Airport Authority Of India vs Commissioner Of Income Tax
2011 Latest Caselaw 6186 Del

   *                IN THE HIGH COURT OF DELHI AT NEW DELHI
   +                         ITA 432 OF 2008
                             ITA 433 OF 2008
                             ITA 437 OF 2008
                             ITA 517 OF 2008
                             ITA 792 OF 2008
                             ITA 1250 OF 2008
                             ITA 1251 OF 2008


                                                      Judgment Reserved On: 2.12.2011
   %                                                  Judgment Pronounced On:16.12.2011


(1) ITA 432/2008

   AIRPORT AUTHORITY OF INDIA                                         . . . APPELLANT

                                     Through :. Mr. O.S. Bajpai, Sr. Advocate with Ms.
                                                Manasvini Bajpai and Mr. V.N. Jha,
                                                Advocates.

                                              VERSUS

   COMMISSIONER OF INCOME TAX                                         . . .RESPONDENT

Through: Mr. Kamal Sawhney, Sr. Standing Counsel.

(2) ITA 433/2008

   AIRPORT AUTHORITY OF INDIA                                         . . . APPELLANT

Through :. Mr. O.S. Bajpai, Sr. Advocate with Ms. Manasvini Bajpai and Mr. V.N. Jha, Advocates.

   ITA 792/2008,ITA 1250/2008,ITA 1251/2008
                                               VERSUS

   COMMISSIONER OF INCOME TAX                                      . . .RESPONDENT

                                      Through:       Mr. Kamal Sawhney, Sr. Standing
                                                    Counsel.
(3) ITA 437/2008

   AIRPORT AUTHORITY OF INDIA                                       . . . APPELLANT

Through :. Mr. O.S. Bajpai, Sr. Advocate with Ms. Manasvini Bajpai and Mr. V.N. Jha, Advocates.

                                              VERSUS

   COMMISSIONER OF INCOME TAX                                      . . .RESPONDENT

                                      Through:       Mr. Kamal Sawhney, Sr. Standing
                                                    Counsel.
(4) ITA 517/2008

   AIRPORT AUTHORITY OF INDIA                                       . . . APPELLANT

Through :. Mr. O.S. Bajpai, Sr. Advocate with Ms. Manasvini Bajpai and Mr. V.N. Jha, Advocates.

                                              VERSUS

   COMMISSIONER OF INCOME TAX                                      . . .RESPONDENT

                                      Through:       Mr. Kamal Sawhney, Sr. Standing
                                                    Counsel.
(5) ITA 792/2008

   AIRPORT AUTHORITY OF INDIA                                       . . . APPELLANT

   ITA 792/2008,ITA 1250/2008,ITA 1251/2008

Through :. Mr. O.S. Bajpai, Sr. Advocate with Ms. Manasvini Bajpai and Mr. V.N. Jha, Advocates.

                                              VERSUS

   COMMISSIONER OF INCOME TAX                                    . . .RESPONDENT

                                      Through:       Mr. Kamal Sawhney, Sr. Standing
                                                    Counsel.
(6) ITA 1250/2008

   AIRPORT AUTHORITY OF INDIA                                       . . . APPELLANT

Through :. Mr. O.S. Bajpai, Sr. Advocate with Ms. Manasvini Bajpai and Mr. V.N. Jha, Advocates.

                                              VERSUS

   COMMISSIONER OF INCOME TAX                                    . . .RESPONDENT

                                      Through:       Mr. Kamal Sawhney, Sr. Standing
                                                    Counsel.
(7) ITA 1251/2008
    AIRPORT AUTHORITY OF INDIA                                      . . . APPELLANT

Through :. Mr. O.S. Bajpai, Sr. Advocate with Ms. Manasvini Bajpai and Mr. V.N. Jha, Advocates.

VERSUS

COMMISSIONER OF INCOME TAX . . .RESPONDENT

ITA 792/2008,ITA 1250/2008,ITA 1251/2008 Through: Mr. Kamal Sawhney, Sr. Standing Counsel.

