STAR TEXTILE MILLS LTD. Versus GOVERNMENT OF SIND

ALI HUSSAIN QAZILBASH, J. ‑‑This is an appeal, by leave, against the judgment of a learned Division Bench of Sind High Court, dated 25‑11‑1971, whereby the constitutional petition of the appellant was dismissed.

2. The facts in brief are that plot bearing survey No.7/2, measuring 918 square yards with a double storeyed building, situate at the junction of Dunolly and Mcleod Roads, Karachi, was an evacuee property. On the promulgation of settlement operations it was transferred to Mst. Najamun Nisa Begum and five others, P.T.O. and P .T D were accordingly issued. As the building was in occupation of various tenants, Mst. Najamun Nisa Begum, the transferee, had issued to each of the tenants, a notice under section 30 of the Displaced Persons (Compensation and Rehabilitation) Act, 1958, on 23‑9‑1959. On 20‑6‑1963 the property mentioned above was purchased by the appellant through a registered sale‑deed for a consideration of Rs.3,10,000. Besides the sale consideration, the appellant had further incurred the following expenses:

(a) Stamp duty for conveyance deed Rs.16,962.00

(b) Registration charges of conveyance deed Rs.1,571.00

(c) Brokerage paid to Mr. Kenny D'Souza,

Estate Broker Rs.6,200.00

(d) Property taxes etc., paid to Karachi Municipal

Corporation and Excise and Taxation Department Rs.12,374.00

(e) Ground rent paid to the Deputy Collector,

Karachi Rs. 551.50

(f) Transfer fee paid to the Settlement Department for conveyance deed of the property Rs. 2,550.00

(g) Miscellaneous expenses Rs.11,195.82

(h) Compensation paid to the tenants to secure vacant possession of the property Rs.2,71,000.00

According to the appellant the said property was an old building and it with a bona fide intention and in good faith required the same for demolition and re‑construction but since the tenants were protected under the law, they could not be ejected from their respective tenements, therefore, in order to obtain the vacant possession of the building it paid a sum of Rs.2,71.000 as compensation and secured the vacant possession of the building. After doing the needful. it demolished the superstructure but on account of certain adverse circumstances the appellant could not raise new construction over the plot as intended and, therefore, sold the plot to the American Express International Banking Corporation, Karachi, for a sale consideration of Rs.12,00,000.

3. As required under the West Pakistan Finance Act, 1963 (IX of 1963), the appellant filed its return to the Excise and Taxation Officer 'L' Division, Karachi, showing the real and actual gains to the extent of Rs.4,68,444. The Excise and Taxation Officer, however, disallowed the above items of expenditure except items (a),(b) and (c) vide his order dated 1‑4‑1970. Its appeal before the Director, Excise and Taxation, Karachi, was dismissed on 30‑11‑1970. Its revision before the Director‑General, Excise and Taxation, Karachi, was dismissed on 13‑3‑1971 and its constitutional petition was dismissed by the High Court through the impugned order.

4. Leave in this case was granted to consider whether all the deductions claimed by the appellant‑company were costs incurred by the assessee towards the price of the property and, therefore, could A be exempted under section 16(2) of the West Pakistan Finance Act of 1963 from the capital gains tax.

