Commissioner Of Income Tax v. Gopal Das Estates & Housing Pvt.ltd

$~ * IN THE HIGH COURT OF DELHI AT NEW DELHI + ITA 742/2009 COMMISSIONER OF INCOME TAX ..... Appellant Through: Ms. Vibhooti Malhotra, Jr. Standing Counsel for the Revenue. versus GOPAL DAS ESTATES & HOUSING PVT.LTD . .... Respondent Through: Mr. M.S. Syali, Senior Advocate with Mr. Arta Trana Panda and Ms.Gargi Sethee, Advocates. CORAM: JUSTICE S. MURALIDHAR JUSTICE SANJEEV NARULA ORDER20.03.2019 1. This appeal by the Revenue under Section 260-A of the Income Tax Act, 1961 (‘Act’) is directed against the judgment dated 9[th] May 2008 of the Income Tax Appellate Tribunal (ITAT) in ITA No. 3337/Del/2005 for the Assessment Year (AY) 2002-03. 2. While admitting this appeal on 11[th] August 2009, this Court framed the following questions of law for consideration: (1) Whether the ITAT is correct in law where confirming the order of CIT(A) deleting the addition made on account of disallowance of interest and bank guarantee commission, amounting to Rs. 2,27,58,621/-? (2) Whether the ITAT is correct in law and on merits in confirming the order of CIT(A) while deleting the addition made onaccount of disallowance of service charges amounting toRs.3,03,256/-? 3. The above questions stand answered today by this Court by a detailed common judgment in the present appeal and other connected appeals, in the affirmative i.e. in favour of the Assessee and against the Revenue. A copy of the said judgment is placed below. 4. The appeal is accordingly dismissed and the impugned order of the ITAT on the issues is affirmed. S. MURALIDHAR, J. MARCH 20, 2019 tr SANJEEV NARULA, J. $~ * IN THE HIGH COURT OF DELHI AT NEW DELHI Reserved on: 16[th] November, 2018 Decided on: 20[th] March, 2019 + ITA 210/2003 GOPAL DAS ESTATES & HOUSING PVT.LTD ..... Appellant Through: Mr. M.S. Syali, Senior Advocate with Mr. Arta Trana Panda and Ms. Gargi Sethee, Advocates. versus COMMISSIONER OF INCOME TAX ..... Respondent Through: Ms. Vibhooti Malhotra, Jr. Standing Counsel. + ITA 609/2005 COMMISSIONER OF INCOME TAX ..... Appellant Through: Ms. Vibhooti Malhotra, Jr. Standing Counsel. versus GOPAL DAS ESTATES & HOUSING PVT.LTD ...... Respondent Through: Mr. M.S. Syali, Senior Advocate with Mr. Arta Trana Panda and Ms. Gargi Sethee, Advocates + ITA 611/2005 COMMISSIONER OF INCOME TAX ..... Appellant Through: Ms. Vibhooti Malhotra, Jr. Standing Counsel. ITA 210/2003 & connected matters Page 1 of 36 versus GOPAL DAS ESTATES & HOUSING PVT.LTD ...... Respondent Through: Mr. M.S. Syali, Senior Advocate with Mr. Arta Trana Panda and Ms. Gargi Sethee, Advocates. + ITA 772/2005 COMMISSIONER OF INCOME TAX ..... Appellant Through: Ms. Vibhooti Malhotra, Jr. Standing Counsel for the Revenue. versus GOPAL DAS ESTATES & HOUSING PVT.LTD ...... Respondent Through: Mr. M.S. Syali, Senior Advocate with Mr. Arta Trana Panda and Ms. Gargi Sethee, Advocates. + ITA 1134/2005 COMMISSIONER OF INCOME TAX ..... Appellant Through: Ms. Vibhooti Malhotra, Jr. Standing Counsel for the Revenue. versus GOPAL DAS ESTATES & HOUSING PVT.LTD ...... Respondent Through: Mr. M.S. Syali, Senior Advocate with Mr. Arta Trana Panda and Ms. Gargi Sethee, Advocates. + ITA 400/2009 COMMISSIONER OF INCOME TAX ..... Appellant Through: Ms. Vibhooti Malhotra, Jr. Standing ITA 210/2003 & connected matters Counsel for the Revenue. versus GOPAL DAS ESTATES & HOUSING PVT.LTD ..... Respondent Through: Mr. M.S. Syali, Senior Advocate with Mr. Arta Trana Panda and Ms. Gargi Sethee, Advocates. + ITA 742/2009 COMMISSIONER OF INCOME TAX ..... Appellant Through: Ms. Vibhooti Malhotra, Jr. Standing Counsel for the Revenue. versus COMMISSIONER OF INCOME TAX ..... Appellant Through: Ms. Vibhooti Malhotra, Jr. Standing Counsel for the Revenue. versus GOPAL DAS ESTATES & HOUSING PVT.LTD ...... Respondent Through: Mr. M.S. Syali, Senior Advocate with Mr. Arta Trana Panda and Ms. Gargi Sethee, Advocates. + ITA 400/2009 COMMISSIONER OF INCOME TAX ..... Appellant Through: Ms. Vibhooti Malhotra, Jr. Standing ITA 210/2003 & connected matters Counsel for the Revenue. versus GOPAL DAS ESTATES & HOUSING PVT.LTD ..... Respondent Through: Mr. M.S. Syali, Senior Advocate with Mr. Arta Trana Panda and Ms. Gargi Sethee, Advocates. + ITA 742/2009 COMMISSIONER OF INCOME TAX ..... Appellant Through: Ms. Vibhooti Malhotra, Jr. Standing Counsel for the Revenue. versus GOPAL DAS ESTATES & HOUSING PVT.LTD ...... Respondent Through: Mr. M.S. Syali, Senior Advocate with Mr. Arta Trana Panda and Ms. Gargi Sethee, Advocates. + ITA 55/2010 COMMISSIONER OF INCOME TAX ..... Appellant Ms. Vibhooti Malhotra, Jr. Standing Counsel for the Revenue. Through: versus GOPAL DAS ESTATES & HOUSING PVT.LTD ...... Respondent Through: Mr. M.S. Syali, Senior Advocate Mr. M.S. Syali, Senior Advocate with Mr. Arta Trana Panda and Ms. Gargi Sethee, Advocates. + ITA 548/2010 COMMISSIONER OF INCOME TAX ..... Appellant ITA 210/2003 & connected matters Page 3 of 36 Through: Ms. Vibhooti Malhotra, Jr. Standing Counsel for the Revenue. versus GOPAL DAS ESTATES & HOUSING PVT.LTD ...... Respondent Through: Mr. M.S. Syali, Senior Advocate with Mr. Arta Trana Panda and Ms. Gargi Sethee, Advocates. + ITA 581/2010 COMMISSIONER OF INCOME TAX ..... Appellant Through: Ms. Vibhooti Malhotra, Jr. Standing Counsel for the Revenue. versus GOPAL DAS ESTATES & HOUSING PVT.LTD ...... Respondent Through: Mr. M.S. Syali, Senior Advocate with Mr. Arta Trana Panda and Ms. Gargi Sethee, Advocates. + ITA 2078/2010 COMMISSIONER OF INCOME TAX ..... Appellant Through: Ms. Vibhooti Malhotra, Jr. Standing Counsel for the Revenue. versus GOPAL DAS ESTATES & HOUSING PVT.LTD ...... Respondent Through: Mr. M.S. Syali, Senior Advocate with Mr. Arta Trana Panda and Ms. Gargi Sethee, Advocates. CORAM: JUSTICE S. MURALIDHAR JUSTICE SANJEEV NARULA ITA 210/2003 & connected matters J U D G M E N T Dr. S. Muralidhar, J.: 1. These are 11 appeals under Section 260-A of the Income Tax Act, 1961 („Act‟) of which 1 is by the Assessee and 10 are by the Revenue. Apart from the facts being similar, the questions of law too are common to many of the appeals. They are accordingly disposed of by this common judgment. Background facts 2. The Assessee is engaged to the business of construction and sale of commercial space. The Assessee developed the 17 storied building known as Dr. Gopal Das Bhawan in Connaught Place in New Delhi. The Assessee follows the Completed Contract Method („CCM‟) as compared to the Percentage Completion Method („PCM‟). The case of the Assessee is that since it follows the CCM, income is not recognised till the completion of the project. All receipts are treated as „advance‟ and all direct expenses are accounted for as „capital work and progress.‟ A reference is made to the Accounting Standard („AS‟) 7 issued by the Institute of Chartered Accountants of India („ICAI‟) initially in 1983 which was revised first in 2002 and then in 2016. According to the Assessee, only on completion or substantial completion of the project, revenue is recognised. Payment of compensation to flat/space buyers 3. The Assessee states that the Gopal Das Bhawan Project was completed in the Financial Year („FY‟) 1994-95 relevant to Assessment Year („AY‟) 1995-96. Some of the allottees of the flats refused to take them for completion since the New Delhi Municipal Council („NDMC‟) changed the ITA 210/2003 & connected matters Payment of compensation to flat/space buyers 3. The Assessee states that the Gopal Das Bhawan Project was completed in the Financial Year („FY‟) 1994-95 relevant to Assessment Year („AY‟) 1995-96. Some of the allottees of the flats refused to take them for completion since the New Delhi Municipal Council („NDMC‟) changed the ITA 210/2003 & connected matters usage of the Lower Ground Floor („LGF‟). The Assessee then started negotiating with the relevant flat buyers and persuaded them to surrender their ownership and allotment letters. The Assessee decided to repay the advance money received from these flat owners which worked out to Rs.32,08,271. The Assessee also decided to pay in addition compensation amounting to Rs.1,18,38,705 in lieu of surrender of their rights in the flat. This expenditure was claimed by the Assessee as „revenue in nature‟ and was charged to the Profit and Loss Account („P&L Account‟). Proceedings before the AO 4. The Assessing Officer („AO‟) who picked up for scrutiny the Assessee‟s return for AY 1995-96 by an order-sheet entry dated 5[th] December 1997 required the Assessee to give the full details and addresses of the persons to whom the aforementioned compensation amounts were paid. The Assessee was asked to explain why the said amounts should not be disallowed as capital expenditure/loss as it had not been paid for business purposes. 5. By a reply dated 15[th] December 1997 the Assessee contended that the space to be sold was in its stock and trade. The space allotted to various persons had been surrendered by them for various reasons. Such persons who surrendered had insisted that since they had invested money with the Assessee which had remained with the Assessee for a number of years, the Assessee should compensate them for the loss of the interest income on such investment. Considering that the space surrendered by such allottees would give the Assessee an opportunity to sell the same space at a higher rate, the Assessee considered it commercially prudent to pay them compensation in ITA 210/2003 & connected matters order to get the spaces surrendered. The Assessee‟s contention was that since such payment pertained to stock and trade, it cannot be considered as capital expenditure or capital loss. Assessment order 6. The AO negatived the above plea of the Assessee by holding that the Assessee had not paid any compensation to the allottees but had in fact “repurchased these flats” since the allottees had “surrendered their rights in those flats.” Consequently, it was held that the compensation paid to the flat owners could not be said to be business expenditure but rather was “capital investment in purchase of stock and trade.” It was, however, observed that the Assessee was free to include the cost of compensation in the cost of the flats so acquired and claim deduction of the amount at the time of sale as cost of purchase of the flats. It is observed that the Assessee had paid compensation amount “once and for all to repurchase the property” and this was “in fact a sale consideration and cannot be allowed as business expenditure.” 