CORAM :-

HON'BLE THE ACTING CHIEF JUSTICE HON'BLE MR. JUSTICE RAJIV SHAKDHER HON'BLE MR. JUSTICE R.V. EASWAR

A.K. SIKRI, ACTING CHIEF JUSTICE:

1. In all these appeals, preferred by the singular assessee namely Airport

Authority of India, two additions made by the Assessing Officer and

sustained by the Tribunal are questioned. Vide orders dated 14th July, 2011

the Division Bench of this Court referred these two additions/issues for a

decision by the Full Bench. At the time of arguments, it was agreed to

between the parties that these issues can be decided on merits by the Full

Bench. Accordingly, appeals are admitted on the following substantial

questions of law:-

" (i) Whether on the facts and circumstances of the case and in law, the ITAT has erred in holding that the appellant was not entitled to deduct the amount provided under mercantile system of accounting towards the liability on account of expenditure to be incurred in removal of encroachments in and around the technical area of the Airport which was necessitated out of safety and security consideration in

ITA 792/2008,ITA 1250/2008,ITA 1251/2008 the normal course of business of authority enjoined with the responsibilities of maintenance and operation of airports all over India?

(ii) Whether on the facts and circumstances of the case and in law, the ITAT was justified in treating the amount raised in proforma invoices as income relying on its order for the assessment year 1998-99?

(iii)Whether the order passed by the ITAT is perverse in law and on facts of the case?"

2. It is not necessary to state in detail the factual matrix. Our purpose shall

be served by mentioning the material facts, that too, in brief, which touch

upon the aforesaid question.

3. The appellant Airport Authority of India is a statutory Authority

constituted first under the International Airports Authority of India, Act, 1972

when it took over the Central Warehousing Corporation. After repeal of the

said Act, the Airport Authorities Act of 1994 was enacted and the

appellant/assessee took over the functions of management of certain airports

and other allied activities. On some of these airports, illegal encroachments

were found in and around the security area of the airports. With the

intervention of local authorities, schemes were devised to rehabilitate the

ITA 792/2008,ITA 1250/2008,ITA 1251/2008 encroachers and the money required for rehabilitation. For this reason, the

assessee has been making provisions for the aforesaid expenditure to be

incurred in removal of encroachers and has been incurring the expenditure for

the said purpose from time to time. Such a provision was made in all these

assessment years from 1996-97 onward which are the subject matters of

these appeals. The Assessing Officer disallowed the same and added to the

income of the assessee which order has been upheld till the stage of the

Tribunal.

4. The assessee has also given space in the airports to various government

agencies like the Police Department, Post and Telegraph, Metrological

Department etc. According to the assessee, no payment is made by these

government agencies to the assessee, however, on the advice of CAG the

assessee has been raising proforma invoices/bills. Even when no money was

received in respect of those proforma bills ever since the assessee Authority

came into existence, the Assessing Officer treated the amount of those

invoices/bills as income of the assessee in all these assessment years on the

ground that the assessee was following mercantile system of accounting and,

therefore, the income has accrued by the very fact that spaces were given to

ITA 792/2008,ITA 1250/2008,ITA 1251/2008 these agencies and against those spaces proforma invoices/bills were raised.

These additions have also been sustained till the stage of the Tribunal.

QUESTION OF LAW NO. (i):

5. The case setup by the assessee before the authorities below was that

due to influx and increase in population in metropolitan cities, the land around

the airport area was illegally encroached and hutments were constructed

thereon, thus, endangering the safety of aircraft while taking off or landing.

The cluster of hutments also attracted vultures and birds which prove

dangerous to the aircraft. Over the years the hutments became slums. In

Mumbai alone it was estimated that there were about 63 slum pockets with

about 85,000 hutments. These illegal encroachments were sought to be

removed with the help of the State Governments. It was further submitted

that expenditure on such removal was estimated at about Rs.200 crore in

Mumbai alone. Similar situations existed in other metropolitan cities. Since

removal of encroachments was a on-going process, a liability of Rs.20.00

crores was provided in each of these assessment years in the books of

ITA 792/2008,ITA 1250/2008,ITA 1251/2008 accounts of the assessee. It was also argued that apart from making provision

certain amount was in fact paid as well every year.

