ARUN KUMAR GUPTA (HUF),NEW DELHI vs. ACIT, NEW DELHI

PER A.T. VARKEY, JUDICIAL MEMBER :

“1. On the facts and in law Ld. Commissioner of Income Tax (Appeals)- XXVIII, was not justified in dismissing appeal of the assessee.

2. On the facts and in circumstances of the case Ld. Commissioner of Income Tax (Appeals)-XXVIII, was not justified in confirming addition of Rs.47,650/- towards estimated interest on advances, made by the Assessing Officer.

3. On the facts and in law Ld. Commissioner of Income Tax (Appeals)- XXVIII, has erred in rejecting the claim of the appellant that the payment MCD amounting to Rs.4,67,950/-, towards registration, conversion and parking charges, was of revenue nature, therefore, allowable u/s 37(1) of the I.T. Act.

4. On the facts and in law Ld. Commissioner of Income Tax (Appeals)- XXVIII, was wrong to confirm the addition made by Assessing Officer for Rs.4,67,950/-, towards payment made to MCD and considered by him, in the nature of capital expenditure.

5. On the facts and in circumstances of the case Ld. Commissioner of Income Tax (Appeals)-XXVIII, has erred in confirming disallowance of Rs.23,404/-, being 1/5th of conveyance expenses, made by the Assessing Officer on estimated basis.

6. On the facts and circumstances of the case Ld. Commissioner of Income Tax (Appeals)-XXVIII, has erred in confirming disallowance of Rs.5,431/-being 1/5th of vehicle maintenance expenses, made by the Assessing Officer on estimated basis.

7. On the facts and circumstances of the case Ld. Commissioner of Income Tax (Appeals)-XXVIII, has erred in confirming disallowance of Rs.7,639/-being 1/5th of Telephone expenses made by the Assessing Officer on estimated basis.

8. The Appellant craves leave to add, alter, amend or forgo any of the grounds of appeal at the time of hearing.”

The assessee is engaged in the trading of various kinds of Iron & Steel works under the name M/s. Shyam Sunder Arun Kumar. The return of income was filed by the assessee on 12.09.2008 declaring total income of Rs.16,14,980/-.

The case was taken up for scrutiny after CCIT approval. A notice u/s 143 (2) of the Income Tax Act, 1961 (hereinafter ‘the Act’) was issued on 25.09.2009.

Detailed questionnaire along with notice u/s 142 (1) was issued on 10.05.2010.

The AO completed the assessment by making several disallowances amounting to Rs.5,17,380/- and completed the assessment on total income of Rs.21,32,360.

In appeal, the order of the AO was confirmed by the ld. CIT (A). Now, the assessee, being aggrieved, is in appeal before us.

(i) Shri Nitasha Gupta Rs.1,00,000/- (ii) Smt. Sunita Gupta Rs.2,15,000/- (iii) Smt. Anita Gupta Rs. 82,078/- Total : Rs.3,97,078/- The AO observed that no interest had been received on these advances and all these persons were family members, viz., Smt. Anita Gupta is wife of Shri Arun Gupta. The AO noted that Shri Arun Gupta is Co-parcener of Arun Kumar Gupta (HUF) who is the proprietor of M/s. Shyam Sunder Arun Kumar and Smt. Sunita Gupta is wife of Shri Alok Gupta, who is the nephew of Shri Arun Gupta and Shri Nitasha Gupta is also a relative and there was no business connection for giving above mentioned loans to relatives. The AO further pointed out that the counsel of the assessee also agreed that there was no business connection for these advances and this fact had been noted in order sheet entry dated 07.12.2010. The AO observed that the firm, M/s. Shyam Sunder Arun Kumar, had not received any interest on these advances given to the aforesaid relatives but the firm was paying interest to the tune of Rs.10,09,156/- to the Bank and on unsecured loan taken. Therefore, the AO held that interest @ 12% on the interest free advances given for non-business purpose came to Rs.47,650/- and he, accordingly, added this amount to the total income of the assessee. The AO relied on certain judicial pronouncements for making the aforesaid decision. The ld. CIT (A) confirmed the addition by observing as under:-

“ I have gone through the assessment order and written submission of the appellant. The Assessing Officer has contended that firm Shyam Sunder Arun Kumar is not receiving any interest on these advances given but firm is paying interest to the tune of Rs.10,09,156/- to the Bank on unsecured loan taken. Therefore that amount of interest which should have been received on loan/ advances given is being disallowed u/s 36( l)(iii) from the total interest debited to the P&L A/c. Interest at the rate of 12% on the interest free advances given for non-business purpose comes to Rs.47,650/ -. This amount of interest was disallowed from the total interest claim of Rs.10,09,156/- and added back to the total income of the assessee by the Assessing Officer. He has placed reliance on these case laws, CIT Vs. Abhishek Industries Ltd. 286 ITR 001 and Elmer Havell Electricals Vs. CIT, 227 ITR 549, S.A. Builders Ltd. V. CIT (2004) 269 ITR 535. I agree with the contention of the Assessing Officer, he has rightly disallowed interest amounting to Rs.47650/-, I sustain the addition. Appeal on this ground is dismissed.”