7. The AO further observed that enquiries had been made with some of flat owners to ascertain the treatment they had given to the said receipt of compensation in their books of accounts and income tax returns. All of them had shown the amount received from the Assessee as capital gains in their books of accounts as well as income tax returns after indexation of the cost of acquisition. This was an additional ground for the AO to reject the plea of the Assessee that the payment of compensation was business expenditure. Accordingly, the payment of compensation towards “repurchase of the flat” ITA 210/2003 & connected matters Page 7 of 36 was disallowed by holding that it was “a capital expenditure.” The said amount was added back to the income of the Assessee. Order of the CIT (A) 7. The AO further observed that enquiries had been made with some of flat owners to ascertain the treatment they had given to the said receipt of compensation in their books of accounts and income tax returns. All of them had shown the amount received from the Assessee as capital gains in their books of accounts as well as income tax returns after indexation of the cost of acquisition. This was an additional ground for the AO to reject the plea of the Assessee that the payment of compensation was business expenditure. Accordingly, the payment of compensation towards “repurchase of the flat” ITA 210/2003 & connected matters Page 7 of 36 was disallowed by holding that it was “a capital expenditure.” The said amount was added back to the income of the Assessee. Order of the CIT (A) 8. In the appeal filed by the Assessee, the Commissioner of Income Tax Appeals [„CIT (A)‟] by order dated 30[th] October, 1998 came to the following conclusions: (i) There was no dispute that the Assessee was engaged in the business of real estate and the space constructed by it constituted its stock and trade; (ii) The expenditure in relation to stock and trade would be of revenue nature whether incurred on purchase of stock and trade or compensation for retaining of stock and trade. Expenditure on stock and trade did not represent investment of capital nature; (iii) The same transaction can be of capital nature in the hands of one person and of revenue nature in the hand of the other on account of the different nature of their business activities. Therefore, the AO‟s view that since the recipients of compensation i.e. the allottees had treated it in their hands as capital gains, they should be treated as capital expenditure in the hands of the Assessee, was not based on sound reasoning. (iv) Expenditure on purchase of stock and trade is charged to the P&L and trading account at the time of purchase, which cannot be deferred. The observation of the AO that the Appellant was free to claim the deduction as ITA 210/2003 & connected matters Page 8 of 36 cost is paid at the time of their sale was not in conformity with the principles of accountancy. 9. Accordingly the compensation paid to the allottees of the flats for their surrendering the rights therein was directed to be allowed as business expenditure of the Assessee, and the view of the AO was, therefore, reversed. Impugned order of the ITAT 10. The Revenue went in appeal before the Income Tax Appellate Tribunal („ITAT‟) by way of ITA No.469/Del/99 for AY 1995-96. The ITAT took note of the plea of the Assessee before it that in case the Assessee had not taken back the space pursuant to the cancellation of booking, “there was every likelihood of some bigger loss to be suffered since the discontinued parties/persons would cause all types of obstruction.” The Assessee further contended that “non-payment of compensation would have resulted in loss of reputation which the Assessee could not afford in its land of business.” 11. The ITAT raised certain queries and required the Assessee to place on record facts relating to the payment of „compensation‟. The ITAT sought clarification whether “(i) Compensation was insisted upon by the parties/persons; (ii) Whether legal opinion was sought before parting with the compensation; and (iii) Whether payment of compensation was' provided for in the agreement entered into at the time of the booking.” ITA 210/2003 & connected matters 12. Documents were then placed before the ITAT by the Assessee which it analysed. In the impugned order, the ITAT arrived at the following conclusions: (i) Although in the space buyer‟s agreement, the amount given for booking of the flat is to be refunded along with the interest in certain eventualities, “nothing over and above” the said sum was payable and the term „compensation‟ does not appear in either the letter of allotment or in the space buyer‟s agreement. “(i) Compensation was insisted upon by the parties/persons; (ii) Whether legal opinion was sought before parting with the compensation; and (iii) Whether payment of compensation was' provided for in the agreement entered into at the time of the booking.” ITA 210/2003 & connected matters 12. Documents were then placed before the ITAT by the Assessee which it analysed. In the impugned order, the ITAT arrived at the following conclusions: (i) Although in the space buyer‟s agreement, the amount given for booking of the flat is to be refunded along with the interest in certain eventualities, “nothing over and above” the said sum was payable and the term „compensation‟ does not appear in either the letter of allotment or in the space buyer‟s agreement. (ii) The compensation amount had no relationship whatsoever either with the area comprising a flat booked or with reference to the total amount paid to the Assessee. There was no material which could justify the “quantum of payments stated to be the compensation to various persons.” (iii) The opinion given by a lawyer justifying the payment of compensation, stating that since it would ultimately enhance the value of the space which could then be sold at a higher price to another buyer, was “a tailor-made opinion”. The huge amounts paid by the Assessee as compensation, even when the agreement between the parties did not require it, was not justified event accounting for the cost of litigation that might ensue. (iv) The payment was for “extraneous considerations” and was not expenditure that was “expedient to the Assessee‟s business.” The compensation was not provided for an agreement between the parties and the expenditure towards compensation “far outstripped any expenditure ITA 210/2003 & connected matters Page 10 of 36 whether legal or otherwise, which the Assessee was supposed to incur in the eventuality of some of the persons opting out of the agreement to purchase flats.” 