Delhi High Court
Commissioner Of Income-Tax vs Vishal Builders P. Ltd. on 13 December, 2001
Equivalent citations: [2002]254ITR55(DELHI)
Author: S.B. Sinha
Bench: S.B. Sinha, A.K. Sikri
JUDGMENT S.B. Sinha, C.J.
1. The questions referred under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as the "Act"), for the opinion of this court by the Income-tax Appellate Tribunal, Delhi Bench "C", Delhi (hereinafter referred to as "the Tribunal"), in R. A. No. 942 (Delhi) of 1980 are in the following terms :
"1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is justified in law in upholding that the security deposit of Rs. 3,66,000 forfeited by the Delhi Development Authority for retracting the bids offered by the assessed for purchasing the commercial flats in Nehru Place, New Delhi, was a business loss and was deductible in computing the assessed's income for the assessment year 1975-76 ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in upholding that the provision of Rs. 2,42,000 for registration charges of plots by the assessed in its accounts were chargeable as accrued liabilities against this income ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in treating the assessed-company as an industrial company for the purpose of rate of tax ?"
2. The basic facts of the matter are not in dispute.
3. An auction was held by the Delhi Development Authority (in short, "the DDA"), on February 6, 1973, for perpetual leasehold rights of certain plots and the assessed made bids for plots Nos. 39, 40 and 41 for Rs. 7,00,000, Rs. 7,75,000 and Rs. 8,00,000, respectively, and further paid the earnest money amounting to Rs. 5,68,750, i.e., 25 per cent, of bid amount. Vide letter dated March 2, 1973, the assessed retracted its bids for the aforesaid three plots stating as under :
"On going through the details of these plots, we find that all these plots are too small to have any proper planning. Total covered area also being very small, we being the promoters do not feel it worth marketing the flats to the public. We, therefore, request your goodself to kindly treat our bid for the above plots as withdrawn and refund our money at the earliest possible."
4. The Delhi Development Authority gave a reply to the assessed vide letter dated March 28, 1973, stating that the bid shall not be revocable by the bidder, therefore, his request cannot be acceded to. The assessed, however, was advised to surrender the plots and in case the plots are surrendered within a period of two months from the date of the issuance of the letter confirming the bid, two per cent, of the premium or loss in the re-auction whichever is more shall be deducted and balance refunded to the assessed.
5. The aforesaid plots were re-auctioned on August 28, 1973, for Rs. 3,66,000 less than the assessed's earlier bid. Thus, the Delhi Development Authority deducted this amount of Rs. 3,66,000 from the earnest money of Rs. 5,68,750 and refunded the balance of Rs. 2,02,750 to the assessed on December 3, 1973. Rs. 3,66,000 is the amount claimed by the assessed as business expenditure/ loss in its books for the year ending June 30, 1974.
6. The Income-tax Officer (in short "the ITO"), made the addition for the following reasons :
(i) That the assessed had not acquired leasehold rights in the land with the purpose of resale but had intended to retain the same with itself. These rights, therefore, constitute the capital stock of the assessed and on that account would not be a revenue loss.
(ii) That the assessed-company only offered to purchase the said plots of land from the Delhi Development Authority and before the contract was final and complete, it retracted its bid and sought for refund of its earnest money which was allowed by the High Court. Thus, there was no breach of the contract in this case, and therefore, the cases relied upon by it are not useful to the assessed-company.
(iii) That the bid was made for the auction on February 6, 1973, and the assessed retracted from its bid on March 2, 1973, within the accounting period ending on June 30, 1973, relating to the assessment year 1974-75. The loss, therefore, should have been claimed for the assessment year 1974-75.
(iv) That there was no forfeiture of the earnest money as the learned single judge of the Delhi High Court decreed the amount of Rs. 3,66,000 in the assessed's favor and refunded to it under bank guarantee pending decision on the appeal filed by the Delhi Development Authority.
7. The Commissioner of Income-tax (Appeals) (in short, "the CIT(A)"), held as under :
"The assessed's business itself was the construction and sale of multi-storeyed commercial flats. It has been doing this business in respect of other similar plots acquired from the Delhi Development Authority. There is, therefore, no doubt that the assessed bid for these plots in the auction held on February 6, 1973, in the course of its business with a view to acquire stock-in-trade for his business."
