Pr. Commissioner Of Income Tax, Panchkula v. Appe

IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH ITA No.420 of 2015Date of decision: 25.5.2016 Pr. Commissioner of Income Tax, Panchkula Vs. .....- Appe Housing Board Haryana, Panchkula ..... Respond CORAM: HON’BLE MR. JUSTICK AJAY KUMAR MITTALHON’ BLE MRS. JUSTICE RAJ RAHUL GARG 1. Whether Reporters of local papers may be allowed to see the judgment?2. To be referred to the Reporters or not?2. To be referred to the Reporters or not? 3. Whether the judgment should be reported in the Digest? Present: Mr. Yogesh Putney, Advocate for the appellant-revenue. Ms. Radhika Suri, Sr. Advocate with Ms. Rinku Dahiya,Advocate with Ms. Rajni Pal, Advocate for the respondent-assessee. Ajay Kumar Mittal,J, 1]This order shall dispose of ITA Nos.411 and 420 of 2015 as learned counsel for the parties are agreed that the questions of law involved in both the appeals are identical. However, the facts are being extracted from ITA No .420 of 2015 ITA No.420 of 2015 ? ITA No.420 of 2015 has been preferred by the revenue underSection 260A of the Income Tax Act, 1961 (in short, “the Act’) against theorder dated 5.6.2015, Annexure A.3 passed by the Income Tax Appellate Tribunal, Chandigarh Benches ‘A’ and ‘*B’, Chandigarh (in short, “theTribunal’) in ITA No.246/Chd/2013, tor the assessment year 2010-11,claiming following substantial questions of law:- *'1) Whether on the facts and circumstances of the case, the learneITAT has erred in deleting the addition made on account ofdisallowance of expenses incurred as maintenance of coloniesof|<a3,25,96,429/-?ITAT has erred in deleting the addition made on account ofdisallowance of expenses incurred as maintenance of coloniesof|<a3,25,96,429/-? 11) Whether the expenditure to the tune of=a3,25,96,429/- incurredby the respondent assessee-Board towards maintenance ofcolonies 1s a capital expenditure and not allowable underSection 37 of the Income Tax Act, 1961?”by the respondent assessee-Board towards maintenance ofcolonies 1s a capital expenditure and not allowable underSection 37 of the Income Tax Act, 1961?” 3)A few facts relevant for the decision of the controversyinvolved as narrated in ITA No.420 of 2015 may be noticed. Therespondent-assessee Board 1s engaged in providing housing to the generalpublic in the State of Haryana. It filed its return of income on 5.10.2010 by declaring income at=a69,46,65,250/- which was processed on 20.4.2011under section 143(1) of the Act. The case of the assessee was selected forscrutiny and notice under section 143(2) of the Act was issued on 29.8.2011 3)A few facts relevant for the decision of the controversyinvolved as narrated in ITA No.420 of 2015 may be noticed. Therespondent-assessee Board 1s engaged in providing housing to the generalpublic in the State of Haryana. It filed its return of income on 5.10.2010 by declaring income at=a69,46,65,250/- which was processed on 20.4.2011under section 143(1) of the Act. The case of the assessee was selected forscrutiny and notice under section 143(2) of the Act was issued on 29.8.2011 to it. The assesee appeared before the Assessing officer. The Assessingofficer asked for the details of maintenance of colonies. The assessee Boardsubmitted its reply on 16.11.2012 and furnished the details of themaintenance of colonies. The assessee Board was called upon on 16.11.2012to show cause as to why the expenditure claimed towards the maintenance ofcolonies be not capitalized as expenditure in the nature of capitalexpenditure. The assessee submitted its reply on 3.12.2012 stating that theexpenditure incurred on maintenance of colonies should not be capitalized asthe land is procured by it from the government agencies like HUDA,Municipal committees etc. for construction of Housing Board colonies andafter construction of houses, these colonies are either handed over toconcerned municipal committees or local authorities for future maintenanceof estate services. It was also submitted that since Housing Board colonies atCharakpur (Gurgaon) and Narnaul did not fall within the municipal limits,the Board had to maintain these colonies. The Assessing Officer afterconsidering the reply submitted by the assessee found the same to be nottenable and disallowed the expenditure to the tune of|=a3,25,96,429/-claimed as revenue expenditure under section 37 of the Act and held theexpenditure as capital in nature on the grounds that the expenditure incurredwas of enduring nature