Case Law Details

Case Name : Commissioner of Income Tax-II Vs M/s Bhagwati Corporation (Gujarat High Court at Ahmedabad)
Appeal Number : Tax Appeal no. 932 of 2011
Date of Judgement/Order : 15/10/2012
Related Assessment Year :
Courts : All High Courts (3629) Gujarat High Court (305)

Though the questions are multiple, issue is single, namely, the deduction of Rs.61,08,500/- claimed by the assessee towards expenditure being part of development charges. The assessee had paid such sum to Surat Municipal Corporation towards water connection charges. Assessee was engaged in the business of development of land. Assessing Officer disallowed such claim on the ground that the liability of the assessee had not crystalised during the year under consideration. The Assessing Officer noticed that there was some dispute between the assessee as a developer and one NFL as a contractor on whose behalf the land was being developed with respect to who should bear such charge. Such issue was clarified on 1.9.2005 and that therefore, according to the Assessing Officer liability to the assessee was crystalised only on that day and not earlier. For some reason, without any further reference, he also invoked section 43B of the Act and concluded that such expenditure was not allowable either under section 37 or under section 43B of the Act.

Both the lower appellate authorities allowed assessee’s claim after recording factual findings that assessee had actually incurred the said expenditure. Liability in respect of the same had been crystallized during the relevant year and hence, the same cannot be termed as a contingent liability.Neither the contractee had reimbursed the assessee nor had the contractee claimed such amount by way of expenditure. The said view was upheld by the Hon’ble High Court also.

HIGH COURT OF GUJARAT AT AHMEDABAD

TAX APPEAL No. 932 of 2011

COMMISSIONER OF INCOME TAX-II 

Versus

M/S BHAGWATI CORPORATION 

Date : 15/10/2012

ORAL ORDER

(Per : HONOURABLE MR.JUSTICE AKIL KURESHI)

1. Revenue is in appeal against judgement of the Income Tax Appellate Tribunal(“the Tribunal” for short) raising following questions for our consideration :

“(A) Whether the Appellate Tribunal is right in law and on facts in holding that the disallowance made on account of ineligible contractual expenses claim was erroneous?

(B) Whether the Appellate Tribunal is right in law and on facts in dismissing relevant facts regarding contingent and uncertain nature of the claimed liabilities as collected during the assessment proceedings and placed on records?

(C) Whether the Appellate Tribunal is right in law and on facts in relying on theoretical premises, surmises, irrelevant material and  conjectures regarding the so called ‘contractual obligation’ of the assessee?

(D) Whether the Appellate Tribunal is right in law and on facts in making erroneous interpretation of relevant facts and improperly rejecting facts and evidence?”

2. Though the questions are multiple, issue is single, namely, the deduction of Rs.61,08,500/- claimed by the assessee towards expenditure being part of development charges. The assessee had paid such sum to Surat Municipal Corporation towards water connection charges. Assessee was engaged in the business of development of land. Assessing Officer disallowed such claim on the ground that the liability of the assessee had not crystalised during the year under consideration. The Assessing Officer noticed that there was some dispute between the assessee as a developer and one NFL as a contractor on whose behalf the land was being developed with respect to who should bear such charge. Such issue was clarified on 1.9.2005 and that therefore, according to the Assessing Officer liability to the assessee was crystalised only on that day and not earlier. For some reason, without any further reference, he also invoked section 43B of the Act and concluded that such expenditure was not allowable either under section 37 or under section 43B of the Act.

3. The assessee carried the matter in appeal. The Commissioner(Appeals) allowed the appeal making  following observations :

“I have gone through the details and the agreement between the appellant and the contractee. As per the development agreement the appellant developed 530000sq yds of land and the development cost was fixed at Rs.100/- per sq. yds. As per the clause-5 of the agreement the contractee MIL undertook payment of all fees and charges not exceeding Rs.100/- per sq yds and an additional cost over above the said amount would be borne by the contractor. It is also seen that the development work was completed in the year under appeal and the total gross receipts pertaining to the contract are credited in the P & L Account for the year. There was no further income in respect of this contract subsequent to the year under appeal and it is seen that expenditure of approximately Rs.70,000/- in the next year has not been claimed by the appellant since there was no income. The amount of water connection charges paid to the SMC as per mutual understanding between the contractor and the contractee was an ascertained liability as on 1.03.2005 which is relevant to not material that the contractor, i.e. the appellant was informed by the contractee regarding the liability after the expiry of the financial year since the contractor as such had no locus standi with the SMC and the SMC would raise the demand only on the owner of the land, i.e. the contractee. I am inclined to agree with the appellant that the liability crystallized as on 1.03.2005, the moment SMC raised the demand on the contractee since as per mutual agreement this amount was to be borne by the contractor. It is also seen that other expenditure for getting the land converted from agricultural to non¬agricultural land has been paid by the contractee as mutually agreed to by the two parties. This liability cannot be termed as a contingent liability or a liability u/s 43B of the IT Act. It is also not disputed by the AO that the said amount has been paid by the appellant and the same has not been reimbursed or claimed by the contractee as expenditure. I am inclined to agree with the appellant that the amount as per AS-7 and therefore the AO was not justified in  disallowing the expenditure claimed by the appellant in this respect. The addition therefore, is directed to be deleted.”

4. Such issue was carried in appeal by the Revenue before the Tribunal. The Tribunal dismissed the appeal making following observations :

“In the impugned order, the learned Commissioner of Income Tax(Appeal) has merely relied on the development agreement executed on 23.01.2002 between the assessee and MIL. There is no supplementary agreement which is relied by the learned Commissioner of Income tax (Appeal) impugned order. Since clause3(e) (ix) of the agreement dated 23.01.2002 clearly indicates that development expenses only to the extent of not exceed Rs.100/- per sq yd. were to be borne by the contractee, namely MIL/NFL. Therefore, any amount in excess of Rs.100/- per sq yd. is to be borne by the assessee-firm. This amount has been paid by the assessee and this expense has not been claimed by the contractee, namely MIL/NFL. To sum up, the Assessing Officer made the addition on doubt and suspicion and the learned Commissioner of Income Tax (Appeal) has given cogent reason for deleting the same. We therefore, incline to uphold the order of Learned Commissioner of Income Tax(appeals) .”

5. Before us, learned counsel for the Revenue principally sought to place reliance on provisions contained in section 43B of the Act. We are however, of the opinion that CIT(Appeals) as well as Tribunal both having found that expenditure was actually incurred by the assessee, disallowance therefore, under section 43B would not be permissible. Revenue has not brought on record as to when such amount was actually paid by the assessee. Tribunal as noted   above, recorded that the liability had crystalized on 1.3.2005 when the assessee had raised demand and therefore, same cannot be termed a liability which is contingent. The Tribunal also recorded that the assessee had borne such expenditure and was not reimbursed by the contractee and nor the contractee has claimed such amount by way of expenditure. In our view, conclusion of the Tribunal is not required to be interfered. No question of law arises. Tax Appeal is dismissed.

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