| SooperKanoon Citation | sooperkanoon.com/73979 |
| Court | Income Tax Appellate Tribunal ITAT Delhi |
| Decided On | May-13-2005 |
| Reported in | (2006)7SOT642(Delhi) |
| Appellant | T.N. Vohra |
| Respondent | Dy. Cit |
Continental Carriers (P.) Ltd., New Delhi. From these two concerns he derived commission of Rs, 27,57,232 and Rs. 39,92,378 respectively during the accounting year ended 30-4-1994 relevant to the assessment year 1994-95 which is the year under appeal. The commission was derived at the rate of 1 per cent. He wanted the commission to be increased to 1.2 per cent M/s. Continental Carriers agreed to the assessee's request. However, Continental Carriers placed a condition. It stated that the assessee had to provide some more facilities such as an office and godown for the storing of cargo which should be in the vicinity of the International Airport at New Delhi. The assessee agreed to this condition. The arrangement was ultimately finalized like this. The assessee was to construct the godown. Continental Carriers would provide the funds for the construction and adjust them against the commission payable to the assessee. This would be subject to the upper limit of Rs. 50,00,000. In other words, the assessee had agreed to bear not more than Rs. 50,00,000 as cost of construction of the godown.
Fortunately for the assessee, his wife owned a plot of land near the international airport. She was willing to permit the godown to be put up in her land. This arrangement was reduced to writing to which we shall presently refer.
In accordance with the above arrangement construction commenced and an amount of Rs. 18,10,007 was provided by Continental Carriers towards the same. However, the DDA raised objections to the construction and ultimately the structure was totally demolished. The entire arrangement thus fell through. But as per the arrangement the amount spent by Continental Carriers on the construction was debited to the assessee's account by means of debit note raised against the assessee.
In the return filed by the assessee, he claimed that the amount of Rs. 18,10,007 was a loss which arose in the course of his business and should accordingly by allowed as a deduction. The assessing officer rejected the claim. He firstly held that the structure which was demolised later by the DDA was the property of the assessee. He secondly held that the assessee derived a benefit or perquisite in the course of his business and the value thereof shall be assessed under section 28(iv) of the Act. He thirdly held that the assessee applied his commission income towards the construction, after it accrued to him. For these three reasons he held that the amount represented a taxable benefit arising to the assessee in the course of his business.
On appeal, the Commissioner (Appeals) rightly addressed himself to the question whether the amount can be allowed as a loss suffered by the assessee in the course of business activity. After examining the arrangement between the assessee, his wife Smt. Kamlesh Rani and Continental Carriers, he held that the amount cannot be allowed a loss.
He noted that if DDA had not demolished the construction the building would have been completed and the entire expenditure would have been debited to the assessee's account. The assessee's wife would have got only the rentals from the Continental Carriers for using the premises.
Thus, according to the Commissioner (Appeals), the assessee would have given an enduring benefit to his wife in the shape of a godown.
The Commissioner (Appeals) further noted that this was only a case of application of income after it accrued to the assessee in the sense that the expenditure was incurred on the construction out of the commission income which had already accrued to the assessee. He further observed that it was never intended that the assessee would suffer a loss. Any loss was only that of his wife since she could not get any rental income from the building which would have been constructed on her plot. For these reasons, the Commissioner (Appeals) upheld the view taken by the assessing officer.
We have carefully considered the facts and the rival contentions. We have also perused the paper book filed by the assessee. On 9-4-1993, the assessee wrote a letter to Continental Carriers referring to the discussions they had earlier in connection with the increase in the rate of commission. In this letter, the assessee stated that the land owned by his wife would be provided for the purpose of construction of the office and godown. The assessee agreed to bear the cost of construction and furnishing subject to a limit of Rs. 50,00,000. The assessee also stated that the construction can be done as per the choice of Continental Carriers and the amount spent may be debited to the assessee's commission account. The letter also states that in case of any dispute arises between the parties, the arrangement shall be withdrawn and in that case the entire premises alongwith the land will revert to the assessee and the Continental Carriers shall provide peaceful vacant possession. The assessee further stated that in consideration of the above arrangement, the rate of commission shall be increased from 1% to 1.2%. on 12-4-1993 an arrangement was entered to in writing between the assessee and his wife. A letter was written by the assessee's wife to the assessee in which she agreed to provide her land for the construction of the godown. The letter further states that the assessee shall incur all the expenses in raising the superstructure, that the funds provided by the assessee towards the construction will be treated as an advance by the assessee to her which shall not carry any interest; that the construction shall be completed within a period of one and a half years and once the construction of the building is complete the entire advance would be repaid retaining only three months' rent as security, that on completion of the superstructure it belongs to her and she will pay the property tax etc.
and that neither the assessee nor Continental Carriers will have any interest or right over the land or the superstructure. The letter also provided that in case the arrangement is not successfully completed, the assessee's wife shall not be called upon to make any payment or accept any debit in respect of any amount spent by the assessee or by Continental Carriers.
