Income Tax Appellate Tribunal - Hyderabad
Dcit., Circle-1(1), Hyderabad, ... vs M/S A P Tourism Development Corporation ... on 27 September, 2017
ITA Nos 361 of 2015 and 1674 of 2014 APTDC Ltd Hyderabad.
IN THE INCOME TAX APPELLATE TRIBUNAL
Hyderabad ' A ' Bench, Hyderabad
Before Smt. P. Madhavi Devi, Judicial Member
AND
Shri S.Rifaur Rahman, Accountant Member
ITA Nos.361/Hyd/2015 & 1674/Hyd/2014
(Assessment Years: 2009-10 & 2010-11)
Dy. Commissioner of Vs M/s. A.P. Tourism Development
Income Tax, Circle 1(1) Corporation Ltd
Hyderabad Hyderabad
PAN: AADCA 9817 H
(Appellant) (Respondent)
For Revenue : Shri P. Chandra Sekhar, DR
For Assessee : Shri S. Rama Rao
Date of Hearing: 29.06.2017
Date of Pronouncement: 27.09.2017
ORDER
Per Smt. P. Madhavi Devi, J.M.
Both the appeals are filed by the Revenue for the A.Ys 2009-10 and 2010-11 respectively against the orders of the CIT (A)-I/II, Hyderabad, dated 27.01.2015 and 05.08.2014 respectively. The common issue arising in both the appeals is whether the lease rentals which accrued to the assessee on mercantile basis is to be brought to tax or it is only the lease rentals which is received by the assessee during the relevant financial years which is to be brought to tax
2. Brief facts of the case are that the assessee, a State Govt. undertaking, filed its return of income on the basis of Page 1 of 10 ITA Nos 361 of 2015 and 1674 of 2014 APTDC Ltd Hyderabad.
provisional a/cs and subsequently after its accounts were audited by the statutory auditors, filed the revised return of income. During the assessment proceedings u/s 143(3) of the Act, the AO observed that the statutory auditors have commented on schedule-17 i.e. "Accounting policies and notes on accounts" that the property "Balayogi Paryatak Bhavan" was given on lease to 'Lakshmi Gayatri Hotels (P) Ltd (lessee) and the assessee has not recognized the lease rentals on accrual basis but that it has offered the lease amount on receipt basis. The AO observed that the assessee is following the mercantile system of accounting and therefore, assessee ought to have offered the income on Mercantile System of Accounting. He considered the assessee's contention that the lessee had disputed the actual plinth area which was given on lease and the area handed over to it and also as to the fulfillment of certain conditions of the agreement such as erection of lift, faulty working of ACs etc. The AO observed that the lessee continued to remain in the premises till March 2010 and there was no stay on collection of rent by any of the Courts. Therefore, he was of the opinion that the entire lease amount, on accrual basis, is to be brought to tax in the relevant A.Ys. The AO also disallowed certain other expenditure claimed by the assessee on the ground that these claims were not made in the original return of income. On appeal, the CIT (A) granted relief to the assessee in so far as the lease rental is concerned and also with regard to certain other claim of expenditure which was made on the basis of audited books of account in the revised return of income. Aggrieved, the assessee is in appeal before us. For the A.Y 2010-11, vide letter dated 19.12.2016, the Revenue has raised the following grounds of appeal:
Page 2 of 10ITA Nos 361 of 2015 and 1674 of 2014 APTDC Ltd Hyderabad.
"1. Whether Learned CIT(A) is correct in saying that AO should take into account the audited account which determining taxable income whereas section 139(9)(bb) says that the return has to be accompanied by the report as in section 44AB together with proof of furnishing report. Also according to the decision of Hon'ble Apex court in the case of Goetz India Ltd (284 ITR 323) wherein it was held that the revised claims are not allowable unless supported by revised returns of income filed with department.
2. Similarly, whether learned CIT (A) is correct in directing AO to consider the claim of some expenses as per ground No.4 to 7 and 9, before CIT (A), based on the audited accounts in view of above mentioned explanation at point (1) .
