* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA Nos. 166/2001, 161/2004 & 320/2004 &
ITR Nos. 30 - 33/1997
Judgment reserved on: 20th December, 2011
% Date of Decision: 20th March, 2012
Commissioner of Income Tax Delhi ....Appellant
Through Mr. Sanjeev Sabharwal, Sr. Standing Counsel
Versus
D.T.T.D.C. Ltd. ...Respondent
Through Mr. R.P. Garg, Mr. Rajiv Tyagi &
Mr. S.K. Bansal, Advocates.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE R.V. EASWAR
SANJIV KHANNA, J.
This common order will dispose of Income Tax Reference
Nos. 30 33/1997 under Section 256(1) of the Income Tax Act, 1961
(Act, for short) which relate to assessment years 1990-91 and 1991-92;
as well as ITA Nos. 166/2001, 161/2004 and 320/2004 under Sections
260A of the Act, which relate to assessment years 1996-97, 1994-95
and 1992-93.
2. In Income Tax Reference Nos. 30 33/1997, the following
questions of law have been raised and referred to this Court for
adjudication at the instance of the Revenue:
ITAs 166/01, 161/04, 320/04 & ITR 30-33/1997 Page 1 of 33
"1. Whether on facts and circumstances, the Tribunal
was right in law in concluding that the sum of Rs.24.17
crores for the assessment year 1990-91 and a sum of Rs.
28.86 crores for the assessment year 1991-92
constituted a diversion by overriding charge?
2. Whether on facts and circumstances, the Tribunal
was right in law in directing the Assessing Officer to
allow the expenditure incurred by the assessee on
construction of flyovers and pedestrian facilities as
revenue expenditure?"
3. The following questions of law have been raised and referred for
adjudication of this Court at the instance of the assessee Delhi Tourism
and Transport Development Corporation Ltd. in Income Tax Reference
Nos. 30 - 33/1997:
"Whether on the facts and circumstances of the case,
the Income-tax Appellate Tribunal was justified in
holding that the sum of Rs.2,04,35,870/- in assessment
year 1990-91 and Rs.5,39,02,166/- in assessment year
1991-92 did not stand diverted by overriding title and
therefore, constituted taxable income in the hands of
the assessee?"
4. ITA Nos. 166/2001, 161/2004 and 320/2004, have been filed at
the instance of the Revenue and there are no cross-appeals or cross-
objections by the assessee. The substantial questions of law raised by
the Revenue in these three appeals were admitted to hearing vide
orders dated 20th March, 2002, 17th May, 2007 and 17th May, 2007,
respectively. The aforesaid substantial questions of law in the three
ITAs read as under:-
ITAs 166/01, 161/04, 320/04 & ITR 30-33/1997 Page 2 of 33
"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 Administration Other General
Economic Services were not application of income
but diversion of income thereof by overriding title?"
5. The facts found and recorded by the tribunal are as under:-
(i) The assessee is a corporation established and set up by the
Government of NCT of Delhi. It is a Government Company within the
meaning of Section 617 of the Companies Act, 1956. The assessee is
ITAs 166/01, 161/04, 320/04 & ITR 30-33/1997 Page 3 of 33
engaged in the business of providing tourism and transportation
services/facilities, catering and running of liquor shops.
(ii) In a meeting held on 24th April, 1989, it was observed that the
Articles of Association and objectives of the assessee should be
expanded to include investments in transport infrastructure particularly
bridges, grade separators, underpasses and pedestrian cross, over
bridges or sub-ways. It was also noticed that there was substantial
shortage of funds being faced for creation of the said infrastructure in
Delhi. There was a need to establish separate mechanism whereby
resources, apart from the plan resources, were tapped and a major
programme mounted. Retail trade in country liquor and 50 degree U.P.
Rum was then undertaken by Excise Department, Delhi Administration. It
was decided that this retail trade should be transferred to the assessee
w.e.f. 15th May, 1989. The minutes of the said meeting record that this
would generate a surplus of Rs. 100 crores in three financial years from
1989 to 1992 and enable construction of 20 flyovers and a substantial
number of pedestrian facilities. The relevant portion of the minutes
read as under:-
"a) The Articles of Association and objectives of the Delhi
Tourism Development Corporation (DTDC) be expanded
so as to include investments in transport infrastructure,
particularly bridges, grade separators, underpasses and
pedestrian cross over bridges or subways. The
Corporation be renamed as the Delhi Tourism &
Transportation Development Corporation (DTTDC).
