BENGAL SHELTER HOUSING DEVELOPMENT LIMITED.,KOLKATA vs. J.C.I.T (OSD) CIR - 8,KOLKATA., KOLKATA

The assessee is a company. It is engaged in the business of development, execution of real estate projects along with township and infrastructural development works in urban as well as rural areas of West Bengal. The assessee is a joint sector company promoted by West Bengal Housing Board (WBHB) and M/s. Shelter Projects Ltd. WBHB and M/s. Shelter Projects Ltd hold 50% each of the paid-up capital of the assessee.

During the previous year the authorised share capital of the assessee was increased from Rs.5 crore to Rs.55 crore . The assessee paid a sum of Rs.25,00,000/-to the Registrar of companies (ROC) as fees for increase in the authorised share capital. The amount so paid was claimed as revenue expenditure and deductible while computing the income under the head income from business.

We have given careful consideration to the rival submissions. As far as the question whether the expenditure in question is capital or revenue, the issue is no longer res integra and has been finally concluded by the Hon’ble Supreme Court in the cases referred to by the AO. As far as the question of allowing deduction of the expenses in question u/s 35D of the Act is concerned, the list of expenses allowable for deduction u/s 35D(1) of the Act are set out in section 35D (2) of the Act. The list of expenses set out in section 35D(2) of the Act does not include fees paid to ROC for increase in the authorised share capital. Under section 35(2)(c)(iv) of the Act expenses in connection with the issue of shares to the public is allowable as deduction. Admittedly in this case there was no public issue of shares and therefore the expenses in question does not fall within the ambit of aforesaid clause. We are therefore of the view that order of CIT(A) on this issue does not call for any interference. Accordingly ground no.1 raised by the assessee is dismissed.

Ground No.2 raised by the assessee reads as follows :- “2. That the learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of Rs.3,81 ,851 being expenditure incurred during the year but related to prior period.”

In the course of assessment proceedings the AO observed that the assessee in arriving at its income from business claimed a sum of Rs.3,81,851/- which was prior period expenses. The details of prior period expenses are given in page-2 of the assessee’s paper book. The same has been given as Annexure to this order. The AO was of the view that the assessee follows mercantile system of accounting and therefore the expenditure relatable to the previous year relevant to A.Y.2009-10 alone can be allowed as deduction. He therefore disallowed the claim of the assessee for deduction of prior period expenses.

Before CIT(A) the assessee submitted that the expenses though related to prior period had crystallised as liability only during the previous year. It was the plea of the assessee that the bills and other details in respect of the aforesaid expenses were Bengal Shelter Housing Development Limited A.Y.2009-10 4 received during the previous year and therefore the liability in question had crystallised to the assessee only during the previous year. The CIT(A) however was of the view that the reasons advanced by the assessee were not convincing and therefore the prior period expenses cannot be allowed as deduction.

Before us the ld.counsel for the assessee reiterated the submissions made before CIT(A). He drew our attention to one of the items of the expenses given as annexure to this order namely ‘Maintenance Expenses’ of Rs.1,21,817/- which was a sum paid to M/s. Tenacity Security who had raised the bill only on 04.04.2008. Though the security charges were for the month of March, 2008, since the bill was raised for security charges in the month of April, 2008 the sum in question was booked in the previous year relevant to A.Y.2009-10. The ld. Counsel for the assessee placed reliance on the decision of the Hon’ble Delhi High Court in the case of CIT vs. Modipan Ltd. 334 ITR 102 (Delhi) wherein it was held that where expenses are not booked due to non receipt of details, information, it was beyond the control of the assessee. In such circumstances the expenses could be booked in the year in which bills or information and details are received. The ld.DR relied on the order of CIT(A).

We have given a very careful consideration to the rival submissions. Ordinarily under the mercantile system of accounting, which is the system of accounting followed by the assessee in the present case, only expenses which have accrued or arisen to the assessed during the relevant previous year will be allowed as deduction. In the present case the claim of the assessee was that the expenses given in the chart annexed to this order, though they are related to the previous year prior to the previous year relevant to A.Y.2009-10, those bills or details regarding these expenses were received by the assessee only during the previous year and therefore the point of accrual of liability in so far as the assessee is concerned was the previous year relevant to A.Y.2009-10. The assessee has further demonstrated his case by showing us the bill which is at page 3 of the assessee’s paper book evidencing the maintenance charges paid as security charges. The said maintenance expenses relate to March, 2008 for Bengal Shelter Housing Development Limited A.Y.2009-10 5 which a bill dated 04.04.2008 was received by the assessee only in the month of April, 2008 and was booked as expenses pertaining to A.Y.2009-10. It has been claimed by the assessee that all the other expenses given in the annexure are of similar nature. Keeping in view the submissions of the ld. Counsel for the assessee and also the ratio laid down by the Hon’ble Delhi High Court in the case of CIT vs Modipan Ltd. (supra), we are of the view that expenses in question accrued or arose as liability to the assessee only during the previous year relevant to A.Y.2009-10. The claim of the assessee for deduction of the aforesaid sum deserves to be accepted. Accordingly ground no.2 raised by the assessee is allowed.