and will last for longer period; permanent assetswere being created by incurring such expenditure and no income was being received against such expenditure vide order dated 14.1.2013 (AnnexureA.1). Aggrieved by the said order, the assessee filed appeal before theCommissioner of Income Tax (Appeals) [|CIT(A)]|. The CIT(A) allowed tappeal vide order dated 27.12.2013, Annexure A.2 holding that theexpenditure on account of maintenance of colonies was revenue in natureand allowable under section 37 of the Act. Not satisfied with the order, therevenue filed appeal before the Tribunal. Vide order dated 5.6.2015,Annexure A.3, the Tribunal dismissed the appeal. Hence the instant appealsby the revenue. It may be noted that a corrigendum dated 2.9.2015, wasissued by the Tribunal 1n the case of ITA No.741/Chd/2014 to the effect thatsince the appeal 1.e. ITA No.741/Chd/2014 relates to assessment year 201 112, the assessment year 1n question at the title of the order be read as 2011-12 instead of 2010-11. 4We have heard learned counsel for the parties. 4]Learned counsel for the appellant-revenue relied upon judgmentof the Apex court in Arvind Mills Limited vs. Commissioner of IncomeTax,|(1992) 197 ITR 422 to contend that the amount spent by the assessee for repair of roads was capital in nature. It was urged that in suchcircumstances, the CIT(A) as well as the Tribunal erred in allowing the sameas revenue expenditure in the assessment year in question. Controverting the aforesaid submission, learned counsel for the assessee placed reliance on judgment of the Apex Court in L.A.SugarFactory and Oil Mills (P) Limited vs. Commissioner ofIncome Tax, UP,(1980) 125 ITR 293 to argue that the amount spent was revenue in nature.The roads for which repair had been carried out did not belong to theassessee and in such circumstances, the CIT(A) and the Tribunal werejustified 1n deciding the issue 1n favour of the assessee. for repair of roads was capital in nature. It was urged that in suchcircumstances, the CIT(A) as well as the Tribunal erred in allowing the sameas revenue expenditure in the assessment year in question. Controverting the aforesaid submission, learned counsel for the assessee placed reliance on judgment of the Apex Court in L.A.SugarFactory and Oil Mills (P) Limited vs. Commissioner ofIncome Tax, UP,(1980) 125 ITR 293 to argue that the amount spent was revenue in nature.The roads for which repair had been carried out did not belong to theassessee and in such circumstances, the CIT(A) and the Tribunal werejustified 1n deciding the issue 1n favour of the assessee. TdThe CIT(A) after examining the matter has recorded acategorical finding that the assessee 1s providing housing to the generalpublic in the State of Haryana after development of housing colonies.Thereafter, the maintenance of colonies 1s undertaken by the respectivemunicipal committees or local authorities. Since colonies at South Vihar andNarnaul were not falling in any municipal committee or local authority, theassessee had to take up the maintenance work also as per the decision of the Housing Board, Haryana. The expenses incurred by the assessee Board werein the nature of repair and maintenance. There was no creation of any newasset. Thus, the expenditure on account of maintenance of colonies was heldto be revenue in nature. The relevant findings recorded by the CIT(A) readthus:- 6.1. In the present case, the appellant 1s engaged in providinghousing to the general public in the State of Haryana afterdevelopment of housing colonies. After construction ofhousing colonies they are allotted to the individual allottee and once the colonies are sold off, thereafter, the maintenanceof colonies is undertaken by the respective Municipalcommittees or local authorities. As the appellant hassubmitted that colonies at South Vihar and Narnaul were notfalling within any municipal committee or local authority sothe appellant had to take up the maintenance work also. Theappellant has also submitted copy of minutes of meeting ofHousing Board where the amount was approved formaintenance of housing colonies. In the agenda to the meetingit was brought up that there was constant pressure fromallottees of these colonies for upgradation of estate services asthe condition of the same was deteriorated with the passage oftime. The State services needed replacement/upgradation ofroads, park, water supply, sewerage, street light, boundarywall etc. 6.2. In view of above