ITAs 166/01, 161/04, 320/04 & ITR 30-33/1997 Page 4 of 33
b) The retail trade in country liquor and 50 degree U.P. Rum
which has so far been undertaken departmentally by the
Excise Department, be transferred to DTTDC w.e.f. 15 th
May, 1989. That will give DTTDC a surplus of over Rs.100
crores in the three financial years, 1989 to 1992 which will
enable it to construct about 20 road flyovers and a fairly
substantial number of pedestrian facilities. The
Corporation will also derive pay back from the road
owning 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 or in the
manner or procedure of retailing. The department will
continue to call tenders and to take the requisite decisions
for procurement of wholesale supplies.
c) DTTDC will award the construction of bridges to a reputed
public sector construction company at pre-negotiated
turnkey prices. For successfully executing such an
important operation we would need to entrust the work
to an agency which should inter-alia, posses the following
attributes:-
i) It should have adequate experience of executing
such projects in Delhi.
ii) It should have financial and technical capacity for
undertaking the scale of projects contemplated.
iii) It should be able to mobilize men, machinery &
equipment within the time frame contemplated.
ITAs 166/01, 161/04, 320/04 & ITR 30-33/1997 Page 5 of 33
iv) It should be prepared to use prefabrication
technology to ensure that there is minimum
disruption to traffic during construction.
Evaluation of the various construction agencies in view has
led us to the conclusion that the body best suited to take
up our work is the U.P. Bridges Corporation, which
possesses all the above mentioned attributes. It has
already constructed three good flyovers in Delhi. It has
been sounded and has indicated its readiness to take the
construction contract from us. It is proposed to establish a
group of officers consisting of E-in-C, MCD, CE(I) PWD, a
representative of the Roads Wing of the Ministry of
Surface Transport and a representative of Finance to
negotiate with the U.P. Bridges Corporation, the most
advantageous turnkey prices and other terms and
conditions. All important consideration will be to lay down
a short time frame for construction and a substantial
penalty for delay. Construction of at least four flyovers
will be commenced in June, 1989. With subsequent
batches taken up at intervals of three to four months."
(iii) In terms of the said minutes, the assessee took over retail trade
for sale of country liquor and 50 degree U.P. Rum in Delhi. However,
the requisite details were left undetermined. For the assessment years
1990-91 and 1991-92, the assessee filed its return of income on 31st
December, 1990 and 31st December, 1991, declaring income of
Rs.90,11,968/- and Rs.91,79,000/- respectively. Returns of incomes
were without audited accounts. Return of income for the assessment
year 1990-91, was revised on 27th December, 1991 to Rs.1,28,83,340/-
but again audited accounts were not submitted. Audited accounts
were submitted on 17th September, 1992 and Tax Audit Report was
filed on 5th March, 1993.
ITAs 166/01, 161/04, 320/04 & ITR 30-33/1997 Page 6 of 33
(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 same was credited and paid to Delhi
Administration subsequently in terms of the letter dated 5th February,
1992. Relevant portion of this letter dated 5th February, 1992, reads as
under:-
ITAs 166/01, 161/04, 320/04 & ITR 30-33/1997 Page 7 of 33
"Sub: payment of Sales Proceeds of Country Liquor.
Sir,
This has reference to the Executive Council's
decision dated 25.4.1989 as amended from time to time
according to which you were required to pay the
difference between the retail sale price not covered by
specific duties, taxes and margins as allowed to you by the
Delhi Administration and the whole sale price w.e.f.
15.5.1989 to 8.4.1991 to the credit of Major Head 1475
"other General Economic Services" Minor Head 109, "Sale
Proceeds of Liquor".
You are requested to make arrangement to deposit
the same.
