Income Tax Appellate Tribunal - Delhi
New Delhi Hotels Ltd. vs Income-Tax Officer on 26 August, 1991
Equivalent citations: [1991]39ITD259(DELHI)
ORDER
A. Kalyanasundharam, Accountant Member
1. These are appeals filed by the assessee, a limited company, engaged in the business as promoters, developers in the construction of multi-storey buildings and selling flats and the business of financing. Three appeals of the assessee company are against the orders of the CTT(A) in not allowing the claim of interest provided in the accounts, as payable to L & DO and two of the appeals are against the orders of the CIT, setting aside the assessments made. Since the assessment years involved are the same and they do involve common issues, these appeals were grouped together, heard and are accordingly being disposed of by this composite order.
2. We shall initially deal with the issue on the claim of interest provided in the accounts, as payable to L & DO. The facts stated briefly relates to the claim made by the L & DO as conversion charges for allowing of the residential house at No. 27 Barakhamba Road to be used as a commercial property. The property initially was under lease with M/s Chandigo Sugar Mills Ltd. As a consequence of the drawing up of the Master Plan for Delhi, certain areas were marked as usable for commercial purposes and one such area was the adjoining areas in and around Connaught Place, New Delhi. The Master Plan for the development of Delhi was given the statutory recognition by the Statute Delhi Development Act, 1957. This Act prescribed the use of the land in various areas and thus, contrary use of the land in those areas was prohibited or would be treated unlawful. M/s Chandigo Sugar Mills Ltd. (hereinafter referred to as 'applicant'), had moved an application to the New Delhi Municipal Committee (NDMC) on Oct. 2, 1990, for the construction of a multi-storeyed building on plot no. 27, Barakhamba Road, by submitting the building plans, for sanction of the construction of the multi-storeyed building. NDMC on Nov. 16, 1990 after processing the plans, sent a set of the plans to the Land & Development Officer, Government of India, attached to the Ministry of Works, Housing & Urban Development. In this communication, (as stated by the assessee in its plaint before the Delhi High Court challenging the notice of claim of conversion charges, lest in might re-enter the property), it was stated that, in case of non-receipt of reply within fifteen days from the date of the said communication, it would be deemed that L & DO has no objection to the said construction of the multi-storeyed commercial building. The building plans were said to have been passed by NDMC by means of a resolution no. 37/6 dated Dec. 4, 1970 and the said sanction was communicated to the applicant on Feb. 16, 1971. NDMC vide their letter dt. Feb. 15, 1972 confirmed having sent a set of sanctioned building plans on Feb. 16, 1971. The applicant commenced the construction of the building in January 1971, soon after it had come to know of the plans having been sanctioned. While the construction was in progress, the applicant agreed to sell/assign the said property no. 27 Barakhamba Road to the assessee-company and as per the plaint, the said transfer/assignment was recognized by the L&DO vide communication dt. June 14, 1972.
3. L & DO issued a show-cause notice to the applicant, viz., M/s Chandigo Sugar Mills Ltd., dt. July 19, 1971, alleging breach of clause no. 2(5) of the lease deed and why re-entry should not be made by L & DO. The plaint indicates that, there was silence by L & DO till June 14, 1972, i.e., till the transfer of the lease of the property in favour of the assessee-company. In the second show-cause notice, it is alleged that, on inspection by the authorities of L & DO of the property, the construction of the commercial building was without the prior approval of the lessor, viz., L & DO, and thus it was in violation of Clause 2(5) of the lease-deed. The assessee sent its reply to this show-cause notice on July 11, 1972. L & DO vide its communication dt. Oct. 21, 1972 indicated that, re-entry on the said land has been decided with effect from Oct. 4, 1972 and directed the assessee to hand over possession of the said land. This was refuted by the assessee vide its letter dt. Nov. 13, 1972. L & DO then issued a notice of eviction on April 6, 1973. The assessee as a consequence of this notice of eviction, as well as the notices of re-entry moved the Delhi High Court by means of a writ petition.