5. The learned counsel for the parties heard at considerable length. Mr. Sharaf Faridi, the learned counsel for the appellant, took us through the provision of section 16 of the West Pakistan Finance Act, 1963, which pertains to the capital gains tax and rightly submitted that it has been lifted from the Income and Excess Profits Tax (Amendment) Act, 1947, and is para materia to section 12‑B of the latter Act. As to the exemption claimed by the appellant under section 16 of Act IX of 1963, he confined himself to the sum of Rs.2,71,000 which it had paid to the tenants and secured vacant possession of the property. Basing his case on the provision of section 16(2)(b) he vehemently urged that in the first instance the Excise and Taxation authorities and the High Court should have taken the above sum, i.e.. Rs.2,71,000, as the "actual cost to the assessee of the property" or in the alternative towards "any expenditure of a capital nature incurred and borne by him in making any additions or alterations thereto". His emphasis here before us was on the words "including any other expenditure of a capital nature incurred and borne by him in making any additions or alterations thereto" as appear in section 16(2)(b) of Act IX of 1963. According to him, in paying a sum of Rs.2,71,000 to the tenants and in demolishing the old structure a substantial alteration and addition in the property was made, as a result of which the price of the property soared to nearly four times. This demolition of the old structure was not at all possible because the same was occupied by the tenants who were protected under the law and thus could not be ejected. A via media was, therefore, adopted, a compromise was effected with the tenants against the payment of a sum of Rs.2,71,000 in lieu of the possession. Justice and equity, he submitted, demanded that the authorities should have considered the amount so paid towards the 'actual cost' and deduction allowed accordingly. Reliance was placed by him on Corporation of Birmingham v. Barnes (1935 Appeal Cases 292), C.I.T. v. Standard Vacum Refining Co. of India Ltd. (1966) I.T.R. 799), Commission of Income Tax v. Bengal Assam Investores Ltd. (1969) I.T.R.319), C.I.T. v. L.G. Balakrishnan & Bros. (P.) Ltd. (Mad.) (1974) I.T.R.284), C.I.T. v. J.K Cotton Spg. & Wvg. Mills Ltd. (All.) (1975) 98 I.T.R.153), C.I.T. v. Travancore‑Cochin Chemicals Ltd. (Ker.) (1975) 99 I.T.R.24) Challapalli Sugars Ltd. v. C.I.T. (SC) (1975) 98 I.T.R. 167) and C.I.T. v. A. Venkataraman (Mds.) 137 I.T.R. 846).

The learned counsel for the appellant further contended that though through the registered sale‑deed dated 20‑6‑1963 the ownership rights in the property were transferred to the appellant possessory right of the property was not so transferred because the same was occupied by the tenants. Therefore, in order to become an absolute owner of the property the appellant was compelled to pay a huge sum of Rs.2,71,000 to the tenants in lieu of the vacant possession of the tenements.. The above expenditure was, therefore, incurred by the appellant to secure its right towards the same. Reliance in this regard was placed by him on certain observations made by Justice Mahmood in the case of Indar Sen v. Naubat Singh (1885) I.L.R.7 Allahabad 553) .

6. We have examined the instant case in the light of the above arguments and the authorities cited but we do not find that the same has any merits.

7. Since this case requires interpretation of section 16(2) of the West Pakistan Finance Act, 1963, the same is reproduced. below to facilitate reference:

"16. Capital gains tax. (1) ..

(2) The amount of the capital gains shall be computed after making the following deductions from the full value of the consideration for which the sale, exchange or transfer of property is made: ‑

(a) ****

(b) actual cost to the assessee of the property including any expenditure of a capital nature incurred and borne by him in making any additions or alterations thereto:

As stated earlier, the appellant has now before us laid its claim for exemption from the gains tax a sum of Rs.2,71,000 which it has paid to the tenants. There is no denying the fact that the appellant did pay the above amount to the tenants to secure possession of the property and this obviously is an expenditure of a capital nature. But the question for consideration is whether this amount could be taken as an actual cost to the assessee of the property as provided for under section 16(2)(b) ibid and exemption allowed. The term "actual cost" has not been defined in the Act. In the Black's Law Dictionary, Fifth Edition, "actual cost" means: "the actual price paid for goods by a party, in the case of a real bona fide purchaser, which may not necessarily be the market value of the goods. It is a general or descriptive term which may have varying meanings according to the circumstances in which it is used. It imports the exact sum expended or loss sustained rather than the average or proportional part of the cost. Its meaning may be restricted to materials, labour, and overhead or extended to other items."

Wheatcroft in his book on Capital Gains Taxes, 1967 Edition, in Chapter 20, Item 20‑11, defines "Expenditure .

"20‑11 Having ascertained the consideration for the disposal, the next step is to ascertain the expenditure allowable against it. Only three classes of expenditure are allowed as deductions to the person disposing of the asset:

(a) the amount or value of the consideration, in money or moneys worth given by him or on his behalf wholly and exclusively, for the acquisition of the asset, together with the incidental costs to him of the acquisition or, if the asset was not acquired' by him, any expenditure wholly and exclusively incurred by him in providing the asset:

(b) the amount of any expenditure wholly and exclusively incurred on the asset by him or on his behalf for the purpose of enhancing the value of the asset, being expenditure reflected in the state or nature of the asset at the time of the disposal, and any expenditure wholly and exclusively incurred by him in establishing, preserving or defending his title to, or to a right over, the asset,

(c) the incidental costs to him of making the disposal."