Yours faithfully
(ALKA DIWAN)
DY. SECRETARY (FINANCE)"
(vii) There was another letter dated 5th February, 1992, with regard to
TIUF and the same reads as under:-
"Sub: Country Liquor Trade DTTDC
Sir,
Delhi Administration has decided to entrust retail sale of
Country Liquor to Delhi Tourism & Transport Development
Corporation Ltd. (DTTDC) on a retail margin which will be
determined from time to time. As a continuing and
ongoing consideration for DTTDC be obliged to construct
fly-overs and substantial number of pedestrian facilities
etc. as per directions issued by Delhi Administration to the
DTTDC from time to time, and, on competition of such
infrastructure facilities, DTTDC shall be obliged to hand
over same to the appropriate Government office's on a
FOC basis, subject to execution of a deficiency charge
report.
Yours faithfully
(ALKA DEWAN)
DY. SECRETARY (FINANCE)"
ITAs 166/01, 161/04, 320/04 & ITR 30-33/1997 Page 8 of 33
TRANSPORT INFRASTRUCTURE UTILISATION FUND (TIUF)
6. The tribunal has held that the amount deposited in TIUF Fund
was income of the assessee and accordingly has to be included in the
profit and loss account. Receipts were income/earnings. It has also
been held that the expenditure incurred by the assessee on
construction of flyovers, pedestrian facilities etc. was expenditure
incurred by the assessee under Section 37 of the Act and accordingly
have to be reduced/deducted for computing taxable income. In ITR
Nos. 30 33/1997, at the instance of the assessee the question of law
raised is whether the aforesaid amount stands diverted at source by
way of overriding title to the Government of Delhi. The question raised
at the instance of the Revenue in 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
ITAs 166/01, 161/04, 320/04 & ITR 30-33/1997 Page 9 of 33
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 read:-
"(ii) The assessee's second contention is that the
expenditure of Rs.2.39 crore is revenue and not capital in
nature as no asset had come into existence in the hands of
the assessee also dos not appear to be correct. As a result
of the application of this amount a Capital asset has come
into existence and the amount which goes into the
creating of such an asset is capital expenditure. The fact
that the Assessee Company has not created an asset (WIP
at present) in its own books is itself incorrect. The Letter
of Delhi Administration clearly says that "........ on
completion of such infrastructure facilities, D.T.T.D.C.
offices on a Free of Cost basis ............." The clearly
intention is that till the time of completion, the structures
would be assets in the hands of Delhi Administration from
the very beginning, then the question of their being
Hence, the assessee's contention that no asset had come
into existence in its hand and hence the amount should be
allowed as revenue expenditure cannot be accepted. The
position regarding allowability of depreciation on such
assets would however be considered in view of the fact
that at present the assessee can only show Work in
Progress and Whether the assessee would derive any
income from their construction, so as to entitlte it to claim
depreciation on them.
ITAs 166/01, 161/04, 320/04 & ITR 30-33/1997 Page 10 of 33
8. Both the CIT (Appeals) and tribunal have disagreed with the
aforesaid findings and held that the expenditure incurred out of TIUF
was revenue expenditure and not capital expenditure. They are correct.
The assessee was entitled to a specified amount towards administrative
and other expenses from the sale proceeds. The amount which was
retained and kept in TIUF was for construction of the flyovers. The
assessee was required and mandated to make the said expenditure as a
condition for undertaking the country liquor trade. The assessee was
given license to conduct and carry on liquor trade in Delhi on the basis
of the minutes of the meeting held on 24th April, 1989. Construction of
flyovers etc was a pre-condition or an obligation imposed and had to be
complied with to enable the assessee to conduct business of sale of
country liquor in Delhi. The minutes mandated and required the
assessee to construct the flyovers/pedestrian facilities. Prior to that sale
of country liquor was carried on by Delhi Administration itself through
the excise department. Delhi Administration 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
ITAs 166/01, 161/04, 320/04 & ITR 30-33/1997 Page 11 of 33
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 construction of flyovers etc by the Delhi Administration.
