Commissioner of Income Tax vs Vishal Builders (P.) Ltd.

S.B. Sinha, C.J.—The questions referred to u/s 256(1) of the income tax Act, 1961 (''the Act'') for the opinion of this Court by the Tribunal, Delhi Bench ''C'', 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 deposits of Rs. 3,66,000 forfeited by the DDA for retracting the bids offered by the assessee for purchasing the commercial flats in Nehru Place, New Delhi, was a business loss and was deductible in computing the assessee''s income for the assessment year 1975-76 ?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in upholding that the provisions of Rs. 2,42,000 from registration charges of plots by the assessee in its accounts were chargeable as accrued liabilities against this income ?

Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in treating the assessee-company as an industrial company for the purpose of rate of tax ?

The basic fact of the matter is not dispute. An auction was held by the Delhi Development Authority (the ''DDA'') on 6-2-1973 for perpetual leasehold rights of certain plots and the assessee made bids for plot Nos. 39, 40 and 41 for Rs. 7 lakhs, Rs. 7,75,000 and Rs. 8 lakhs, respectively, and further paid the earnest money amounting to Rs. 5,68,750, i.e., the 25 per cent of the bid amount. Vide letter dated 2-3-1973, the assessee 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 We, therefore, request your goodself to kindly treat our bid for the above plots as withdrawn and refund our money at the earliest possible.

The DDA gave a reply to the assessee vide letter dated 28-3-1973 stating that the bid shall not be revocable by the bidder, therefore, his request cannot be acceded to. The assessee, 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 assessee.

The aforesaid plots were re-auctioned on 28-8-1973 for Rs. 3,66,000 less than the assessee''s earlier bid. Thus, the DDA 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 assessee on 3-12-1973. Rs. 3,66,000 is the amount claimed by the assessee as business expenditure/loss in its books for the year ending 30-6-1974.

The ITO made the addition for the following reasons :--

(i) That the assessee 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 assessee and on that account would not be a revenue loss.

(ii) That the assessee-company only suffered to purchase the said plots of land from the DDA 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 assessee-company.

(iii) That the bid was made for the auction on 6-2-1973 and the assessee retracted from its bid on 2-3-1973 within the accounting period ending on 30-6-1973 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 assessee''s favour and refunded to it under bank guarantee pending decision on the appeal filed by the DDA.

The Commissioner (Appeals) held as under :

. . . The assessee''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 DDA. There is, therefore, no doubt that the assessee bid for these plots in the auction held on 6-2-1973 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 assessee should have paid the full amount of the bid to the DDA. 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 assessee''s business, that the DDA forfeited the amount of Rs. 3,66,000. There has, thus, clearly been a breach of contract in the course of assessee''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 assessee''s case.

Both the reduction and the actual forfeiture by the DDA took place in the year ended 10-6-1974 relevant for the assessment under appeal. I, therefore, fail to see how the less of Rs. 3,66,000 could be described as ''imaginary'' or ''could have been claimed for the assessment year 1974-75''. The less undoubtedly relates to the assessment under appeal.

The ITO''s observation 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 COMMISSIONER OF Income Tax, PUNJAB Vs. TULSI RAM KARAM CHAND., the amount of Rs. 3,66,000 had came out of the assessee''s coffers in the course of his business in the accounting year and there was no admitted liability of any person including the DDA to return the amount to the assessee. The assessee was no doubt pursuing the matter in litigation but this was only a ''shadowy hops'' of recovery which cannot in law form a legitimate ground for disallowance of the loss. The ITO''s reliance on the Single Bench judgment of the Delhi High Court which was delivered on 23-3-1977 is again in my opinion erroneous. For one thing, as held in COMMISSIONER OF Income Tax, PUNJAB Vs. TULSI RAM KARAM CHAND., , 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 favour of the assessee. The assessee had to furnish a bank guarantee pending decision on the appeal filed by the DDA and, therefore, even today there is no debt or right in the assessee''s favour in respect of the amount of Rs. 3,66,000 even if the assessee ultimately receives back the amount of rupees 3,66,000, that would not in my opinion and in view of the High Court''s decisions cited earlier constitute any reason why the amount of rupees 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 assessee in the accounting year. If the assessee 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 receipts take place. Section 41(1) is specifically intended to deal with cases of this type and cannot in my opinion be controverted into a dead letter by disallowing the loss in the year in which it was really incurred in accordance with commercial principles of accounting and the assessee''s own method of accounting.

The assessee filed a suit on 16-9-1973 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 the rate of 6 per cent per annum from the date of suit till payment along with the costs against the DDA. The matter, however, was taken up in appeal by the DDA 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 DDA is sub judice even now.

Whether the purported loss incurred by the assessee to the extent of Rs. 3,66,000 would be a capital loss or the business loss is the question involved in this reference.

The forfeiture of the said amount took place as a result of purported failure on the part of the assessee to fulfil the contractual obligation. In the judgment of this Court passed in the suit filed by the assessee, it has clearly been held that the assessee 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 assessee has withdrawn the same on furnishing bank guarantee in terms of directions of this Court. The DDA has preferred an appeal, but having regard to the fact that the decree in the aforementioned suit passed by this Court still in existence, we are of the opinion that he had not suffered any loss.

