Deputy Commissioner Of Income Tax vs Divya International (P) Ltd. ...
1995 Latest Caselaw 672 Del

ORDER

MANZOOR AHMED BAKSHI, J. M. :

These cross appeals, four by the assessee and four by the Revenue, relating to asst. yrs. 1985-86 to 1988-89 are disposed of by this consolidated order. The learned counsel, Shri S. L. Batra, and the learned Departmental Representative, Smt. Surabhi Sinha, have been heard and records perused. Assessee is an original promoter of a hotel project known as Bharat Hotels. On 11th March, 1981, Delhi Automobiles P. Ltd. (DAPL), another promoter company had entered into a license agreement with NDMC. On 18th June, 1981, DAPL had entered into an agreement with M/s Bharat Hotels Ltd. (BHL). On 22nd (sic), 1982, there was a direct license deed executed between the BHL and NDMC. On 31st March, 1984, there was a tripartite agreement between DAPL, M/s Divya International P. Ltd. and M/s Diksha Holdings P. Ltd. As per this agreement assessee was to receive 75% booking deposit whereas 25% was received by M/s Diksha Holdings. Assessee was, however, required to bear 25% of the expenses along with M/s Diksha Holdings P. Ltd. incurred up to the date of the execution of the agreement and to be incurred thereafter by DAPL on brokerage, commission and advertisement. 3/4th of the expenses was to be borne by the assessee and 1/4th by M/s Diksha Holdings P. Ltd. Assessee received a sum of Rs. 23,35,086 as its share out of the deposits received up to the date of execution of the agreement. The receipts up to 12th Nov., 1987 were also apportioned between the assessee and M/s Diksha Holdings in the ratio of 75% and 25% respectively. A dispute seems to have arisen between the parties regarding the agreement executed on 31st March, 1984 relating to sharing of the deposits and the corresponding expenses. Neither the assessee nor the Diksha Holdings (P) Ltd. were responsible to the original depositors for any refund. There was a demand from Industrial Finance Corporation of India asking for the return of the amounts which the assessee readily agreed and the agreement between DAPL and BHL had even been cancelled. Thereafter on 13th Nov., 1987, there was again an agreement between DAPL, the assessee, namely, M/s Divya International (P) Ltd. and M/s Diksha Holdings P. Ltd. cancelling the earlier agreement executed on 31st March, 1984. As a result of the agreement executed on 13th Nov., 1987, assessee returned a sum of Rs. 4,48,55,964.50 to the DAPL. Similarly, M/s Diksha Holdings (P) Ltd. also returned a sum of Rs. 1,49,51,989.85. Though the said agreement provided that the agreement executed on 31st March, 1984 stands cancelled by mutual agreement from this date, i.e., the date of execution, namely, 13th Nov., 1987, cl. 3 provides that the parties shall not be required to share any expenses for raising such shop deposits as mentioned in the agreement dt. 31st March, 1984 between the parties hereto.

2. A dispute had arisen between the Department and the assessee relating to the assessability of the deposits. The AO (AO) had assessed the amount received by the assessee on account of deposits received from DAPL as income of the assessee. This has not been approved by the first appellate authority and the addition so made have been deleted against which Revenue is in appeal before us.

3. Assessee had claimed expenses on account of advertisement, commission and service charges in view of an agreement dt. 31st march, 1984. The AO did not allow the expenses as having been incurred for the purposes of earning of any income. The first appellate authority has confirmed the disallowance.

4. The issue relating to the assessability of the deposits has been decided by the Tribunal in the case of Bharat Hotels Ltd. vs. Dy. CIT (1995) 53 ITD 450 (Del) against the Revenue by holding that the deposits received did not take the character of income in the hands of recipients. However, in the present case the issue has become purely academic in view of the subsequent agreement dt. 13th Nov., 1987 executed between the DAPL, the assessee and M/s Diksha Holdings P. Ltd., by virtue of which the earlier agreement dt. 31st March, 1984 was cancelled and the entire deposits had been refunded. As such there is no scope left for any controversy regarding the assessability of the deposits received by the assessee earlier which has been refunded to DAPL. The agreement dt. 31st March, 1984 having been cancelled and the assessee having refunded the receipts, therefore, there is no question of assessability of any income attributable to such deposits in the hands of the assessee. The decision of the first appellate authority in deleting the additions on that account is, therefore, in order and no interference is warranted. The appeals of the Revenue are accordingly dismissed.

