M/S Hotel Shiv vs Commissioner Of Income Tax-Viii, ...
2014 Latest Caselaw 958 Del

     *IN THE HIGH COURT OF DELHI AT NEW DELHI

%          Order reserved on :            27 th November, 2013
           Order pronounced on:            21 st February, 2014

+                          WP(C) No. 3094 of 2013

M/s HOT EL SHIV                                 .... Petitioner
                           Through   Mr.Kedar Nath Tritpathy
                                     with  Mr.  H.P.     Sah u,
                                     Advocates.

                               Versus

COMMISSIONER OF INCOME T AX -VIII, NE W DEL HI.

                                               .....Respondent
                           Through: Mr. Balbir Singh with Mr.
                                    Rupender Sinhmar and Mr.
                                    Abhishek Singh Baghel,
                                    Advocates.

CORAM:

HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE SANJEEV SACHDEVA


SANJEEV SACHDEVA, J.

1. The petitioner has filed the present petition impugning

the order dated 25.03.2013, whereby the revision

petition of the petitioner under Section 264 of the

Income Tax Act, 1961 (hereinafter called 'the Act') has

been partly rejected.

2. The petitioner-assessee is a partnership firm engaged

in the business of running a guest house. The

assessment year in issue is 2008-09. The petitioner -

assessee filed its return of income tax o n 25.09.2008,

which was processed under Section 1 43(1) of the Act.

Subsequently assessment was framed under Section

143(3) on 29.10.2010 on taxable income of

Rs.18,75,616/-.

3. By the assessment order expenses of Rs.12,26,508/ -

were disallowed. The said expenses comprised of

Rs.11,63,391/- paid as conversion charges and

Rs.63,117/- as annual property tax with respect to the

portion of the building used as guest house.

4. The petitioner-assessee filed an application under

Section 264 of the Act, seeking revision of the

assessment order and claimed allowance of the

expenditure of Rs.12,26,508/-, that had been

disallowed by the Assessing Officer.

5. To understand the controversy, it would be necessary

to refer to the facts briefly.

6. The petitioner is a partnership firm of two partners

namely Smt. Krishna Leekha an d her son Shri. Anuj

Leekha. The partnership firm was set up with the

objective of running and operative guest house

services from the first and second floor of the building

situated at H-2, Green Park Ext., New Delhi.

7. The building, from where the said gue st house

operates, wa s owned by the two partners in their

individual names. Smt. Krishna Leekha is the owner

of the first floor and Shri. Anuj Leekha is the owner of

the second floor.

8. Since the partnership firm was using the portion of the

building for the purposes of running the guest house,

the expenditure relating to the maintenance of the

building was being booked by the said firm in its

accounts as revenue expenditure. The house tax

being paid on commercial rates was also being

claimed as revenue expe nditure by the assessee firm.

9. Pursuant to the judgment of the Supreme Court in the

case of M.C. Mehta & Ors. Vs. U.O.I. & Ors. (WP (C)

4677 of 1985) , the Ministry of Urban Development

notified that commercial establishments on notified

roads would be allowed to continue /operate, subject to

payment of conversion charges fixed by the

Government under the mixed land use policy.

10. The building, from which the petitioner-assessee was

operating, fell on one such notified road and the

owners became entitled to the conversion of the land

use. The petitioner firm , paid a sum of Rs.11,63,391/-

towards conversion charges and Rs.63,117/- as

property tax in the year 2007-08. The petitioner

claimed this sum of Rs.12,26,508/- (Rs.11,63,391/- +

Rs.63,117/-) as revenue expenditure and debited the

same in the profit and loss account.

11. This claim of the petitioner was rejected by the

Assessing Officer, while framing the assessment for

the year 2008-09.

12. Aggrieved by the disallowance of the said expenditure,

the petitioner filed the application under section 264 of

the Act, seeking revision of the assessment order and

setting aside of the disallowance of the said sum of

Rs.12,26,508/-.