8. The provision of section 16(2)(b) has come up for consideration before various superior Courts of English and Indian jurisdiction and the same has been interpreted according to the facts and circumstances of each case. From a careful perusal of the provision of section 16(2)(b) of the West Pakistan Finance Act, 1963, one thing has become quite clear and that is, that it is not that every expenditure which an assessee incurs in respect of a property is to be taken as 'actual cost of the property'. For it is only the actual purchase price which is paid by the assessee and other genuine and legitimate expenditure and the one allowed under the law which can be accounted for towards 'actual cost." As the case stands, in our view the payment of a sum of Rs.2,71,000 to the tenants is neither legitimate nor permissible under the law. The appellant purchased the property in question through a registered sale‑deed for a consideration of Rs.3,10,000 This is an actual cost of the property plus, of course, items (a), (b) and (c) which were paid towards the completion of the conveyance, The contention of the learned counsel that the rise in the price of the property from Rs .3,10, 000 to Rs .12, 00, 000 was as a result of additions and alterations carried out by it in the property has no substance. There is no doubt that the price of the property rose to nearly four times but we think it was not as a result of the alleged addition or alteration, for we are not oblivious of the fact that during the last quarter of a century there has been astronomical rise in the price of the real estate in our country as a whole and in Karachi in particular, and this phenomenon alone has been a great factor in the escalation of the price of the property, moreso when a period of six years had elapsed between the two sales. Therefore, the expenditure was rightly refused to be taken towards the alleged addition or alteration. Further, the expenditure of a sum of Rs.2,71,000 did not relate to the property exclusively in that the same was not incurred, in preserving or defending the right over the property. This amount was paid to the tenants for vacating the premises which under, the relevant law was neither possible nor permissible, By paying this sum to the tenants, not only the tenancy law has been violated but as a matter of fact the tenants were induced and pressurised to part with the possession of the property, which obviously was against the public policy. On this score too, the exemption has been rightly disallowed.

9. Though in the authorities relied upon by the learned counsel for the appellant the word "actual cost" has been interpreted by their Lordships according to the facts of each case, with which we have no dispute, but these authorities are distinguishable as for the case in hand is concerned. In the case reported in Corporation of Birmingham v. Barnes (1935 Appeal Cases 292), by an agreement between the Birmingham Corporation and the Dunlop Rubber Company, the Corporation agreed to lay a tramway from the Company's works. By virtue of work having been completed by a certain date, the Corporation received 10 806 b in accordance with the terms of an agreement. The Corporation laid the tramway at the cost of 54,752 Through another agreement, the Corporation spent 2,71 399 , on renewing its tramways and received from the Unemployed Grants Committee 46,238 in respect of the work done. These grants were made under certain conditions to the local authorities to assist them in carrying out approved schemes of public utility expeditiously on which large number of unemployed persons could be engaged. In this case, the words "actual cost" came for interpretation before the House of Lords, where Lord Atkin, who spoke for the House, observed:

"The word 'actual' itself gives me no assistance. It serves, as Mr. Latter suggested, to give emphasis to the word following. It is to be the cost, the whole cost, and nothing but the cost. It removes any question of estimate, and in cases where the plant has been purchased for a lump sum together with factory premises it may give rise to a difficult question of fact. The word 'actual' is used in the same emphatic sense in Rule 3 in respect of 'actual wages, actual expenditure and actual loss'. I do not read 'actual cost' to mean anything more than cost accurately ascertained.

But it is said that the words 'to the person' in the phrase 'actual cost to the person' plainly indicate that the section is intending to confine the relief to an aggregate equal to the sum of money which the person has defrayed out of his own resources, cost of which the burden has ultimately fallen upon him. My Lords, I confess I do not think that this is the natural meaning of the words. What a man pays for construction or for the purchase of a work seems to me to be the cost to him: and that whether some one has given him the money to construct or purchase for himself; or, before the event, has promised to give him the money after he has paid for the work; or after the event, has promised or given the money which recoups him what he has spent."

The House of Lords held that: "'the actual cost' to the Corporation within the meaning of Rule 6, S.6, above was 54,752 in respect of the new tramway and 271,399 in respect of the renewed tramways, and that in arriving at 'the actual cost' the contributions of 10,806 and 46,238 , were not to be deducted; and that as the proposed allowance for wear and tear would not, with the earlier allowances exceed the actual cost as defined above, the Corporation were entitled to claim them."

