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From the Courts »
  Vatsala Shenoy vs. JCIT (Supreme Court)
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COMMISSIONER OF INCOME TAX DELHI Vs. D.T.T.D.C. LTD.
February, 04th 2013
*          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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