5. In assessees appeals common issue involved is relating to allowance of deduction on account of certain expenses claimed by the assessee. As already observed, assessee had entered into an agreement with DAPL and M/s Diksha Holdings P. Ltd. on 31st March, 1984 by virtue of which assessee was entitled to receive share of deposits on account of providing licenses in the shopping complex. Assessee was entitled to retain these deposits until these were refundable to the licensees. The refunds were due only after the termination or determination of the license agreements. The license agreements were ordinarily for a period of more than 90 years. As per the said agreement dt. 31st March, 1984 the assessee was to share the expenses incurred by DAPL on account of advertisement and publicity, commission and service charges incurred by them in connection with obtaining the deposits on account of providing the premises on leave and license basis. The said agreement, as already observed, was terminated by an agreement dt. 13th Nov., 1987. The entire amount received by the assessee on account of deposits has been refunded to the DAPL.

6. Whereas the Revenue has assessed the share of shop deposits accruing to the assessee as its income, the share of expenses borne by the assessee were not allowed as a deduction on the ground that these expenses had not been incurred by the assessee and, in any case, the expenditure had not been incurred for earning of any income.

7. Assessee had appealed against the decision of the Revenue in assessing the deposits as its income as also against the disallowance of expenses. The first appellate authority decided the issue relating to the assessments of deposits in favor of the assessee and we have confirmed that view in the Departmental appeals relating to these assessment years. With regard to the disallowance of expenses, the controversy now is as to whether by virtue of the agreement dt. 13th Nov., 1987 the earlier agreement stood cancelled and as to whether assessee was legally obliged to share the expenses incurred by DAPL notwithstanding the fact that the entire deposits accruing to the assessee had been returned. If the controversy is decided in favor of the assessee, the second issue that would arise for consideration is as to whether the expenditure has been incurred by the assessee for the purposes of earning of income and as to whether deduction would be permissible under the head Income from other sources.

8. We shall first consider the issue as to whether on the basis of the termination agreement executed on 13th Nov., 1987, assessee could be said to be obliged to bear the expenses incurred by DAPL notwithstanding cancellation of the earlier agreement and the refund of the entire share of deposits received by the assessee. In this connection, it is necessary to refer to the termination agreement placed at page 45 onwards of the paper book. The preamble and terms of the said agreement read as under :

"Whereas the parties hereto entered into an agreement executed on 31st March, 1984, whereunder the parties agreed to share between themselves the shop deposits accruing to the party of the first part under agreement dt. 18th June, 1981, entered into by the party of the first part with M/s Bharat Hotels Ltd., and also agreed to share the expenses incurred/to be incurred by Bharat Hotels Ltd. /DAPL, i.e., party of the first part of securing such deposits as embodied in the agreement dt. 31st March, 1984.

And whereas the amount of Rs. 4,48,55,964.15 accrued to the party of the second part as its share out of the shop deposit in terms of agreement dt. 31st March, 1984.

And whereas an amount of Rs. 1,49,51,989.85 accrued to the party of the third part as its share out of the shop deposit in terms of agreement dt. 31st March, 1984.

And whereas by mutual agreement between the parties hereto it has been agreed upon to terminate the said agreement dt. 31st March, 1984 with immediate effect.

And whereas the party of the second part has since repaid the said amount of Rs. 4,48,55,964.15 to the party of the first part which the party of the first part do hereby acknowledge.

And whereas the party of the third part has since repaid the said amount of Rs. 1,49,51,989.85 to the party of the first part which the party of the first part do hereby acknowledge.

Now it is hereby agreed as under :

1. Agreement executed on 31st March, 1984 by the parties hereto and subsisted between them stands cancelled by mutual agreement from this date.

2. Parties of the second and third parts hereto shall not be entitled to hereinafter to receive any share in shop deposit hereinbefore accruing to the party of the first part under agreement dt. 18th June, 1981, entered into by the party of the first part with M/s Bharat Hotels Ltd.

3. Parties of the second and third parts shall not be required to share any expenses for raising such shop deposit as mentioned in the agreement dt. 31st March, 1984, between the parties hereto.

