2011 (12) TMI 114 - HC - Income Tax

Dis-allowance of provision of liability made for expenditure to be incurred in removal of encroachments in and around the technical area of the Airport - capital expenditure or revenue expenditure - Treatment of the proforma invoices issued on government agencies for space provided in Airport as income Mercantile system of accounting - Held that - It is not in dispute that the land belongs to the assessee. In the schemes formulated by the Government for removal of these encroachers and rehabilitate them at other places, if the assessee had paid the amount that amount is not for acquisition of new assets. The payment was made to facilitate its smooth functioning of the business. Therefor, expenditure is revenue in nature. See Bikaner Gypsums Ltd vs CIT (1990 - TMI - 5308 - Supreme Court).-Decided in favor of assessee. In respect of the Government Agencies on the application of real income theory and taking a realistic view, it is held that no income has accrued merely because proforma advices were raised, that too, at the instance of the CAG of India since these departments have their offices to facilitate the functioning of the assessee and they do not agree to pay any licence fee of the space occupied by them. The matter is restored back to A.O. determine the taxability of proforma invoices in respect of those parties who have been remitting part payments and have accepted their liability and not in respect of those Government Agencies who have never paid any amount.-Decided partly in favor of assessee.

Issues Involved:
1. Deductibility of expenditure for removal of encroachments.
2. Treatment of proforma invoices as income.
3. Whether the ITAT's order is perverse in law and on facts.

Detailed Analysis:

Issue 1: Deductibility of Expenditure for Removal of Encroachments

The appellant, a statutory authority, made provisions for expenditure to remove illegal encroachments around airports, arguing this was necessary for safety and security. The Assessing Officer disallowed these provisions, treating them as capital expenditure. The Tribunal upheld this view. The appellant contended that the expenditure was revenue in nature, necessary for maintaining existing assets, and should be deductible under the mercantile system of accounting. The Tribunal disagreed, citing a previous High Court decision that classified similar expenditure as capital in nature.

Upon review, the Court referenced the Supreme Court's decision in Bikaner Gypsum Vs. Commissioner of Income-Tax (1991) 187 ITR 39, which held that expenditure to remove obstructions to business operations is revenue in nature. Applying this principle, the Court concluded that the appellant's expenditure for removing encroachments was indeed revenue in nature, as it facilitated the smooth functioning of the business without creating new assets. The Court overruled the previous decision in Airport Authority of India Vs. CIT, 303 ITR 433, holding that such expenditure should be deductible.

However, the Tribunal had also found that no legally enforceable liability was incurred by the appellant in the relevant assessment years, as no agreement with the encroachers or third parties was presented. The Court emphasized that the appellant must prove actual payment of the expenditure to claim deductions. The Tribunal's requirement for an agreement with hutment dwellers was deemed unnecessary, as government schemes for rehabilitation sufficed as evidence. The Court directed the Assessing Officer to allow deductions based on proof of actual payment.

Issue 2: Treatment of Proforma Invoices as Income

The appellant provided space to various government agencies at airports and raised proforma invoices as advised by the CAG, although no actual payments were received from these agencies. The Assessing Officer treated these proforma invoices as income, a view upheld by the Tribunal. The appellant argued that no real income accrued from these invoices, as the government agencies did not agree to pay for the space.

The Court referenced the concept of "real income" from State Bank of Travancore Vs. CIT, (1986) 158 ITR 102, which posits that hypothetical income entries do not constitute taxable income if no actual income materializes. The Court noted that some government agencies never made payments, while others made partial payments. It ruled that proforma invoices should not be treated as income for agencies that never paid, applying the "real income" theory. The Court remanded the issue to the Assessing Officer to determine the taxability of proforma invoices based on actual payments received from government agencies.

Issue 3: Whether the ITAT's Order is Perverse in Law and on Facts

The Court found that the Tribunal's order was not perverse but required further scrutiny regarding the actual payment of expenses for encroachment removal and the treatment of proforma invoices. The Assessing Officer was directed to reassess these issues based on the Court's guidelines.

Conclusion

The appeals were disposed of with directions to the Assessing Officer to allow deductions for encroachment removal expenses upon proof of payment and to reassess the taxability of proforma invoices based on actual payments from government agencies. No costs were ordered.

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