13. Consequently, the ITAT by its order dated 28[th] February 2002 set aside the order of the CIT (A) and restored the order of the AO. The said order has been challenged by the Assessee by filing ITA No. 210 of 2003 which pertains to AY 1995-96. The solitary question of law framed by this Court while admitting this appeal on 12[th]October 2004 was “whether the conclusion recorded by the Income Tax Appellate Tribunal („ITAT‟) that the compensation of Rs.11838705 was paid for „extraneous consideration‟ is not perverse and contrary to the record?” 14. In the appeal for AY 1997-98, the ITAT while dealing with the above question, disagreed with its own view taken in AY 1995-96 and accepted the plea of the Assessee that the said payment of compensation was in the nature of revenue expenditure. The ITAT was of the same view in the appeals for AYs 1996-97, 1999-2000, 2001-02, 2008-09, 2009-10. This explains why the appeals for all the remaining years, apart from AY 1995-96 on this aspect are by the Revenue. 15. This Court has heard the submissions of Mr. M.S. Syali, learned Senior Counsel appearing for the Assessee and Ms. Vibhooti Malhotra, learned counsel for the Revenue. Analysis and reasons 16. A fact which has not been addressed by either the AO or the ITAT is that the Assessee follows the CCM and not the PCM. AS 7 which was originally issued by the ICAI in December 1983 was first revised in 2002. The revised AS 7 came into effect in respect of “all contracts entered into during the accounting period commencing on or after 1[st]April 2003.” 17. Therefore, as far as the case in hand is concerned, since there is no dispute that the Gopal Das Bhawan Project was completed in FY 1994-95, it is AS 7, pre-revised, which would apply. AS 7 as issued in December 1983 is titled “Accounting for Construction Contracts”. Para 7.1 acknowledges the two methods of accounting that are commonly followed: the CCM and the PCM. Para 7.3 states that under the CCM, Analysis and reasons 16. A fact which has not been addressed by either the AO or the ITAT is that the Assessee follows the CCM and not the PCM. AS 7 which was originally issued by the ICAI in December 1983 was first revised in 2002. The revised AS 7 came into effect in respect of “all contracts entered into during the accounting period commencing on or after 1[st]April 2003.” 17. Therefore, as far as the case in hand is concerned, since there is no dispute that the Gopal Das Bhawan Project was completed in FY 1994-95, it is AS 7, pre-revised, which would apply. AS 7 as issued in December 1983 is titled “Accounting for Construction Contracts”. Para 7.1 acknowledges the two methods of accounting that are commonly followed: the CCM and the PCM. Para 7.3 states that under the CCM, “revenue is recognised only when the contract is completed or substantially completed; that is, when only minor work is expected other than warranty obligation. Costs and progress payments received are accumulated during the course of the contract but revenue is not recognised until the contract activity is substantially completed.” 18. Para 8 of AS 7 talks of “Costs to be Accumulated for Construction Contracts”. Para 8.1 states that “Costs attributable to a contract are identified with reference to the period that commences with the securing of the contract and closes when the contract is completed.” 19. Under para 8.4, the costs incurred by a contractor are stated to be divided into “i. Costs that relate directly to a specific contract; ii. Costs that can be attributed to the contract activity in general and can be allocated to specific contracts; iii. Costs that relate to the activities of the contractor generally, or that relate to contract activity but cannot be related to specific contracts.” 20. Para 8.7 of AS 7 elaborates what 8.4 (iii) talks of, viz., examples of costs that relate to the activities of the contractor generally, or that relate to contract activity but cannot be related to specific contracts. These include: “i. general administration and selling costs; ii. finance costs; iii. research and development costs; iv. depreciation of plant and equipment that cannot be allocated to a particular contract.” 21. The pros and cons of the CCM are discussed in para 10. Para 11.2 of AS 7 states that when a contractor uses a particular method of accounting for a contract, “then in respect of all other contracts that meet similar criteria, the same method is used.” Para 11.3 states that the methods of accounting used by the contractor and the criteria adopted in selecting the method represents “an accounting policy.” If the contractor changes from PCM to CCM or vice versa, there has to be a disclosure to the effect of the change and its amount. 22. It must be added here that as far as the present cases are concerned, in all the AYs in question, the Assessee has followed a consistent accounting policy by following the CCM. The Revenue has never disputed that the Assessee follows the CCM and, therefore, what logically flows from the ITA 210/2003 & connected matters Page 13 of 36 adoption of such accounting policy by the Assessee cannot be overlooked by the Revenue. 