were brought forward balance and in earlier year, no such disallowance of interest was made. He has made reliance on the judgments made before the ld. CIT (A) to distinguish the judgment quoted by the AO in his order. He, therefore, pleaded that this disallowance be deleted and the ground be allowed.

In reply to the said show cause notice, the assessee filed the submissions which were considered by the AO. The AO observed that these charges were paid as

per the MCD Notification published in the newspaper in pursuance of the decision of the Hon'ble Supreme Court of India in case of MC Mehta v. UOI & others CWP No. 4677/1985; and as per the said Notification, if related documents/affidavits/payments were not made, shops would be sealed. The AO was of the opinion that since the assessee violated the Municipal Corporation Laws, therefore, assessee had to pay these charges/payments. He further opined that had these charges been not paid, shops of the assessee would have been sealed because shops were not following municipal laws. He, therefore, held

that since these charges had been paid for violation of law, it could not be allowed as per Explanation to Section 37(1) of the Act and accordingly, disallowed Rs.4,67,950/- and added the same to the total income of the assessee.

The ld. CIT (A) confirmed the addition by observing as under :-

“I have gone through the assessment order and written submission of the appellant. I have also perused and considered the case laws cited by the appellant. During the year under consideration M/ s Shyam Sunder Arun Kumar has paid Rs.244740/- and Rs.233210/- to Municipal Corporation of Delhi against parking charges, registration charges and conversion charges. The payments were made in view of MCD’s notification published on dated 05.09.2006, in the news papers based on judgment of Hon'ble Supreme Court. These charges were paid in pursuant of a notification in published in the news paper as submitted by the assessee. Notification said that it is in pursuant of the decision of the Hon'ble Supreme Court of India in case of MC Mehta v. UOI & others CWP No. 4677/1985. As per notification if related documents/affidavits/payments are not made, shops would be sealed. The appellant violated the Municipal Corporation Laws and therefore was made to pay these charges. Had these charges not been paid, shops would have been sealed. As these charges have been paid for violation of law, it cannot be allowed as per Explanation to Section 37 (1) of the AI Act, 1961. Therefore the Assessing Officer disallowed this amount of Rs.4,67,950/-. The Assessing Officer further distinguished the case laws cited by the appellant. Facts of these cases are different from the present case. In the case of CIT v. K.K. Industries Pvt. Ltd.- (1980) 125 ITR 0218, municipal taxes paid on the Land was allowed in pre-construction period. But in the present case, first, assessee has paid conversion, parking & registration charges and not municipal taxes. Secondly, in the case referred by the assessee, no building was constructed on the said land. But in the present case, there is already a shop for which if conversion charges are not paid, shop would be sealed. Thirdly, in the case referred by the assessee, there was no violation of law. But in the present case, there is violation of municipal laws and direction from Hon'ble Supreme Court came to make the payments. So facts of the present case are different from the case quoted by the appellant. In the case of CIT v. Suri Sons (1989) 177 ITR 0406, a plot of land was purchased to construct a building and municipal taxes paid on the land, were claimed as revenue expenditure. But in the present case no land was purchased to construct any building. In the quoted case, municipal taxes has been paid on land. But in the present case, payment has been made for shop. Therefore facts of the quoted case are different from the present case. The appellant has further placed reliance on Full Bench judgment by Hon'ble Delhi High Court, in the case of Airport Authority of India Vs CIT (Delhi). I have considered the submission of the appellant in this regard. The facts of the Airport Authority of India. The Assessing Officer disallowed the charges paid to MCD and claimed as revenue expenditure. The Assessing Officer further gave a finding that payments of these expenses resulted in the benefits of enduring and lasting nature. As such no new asset was created but payment of these charges has made possible the use of the shop. Though no specific parking space has been allotted but payment of these charges has made possible that appellant can use space outside its shop for parking. In view of the findings of the Assessing Officer and facts of the case these charges to MCD are capital expenditure. The Assessing Officer has rightly capitalized Rs.467950/- and added back to the block of building and allowed depreciation as per law. I sustain the action of the Assessing Officer. Appeal on these grounds is dismissed.”