"The bid itself was a contract according to which the assessed should have paid the full amount of the bid to the Delhi Development Authority. It is this contract in respect of which there was a breach and as pointed out earlier it is in respect of this breach, which arose in the course of the assessed's business, that the Delhi Development Authority forfeited the amount of Rs. 3,66,000. There has thus clearly been a breach of contract in the course of the assessed's business as was the case in the various High Courts' judgments relied upon by the learned representative. It appears to me that the Income-tax Officer has merely brushed aside the applicability of the High Courts judgments to the facts of the assessed's case."
"Both the reduction and the actual forfeiture by the Delhi Development Authority took place in the year ended June 10, 1974, relevant for the assessment under appeal. I, therefore, fail to see how the loss of Rs. 3,66,000 could be described as 'imaginary' or 'could have been claimed for the assessment year 1974-75'. The loss undoubtedly relates to the assessment under appeal."
"The Income-tax Officer's observations that there was no forfeiture of the amount of Rs. 3,66,000 in the accounting year is again factually incorrect. As pointed out in CIT v. Tulsi Ram Karam Chand [1964] 52 ITR 180 (P & H), the amount of Rs. 3,60,000 had come out of the assessed's coffers in the course of his business in the accounting year and there was no admitted liability of any person including the Delhi Development Authority to return the amount to the assessed. The assessed was no doubt pursuing the matter in litigation but this was only a 'shadowy hope' of recovery which cannot in law form a legitimate ground for disallowance of the loss. The Income-tax Officer's reliance on the single Bench judgment of the Delhi High Court which was delivered on March 23, 1977, is again in my opinion erroneous. For one thing, as held in CIT v. Tulsi Ram Karam Chand [1964] 52 ITR 180 (P & H) and Laxmi Ginning and Oil Mills v. CIT [1971] 82 ITR 958 (P & H), when the loss of rupees 3,66,000 was in fact incurred in the accounting year, the pendency of litigation would not constitute a good reason or justification for postponing allowance of the loss in the correct year to which it relates. Secondly, it is not as if the single Bench's judgment of the Delhi High Court has settled the matter in favor of the assessed. The assessed had to furnish a bank guarantee pending decision on the appeal filed by the Delhi Development Authority and therefore even today there is no debt or right in the assessed's favor in respect of the amount of Rs. 3,66,000 even if the assessed ultimately receives back the amount of Rs. 3,66,000 that would not in my opinion and in view of the High Court decisions cited earlier constitute any reason why the amount of Rs. 3,66,000 can be disallowed in the year under appeal. The forfeiture took place in the year under appeal and the loss was actually and from a business and commercial point of view suffered by the assessed in the accounting year. If the assessed is ultimately successful, on the basis of the High Court's judgment cited above and the specific provisions of Section 41(1) of the Act, the amount obtained can certainly be brought to tax in the year in which such receipt takes place. Section 41(1) is specifically intended to deal with cases of this type and cannot in my opinion be controverter into a dead letter by disallowing the loss in the year in which it was really incurred in accordance with the commercial principles of accounting and the assessed's own method of accounting."
8. The assessed filed a suit on September 16, 1973, in this court for recovery of a sum of Rs. 5,68,750 besides interest, which was registered as Suit No. 409 of 1973. The learned single judge decreed the said suit for Rs. 3,66,000 with interest at 6 per cent, per annum from the date of the suit till payment along with the costs against the Delhi Development Authority. The matter, however, was taken up in appeal by the Delhi Development Authority before this court having been referred to a Full Bench, which is still pending. Thus, the question of refund of the amount of Rs. 3,66,000 forfeited by the Delhi Development Authority is sub judice even now.
9. Whether the purported loss incurred by the assessed to the extent of Rs. 3,66,000 would be a capital loss or business loss is the question involved in this reference.