23. One of the basic principles of accountancy is that an expenditure incurred in relation to stock and trade would be of revenue nature. There can be no doubt that the unsold flats that had been surrendered to the Assessee were part of its stock and trade. The AO himself noted that the Assessee had booked the flats to various persons after receiving periodical amounts as advance. They were termed as „prospective buyers.‟ It was also noted that after completion of construction, the flats had been “allotted to these persons and possession had also been handed over to them.” ITA 210/2003 & connected matters Page 13 of 36 adoption of such accounting policy by the Assessee cannot be overlooked by the Revenue. 23. One of the basic principles of accountancy is that an expenditure incurred in relation to stock and trade would be of revenue nature. There can be no doubt that the unsold flats that had been surrendered to the Assessee were part of its stock and trade. The AO himself noted that the Assessee had booked the flats to various persons after receiving periodical amounts as advance. They were termed as „prospective buyers.‟ It was also noted that after completion of construction, the flats had been “allotted to these persons and possession had also been handed over to them.” 24. There is merit in the contention of the Assessee that it had not “repurchased the flats from the buyers.” The stage of parting with title/ownership in relation to commercial space allotted to the buyers had not been reached. The AO himself noted that “since the Assessee has not sold the space which has been surrendered by the buyers/allottees, therefore, the compensation paid in lieu of surrender of rights in flats/space shown in work and progress in balance-sheet will enhance the value of work and progress.” 25. It was contended by Ms. Malhotra that even if the compensation paid for the surrender of the flats is not treated as capital expenditure, it should form part of the valuation of stock. In reply, Mr. Syali pointed out that the Assessee has explained that the reason for payment of compensation was that the LGF initially was approved by NDMC as „airconditioned space‟ and, therefore, while booking that space, prospective buyers proceeded on ITA 210/2003 & connected matters Page 14 of 36 the basis that it would be for commercial use. However, in terms of the completion certificate issued by the NDMC, the LGF was sanctioned as „storage.‟ It was for this reason that the buyers lost interest. The Assessee then decided to return the advance received and also compensate the buyers since the buyers‟ funds had remained with the Assessee for some time. The Assessee had sought to explain that this compensation corresponded to the increase in the resale value. 26. There is merit in the contention of the Assessee, based on AS 2 that compensation paid subsequent to the completion of the project is an „extraordinary item.‟ It was not „cost‟ of completion of the project and, therefore, such compensation could not be added to the value of the stock and trade of the Assessee. AS 2 governs valuation of inventories. „Cost‟comprises all of the costs of purchase, cost of completion and other costs incurred “in bringing the inventories to their present location and condition.” That which is not relevant to bringing the stock to its present condition or location cannot be a part of its value. 27. Under AS 2, not everything that relates to stock can be added to its value. The following have to be „excluded from cost‟ and „recognized as expense‟: “(a) abnormal amounts of wasted materials, labour, or other production costs; (b) storage costs, unless those costs are necessary in the production process prior to a further production stage; (c) administrative overheads that do not contribute to bringing ITA 210/2003 & connected matters the inventories to their present location and condition; and (d) selling and distribution costs.” 28. There is, therefore, merit in the contention of the Assessee that the compensation paid to the flat buyers upon surrender of the respective allotted commercial spaces cannot be added to the value of „stock and trade.‟ In the considered view of the Court, the view expressed by the CIT (A) merits acceptance. The conclusion of the ITAT that the payment was made for „extraneous consideration‟ appears to be based on surmises and conjectures. (b) storage costs, unless those costs are necessary in the production process prior to a further production stage; (c) administrative overheads that do not contribute to bringing ITA 210/2003 & connected matters the inventories to their present location and condition; and (d) selling and distribution costs.” 28. There is, therefore, merit in the contention of the Assessee that the compensation paid to the flat buyers upon surrender of the respective allotted commercial spaces cannot be added to the value of „stock and trade.‟ In the considered view of the Court, the view expressed by the CIT (A) merits acceptance. The conclusion of the ITAT that the payment was made for „extraneous consideration‟ appears to be based on surmises and conjectures. 29. The mere fact that the space buyer‟s agreement or the allotment letter did not mandate payment of compensation would not come in the way of the Assessee treating such payment as „revenue expenditure.‟ In Shahzada Nand & Sons v. CIT, Patiala (1977) 108 ITR 358 (SC) it was held that the requirement of „commercial expediency‟ “must be judged not in the light of the 19th century laissez faire doctrine which regarded man as an economic being concerned only to protect and advance his self-interest but in the context of current socio-economic thinking which places the general interest of the community above the personal interest of the individual and believes that a business or undertaking is the product of the combined efforts of the employer and the employees and where there is sufficiently large profit, after providing for the salary or remuneration of the employer and the employees and other prior charges such as interest on capital, depreciation, reserves, etc., a part of it should in all fairness go to the employees.” 