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TMI Blog2012 (3) TMI 321X X X X Extracts X X X X X X X X Extracts X X X X ..... 95 paise was not transferred or paid by the assessee to the Delhi Administration - held that the amount standing in TIUF was not diverted at source by way of overriding title and, therefore, was to be included in the taxable income of the assessee - Decided against the assessee. Taxability of part of sale proceeds kept in separate account - held that:- Mere fact that the amount was retained in the bank account of the assessee under the head ‘OGES’, does not show or prove that it was the income of the assessee. Mere realization of an amount in course of trading was not determinative whether the amount received was income. The court/authorities must determine the nature and character of the receipts before the amount can be taxed as income. This part of the sale consideration i.e. OGES was kept in a deposit unrelated to the business of the respondent assessee. The assessee did not exercise dominion over the said fund/deposit and deal with the said fund/deposit. Keeping in view the aforesaid elucidation of law and applying the same to the factual matrix, noting the nature and character of the OGES, it has to be held that the same was not taxable income of the assessee. The same ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, 2007, respectively. The aforesaid substantial questions of law in the three ITAs read as under:- ITA No. 166/2001 1. Whether ITAT was correct in holding that the amount of Rs.8,28,86,180/- transferred to Transport Infrastructure Utilization Fund was diversion of income and not application of income and the ratio of the Hon ble Supreme Court s judgment in the case of Motilal Chhandami Lal Jain v. CIT, (1991) 190 ITR (SC) was applicable to this case? 2. Whether the ITAT was correct in holding that the amount of Rs.43.08 lakhs interest earned and transferred to Transport Infrastructure Utilization Fund was not the income of the assessee company? ITA 161/2004 Whether the Income Tax Appellate Tribunal was correct in holding that the amount of Rs.13,48,20,984/- transferred to Transport Infrastructure Utilisation Fund amounts to diversion of income and not application of income by relying upon its earlier orders passed in assessment years 1990-91 and 1991-92? ITA 320/2004 Whether the Income Tax Appellate Tribunal was correct in law holding that the amount of Rs.5,83,37,236/- transferred to Transport Infrastructure Utilisation Fund and Rs.48,77,357/- transferred to Delhi Adm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authorities (as explained hereunder) whereby it will be possible to expand the programme further. The shift of retail trade from the department to the Corporation (as it already obtains for Indian Made Foreign Liquor) apart from delivering funds to DTTDC for transportation infrastructural development, is desirable on other grounds also. There must be a separation of the retail business by corporate bodies such as DTTDC, the latter should continue to be the functions of the departmental authorities who have the requisite legal sanctions. The operational details of the transfer of retail trade from the department of DTTDC have been examined and are easy to negotiate. The 10 vends being currently operated by the department will be transferred to DTTDC. Bulk of the staff managing the country liquor trade is composed of deputationists, who from the date of their transfer to DTTC will continue to be treated as working on deputation under DTTC. There are a few other employees working on ad hoc basis, who will be absorbed in the Corporation. As a consequence of transfer of retail trade from the department to DTTC no difference will be caused either in the procurement of wholesale supplies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted. Audited accounts were submitted on 17th September, 1992 and Tax Audit Report was filed on 5th March, 1993. (iv) In the assessment year 1991-92, Tax Audit Report under Section 44AB was filed subsequently in the course of assessment proceedings after notice under Section 143(2) was issued. (v) During the course of assessment proceedings, it was noticed that the assessee had not treated the two accounts as income or receipts and not included the same in the profit loss account for the purposes of tax. These accounts were Transport Infrastructure Utilisation Fund (TIUF, for short) of Rs.2,39,07,659/- and Rs.6,55,05,785/- and Other General Economic Service (OGES, for short) of Rs.24,17,65,160/- and Rs.28,86,02,020/- for the assessment years 1990-91 and 1991-92, respectively. Entries/ transactions in these two accounts were excluded from the profit and loss account. (vi) The stand of the assessee was that the TIUF represents the amount which is mandated and required to be spent on construction of road infrastructure in Delhi i.e. bridges, flyovers etc. The amount under OGES represented the amount that was to be credited/paid to the Delhi Administration and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n ITR Nos. 30 33/1997, is whether the tribunal has erred and should not have treated the expenditure incurred by the assessee on construction of flyovers and pedestrian facilities as a revenue expenditure. It was a capital expense. 