Commissioner Of Income-Tax-Iii v. Samara India Pvt. Ltd

THE HIGH COURT OF DELHI AT NEW DELHI %Judgment delivered on: 10.05.2013 +ITA 45/2013 COMMISSIONER OF INCOME-TAX-III .....Appellant versus SAMARA INDIA PVT. LTD. .....Respondent Advocates who appeared in this case:For the Appellant: Mr Sanjeev Rajpal, Advocate.For the Respondent: Mr S. Krishnan, Advocate CORAM:-HON’BLE MR JUSTICE BADAR DURREZ AHMEDHON’BLE MR JUSTICE VIBHU BAKHRU JUDGMENT VIBHU BAKHRU, J 1.This is an appeal preferred by the revenue under Section 260A of theIncome Tax Act, 1961 (hereinafter referred to as ''the Act'') challenging the orderdated 09.07.2012 passed by the Income Tax Appellate Tribunal, Delhi in ITANo.3692/Del/2009 in relation to the assessment year 2004-2005. The controversyin the present matter is limited to an amount of Rs 33,47,489/- which was paid asan advance rent by the assessee and had been written off as not recoverable in theprevious year relevant to the assessment year 2004-2005. 2.The assessee is, inter alia, engaged in the business of dealing andservicing motor vehicles and had taken certain property on lease from threelandowners (hereinafter referred to as "the lessors") for a period of three yearsrenewable for two further periods of 3 years each. The property consisted of a plot of land whereupon the lessors were required to build a warehouse cumworkshop and hand over the same to the assessee. In this regard, the assesseeadvanced certain sums to the lessors which were liable to be adjusted againstmonthly rent. The monthly rent for the property in question was agreed at Rs32,400/- and the assessee was entitled to adjust a sum of Rs 17,400/- per monthfrom the advance paid by the assessee to the lessors. In addition to the advancepaid by the assessee to the lessors, the assessee also incurred substantialexpenditure on the development and interiors of the property. However, theworkshop was demolished by the Delhi Development Authority on 01.06.2000 asthe land which was subject matter of the lease agreement, in fact, belonged to theDelhi Development Authority and not the lessors. The assessee, thereafter, fileda suit in this Court being suit titled asSamara India Pvt. Ltd v. Union of India &Ors.: CS(OS) No.2467/2001. The said suit is still pending before this Court forrecovery of the sums advanced by the assesse to the lessors and the amountexpended by the assesse on development and interiors of the property. 3.The assessee has written off a sum of Rs 64,60,707/- as irrecoverable inthe previous year relevant to the assessment year 2004-2005. This amount is anaggregate of two components, namely, advance rent of Rs 33,82,289/- paid by theassessee to the lessors and Rs 30,78,418/- spent by the assessee on the property. 4.The assessing officer disallowed the entire amount of Rs 64,60,707/-,written off by the assessee in his profit and loss account, by holding that theamount represented capital expenditure and thus writing off the said amount wasnot allowable as a deduction from the taxable income of the assessee.Accordingly, the Assessing Officer passed an assessment order dated 30.11.2006inter-alia disallowing the amount written off by the assesse as irrecoverable andadding a sum of Rs 64,60,707/- to the income of the assessee. It is relevant tostate that the genuineness of the expenditure was not doubted by the Assessing Officer and the Assessing Officer disallowed the amount written off on theground that the amount incurred by the assesse was on development andimprovement of the leasehold property and was of an enduring nature and thuscould not be considered as revenue expenditure. The Assessing Officer held thatin view of the explanation to Section 32(1) of the Act, capital expenditureincurred by an assessee in respect of a building not owned by him, was requiredto be treated in the same manner as if the expenditure had been incurred on abuilding owned by the assessee. Officer and the Assessing Officer disallowed the amount written off on theground that the amount incurred by the assesse was on development andimprovement of the leasehold property and was of an enduring nature and thuscould not be considered as revenue expenditure. The Assessing Officer held thatin view of the explanation to Section 32(1) of the Act, capital expenditureincurred by an assessee in respect of a building not owned by him, was requiredto be treated in the same manner as if the expenditure had been incurred on abuilding owned by the assessee. 5.The assessee preferred an appeal before the CIT (Appeals) challenging theaddition Rs 64,60,707/- on account of advance rent paid to the lessors and theamount expended by the assessee on the workshop which was lost on account ofdemolition carried out by the DDA. The CIT (Appeals) noted the fact that theassessee had filed a suit inter-alia claiming the said amount from the lessors. TheCIT (Appeals) made a distinction between the amount spent by the assessee oncarrying out the renovation and betterment of the workshop and the amount paidby the assessee as advance rent. The CIT (Appeals) upheld the decision of theAssessing Officer to disallow the write off of a sum of Rs 30,78,418/- spent bythe assessee on the workshop. In respect of the sums advanced by the Assessee tothe lessors, the CIT (Appeals) deleted the addition to the extent of Rs 34,800/-and upheld the addition of Rs 33,47,489/- to the income of the assessee. The CIT(Appeals) held