4. Parties hereto do hereby release each other from all obligations whatsoever cast on them under the said agreement dt. 31st March, 1984.

5. Parties hereto confirm that nothing is due from the parties of second and third parts hereto to the party of the first part under the said agreement dt. 31st March, 1984.

6. Parties hereto further agree that this agreement shall not be open to challenge by any party hereto on any ground whatsoever."

When this agreement is read as a whole, it is abundantly clear that whatever amounts had been received by the assessee after deduction of expenses alone, have been refunded to DAPL. The agreement stands cancelled with mutual agreement. Clause 3 of the agreement clearly provides that neither the assessee nor Diksha Holdings were required to share any expenses for raising shop deposit as mentioned in the agreement dt. 31st March, 1984. This clause makes it abundantly clear that assessee was no longer required to share the expenses incurred by the DAPL. As such assessee would not be entitled to any deduction on account of the expenses under any circumstances.

9. Assuming without admitting that the agreement dt. 13th Nov., 1987 was capable of another interpretation as canvassed by the assessee, i.e., the expenses incurred up to the date of termination were to be borne by the assessee notwithstanding the refund of deposits. The question would arise as to whether the expenditure could be said to have been legitimately incurred by the assessee for the purposes of securing the deposits. As is clear from the earlier agreement dt. 31st March, 1984 assessee was entitled to retain the deposits till the same were refundable to the licensees. In consideration of retaining the deposits for such a long period, assessee had agreed to share some expenses which were incurred by DAPL at the time of receipt of the deposits. Thus, expenditure borne by the assessee would be an expenditure by virtue of which assessee would derive benefit for a period of more than 90 years which was the period of license. Assessee having voluntarily agreed to refund the deposits to DAPL and if they had agreed to share the expenses notwithstanding the refund, such an act would be an act of voluntary surrender and cannot be said to have been done for business considerations. Such a surrender of the expenditure is not allowable in any case as a legitimate expenditure incurred for earning of income.

10. We, therefore, are of the considered view that with termination of agreement dt. 31st March, 1984 by agreement dt. 13th Nov., 1987, the liability of the assessee to bear the expenses ceased. If assessee has borne the expenditure notwithstanding that they had no liability to bear the same the expenditure cannot be considered to have been incurred for purposes of earning of any income. As such disallowance made by the Revenue is warranted. In the light of our decision in this regard it is not necessary for us to consider as to under what head the deduction would be permissible to the assessee.

11. The only other issue in assessees appeal for asst. yr. 1985- 86 is relating to the gifts received from abroad. A sum of Rs. 6,27,643 had been received by means of a bank draft dt. 7th Feb., 1984. This issue has been set aside by the first appellate authority on the ground that it relates to asst. yr. 1984-85. The Assessing Officer (AO) has been directed to verify the claim of the assessee and decide the issue in asst. yr. 1984-85 after verification. Assessees claim is that the addition ought to have been deleted without any direction for verification. We do not find any merit in this ground raised by the assessee. The claim of the assessee that the gift did relate to asst. yr. 1985-86 has been sent for verification to the AO and once the AO came to the conclusion that gift does not fall within the financial year 1984-85, the addition has got to be deleted on that ground alone without going into the merits of the case. That is exactly what the first appellate authority has directed. We see no real grievance of the assessee against the order of the CIT(A). We may, however, clarify that should the AO come to a conclusion that the gift relates to the year under appeal and not to asst. yr. 1984-85, he shall keep in mind the decision of the Tribunal in the related case of Smt. Shama Suri, G. Sagar & G. Sagar Suri Sons ITA No. 3089/Del/1987, 794/Del/1986, 6738/Del/1985 dt. 28th Sept., 1990 in deciding the issue afresh. We, therefore, decline to interfere.

12. Assessees appeal for asst. yr. 1984-85 is accordingly dismissed.

13. For asst. yrs. 1986-87, 1987-88 and 1988-89, the only issue involved is relating to the disallowance of expenses on account of advertisement and publicity, service charges and commission. We have already decided similar issue for asst. yr. 1984-85 as above. For the same reasons, the disallowance is confirmed.

14. Appeals of the Revenue are dismissed. The appeals of the assessee, subject to the observations in para 11, are also dismissed.