Ground nos. 3 to 7 raised by the assessee read as follows :-

That the conclusion drawn by the learned Commissioner of Income Tax (Appeals), that the Appellant had transferred all its rights in respect of 15% share in College Street Market Complex to its subsidiary M/s Barnaparichay Book Mall Pvt. Ltd., during the financial year relevant to the Assessment Year 2009-10 for RS.63,12,00,000 and therefore the whole of such amount is liable to tax, is against facts on record and therefore perverse.

As we have already seen that the assessee carries on business of development and execution of real estate projects. Kolkata Municipal Corporation a statutory body established and governed under the Kolkata Municipal Corporation Act, 1980 hereinafter referred to as “KMC” owns a municipal market at College street, popularly known as “college street market”. KMC wanted to improve the college street market as a comprehensive market complex with all necessary infrastructural amenities with the object of providing both domestic and international book publishers and book sellers space and other allied infrastructure. KMC also wanted to rehabilitate the existing licencees in the college street market. KMC had limited resources and therefore approached the assessee for carrying out development after demolishing of the existing college street market. The terms of the agreement between KMC and the assessee are contained in an agreement dated 24.02.2006, a copy of which is placed at pages 4 to 25 of the assessee’s paper book. As per the agreement the assessee was engaged as a developer for development of a comprehensive market complex. The assessee had to pay a sum of Rs.2 crores as premium and was also to pay Rs.36 lakhs for meeting the cost of arranging alternative accommodation for KMC labourers who lived in college street market premises. The important terms and conditions relevant for the present appeal are clause-4 of the agreement which provides that after development of the new comprehensive market complex by the assessee, 70% of the built up area will be reserved for the assessee and 30% of the build up area will be allotted to KMC to enable KMC to locate the existing licencees and the stall holders of the college street market. 70% of the built up area to be allotted to the assessee was only a lease hold right of the built up area. The assesse however had the right to deal with the lease hold rights in any manner it deems fit. The agreement dated 24.02.2006 was followed by another supplementary agreement dated 12.06.2006 between the assessee and KMC.

In pursuance of the aforesaid agreement with KMC, the assessee demolished the old structure after making suitable arrangements for shifting the existing occupants to the temporary accommodation. The assessee also made a final survey and prepared Bengal Shelter Housing Development Limited A.Y.2009-10 7 the building plan which was duly sanctioned by KMC. As per the terms of the agreement, the assessee could either carry out the development work itself or could appoint a contractor to carry out the development work. There was another subsidiary company of the assessee by name Square Feet Furnishers Pvt. Ltd. (SFFPL) which was later named as M/s. Barnaparichay BookMall Private Limited (BBMPL). The assessee decided to carry out the development of college street market through BBMPL and accordingly agreement dated 06.03.2008 was entered into between the assessee and BBMPL/SFFPL. As per the terms of this agreement, SFFPL/BBMPL agreed to develop the college street market at its cost and do all the civil works as per the specifications and drawings given by the assessee. Clause 3 to 7 of the aforesaid agreement provides that SFFPL will be entitled to deal with 70% share of leasehold right over the built up area in the new market to be constructed. These clauses read as follows:

SFFPL shall be. entitled to raise necessary finance for development of comprehensive Market Complex in whatsoever manner, including finance from the authorized financial institution, Banks, Corporate of the land by houses or such other bodies for development construction/development of the comprehensive Market, Complex as per terms of the Development Agreement and Supplemental Agreement made between Kolkata Municipal Corporation and BSHDL .without however creating any financial liability for the Kolkata Municipal Corporation.