4. L & DO sometime in 1976 indicated the terms and conditions for withdrawal of reentry orders and permission for construction of mulli-storeyed commercial building on the plot of land no. 27, Barakhamba Road. In the terms it had specified the amount of additional premium of Rs. 9,19,771, and interest on additional premium upto Aug. 28,1976 amounting to Rs. 4,25,025.70 and thereafter at Rs. 7,664.76 per month up to the date of receipt of the payments in this office, additional ground rent of Rs. 1,34,437.73, interest on the additional ground rent upto Sept. 14, 1976, and thereafter, Rs. 1,060.71 per month, upto the date of receipt by the said office, payment of ground rent from Jan. 15, 1971 to Nov. 4, 1976, together with interest for belated payment, additional ground rent in perpetuity, interest on the same, revised ground rent from Nov. 15, 1976, all aggregating to Rs. 15,41,141.53. The assessee wrote to the then Minister for modification of the terms and conditions on Dec. 27,1978 and again on April 21,1979, The reply of the Minister dated June 5,1979, indicated that, interest is payable on the entire amount which became due for payment on the crucial date. The assessee vide its communication dt. April 29, 1989 to L & DO, referring to its letter to the Minister in June 1979 stated that, the terms as provided by the lawyer of L & DO have been accepted by it, amendment to its writ petition before the Delhi High Court has also been moved and that, it is enclosing a cheque for Rs. 10,59,897.38. This amount included Rs. 9,19,771 for additional premium, additional ground rent of Rs. 1,34,437.73, ground rent of Rs. 2,265.74, additional ground rent in perpetuity Rs. 2,542.36, interest for belated payment of ground rent of Rs. 583.60 and Rs. 236.95 and other fee of Rs. 60. In this communication, in the last para it has been stated that, interest mentioned in the terms should not be demanded by L & DO, as it had offered to make the payment vide its letter dt. June 1979 to the Minister. It has further been staled that, in case other promoters do pay the interest, it would also follow suit and it is prepared to offer bank guarantee to cover the interest element. The copy of the letter addressed to the Minister dt. June 15,1979, which has been placed at page 23 of the paper-book indicates that, it had no other choice but to accept the terms given by the L & DO in order to avoid litigation and requested him to direct the L & DO to prepare the necessary documents for execution by the company according to the terms for the withdrawal of re-entry orders, regularize the project, to enable it to pay the amount and to withdraw its writ petition before the High Court. On the petition moved for amendment, High Court permitted the same on Oct. 28, 1982.
5. The appellant's claim is that, as a consequence of its surrender of June 15, 1979 to the demand of the authorities, since it was following the system of mercantile system of accounting, it had been providing of the interest on the amount of additional premium in its accounts year after year, since it happened to be a statutory liability and, therefore, the interest as provided for being related to the business of construction of multi-storeyed building at 27 Barakhamba Road, the same was allowable as a deduction. In support of the claim, it had filed the copy of the modified plaint, which has been so allowed to be modified by the Delhi High Court. The appellant also placed reliance on the special bench decision of the Tribunal in ITO v. Andhra Pradesh Paper Mills Ltd. [1991] 38 ITD 1, which according to the learned senior advocate Shri G.C. Sharma, squarely answers the question and the claim of the assessee company.
5.1 The revenue had not accepted this plea for the reason of the fact that, the silence on the part of L & DO from June 15, 1979 to April 29, 1989 was impossible and that, the payment as made on April 29, 1989 indicated that the dispute of contractual liability got settled only in 1989, hence, there was no liability in the earlier years. The revenue placed reliance on the Supreme Court ruling in CIT v. Swadeshi Cotton & Flour Mills (P.) Ltd. [1964] 53 ITR 134; in the Bombay High Court ruling in CIT v. Phalton Sugar Works Ltd. [1986] 162 ITR 622 and in the Calcutta High Court ruling in CIT v. Soorajmull Nagarmull [1981] 129 ITR 169.
6. The rival contentions on the issue have been very carefully considered alongwith the relevant documents that have been placed on our record, which are purported to have been placed on the records of the authorities below, which has not been disputed by the departmental representative.
6.1 The appellant had placed at page 24 of the paper book, the copy of the order of the Delhi High Court dated October 20, 1982, which reads "The application is not opposed. It is allowed as prayed. Amended petition be filed within 10 days with copy to counsel for the respondents who may now file return to the amended petition within four weeks of the receipt of the copy. Rejoinder, if any, within a week thereafter." At pages 6 to 19, it had placed the amended application in the civil writ petition no. 1194, which is not dated, which is accompanied with the original demand as was raised by the L & DO in 1976, and the letters that were exchanged by the assessee and the Minister and the final letter dated June 15, 1979 to the Minister, in which the assessee had stated that, it had no choice but to accept the demand as made by L & DO, requesting for the preparation of various documents for execution by the assessee according to the terms for withdrawal of the re-entry orders, regularize the project, enable the assessee to pay the demand and withdraw the writ petition.