9. The flyovers and pedestrian facilities have resulted in creation of
infrastructure facilities in Delhi. The physical structures were/are of
enduring nature, but this in the present case cannot be the
determinative factor/reason for deciding whether or not the
expenditure incurred in the hands of the assessee was capital or
revenue expenditure. The assessee was not the owner of the said
structure and was not to utilize the said infrastructure for the purpose
of its business. The task and the obligation assigned and undertaken by
ITAs 166/01, 161/04, 320/04 & ITR 30-33/1997 Page 12 of 33
the assessee was to get the flyovers and pedestrian facilities
constructed and pay for the same. After constructions these flyovers,
pedestrian facilities were to be transferred to the Delhi Government or
the respective departments. As far as the assessee was concerned no
enduring benefit or advantage was accruing to them. For the assessee,
no capital or revenue earning asset came into existence.
Activity/expenditure on construction of immovable structure of
enduring nature, is not universally capital expense in all cases. The
contention of the Revenue that as an immovable superstructure of
enduring benefit has come into existence and, therefore, expenditure
incurred is of capital nature, is flawed. A contractor/builder who
constructs a building for sale to third parties is creating or creates an
immovable asset but in the hands of the said builder the said asset, is
stock in trade, though in the hands of the purchaser/buyer it may be a
capital asset. The expenditure incurred by the assessee, therefore, is a
revenue expense and not a capital expense. The tribunal has rightly
pointed out that the minutes of the meeting dated 24th April, 1989
stipulated and provided that the exact modalities would be worked out
subsequently. These minutes were not final. This is also apparent from
the letter dated 5th February, 1992, with reference to sale proceeds of
country liquor. The letter specifically states that the Executive Council's
ITAs 166/01, 161/04, 320/04 & ITR 30-33/1997 Page 13 of 33
decision dated 25th April, 1989 was amended from time to time. The
second letter dated 5th February, 1992, with regard to TIUF is more
erudite and states that the assessee was obliged to construct flyovers
and substantial numbers of pedestrian facilities as per directions issued
by Delhi Administration to the assessee from time to time and on
completion of such 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
ITAs 166/01, 161/04, 320/04 & ITR 30-33/1997 Page 14 of 33
present case, as noticed above, retail trade of country liquor was
transferred to the assessee w.e.f. 15th May, 1989, but the terms and
conditions and the margin of the assessee was to be determined later
on. The tribunal has specifically referred to letter dated 25th June,
1991, issued by the Commissioner of Excise, Delhi to the Deputy
Commissioner of Income Tax, Special Range-VI, New Delhi, stating inter-
alia that due to administrative difficulties on the question of fixation of
retail margin on sale of country liquor was still pending consideration,
keeping in view the financial interest of Delhi Administration as well as
the assessee.
11. In view of the aforesaid findings, it has to be held that the
expenditure incurred on construction of flyovers etc was revenue
expense and not capital expense. The expenditure has to be allowed
under Section 37 of the Act. The second question raised by the
Revenue in this regard in ITRs No. 30-33/1997, has to be answered in
affirmative and in favour of the assessee and against the Revenue.
12. This brings us to the question raised by the assessee whether or
not amount deposited under the TIUF fund stand diverted and
therefore did not constitute taxable income in the hands of the
assessee. In the present case, the factual findings recorded are that the
assessee on the directions of the Delhi Administration had got flyovers
ITAs 166/01, 161/04, 320/04 & ITR 30-33/1997 Page 15 of 33
and infrastructure facilities constructed. The contract of construction of
flyovers and other facilities was awarded by the assessee. It may be
relevant to reproduce here the resolution of the Board of Directors of
the assessee which has been quoted in the impugned order passed by
the tribunal:-
"Resolved that
i) The action to create a Transportation
Infrastructure Utilisation Fund in respect of margin
equivalent to Rs. 1/- (Rupee one only) per bottle
sold during the year as per the direction of delhi
Admn. to the Company to manage the trade of
country liquor and to construct flyovers and
pedestrian facilities therefrom, and
ii) The action to charge 5 paise (five paise) per bottle
of the country liquor sold as administrative
expenses towards its Corporate Office expenses
against the Transportation Infrastrucutre
Utilisation Fund.
Be and are hereby approved."
13. The aforesaid resolution clearly shows that it was the obligation
of the assessee to construct flyovers and pedestrian facilities out of 95
paise from Re. 1/- which the assessee was entitled to retain and keep.
The balance 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.