SFFPL shall also be entitled to enter into agreements, including sub-lease, under- lease, assignment of lease in respect of built up space containing such provisions and with such Purchasers and/.or other persons as provided for in the said Development Agreement and to receive payment moneys and/or part and on full Bengal Shelter Housing Development Limited A.Y.2009-10 8

There was another supplementary agreement dated 31.03.2009 between the assessee and SFFPL/BBMPL. This agreement refers to the earlier agreement dated 6.3.2008 and further states that subsequent to the agreement dated 6.3.2008 the Assessee had decided to relinquish 1,23,600 Sq.ft. out its 70% share of leasehold rights in the built up area in the new market to be constructed in favour of SFFPL/BBMPL for a consideration of Rs.63,12,00,000. SFFPL/BBMPL paid a sum of Rs.57,16,68,000 to the Assessee. This agreement contains a schedule which identifies the location of the built up area to be allotted to SFFPL/BBMPL and its value and the same is as follows :- SCHEDULE OF ALLOCATION Block Floors Built up area Rate per sqft Total (Rs.) 2nd 25,000 5500 137,500,000 3rd 25,000 5500 137,500,000 4th A 25,000 5250 131,250,000 5th 25,000 4750 118,750,000 6th & 7th 23,600 4500 106,200,000 123,600 631,200,000 By a letter dated 31.03.2009 SFFPL/BBMPL specifically agreed that the area that has to be allotted to it will be so allotted only on completion of the bare construction and in respect of portions referred to above which remains incomplete, such area will be transferred only in the year of completion of construction.

It is not in dispute that during the previous year bare construction was completed only in respect of 2nd floors of the new market complex of 25,000/- sq.ft., the value of the same was Rs.18,69,15,000. We have already seen that the total value of the built up area that SFFPL/BBMPL has to get a sum of Rs.63,12,00,000/-. We have already seen that SFFPL has paid an advance of a sum of Rs.57,16,68,000. We have already seen that the value of the construction portion as on the last date of the previous year relevant to A.Y.2009-10 was Rs.18,,69,15,000/-.

The assessee in its books of account recognised income only to the tune of Rs.18,69,15,000/-. The assessee had shown a sum of Rs.57,16,16800 as advance. The difference between the amount of income recognised when the books of accounts and the advance taken from FFPL namely Rs.38,37,53,000/- (57166800 – 8869,15,000) was shown in the current liabilities in the balance sheet i.e. as advance against development rights. It is the case of the assessee that it is only after completion of the construction by SFFPL that income would accrue to the assessee and therefore the income to the extent of construction that was complete of the value of Rs.18,69,15,000/- alone was recognised as income. The case of AO however was that on signing of the agreement between the assessee and SFFPL, income to the tune of Rs. 63,12,00,000 accrues to the assessee and that had to be brought to tax. The AO in brining the sum of Rs.44,42,85,000/- to tax (63,12,00,000 – 18,69,15,000) was of the view that by the agreement dated 31.3.2008, transfer of leasehold right in an area of 1.23,600 Sq.ft. was complete and therefore entire income of Rs.63.23.00,000/- accrued to the Assessee. According to the AO the contingencies mentioned in the agreement dated 31.3.2008 cannot defer the accrual of income. He held that the transfer of rights cannot be linked to the stage of completion of development works carried on by BBMPL. He therefore held that the assessee was not correct in recognizing its income on transfer of lease rights transfer in proportion to the stage of completion of development works by BBMPL. The AO accordingly held that the entire sum of Rs.63,12,00,000/- has to be assessed as business income of the assessee for the current assessment year. Since the assessee has credited the P&L account by a sum of Rs.18,69,15,000/-, the balance sum of Rs.44,42,85,000/- was added back as business income of the assessee.

On appeal by the Assessee, the CIT(A) concurred with the view of the AO. The CIT(A) in upholding the order of the AO and came to the following conclusion :- “1. The arguments on behalf of the Assessee that profit/income in lieu of transfer of 15% of the leasehold rights to its subsidiary company, the BBMPL is assessable in its hands on project completion method cannot be accepted because what is transferred is not the right to share profit, but the leasehold rights vested in the Assessee.

The following were the final conclusion of the CIT(A):