facts, it is noted that the colonies were inexistence which were basically in the nature of stock in tradeas after development of these colonies these were not inpossession of appellant. The expenses incurred on the existinginfrastructure were in the nature of repair and maintenancewhich shows that there was no creation of any new asset andit was incurred for maintaining the business of appellant byproviding better estate services. Even if, such expendituregives enduring benefit, the benefit does not accrue to theappellant rather the benefit goes to the allottee. The AQO’other reasoning that no income is being received against theexpenditure does not have any relevance on the nature ofexpenditure and it is not a valid criteria to treat the expenditure as capital in nature. Further, no value addition byincurring such expenditure has accrued on any assetsbelonging to and/or held by the appellant. Considering thereasons discussed in above paras and judicial pronouncementscited by the appellant, I am of the view that the expenditureon account of maintenance of colonies is revenue in nature.Hence, the AO 1s directed to delete the addition of43,21,25,745/-.”incurring such expenditure has accrued on any assetsbelonging to and/or held by the appellant. Considering thereasons discussed in above paras and judicial pronouncementscited by the appellant, I am of the view that the expenditureon account of maintenance of colonies is revenue in nature.Hence, the AO 1s directed to delete the addition of43,21,25,745/-.” expenditure as capital in nature. Further, no value addition byincurring such expenditure has accrued on any assetsbelonging to and/or held by the appellant. Considering thereasons discussed in above paras and judicial pronouncementscited by the appellant, I am of the view that the expenditureon account of maintenance of colonies is revenue in nature.Hence, the AO 1s directed to delete the addition of43,21,25,745/-.”incurring such expenditure has accrued on any assetsbelonging to and/or held by the appellant. Considering thereasons discussed in above paras and judicial pronouncementscited by the appellant, I am of the view that the expenditureon account of maintenance of colonies is revenue in nature.Hence, the AO 1s directed to delete the addition of43,21,25,745/-.” |While concurring with the findings recorded by the CIT(A), the Tribunal noticed that the expenses were incurred by the assessee formaintenance of colonies. The assets 1.e. the colonies did not belong to theassessee. Thus, it could not be concluded that the assessee had derivedenduring benefit from such expenses. The findings recorded by the Tribunalread thus:- "7. We have considered the rival submission carefully and findthat identical issue came up for consideration before theTribunal in the case of Punjab Urban DevelopmentAuthority, Mohali’. vs. ACIT, Chandigain ITANo.759/Chd/2008. This issue was decided vide paras 110 to115 which reads as under:-that identical issue came up for consideration before theTribunal in the case of Punjab Urban DevelopmentAuthority, Mohali’. vs. ACIT, Chandigain ITANo.759/Chd/2008. This issue was decided vide paras 110 to115 which reads as under:- “110. Ground No.4 — After hearing both the parties we findthat during assessment proceedings the AO noticed that theassessee authority was in the business of acquiring land anddeveloping it and after development of the land, the samewas sold in auction. It was maintaining various sectors evenafter completion, for different time period ranging from 5-13that during assessment proceedings the AO noticed that theassessee authority was in the business of acquiring land anddeveloping it and after development of the land, the samewas sold in auction. It was maintaining various sectors evenafter completion, for different time period ranging from 5-13 years depending on the same. That means that maintenanceand development in respect of developed sectors andundeveloped sectors was being done by PUDA staff andinfrastructure available with the PUDA was jointly shared bythe developed and underdeveloped sectors. The assessee haddebited entire cost in respect of this expenditure and claimedthe same as revenue expenditure. The assessee was asked tobifurcate these expenses into two parts 1.e. the expenditure ondeveloped and developing sector. It was submitted that as peraccounting standard AS7, general administration cost andfinance cost were to be allowed as revenue expenditure. TheAssessing Officer noted that if the assessee was followingcash system of accounting whereas AS/7 provides thataccounting for such contract has to be on accrual system,therefore, according to him the expenses in relation todeveloping the sectors were to be capitalized. He furtherobserved that the total administrative expenses were=30,40,02,391/-. Since a separate addition on account of CPFcontribution was made and this amount was reduced fromtotal, was disallowed being of capital nature. 