6. On the aforesaid basis the case set up by the assessee was that the

expenditure was only to secure the existing assets and no new assets came

into existence in the books of the assessee and therefore such an expenditure

was revenue in nature. It was further submitted that since the assessee was

maintaining the books of accounts on mercantile method, it was necessary to

take this liability in its books. Reliance was placed by the assessee in the

case of Bharat Earth Movers Vs. CIT, 112 ITR 61 to argue that if a liability

had been incurred, the deduction should be allowed even though it may

have to be quantified and discharged at a future date. It was also argued that

in any case some specified amounts had been paid in these assessment years.

For example, as per the assessee in the assessment year 1998-99 a sum of Rs.

16.01 crores had in fact been paid. The Tribunal, however, did not accept the

aforesaid submissions of the assessee giving its own reasons. We will advert

to these reasons at a later stage. Before that, we would like to point out that a

Division Bench of this Court in its decision dated 15 th October 2001 passed in

the case of the assessee itself, in a case related to the assessment year 1997-98

ITA 792/2008,ITA 1250/2008,ITA 1251/2008 held that such an expenditure was capital in nature. Therefore, it would be

necessary to take note of that judgment and first decide the issue as to

whether the expenditure in question, if incurred would be capital or the

revenue in nature.

7. For identical purpose namely for removal of hutments/encroachers, the

assessee had paid a sum of Rs. 19.89 crores to the DDA for development of

an alternate site for the residents of that area who were vacated as their lands

were acquired for expanding of International Airport of Delhi. The Assessing

Officer and the Tribunal held that the expenditure was capital in nature.

Reference was made to the High Court on the following question:-

"Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the expenditure of ` 19.89 crores was a capital expenditure as it gave the assessee addition of enduring nature?"

8. This Court answered the aforesaid question in the affirmative i.e. in

favour of the Revenue and against the assessee. It had referred to the

judgment of Supreme Court in V. Jaganmohan Rao Vs. Commissioner of

Income Tax, 751 ITR 373 where money was paid to perfect a title or as

consideration for getting rid of a defect in the title or a threat of litigation the

ITA 792/2008,ITA 1250/2008,ITA 1251/2008 payment would be a capital payment. Two more decisions of Supreme

Court in Sitalur Sugar Works Ltd. Vs. Commissioner of Income Tax 491

ITR 160 and Bombay High Court in Hardiallia Chemicals Ltd. Vs. CIT,

218 ITR 598 were noted wherein the Court had held that where expenditure

was incurred by the assessee for shifting the factory from one place to

another to improve the business, the same was capital expenditure in nature.

9. However, at the time of arguments nobody had appeared on behalf of

the assessee. An application was filed for setting aside the aforesaid ex parte

order which was allowed by this Court vide a detailed judgment which is

reported in 286 ITR 323. Thereafter, the reference was heard afresh. After

hearing the counsel for the parties, the Division Bench of this Court passed

orders dated 6th October, 2006 reiterating the ex parte view taken by the

Division Bench in its order dated 15th October, 2001. While deciding the

question in the aforesaid manner the discussion which ensued is as under:-

"We have heard learned Counsel for the Revenue.

There is no appearance on behalf of assessed in spite of notice. Learned Counsel for the Revenue submitted that the Tribunal has analysed the factual position and has come to hold that the expenditure incurred resulted in bringing into existence an enduring benefit

ITA 792/2008,ITA 1250/2008,ITA 1251/2008 and, Therefore, was rightly held to be capital in nature.

In V. Jaganmohan Rao v. Commissioner of Income Tax [1970]75ITR373(SC) it was held that where money is paid to perfect a title or as consideration for getting rid of a defect in the title or a threat of litigation the payment would be a capital payment and not a revenue payment. In Sitalpur Sugar Works Ltd.

v. Commissioner of Income Tax [1963]49ITR160(SC) it was held that where expenditure was incurred by the assessed for shifting the factory from one place to another to improve the business, same was capital expenditure in nature. Similar view was also expressed by the Bombay High Court in Hardiallia Chemicals Ltd. v. CIT (1996) 218 ITR 598.

Above being the position, the conclusion of the authorities below and the Tribunal are in order. We answer the question referred in the affirmative, in favor of the Revenue and against the assessed."