We have heard the submissions of the ld. Counsel for the assessee and the ld. DR. The ld. Counsel for the assessee submitted that the Assessee does not dispute assessment of the sum of Rs.18,69,15,000 in the assessment year 2009-10. However, the assessee company disputes the addition of the balance sum of Rs.44,42,85,000 (Rs,63,12,00,000 - Rs.18,69, 15,000). It was his submission that the Assessee received a sum of Rs.57,16,68,000 from BBMPL and after recognising a sum of RS.18,69,15,000/- as income of the previous year, the balance amount of Rs.38,47,53,000 (Rs.57,16,68,000 – 18,69,15,000) was shown as advance against the leasehold right appearing at Schedule 12 being details of Current liabilities & Provisions at Page 63 of the Paper Book. Similarly, BBMPL also capitalized the said sum of Rs.18,69,15,000 in the financial year 2008-09 corresponding to the Assessment Year 2009-10. The audited accounts are at pages 78 to 94 of PB. The balance amount of 3,847.53 lacs was treated as advance against purchase of development rights. Our attention was drawn to Note No. 2(c) at Page 89 of the paper Book and also Schedule 6 (Details of Loans and Advances) appearing at Page 85 of the paper Book. It was submitted that in accordance with the agreement dated 31.3.2008, Assessee booked income from transfer of leasehold rights to BBMPL from year to year on completion of the bare construction of the agreed area as specified in schedule annexed to the agreement. Our attention was brought to the fact that income in the subsequent years on completion of bare construction was declared by the Assessee as follows: 31st March, 2010 Rs. 2,97,52,500 - page 105 of PB 31st March, 2011 Rs.13,09,40,000 - Page 148 of PB Our attention was drawn to the fact that M/s BBMPL also capitalized the aforesaid amount in their Balance Sheet as detailed herein below. 31st March, 2010 Rs. 2,97,52,500 - page 130 of PB 31st March, 2011 Rs.13,09,40,000 - Page 169 of PB In view of the aforesaid facts, it was submitted that income accrued to the assessee only when the respective right were transferred. It was argued that the agreement clearly spelt that the leasehold right would be transferred on bare completion of the Bengal Shelter Housing Development Limited A.Y.2009-10 12 area specified in the agreement. It is also a fact that the whole of the construction was not completed in the first year itself. There is no dispute about it. The Assessee has correctly shown the income in respect of the area for which BBMPL completed the bare construction as agreed upon and the leasehold rights therein transferred. The area for which construction remained to be completed could not be transferred unless the same is in existence. In these circumstances, it was submitted that the Assessee had declared that part of income in the respective years in which the bare construction of the area was completed by BBMPL. It was submitted that the Assessee gets title to lease hold rights only on completion of construction of the new market and therefore it cannot give something which it does not have. It was argued that the maxim "Nemo dat quod non habet" which means - no one can transfer something which he does not possess, will be applicable in the present case. Income would accrue to the assessee only with reference to consideration of the area for which the actual transfer was effected of the value of Rs.18,69,15,000 only and not Rs.63,12,00,000 for the whole area to be constructed in five years as alleged by AO. It was submitted that the following amounts being part of the sum of Rs.44,42,85,000 (Rs.63,12,00,000 - Rs.18,69,15,000) has already been offered to tax by the Assessee as its income accrued to it in the following years, when the respective rights were transferred on completion of the work as agreed, and has been taxed accordingly. 31st March, 2010 Rs. 2,97,52,500 - page 105 of PB 31st March, 2011 Rs.13,09,40,000 - Page 148 of PB M/s BBMPL also capitalized the aforesaid amounts in their Balance Sheet as detailed herein below. 31st March, 2010 Rs. 2,97,52,500 - page 130 of PB 31st March, 2011 Rs.13,09,40,000 - Page 169 of PB It was argued that the assessment of the aforesaid sums have been accepted by the AO to be taxed in respective assessment years. In these facts and circumstances of the case it was submitted that the addition of Rs.44,25,00,000 should be directed to be deleted. The ld. DR relied on the order of CIT(A).

We have given a very careful consideration to the rival submissions. The Assessee under an Agreement dated 24.2.2006 read with supplementary Agreement dated 12.6.2006 with KMC agreed to carry out development of a comprehensive new market in place of the old market known as “College Street Market”, after demolition of the existing old structure. The Assessee was to bear all the cost of carrying out the construction, development etc. The Assessee was entitled to leasehold rights in respect of 70% of the built up area of the new construction and KMC was entitled to 30% of the built up area of newly constructed market.