111. Qn appeal before the learned CIT(A), it was mainlysubmitted that addition made by the Assessing Officer wasnot in accordance with AS7 as well as general accountingprinciples. It was submitted that admunistrative expenseswhich could not be identified were required to be shown inthe profit and loss account and should not be made as part ofthe contract. 112. The learned CIT(A) after considering the submissions 111. Qn appeal before the learned CIT(A), it was mainlysubmitted that addition made by the Assessing Officer wasnot in accordance with AS7 as well as general accountingprinciples. It was submitted that admunistrative expenseswhich could not be identified were required to be shown inthe profit and loss account and should not be made as part ofthe contract. 112. The learned CIT(A) after considering the submissions observed that as per the decision of Hon’ble Supreme Courtin case of Tuticorin Alkali Chemicals and FertilizersLimited vs. CIT,227 ITR 172 (SC), Accounting Standardswere made for general guidelines and accounting purposesand the same cannot be used for determining tax liability. Hefurther observed that no project can be completed withoutgeneral administration expenses and accordingly confirmedthe addition.in case of Tuticorin Alkali Chemicals and FertilizersLimited vs. CIT,227 ITR 172 (SC), Accounting Standardswere made for general guidelines and accounting purposesand the same cannot be used for determining tax liability. Hefurther observed that no project can be completed withoutgeneral administration expenses and accordingly confirmedthe addition. 113. Before us, the learned counsel for the assessee reiterated thesubmissions made before the learned CIT(A). He furthersubmitted that the assessee was following cash system ofaccounting and the Assessing Officer has himself held thatinstalments received 1n cash on account of sale of houses andflats under hire purchase agreement were taxable whichmeans he has totally followed cash system of accounting andtherefore, he cannot take a “U” turn and deny the deductionon account of admunistrative expenses which have beenincurred in cash. Alternatively, 1t was submitted that if theseexpenses are held to be on capital account then value of theopening stock and closing stock should be adjustedaccordingly.submissions made before the learned CIT(A). He furthersubmitted that the assessee was following cash system ofaccounting and the Assessing Officer has himself held thatinstalments received 1n cash on account of sale of houses andflats under hire purchase agreement were taxable whichmeans he has totally followed cash system of accounting andtherefore, he cannot take a “U” turn and deny the deductionon account of admunistrative expenses which have beenincurred in cash. Alternatively, 1t was submitted that if theseexpenses are held to be on capital account then value of theopening stock and closing stock should be adjustedaccordingly. 114. On the other hand, the learned DR for the revenue submitted!that administrative expenses were incurred jointly fordeveloped and developing sectors. The Assessing Officer hasasked for bifurcation of the same which was not given. Shefurther submitted that even 1f the assessee was following cashsystem of accounting and when the assessee was not showingreceipt from a particular project then the expenses against thethat administrative expenses were incurred jointly fordeveloped and developing sectors. The Assessing Officer hasasked for bifurcation of the same which was not given. Shefurther submitted that even 1f the assessee was following cashsystem of accounting and when the assessee was not showingreceipt from a particular project then the expenses against the same could not be allowed. 