10. The forfeiture of the said amount took place as a result of purported failure on the part of the assessed to fulfill the contractual obligation. In the judgment of this court passed in the suit filed by the assessed it has clearly been held that the assessed was entitled to withdraw his offer within the time stipulated and as such he did not commit any breach. The suit has been decreed. The decretal amount has been deposited and the assessed has withdrawn the same on furnishing bank guarantee in terms of the directions of this court. The Delhi Development Authority has preferred an appeal, but having regard to the fact that the decree in the aforementioned suit passed by this court is still in existence, we are of the opinion that he had not suffered any loss.
11. In the event, the appeal is allowed, the assessed can raise his claims for incurring loss in the relevant year.
12. The question is answered accordingly.
13. So far as the second question is concerned, the facts of the matter are as follows :
The Income-tax Officer had disallowed the assessed's claim as follows :
"The assessed has charged a sum of Rs. 2,42,000 (Rs. 1,29,000 for Vishal Bhawan and Rs. 1,13,000 for Aggarwal Bhawan) to the two projects accounts in this year by way of 'provision for registration of plots'. On being requested to implement the basis of the claim, reference has been invited (vide assessed's letter dated December 5, 1997) to the terms and conditions for sale of auction by the Delhi Development Authority of the perpetual leasehold rights in the commercial flats in Nehru Place to the effect that 'the intending purchaser shall execute a lease deed in the said form when called upon to do so'. The registration was not done in the year of purchase; nor it has been done so far even though the structure thereon has been constructed and sold out. It is gathered that the association of builders of the multi-storeyed building has disputed its liability to pay the registration charges to the extent of 8 per cent. There is no evidence that, that assessed has been called upon to execute the lease deed. According to Clause 33 of the agreement to sale between the assessed and the buyers flats the expenses of transfer are to be borne by the body of buyers. There is, therefore, no valid grounds for charging the registration fees to the accounts for this year. No deduction is admissible for the provision for expenses. The expenditure cannot be said to have been incurred in this year even under the mercantile system of accounting particularly in the face of the above facts. The Inspecting Assistant Commissioner has upheld the above disallowance and has further observed that there was no definite obligation of the assessed-company for the impugned expenditure in view of Clause 33 of the agreement of sale between the assessed-company and the buyers of flats. The expenses on registration if at all they were to be incurred by the assessed-company, were chargeable in the accounting year when the flats were purchased, i.e., 1974-75 assessment year. In other words, if registration of the plots was the liability of the assessed-company, then it was definitely incurred in the assessment year 1974-75. Reliance is placed on the ratio given in Calcutta Company Ltd v. CIT [1959] 37 ITR 1 (SC, wherein it was held that if a liability has been definitely incurred in the accounting year, e.g., an unconditional contractual liability, it cannot be regarded as contingent merely because it is to be discharged at a futures date and the cost of discharging it is not definite but may have to be estimated."
14. The learned Commissioner of Income-tax allowed the assessed's claim relying on the judgment of the Supreme Court in Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 and observed as follows :
"The legal principle stated by the learned representative is indeed valid and has to be accepted. The Income-tax Officer has failed to meet this point, which was also raised before him. One of the objections raised by the Income-tax Officer is 'there is no evidence tha,t the assessed has been called upon to execute the lease deed'. On this point, I have made enquiries with the Delhi Development Authority and find that although the lease deed has not so far been executed in respect of the impugned plots the lease deeds have certainly to be executed and the Delhi Development Authority is not going to exempt the assessed from this obligation. The only reason for the delay in this matter is Clause 33 of the agreement, which the assessed has entered into with the purchasers of the flats, according to which the registration charges relating to the lease deeds would be borne by the co-operative society, limited company or other corporate body of buyers if found to hold the properties and if the Delhi Development Authority executes the lease deed directly in favor of such society, company or corporation body buyers. The Delhi Development Authority has not so far agreed to execute such a direct lease deed by which the assessed would be able to escape the necessity of incurring the registration charges from its pocket. The correct position till now is therefore that the assessed is bound with the Delhi Development Authority to incur the registration charges as claimed by it. Such a claim is a proper deduction in the year under appeal under the method of accounting followed by the assessed and accepted by the Income-tax Officer and in accordance with the principle laid down by the Supreme Court in Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1. In the event of the Delhi Development Authority either relieving the assessed from its obligation to incur the registration expenses or the assessed escaping from the need to incur such expenses on account of the Delhi Development Authority agreeing to execute the lease deed directly in the name of the society, company or other corporate body of the persons who purchased the flats from the assessed, Section 41(1) would certainly operate and the assessed can then be taxed in respect of the benefit obtained or accruing by way of such remission, revision or cessation. However, the mere possibility of such a remission or cessation taking place in the future cannot be a reason for disallowing the claim of Rs. 2,42,000 in the order under appeal.
