KERALA ROAD LINESversusCOMMISSIONER OF INCOME TAX, COCHIN

                         (2008] 5 S.C.R. 42

                                                                    ~
A                     KERALA ROAD LINES
                                v.
           COMMISSIOl\JER OF INCOME TAX, COCHIN
              (Civil Appeal No. 5308-5309 of 2002)
                         MARCH 12, 2008
B
            (ASHOK BHAN AND J.M. PANCHAL, JJ.)

         Income Tax Act, 1961:

         s. 37 - Business expenditure - Deduction of - Amount
c of interest paid by assessee on delayed payment of purchase
    consideration - Pursuant to agreement for purchase of land -
    HELD: Income Tax Appellate Tribunal rightly held the amount
    of interest as expenditure u/s 37(1).
          The assess1~e. pursuant to an agreement for
D
    purchase of land, paid an interest of Rs. 4 lacs for delayed
    payment of purchase consideration. The assessee                ....
    claimed the said amount as revenue expenditure. The
    assessing authority disallowed the claim holding the
    payment of interest as capital expenditure. The order was
E   confirmed by the Commissioner of Income Tax (Appeals)
    as regards the interest referable to lands sold to
    assessee's sister concerns, and gave a part relief towards
    the land retained by the assessee. The Income Tax
    Appellate Tribum:1I allowed the appeal of the assessee
F   holding that it had entered into an agreement to purchase
    the entire land, including the buildings standing thereon      ~


    which was demolished by the assessee and sold as scrap
    material, and since the said sale price was treated as
    business income, payment of interest of Rs. 4 lacs by the
G   assessee bein£J a contractual obligation was an
    expenditure u/s 37 of the Income Tax Act, 1961. Two
    references were made to the High Court: one at the
    instance of the Revenue with regard to assessee's claim
                                                                   -r '
    for interest to be treated as revenue expenditure u/s 37
H                                42
            KERALA ROAD LINES v. COMMISSIONER OF                43
                     INCOME TAX, COCHIN

f
        and the other at the instance of the assessee with regard A
        to power of Tribunal to rectify its order passd u/s 256(1).
        The latter was answered by the High Court against the
        assessee relying on its earlier decision whereagainst petition
        for special leave had been dismissed by the Supreme
        Court. Aggrieved, the assessee filed CA No. 5308 of 2002. B

>             As regards the reference with respect to s.37 of the
        Act, the High Court held that the assessee was in transport
        business and therefore the interest paid on delayed
        payment towards purchase of land would not be covered
        by provisions of s.37(1 ). The assessee challenged this       c
        order in CA No. 5309 of 2002.
            Allowing CA No. 5309 of 2002 and dismissing CA No.
        5308 of 2002, the Court
              HELD: 1. The Income Tax Appellate Tribunal in its
                                                                   D
        order has categorically recorded that the sale proceeds
        of the scrap material after demolishing the structures
        standing on the land was treated as business income of
        the assessee. In this view of the matter, the Tribunal was
        right in observing that the payment of interest amounting
        to Rs.4 lacs, which was the contractual obligation, would E
        also be business expenditure. The High Court has erred
        in recording a finding to the contrary. The order passed
        by the High Court is set aside and that of the Tribunal
        treating the income of Rs. 4 lacs as revenue expenditure
        is restored. [para 11] [47-E, F; 48-A]                     F
              2. In view of the dismissal of the special leave
    "   petitions against the relied on judgment, the order passed
        by the High Court with regard to power of the Tribunal to
        rectify the order passed u/s 256(1) of the Income Tax Act,
        1961 does not warrant interference. [para 4] [45-C, DJ     G

             CIVILAPPELLATE JURISDICTION : Civil Appeal No. 5308
        of 2002.
~            From the final Judgment and order dated 13.11.2001 of
        the High Court of Kerala at Ernakulam in ITR No. 310 of 1999. H
    44        SUPREME COURT REPORTS                     [2008] 5 S.C.R.