ITAs 166/01, 161/04, 320/04 & ITR 30-33/1997 Page 16 of 33
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
case in which the income never reaches the assessee, who
even if were to collect it, does so, not as part of his
income, but for and on behalf of the person to whom it is
payable."
15. Explaining the said paragraph, in Moti Lal Chhadami Lal Jain vs.
CIT, (1991) 190 ITR 1 (SC), the Supreme Court elucidated that the
expression "reaches the assessee" and "has been received" have not be
used in the sense of the income being received in hands by one person
or the other. The nature of obligation by reason of which income
becomes payable to a person other than the one entitled to it, is the
relevant and the determinative factor. Where the obligation flows out
of an antecedent and independent title, the income get effectively
sliced away and does not form part of the corpus of the assessee.
Where however, there is an obligation which is self imposed on
ITAs 166/01, 161/04, 320/04 & ITR 30-33/1997 Page 17 of 33
gratuitous, then it is a case of application of income. In the case of
Moti Lal Chhadami Lal Jain's case (supra), a part of the rental income
was being paid to a trust which was running an educational institute as
per the rent deed. The assessee, an HUF was the owner of that
immovable property. The Supreme Court did not agree to exclusion of
the rent receivable by the trust, from the income of the HUF on the
ground that there was diversion of income at source. In the said
decision, the Supreme Court noticed that cases of sub-partnership can
be categorized as border line matters, for commercial compulsions that
had resulted in formation of sub-partnerships. In Muralidhar
Himatsingka vs. CIT, (1996) 62 ITR 323 (SC), it has been held that profits
received under sub-partnership can represent diversion of income at
source. The Supreme Court observed that this analogy cannot be
extended to the cases like the said one.
16. We fail to understand how the assessee can plead diversion of
income at source as in the present case, the amount received remained
with the assessee. It did not part away or pay the said amount to any
third party. A part of the said amount i.e. 5 paise per bottle was
retained by the assessee to meet their administrative and other
corporate expenses and the other part of that was to be used for
construction of flyovers and pedestrian facilities by the assessee. The
ITAs 166/01, 161/04, 320/04 & ITR 30-33/1997 Page 18 of 33
said 95 paise was not transferred or paid by the assessee to the Delhi
Administration.
17. The question of law raised by the assessee in 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 that the assessee itself was getting
ITAs 166/01, 161/04, 320/04 & ITR 30-33/1997 Page 19 of 33
flyovers constructed and making payments for the same. In fact the
assessee had earned interest of Rs.43,08,000/- on TIUF funds. The
decision of the tribunal in this year is contrary to the decision of the
tribunal for the assessment years 1990-91 and 1991-92 which are
subject matters of ITR Nos. 30 33/1997. For the assessment years
1994-95, the tribunal has not discussed the factual matrix but dismissed
the appeal of the Revenue against the order of the CIT (Appeals) on the
basis of tribunal's decision dated 31st August, 1995, in respect of
assessment years 1990-91 and 1991-92. As noticed above, in the
assessment years 1990-91 and 1991-92, the tribunal had in fact decided
this aspect/issue in favour of the Revenue and against the assessee.
19. In the assessment year 1992-93, again the appeal of the Revenue
had been dismissed following the decision dated 31st August, 1995 for
the assessment years 1990-91 and 1991-92. This is misleading of the
order of the tribunal for the assessment years 1990-91 and 1991-92.
Interest earned on and transferred to TIUF is also income of the
assessee and is accordingly taxable.
20. Decision of this Court in the case of the assessee reported in
(2010) 324 ITR 234 (Del.) is not apposite. The assessee had filed
preferred writ petition challenging the notices issued under Section
147/148 of the Act in respect of assessment years 1997-98, 1998-99
ITAs 166/01, 161/04, 320/04 & ITR 30-33/1997 Page 20 of 33
and 1999-2000. The writ petition was allowed on the ground of change
of opinion recording, inter alia, that the Assessing Officer does not have
power to review its earlier decision. Accordingly, it was held that the
jurisdictional pre-condition for reopening was not satisfied and the
action of the Assessing Officer was without jurisdiction. It was clarified
that the Bench had dealt with point of jurisdiction i.e. whether or not
pre-conditions for reopening under Sections 147/148 were satisfied and
not the merits of the issue with regard to taxability of the amount
transferred to TIUF. Thus, this decision does not help the assessee.