13. The Com missioner of Income Tax partly allowed the

revision petition. The annual property tax paid by the

petitioner of Rs.63,117/- was allowed as an

expenditure, however, Rs.11,63,391/- paid towards

conversion charges was disallowed. It is this part of

the order that the petitioner impugns in the present

petition.

14. The property, from where the petitioner was operating,

was a residential property. It is the admitted case of

the petitioner that the property owned by the partners

of the petitioner , was not contributed by the partners

as capital in the firm and the building is also not shown

in the books of accounts as an asset owned by the

firm. The property continues to be owned by the

partners in their individual capacity.

15. In M.C. Mehta's case (supra), Ministry of Urban

Development framed the policy for conversion of the

property to mixed land use and further notified the

roads, on which the property situated could be

converted to mixed land use. Pursuant to the policy

framed by the Ministry of Urban Development, the

properties situated on the said notified road could be

converted and put to comme rcial use, subject to

payment of conversion charges. This resulted and

permitted change of land use for future.

16. As per the policy only those owners, who apply and

pay the conversion charges, were permitted to put

their residential properties to commercia l or mixed use.

Once a property stands converted to

commercial/mixed land use , there was substantial

enhancement and increase in value of the said

property. There being an enduring benefit from the

said conversion.

17. The conversion charge paid for conversio n of the

property from residential to commercial was a one

time charge and not a recurring expenditure incurred

from year to year. The one time conversion charge for

conversion of the property from residential to

commercial use is distinct and different f rom annual

house tax paid at commercial rates. Annual house tax

paid on commercial rate is paid for the use during the

financial year. It is an annual and reoccurring payment

which the land lord, tenant or the occupant must make

under the applicable statu te. The one time conversion

charge permanently converts the use of the property

from residential to commercial/mixed land use . Once

the property is converted, the benefit of the same will

enure to the owners of the property. It enhances and

adds to the va lue of the capital asset i.e. the property

18. In the present case, the owners of the property are the

partners in their individual capacity and as such the

enduring benefit of conversion from residential to

commercial enures to the owners. In case the

petitioner assessee were to discontinue its business,

even then the partners i.e. the owners of the property

in their individual capacity would still have the right to

put the property to commercial /mixed land use. This

advantage and benefit that the property has acquired

by payment of conversion charges will continue to

enure to the individual partners irrespective of the

assessee discontinuing to do the business of guest

house from the said property. Thus, this expenditure is

a capital expenditure and has brough t about an

advantage of an enduring nature, and this advantage

is attached to the property. Since the advantage of

enduring nature is attached to the property, the benefit

of the same will enure to the owners of the said

property. The expenditure for acquiring the said

advantage is an expenditure incurred purely for the

individual partners. Had this expenditure been incurred

by the individual owner , it would have been a capital

and not a revenue expense. There is no justification

and reason, why the petitioner firm made the said

payment and on what terms/ basis payment was made.

The said expenditure cannot be treated as running

business expenditure and cannot be claimed as a

deduction under Section 37 of the Act by the

petitioner/assessee. At best it would b e payment on

behalf of and at the behest of the owners, who were

also partners of the petitioner.

19. Individual owners and the partnership firm are two

distinct tax en tities for the purpose of the Act and are

liable to pay income tax on their income after red ucing

revenue expenditure. But in the facts of the present

case while deciding the question of enduring benefit,

we cannot be oblivious and ignore the practical reality

that unless the partners of the petitioner want the

partnership firm i.e. the petitioner cannot continue to

operate and run the guest house. Therefore, while

determining and deciding the question whether the

expenditure was capital or revenue in nature, the fact

and also the position that the expenditure should have

been incurred by the owners cannot be ignored.

20. We are of the considered view that the nature of

expenditure is clearly capital and incurred on account

of the individual partners and is neither a capital nor

revenue expenditure of the partnership firm

respondent assessee. We find no infirmity in the order

rejecting the application of the petitioner under Section

264 of the Act, refusing to interfere in the assessment

order, whereby the said expenditure has been

disallowed.

21. The present petition is accordingly dismissed. There

shall be no orders as to costs.

SANJEEV SACHDEVA, J.

February 21,       2014                     SANJIV KHANNA, J.
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