TMI Blog2005 (1) TMI 605X X X X Extracts X X X X X X X X Extracts X X X X ..... on lease by the Appellant. 1.2 Without prejudice, since Learned CIT(A) has held that notional income from trucks had accrued. She ought to have allowed depreciation on the trucks. 2.1 The Learned CIT(A) erred in not adjudicating the ground regarding the disallowance to depreciation, which was specifically raised before him. 2.2 It is submitted that in the facts and the circumstances of the case, and in law, no such disallowance was called for. 3.1 The Learned CIT(A) erred in not allowing the claim of Appellant for deduction of an amount of Rs. 9,87,32,500 for repair of damages caused to the Hotel on account of bomb blast. 3.2 It is submitted that in the facts and the circumstances of the case, and in law, the disallowance was allowable while computing total income of the Appellant. 4.1 The Learned CIT(A) erred in not adjudicating the ground regarding addition of Rs. 92,27,566 made by the Assessing Officer on account of license fees receivable from ITC. 4.2 It is submitted that in the facts and the circumstances of the case, and in law, no such addition was called for." 2. We have gone through the application for admission of additional grounds. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntering into agreement/arrangement with others to run hotels. The assessee owned a hotel at Bandra known as Hotel Sea Rock. After running the hotel for some time the assessee entered into an agreement with M/s. ITC in the year 1986, by which the entire running of hotel was entrusted to M/s. ITC and in lieu of that the assessee was paid annual license fees, which was office [ sic. -offered] for taxation. In the year 1993, there occurred a bomb blast (12-3-1993). The hotel was damaged especially the 18th floor was severely damaged which required extensive repair. The assessee got the evaluation of the cost of repair by architects and engineers. The cost was evaluated at Rs. 14,87,32,500. The assessee made insurance claim of Rs. 5 crores and the balance amount of Rs. 9,87,32,500 was claimed as deduction being the cost of repair in the return for assessment year 1993-94. The assessee was filed return of income on 27-12-1993 declaring a loss of Rs. 5,76,13,739. The same was revised to loss of Rs. 5,81,89,890. The Assessing Officer completed the assessment on 27-12-1995 under section 143(3) and assessed the total taxable income at Rs. 4,33,19,342. The computation of total income is repro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the order the assessee is before us with the above grounds. 5. Ground No. 1 Coming to the first ground, the learned AR vehemently objected to the direction of the learned CIT(A) to bring to tax the hire charges and late fee charges in respect of trucks given on lease by the assessee. It was submitted that the assessee had given certain trucks on lease to various parties. The lease rental income was being offered to tax on regular basis in the past and correspondingly depreciation being claimed on the leased trucks was also allowed in the past. Subsequently, serious disputes arose between the assessee and the lessee which led to filing of suites in the courts of law. Under the circumstances, the lessee stopped paying the rent and they did not return the trucks as well. Due to this reason the assessee did not offer any lease rental income in its return. However, since the assets continued to remain employed in leasing business, the assessee continued to claim depreciation on the said leased trucks amounting to Rs. 14,48,353. It is submitted that when the original assessment was completed the Assessing Officer did not tax such hypothetical income. It is submitted that when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 36 (MP) Surrendra Overseas Ltd. v. CIT [1979] 120 ITR 872 (Cal.) ITO v. V.S. Chabbra [1986] 25 TTJ (Bom.) 101 7. On the other land, the learned Departmental Representative relied on the order of the CIT(A). According to him income had accrued as per the terms of agreement and, therefore, it was liable to be included in the total income of the assessee. 8. We have considered the submissions from both the sides. We have also carefully perused the orders of the authorities below. In our opinion the assessee succeeds on this preliminary ground itself, that is the issue regarding the jurisdiction to tax such income in second round of appeal. A bare perusal of the direction given by the CIT(A) in the first round makes it clear that what was set aside by the CIT(A) was only the issue regarding the claim of depreciation and that too with categorical direction to confine his verification only on particular issue i.e., ownership issue. The relevant portion is reproduced below : "Needless to say that the Assessing Officer once again would call for all details of court proceedings and determine whether appellant company is actually satisfying the condition of ownership ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee. This was in addition to the copies of lease agreements filed before the Assessing Officer. The learned CIT(A) has mentioned this fact in his order at para 3.2. After recording this fact, he abruptly stopped the discussion on this issue and has not brought the issue to any logical conclusion either way. After mentioning the fact of ownership, the learned CIT(A) has take up the issue of hire charges and late fees income. It is submitted that the assessee has proved the test of ownership in terms of specific directions given by the earlier CIT(A) s order, which order and direction, was final and unchallenged by the department, the claim of depreciation should be allowed on merit. The learned Departmental Representation sub- mitted that a serious litigation was going on with the lessee. The assessee had not only lost the hire charges income but lost the hire equipments. The learned Departmental Representative supported the action of the Assessing Officer by contending that since no details were filed before the Assessing Officer, the Assessing Officer was perfectly, justified in refusing the claim of depreciation of the assessee. The learned Departmental Representativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue filed as such expenditure when expended may not bring any new asset and may merely restore the hotel to its form of functional self. As during the year no amount had been expended towards repairs nor the amount to be expended had been adequately ascertained, the claim had been rightly rejected by the Assessing Officer. His action in this regard is wholly upheld." It is submitted that the above finding of the CIT(A) was not challenged by the department. But the assessee carried the matter before the ITAT. When the matter was heard by the Tribunal in the first round, the