114. On the other hand, the learned DR for the revenue submitted!that administrative expenses were incurred jointly fordeveloped and developing sectors. The Assessing Officer hasasked for bifurcation of the same which was not given. Shefurther submitted that even 1f the assessee was following cashsystem of accounting and when the assessee was not showingreceipt from a particular project then the expenses against thethat administrative expenses were incurred jointly fordeveloped and developing sectors. The Assessing Officer hasasked for bifurcation of the same which was not given. Shefurther submitted that even 1f the assessee was following cashsystem of accounting and when the assessee was not showingreceipt from a particular project then the expenses against the same could not be allowed. 115. We have heard the rival submissions carefully. We havealready discussed the implications of cash system ofaccounting while adjudicating ground No.5 of revenue's|appeal in ITA No.762/Chd/2008. Basically once the cashsystem of accounting is followed then all receipts whichrelate to the revenue field, have to be taxed. Similarly allcash outgoings which are in the revenue field, had to beallowed as expenditure. Since the assessee is 1n the businessof purchase and developing the land and selling the sameafter the development of the same and_ thereforeadministrative expenses incurred are clearly in the field ofrevenue. Further, the assessee was following cash system ofaccounting, therefore, once cash has been spent or outgonelfrom the assessee, same has to be treated as expenditure,Therefore, we set aside the order of the learned CIT(A) anddelete the addition.’already discussed the implications of cash system ofaccounting while adjudicating ground No.5 of revenue's|appeal in ITA No.762/Chd/2008. Basically once the cashsystem of accounting is followed then all receipts whichrelate to the revenue field, have to be taxed. Similarly allcash outgoings which are in the revenue field, had to beallowed as expenditure. Since the assessee is 1n the businessof purchase and developing the land and selling the sameafter the development of the same and_ thereforeadministrative expenses incurred are clearly in the field ofrevenue. Further, the assessee was following cash system ofaccounting, therefore, once cash has been spent or outgonelfrom the assessee, same has to be treated as expenditure,Therefore, we set aside the order of the learned CIT(A) anddelete the addition.’ S.Though in that case the issue was mainly decided on thebasis that assessee has followed cash system of accounting,therefore, all expenses are to be allowed. There is further anobservation that expenses involved are of revenue nature. In thepresent case also the nature of expenses is upliftment of streetlighting, development and laying of roads, underground tanks etc.These assets would never belong to the assessee but would belongto the community living in the colony and therefore, it cannot besaid that assessee has derived enduring benefit from such expenses,therefore, 1n our opinion, the assessee was under obligation tomaintain this colony for which such expense 1s a necessity, Therefore, we find nothing wrong with the order of learned CIT(A)and confirm the same.” QIn.L.A.Sugar Factory and Oil Mills (P:) Limited’Ss case relie Therefore, we find nothing wrong with the order of learned CIT(A)and confirm the same.” QIn.L.A.Sugar Factory and Oil Mills (P:) Limited’Ss case relie upon by the learned counsel for the respondent-assessee, the assessee thereinwas carrying on business in manufacture and sale of sugar. The assesseecontributed Ly50,000/- to the State of UP towards meeting the cost ofconstruction of roads in the area around its factory under a sugarcanedevelopment scheme. After considering the matter, the Apex Court held thatthe construction of roads no doubt facilitated the business operations of theassessee and enabled the management and conduct of the assessee's businessto be carried on more efficiently and profitably but it was not an advantagein the capital field because no tangible or intangible asset was acquired bythe assessee nor was there any addition to or expansion of the profit makingapparatus of the assessee. The relevant observations made by the ApexCourt read thus:- “Now it is clear on the facts of the present case that byspending the amount of|v50,000, the assessee did not acquireany asset of an enduring nature. The roads which wereconstructed around the factory with the help of the amount of<a50,000 contributed by the assessee belonged to the(government of Uttar Pradesh and not to the assesseeMoreover, it was onlya part of the cost of construction of theseroads that was contributed by the