10. In fact, a perusal of orders dated 6th October, 2006, revealed that

earlier order is reproduced in its entirety. Thereafter, certain contentions

raised by the counsel for the assessee are dealt and rejected and it is held that

the view expressed earlier was correct. This decision is reported as Airport

Authority of India Vs. CIT, 303 ITR 433.

ITA 792/2008,ITA 1250/2008,ITA 1251/2008

11. The argument of Mr. Bajpai was that identical issue had fallen for

consideration in Bikaner Gypsum Vs. Commissioner of Income-Tax (1991)

187 ITR 39 and the Supreme Court had held such an expenditure to be the

revenue in nature. It would, therefore, be necessary to find out the ratio of

Bikaner (supra). . In that case the assessee company had taken over a lease

of 4.27 square miles for mining gypsum for a period of 20 years with

provision for renewal for a further period of 20 years and carried on the

business of mining gypsum in accordance with the terms and conditions of

the lease. One of the clauses in the lease deed provided that no mining

operation shall be carried on in or under the lands within a distance of 100

yards from any railway, reservoir, canal or other public works or any

buildings, etc., except with previous permission. The railway authorities

extended the railway area on the leased land by laying down fresh track,

providing railway siding and also constructing quarters. The suit of the

appellant for ejecting the railway was dismissed. Thereafter, under an

agreement with the Government, the Railway Board and the Sindri Fertilisers

to whom the appellant company supplied gypsum , the railway station, track,

etc. were removed to another area offered by the appellant company. Out of

the total expenses of Rs. 12 lakhs incurred by the railway for shifting, the

ITA 792/2008,ITA 1250/2008,ITA 1251/2008 appellant company paid Rs. 3 lakhs as its share under the agreement. The

appellant claimed deduction of the sum of Rs. 3 lakhs in computing its profits.

The Appellate Tribunal held that the sum was allowable as a deduction as it

was a revenue expenditure. But the High Court, on a reference, held that the

amount was capital expenditure. On appeal to the Supreme Court, the

decision of the High Court was reversed holding that the amount was spent on

the removal of a restriction which obstructed the carrying on of the business

of mining within a particular area in respect of which the appellant had

already acquired mining rights. The payment of Rs. 3 lakhs was not made for

initiating the business of mining operations or for acquiring any right; the

payment was made for shifting the railway station, track, etc, i.e. to remove

an obstruction to facilitate the business of mining, and it did not bring into

existence any advantage of an enduring nature. The expenditure was on

revenue account. The Supreme Court took note of its various judgments in

earlier cases decided by it and noted the following simple test laid down by it

in Assam Bengal Cement Co. Ltd. Vs. CIT (1995) 25 ITR 34 for determining

the nature of expenditure:-

"if the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly

ITA 792/2008,ITA 1250/2008,ITA 1251/2008 attributable to capital and is of the nature of capital expenditure If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business s is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure."

12. Applying the text to the crux of the case before it, the Court was

influenced by the fact that the assessee had already been granted a mining

lease and under that lease it had acquired full rights to carry on mining

operations in the entire area including the railway area. The payment of Rs. 3

lacs was not made for grant of permission to carry on mining operation within

the railway area, instead it was made towards the cost of removing the

construction which obstructed the mining operation. In this premise, the

expenditure was treated to have been made in relation to carrying on business

in a profitable manner and was, therefore held to be on revenue account. A

Division Bench of this Court, authored by one of us (Rajiv Shakdher,J.) has

ITA 792/2008,ITA 1250/2008,ITA 1251/2008 succinctly culled out the principle/factors which go into determining the

nature of the expenditure in the case of Commissioner of Income-Tax Vs.