7. Firstly, we take up the question raised by the Revenue. The contention of the Revenue is that the construction of flyovers, pedestrian facilities etc. was capital expenditure as the facilities being constructed had an enduring benefit and had resulted in creation of permanent facilities. The reasoning given by the Assessing Officer was that the right to do business in country liquor had resulted in virtually no gain to the assessee. Delhi Administration had permitted and allowed the assessee to retain a small margin @ .05 p. per bottle. In these circumstances, any expenditure incurred from TIUF cannot be regarded as a business expense. The Assessing Officer had recorded that there was a conscious effort to siphon off the profits from the country liquor business. The immovable structures after completion had to be handed over to the Delhi Administration etc. and this fact was known from the beginning. The findings recorded by the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nistration permitted and granted license to the assessee to carry on the said trade but subject to the conditions imposed. The assessee could not have changed or amended the conditions and had to comply with the same. Whether or not the assessee should have undertaken the liquor trade, whether or not it was financially beneficial etc., is a decision which had to be taken by the assessee. The decision taken by the assessee may not have been correct or commercially viable, it may not have resulted in income/substantial income but the Revenue cannot question and challenge the decision. The assessee being a corporation established by the Government of NCT of Delhi and a government company under Section 617 of the Companies Act, 1956, may have accepted and taken the decision pursuant to the decision of the Delhi Government but this cannot be a ground to recomputed the profits ignoring the expenditure incurred as long as requirements of Section 37 of the Act are satisfied and the expenditure is not a capital expenditure. Revenue expenditure will not become a capital expenditure merely because the assessee corporation was obliged and required to construct and incur expenditure on construc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... infrastructure facilities, the assessee was obliged to hand over the same to the appropriate government on free of cost basis, subject to execution of a deficiency charge report. 10. We also agree with the findings recorded by the tribunal that the condition to construct the flyovers etc., to bear and pay costs of the flyovers was neither self imposed or gratuitous. The condition was imposed by the Delhi Administration with the approval of Lt. Governor of Delhi. Sale of liquor or alcohol in union territory of Delhi at that time was regulated and controlled under the Punjab Excise Act, 1914. As per the provisions of the said Act, liquor could not be bottled for sale and no intoxicant could be sold in Delhi except and subject to terms and conditions of the licence granted in that behalf. Under Section 34 of Punjab Excise Act, 1914, Delhi Administration was entitled to fix the fee etc. and stipulate the terms and conditions for sale of liquor. Under the Liquor License Rules, 1976, Lt. Governor of Delhi was the authority empowered to grant license for retail vending of country liquor. In the present case, as noticed above, retail trade of country liquor was transferred to the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 paise per bottle was to meet the administrative expenses including corporate expenses, but it does not mean that there was diversion of title of income by way of overriding title. 14. The concept of diversion of income by way of overriding title for the purpose of income tax was expounded and explained by the Supreme Court in CIT vs. Sitaldas Tirathdas, (1961) 41 ITR 367 (SC) as under:- Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one s own income, which has been received and is since applied. The first is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR Nos.30-33/1997 therefore is answered in affirmative and it is held that the amount standing in TIUF was not diverted at source by way of overriding title and, therefore, was to be included in the taxable income of the assessee. This question of law is accordingly answered in favour of the Revenue and against the assessee. 18. We may at this stage refer to the questions of law raised by the Revenue in ITA Nos. 166/2001, 161/2004 and 320/2004. In the assessment years i.e. 1996-97, 1994-95 and 1992-93, the assessee was entitled to retain Rs.6/- from sale of each liquor bottle. Rs. 5/- was to be utilized for construction of flyovers, pedestrian facilities etc and balance amount of Re.1/- was to be retained and utilized by the assessee to meet its administrative and other costs in the liquor trade. The tribunal in the order dated 27th October, 2010, for the assessment year 1997-98, held that as per the Delhi Government s order dated 21st August, 1997, it specifically stipulated that retail margin of Rs.5/- per bottle would be utilized for construction of flyovers and pedestrian facilities and this amount was to be deposited in Consolidated Fund of India. Facts noticed above show ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be given in affirmative and in favour of the Revenue and against the assessee in view of the findings recorded above. TAXABILITY AND TREATMENT OF OTHER GENERAL ECONOMIC SERVICES (OGES) 21. Question No. 1 at the instance of the Revenue in ITR Nos.30-33/1997 has been only raised in assessment years 1990-91 and 1991-92, in respect of Rs.24.17 crores and Rs.28.86 crores. This question has not been raised in respect of other assessment years. It is apparent that no addition on this account has been made in the assessment years 1996-97, 1994-95 and 1992-93, which are subject matters of ITA Nos. 166/2001, 161/2004 and 320/2004. Facts below will elucidate that the Revenue has rightly not raised this issue in respect of the other years. 22. The contention of the Revenue is that the entire sale proceeds received from the sale of liquor trade should be added and included as taxable receipts. The stand of the assessee on the other hand is that the entire receipts are not taxable in their hands either as income diverted at source or on the ground that the sale proceeds received and deposited in OGES were not income of the assessee. 