1. This reference under s. 256(1) of the I.T. Act, 1961 (hereinafter referred to as 'the Act'), at the instance of the Department has posed the following question :
'Whether, on the facts and in the circumstances of the case and the construction of clause 20 of the agreements of sale dated March 9, 1968, and April 15, 1968, the Tribunal was justified in following the payment of Rs. 35,000 as a deduction for the assessment year 1969-70 ?'
2.The facts briefly are these. The assessed is a registered firm of three partners carrying on business under the name and style of M/s. B. L. Dhingra & Sons. The assessment year is 1969-70 and the relevant previous year followed by the assessed ended on October 10, 1968. The assessed entered into an agreement of sale dated March 8, 1968, for acquisition of the property of a cinema house known as Vivek Cinema for a consideration of Rs. 27 lakhs. Out of the consideration of Rs. 27 lakhs, a sum of Rs. 11,10,000 was paid by the assessed and received by the vendors in part payment, as mentioned in the agreement, to sell and the balance payment of Rs. 15,90,000 was to be made by the assessed to the vendors in the manner mentioned in the agreement to sell. It was partly payable before the Sub-Registrar at the time of registration of the sale deed and partly by installments with interest @10-1/2% per annum. By clause 20 of the agreement to sell, it was agreed, inter alia, that the purchases shall pay to the vendors a sum of Rs. 3,000 a month for the period between the singing of the agreement to sell and the registration of the sale deed in order to compensate the vendor during the intervening period. Subsequently, a supplementary agreement was executed on April 15, 1968, by which clause 20 of the original agreement was modified. It provided that the purchaser would pay to the vendors a sum of Rs. 10,000 per month for the first two months only, i.e. from March 8, 1968 to May 7, 1968, and for the remaining period as before a sum of Rs. 3,000 per month up to the date of the seasoning of the sale deed. In pursuance of these agreements, the assessed paid Rs. 10,000 per month for the period of two months and paid a further sum of Rs. 15,000 for the remains five months, in all Rs. 35,000, till the registration of the sale deed. The dispute relates to this payment of Rs. 35,000 by the assessed to the vendors.
3. The ITO took the view that the above sum of Rs. 35,000 was a part of the purchase price and not licensee fee or hire charges as claimed by the assessed and added back the same to the assessed's income. The assessed appealed to the AAC and contended that the payment of Rs. 35,000 represented the enhanced rent of hire charts for the cinema property and not any purchase consideration alleged to have been increased by virtue of the supplementary agreement. The AAC observed that the assessed's main purpose was not to allow the transaction to fall through and so it paid Rs. 35,000 extra which could only be taken as a part of the purchase consideration. In this view of the matter, the addition was held as justified.
4. The assessed went up in second appeal before the Income-tax Appellate Tribunal (for short called 'the Tribunal'). The Tribunal considered the provisions of the agreement to sell dated March 8, 1968, and the modifications made in the agreement dated April 15, 1968, and opined that after the purchases was put in possession of the cinema property in part performance of the agreement to sell, he could defend his title and the only remedy of the vendors was to cover the unpaid ale price. The Tribunal held that there was no question of any license fee or rent being paid to vendors. The Tribunal took the view that the payment of Rs. 35,000 was compensation for the user of the balance sale price of Rs. 15,90,000 kept back by the purchaser till the registration of the scale deed. It also took the view that the user of the amount of Rs. 15,90,000 would be an act incidental to the assessed's business and it would not be creating any asset or advantage of enduring nature and that the payment was necessitated for the user of the money for the limited purposes. The Tribunal held that the payment of Rs. 35,000 was incidental to the assesseds business and was, thereforee, revenue in nature.
5. Mr. G. C. Lalwani, the learned counsel for the Department, invites our attention to the various clauses of the agreement to sell dated March 8, 1968, and the supplementary agreement dated April 15, 1968, making certained clarifications and modifications to the original agreement dated March 8, 1968, He submits that the sum of Rs 35,000 paid by the assessed was in pursuance of the clauses contented in the agreement to sell and was towards the purchase price and forms part of the sale consideration. The submission is that such an expenditure is of a capital nature as consideration is paid by the assessed to perfect his title. Reliance is placed on v. Jaganmohan Rao v. CIT : 75ITR373(SC) , wherein it was held that where money is paid to perfect a title or as consideration for getting rid of a defect in the title or a threat of litigation, the payment would be a capital payment and not a revenue payment and that money paid in consideration for the acquisition of a source of profit or income of capital expenditure.