The Assessee by an agreement dated 6.3.2008 entered into with SFFPL/BBMPL assigned all its rights and obligations under the Agreement with KMC to and in favour of SFFPL/BBMPL. We have already set out the terms of this agreement in the earlier part of this order. A reading of this agreement shows that the Assessee had completely assigned all its rights and obligations under the Agreement with KMC in favour of SFFPL/BBMPL. The Assessee received a sum of Rs.57,16,68,000 from SFFPL/BBMPL. This receipt is not acknowledged in this agreement. KMC is not a party to this agreement between the Assessee and SFFPL/BBMPL. Subsequenlty there was another agreement dated 31.3.2008. This agreement refers to the earlier agreement dated 6.3.2008 and further states that subsequent to the agreement dated 6.3.2008 the Assessee had decided to relinquish 1,23,600 Sq.ft. out its 70% share of leasehold rights in the built up area in the new market to be constructed in favour of SFFPL/BBMPL for a consideration of Rs.63,12,00,000. SFFPL/BBMPL paid a sum of Rs.57,16,68,000 to the Assessee. This agreement contains a schedule which identifies the location of the built up area to be allotted to SFFPL/BBMPL and its value. As we have already observed when the entire rights and obligations of the Assessee under the Agreement with KMC is assigned under the Agreement dated 6.3.2008 there was no necessity for the Agreement dated 31.3.2008. The revenue has however proceeded on the basis of the terms of the Agreement dated 31.3.2008 and therefore, we shall confine ourselves to the question whether income to the tune of Rs. Bengal Shelter Housing Development Limited A.Y.2009-10 14 63,12,00,000 accrued to the assessee and that had to be brought to tax in the relevant AY.

By a letter dated 31.03.2009 between the Assessee and SFFPL/BBMPL it was specifically mentioned after referring to the agreement dated 31.3.2009 that the area that has to be allotted to it will be so allotted only on completion of the bare construction and in respect of portions which remains incomplete, such area will be transferred only in the year of completion of construction. This letter is the basis on which the Assessee claims that accrual of income will be based on the completion of structure which is referred to as “Bare construction” in the said letter.

There is no dispute before us that the income in question is to be assessed under the head income from business. U/s.145 of the Act, income from business is computed in accordance with the regular method of accounting followed by the Assessee which could be either cash or mercantile system of accounting. The Assessee in the present case follows mercantile system of accounting. In mercantile accounting system, transactions are recorded on accrual basis, i.e., amount paid and payable or received or receivable in business for a period are recorded. The question is whether the sum of Rs.44,42,85,000/- can be considered as having accrued to the Assessee.

Under the mercantile system of accounting there would be an accrual of the entire consideration agreed between the parties viz., Rs.63,12,00,000/- as on 31.3.2009.. In fact the Assessee agrees that there has been accrual of income to the extent of Rs.18,69,15,000/-. The reason for considering the remaining sum of Rs.44,42,85,000 as income not accrued is due to the non completion of the built up area by BBMPL. The Assessee seeks to rely on the fact that as per the agreement the built up area allotted to BBMPL will be subject to the completion of construction by BBMPL of the said area and therefore till construction is completed, there cannot be accrual of income in the hands of the Assessee. In this regard, we are of the view that transfer of Bengal Shelter Housing Development Limited A.Y.2009-10 15 leasehold rights and vesting of legal title in favour of BBMPL will not decide the accrual of income in the hands of the Assessee. In other words the entire sum of Rs.63,12,00,000 should be deemed to have accrued or arisen to the Assessee on 31.3.2009 when the Agreement was signed between the Assessee and BBMPL. In this regard it is also pertinent to note that the Assessee received a sum of Rs.57,16,68,000 out of the agreed value of Rs.63,12,00,000 during the previous year. This again goes to show that completion of construction was not a condition precedent for payment of consideration by BBMPL to the Assessee in respect of the built up area the lease hold rights of which was to be allotted to BBMPL. We are also of the view that the parties by an agreement cannot alter the time of accrual of income under the mercantile system of accounting. Income under the mercantile system will accrue and arise when the right to receive the sum in question is determined. Such right to receive the sum in question and its accrual under the mercantile system cannot get postponed by agreement between the parties. The argument that the Assessee followed percentage completion method or completion contract method of Accounting, is again not acceptable, because the income in question, in so far as the Assessee is concerned, does not arise from execution of any construction contract by it. It arises out of the Assessee’s action of trading the built up space which it was to get by virtue of its agreement for building new market with KMC.

The argument that even BBMPL recognised income only on the basis of completion of construction, is again irrelevant when it comes to determining income of the Assessee. The fact that the Assessee was offering to tax income as and when bare construction was completed is again not relevant. It was argued by the learned counsel for the Assessee that the revenue has taxed income offered in the subsequent years by the Assessee and taxing the same income in the present AY would amount to double taxation of the same income. We are of the view that these factors cannot decide the accrual of income in the hands of the Assessee. If there is double taxation of the same income then it is for the Assessee to work out its rights in a manner known to law.

For the reasons given above, we find no merits in Grds. 3 to 7 raised by the Assessee and accordingly dismiss the same.

In the result, appeal by the Assessee is partly allowed.