K. BHATIA CORPORATION,MUMBAI vs. AST CIT CIR 19(3), MUMBAI

ACIT Cir 19(3), M/s K. Bhatia Corporation Piramal Chambers, 3rd Flat No. 1, May Queen बिधम/ Floor, Lalabuag, Parel, Apartments, 33 Rd, Vs. Mumbai-400 013 Bandra (W), Mumbai-400 050. स्थायीलेखासं./जीआइआरसं./ PAN No. AAEFK9626Q (अपीलाथी/Appellant) (प्रत्यथी / Respondent) : अपीलाथीकीओरसे/ Appellant by : Shri Neelkanth Khandelwal, AR प्रत्यथीकीओरसे/Respondent by : ShriH. Anoop Sadashiv, DR सुनवाईकीतारीख/ : 11.05.18 Date of Hearing घोषणाकीतारीख / : 08/06/2018 Date of Pronouncement आदेश / O R D E R

Per Sandeep Gosain, Judicial Member:

1. On the facts and circumstances of the case, the Ld. Commissioner of Income-tax has erred in rejecting the appeal and confirming the addition of Rs. 90,00,000/- payable to BMC without proper verification of facts.

2. The brief facts of the case are that assessee is engaged in the business of builders and real estate developers. The return of income for the year under consideration was filed on 27.10.06 declaring total loss of Rs. 10,17,534/-. During the year under consideration the assessee has shown to have undertaken a project. In addition to business loss, the assessee’s total income consists of income under the head ‘Income from house property’, any other source of income is denied. It has been observed from M/s K. Bhatia Corporation the Notes to Accounts and the Tax Audit Report that the assessee is following ‘Completed Project’ method of accounting. Thereafter the case was selected for scrutiny and after serving statutory notice and seeking reply, the AO while passing the order of assessment denied the liability of expenses claim of Rs. 90 lakhs, which the assessee is claiming as provision for premium payable to BMC. Apart from this, a sum of Rs. 16 lakhs were added to the income of the assessee as international cash credit u/s 68 of the I.T. Act.

Aggrieved by the order of AO, assessee preferred appeal before Ld. CIT(A) and Ld. CIT(A) after considering the case of both the parties, dismissed the appeal of the assessee.

Now before us, the assessee has preferred the present appeal by raising the above grounds.

Ground No. 1. 3. This ground raised by the assesseerelates to challenging the order of Ld. CIT(A) in rejecting the appeal and confirming

M/s K. Bhatia Corporation the addition of Rs. 90,00,000/- payable to BMC without proper verification of facts.

4.1 Further, it is clearly evident from facts mentioned above, that even if expenses of Rs. 90 lakhs are allowable, even then as per assessee's own estimate, out of that Rs. 31,31,440/- is for penalty purpose, which is not allowable at all, even in the year of actual payment as per provisions of Explanation to sec. 37(1) which is states that For the removal of doubts, it is hereby declared 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 M/s K. Bhatia Corporation business or profession and no deduction or allowance shall be made in respect of such expenditure".

4.2 Furthermore, as per B.M.C. rules, penalty imposed on assessee was Rs.1,20,38,800/- which get confirmed by the High Court also, so whole of provision of Rs.90 lakhs has been covered by amount of penalty, itself i.e. Rs.1 ,20,38,800/- which is not as allowable expenses as per Explanation to sec. 37(1). So full provision of Rs.90 lakhs has been disallowed, not only in A.Y.2006- 07, but also in year of actual payment and even if assessee's contention has been accepted, then also only Rs,58,68,560/- are allowed as expenditure in the year of actual payment.

4.3. Further more, this liability of assessee is still not fully ascertained as submitted by assessee himself that matter is still pending in Supreme Court and assessee is showing his liability in her books as damages payable as on 31.03.2006 i.e. assessee has not actually paid but only made a provision for it. Since it is still not an ascertained liability so its provision can't be allowed at all.