6.2 The lessor of the land is Government of India and Min. of Works & Housing, Urban Development being a wing of the Government of India, acts for the lessor. The lease agreement as was executed initially permitted the lessee to use the land for residential purposes. Consequent to the development plans, the lessor had been allowing the modification of the lease agreement, i.e., the use of the property from residential to commercial was permitted on payment of a fee, as fixed by the lessor. Therefore, it is clear that, permission of the lessor is the basic requirement for the change in usage of the property. NDMC is a statutory authority for allowing the construction of residential and the commercial properties as per certain set plans and actions. Its duty is to allow the construction based on a design plan submitted by the person desirous of construction by according its sanction to the design plan. The intimation it had sent to the lessor L & DO on Nov. 16, 1970, stating that, it would be deemed by NDMC that, lessor has no objection to NDMC allowing the construction of the commercial multi-storey flats at 27 Barakhamba Road, does in no way bind the L & DO to the construction being allowed, because, the primary requirement is the modification of the clauses of the lease agreement, permitting the change or modification of the use of the land from residential to commercial. This intimation, in our opinion does nothing more than, indicating the fact that, NDMC had found the design plan of the multi-storey commercial building acceptable as per norms allowing construction of property within the zone of NDMC. This is amply clear from the officers of the L & DO inspecting the property sometime in 1972, which was followed by the notice of re-entry for violating the clauses of the agreement, of putting to use the land for commercial purposes, which was not so allowed. The lease agreement between a lessor and lessee is a pure contract between the two parties affecting their mutual rights. Any modification of the lease agreement results in a pure modification of the earlier contract between the two and any liability arising as a consequence of modification of the contract gives rise to a contractual obligation and liability. L & DO no doubt is a wing of the Government of India and it might be re-modifying the earlier lease agreement as a consequence of the Statute Delhi Development Act of 1957, but, the contract of lease between L & DO and the assessee remains a simple business transaction, binding the two to adhere to the terms and conditions specified in the lease-agreement, and any violation of any of the part of the lease, would result in the breach of contract and for regularization of such breach, if the lessor demands any compensation, such a compensation is contractual simpliciter. A statutory liability is one which depends for its existence on the enacument of a statute and that which would not exist but for the statute. A contractual liability in contra-distinction to the statutory liability, is one which arises as a consequence of the contract between the parties. The providing of a lease of the land is not by any Statute but, is an act of business, though, one of the parties to the contract would be a statutory authority. The modification of the use of the land may be governed by a Statute and in accordance with that Statute, the L & DO may be enforcing the Statute in regularizing the terms of the lease, by payment of premium etc. That by itself would not make the demand of additional premium a statutory liability. As observed earlier, since the additional premium was imposed for regularization of the lease of land allowed by L & DO in favour of the assessee, which the assessee had violated, the charge so created on the assessee is purely a contractual liability. Therefore, the claim as propagated by the assessee's counsel that, the demand as made by L & DO gave rise to statutory liability is clearly baseless, and, hence rejected.
6.3 What had transpired between 1972 to 1976 is not available from the records. L & DO purportedly sent the assessee terms of modification of the lease-agreement sometime in 1976, indicating in the heading thus - "Statement showing the terms and conditions for withdrawal of Re-entry orders and permission for construction of multi-storeyed commercial building upon the premises situated on Plot No. 50 Block No. 148 known as 27, Barakhamba Road, New Delhi." In this intimation, it had demanded additional premium, stating that "the additional premium is recoverable in 4 equal instalments. In this case all the instalments have become due"; interest on additional premium from 9-12-1970 (date of sanction of the plans by the Local Body for the construction of the multi-storeyed commercial building), interest at varying rates from 4-10-1971 to 28-8-1975, 29-8-1975 to 28-8-1976 and at Rs. 7,664.76 per month upto the date of receipt of the payments by L & DO; additional ground rent, interest on belated payment of additional ground rent etc. The assessee had contested this demand by filing a writ petition before the Delhi High Court. The assessee then made efforts through the then Minister for relaxation of the demand, which was refused in June 1979. The assessee alleges to have written to the then Minister vide it communication dt. June 15,1979, which is reproduced for the sake of facility.
We are in receipt of your letter No. D.O. No. LI(9)/148(50)/75/2480 dated 5th June, 1979 regarding 27, Barakhamba Road, New Delhi. Though what we have mentioned in our letter dated 27th December, 1978 is certainly a discrimination in giving the terms for our Project in comparison to the terms given to 19, Curzon Road, but as your goodself does not agree with this, we have, under the circumstances, no other choice but to accept the terms given by the Land & Development Officer in order to avoid litigation.
We, therefore, request you to please direct the Land & Development Officer to prepare the necessary documents for execution by us according to the terms for withdrawal of the Re-entry orders, to regularize the Project and also enable us to pay the amount and withdraw the Writ Petition from the High Court.