learned Departmental Representative filed certain materials which indicated that there was dispute between the assessee and M/s. ITC about the liability of the repairs and this material was in the form of suit filed by M/s. ITC. The learned Departmental Representative drew our attention to the order of ITAT which is placed at pages 17 to 20 of the paper-book. He read out a portion of paras 3 and 4 of the Tribunal order which is reproduced below : "3. The CIT (Appeals) held that the expenditure may be of a revenue nature but disallowed the claim of deduction of Rs. 9,87,32,500 on the ground that the amount was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... many legal issues. In this regard the learned AR drew our attention to paras 4.13, 4.14 and 4.15 of the order of CIT(A). It is submitted that according to the CIT(A) the only reason for rejecting the claim was that the question as to who has to bear the burden of repair had not reach finality. In this factual background, the learned AR submitted that the issue to be adjudicated is whether, the claim of the assessee be denied just because, according to the department, the question as to who is to bear the burden of repairs had not reached a finality. According to the learned AR this is the only issue that survives for consideration, which is in conformity with the stand taken by the department itself in the earlier proceedings. The learned counsel referred to the suit No. 1877 of 1995 filed by M/s. ITC which is placed in the paper-book. The learned AR submitted that the suit was filed by ITC against the assessee asking for compensation by way of damages from the assessee amounting to Rs. 117.86 crores, in respect of administrative expenses incurred by ITC as well as loss suffered by ITC to the assessee not carrying out the necessary repairs in time. It is submitted that it is the cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... department would argue that the liability had arisen or accrued in assessment year 1993-94, or it may be so held by the appellate authorities. Thus, the assessee may stand to lose the entire claim altogether. As against this, it was further submitted that if at all it is found that the actual liability was less than what has been claimed and allowed in this year, the difference in the amount could always be brought to tax as per the provisions of section 41(1) of the Act. It is submitted, that, as such, the interest of the revenue is fully safeguarded, even if the claim is allowed in this year and the interest of the assessee is not at all safeguarded, if the claim is not allowed in the year under consideration, 14. Referring to the observation of the Assessing Officer that no income has accrued to the assessee and no amount has been paid, the learned counsel drew our attention to section 43(2), which defines the term paid and reads as under : "paid" means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head "Profits and gains of business or profession" Thus it is submitted that the Act its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... retty Cycle Industries [1987] 27 TTJ (Chd.) 530 ( k ) ITO v. South India Viscose Ltd. [1988] 27 ITD 501 (Mad.) ( l ) Voltas Ltd. v. Dy. CIT [1998] 64 ITD 232 (Mum.) The learned counsel finally summarised his submission in support of the claim of deduction on account of repair expenses as under : ( i )as will be evident from the suit as well as other legal proceedings, the primary liability for incurring the expenses was on the assessee, which was admitted so and, in fact, carried out by the assessee. ( ii )As against that, M/s. ITC has flatly denied its liability in this regard and in fact has filed the suit against the assessee, asking for compensation for loss of profit due the shrinkage in its business. ( iii )Even out of commercial expediency, the assessee being owner of the hotel, it was prudent on the part of the assessee to ultimately to take the responsibility for the repairs and bear the liability. ( iv )The liability had actually arisen, the damage had already occurred, which was required to be undertaken in any case to restore the business to its normalcy. As such, nothing was contingent or uncertain. ( v )Even the amount was quantified scientifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see and M/s. ITC. In fact this was the basis on which the department had sought to set aside the earlier CIT(A) order before the Tribunal in its first inning and this is the base on which the CIT(A) in the present appeal had disallowed the claim. We must first make it clear that the disallowance of the claim by the Assessing Officer and CIT(A) is not on the basis that the liability was of capital nature. Thus, so far as the nature of expenditure is concerned, the liability was on the revenue field. Now coming to the issue about litigation, we have perused the entire suit papers, as well as the other correspondences and evidence filed by the assessee in the paper-book. On perusal of the suit filed by M/s. ITC against the assessee, it becomes clear that not only ITC had flatly denied having anything to do with the liability for the repairs, but the assessee itself had agreed to carry out the repairs. This is clear from the fact as reflected in the suit, more specifically from pages 8, 9, 10, 15, 17 and 21. This fact is duly supported by the actual correspondences exchanged between the assessee and M/s. ITC. We have also perused such correspondences, which are annexed as various Exhib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e during the year. The definition of the term paid as contained in section 43(2) of the Act, answers the same. In any case, the legal position of allowability of a liability, on its accrual, even if not paid or extactly quantified, during the year, is too well settled to necessitate citing plethora of judgments which have been relied and mentioned in the legal note submitted by the learned counsel of the assessee. The assessee has also referred to numerous judgments and various aspects especially the judgment of the Hon ble Supreme Court in the case of Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 , is worth mentioning. This decision has been followed subsequently in various other judgments, which have also been referred to by the learned counsel in this legal note, submitted separately. The relevant portion of the decision in the case of Calcutta Co. Ltd. is as under : "Inasmuch as the liability which had thus accrued during the accounting year was to be discharged at a future date the amount to be expended in the discharge of that liability would have to be estimated in order that under the mercantile system of accounting the amount could be debited before it was actually disb ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