6. In order to appreciate this contention, it is necessary to make a reference to certain clause of the aforesaid two agreements which form part of the statement of case. The vendors had agreed to sell or to transfer to the assessed the cinema property for a sum of Rs. 27 lakhs. The sale consideration is, thereforee, determined and fixed in the agreement to sell. The assessed made a part payment of Rs. 11,10,000. In consideration of the part payment by the assessed to the vendors, the assessed was put in possession. Clause 14 of the agreement to sell dated March 8, 1968, reads as follows :
'That in consideration of the payment by the purchaser to the vendors of the sum of Rs 11,10,000, as mentioned in paras 2 and 3 above, the receipt whereof the vendors hereby acknowledge, the vendors have in part performance of this agreement to sell handed over today to the purchaser the vacant possession of the entire cinema building, machinery apparatus, furniture, fittings, fixtures and air conditioning plant, canteen, restaurant and the cycle stand, etc., and all other things connected therewith or concerned therewith along with the land underneath and attached to the cinema house. The vendors have also given a separate letter to the purchaser showing the fact of handing over the possession of the cinema building, etc. As from today, the date of handing over of the possession of the cinema house, etc., as aforesaid, the purchaser would be entitled to run, control and manage the cinema, etc., and bear the necessary expenses for running the cinema, etc., in the same way as the vendors would do the same and that, as such, the purchaser would be entitled to appropriate to himself the income or profits arising from the running of the cinema, etc.'
7. This contact between the assessed and the vendors has to be read in the light of the rights conferred by s. 53A of the Transfer of Property Act, Section 53A of the Transfer of Property Act creates certain rights which were not in existence before the enactment was passed. These rights to retain possession rest on the express provisions of the statute. One of the rights conferred is a right to the assessed to protect his possession. The vendors or their successors-in-interest are debarred from enforcing any right or interest expressly provided by the agreement to sell under which the assessed is put in possession. thereforee, from the date of handing over of the possession of the cinema property, the assessed was entitled to run and manage the cinema and enjoy the profits and income from the said business. The only right of the vendors thus left was to receive the balance of the sale consideration.
8. The balance of the sale consideration of Rs. 15,90,000 remained unpaid. Clause 20 of the original agreement to sell dated March 8, 1968 provides as follows :
'That the purchaser shall pay to the vendors a sum of Rs. 3,000 (rupees three thousand only) a month for the period between the signing of this agreement to sell and the registration of the sale deed in order to compensate the vendors during the said intervening period.'
9. Clause 9 of the supplementary agreement to sell dated April 15, 1969, provides as follows :
'It has been provided in clause 20 of the agreement dated March 8, 1968, that the purchaser shall pay to the vendors a sum of Rs. 3,000 a month for the period between the date of the signing of the agreement, viz., March 8, 1968, uptil the date of the registration of the sale deed. Now, the purchaser has agreed to pay to the vendors a sum of Rs. 10,000 per month for the first two months only i.e., from March 8, 1968, to May 7, 1968. Clause 19 will remain as it is with the above exception.'
10. The true nature of the payment to be made by the assessed to the vendors is reflected in clause 20. The payment is made in order to compensate these vendors during the intervening period, namely from the date of the handing over the cinema property to the assessed and up to the registration of the sale deed. This compensation is in respect of the non-payment of the balance of the sale consideration. The payment is made to procure extension of time for performance of the complete agreement to ell and payment of the balance consideration. If the requisite amount of consideration of Rs 15,90,000 had been borrowed by the assessed from a stranger, then interest paid thereon would have been permissible. An expenditure is allowable when it is incurred in the assessed's character as a trader. The compensation payment of Rs 35,000 is incidental to the running of the cinema from the date of possession by the assessed and till the date of registration of the sale deed. The assessed retained a sum of Rs. 15,90,000 and utilised it for its business. For the unpaid purchase price, the vendors were compensated by these payments of Rs. 35,000 mentioned in the two agreements. By making this payment of Rs. 35,000, the assessed has not acquired any advantage of the enduring benefit of the trade. The value of the asset has not been enhanced by this payment of Rs. 35,000. By this payment of Rs. 35,000, no new asset has been brought into existence. The case of Jaganmohan Rao : 75ITR373(SC) has no application to the facts of this case. That was a case where money was laid out for the improvement of a fixed capital asset. The assessed there purchased a capital asset with the knowledge of defect in title and later had perfected or improved it by further payment. It is on these facts that it was held attributable to capital. In the case before us, the item of expenditure is laid out for the purpose of business in the terms of the written contract between the assessed and the vendors. On a proper construction of the terms of the two deeds, this payment of Rs, 35,000 is a revenue disbursement. The payment is calculated to effect from a practical and business point of view a small expenditure as against the retention of the balance of the sale consideration after being put into possession of the entire cinema property. The Tribunal, thereforee, rightly held the this payment of Rs. 35,000 was relatable to the use odd the money of Rs. 15,90,000 kept by the assessed. It is in the nature of an interest or compensation on the money not paid by the assessed for the intervening period.
11. For the above reasons, the reference is answered against the Department but with no order as to costs.