He submitted that from these documents, it could be appreciated that by paying these charges, no new asset of enduring benefit had been created and these charges were levied by the MCD on all the such businesses as per their policy decision. He further submitted that by paying parking charges, MCD had not allotted any specific parking space to the assessee and no asset had been created. He submitted that therefore, the expenses were incurred mandatorily in bonafide business interest and were in the nature of revenue expenses and should be allowed as such to the assessee. In this regard, he submitted that the charges paid to MCD should not be treated as capital expenditure since they have not been paid for acquisition of any business asset but for retention of the same, and therefore, it would be allowable as business expenditure u/s 37 of the Act and in this regard, he relied on the judgment of Hon’ble Calcutta and Punjab & Haryana High Courts in the case of CIT vs. J.K. Industries Pvt. Ltd. – 125 ITR 218 and CIT vs. Suri Sons – 177 ITR 405, which were also relied before the lower authorities. Ld. AR further drew our attention to a recent Full Bench judgment by Hon'ble jurisdictional High Court in the case of Airport Authority of India Vs CIT (Delhi), which was also relied upon before the ld. CIT (A). He submitted that the Hon’ble High Court has considered the question as to whether the expenditure is incurred for initiating the business or for removing an obstruction to facilitate an existing business, is capital or revenue In nature and has held that 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 revenue nature even though the advantage obtained may last for an indefinite period. He submitted that in this case, assessee paid certain amount for removing encroachments on the land belonging to it and he payments were considered by revenue authorities as capital in nature, however, Hon’ble High Court (Full Bench) has reversed its earlier judgment of Division Bench and considered the expenditure as revenue in nature. He submitted that the ld. CIT (A) has not appreciated the facts of the aforesaid judgment and not relied on this judgment by observing that the facts of the present case are different and distinguishable from the aforesaid case of Hon’ble jurisdictional High Court.

He, therefore, pleaded that this disallowance be deleted and the ground be allowed.

Shyam Sunder Arun Kumar remitted Rs.2,44,740/- and Rs.2,23,210/- to Municipal Corporation of Delhi against parking charges, registration charges and conversion charges. The payments were made in view of MCD’s Notification published on 05.09.2006 in the newspapers pursuant to the judgment of Hon’ble Supreme Court in the case of MC. Mehta vs. UOI & Ors.

In CWP No.4677 / 1985. As per the Notification, if related documents/affidavits/payments were not made, then shops would be sealed.

According to the AO, the aforesaid payments were made because the assessee

Municipal Corporation Laws and, therefore, these payments were paid for violation of law, so he disallowed the said expenditure as per Explanation to Section 37(1) of the Act and did not accept the claim of the assessee that it was a revenue expenditure and held it to be a capital expenditure and capitalized the amount of Rs.4,67,950/- and allowed the depreciation on it.

The ld. CIT (A) concurred with the view of the AO. We find that similar issue was decided by the ITAT, ‘C’ Bench, New Delhi in the case of DCIT vs. Haldiram Products Ltd. in order dated 08.02.2013 for AY 2008-09 wherein the ITAT considered the Hon’ble jurisdictional High Court decision in the case of CIT vs. J.K. Synthetics Ltd. (2009) 309 ITR 371 (Delhi) as well as the judgment of the Hon’ble Supreme Court in the case of Bikaner Gypsums Ltd. vs. CIT (1991) 187 ITR 39 (SC) and in para 10 held as follows :-

“10. In the present case, the assessee had paid amounts for one time conversion charges and for parking charges at the two outlets, the benefits of which might accrue to the assessee for indefinite period of time yet these were incurred to enable the profit making structures to work more efficiently leaving the source or the profit making structure untouched and moreover, the expenditure were in the nature of levies/taxes paid by an assessee to a government authority for making available the required infrastructure to run the business efficiently and effectively. Therefore, on the facts and circumstances of the case and following Judicial pronouncements, we do not find infirmity in the order of Ld. CIT (A). We are of the considered opinion that Ld. CIT (A) had rightly deleted the additions.”

The Tribunal had held that the onetime conversion charge and parking charges paid to MCD are allowable as revenue expenses. We find force in the contention of the assessee that payment of conversion charges to MCD does not result in creation of a new asset. Respectfully following the coordinate Bench view in a similar case, we allow the claim of the assessee that the expenditure to be treated as revenue expenditure and must be allowed. We order accordingly. 15. Grounds No.5, 6 & 7 are against the ad hoc disallowance in respect of conveyance, vehicle maintenance expenses and telephone expenses respectively. Taking into consideration smallness of the amount involved in the issues, the ld. AR did not press these grounds. So, we dismiss these grounds as not pressed. 16. In the result, the appeal of the assessee is partly allowed.

Order pronounced in open court on this day of 22nd December, 2015.