No such question arises in this case because no contribution was made by another party.

In the case reported as C.I.T. v. Standard Vacuum Refining Co. of India Ltd. (1966) 61 I . T . R .799) , the assessee‑Company set up a refinery at the cost of rupees twelve crores. This included a sum of rupees four crores which it had borrowed on debentures. A sum of Rs. 23,53,284 accrued as interest from the date of borrowing to the date of commencement of the business on the aforesaid debenture loan and it was claimed that depreciation must be allowed on the full amount. The Tribunal allowed the claim of the assessee including interest. On reference to the High Court by the Department, it was held: "that the interest paid on the debentures issued formed part of the actual cost incurred by the assessee‑Company in acquiring the capital asset and under sections 10(2)(vi), 10(2)(via), 10(2)(vib) read with section 10(5), such interest must be taken into consideration for the purpose of depreciation and development rebates."

In the case reported in C.I.T. v. L.G.7Balakrishnan & Bros, (P.) Ltd.(Mad.) ((1974) 95 I.T.R.284): the assessee entered into a collaboration agreement with a West German firm for providing the technical know how for the manufacture of various types of chains for which it had started a factory and paid a sum of Rs .17,143 for transmitting arrangements of their experience and assistance. It incurred Rs.42,712 in the foreign tours and Rs.33,000 by way of interest on amounts borrowed by it for purchase of machinery for setting up the factory. It claimed depreciation and development rebates on these amounts. The Income‑tax Officer rejected the claim as a whole. On appeal, the Appellate Assistant Commissioner held the assessee entitled to capitalise, in addition to the interest amount, the foreign tour expenses as well. On reference to the High Court it was held: "that the interest paid on the amounts borrowed for the purchase of machinery had rightly been capitalised as part of the cost of the machinery and the Tribunal was right in allowing the assessee's claim for depreciation and development rebate on this amount also."

It further held:

"The foreign tour expenses, so far as they relate to the purchase of the machinery, as for example, expenses connected with the inspection and supervision of the machinery purchased, will have to be capitalised and depreciation and development rebate granted, while in respect of the expenses such as incurred in sending engineers for learning the technique of erecting or handling the machinery which do not enhance the value of the machinery purchased and which do not relate to the purchase of the machinery, cannot be capitalised."

It further held: "the payment to the foreign collaborators was not for the acquisition of the machinery and hence could not be capitalised."

In the case reported in C.I.T. v. J.K. Cotton Spg. & Wvg. Mills Ltd. (All.) 1975) 98 I . T . R .153) , the assessee included in the actual cost the following items: (i) interest paid to State Government on the loan of Rs.90 lakhs taken for the specified purpose of setting up the factory; (ii) interest paid to foreign suppliers of machinery; (iii) fees paid to State Government for survey of building and machinery, etc.; (iv) stamp fee and registration charges; (v) reward paid to the officers and technicians for expeditious installation of the factory and (vi) other expenses like wages, salaries, insurance premia etc. The Income‑tax Officer disallowed all the items. On appeal, the Appellate Assistant Commissioner allowed all the items towards the actual cost excepting item (v). The Appellate Tribunal agreed with the view of the Appellate Assistant Commissioner, Or, reference at the instance of the Department, the High Court held that: "the assessee was entitled to include all the items which had been allowed by the Appellate Tribunal in the 'actual cost' of its assets for purposes of depreciation and development rebate. As the entire loan from the State Government was utilized for the purpose of setting up the factory, and became part of the cost of the factory, the interest paid for borrowing such capital is also part of the cost."

Item '(v)' which related to the reward paid to the officers and technicians was disallowed because it was not exclusively incurred for establishing, preserving or defending the title or right over the property. This principle is squarely applicable to the instant case.

In the case reported in C.I.T. v. Travancore‑ Cochin Chemical Ltd, (Ker.) L(1975) 99 I.T.R 24), a rectifier plant was installed for a sum of Rs.25,99,861. This included proportionate interest charges on loans to the extent of Rs.4,70,740. The Income‑tax Officer disallowed this amount as not forming part of the actual cost to the assessee. This was upheld on appeal but reversed in further appeal and the Tribunal held the interest as part of actual cost to the assessee. On reference being made to the High Court, the learned Judges relying on the case of Birmingham Corporation versus Barnes (1935 Appeal Cases 292) upheld the finding of the Tribunal and declared the interest on borrowed money as part of the actual cost.

