first time trustees as tenants of premises. He, therefore, held that payment was of capital nature. He distinguished case decided by Bombay High Court relied upon assessee. In those cases, according to him, payment had been made for protecting rights and not for curing or completing title. As corollary of above decisions, CIT(A) held that litigation expenses of Rs. 9,260 would also not be held as revenue expenditure. ld. counsel for assessee took us through various documents in form of agreement of tenancy between Elphinstone Dye Works Pvt. Ltd and Western India Warehousing Corporation as firm. copy of Board of Directors of company approving above agreement was also placed before us. Besides above agreement of 7th April, 1982, reference was made to Indenture of assignment by which partners of firm assigned tenancy in favour of trustees of assessee trust. It was pointed out that under original agreement, it was lawful for original tenants to subject whole or any part of premises or transfer interest therein. It had been agreed that land lord company would not have any objection to such subletting. assignees had paid certain sum of money for fixtures and furniture and also another sum of Rs. 45,000 towards goodwill. It was, therefore, submitted that whole going concern had been validly assigned to trust. assessee trust was also put in possession of above premises w.e.f. 7th Jan., 1974. As landlord company M/s. Elphinstone Dye Works had gone under liquidation., their rent was being paid to him and several receipts signed on behalf of Official Liquidator have been filed. All these receipts are for year 1974 and certain months of 1975. It was submitted that Official Liquidator who had been appointed in Sept., 1973 challenged arrangements between company and firm and later on with trust. Official Liquidator had addressed letters to Collector of Customs who had taken warehouse for their use asking for rent to be paid to company. He challenged tenancy in favour of assessee trust assessed in status of association of persons. Bombay High Court was moved to declare tenancy agreement dt. 7th April, 1972 and later Deed of Assignment dt. 7th Jan., 1974 to be void, and request was made that premises should be handed over to company. As against this, assessee trust moved application for declaration of trustees as lawful tenants. It has also been alleged that agreement of 7th April, 1972 had been antedated and it was executed sometime in Oct., 1972. Thus in litigation, claims and counterclaims were made and certain statements were made putting claim of each party in exaggerated manner. It was this litigation which was compromised and Consent Degree was passed after both sides agreed for same. It was as result of this Consent Decree that trustees of trust were accepted as tenants of premises as given in Deed of Assignments of 1974. arrears of rent had to be paid at agreed rate of Rs. 3,000 per month and it was also agreed between Official Liquidator and trustees that tenancy could not be terminated except for non-payment of rent. Customs Department was to continue to use premises as in past. This compromise had been arrived at on 24th Nov., 1966. validity of tenancy was accepted in accordance with deed of assignment of 7th Jan., 1974. Of course, this was subject to payment of Rs. 7,73,931. ld. counsel for assessee submitted that tenancy had been acquired by assessee in 1974 and after that, rent had been actually paid to company represented by Liquidator. It was submitted that as result of Consent Degree, no new right was obtained, but only some obstruction in enjoyment of tenancy rights were removed. It was pointed out that CIT(A) had gone on basis of averments made in course of litigation and it was not porper to rely on such averments which are nothing but exaggerated claims of parties. He submitted that CIT(A) has not been able to point out to any defect in title of assessee. He submitted that there was no legal law in right of assessee and assignment had been validly made. He further pointed out that customs Department had stopped making payments to assessee and it was necessary to conclude litigation so as to enable assessee to continue to get payments from customs Departments. He further submitted that payments was not to cure any defect in title or to complete title of assessee. It was only to protect and defend title or right of assessee in enjoyments of above premises. He submitted that payment was made to facilitate carrying on of commercial activities of assessee and to ensure continued receipt of business income. Departmental Representative, on other hand, submitted that CIT(A) has discussed matter at great length and payment had been made only to cure defect in title or to complete title. He submitted that but for acceptance of tenancy by Official Liquidator there was no valid right with assessee and it was after payment of this amount that such right was acquired. He, therefore, submitted that payment was of capital nature as it was made to cure defect in title or to perfect title and not for merely protecting or defending title of assessee in premises. It was also submitted by him that assessee obtained enduring benefit as result of this payment and this amount constituted multiple of 258 of rent received by company. It was, therefore, contented that it was expenditure of capital nature. At this stage we may refer to cases relied upon by both parties. We have already referred to reliance of assessee on decision of Bombay High Court in case of Mohanlal Brothers (supra) and decision of Supreme Court in case of Dalmia Jain & Co. Ltd. (supra) where basic principle laid down. ld Departmental Representative referred to decision of Bombay High Court in case of Prabhat Theatres (P) Ltd vs. CIT (1979) 118 ITR 953 (Bom). In that case, there was dispute regarding lease right of theatre and had resulted in compromise