30. In the said case the Supreme Court was considering whether payment for the extra services rendered by an employee could be allowed as business expenditure. It was held that for the purposes of allowing commercial pay to an employee as expenditure under Section 36 (1) (ii) of the Act, it had to necessarily be paid pursuant to a contractual obligation. The mere fact that the commission was paid „ex gratia‟ would not necessarily mean it is unreasonable. It was observed “even where the nature of the work as remain the same, commercial expediency may require payment of commission to an employee.” The payment was allowed as business expenditure. 31. In Commissioner of Income Tax, U.P. v. Nainital Bank Ltd. (1966) 62 ITR 638 (SC) the Assessee bank had settled the claims of those who had pledged their jewellery with the Bank which was stolen by dacoits. The question was whether such payments could be allowed as business expenditure under Section 10(2)(xv) of the Indian Income Tax Act, 1922? It was acknowledged that “In choosing to compensate its constituents for the loss of their jewellery and maintain its business connections and goodwill, the bank laid out expenditure for the purpose of its business.” 32. It was further explained that “The sole question is whether the bank in incurring the expenditure acted in the interest of and for the purpose of its business. The bank is carrying on banking business and advances loans on the security of jewellery. The credit of a banking business is very sensitive: it largely thrives upon the confidence which its constituents have in its management. To maintain that confidence the management has often to make concessions and thereby to preserve the goodwill of the business and its relations with the clientele. The bank could have, if so advised, taken its stand strictly on its legal jewellery and maintain its business connections and goodwill, the bank laid out expenditure for the purpose of its business.” 32. It was further explained that “The sole question is whether the bank in incurring the expenditure acted in the interest of and for the purpose of its business. The bank is carrying on banking business and advances loans on the security of jewellery. The credit of a banking business is very sensitive: it largely thrives upon the confidence which its constituents have in its management. To maintain that confidence the management has often to make concessions and thereby to preserve the goodwill of the business and its relations with the clientele. The bank could have, if so advised, taken its stand strictly on its legal obligations, and could have recovered the amounts due by the constituents at the same time denying liability to make any compensation for the loss of jewellery pledged with it. But such a stand might very well have ruined its business, especially in the rural areas in which it operated. The bank had evidently two courses open: to enforce its rights strictly according to law, and thereby to lose the goodwill it had built up among the constituents, or to compensate the constituents for loss of their jewellery, and maintain its business connections and goodwill. In choosing the second alternative, in our judgment, the bank laid out expenditure for the purpose of its business. Paying to the constituents the price of the jewellery stolen in a robbery or a burglary was therefore expenditure for the purpose of the business. There can be no doubt that the expenditure was wholly and exclusively in the interest of the business. The expenditure was laid out for no other purpose.” 33. Applying the law explained by the Supreme Court in the above decisions to the case in hand, the plausible conclusion is that the compensation paid by the Assessee to the allottees of the commercial spaces for the surrender of their rights therein cannot be said to be disallowable on the ground of such payment having been made for „extraneous considerations.‟ 34. In Kanga and Palkhivala‟s Commentaryon the Income TaxLawVolume 1, the distinction between the expressions “for the purpose of earning profits‟ and „for purpose of the business‟ was brought out as under: “11. Wholly and Exclusively for the Purposes of the Business. (a) Purpose of Business- Before the corresponding section in the 1922 Act was amended in 1939, allowance was given in respect of any non-capital expenditure „incurred solely for the purpose of earning such profits or gains.‟ Under the present law, the expenditure should be laid out „wholly and exclusively for the purposes of the business.‟ The two expressions are not synonymous; the latter is wider than the former. Expenditure may be for the purpose of the business although it may not be incurred for the purpose of earning the profits of the business. This is established by the decision of the Supreme Court in Meenakshi Mills Ltd. v. CIT 63 ITR 207. The expression “for the purposes of business” is wider than the expression “for the purpose of earning income.” The former would include within its scope expenditure incurred on grounds of commercial expediency.” 35. In the present case, the Assessee has a plausible explanation for making such payment of compensation to protect its „business interests.