In the case reported in Commr. of Income‑tax v. Bengal Assam Investors Ltd. ((1969) 72 I.T.R.319) the facts reported are that in April 1950 the assesseee purchased 19,540 preference shares and 5,085 ordinary shares of Messrs. Munir Mills Ltd. for Rs.87,05,000 at an auction sale. During the relevant accounting year the asessee sold 4, 402 preference shares and 549 ordinary shares. Since section 12‑B of the Indian Income‑tax Act, 1922, was operative, the Income‑tax Officer issued a notice requiring the assessee to furnish particulars of the shares sold and the capital gains made. The assessee in reply claimed a loss of Rs 1, 03.994 which included an expenditure of Rs.1,00,721 incurred by him in litigation in respect of 549 ordinary shares and 4,402 preference shares sold during the year. The Income- tax Officer disallowed the litigation expenses but it was reversed by the Appellate Assistant Commissioner who held that the legal expenses in defending title to the shares sold constituted capital expenditure. On appeal, the Appellate Tribunal agreed with the finding of the Appellate Assistant Commissioner. On reference being made to the High Court, it was held that:

"(1) as the assessee's title to the shares was not complete until the assessee succeeded in having the shares registered in its name through the rectification proceedings instituted by it, the expenses incurred in conducting those proceedings were necessary for curing or perfecting or completing the assessee's title to the shares and hence was a capital expenditure forming part of the actual cost of the asset to the assessee.

(2) by incurring expenses for the suits for amending the articles of association, the assessee was trying to enhance the value of the shares and hence the expenditure was also of a capital nature incurred for making additions or alterations to the assets within the meaning of section 12‑B(2)(ii)."

From the above it will be seen that these cases have no bearing on the case in hand.

In the case reported in C.I T. v. A. Venkataraman (Mad.) (137 I.T.R.846) payments made to the tenants for vacating the premises have been held to be actual cost, but these payments were made to the tenants because it was one of the conditions in the agreement that vacant possession of the properties should be given to the vendee. No such question arises in this case. In this very case the Court did not allow payment of a sum of Rs.25,000 for the marriage expenses of the sister of the assessee because there was no such agreement in the partition deed and also the law did not allow any such deduction in the computation of capital gains.

10. The contention of the learned counsel for the appellant that the possessory right of the property was not transferred to it because the same was occupied by the tenants is fallacious. This was not its case before the Income‑tax authorities or the High Court. Moreover, in the sale‑deed executed in its favour on 20‑6‑1963 all the rights have been transferred to it, for it has been laid down:

"The vendors (Mst. Najamun Nisa Begum, etc.) do hereby grant, sell, convey, assign and transfer to the Purchaser the said property together with all rights of easement, liberties and privileges and appurtenances thereto and all the rights, title, interest and estate of the Vendors as held by the Vendors under the abovementioned Deed of Sale, dated 9 th August, 1962 executed by and between the Settlement Commissioner Karachi and the Vendors and registered on 10 th August, 1962 as per Registration No.4779 at pages Nos.385 to 393 Volume No.1108 of Book No.1 by the Registrar of Deeds, Karachi to have and hold the same unto and to the use of the Purchaser absolute and free from all burdens and encumbrances upon and subject nevertheless to the terms and conditions on which the same is now held by the Vendors that henceforth the Purchaser shall be the rightful and absolute owner of the said property and every part there' and shall peacefully, quietly have, hold, occupy, use and possess the said property and enjoy and recover all rents, profits, emoluments and benefits thereof without any let, claim, denial, demand, hindrance or interruption or eviction of or by the Vendors or any person or persons lawfully claiming through or under the Vendors an that all dues, charges, taxes of every kind payable in respect the said property shall be payable by the purchaser alone.

Further, it is not the case of the appellant that the tenants who were occupying the building had ever defaulted in the payment of rent to it or had denied the title of the appellant in respect of the suit property, therefore, the appellant was fully enjoying the absolute rights over the suit property. The observations made by Justice Mahmood in the case reported in Indar Sen v. Naubat Singh ((1885) I.L.R.7 Allahabad 553) are not relevant here.

11. In the light of the above, we do not find any merit in this appeal and the same is dismissed but with no order as to costs.

M.B.A./S‑106/S Appeal dismissed.