J.K.Synthetics Limited, (2009) 309 ITR 0371, in the following manner:-

"Broad principles which emerge on reading of various authorities

An overall view of the judgments of the Supreme Court, as well as, of the High Courts would show that the following broad principles have been forged over the years, which require, to be applied to the facts of each case:

(i) the expenditure incurred towards initial outlay of business would be in the nature of capital expenditure, however, if the expenditure is incurred while the business is on going, it would have to be ascertained if the expenditure is made for acquiring or bringing into existence an asset or an advantage of an enduring benefit for the business, if that be so, it will be in the nature of capital expenditure. If the expenditure, on the other hand, is for running the business or working it, with a view to produce profits, it would be in the nature of revenue expenditure;

(ii) it is the aim and object of expenditure, which would, determine its character and not the source and manner of its payment;

(iii) the test of 'once and for all' payment i.e., a lump sum payment made, in respect of, a transaction is an inconclusive test. The character of payment can be determined by looking at what is the true nature of the asset which is acquired and not by the fact

ITA 792/2008,ITA 1250/2008,ITA 1251/2008 whether it is a payment in 'lump sum' or in an instalment. In applying the test of an advantage of an enduring nature, it would not be proper, to look at the advantage obtained, as lasting forever. The distinction which is required to be drawn is, whether the expense has been incurred to do away with, what is a recurring expense for running a business, as against, an expense undertaken for the benefit of the business as a whole;

(iv) an expense incurred for acquisition of a source of profit or income would in the absence of any contrary circumstance, be in the nature of capital expenditure. As against this, an expenditure which enables the profit making structure to work more efficiently leaving the source or the profit making structure untouched, would be in the nature of revenue expenditure. In other words, expenditure incurred to fine tune trading operations to enable the management to run the business effectively, efficiently and profitably leaving the fixed assets untouched would be an expenditure of a revenue nature even though the advantage obtained may last for an indefinite period. To that extent, the test of enduring benefit or advantage could be considered as having broken down;

(v) expenditure incurred for grant of License which accords 'access' to technical knowledge, as against, 'absolute' transfer of technical knowledge and information would ordinarily be treated as revenue expenditure. In order to sift, in a manner of speaking, the grain from the chaff, one would have to closely look at the attendant circumstances, such as:

(a) the tenure of the Licence.

ITA 792/2008,ITA 1250/2008,ITA 1251/2008

(b) the right, if any, in the licensee to create further rights in favour of third parties,

(c) the prohibition, if any, in parting with a confidential information received under the License to third parties without the consent of the licensor,

(d) whether the Licence transfers the 'fruits of research' of the licensor, 'once for all',

(e) whether on expiry of the Licence the licensee is required to return back the plans and designs obtained under the Licence to the licensor even though the licensee may continue to manufacture the product, in respect of, which 'access' to knowledge was obtained during the subsistence of the Licence.

(f) whether any secret or process of manufacture was sold by the licensor to the licensee. Expenditure on obtaining access to such secret process would ordinarily be construed as capital in nature;

(vi) the fact that assessee could use the technical knowledge obtained during the tenure of the License for the purposes of its business after the Agreement has expired, and in that sense, resulting in an enduring advantage, has been categorically rejected by the courts. The Courts have held that this, by itself, cannot be decisive because knowledge by itself may last for a long period even though due to rapid change of technology and huge strides made in the field of science, the knowledge may with passage of time become obsolete;

(vii) while determining the nature of expenditure, given the diversity of human affairs and complicated nature of business; the test enunciated by courts have to be applied from a business point of view and on a

ITA 792/2008,ITA 1250/2008,ITA 1251/2008 fair appreciation of the whole fact situation before concluding whether the expenditure is in the nature of capital or revenue"

13. When we apply the aforesaid test laid down by this Court as well as

the ratio of Bikarner Gyupsum (supra) to the facts of this case, a conclusion

would be that the expenditure in question by the assessee was revenue in

nature. It is not in dispute that the land belongs to the assessee. Certain

encroachers in all these airports had encroached upon the part of the land.

In the schemes formulated by the Government for removal of these

encroachers and rehabilitate them at other places, if the assessee had paid the

amount that amount is not for acquisition of new assets. The payment was

made to facilitate its smooth functioning of the business i.e. in relation to

carrying on the business in a profitable manner.

14. We are therefore of the opinion that the Division Bench of this Court in

Airport Authority of India Vs. CIT, 303 ITR 433 does not lay down the

correct law. We accordingly over rule the same holding that such an

expenditure if incurred by the assessee would be on revenue account and is

ITA 792/2008,ITA 1250/2008,ITA 1251/2008 not capital in nature. Having held so, we turn to the reasons given by the

Tribunal in denying this expenditure.