In the event, the appeal is allowed, the assessee can raise his claims for incurring loss in the relevant year.

The question is answered accordingly.

So far as the second question is concerned, the fact of the matter is as follows :--

The ITO had disallowed the assessee''s claim as follows:--

The assessee 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 project 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 assessee''s letter dated 5-12-1997) to the terms and conditions for sale of auction by DDA of the perpetual leasehold rights in the commercial flats in Nehru Place to the effect that ''the intending purchaser shall execute lease deed in the said firm 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 buy, the registration charges to the extent of 8%. There is no evidence that, that assessee has been called upon to execute the lease deed. According to clause 33 of the agreement of sale between the assessee and the buyers of flats, the expenses of transfer were borne by the body of buyers. There is, therefore, no valid grounds for charging the registration fees to 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 IAC has upheld the above disallowance and has further observed that there was no definite obligation of the assessee-company for the impugned expenditure in view of clause 33 of the agreement of sale between the assessee-company and the buyers of flats. The expenses on registration, if at all, were to be incurred by the assessee-company, they were chargeable in the accounting year when the flats were purchased, i.e., 1974-75 assessment year. In other words, registration of the plots was the liability of the assessee-company, then it was definitely incurred in the assessment year 1974-75. Reliance is placed on the ratio given in Calcutta Company Ltd. Vs. The Commissioner of Income Tax, West Bengal, wherein it was held that if a liability has been definitely incurred in the accounting year, e.g. an (sic) unconditional contractual liability, it cannot be regarded as contingent merely because it is to be discharged at a further date and the cost of discharging it is not definite but may have to be estimated.

[Emphasis supplied]

The learned Commissioner allowed the assessee''s claim relying on the judgment of the Supreme Court in Calcutta Company Ltd. Vs. The Commissioner of Income Tax, West Bengal, and observed as follows :

The legal principle stated by the learned representative is indeed valid and has to be accepted. The ITO has failed to meet this point, which was also raised before him. One of the objections raised by the ITO is ''there is no evidence that the assessee has been called upon to execute the lease deed''. On this point, I have made enquiries with the DDA 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 DDA is not going to exempt the assessee from this obligation. The only reason for the delay in this matter is clause 33 of the agreement, which the assessee 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 DDA executes the lease deed directly in favour of such society, company or corporate body of buyers. The DDA has not so far agreed to execute such a direct lease deed by which the assessee would be able to escape the necessity of incurring the registration charges from its pocket. The correct position till now is, therefore, that the assessee is bound with the DDA 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 assessee and accepted by the ITO and in accordance with the principle laid down by the Supreme Court in Calcutta Company Ltd. Vs. The Commissioner of Income Tax, West Bengal, . In the event of DDA either relieving the assessee from its obligation to incur the registration expenses or the assessee escaping from the need to incur such expenses on account of the DDA agree 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 assessee, section 41(1) would certainly operate and the assessee 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 year under appeal.

The ITO has stated that the expenses on registration were chargeable in the accounting year relevant for the assessment year 1974-75 on the ground that the plots were acquired in that year. I consider this to be erroneous as all the expenses incurred last year were not carried to 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 booking value of the flats were received that the assessee 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 came 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 assessee is entitled in the year under appeal. It is for the ITO to keep track of future developments and one whether in any future years the assessee becomes liable to tax in respect of either the whole or a part of the amount Rs. 2,42,000 u/s 4(1) but that is no reason for disallowing the claim this year.

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 assessee and the intended purchasers of apartments, registered documents are required to be executed, the requisite charges would not be allowable till such expenditure is 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 assessee.

Unfortunately, this aspect of the matter had not been considered by the learned Tribunal. The said question, therefore, must be answered in favour of the revenue and against the assessee.

So far as third question is concerned, the same in no longer res integra. Having regard to the nature of the question, it is not necessary to notice the fact of this matter in relation to the said question. Construction activity cannot be said to be an industrial activity Commissioner of Income Tax, Orissa and Others Vs. N.C. Budharaja and Company and Others, . It has been held by the Apex Court that a firm of contractors constituted for the purpose of construction of a dam, claimed deduction u/s 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 were raised on behalf of the department against the finding that the respondent was an industrial undertaking. It was further held that the assessee was not entitled to the benefit provided u/s 80HH, because the activity of construction of a dam could not be characterized as manufacture or production of an article or articles within the meaning of section 80HH(2)(i) of the Act. Yet again in Minocha Bros. Pvt. Ltd. Vs. Commissioner of Income Tax, , the Apex Court observed that in order to be entitled to the lower rate of tax on an ''industrial company'', it is for the assessee-company to adduce material to establish that its income is attributable to the activities of manufacture or production of goods and 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.

The aforesaid principle has been reiterated in Builders Associations of India Vs. Union of India and others, ). The third question, therefore, must also be answered in favour of the revenue and against the assessee.

All the questions referred to this Court for its opinion must, thus, be answered in the negative, in favour of the revenue and against the assessee. This reference is, accordingly, disposed of.