It is in accordance with the above arrangement that Continental Carriers spent Rs. 18,10,007 towards the construction and raised a debit note against the assessee on 31-3-2004. The statement of account of the assessee in the books of Continental Carriers shows the debit on 31-3-1994. A copy of the statement is at pages 14 and 15 of the paper book. The debit note is at page 13 which narrates the debit as "being the amount of claim debited to your account for payments made on your behalf for providing office-cum godown for the storage of cargo at village Rangpuri in the vicinity at Air Cargo Complex, as per arrangement".
On the above facts, the question is whether the loss arises out of the assessee's business activity. Before examining this question we have to clarify that the finding of the assessing officer in page 3 of the assessment order that the structure was to become the assessee's property is factually incorrect. The arrangement shows that the structure was to become the property of the assessee's wife which she would let out to Continental Carriers for rent. The arrangement documented to 12-4-1993 between the assessee and his wife clearly states that neither the assessee nor Continental Carriers would be entitled to any rights over the land or the superstructure. The observation of the Commissioner (Appeals) in paragraph 12 of his order that it is not known whether the assessee's wife was to pay back the investment made by the assessee towards the construction is also not correct because according to clause 8 of the letter dated 12-4-1993, the assessee's wife was to refund the assessee the entire amount of advance on completion of the connection of the superstructure, retaining only three month's rent as security. It seems to us from an examination of the arrangement between the assessee, his wife and Continental Carriers that the less is allowable as incidental to the assessee's business. It is not in dispute that the commission income earned by the assessee is assessable under the head "business". It has been so returned by the assessee as we find from the computation of income at page 1 of the paper book. It has been assessed under the head "business" as seen from page 4 of the assessment order. The assessee has been deriving substantial commission income. In the assessment year 1993-94, he derived commission of Rs. 64,69,924. For the year under consideration, he derived commission income of Rs. 67,49,610 of which the commission derived from Continental Carriers was Rs. 27,57,232.
This commission figure is the net figure which is arrived at by deducting the amount of Rs. 18,10,007 from the commission of Rs. 45,67,239 received from Continental Carriers. These facts have been gathered from -the assessee's letter dated 25-11-1995 addressed to the assessing officer, a copy of which is at page 11 of the paper book. The entire arrangement was entered into only because the assessee wanted an increase in the commission. Continental Carriers wanted the assessee to provide certain facilities such as a cargo godown near the International Airport so that the movement of goods becomes easier.
Such an arrangement obviously was beneficial to both the parties and that is why it was proposed and accepted by them. The amount towards the construction was to come from Continental Carriers but the arrangement clearly was that the amount would be borne by the assessee out of his commission income. This is seen from the assessee's letter dated 9-4-1993 to Continental Carriers wherein he has agreed to bear the cost of construction subject to the limit of Rs. 50,00,000 and has also agreed that once the construction was completed the entire amount spent by Continental Carriers may be debited and adjusted against his commission account. The plot belonged to the assessee's wife. The superstructure once built was to belong to her. She would charge monthly rentals from Continental Carriers. Thus, the assessee had no interest either in the land or in the superstructure. The entire arrangement, which was to the mutual benefit of the parties, emanated only from the assessee's request for an increase in the rate of commission. It was quite unfortunate that the building was demolished by the DDA, apparently for violation of the relevant rules. The amount spent by Continental Carriers upto that point was Rs. 18,10,007 and as per the arrangement dated 9-4-1993, it was to be debited against the assessee's commission account. If the arrangement had gone through and the building had been completed without any problem undeniably the assessee would have been entitled to the higher rate of commission. But since the building had to be demolished the assessee had to bear the loss as per the agreement between him and Continental Carriers. All these facts show that there was a close connection between the assessee's commission earning activity and the loss claimed by him. We are, therefore, of the opinion that the claim confirms to the test laid down by the Supreme Court in the case of Badridas Daga v. CIT( 1958) 34 ITR 10 (SC). In that case it was held that the loss for which a deduction could be made must be one that a springs directly from the carrying on business and is incidental to it and not any loss sustained by the assessee, even if it is merely connected with his business. The principle laid down in the case of Badridas Daga (supra) has been applied subsequently in several cases and we shall notice some of them briefly. In CIT v. B.M.S. (P.) Ltd ( 1979) 119 ITR 321 (Mad.) the assessee was a company carrying on business as transporters. It borrowed money from the bank at 20% interest and prescribed to the Government bonds which carried interest only at four and a half per cent. These bonds were purchased at the instance of the road transport authorities, obviously to keep them in good humour and under the bona fide belief that it was necessary to keep them in good humour in order to carry on the business smoothly. The assessee thereafter sold the bonds at a loss and claimed the same as a deduction in computing its business income. It contended that the bonds were sold before they matured for payment only to stop incurring further loss on account of huge interest payment on the loans borrowed. The Tribunal held that the loss was incidental to the business as it was incurred while trying to discharge the obligations in accordance with the accepted commercial practice in the line of business. This view was upheld by the Madras High Court. Inopkin & Williams (Travancore) Ltd. v. CIT ( 1967) 64 ITR 76 (Ker.), the assessee carried the business of processing mineral sand and exporting the same. It claimed as business loss, the value of certain quantity of sand which had disappeared from the godown. The Tribunal found that the sand had been removed from the godowns owing to the fraud or negligence of the employees of the assessee and the contractor. Applying the case of Badridas Daga (supra), the Kerala High Court held that the loss claimed by the assessee was allowable as a deduction. In V. Ram Krishna & Sons Ltd, v. CIT (1984) 16 Taxman 433 (Mad.), the assessee was a managing agent it floated a subsidiary of the managed company which ran into difficulties. The assessee was, therefore, forced to take over the same by setting up the factory, purchased raw material and make a trial run. Thereafter the activities remained suspended. The Madras High Court on these facts held that the expenses and losses incurred by the assessee on running the factory would be deductible in computing the income. In CIT v. Inden Biselers (1973) 91 ITR 427 (Mad.), the assessee entered into certain contracts with an American company to supply certain quantity of magnese ore of a specified quality within a specified time. After supplying a part of the ore, the assessee could not get the specified quality of the ore and, therefore, requested the American company to cancel the contract.
