Income Tax Appellate Tribunal - Delhi
Income-Tax Officer vs Janak Steel Tubes (P.) Ltd. on 15 March, 1988
Equivalent citations: [1988]27ITD323(DELHI)
ORDER
A.V. Balasubramanyam, Judicial Member
1. These appeals preferred by the revenue have relation to assessment against Janak Steel Tubes (P.) Limited for years 1982-83 and 1983-84.
2. We shall first deal with the common point for both the appeals which has reference to a claim for deduction under Section 35CC(1).
3. The assessee participated, in a programme of rural development sponsored by the Haryana Government. In the village Daya, Hissar District, Haryana, a middle school was being run by the State Government. This was in a backward area. The upgrada-tion of this institution was in the offing. The building was on the Government land. Adjoining thereto, there was 6-acre of open plot of land belonging to Gram Panohayat. The Gram Panchayat was willing to hand over the plot to the middle school, the upgradation of which was under consideration. It is at that stage the assessee proposed not only to renovate the existing building but to put up extension and provide all furniture, fittings, etc., as per the approved plan of the State Government. Even a playground had to be formed.
4. The assessee proposed to the Government to develop the building in the manner required of them by expending money and the Gram Panchayat too agreed to spare the adjoining open plot of land. After the formality was gone into, the old building and the adjoining plot were formally given to the possession of the assessee pursuant to resolutions passed by the Gram Panchayat in this regard. The assessee took the necessary approval by the Commissioner of Income-tax, Rohtak, Haryana, under Section 35CC. The period of construction spread over for three years and necessary extension was also granted by the Commissioner of Income-tax. The expenditure incurred in the accounting year relevant to the assessment year 1982-83 was Rs. 2,38,794 and the expenditure in the next year was Rs. 2,63,577. In the last year, it was Rs. 1,989. For the purpose of supervising the work, the assessee liad engaged come employees to whom salary had been paid. The amount is Rs. 2,960 incurred in the accounting year relevant to the assessment year 1982-83.
5. The IAC did not allow the claim for deduction under Section 35CC(1). Besides, he took the cost of construction at a reduced figure based upon a certain report. In the appeal, the CIT(A) held that the declared value of construction is evidenced by the report of a registered valuer and he accepted the same. We should have earlier observed that the assessing officer had disallowed the claim under Section 35CC(1) on the premise that the assessee had not divested itself of the ownership of the asset as required under Section 35CC(2); but instead granted depreciation' on the figure he had fixed as its cost. The assessee succeeded before the CIT(A). The revenue is in appeal objecting to the relief given by the CIT(A).
6. There is no dispute that the development programme embarked upon by the assessee was one to which deduction under section 35CC(1) was allowable and the Commissioner of Income-tax, Rohtak, had too granted approval in this regard. So far as the cost is concerned, the finding of the CIT(A) remains intact since no specific ground is raised. The only point on which argument was addressed was that the assessee had not divested itself of ownership of the asset created by the expenditure incurred. In a sense the argument proceeded on the assumption that the asset created was of the ownership of the assessee.
7. Expenditure had been incurred and this had resulted in creation of an asset. The whole programme of rural development comprised of not only construction of a new building as an extension to the old building, but also renovation of the old building, forming a playground and providing furniture, etc. The plot where the old building stood belonged to the Government. The adjoining open space made available for the development programme belonged to the Gram Panehayat. By resolutions passed by the Gram Pancha-yat, this land was put in the possession of the assessee with a specific object. The resolution of the Gram Panehayat, dated. 31-5-1981, clearly stipulated that the assessee should construct the building in accordance with the rules and regulations of the Education Department and hand over back possession to the State Government for running the school. To ensure that the assessee did not make any claim on the building so constructed sufficient safeguards had been placed as is clear from the several resolutions of the Gram Panehayat. The assessee had at no time any intention of creating the asset for its benefit.
8. Perhaps there would have been some scope for the revenue to sustain its stand had the land on which development work was done belonged to the assessee. The part played by the assessee is only to Incur the expenditure in the manner the rules and regulations of the Haryana Government required and hand over physical possession of the whole completed building to the Education Department to run the school. But for the specific permission granted to constructing the school building, the act would have been unlawful. The assessee was no more than a licensee to enter upon the land to undertake development work. The object is to complete the development programme by renovation, construction, etc., and when this purpose is over, the permission ceased to be in operation. So, this was a case where licence got revoked the moment the purpose for which it was granted was fulfilled - see Section 62(f) of the Easements Act.
9. An asset may be acquired or brought into existence during the course of a rural programme contemplated under Section 35CC in a variety of manners. In a given case, there may be an asset created or brought into existence, the ownership of which could definitely be located in the assessee. On the basis of Sub-section (2), of Section. 35CC, it cannot be assumed that the assessee became the owner of the asset created or acquired merely because it had incurred the expenditure. A person who spends amount may become the owner of an asset, but expenditure is not everything and it should be ascertained, from all the facts and surrounding circumstances, whether the assessee acquired ownership in the asset.