4.3. From the above facts, it can be conclusively said that as section 43B clearly stipulates that "any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the M/s K. Bhatia Corporation time being in force" is to be allowed only when actual payment has been made. Since Rs.90 lakhs is statutory payment as per B.M.C. rules, out of which Rs.31,31,440/- is for penalty payable to B.M.C., which will be disallowed as per Expi. To Section.37(1). Remaining amount i.e. Rs.58,68,5601- will be allowed only when actual payment made, but this is also not an ascertained liability as discussed above. So it won't be allowed as expenses in A.Y.2006-07, as it is a provision only and that also for an unascertained liability and also not actually paid. As it is from the submission of assessee itself that assessee has not made any payment in this behalf. Accordingly, the provision of Rs.90 lakhs is disallowed. Penalty proceedings u/s.271(1)(c) are initiated separately.

Ld. AR further submitted that aggrieved by the above, assessee preferred the appeal before Ld. CIT(A) by filing written submission, which is explained in para no. 2.4 of the order of Ld. CIT(A) and the Ld. CIT(A) after considering the case had decided this ground in para no. 2 (2.1 to 2.9). The operative portion of the order of Ld. CIT(A) is contained in para no. 2.5 to 2.9, which is reproduced below:-

M/s K. Bhatia Corporation 2.5 I have carefully gone through the assessment order, submissions of the appellant and the facts of the case. In this case, the appellant has claimed Rs. 90,00,000/- as expenses in its account being provision for premium payable to BMC. The A.O. in the assessment order held that the sum of Rs. 90,00,000/- is not allowable to the appellant under two sections of the I.T. Act (i) u/s. 43B and (ii) explanation to section 37(1). As regards to section 43B, the A.O. held that since, the sum of Rs. 90,00,000/- is payable to BMC and the same has not been actually paid, this is not an allowable expense u/s. 43B of the I.T. Act. The sum of Rs. 90,00,000/- is a statutory liability and as per Section 43B, deduction is allowable to only those sums which are actually paid before due date of filing of return of income. In this case, the appellant has only created a provision and no actual payment of Rs. 90,00,000/- has been made to BMC. The A.O. has also stated that this liability is not fully ascertained as the matter is still pending before the Supreme Court of India. Under the Income-tax Act, no provision are allowable and only ascertained liability are allowable.

2.6 The A.O. has also held that sum of Rs. 90,00,000/- is also not allowable as the same is hit by the explanation to Section 37(1) of the I.T. Act. The A.O. has stated that Rs. 31,31,440/- is a penalty imposed by M/s K. Bhatia Corporation BMC for carrying out work without obtaining commencement certificate as it is clear from clause 4 of the High Court order which has been reproduced in the earlier part of the order. The A.O. finally summed up that Rs. 90,00,000/- is statutory payment as per BMC Rules out of which Rs. 31,31,440/-is penalty payable to BMC which is liable to be disallowed as per explanation to section 37(1) of the I.T. Act. Remaining amount of Rs. 58,68,560/- will be allowed only when actual payment is made. But this is also not ascertained liability as discussed above. Therefore it is not allowable as an expense in the A.Y. under consideration as it is a provision only and that also for an unascertained liability and also not actually paid. For all these reasons, the A.O. disallowed the sum of Rs. 90,00,000/-.

2.7 The Ld. A.R. on the other hand has pleaded that premium is not at all equivalent to tax, duty, cess or fee. The appellant has relied upon the decision of Amritsar Tribunal in the case of Smt. Garo Devi Vs. ITO (2001) 71 TTJ 880 (Asr). It is also submitted by the appellant that the premium payable by the appellant is for regularizing the building i.e. acquiring the right which will be transferred to the flat owners. This right shall prevail the building exists. Such premium by no stretch of imagination be treated as tax,

M/s K. Bhatia Corporation duty, cess or fee. The appellant also relied upon the case of Ch. Aishi Ram Btra Vs. ITO (2004) 91 TTJ 1122 (Asr.)