‟ While it is true that there was no „contractual obligation‟ to make the payment, it is plain that the Assessee was also looking to build its own reputation in the real estate market. 36. Further the mere fact that the recipients treated the said payment as „capital gains‟ in their hands in their returns would not be relevant in deciding the issue whether the payment by the Assessee should be treated as „business expenditure.‟ As explained by the Madras High Court in CIT v. Sarda Binding Works 102 ITR 187 (Mad),it is the point of view of the payer which is relevant. 35. In the present case, the Assessee has a plausible explanation for making such payment of compensation to protect its „business interests.‟ While it is true that there was no „contractual obligation‟ to make the payment, it is plain that the Assessee was also looking to build its own reputation in the real estate market. 36. Further the mere fact that the recipients treated the said payment as „capital gains‟ in their hands in their returns would not be relevant in deciding the issue whether the payment by the Assessee should be treated as „business expenditure.‟ As explained by the Madras High Court in CIT v. Sarda Binding Works 102 ITR 187 (Mad),it is the point of view of the payer which is relevant. 37. The decision in CIT v. Mangal Tirth Estates Ltd. 303 ITR 366 (Mad)was a case where the Assessee therein had also followed the CCM. It was engaged in the business of construction and sale of a multi-storeyed office cum shopping complex. The Assessee had under the development agreement agreed to provide air conditioning to the shops and to also allot car park space. The Assessee claimed deduction on advertisement, sales promotion, ITA 210/2003 & connected matters Page 19 of 36 legal charges and claimed losses in its return. The AO rejected the claim on the ground that only a portion of the expenditure related to the space already constructed could be allowed. It was held that since the Assessee had maintained the system of accounts on mercantile basis by adopting CCM, the revenue expenditure “normally, must be allowed in its entirety in the year in which it was incurred. The Assessee was held entitled to deduction of the entire legal and advertisement expenses in the year in which it was incurred.” On a similar analogy, in the present case, the payment of compensation is to be allowed in full in the year of payment of such compensation. 38. The result of the above discussion is that the Court holds that the payment made by the Assessee to the allottees of the flats for their surrendering the rights therein should be allowed as business expenditure of the Assessee. 39. This Court accordingly answers the question of law framed in ITA 210 of 2003 the affirmative i.e. in favour of the Assessee and against the Revenue by holding that the conclusion recorded by the ITAT that the compensation of Rs.11838705 was paid by the Assessee for „extraneous consideration‟ is perverse and contrary to the record. 40. ITA 210 of 2003 filed by the Assessee is accordingly allowed. Accordingly, the appeals of the Revenue vis-à-vis the said issue would fail. However, the Court proposes to pass separate orders in each of the appeals. Is rental income business income or income from house property? 41. The next issue that arises is whether rental income earned by the Assessee from its stock and trade should be treated as income from house property (IHP), as claimed by the Assessee, or as business income? 42. The question arose even in AY 1995-96 where the AO by order dated 27[th] March 1998 assessed the said rental income as „income from business.‟ During AY 1995-96 the Assessee had shown a sum of Rs.2,09,40,492 as a rental income from the flat/space given on rent to various parties. These spaces/flats were part of the stock and trade and the rental income was claimed as income from house property. The Assessee also claimed deduction of 1/5[th] of the repairs amounting to Rs. 41,29,837 under Section 24 of the Act. 43. During the assessment proceedings, in its reply dated 15[th] December 1997 to the query raised by the AO, the Assessee pointed out that there is nothing in law which prohibited the leasing out of stock and trade. It relied on the decision in CIT v. Chagan Das and Company 54 ITR 17 where the Supreme Court held that where a person buys and sells property, the income from that activity should be assessed as business income whereas the rental income from such property is assessed as income from house property. 43. During the assessment proceedings, in its reply dated 15[th] December 1997 to the query raised by the AO, the Assessee pointed out that there is nothing in law which prohibited the leasing out of stock and trade. It relied on the decision in CIT v. Chagan Das and Company 54 ITR 17 where the Supreme Court held that where a person buys and sells property, the income from that activity should be assessed as business income whereas the rental income from such property is assessed as income from house property. 44. For AY 1995-96, the CIT (A) in the order dated 30[th] October 1998 agreed with the Assessee and held that as the Assessee was the owner of the property which had been let out otherwise than in the course of business of letting and subletting, the rental income had to be assessed as IHP. It was ITA 210/2003 & connected matters Page 21 of 36 noted that “The appellant had entered into an agreement with the co-owners of the leasehold land for construction of the property at the cost of the appellant. On completion of the building, the co-owners were entitled to the specific share and the balance space belonged to the appellant which it was free to assign or sell or otherwise transfer to any person, firm, company or association. There is therefore no doubt that the· appellant had acquired the ownership of its share of the space.” 