assessee, since under the Sugarcane Development Scheme, one third of the cost ofconstruction was to be borne by the Central Government, onethird by the State Government and only the remaining one thirdwas to be divided between the sugarcane factories andSugarcane growers. These roads were undoubtedlyadvantageous to the business of the assessee as they facilitatedthe transport of sugarcane to the factory and the outflow ofmanufactured of sugar from the factory to the market centres.There can be no doubt that the construction of these roadsfacilitated the business operations of the assessee and enabledthe management and conduct of the assessee's business to becarried on more efficiently and profitably. It 1s no doubt truethat the advantage secured for the business of the assessee wasof a long duration in as much as it would last so long as theroads continued to be in motorable condition, but 1t was not anadvantage in the capital field, because no tangible or intangibleasset was acquired by the assessee nor was there any additionto or expansion of the profit making apparatus of the assessee.The amount ofL50,000 was contributed by the assessee forthe purpose of facilitating the conduct of the business of theassessee and making it more efficient and profitable and it wasclearly an expenditure on revenue account.” 10... Learned counsel for the appellant-revenue has not been able to show any illegality or perversity in the findings recorded by the CIT(A) as well as the Tribunal| 11,Adverting to the judgment relied upon by the learned counsel for the appellant revenue, it may be noticed that in.Arvind Mills Limited'Scase (supra), the assessee company was running a textile mill and had to paycertain amount called betterment charge towards the Bombay TownPlanning Scheme under Section 66 of the Bombay Town Planning Act,1954. Under the scheme, the lands of different owners including the land ofthe assessee therein were treated as included in a common pool and variousimprovements such as laying roads and making provision for drainage were 10... Learned counsel for the appellant-revenue has not been able to show any illegality or perversity in the findings recorded by the CIT(A) as well as the Tribunal| 11,Adverting to the judgment relied upon by the learned counsel for the appellant revenue, it may be noticed that in.Arvind Mills Limited'Scase (supra), the assessee company was running a textile mill and had to paycertain amount called betterment charge towards the Bombay TownPlanning Scheme under Section 66 of the Bombay Town Planning Act,1954. Under the scheme, the lands of different owners including the land ofthe assessee therein were treated as included in a common pool and variousimprovements such as laying roads and making provision for drainage were effected for the better enjoyment of the lands under the scheme.Consequently, the owner got betterment of the land and the value of the landincreased providing better facilities for carrying on the business of theassessee. The question that arose for consideration was regarding the natureof expenditure being capital or revenue relating to payment for thebetterment charge required to be paid by the assessee. The Apex Court heldthat since the payment had no direct nexus with the day to day running ofthe business and as a result of the payment of the betterment charge, thevalue of the assessee's land had increased, the betterment charge was capitalexpenditure. 12.The position in the present case is different. Herein, theassessee's business was to provide housing to the general public in the Stateof Haryana after development of housing colonies. The maintenance work was to be carried out by the respective municipal committees or local authorities. With regard to particular colonies at South Vihar and Narnaul,as per decision of the Board, the assessee had to carry out the maintenancework like upgradation of roads, park, street light, boundary wall etc. Theenduring benefit did not accrue to the appellant but to the allottee. Further,the assets did not belong to the assessee. Thus, the expenditure incurred bythe assessee on maintenance work was held to be revenue in nature and,therefore, the judgment relied upon by the learned counsel for the appellant-revenue 1n-Arvind Mills Limited'scase (supra) 1s distinguishable. 13,In view of the above, no substantial question of law arises. Theappeals stand dismissed. (Ajay Kumar Mittal)vudge May 25, 2016:0!: (Ray Rahul Garg)vudge