23. We have noted the factual controversy. For the sak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits/income which arise to an assessee and profits/ income of a third person. Reference with approval was made to concept of real income as expounded by Bombay High Court in H.M. Kashiparekh Co. Ltd. vs. CIT, (1960) 39 ITR 706 (Bom.). The said principle as stated in the head note of H.M. Kashiparekh Co. Ltd. (supra) was quoted. The said quote reads as under:- The principle of real income is not to be so subordinated as to amount virtually to a negation of it when a surrender or concession or rebate in respect of managing agency commission is made, agreed to or given on grounds of commercial expediency, simply because it takes place sometime after the close of an accounting year. In examining any transaction and situation of this nature the court would have more regard to the reality and speciality of the situation rather than the purely theoretical or doctrinaire aspect of it. It will lay greater emphasis on the business aspect of the matter viewed as a whole when that can be done without disregarding statutory language. " 27. Therefore, a distinction has to be made between deductions for ascertaining profits made and distribution made out of profits; and receipts whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income taking the probability or improbability of realisation in a realistic manner and dovetailing of these factors together but once the accrual takes place, on the conduct of the parties subsequent to the year of closing an income which has accrued cannot be made " no income ". 32. In Siddeshwar Sahakari Sakhar Karkhana Ltd. vs. CIT Ors., (2004) 270 ITR 1 (SC), the word income or profit was examined and interpreted. In the said case, issue arose whether deposits/payments made in different heads/parties was diversion of income at source or not and whether the deposits/funds have to be included in the income earned. The Supreme Court emphasized that the nature and character of the deposits/payments is determinative and relevant. Reference was made to the earlier decision in the case of CIT vs. Bazpur Coop. Sugar Factory Ltd. (1988) 172 ITR 321 (SC) where the amounts credited to loss equalization and capital redemption reserve fund were held to be income/profit. It was held in the said case that the assessee had proprietary interest over the fund and enjoyed dominion. It was observed that the line of enquiry must focus on ascertaining the true nature and character of the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clusion does not necessarily follow that all such realisations get impressed with the character of revenue receipts, giving rise to taxable income in the hands of the assessee. It is not any and every receipt linked to the trading activity that acquires the quality of revenue receipt. The Tribunal or the court should go further and delve into the true nature, character and purpose of the realisations. If the amounts are meant to be held as deposits liable to be returned to the depositor at a specified point of time or on the happening of specified contingencies which are by no means uncertain or is otherwise treated as members money the depository having no unfettered dominion over the said funds, then, it is difficult to characterise them as the income of the assessee. The realisation of monies from the grower-members in the course of trading operations could as well be construed to be an occasion, mode or convenient point of time at which the deposit could be collected. Perhaps keeping this legal position in view, notwithstanding what has been stated in the earlier portion of the judgment, the learned judges proceeded to address the next question, i.e., whether the receipts by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the assessee exercised complete dominion over the deposits or had title over the same. We may note that in the same decision there were certain other categories of deposits which were retained by the assessee in order to remit them to the Government. These included Prime Minister s Relief Fund, Late Y.B. Chavan Memorial Fund and Hutment Fund. It was held that these funds were required to be remitted to the Government and Trusts and assessee had merely acted as an agent to collect the amount and remit the same and therefore not profit/income. These funds were, however, distinguished from the Area Development Fund in the following manner:- The Area Development Fund, as we see from the various communications placed in the paper-book, is meant to enable the co-operative sugar factories to render socio-economic services in the area of operation. The area development programmes may cover agricultural extension, irrigation facilities, educational and medical services, development of animal husbandry and poultry, drought relief work and so on. By doing so, the sugar co-operatives will be supplementing the efforts of the Government in promoting the socio-economic development o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of income at source. The crux of the matter is that there has never been a diversion of income to a third party (Government) before it reached the assessee. The receipts in the form of Area Development Fund always remained with the assessee. 35. Similarly, the Supreme Court referred to the sugarcane development fund and observed that the case of the Revenue was on stronger footing. The beneficiaries were none other than the member of the sugar cooperative society and the Directors were to ensure that the benefit accrues to the members in form of augmentation of sugarcane production. The assessee had dominion over the said fund but the only restriction was in the manner and mode of using the said fund. A supervisor role was played by the Directorate of Sugarcane. 36. Mere fact that the amount was retained in the bank account of the assessee under the head OGES , does not show or prove that it was the income of the assessee. Mere realization of an amount in course of trading was not determinative whether the amount received was income. The court/authorities must determine the nature and character of the receipts before the amount can be taxed as income. This part of the sal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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