The Income-tax Officer has stated that the expenses on registration were chargeable in the accounting year relevant for the year 1974-75 assessment on the ground that the plots were acquired in that year. I considered this to be erroneous as all the expenses incurred last year were not carried to the profit and loss account but to project account in the balance-sheet. It is only in the year under appeal when the construction gathered momentum and substantial receipts of more than 50 per cent, of the total bookings value of the flats received that the assessed started the profit and loss account transferring the project account also thereto. Having accepted this method of accounting, even if the registration charges were debited in the earlier accounting year they would again come up for debit in the year under appeal in the project account.
From the facts and the correct legal position explained above, I think the amount of Rs. 2,42,000 is a proper deduction to which the assessed is entitled in the year under appeal. It is for the Income-tax Officer to keep track of future developments and see whether in any future years the assessed becomes liable to tax in respect of either the whole or a part of the amount Rs. 2,42,000 under Section 41(1) but that is no reason for disallowing the claim this year."
15. Registration of a document is a contingent liability. It is not an accrued liability. Only because in relation to the transactions by and between the assessed and the intending purchasers of the apartments, registered documents are required to be executed, the requisite charges would not be allowable till such registrations are actually made. In any event, it cannot be said that the expenditure to be incurred on the said head would be an accrued liability. In any event, such registration charges are to be paid by the allottees and not by the assessed.
16. Unfortunately this aspect of the matter had not been considered by the learned Tribunal. The said question, therefore, must be answered in favor of the Revenue and against the assessed.
17. So far as the third question is concerned the same is no longer res integra. Having regard to the nature of the question, it is necessary to notice the facts of this matter in relation to the said question. Construction activity cannot be said to be an industrial activity, (see CIT v. N. C. Budharaja and Co.; CIT v. Pressure Piling Co. (India) P. Ltd.; CIT v. Shankar Construction Co.; CIT v. Suresh Malpani and Co.; CIT v. Buildment P. Ltd and CIT v. Universal Bore-well Agencies [1993] 204 ITR 412). It has been held by the apex court that a firm of contractors constituted for the purpose of construction of a dam, claimed deduction under Section 80HH of the Act for the assessment years 1974-75 and 1975-76, from the total profits from construction of the dam as such, on the ground that it was an industrial undertaking and that it had started to produce or manufacture an "article", viz., the dam. The Tribunal allowed the claim and the High Court, on a reference, affirmed the decision of the Tribunal. On appeal to the Supreme Court, no arguments being raised on behalf of the Department against the finding that the respondent was an industrial undertaking. It was further held that the assesssee was not entitled to the benefit provided under Section 80HH, because the activity of construction of a dam could not be characterised as manufacture or production of an article or articles within the meaning of Section 80HH(2)(i) of the Act.
18. Yet again in Minocha Bros P. Ltd. v. CIT [1993] 204 ITR 628, the apex court observed that in order to be entitled to the lower rate of tax on an "industrial company", it is for the assessed-company to adduce material to establish that its income attributable to the activities of manufacture or production of goods is not less than 51 per cent, of the total income. It was further held that the company engaged in the construction of buildings was not an industrial company entitled to be taxed at the concessional rate because it had failed to adduce material to establish that the income attributable to the manufacturing activity undertaken by it represented not less than 51 per cent, of its total income.
19. The aforesaid principle has been reiterated in Builders Associations of India v. Union of India [1994] 204 ITR 877 (SC). The third question, therefore, must also be answered in favor of the Revenue and against the assessed.
20. All the questions referred to this court for its opinion must thus be answered in the negative, in favor of the Revenue and against the assessed.
21. This reference is accordingly disposed of.