The American company suggested certain modifications to the original contract subject to the assessee executing promissory notes as security for the due performance of the contract. The assessee could not execute even the modified contract. Therefore, the American company forfeited the promissory notes given as security. The assessee paid the amount and claimed the same as business loss. On these facts, the Madras High Court held that the loss on account of forfeiture of the security deposit was allowable as a deduction in computing the assessee's income, applying the decision of the Supreme Court in the case of Badridas Daga (supra).
We may also refer to a decision of the Bombay High Court in the case of IBM World Trade Corpn. v. CIT (1990) 48 Taxman 11. In this case, the assessee-company entered into an agreement with landlord whereby the landlord undertook to construct a factory together with a garrage and a two rooms flat on the plot owned by him and agreed to grant a lease of the premises to the assessee for a period of 10 years which was renewable for a further period of 5 years at the option of the assessee. In order to facilitate speedy construction, the assessee-company advanced certain amount to the landlord for interest.
The landlord became insolvent and could not return the money to the assessee. The assessee, therefore, wrote off both the principal and the interest accrued in its books and claimed the amount written off as a business loss. The claim was rejected up to the Tribunal but the Bombay High Court held that the loss/business loss. The following observations are relevant :- "The question that arises for consideration is whether the fact that in the present case the amounts have been advanced to the landlord in pursuance of the agreement before the execution of the lease deed would make not any difference. In our opinion, it will not. It is not disputed that the assessee required a factory premises for its business and that it did not get a ready factory for that purpose. It took a business decision to enter into agreements with the landlord who owned the land which did not have the factory shed and other structures required by the assessee. The landlord expressed difficulty in constructing the factory building and other structures. The assessee in pursuance of other agreements entered into, advanced moneys which were in the beginning to be adjusted against the future rents, but subsequently were agreed to be refunded to the assessee on a fixed date. It is true that if the landlord had failed to construct the factory building and other structures as agreed upon, the agreements would have fallen through and there was no penalty clause as such.
However, one cannot get away from the fact that all this was done by the assessee with a view to acquire factory premises on lease. Mere fact that the factory would be ready in a year or so, would not make any difference." It may be noticed from the judgment that the Bombay High Court, even though it did not refer to the judgment of the Supreme Court in the case of Badri Das Daga (supra) however referred to another judgment of the Supreme Court in CIT v. Mysore Sugar Co. Ltd. (1969) 46 ITR 649 (SC).
A perusal of the above authorities shows that so long as the loss arises directly from the carrying on the business and not merely connected to the business it has to be allowed as a deduction. On the facts of the present case we are unable to say that the loss was merely connected to the business. In our opinion the loss arises directly from the carrying on the business because as held by the Bombay High Court in the above judgment it was a business decision accepted by the assessee in the present case and that the commission payable to the assessee would be increased from 1% to 1.2% if the assessee could arrange to provide a godown near the Airport for storing the cargo. The assessee was receiving a substantial commission from Continental Carriers. Therefore, there is every reason for him to think that even if the commission is increased marginally by 20% from 1% to 1.2%, there would be substantial increase in the commission receipts from Continental Carriers in future. This obviously has persuaded the assessee to agree to the proposal made by Continental Carriers. Since the construction could not get completed on account of supervening circumstances over which the assessee had no control nor was he responsible for the same, the amount spent by Continental Carriers was debited to the commission account thereby reducing the commission due to the assessee. On these facts we are of the opinion that there is a close nexus between the assessee's business activity and the loss claimed by him as a deduction. In our opinion the loss claimed is allowable.
In the course of the arguments, a question arose as to whether the loss can be considered to fall within the Explanation below section 37(1) inserted by the Finance Act, 1998 with retrospective effect from 1-4-1962. This Explanation says that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business and no deduction or allowance shall be made. This point came up in connection with the fact that the building had to be demolished because of violation of the building rules. However, this Explanation is not applicable firstly because it applies only to an expenditure but not to a loss. Secondly there is no allegation that it was the assessee who committed any violation of the building rules because the building was being constructed on the plot of land belonging to his wife and if at all there is any violation of the building rules, the assessee was in no way responsible for the same.
For the above reasons, we allow the loss of Rs. 18,10,007 as a deduction and allow the appeal.