A                                 WITH
         Civil Appeal No. E>309 of 2002.
         Krishnan Venugopal and A. Raghunath for the Appellant.
       T.S. Doabia, O.P. Srivastava (for B.V. Balaram Das) for
B the Respondent.
                                                                               .,
         The Judgment of the Court was delivered by
         ASHOK BHAN, JI. These two appeals have been filed by
    the appellant-assessee (hereinafter referred to as 'the
c   assessee') with the leave of the Court against a common
    judgment dated 13th day of November, 2001 passed by the High
    Court of Kerala at Ernakulam in Income Tax Reference Nos.234
    of 1997 and 310of1999.
          2. The following two questions were referred by the Income
D
    Tax Appellate Tribunal, Cochin to the High Court at the instance
                                                                           'I.
    of the revenue in ITR No.234 of 1997 for its opinion:
         "1. Whether, on the facts and in the circumstances of the
         case, the Tribunal is right in law anp fact in holding that the
E        assessee is entitled to deduct the entire amount of interest
         as revenue expenditure under Section 37 of the Income-
         tax Act?
         2. Whether, on the facts and in the circumstances of the
         case and also on an interpretation of the agreement dated                  ~

F        27.9.1993, the Tribunal is right in holding that the assessee
         would not only to forfeit the advances but also stand             ,.
         exposed to civil and criminal action and in that sense
         allowing the payment of interest as contractual
         obligation?
G
          3. The following two questions were referred by the Income
    TaxAppellat~ Tribunal, Cochin to the High Court at the instance
    of the assessee in ITR No.310 of 1999 for its opinion:
                                                                           ..,.
         "1. Whether thE~ Tribunal was right in rectifying the order
H        pass8d under Section 256(1) on the ground that there


                                                                           I
             KERALA ROAD LINES v. COMMISSIONER OF                      45
               INCOME TAX, COCHIN [ASHOK BHAN, J.]

              was a mistake apparent from record?                            A
              2. Whether the Tribunal was right in holding that 11 has
              inherent power for rectifying the order under Section 256(1)
              for rendering justice?

~              4. The questions referred to the High Court in ITR No.31 O B
         of 1999 at the instance of the assessee were answered in favour



t
         of the revenue and against the assessee relying upon its own
         earlier decision dated 31.10.2001 passed in ITR Nos.61/1997,
         275/1999 and O.P.No.20583of1996. It is brought to our notice
         that against the relied on judgment dated 31.10.2001 passed         c
         in ITR Nos.61/1997, 275/1999 and O.P.No.20583 of 1996,
         assessee filed special leave petitions in this Court which were
         dismissed by this Court in limini. Since, the special leave
         petitions against the relied on judgment were dismissed by this
         Court, we are not inclined to interfere with the order passed by
                                                                          D
         the High Court insofar as questions referred in ITR 31Oof1999
         at the instance of the assessee are concerned. Accordingly Civil
         Appeal No.5308 of 2002 filed against ITR No.310 of 1999 is
         dismissed.

               5. To decide. Civil Appeal No.5309 of 2002 in which merits    E
         of the dispute have been challenged, it would be necessary
         to refer to few facts to understand the dispute which are as
         under:

               Assessee entered into an agreement with M/s. Peirce
         Leslie (India) Ltd. on 27.9.1983 for purchase of an extent of F
         466 cents of land with buildings thereon at Calicut. It was agreed
    '"   that the sale deed will either be got executed in favour of the
         assessee or its nominees. As per agreement, if the purchase
         price was not paid within the specified time, assessee was liable
         to pay interest at the rate of 18% per annum. The buildings G
         standing on the lands were demolished and the scrap materials
         were sold for Rs.5,88,001/-. This income was treated as
         business income. Under the agreement, the assessee had to
         pay an interest of Rs.4 lacs for the delayed payment of purchase
         consideration. The assessee claimed this amount as a revenue H
    46       SUPREME COUf~T REPORTS                 [2008] 5 S.C.R.