2.8 In view of the above, it is submitted by the appellant that provisions of Section 43B cannot be applied to the premium payable to BMC. As regard the observation of the A.O. that balance of Rs. 31,31,440/- is for the penalty payable to BMC, the appellant submitted that the same is not correct. It is also stated by the appellant that premium paid is compensatory in nature. In addition to the aforesaid submissions, the appellant has also made the following submissions:

M/s K. Bhatia Corporation 41. The Assessee states that the Id. Assessing officer erred in not giving sufficient opportunity to present the case.

2.9 I have heard the rival submissions but I am not inclined to agree with the arguments and submissions of the appellant. I find considerable force in the argument of the A.O. that the sum of Rs. 90,00,000/- is not a ascertained liability but is a contingent liability. It is gathered from the appellant that as per their working, the amount which is payable on account of premium comes to Rs. 90,00,000/- and that is why, they are showing this sum in their books as ascertained liability. However, there is a dispute between the appellant and the BMC with regard to the working of this sum also. The appellant has adopted the rates of earlier years for working out the premium payable, whereas, the BMC has adopted the rates of different years for working out the premium payable. Thus, the sum of Rs. 90,00,000/- is a contingent liability as this sum is in dispute. In fact, it was because of this fact that the BMC has not accepted the proposal of the appellant to make payment of this sum. Thus, it becomes quite clear that the sum of Rs. 90,00,000/- is a M/s K. Bhatia Corporation contingent but not an ascertained liability. It is an undisputed fact that the appellant is in appeal against the order of the Municipal Commissioner of BMC asking the appellant to pay the sum of Rs. 1,20,38,800/- before the Supreme Court of India. Further I also find considerable force in the argument of the A.O. that the sum of Rs.90,00,000/- payable to BMC is a statutory liability and since, the same has not paid before the due date of filing of return of income, Section 43B of the I.T. Act is attracted on this amount. As per Section 43B, statutory payments are allowable only on the basis of their payment. However, in the case of the appellant, it is seen that the sum of Rs. 90,00,000/- has not been paid by the appellant to BMC. Further, the A.O. has clearly mentioned in the assessment order that the sum of Rs. 31,31,440/- is for penalty payable to BMC and therefore, the same is not allowable as per explanation to section 37(1) of the I.T. Act. However, it is seen from the computation of the total income that the A.O. has disallowed a sum of Rs. 90,00,000/- u/s. 43B of the I.T. Act.In view of the above discussion, I am of the opinion that the A.O. is quite justified in making the disallowance of Rs. 90,00,000/-and therefore, disallowance so made by the A.O. is accordingly confirmed. Hence, this ground of appeal is dismissed.

After having gone through the facts of the present case, submissions of both the parties as well as judgment cited by both the parties and the orders passed by revenue authorities, we find that assessee has claimed a sum of Rs. 90 lakhs as expenses in its account as provision for premium payable to BMC. Whereas the revenue authorities held that the above amount is not allowable under both section 43B and 37(1) of the I.T. Act. We notice that Ld. CIT(A) has categorically held that since the above amount i.e. 90 lakhs allegedly payable to BMC has not been actually paid, therefore the same cannot be allowed as expenses u/s 43B of the I.T. Act. On this aspect, Ld. AR categorically stated that the assessee had carried out the development of the building and construction from October 2002 and the same was completed by October 2003 and in the meantime two Writ petitions No. 379/03 and W.P. No. 2822/03 were filed against MCGM objection to grant Completion Certificate and /or regularization of 158 buildings in the jurisdication of H/west, R and K wards which violated DC regulations of 1991. It was further submitted by Ld.

