Commissioner of Income Tax vs Som Dutt Builders Pvt. Ltd.

The subject matter of challenge in this appeal is a judgment and order dated 12th November, 2010 pertaining to the assessment year 2003-04. The Revenue has come up in appeal. The following three questions were admitted :

"(a) Whether the learned Tribunal below committed substantial error of law in allowing deduction of Rs. 79,42,442/- under section 80HHBA notwithstanding the fact that the said receipt was from the sale of scrap which has nothing to do with a housing project awarded to the assessee.

(b) Whether the learned Tribunal below committed substantial error of law in approving the deletion of interest accrued in favour of three companies on the ground that before accrual of interest the Board of Directors had waived interest by totally overlooking the fact that in that event there was no justification of showing those interest in the account of the company.

(c) Whether the learned Tribunal below committed substantial error of law in treating the expenses on registration and stamp duty as revenue expenditure instead of capital expenditure."

In so far as question No. 1 is concerned, the learned Tribunal concurred with the views expressed by the CIT(A). The CIT(A) held as follows:

"As regards ''sale of scrap'', this issue has not been before the ITAT. However the tribunal considered other incomes like income from sale of empty bags and income from used oil and decided in favour of the appellant. In my opinion, the same ratio can be applied to ''sale of scrap'' which is directly connected to execution of the project. Thus the income on sale of scrap needs to be considered for working out a deduction. I direct the A.O. to consider this income also for a deduction u/s. 80HHBA."

The aforesaid views were upheld by the learned Tribunal. Mr. Poddar, learned senior advocate appearing for the assessee, drew our attention to a judgment in the case of Fenner (India) Ltd. Vs. Commissioner of Income Tax (No. 2), (2000) 241 ITR 803 , wherein the following views were expressed:

"For the sake of emphasis, we may say that the scrap materials come within the manufacturing process of the industrial undertaking in the manufacture of certain products such as V-belts, oil seals. O-rings and certain rubber moulded products, etc. In this view of the matter, we are of the view that profits and gains from the sale of scrap materials are eligible to deduction in an amount equal to twenty per cent under section 80HH, inasmuch as such gains or profits are derived from the industrial undertaking and includible in the gross total income of the assessee and the question relatable to the profit on the sale of scrap is thus answered in favour of the assessee."

So far as question No. 2 is concerned, the views expressed by the learned Tribunal are as follows:

"6.2. In the case before us, there is no dispute to the fact that the assessee-company had passed requisite Board Resolutions not to charge interest from aforesaid 3 parties on the advances given by it to them. Therefore, we hold that the Assessing Officer was not justified to consider that the interest income has accrued to the assessee on the outstanding advances as the assessee has agreed not to charge interest on the outstanding advances before the interest income had accrued to it. In view of the above, we uphold the order of the Ld. CIT(A) in deleting the aforesaid interest addition of Rs. 1,21,05,788/- made by the Assessing Officer. Therefore, ground No. 1 of the appeal taken by the Department is rejected."

Mr. Poddar, learned senior advocate appearing for the assessee, relying upon the judgment of the Apex Court in the case of Commissioner of Income Tax, Amritsar Vs. Shiv Prakash Janak Raj and Co. Pvt. Ltd. and Others, (1996) 7 AD 625 : (1996) 136 CTR 421 : (1996) 222 ITR 583 : (1996) 8 JT 603 : (1996) 7 SCALE 368 : (1996) 11 SCC 530 : (1996) 7 SCR 81 Supp : (1996) 88 TAXMAN 536 , submitted that the relevant question is whether the waiver was made after the interest had accrued. If an answer to the question is in the affirmative then, the liability to pay tax can not be avoided. If on the other hand, the answer to the question is in the negative, in other words, if the waiver had been made before the interest accrued to the assessee, the liability to pay tax on that amount can not be fastened. This is precisely the view taken by the Supreme Court in the aforesaid case. The following finding may usefully be referred to :

"The waiver of interest after the expiry of the relevant accounting year only meant that the assessee was giving up the money which had accrued to it. It cannot be said, in the circumstances, that the interest amount had not accrued to the assessee. Therefore, the Tribunal was right in taking the view it did in respect of the assessment years 1969-70, 1970-71 and 1971-72. In the case of the assessment year 1968-69, however, the resolution was passed before the expiry of the accounting year and though the finding of the Tribunal is that the said waiver was not actuated by any commercial considerations, yet learned counsel for the Revenue did not press the Revenue''s case so far as this assessment year is concerned."

In so far as the question No. 3 is concerned, the views expressed by the learned Tribunal are as follows:

"13. Ground No. 3 of the appeal is in respect to delete disallowance of registration charges of Rs. 31,32,178/- paid by the assessee in its Real Estate Project relating to Som Datt Plaza, Kanpur.

We have heard the Ld. Representatives of the parties. We observe that the Assessing Officer has stated that the assessee claimed administrative expenses of Rs. 1,45,46,257/- and it includes sum of Rs. 31,32,178/- towards Registration and Stamp Duty for the area pertaining to Som Datt Plaza. The Assessing Officer has stated that the assessee has shown rental income in respect of that property and hence, the expenditure of Rs. 31,32,178/- is to be disallowed. However, in first appeal, the ld. CIT(A) given the direction to the Assessing Officer stating that to verify/ascertain the registration charges attributable to shops which have been rented out by the assessee and disallow the same on proportionate basis and allow the balance of registration charges as eligible expenditure. Hence, the Department is in appeal before the Tribunal.

During the course of hearing, the Ld. Departmental Representative supported the action of the Assessing Officer and whereas the Ld. Authorised Representative of the assessee supported the order of the Ld. CIT(A). He further referred to pages 208 & 209 of the paper book and submitted that out of total area of 74792 Sft. of the above Som Datt Plaza Project, let out area was only 16143.54 Sft. and the balance area of 58648.46 Sft. has been sold or lying vacant. The Ld. Authorised Representative of the assessee further submitted that the assessee has himself disallowed the proportionate expenses towards registration. The ld. Departmental Representative could not controvert the above submissions of the Ld. Authorised Representative of the assessee.

Considering the above facts, we are of the considered view that there is no reason to interfere with the order of the Ld. CIT(A). Therefore, we uphold the same and reject ground No. 3 of the appeal taken by the Department."

It was essentially a question of fact whether apportionment of the registration charges and the stamp duty had been made by the assessee and the question of fact was answered concurrently in favour of the assessee both by the CIT(A) and the learned Tribunal. The amount allowed to be treated as revenue expenditure pertained to that part of the expenditure, which related to the construction raised by the assessee for the purpose of real estate business. Therefore, the investments made were all in the nature of revenue expenditure. If the land purchased is to be allowed as revenue expenditure, can it be said that the stamp duty and the registration charges will be treated as capital expenditure? This is what was sought to be argued before us on behalf of the Revenue.

We are, for the aforesaid reasons, of the opinion that the view expressed by the learned Tribunal is correct and all the three questions are answered in the negative and in favour of the assessee.

The appeal is, therefore, dismissed.