A   expenditure.                                                           ~

                                                                       '
        The assessing authority disallowed the claim of the
  assessee on the ground that the payment of interest on the
  purchase of the property would be in the nature of a capital
  expenditure and not as revenue expenditure. This order of
8 assessing authority was confirmed by the Commissioner of
  Income Tax(Appeals). It was held that the intention of the
  assessee was to enter into an adventure in the nature of trade
  and ultimately the assessee had retained only 65.57 cents of
  land with it and the remaining land was purchased by the sister
c concerns of the assessee! in ~mall pieces. It was held that since
  the assessee was only an intermediary for the other sister
  concerns, the part of interest referable to the lands sold to the
  sister concerns could not be allowed as revenue expenditure.
  Thus, Commissioner of Income Tax gave part relief and allowed
D the interest referable to 65.57 cents of land retained by the
  assessee.
        6. Assessee, bein~1 aggrieved, filed an appeal before the
  Income Tax Appellate Tribunal, Cochin Bench (for short 'the
  Tribunal'). The Tribunal accepted the appeal, set aside the order
E passed by the CIT(Appeals). It was held that the assessee had
  entered into an agreement to purchase the entire property
  including buildings standing thereon. The building was
                                                                           .
  demolished and structure standing thereon was sold as scrap
  material for Rs.5,88,001/-. This sum was offered for assessment
F as business income and assessed as such. The payment of
  interest of Rs.4 lacs for the delayed payment of purchase
                                                                      1'
  consideration has been provided in the agreement and thus,
  the payment of interest was a contractual obligation. It was held
  by the Tribunal that the payment of interest was to be viewed as
G an expenditure under Section 37 of the Income Tax Act, 1961
  (for short 'the Act'), especially when the sale proceeds of the
  scrap materials from the demolished structures have beer.
  treated as business income and ultimately allowed the claim of
  the assessee for deduction of interest.                             -r
H
          KERALA ROAD LINES v. COMMISSIONER OF                      47
           INCOME TAX, COCHIN [ASHOK BHAN, J.]

           7. Aggrieved against the said order, the assessee as          A
      well as revenue filed reference application under Section
      256(1) of the Act. Accordingly, two questions each, as quoted
      above, were referred at the instance of the assessee as well
      as revenue.

            8. Insofar as questions referred at the instance of the      B



r
      assessee in Civil Appeal No.5308 of 2002 are concerned, we
      have already held that since the special leave petitions against
      the relied on judgment dated 31.10.2001 passed in ITR Nos.61/
      1997, 275/1999 and O.P.No.20583 of 1996 were dismissed
      by this Court, we are not inclined to interfere in the present     c
      appeal as well. The appeal is dismissed accordingly.

           9. Insofar as dispute on merits is concerned, we find some
      substance in the argument raised by the counsel appearing for
      the assessee. The High Court without answering the question
                                                                      D
      as to whether the expenditure is capital or revenue in nature
      reversed the decision of the Tribunal by holding that assessee
      was not doing the business in real estate; that the business of
      the assessee was transport only and, therefore, the expenditure
      would not be covered by the provisions of Section 37(1) of the
      Act.                                                            E

           10. Counsel for the parties have been heard.
            11. Tribunal in its order has categorically recorded that the
      sale proceeds in the sum of Rs.5,88,001/- of the scrap material
      after demolishing the structures standing on the land was treated F
Jo,
      as business income of the assessee. If that be so, the Tribunal
      was right in observing that the payment of interest which was
      the contractual obligation would also be a business expenditure.
      The High Court has erred in recording a finding to the contrary.
      Once the revenue has accepted the sum of Rs.5,88,001/- as G
      business income as sale proceeds from the scrap material of
      the structures standing on the lands then correspondingly
'I    assessee would be entitled to claim a sum of Rs.4 lacs as
      revenue expenditure paid as interest on the delayed payment
      of the purchase consideration.                                      H
    48         SUPREME COURT REPORTS                  [2008] 5 S.C.R.

                                                                         .;   ...

                                                                              ,....
A         12. For the foregoing reasons, we set aside the order
    passed by the High Court and restore that of the Tribunal treating
    the income of Rs.4 lacs as revenue expenditure. Accordingly,
    question No.1 is answered in favour of the assessee and against
    the revenue and correspondingly question No.2 is answered in
B   favour of the assessee and against the revenue.
           13. The Appeal is a.llowed accordingly.

    R.P.                  Civil Appeal No. 5309 of 2002 allowed.
                    and Civil Appeal No. 5208 of 2002 dismissed.