3. Whether learned CIT (A) is correct in allowing delay payment made to ESI based on Hon'ble Apex Court decision in the case of Mahalakshmi Sugar Mills co (123 ITR 429) but whereas in the case of Indian Aluminium Co Ltd (79 ITR 514) the Hon'ble Apex Court has held that a payment made under statutory obligation because of assessee default could not constitute expenditure laid out for the purpose of the business carried on by the assessee, and hence not allowable.
4. Based on facts and circumstances of the case, whether learned CIT (A) is correct in directing AO not to add 'lease rentals' as there is a long drawn litigation based on various judicial pronouncement. But, the Hon'ble Apex Court in the case of Marvin Industries Ltd (82 ITR 873) held that income will accrue when it has become due to the assessee and that postponement of payment date does not affect the accrual of income and the fact that subsequent non-receipt of income does not the accrual of income.
5. Any other ground that may be urged at the time of hearing".Page 3 of 10
ITA Nos 361 of 2015 and 1674 of 2014 APTDC Ltd Hyderabad.
3. As regards Ground No.4, the learned DR, supported the orders of the AO while the learned Counsel for the assessee supported the orders of the CIT (A). We find that the CIT (A) has reproduced the relevant facts in Para 7.2 of her order. From the above facts, it is clear that though the assessee has received the lease rentals as agreed to in the lease agreement till March, 2008, the lessee has refused to pay the lease rental thereafter in accordance with the agreement and has in fact asked the assessee to adjust the excess lease rentals paid by it till March, 2008 towards the other months. It is also noticed that the dispute was raised as early as 17.08.2007 and the issue had also travelled to the City Civil Court and subsequently to the Hon'ble High Court of A.P.
4. The learned DR has placed reliance upon the decision of the Hon'ble Supreme Court in the cases of CIT vs. Shiv Prakash Raj & Co. Pvt Ltd (88 Taxman 536) (S.C), State Bank of Travancore vs. CIT reported in (1986) 24 Taxmann 337 (S.C) and also in the case of Morvi Industries Ltd vs. CIT (82 ITR 835 (S.C). We find that these decisions are distinguishable on facts from the facts of the case before us. In the case of CIT vs. Shiv Prakash Raj & Co, the assessee therein had passed resolution to waive interest after expiry of accounting year in question, and it was in these circumstances that the Hon'ble Supreme Court held that, interest having accrued to the assessee, was liable to be taxed, notwithstanding the fact that no entries have been made in the accounts of the assessee to that effect and no interest income was actually received. In the case of Morvi Industries Ltd, the Hon'ble Supreme Court was considering the case of an assessee where the Page 4 of 10 ITA Nos 361 of 2015 and 1674 of 2014 APTDC Ltd Hyderabad.
assessee company being managing agent of its subsidiary company, maintained its accounts on mercantile system and relinquished certain amounts representing fixed monthly sum allowances and commission on sale payable to managed company, in view of heavy financial losses suffered by the managed company and the Hon'ble Supreme Court held that the amounts of commission were relinquished after they had become "due" but before they were payable in terms of the managing agencies agreement and since the amounts of income for years in question were given up unilaterally by the assessee after they had accrued to it, the assessee company could not escape the liability of tax liability for those amounts and since there was nothing to show that the amounts were relinquished on the basis of commercial expediency or for advancing assessee's business interest, it was held that the assessee was not entitled to claim deduction of the said amount as business expenditure u/s 10(2)(xv) of the 1922 Act.
5. In the case of State Bank of Travancore (cited supra), we find that the Hon'ble Apex Court has laid down the following principles for recognition of income:
"(1) It is the income which has really accrued or arisen to the assessee that is taxable. Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation. (2) The concept of real income would apply where there has been a surrender of income which in theory may have accrued but in the reality of the situation no income had resulted because the income did not really accrue.Page 5 of 10
ITA Nos 361 of 2015 and 1674 of 2014 APTDC Ltd Hyderabad.
(3) Where a debt has become bad, deduction in compliance with the provisions of the Act should be claimed and allowed.
(4) Where the Act applies, the concept of real income should not be so read as to defeat the provisions of the Act.
(5) If there is any diversion of income at source under any statute or by overriding title, then there is no income to the assessee.
(6) The conduct of the parties in treating the income in a particular manner is material evidence of the fact whether income has accrued or not.