Thus the aforesaid questions of law in ITA Nos. 166/2001, 161/2004
and 320/2004 are decided in negative and in favour of the Revenue and
against the assessee. The question No. 2 raised for ITR 166/2001 relates
to taxability of interest of Rs.43.08 lacs earned and transferred to TIUF.
The answer to the said question has 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
ITAs 166/01, 161/04, 320/04 & ITR 30-33/1997 Page 21 of 33
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 sake of
convenience, it may be again briefly noticed. Vide meeting held on 24th
April, 1989, the assessee was permitted and allowed retail vending of
country liquor. Part of the sale proceeds were to be utilized for
construction of flyovers, pedestrian facilities but the exact details and
modalities were to be worked out. Subsequently, in terms of letter
dated 5th February, 1992, the sale proceeds under the head OGES were
transferred to the Delhi Administration. Till the said date, the amount
under OGES was retained by the assessee. During the course of
arguments before the tribunal, the counsel for the Revenue had
submitted that the letter dated 5th February, 1992 was issued after the
ITAs 166/01, 161/04, 320/04 & ITR 30-33/1997 Page 22 of 33
end of the financial years 1990-91 and 1991-92 and, therefore, the
transfer made should not and would not affect the taxability of the sale
proceeds which were retained and kept under the head `OGES'. He
submitted that there cannot be transfer of income by way of overriding
title retrospectively. The letter would be effective on or after 6th
February, 1992.
24. We are in agreement with the Revenue that the question of
diversion of income by way of overriding title till letter dated 5th
February, 1992 was issued does not arise. However, till that date i.e. 5th
February, 1992, the respondent assessee did not have any dominion or
control over the aforesaid amount credited under the OGES head.
25. Every receipt or amount received/accounted, is not income.
Amount received is income in the hands of the assessee if he has
title/right over the said amount in form of dominion and right to use
the said amount. When examining, the concept of `income' one has to
keep in mind, commercial reality, specialty of the situation rather than
pure theoretical or doctrine aspects. The business aspect of the matter
has to be viewed as a whole but without disregarding the statutory
language. Depending upon the nature and character of the
deposits/payments, treatment should be given to hold whether or not
the amount received was income/profit.
ITAs 166/01, 161/04, 320/04 & ITR 30-33/1997 Page 23 of 33
26. The Supreme Court in Poona Electric Supply Co. Ltd. vs. CIT,
Bombay, (1965) 57 ITR 521 (SC) had drawn a distinction between
payments out of profits and payments to earn profits. Distinction was
drawn between deduction made for ascertaining profits and the
distribution made out of profits. In addition to the said distinction,
difference was made between 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
ITAs 166/01, 161/04, 320/04 & ITR 30-33/1997 Page 24 of 33
receipts which do not form part of the profit. The latter do not form
part of the profit and loss account.
28. The nature and character of the receipt has to be looked from
practical and a commercial point of view (see R.B. Jodha Mal Kuthiala
vs. CIT (1971) 82 ITR 570 (SC).
29. In Godhra Electricity Co. Ltd. vs. CIT, (1997) 225 ITR 746 (SC),
reference was made to the following observations in CIT vs. Shoorji
Vallabhdas & Co. (1962) 46 ITR 144 (SC):
"Income-tax is a levy on income. No doubt, the Income-
tax Act takes into account two points of time at which the
liability to tax is attracted, viz., the accrual of the income
or its receipt; but the substance of the matter is the
income. If income does not result at all, there cannot be a
tax, even though in book-keeping, an entry is made about
a hypothetical income, which does not materialize."
30. Thus, the aforesaid principle would equally apply to accounts
maintained under cash system or mercantile system.