M/s K. Bhatia Corporation AR that assessee received stop work notice u/s 354A of BMC Act on around Nov, 2003. Ld. AR further submitted that both PILs were decided by Hon’ble Bombay High Court thereby directing the Municipal Corporation to dispose the pending 128 proposals for regularization on buildings. Consequent thereto, the Municipal corporation passed an order by applying premiums at current 2007 market rates on the society. It was further submitted by Ld. AR that since the assessee has filed an appeal before the Hon’ble Bombay High Court against the said order and the Hon’ble Bombay High Court put a condition that the matter can only be heard on the payment as per the orders of Municipal Corporation. It was further submitted that since the assessee was aggrieved by the order of Hon’ble Bombay High Court, therefore a petition was filed before Hon’ble Supreme Court which is still pending. After analyzing the facts of the present case as discussed above and after considering the submissions made by both the parties as well as the orders passed by revenue authorities, we find that the Municipal Commissioner directed theassessee to pay the following amounts, which is contained in the written

M/s K. Bhatia Corporation submissions reproduced in the order of Ld. CIT(A) at page no. 9 and the same is also reproduced below:-

Particulars Amount Premium for open space to the extent of 51,73,800 19.53% and in FOSof 100% Premium for approval to grant area 74,25,900 covered byStaircase, lift, lobby Loss of facility as result of condonation / 51,77,600 concession to the occupants of building after formation of society Infrastructure development to M.C.G.M 2,05,300 Enhanced fine for carrying work beyond 1,20,38,800 approval Rs. 3,00,66400 After having gone through the above particulars, we find that the first and second items in the table referred above pertains to „Premium for open space‟ and ‘Premium for approval to grant area covered by Staircase, lift, lobby, etc’. and thus, both the above charges are mandatorily payable to the Municipal Corporation for seeking regularization as per the existing norms and to bring it within the parameters as prescribed by the Municipal Corporation. Since both the amounts mentioned in M/s K. Bhatia Corporation Item No. 1 & 2, i.e. 51,73,800 & 74,25,900, totaling Rs. 1,25,99,700/- are mandatorily required to be paid to the Municipal Corporation for obtaining ‘Occupation certificate‟ and the said payment condition is a sine qua non for seeking ‘Occupation certificate’, therefore these amounts i.e. mentioned at item no. 1 & 2 in no manner whatsoever be related for any illegality or is not an offence or not prohibited by law and thus in the above circumstances, the provisions of Explanation-1 of section 37(1) of the I.T. Act do not come into action. Even otherwise, as per the facts mentioned by the assessee, the provision of Rs. 90 lacs are even less than the demand of both the two items calculated altogether which comes to Rs1,25,99,700/- to be paid to the Municipal Corporation and is thus an „ascertained liability‟ and not a „contingent liability‟. Even in para no. 25 of the written submissions filed by the assessee before the Ld. CIT(A), wherein it has been categorically mentioned that ‘Premium’ is basically a consideration for the grant of permission. Even the provisions of section 43B of the I.T. Act are also not get triggered as the above mentioned „premium‟ payable is M/s K. Bhatia Corporation neither tax, duty, cess or fee, which is payable. In this respect, we draw strength from the decision of Coordinate Bench of Hon’ble ITAT in the case of Smt. Garo Devi Vrs. ITO (2001)71 TTJ 880 (Asr), wherein it has been categorically held as under:- “The dictionary meaning of the word „Premium‟ is a reward, a prize, excess over original price, anything offered as an incentive, which clearly indicates that the word „premium‟ is neither a tax nor a duty nor a cess nor a fee”. The premium payable by the assessee is for regularizing the building i.e. acquiring the right which will be transferred to the flat owners. This right shall prevail till the building exists. Such premium by no stretch of imagination be treated as tax, duty, cess or fee.

We also draw strength from the decision of Hon’ble Supreme Court in the case of CIT Vrs. Mc.Dowell & Co. Ltd. (2009) 314 ITR 167. Therefore, while taking into consideration our above observations as well as legal propositions, we allow the claim of assessee. Resultantly, this ground raised by the assessee is allowed.