(7) Mere improbability of recovery, where the conduct of the assessee is unequivocal, cannot be treated as evidence of the fact that income has not resulted or accrued to the assessee. After debiting the debtor's account and not reversing that entry, but taking the interest merely in suspense account, cannot be such evidence to show that no real income has accrued to the assessee or has been treated as such by the assessee.
(8) The concept of real income is certainly applicable in judging whether there has been income or not, but in every case it must be applied with care and within well- recognised limits, and must not be called in aid to defeat the fundamental principles of law of income-tax as developed".
6. We find that in the case on hand, it was not a unilateral action of the assessee of relinquishing its right to receive the lease rentals. In fact, it was on account of a dispute raised by the payer as early as 17.8.2007 and the dispute also had travelled up to the Courts. The Hon'ble Supreme Court in the case of Godhra Electricity Co. Ltd vs. CIT reported in (1997) 225 ITR 0746 after considering the principles of real income theory laid down in the case of State Bank of Travancore (cited Supra) has held as under:
Page 6 of 10ITA Nos 361 of 2015 and 1674 of 2014 APTDC Ltd Hyderabad.
"7. If the matter is examined in the light of the aforementioned principles laid down by this Court, it must be held that even though the assessee-company was following the mercantile system of accounting and had made entries in the books regarding enhanced charges for the supply made to the consumers, no real income had accrued to the assessee- company in respect of those enhanced charges in view of the fact that soon after the assessee-company decided to enhance the rates in 1963 representative suits (Civil Suit Nos. 152 of 1963 and 50 of 1964) were filed by the consumers which were decreed by the trial court and which decree was affirmed by the appellate court and the learned single Judge of the High Court and it is only on 3-12-1968 that the letters patent appeals filed by the assessee-company were allowed by the Division Bench of the High Court and the said suits were dismissed. But appeals were filed against the said judgment by the consumers in this Court and the same were dismissed by the judgment of this Court dated 26-2-1969. Shortly thereafter, on 19-3-1969, the Under Secretary to the Government of Gujarat wrote a letter advising the assessee-company to maintain the status quo for the rates to the consumers for at least six months and the Chief Electrical Inspector was directed to go through the accounts of the assessee-company from year to year and to report to the Government about the actual position about the reasonable returns earned by the assessee-company. On 16-5-1969 another representive suit (Suit No. 118 of 1969) was filed by the consumers wherein interim injunction was granted by the Court and which was finally decreed in favour of the consumers on 23-6-1974. It would thus appear that after the decision was taken by the assessee-company to enhance the charges it was not able to realise the enhanced charges on account of pendency of the earlier representative suits of the consumers followed by the letter of the Under Secretary to the Government of Gujarat and the subsequent suit of the consumers and during the pendency of the subsequent suit the manage- ment of the undertaking of the assessee-company was taken over by the Government of Gujarat under the Defence of India Rules, and the undertaking was subsequently transferred to the Gujarat State Electricity Board.
It is no doubt true that the letter addressed by the Under Secretary to the Government of Gujarat to the assessee- company had no legally binding effect but one has to look at things from practical point of view. [See: R.B. Jodha Mal Kuthiala's case (supra)]. The assessee-company, being a licensee, could not ignore the direction of the State Government which was couched in the form of an advice, Page 7 of 10 ITA Nos 361 of 2015 and 1674 of 2014 APTDC Ltd Hyderabad.
whereby the assessee- company was asked to maintain the status quoior at least six months and not to take steps to recover the dues towards enhanced charges from the consumers during this period. Before the expiry of the period of six months the subsequent suit had been filed by the consumers and during the pendency of the said suit the undertaking of the assessee-company was taken over by the Government of Gujarat under the Defence of India Rules, and subsequently it was transferred to the Gujarat State Electricity Board and, as a result, the assessee-company was not in a position to take steps to recover the enhanced charges.