31. In State Bank of Travencore vs. CIT (1986) 158 ITR 102 (SC), the
concept of `real income' was elucidated and it was observed :-
"An acceptable formula of co-relating the notion of
real income in conjunction with the method of accounting
for the purpose of the computation of income for the
purpose of taxation is difficult to evolve. Besides, any
strait-jacket formula is bound to create problems in its
application to every situation. It must depend upon the
facts and circumstances of each case. When and how does
an income accrue and what are the consequences that
follow from accrual of income are well-settled. The accrual
must be real taking into account the actuality of the
situation. Whether an accrual has taken place or not
must, in appropriate cases, be judged on the principles of
real income theory. After accrual, non-charging of tax on
ITAs 166/01, 161/04, 320/04 & ITR 30-33/1997 Page 25 of 33
the same because of certain conduct based on the ipse
dixit of a particular assessee cannot be accepted. In
determining the question whether it is hypothetical
income or whether real income has materialised or not,
various factors will have to be taken into account. It would
be difficult and improper to extend the concept of real
income to all cases depending upon the ipse dixit of the
assessee which would then become a value judgment
only. What has really accrued to the assessee has to be
found out and what has accrued must be considered from
the point of view of real 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 receipt and this does not stop at merely
ITAs 166/01, 161/04, 320/04 & ITR 30-33/1997 Page 26 of 33
determining whether the realization was in course of trade. All
realizations do not get impressed with the character of revenue
receipts includable in the taxable income. The focus has to be into the
true nature, character and purpose of realization. The amounts which
are held as deposits and have to be returned at a specified point of time
or happening of specified contingency, which is not otherwise
uncertain; which are treated as someone's else money and when the
assessee does not have unfettered dominion over the money, are good
indicators not to categorize as the receipt as income. The Supreme
Court expounded that the following questions should be raised and
answered: (1) Do the receipts bear a character of income at the time it
reached the hands of the assessee? (2) Does the title in the receipt vest
with the assessee? (3) Does the assessee exercise complete dominion
over the funds in question? (4) Does the assessee regarded the money
as that of a third party or treat the money of that of a third party, with
assessee having no unfettered dominion over the same? (5) Does the
assessee stand in the position of debtor in relation to those
funds/deposits? (6) What is the primary purpose of collection of said
amount?
33. It was elucidated and explained in S. Shahakari Shakkar
Karkhanna Ltd. (supra) :-
ITAs 166/01, 161/04, 320/04 & ITR 30-33/1997 Page 27 of 33
"These factors may broadly satisfy the first test applied in
Bazpur Co-operative Sugar's case *1988+ 172 ITR 321 (SC).
The following are the relevant observations in this regard
(page 329) :
"It is clear that these amounts which were
deducted by the respondent from the price
payable to its members on account of supply of
sugarcane were deducted in the course of the
trading operations of the respondent and these
deductions were a part of its trading operations.
The receipts by way of these deductions must,
therefore, be regarded as revenue receipts and are
liable to be included in the taxable income of the
respondent."
However, it needs to be clarified that the line of inquiry, in
order to determine the true nature and character of the
receipts, does not stop at ascertaining the mere fact
whether the realisation was in the course of trading
operations. The moment it is found that certain amounts
were deducted by the assessee out of the price payable to
its members who supplied the raw material, the
conclusion 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 way of deductions could be
regarded as deposits as described in the bye-laws. While
answering that question in the negative, the court pointed
out that it is the true nature and quality of the receipt that
is material but not the head under which it is entered in
ITAs 166/01, 161/04, 320/04 & ITR 30-33/1997 Page 28 of 33
the account books--a principle which is reiterated in a
catena of decisions. The court then went on to conclude
that the receipts by way of deductions from the purchase
price were not in the nature of deposits. In this context,
the reasoning of the Bench may be noticed (page 330 of
[1988] 172 ITR) :
"The essence of a deposit is that there must be a liability
to return it to the party by whom or on whose behalf it is
made on the fulfilment of certain conditions. Under the
unamended bye-law, the amounts deducted from the
price and credited to the said fund were first liable to be
used in adjusting the losses of the respondent-society in
the working year; thereafter in the repayment of initial
loan from the Industrial Finance Corporation of India and
then for redeeming the Government share and only in the
event of any balance being left, it was liable to be
converted to share capital. The primary purpose for which
the deposits were liable to be used were not to issue
shares to the members from whose amounts the
deductions were made but for discharging of liabilities of
the respondent-society. In these circumstances, the
receipts constituted by these deductions were really
trading receipts of the assessee-society. . ."