15. The Tribunal proceeded to discuss the case on the basis that only a

provision for such an expenditure was made and in fact there was no

payment made in the assessment year (s) in question. It, thus, went on the

determine whether it was a contingent liability to be accrued at a future date

on happening of certain events. The Tribunal first observed that the liability

was not a statutory in nature. If at all, it was contractual. Thereafter, it

addressed the issue as to whether the liability was contractual in nature and

was capable of fair ascertainment taking note of Bikaner Gyupsum (supra).

Such an expenditure if incurred in the year would be revenue in nature as is

clear from the following observations of the Tribunal:-

"We may also refer to the decision of Hon‟ble Supreme Court in the case of Bikaner Gypsum Ltd. in which it was held that any sum paid for removal of disability in carrying on the business will be of revenue nature. Obviously, removal of hutments is in the nature of removal of disability and, therefore, if any liability has been incurred in this year, it will constitute an admissible deduction."

ITA 792/2008,ITA 1250/2008,ITA 1251/2008

16. However, the Tribunal stated that on the facts of that case, no such

liability had been incurred or crystallized. It held that various meetings had

taken place between the assessee and the Government, apart from making

certain recommendations and estimating the likely expenditure, no

agreement came into existence between the assessee and the hutment

dwellers with or without the involvement of any third party and as no

agreement between the assessee and hutment dwellers has been filed, we are

of the view that no legally enforceable liability was fastened on the assessee

in this year, and therefore, even under mercantile system of accounting, the

assessee is not entitled to deduct the impugned amount simply because a

provision was made. The Tribunal also took note of the submission of the

assessee that it had in fact released a payment of `16.01 crore, but rejected

this plea on the ground that the date of release of the money and the person

to whom the money had been paid had not been stated.

17. No doubt, having regard to the judgment of the Apex Court in Bharat

Earth Movers Vs. CIT, 245 ITR 428 which laid down that the liability should

have been actually incurred in the year and it should be capable of reasonable

ascertainment, the assessee is to prove that such a liability had actually been

ITA 792/2008,ITA 1250/2008,ITA 1251/2008 incurred and was capable of reasonable ascertainment. A finding of fact is

arrived at that no such ascertainment of liability could be proved by the

assessee. To that extent the order of the Tribunal cannot be faulted with.

However, it would be necessary to mention at this stage that certain

documents were produced before us by the learned counsel for the assessee to

show that amount of ` 16.01 crores in the assessment year 1998-99 was in

fact paid and similar amounts were paid in other years as well. Once we have

held that such amounts are paid, these are admissible deductions being

revenue in nature, we answer the question no.1 in favour of the assessee and

against the Revenue. At the same time, we hold that the deduction would be

allowed by the Assessing Officer only after the assessee furnishes proof of

having made such a payment in the different assessment year in question.

18. We may also state that the criteria laid down by the Tribunal that for

admissibility of the expenditure there has to be an agreement between the

assessee and the hutments dweller is clearly wrong. It is a matter of record

that in these schemes no such agreement is actually arrived at between the

persons who make the payment like the assessee herein and the hutments

dwellers. Therefore, even if, in a given case, the assessee is able to show that

ITA 792/2008,ITA 1250/2008,ITA 1251/2008 rehabilitation scheme was formulated by the Government and the assessee as

beneficiary was asked to make the payment under the said scheme, that

would be sufficient evidence to claim the deduction on expenditure as held

by the Supreme Court in Bikaner Gyupsum (supra). However, we find that

in the present case, a finding of fact is recorded by the Tribunal that no such

scheme could be furnished by the assessee for which the assessee was

supposed to make the provision. To that extent, therefore, the Tribunal is

correct in its view. At the same time, following Bikaner Gyupsum (supra),

this finding has become irrelevant as we are allowing the deductions on the

basis of actual payment.