10. It may not be inapposite to refer to the circular of the CBDT vide letter No. RD(1)/665, dated 5-8-1981, wherein it has been clarified that 'assets of permanent nature created under Section. 35CC and proposed to be handed over to the local authority/State Government after completion do not constitute a gift. This is a donation and does not attract any gift-tax'. Even Board treats the expenditure as donation. There is no business element involved in the expenditure. In fact, the expenditure has nothing to do with the business of the assessee. It is only a benefit of deduction which the assessee gets in the computation of business income so long as conditions under Section. 35CC are satisfied. The assessee incurred expenditure at the various stages of the construction to complete the developmental programme. At no stage, it ever had intention of benefiting itself or to be the owner of the asset so created. On the other hand, the clear intention was that the asset should be for the benefit of the middle school which the State Government was running and the upgradation of which was in its mind. Therefore, even from the moment the amounts left the till of the assessee, it partook the character of donation and there was a change in the complexion then alone. The payments in this case were in truth payments of donation. As a matter of fact, the assessee has completed development programme and delivered back possession of the school building to the State Government.
11. Take the case of renovation or playground formed. The old building and the open space were assets of State Government/ Gram Panchayat. It can hardly be said that improving old school building or forming the playground produced a recognizable or identifiable new asset. What matters is the nature of the advantage the assessee was expecting to get by the expenditure. It can hardly be doubted that what the assessee intended to secure by the expenditure was no more than a deduction under Section 35CC(1). We think that the proper test is the purpose and not the effect of expenditure.
12. Upon the whole, we are convinced that the assessee was never the owner of the super-structure constructed by it. In fact, part of the expenditure was in connection with the renovation of the building which was already there and belonged to the State Government. Renovation is also a part of the rural development programme. The assessee had at no time acquired ownership of the super-structure constructed by it and consequently there was no necessity to divest itself of it. This is a case which did not attract Sub-section (2) of Section 35CC and the provision has been wrongly applied by the assessing authority. We are not persuaded that the CIT(A) was wrong in his conclusion in regard to entitlement for deduction under Section 35CC(1). For the same reasons, the expenditure of Rs. 3,960 towards the salary paid to employees would also be covered by Section. 35CC(1).
13. We now take up the first ground in the appeal for 1982-83. The controversy relating to the first ground is whether an expenditure of Rs. 56,570 was in the capital field or an allowable revenue expenditure. The assessee manufactures and sells pipes and tubes. The assessee and two other companies were having some difficulty in unloading of its goods at the railway siding. Negotiations were made with the railways who agreed to provide facility by constructing a proper platform along the railway siding at Hissar. The railway authorities, however, insisted that in order to provide the requisite facility, the assessee and the other two companies should bear the cost of construction of the platform and the other facilities to be provided. The three companies agreed. As per the share of the assessee-company, the payment of Rs. 56,570 had been made in this accounting year to the railways. This expenditure was held to be in the capital field by the IAC but the CIT(A) disagreed and, following the decision of the Tribunal in the case of the assessee for earlier assessment year 1981-82, held that it was a revenue expenditure. The addition, therefore, came to be deleted.
14. After having heard both sides and reading the order of the Tribunal for the assessment year 1981-82. we are convinced that the assessee derived no benefit of enduring value and that by the arrangement made by it only got better facilities for loading and unloading its goods at the railway siding. This expenditure was held to be incurred wholly and exclusively for business purposes. We follow the earlier order of the Tribunal in the case of the assessee for the assessment year 1981-82 and sustain the finding of the CIT(A) in this regard. The first ground, therefore, fails.
15. The last ground in the appeal for 1982-83 is in regard to deletion of an addition made by the IAC. The addition was Rs. 7,686. The assessee were due to the following three parties of amounts mentioned in respect of them -
Rs.
(i) Supreme General India, Hissar 704 (ii) Bharatiya Cutler Hammer Pvt. Ltd., Faridabad 6,300 (iii) Wesman Engg. Works, Calcutta 682
The IAC made an addition on the sole reason that the assessee is under no legal obligation to pay the amount since the outstandings are more than three years. In the appeal, the CIT(A) deleted the addition disagreeing with the reason given by the IAC.
16. We have heard the learned Departmental Representative on the issue. For the assessee, reliance was placed upon the decision of the Rajasthan High Court in the case of C1T v. Sadul Textiles Ltd. [1987] 167 ITR 634. First, it cannot be said that limitation has run out merely because the origin of the liability is beyond three years. Assuming for argument sake that limitation has run out, it only bars the remedy in a court of law but the liability as such is not wiped out. This is not a case where there has been a cessation or remission of liability or abandonment of the claim by the creditor Sadul Textiles Ltd.'s case (supra) is in point. The finding of the C1T(A) is in order and we affirm the same.
17. In the appeal for 1983-84, the first ground relating to Section 35CC has already been dealt with and for the reasons given, we reject the first ground.
18. The second ground is in the alternative. It is to contend that depreciation should have been allowed as done by the IAC in the assessment under Section 35CC(2). Since the claim has been allowed under Section 35CC(1), this does not survive at all.
19. The last ground is whether depreciation on the written down value of the fixed assets should be without reducing the same by the amount of subsidy received from the Government. The CIT(A) has found this issue in favour of the assessee following the order of the Tribunal in the case of the assessee for 1977-78. This issue stands covered against the revenue by the two High Court decisions. One is the decision of the Andhra Pradesh High Court in the case of CIT v. Godavari Plywoods Ltd. [1987] 168 ITR 632 and the other is the decision of the Madhya Pradesh High Court in the case of CIT v. Bhandari Capacitors (P.) Ltd. [1987] 168 ITR 647. Following the same we affirm the finding of the CIT(A).
20. In the result, both the appeals filed by the fail. They are dismissed.