that as the property was demolished on 01.06.2000 i.e. after aperiod of only two months from the commencement of the previous year 2000-2001, an amount of Rs 34,800/- ( i.e. Rs. 17,400/- for each month) was liable tobe adjusted from the advance rent in terms of the lease agreement entered intobetween the assessee and the lessors of the property. However, the addition of thebalance amount of Rs 33,47,489/- was upheld by CIT (Appeals) not on theground that the same was a capital expenditure but on basis that the same could not be allowed as a revenue loss as the assessee had filed a civil suit for recoveryof that amount and the same was being pursued. The CIT (Appeals) held that asthe assessee was pursuing its remedies before a Court by way of a civil suit forrecovery of the amounts advanced to the lessors, it could not be held that theamounts had become bad debts. The relevant portion of the order passed by theCIT (Appeals) is quoted below:- “8.5.5.It is noticed that the amount disallowed by the AO asloans and advances was Rs 64,60,707/-, under explanation tosection 32(1) of the Act and after disallowing capital loss of Rs30,78,418/-, balance amount of Rs 33,82,289/- (Rs 64,60,707 - Rs30,78,418) was towards payment of advance rent by the assesseecompany to the lessor. The property was demolished on 1[st]June,2000 and advance rent @ Rs 17,400/- per month (para 8.5.2.-2) fora period of two months amounting to Rs 34,800/- would beallowed. The balance amount of Rs 3,47,489/- is not being allowedas a revenue loss since the assessee company has filed a Civil Suitin the High Court of Delhi and claimed advance rent of Rs33,82,289/- from the Defendants 3 to 9 (the lessor).Since thisamount is outstanding to the assessee company which is beingpursued by them by way of filing a Civil Suit, it cannot be called abad debt at this stage and allowed as a revenue expenditure. Thecase laws referred to by the assessee are not applicable to the factsand circumstances of the case. In Lucent Technologies HindustanLtd. v. JCIT, 106 TTJ (Bang) 205 the case was of repair/renovationof a cinema hall taken on lease; in the instant case, a plot of landwas converted into a warehouse cum workshop which is a capitalexpenditure.Similarly, Agra Color Lab (P) Ltd v. ITO 86 TTJ(Agra) 836 and Escorts Ltd v. ACIT 102 TTJ (Del) 522 are notapplicable as it was expenditure on furnishing, painting etc and noton conversion of plot of land to a warehouse cum workshop. Accordingly, a sum ofRs 33,47,489/- of advance rent andRs 30,78,418/- of capital expenditure is confirmed, relief allowed isonly Rs 34,800/- of advance rent adjusted till the demolition ofbuilding.” 6.The revenue accepted this order and did not file an appeal before theIncome Tax Appellate Tribunal. However, the assessee preferred an appeal fromthe decision of the CIT (Appeals). The Tribunal upheld the decision of theAssessing Officer and the CIT (Appeals) with regard to the amount of Rs30,78,418/- spent by the assessee on the workshop as capital expenditure butgranted relief to the assessee with regard to the addition made by the AssessingOfficer in respect of the advance rent of Rs 33,82,289/- which had been writtenoff by the assessee, in his profit and loss account, as irrecoverable. 7.Following the decision of the Supreme Court in the case of theT.R.F Ltd.v. CIT: 323 ITR 397(SC), the Tribunal held that pendency of the civil suit wasnot a bar on writing off the debt if in the opinion of the assessee its probability ofrecovery was remote. The Tribunal did not accept the view of the CIT (Appeals)that writing off advance rent was not permissible since the assessee was pursuingthe suit for recovery of the said amount. 8.We find no infirmity in the view expressed by the Tribunal.It is notdisputed that the assessee had paid a sum of Rs 33,82,289/- as advance whichwas to be adjusted against lease rents.The assessee had been carrying onbusiness even prior to the lease agreement with respect to which advance hadbeen made. The assessee had come to a conclusion that chances of recovery, ofthe amounts claimed from the lessors, in the near future were remote and hadtherefore written off the amount of Rs 64,60,707/- as irrecoverable in theprevious year relevant to the assessment year 2004-2005. For an assessee toclaim deduction in relation to the bad debts it is now no longer necessary for theassessee to establish that the debt had become irrecoverable and it is sufficient ifthe assessee forms such an opinion and writes off the debt as irrecoverable in itsaccounts. The decision of the Supreme Court in the case of theT.R.F Ltd.(supra) squarely covers the issue. The Supreme Court had examined the import of the amendment in Section 36(1)(vii) of the Income Tax Act w.e.f. 01.04.1989and held as under: “After the amendment of sec. 36(1)(vii) of the Income TaxAct, 1961, with effect from 1[st]April, 1989, in order to obtain adeduction in relation to bad debts, it is not necessary for theassessee to establish that the debt, in fact, has become irrecoverable: it is enough if the bad debts is written off as irrecoverable in theaccounts of the assessee.” 9.Following the aforesaid decision in the case ofT.R.F Ltd.(supra), we findthat the appeal does not raise any substantial question of law for ourconsideration. 10.We accordingly, dismiss the present appeal and leave the parties to beartheir own costs. VIBHU BAKHRU, J BADAR DURREZ AHMED, J MAY 10, 2013MK