QUESTION OF LAW NO.(ii)

19. It is a matter of record that certain Government Department like

Customs, Immigration, Meteorological Department, Post Office, Police

Agencies including BSF, CISF, Special Bureau of Govt., FRRO, Intelligence

Bureau etc. have been provided accommodation in the terminal buildings

and other technical areas by the assessee. It is the case of the assessee that

these departments have their offices to facilitate the functioning of the

assessee and they do not agree to pay any licence fee of the space occupied by

them on the plea that they are regulatory bodies to provide special services in

ITA 792/2008,ITA 1250/2008,ITA 1251/2008 terms of the Government directions. Still the assessee had raised the

proforma invoices in all these years and kept in memoranda account for

example in the assessment year 1998-99. The proforma invoices were to the

tune of ` 19.66 crores. According to the assessee these memoranda accounts

are maintained by the assessee only because its auditors namely CAG of

India had suggested/emphasized the assessee to maintain these accounts. The

assessee also emphasized that such use by Government Department should

not be treated as commercial departments since they have to be provided

space for the performance of duty. Therefore, no regular revenue was being

generated. The advices were only proforma in nature. The Assessing

Officer, however, did not accept the aforesaid plea and treated the amount of

proform advices as income of the assessee. The plea of the assessee that

there was no „real income‟ accrued to the assessee was turn down. The CIT

(A) upheld the aforesaid addition, on the ground that some of these

government agencies had in fact paid the amount. On this very reasoning,

the Tribunal has also rejected the ground of the assessee. The question is as

to whether there is a „real income‟ which has accrued to the assessee. This

real income theory is accepted by the Apex Court in State Bank of

Travancore Vs. CIT, (1986) 158 ITR 102. As per this judgment, the concept

ITA 792/2008,ITA 1250/2008,ITA 1251/2008 of real income is applicable in judging whether there has been income or

not. If income does not result at all, there cannot be a tax, even though in

book-keeping, an entry is made about a hypothetical income which does not

materialized. This principle is applicable whether the accounts are

maintained on cash system or under mercantile system. If the accounts are

maintained under the mercantile system, what has to be seen whether income

can be said to have been really accrued to the assessee company. (see

Godhara Electricity Co. Ltd. Vs. Commissioner of Income-Tax, 225 ITR

746). It is not in dispute that there is some realization from the aforesaid

Government Agencies though details are not available. In the year 1998-99 `

19.66 crores towards proforma advices were made. These included private

parties as well as Government Departments. Insofar as private parties are

concerned, there is no issue that the income has accrued and would be

taxable in the year in which these invoices is made. In case money from

these private parties is not realized later on, that can always be claimed as bad

debt. We are here concerned with the proforma bills in respect of government

parties in respect of which proforma advices totaling ` 5.33 crores were

made. However, in respect of assessment year 1998-99 against the total

proforma invoice of ` 5.33 crores, the payment receipt was of a meager sum

ITA 792/2008,ITA 1250/2008,ITA 1251/2008 of ` 10.30 lacs. The same is the position in respect of earlier assessment

years.

20. We are of the opinion that the Tribunal is not correct that merely

because a meager sum of ` 10.33 lacs is received, the entire amount of ` 5.33

crores is to be treated as income and same treatment is to be given in other

assessment years. What was to be seen as to which Government Department

is remitting the amount. From the details furnished, it is obvious that some of

the Departments have never made any payment.

21. We thus restore this issue back to the Assessing Officer to examine the

matter in the light of our aforesaid discussion. In respect of the Government

Agencies, like Police, Customs who have never paid any amount to the

assessee, on the application of „real income‟ theory and taking a realistic

view, it is held that no income has accrued merely because proforma advices

were raised, that too, at the instance of the CAG of India.

22. This question of law is answered accordingly with the direction to the

Assessing Officer to determine the taxability of proforma invoices in respect

of those parties who have been remitting part payments and have accepted

ITA 792/2008,ITA 1250/2008,ITA 1251/2008 their liability and not in respect of those Government Agencies who have

never paid any amount.

23. All these appeals are disposed of in the aforesaid terms.

24. There shall be no order as to the costs.

ACTING CHIEF JUSTICE

(RAJIV SHAKDHER) JUDGE

(R.V.EASWAR) JUDGE

DECEMBER 16, 2011 skb

ITA 792/2008,ITA 1250/2008,ITA 1251/2008