M/s K. Bhatia Corporation Ground No. 2. 5. This ground raised by the assessee relates to challenging the order of Ld. CIT(A) in confirming the addition of Rs. 16,00,000/- being advance received from Mrs. Parekh in-spite of fact that the same was received during the AY 2004-05.

3.3 I have carefully gone through the submissions made on behalf of the appellant. It has been submitted on behalf of the appellant that the firm has received Rs. 22,00,000/- as advance for booking a flat from Mrs. Rita Parikh during A.Y. 2004-05. Since, the appellant firm could not provide Mrs. Parikh the flat, the money received from her was to be returned back to her. It is M/s K. Bhatia Corporation submitted that Rs. 6,00,000/- were paid back to Mrs. Rita Parikh on 14-12-2004. therefore, the balance amount which was to be returned back to her at the end of the previous year relevant to A.Y. 2005-06 was Rs. 16100,000/-. It is also submitted by the Ld. A.R. that A.Y. 2006-07 was the least year of the existence of the firm. After this A.Y., the firm was dissolved. The Ld. A.R. has not submitted any information/ details as to what happened to Rs. 16,00,000/- and whether same has been paid to Mrs. Rita Parikh or not in subsequent years. Therefore, this appears to be a case of the cessation of liability as neither any flat was provided to Mrs. Rita Parikh nor the amount was returned back to her even after so many years of the receipt of advance. Under this circumstances, the A.O. is justified in adding a sum of Rs. 16,00,000/- in the income of the appellant though in my view, the same is to be added to the income of the appellant on account of cessation of liability and not u/s. 68 of the I.T. Act as the appellant has furnished confirmation from Mrs. Rita Parikh. Therefore, addition of Rs. 16,00,000/- to the income of the appellant is justified and the addition is confirmed. Hence, this ground of appeal is dismissed.

M/s K. Bhatia Corporation After having gone through the facts of the present case, judgment cited by both the parties as well as considering the orders passed by revenue authorities and submissions made by both the parties, we find that as per the submissions of the assessee, it was contented that a sum of Rs. 16 lakhs being advance payable to Mrs. Parekh on dissolution of the firm, has been taken over by one of the partners of the firm and hence, this ought to be treated as paid by the firm. It was also submitted that in view of the matter, the AO could not have made the impugned addition under section 68 of the Act and Ld. CIT(A) has sustained the addition u/s 41(1) of the Act without appreciating the fact that the same has not been allowed as a deduction in any of the earlier years and hence, the provisions of section 41(1) do not get triggered at all. Ld. AR also relied upon the judgment of Hon’ble Supreme Court in the case of CIT Vrs. Mahindra and Mahindra Ltd (2018) 93 taxmann.com32 (SC), wherein it was held as under:-