8. The High Court has observed that the subsequent suit that was filed on 16-5-1969 related to recovery of enhanced charges for the period subsequent to 31-3-1969 and not prior thereto. We have, however, perused the judgment of the Joint Judge (Junior Division), Godhra dated 20-6-1974 in the said suit which was annexed as Annexure 'D' to the statement of the case. The said judgment does not show that the suit was confined to the period subsequent to 31-3-1969. On the other hand, it shows that the plaintiffs in that suit were challenging the enhancement in charges made in 1963 had sought a declaration that the assessee-company was not entitled to recover more than 31 paise per unit for lights and fans and 20 paise per unit for motive power and the trial court, while decreeing the said suit had given a declaration in these terms. The said declaration is not confined to the period subsequent to 31-3-1969.
9. The question whether there was real accrual of income to the assessee- company in respect of the enhanced charges for supply of electricity has to be considered by taking the probability or improbability of realisation in a realistic manner. If the matter is considered in this light, it is not possible to hold that there was real accrual of income to the assessee-company in respect of the enhanced charges for supply of electricity which were added by the ITO while passing the assessment orders in respect of the assessment years under consideration. The AAC was right in deleting the said addition made by the ITO and the Tribunal had rightly held that the claim at the increased rates as made by the assessee- company on the basis of which necessary entries were made represented only hypothetical income and the impugned amounts as brought to tax by the ITO did not represent the income which had really accrued to the assessee- company during the relevant previous years. The High Court, in our opinion, was in error in upsetting the said view of the Tribunal".
Page 8 of 10ITA Nos 361 of 2015 and 1674 of 2014 APTDC Ltd Hyderabad.
7. The decisions relied upon by the learned CIT (A) at Para 4.5 of her order, also clearly establish that where there is a dispute, the income would accrue and would not crystallize till the dispute is settled and therefore, the same cannot be brought to tax even under mercantile system of accounting. In our opinion, the decisions relied upon by the learned CIT (A) are clearly applicable to the facts of the case before us. In view of the same, we see no reason to interfere with the order of the CIT (A) on this issue and the Revenue's ground of appeal No.4 for the A.Y 2010- 11 and the only ground of appeal for the A.Y 2009-10 are rejected.
8. As regards the grounds 1 to 3 for the A.Y 2010-11 are concerned, we find they are against the order of the CIT (A) in deleting the disallowance of the interest paid by the assessee on late deposit of EPF & ESI payments. The CIT (A) has held that these are compensatory in nature and therefore, allowable u/s 37(1) of the Act.
9. The learned DR submitted that the interest is penal in nature and therefore, is not to be allowed u/s 37(1) of the Act. He placed reliance upon the decision of the Hon'ble Supreme Court in the case of Prakash Coton Mills (P) Ltd vs. CIT reported in (1993) 67 Taxmann 546 (S.C) in support of his contentions.
10. The learned Counsel for the assessee, on the other hand, placed reliance upon the order of the CIT (A).
Page 9 of 10ITA Nos 361 of 2015 and 1674 of 2014 APTDC Ltd Hyderabad.
11. Having regard to the rival contentions and the material on record, we find that the interest is paid by the assessee for late payment of PF & ESI to the Govt. A/c and therefore, is only compensatory in nature and attains the nature of the payment on which the interest is paid. In fact, the Hon'ble Supreme Court in the case of Prakash Cotton Mills (P) Ltd (cited Supra) has clearly held that no disallowance u/s 37(1) can be made without examining the scheme of provisions of the relevant statute. Therefore, we see no reason to interfere with the order of the CIT (A) on this issue also.
12. In the result, Revenue's appeals for the A.Y 2010-11 and 2009-10 are dismissed.
Order pronounced in the Open Court on 27th September, 2017.
Sd/- Sd/-
(S.Rifaur Rahman) (P. Madhavi Devi)
Accountant Member Judicial Member
Hyderabad, dated 27th September, 2017.
Vinodan/sps
Copy to:
1 Dy. Commissioner of Income Tax, Circle 1(1) 7th Floor, B Block, I.T.
Towers, A.C. Guards, Masab Tank, Hyderabad 2 M/s. A.P.Tourism Development Corporation Ltd, H.N o.3.5.891 Tourism House, Hyderguda, Himayatnagar, Hyderabad 500029 3 CIT (A)-II Hyderabad 4 CIT - I Hyderabad 5 The DR, ITAT Hyderabad 6 Guard File By Order Page 10 of 10