45. The ITAT in its order dated 28[th] February 2002 for AY 1995-96 was of the view that on this aspect, no interference was warranted with the order of the CIT(A) whereby rental income was taxed under the head IHP. The Revenue file ITA 69 of 2003 in this Court which was dismissed by an order dated 8[th] January 2004. The said order became final. 46. The ITAT appears to have been consistent in this view. For AY 1997-98, the ITAT again held in favour of the Assessee on this issue. The Revenue then filed ITA No.772 of 2005 in this Court. However, by an order dated 10[th] October 2007, this Court declined to interfere on the ground that the Revenue‟s appeal ITA No.69 of 2003 for AY 1995-96 had been dismissed by this Court by an order dated 8[th] January 2004. This Court noted that the Revenue accepted that decision and did not challenge it any further. Accordingly, the Court declined to frame any substantial question of law on this issue. The said order dated 10[th] October 2007 on this aspect does not appear to have been challenged further by the Revenue. 47. The resultant position as far as AYs 1995-96 and 1997-98 are concerned is that the Revenue has accepted the finding of the ITAT as affirmed by this Court. 48. For AY 1996-97, the ITAT decided the issue following its decision for AY 1997-98 which, as already noticed, attained finality. However, the Revenue chose to challenge the ITAT‟s finding on the issue for AY 1996-97 by filing ITA 2078 of 2010. This Court while admitting the said appeal on 3[rd] January 2011 framed a question of law, viz., whether the rental income is to be assessed as IHP or as business income? 49. The Court finds that barring this one year i.e. AY 1996-97, in all the other AYs, the consistent view of the ITAT that rental income is to be assessed as IHP and not business income has been accepted by the Revenue. 50. Ms. Malhotra was unable to point out why only for AY 1996-97 a different view should be taken. Both Ms. Malhotra for the Revenue and Mr. Syali for the Assessee have placed reliance on the decision of this Court in Ansal Housing Finance Company Ltd. (2013) 354 ITR 180 (Del) as supporting their respective cases. A careful perusal of the said judgment shows that the point in fact is answered in favour of the Assessee and not against it. 51.1 Ms. Malhotra sought to rely on the decision in Chennai Properties and Investments Ltd. v. CIT (2015) 373 ITR 673 (SC) as supporting the case of the Revenue. However, this Court is not able to agree with the above submission. In the said case, the object of the Appellant Assessee company ITA 210/2003 & connected matters Page 23 of 36 50. Ms. Malhotra was unable to point out why only for AY 1996-97 a different view should be taken. Both Ms. Malhotra for the Revenue and Mr. Syali for the Assessee have placed reliance on the decision of this Court in Ansal Housing Finance Company Ltd. (2013) 354 ITR 180 (Del) as supporting their respective cases. A careful perusal of the said judgment shows that the point in fact is answered in favour of the Assessee and not against it. 51.1 Ms. Malhotra sought to rely on the decision in Chennai Properties and Investments Ltd. v. CIT (2015) 373 ITR 673 (SC) as supporting the case of the Revenue. However, this Court is not able to agree with the above submission. In the said case, the object of the Appellant Assessee company ITA 210/2003 & connected matters Page 23 of 36 was to acquire and let out properties in the city. The rental income received therefrom was shown as income from business in the return filed by the Assessee. 51.2 The AO, however, held that since the income was received from the letting out of properties, it was in the nature of rental income, and accordingly taxed the same accordingly under that head. The CIT(A) allowed the appeal of the Assessee by holding that income was from business and directed that it should be treated and taxed as such. The ITAT resultantly confirmed the order. 51.3 The High Court allowed the appeal of the Revenue by holding that the income derived by letting out of properties would not be income from business but instead could only be assessed as income from house property. The Supreme Court in a further appeal by the Assessee observed that the main object of the Assessee company was to acquire and hold properties and let out the same and that in the return filed, the entire income which was assessed therein was from letting out of such properties. It was further observed that “letting out of properties is in fact the business of the Assessee.” Applying the judgment in Karanpura Development Co. Ltd. v. Commissioner of Income Tax, West Bengal 44 ITR 362 (SC), the Supreme Court held that the Assessee had rightly disclosed the income under the head „Income from Business‟ and restored the decision of the ITAT. 51.4 The said decision is distinguishable on fact in its application to the case on hand. Here the question is confined to the letting of properties forming ITA 210/2003 & connected matters Page 24 of 36 part of the Assessee‟s stock in trade. Barring AY 1996-97, for all other AYs the consistent view taken by the ITAT, as has been affirmed by this Court and accepted by the Revenue is that it should be treated as IHP. 52. The rule of consistency as explained by the Supreme Court in Parashuram Pottery Works Ltd. v. Income Tax Officer, [1977] 106 ITR 1 (SC) and Radhasoami Satsan