Section (iy), read with section 41(1) of the Income-tax Act, 1961 – Businessincome - Value of any benefit or perquisite, arising from business or exercise of M/s K. Bhatia Corporation profession (Waiver of loan) - Assessment year 1976-77 - Assessee had acquired certain tooling and equipments from KJC for which KJC agreed to provide loan to assessee, however, subsequently, another entity took over KJC and agreed to waive outstanding loan amount - Revenue claimed that waived amount represented income under section 28(iv) or alternatively, under section 41(1) - Assessee however, pointed out that sum waived could not be brought to tax as it represented waiver of a loan liability which was on capital account and, thus, was not in nature of income - Whether, for invoking provisions of section 28(iv), benefit received has to be in some form other than in shape of money and since waiver amount represented cash/money, provisions of section 28 (iv) were inapplicable - Held, yes - Whether further, for application of section 41(1), it is sine qua non that there should be an allowance or deduction claimed by assessee in respect of loss, expenditure or trading liability incurred, however, assessee had not claimed deduction under section 36(1)(iii) for interest on loan and loan was obtained for acquiring capital assets, hence, waiver was on account of liability other than trading liability and, thus, provisions of section 41(1) were inapplicable - Held, yes [Paras 13, 15, 16 and 17][ln favour of assessee] Ld. AR also relied upon the judgment of Hon’ble Bombay High Court in the case of CIT vrs. Xylon Holdings Pvt. Ltd. [2012] 26 taxmann.com 333 (Bom.), wherein it was held as under:- Section 41(1) of the Income -tax Act, 1961 - Remission or cessation of trading liability - Repayment of loan - Assessment year 2004-05 - Whether cessation of liability to repay a loan taken to purchase a capital asset does not result in revenue receipt and it is not taxable under section 41(1) - Heldyes [Para 8 & 9] [In favour of assessee] - Section 28(iv) of the Income-tax Act, 1961 - Business income - Value of benefit arising from exercise of business or profession - Whether cessation of liability to repay a loan taken to purchase a capital asset does not result in a revenue receipt and it is not taxable under section 28(iv) - Held, yes [Para 8 & 9] [In favour of assessee] Ld. AR also relied upon the judgment of Hon’ble Delhi9 High Court in the case of CIT vrs. Tosha International Ltd, [2009] 176 Taxmann 187 (Delhi),wherein it was held as under:-

M/s K. Bhatia Corporation Section 41(1), read with sections 2(24) and 28(iv), of the Income-tax Act, 1961 - Remission or cessation of trading liability - Assessment year 2001-02 - Assessee- company having incurred huge losses ultimately became a sick company and got registered with BIFR - Under one time settlement scheme, financial institutions and banks required assessee to pay 60 per cent of amount due towards principal and waived entire interest payment - Assessing Officer opined that since loans ceased to exist, it amounted to cessation of liability and, therefore, it had to be treated as income - Commissioner (Appeals), however, deleted addition by observing that remission of principal amount of loan did not amount to income under section 41 (1) nor under section 28(iv) nor under section 2(24) - On revenue's appeal, Tribunal opined that remission would become income under section 41(1) only if assesseeclaimed deduction in respect of expenditure or trading liability- In instant case, remission of principal amount of loan so obtained from bank and financial institutions had not been claimed as expenditure or trading liability in any of earlier previous year - So far as waiver of interest was concerned assessee-company had not claimed same as expenditure in computation of income filed before lower authorities - Accordingly, Tribunal confirmed order of Commissioner (Appeals) - Whether conclusions arrived at by Tribunal did not M/s K. Bhatia Corporation require any interference as same had been rendered on correct appreciation of law - Held, yes After having gone through the facts as well as legal proposition as mentioned above, we are of the view that from the perusal of section 41(1), it is clear that the following conditions must be fulfilled before section 41(1) of the Act could be held to be applicable. (i) In the assessment of an assessee, an allowance or deduction has been made in respect of any loss, expenditure or trading liability incurred by him. (ii)(a) Any amount is obtained in respect of such loss or expenditure, or (b) Any benefit is obtained in respect of such trading liability by way of remission or cessation thereof. (iii) Such amount or benefit is obtained by the assessee; and (iv) Such amount or benefit is obtained in a subsequent year.

In this case, the Ld. CIT(A) has sustained the addition u/s 41(1) of the I.T. Act without appreciating the fact that the above conditions have not been complied with before invoking the provisions of section 41(1) as the same has not been allowed as deduction in any of the earlier years and hence, the provisions of M/s K. Bhatia Corporation section 41(1) do not get triggered at all. In this respect, we draw strength from the judgment of jurisdictional High Court in the case of CIT Vrs. Chase Bright Steel Ltd (1989) 177 ITR 128. Keeping in view our above discussion, we direct the AO to delete the addition and thus this ground raised by the assessee stands allowed.

Ground No. 3 7. This ground is general in nature, thus requires no specific adjudication.