as result of which interest of Rs. 34,080 was paid and claimed as deduction. Tribunal found that none of leases that were executed from time to time was filed and assessee had failed to establish that it was in occupation of theatre as tenant from beginning. Tribunal held that amount of interest was paid by assessee in order to legalise assessee's right to occupation and not for preserving its tenancy rights and payment of interest was capital expenditure. It may be mentioned that facts of this case are quite different as in our case. We have got necessary documents and agreements and we have to interpret those agreements. There is also evidence to show that assessee was in occupation of premises as tenant and landlord company had received rents for several years and even Liquidator had received such rent. other decision relied upon by learned Departmental Representative is decision of Patna High Court in case of Jamshedpur Engineering & Machine Manufacturing Co. Ltd vs. CIT (1957) 32 ITR 41 (Pat). In this case, expenditure incurred on shifting of office was held to be capital expenditure as assessee company derived enduring benefit from such shifting. next case relied upon was decision in case of CIT vs. Shri Digvijay Cement Co. Ltd. (1986) 53 CTR (Guj) 274: (1986) 159 ITR 253 (Guj) where expenditure on obtaining facility in Court for setting up shipyard which was not ultimately set up was held to be capital expenditure. Reliance was also placed on decision of Bombay High Court in case of Jaya Hind Industries (P) Ltd vs. CIT (1986) 53 CTR (Bom) 101; (1986) 161 ITR 842 (Bom) where expenses on acquisition of shares was held to be capital expenditure as it was new asset which was being acquired. reference was also made to decision of Supreme Court in case of CIT vs. Jalan Trading Co. (P) Ltd. (1985) 48 CTR (SC) 182; (1985) 155 ITR 536 (SC) where it was held that new company which acquired new right to carry on business of sole selling agency and it was agreed to pay 75 per cent of its annual net profits for acquiring this right and claimed this expenditure as deduction. It was held that it was capital expenditure. As it would appear from above discussion, facts of above cases are entirely different. As regards assessee acquiring enduring benefit under arrangement, ld counsel for assessee had drawn our attention to decision of Supreme Court in case of Empire Jute Co. Ltd vs. CIT (1980) 17 CTR (SC) 113; (1980) 124 ITR 1 (SC) wherein it was held that even if expenditure is incurred for obtaining advantage of enduring benefit; it may sometimes be on revenue account and it is not every advantage of enduring nature acquired by assessee that brings assessee within principles laid down in test of enduring benefit. What was material to consider is nature of advantages in commercial sense. Where advantage is in capital field, expenditure, would be disallowable but where advantage is in Revenue field, it would be allowed as deduction. Court held that test of enduring benefit is not certain or conclusive test and cannot be applied blindly and mechanically without regard to particular facts and circumstances of given case. Now in light of facts of case and case laws relied upon by two parties, we have to consider nature of expenditure claimed by assessee. perusal of agreement of 1972 and Deed of assignment of 1974 clearly shown that trustees had acquired legal right of tenancy as well right to carry on activity of exploiting warehouse. In 1974, going concern was acquired and for that some consideration was paid. Customs Department had taken above premises and were using it as warehouse and were paying monthly rent of Rs. 57,000 to assessee. Thus, when controversy arose, position was that assessee was regularly receiving income from Customs Department whereas they were paying agreed rent to company. It was later on that Official Liquidator thought that rent which was being paid to company was very little considering income which was being obtained by trust. It, therefore, wanted to gain some advantage for company and for this purpose, he challenged arrangement. Whenever such litigation takes place, parties make their different claims in exaggerated manner and it is not possible to adjudicate on their averments at this stage. What one has to see is Consent Degree. In present case, one of parties in Consent Degree was Official Liquidator. Thus, we cannot go beyond terms of Consent Degree. Looking to terms of Consent Degree, it would appear that Official Liquidator recognised legal position of trustees in respect of property w.e.f. date of assignment in Jan., 1974. Thus position regarding validity of arrangements in 1974 was not changed. By making above payment, trustees ensured that they would continue to receive income from Customs Department in future also without any obstruction or difficulty. In fact, what Official Liquidator was trying to claim is that instead of assessee receiving income, it is he who should receive this income from customs Department. Meanwhile Customs Department had stopped making payments to assessee. By making above payment, obstruction in receipt of income was removed and payment was to ensure and facilitate activity of assessee in running warehouse. No new rights have been pointed out by Revenue authorities as to what was defect which was sought to be cured by making above payment. above payment was made to protect right of assessee to earn income by use of all rights acquired in Jan., 1974. fact that advantage acquired to subsist for several years was not result of this payment but also of original agreement of assignment. We are, therefore, of view that payment in question was not capital expenditure and has to be allowed as revenue expenditure. addition of Rs. 7,73,932 is, therefore, deleted. appeal is allowed. *** WESTERN INDIA WAREHOUSING CORPORATION v. TENTH INCOME TAX OFFICER