34. Thus it is the true nature of the receipt and purpose thereof is
the determinative factor and the relevant principle to apply to decide
whether or not an amount should be included or excluded from the
profit/income. This requires examination of the question from various
angles as noticed above, do the receipts bear a character of income at
the time when it reaches the hands of the assessee? Does the money
vest with the assessee once and for all? Whether the assessee exercises
complete dominion over the fund or is it to be regarded as the money
of the depositors or a third person. When an assessee does not have
dominion over the fund it is difficult to categorise the same as income.
ITAs 166/01, 161/04, 320/04 & ITR 30-33/1997 Page 29 of 33
On consideration of the applicable byelaws, the Supreme Court in
Siddheshwar Sahakari Sakhar Karakhana Ltd. (supra) allowed the
appeal of the assessee holding inter-alia that it was difficult to hold 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 of the area. The board of directors of the
co-operative society are required to pass a resolution
specifying the details of expenditure proposed to be
incurred from out of the area development fund. They
should obtain the sanction of the Director of Sugar for
incurring such expenditure. Such information is also
ITAs 166/01, 161/04, 320/04 & ITR 30-33/1997 Page 30 of 33
required to be placed before the general body of the
society and the approval to be obtained from the general
body. On June 21, 1988, the Agriculture and Co-operation
Department of the Government of Maharashtra framed
certain directive principles laying down the modalities of
utilization of Area Development Funds. The said order
was issued in exercise of the power under section 79A of
the Maharashtra State Co-operative Societies Act. This
order passed during the middle of the last assessment
year relevant to these appeals gives statutory basis for
the already existing practice. It is difficult to equate this
fund to the other categories of funds, as has been done
by the Tribunal and affirmed by the High Court. Unlike the
other funds like Chief Minister's Relief Fund, the amount
collected towards Area Development Fund is retained by
the sugar factory itself and utilized as per the guide lines
issued by the Government or the National Co-operatives
Development Corporation. The collective body of the
society and its elected representatives take the decision
as to how much amount has to be spent and for what
purposes. The Director of Sugar or other designated
official, no doubt acts in a supervisory capacity to
oversee that the funds are properly utilized. On that
account, it cannot be said that the collection is made by
the society as an agent of the Government or the
proprietary interest in the funds is vested with the
Government. The conclusion has been reached by the
Tribunal mainly on the basis of the requirement of prior
sanction of the Director of Sugar for incurring the
expenditure. Such restriction prescribed in the larger
interest of the society itself does not in any way detract
from the fact that the societies con cerned do exercise
dominion over the fund and deal with that money subject
of course to the guidelines and restrictions evolved by the
Government. The Tribunal failed to approach the
question in proper perspective on an analysis of the
relevant circulars and orders. The High Court too fell into
an error in invoking the theory of diversion 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
ITAs 166/01, 161/04, 320/04 & ITR 30-33/1997 Page 31 of 33
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 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 has to be excluded from the profit.
The aforesaid receipts were not income earned and do not have
ITAs 166/01, 161/04, 320/04 & ITR 30-33/1997 Page 32 of 33
character of income earned by the assessee over which it had dominion
or right.
37. In view of the aforesaid findings, the aforesaid appeals are
disposed of. The two questions of law raised in ITR Nos. 30-33/1997, on
behalf of the Revenue, have been answered in affirmative i.e. against
the Revenue and in favour of the assessee. The question of law raised
in paragraph 3 and on behalf of the assessee in ITR Nos. 30-33/1997, is
also answered in affirmative i.e. in favour of the Revenue and against
the assessee.
38. The questions of law raised in ITA Nos. 166/2001, 161/2004 &
320/2004, mentioned in paragraph 4 are answered in negative i.e. in
favour of the Revenue and against the assessee. In the facts of the
case, there will be no orders as to costs.
(SANJIV KHANNA)
JUDGE
(R.V. EASWAR )
JUDGE
March 20th, 2012
kkb
ITAs 166/01, 161/04, 320/04 & ITR 30-33/1997 Page 33 of 33
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