6.4 The assessee waited for little over ten years before making full payment of the additional premium, vide its letter to the L & DO dated April 29, 1989. In para 6.2 above, we have clearly observed, that, the agreement of lease is nothing more than a contract between assessee and L & DO. In para 6.3 above, we have extracted from the terms and conditions specified by L & DO in 1976 for affording permission for conversion of use of the property from residential to commercial. The main condition of the terms relating to the conversion from residential to commercial was that, the additional premium of Rs. 9,19,771 was normally payable in four equal instalments, but, in the case of the assessee, the entire amount had become due for payment. It was in response to these terms and conditions, the assessee had moved the Delhi High Court, approached the Minister and later on agreed vide its letter dated June 15, 1979, but waited ten long years before making payment of the additional premium of Rs. 9,19,771, which as per the terms was due on the date of raising of the demand by L & DO and was payable immediately. As observed in para 6.2 above, the request of the lessee (the assessee) for the modification of the lease-clauses was accepted by L & DO and had intimated the assessee, the charges for such modification, vide its terms and conditions of 1976. Had the assessee, complied with this demand by actual performance, i.e., by paying the additional premium immediately on receipt, the assessee could be field to have acted in accordance with the modification of the agreement and also had performed its obligations, but, instead the assessee, after a gap of three years, i.e., in 1979, merely stated its acceptance of the terms, but did not comply with detailed terms and conditions, one of which was payment in full of the additional premium for modified usage, which had become due in 1976, The contract of agreement has two parts. One, agreeing to act as per. the contract and two, performing as per the terms of the contract Any action arising out of the contract, though agreed upon, but not acted or performed as per the terms and conditions of the contract, would result in violation of the contract itself. The assessee's acceptance in 1979, without the payment of the additional premium in 1976 is nothing more than a counter offer as it tantamount to requesting of raising of the demand afresh. Therefore, non-performance of any part of the contract being non-compliance with the terms of the contract, the acceptance offered by the assessee, unless accepted by L & DO as desired by the assessee does not foster any responsibility on L & DO When L & DO has not responded to this offer, it only goes to indicate that, it had stuck to its earlier demand, which has been refuted by the assessee by raising of counteroffer, and therefore, this gives a clear indication of the assessee disputing the contractual liability. Hence, the claim of the assessee, that, the liability had accrued to it is totally unfounded and, therefore, rejected.
6.5 The claim of the assessee is, that, its case is squarely covered by the special bench decision in Andhra Pradesh Paper Mills Ltd.'s case (supra), which we shall now evaluate. In this case, the agreement between the State Government and the assessee, by which the assessee was to supply bamboo on payment of royalty, which was to be revised after five years. The, term of five years ended on Sept. 30, 1980. The State Government intimated the assessee on Feb. 6, 1981, that, the Government is still working the modalities of the revision of royalty and desired that, the assessee provide an undertaking that, it shall pay the royalty as per the revised rates as and when it was finalized. This was accepted by the assessee on Feb. 14, 1981. The revised rates of royalty was intimated on Nov. 14, 1981. The assessee while closing its accounts of June 30, 1981, provided for the royalty based on the revised rates and claimed deduction, on the premise that, it was following mercantile system of accounting. The decision on this claim was that, since the assessee had accepted by giving the undertaking to pay the royalty based on the revised rates as and when determined, it had unequivocally accepted the liability, which was merely quantified subsequently, the liability had accrued and hence was allowable. This decision, to our mind does no help to the assessee's case. Unlike in the special benches case, in the present case, the assessee desired modification of the lease-agreement, which changed the very substratum of the agreement and not merely the rate of premium. Furthermore, the assessee in its application requesting for the modification of the lease-agreement had never offered that, it would abide by the terms of modification suggested by L & DO. Further, every action of the assessee in the instant case was totally open and it did not accept any of the terms and conditions excepting mentioning it in so many words that, it had no choice but to accept, but, not performing the promise demanded by L & DO. Therefore, the said decision of the special bench has no bearing at all to the assessee's case.
The conclusion being that, the issue of payment of interest relates to a contractual liability and that, it had not accrued in the year, for the assessee had disputed the same in the light of the Supreme Court's ruling in Swadeshi Cotton & Flour Mills (P.) Ltd.'s case (supra), the liability would be allowed only when the assessee's dispute comes to an end, by it accepting the demand and paying for the same, which in the instant case has been so complied with on April 29, 1989. Therefore, the claim of interest on the additional premium as provided in the accounts, whereas by not payings the additional premium as per the modified terms by L & DO, cannot be said to have arisen or accrued in the accounting year relevant to the assessment years under appeal, hence has been rightly not allowed to be deducted from out of the business income.
This disposes of the common issue raised in all the three years appeals against the assessment orders.
7 to 8. [These paras are not reproduced here as they involve minor issues.]