M/S HOTEL SHIV Vs. COMMISSIONER OF INCOME TAX-VIII, NEW DELHI
March, 29th 2014
*IN THE HIGH COURT OF DELHI AT NEW DELHI
% Order reserved on : 27 th November, 2013
Order pronounced on: 21 st February, 2014
+ WP(C) No. 3094 of 2013
M/s HOT EL SHIV .... Petitioner
Through Mr.Kedar Nath Tritpathy
with Mr. H.P. Sah u,
COMMISSIONER OF INCOME T AX -VIII, NE W DEL HI.
Through: Mr. Balbir Singh with Mr.
Rupender Sinhmar and Mr.
Abhishek Singh Baghel,
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE SANJE EV SACHDEVA
SANJEEV SACHDEVA, J.
1. The petitioner has filed the present petition impugning
the order dated 25.03.2013, whereby the revision
petition of the petitioner under Section 264 of the
WP(C) No. 3094/2013 1
Income Tax Act, 1961 (hereinafter called `the Act') has
been partly rejected.
2. The petitioner-assessee is a partnership firm engaged
in the business of running a guest house. The
assessment year in issue is 2008-09. The petitioner -
assessee filed its return of income tax o n 25.09.2008,
which was processed under Section 1 43(1) of the Act.
Subsequently assessment was framed under Section
143(3) on 29.10.2010 on taxable income of
3. By the assessment order expenses of Rs.12,26,508/ -
were disallowed. The said expenses comprised of
Rs.11,63,391/- paid as conversion charges and
Rs.63,117/- as annual property tax with respect to the
portion of the building used as guest house.
4. The petitioner-assessee filed an application under
Section 264 of the Act, seeking revision of the
WP(C) No. 3094/2013 2
assessment order and claimed allowance of the
expenditure of Rs.12,26,508/-, that had been
disallowed by the Assessing Officer.
5. To understand the controversy, it would be necessary
to refer to the facts briefly.
6. The petitioner is a partnership firm of two partners
namely Smt. Krishna Leekha an d her son Shri. Anuj
Leekha. The partnership firm was set up with the
objective of running and operative guest house
services from the first and second floor of the building
situated at H-2, Green Park Ext., New Delhi.
7. The building, from where the said gue st house
operates, wa s owned by the two partners in their
individual names. Smt. Krishna Leekha is the owner
of the first floor and Shri. Anuj Leekha is the owner of
the second floor.
WP(C) No. 3094/2013 3
8. Since the partnership firm was using the portion of the
building for the purposes of running the guest house,
the expenditure relating to the maintenance of the
building was being booked by the said firm in its
accounts as revenue expenditure. The house tax
being paid on commercial rates was also being
claimed as revenue expe nditure by the assessee firm.
9. Pursuant to the judgment of the Supreme Court in the
case of M.C. Mehta & Ors. Vs. U.O.I. & Ors. (WP (C)
4677 of 1985) , the Ministry of Urban Development
notified that commercial establishments on notified
roads would be allowed to continue /operate, subject to
payment of conversion charges fixed by the
Government under the mixed land use policy.
10. The building, from which the petitioner-assessee was
operating, fell on one such notified road and the
owners became entitled to the conversion of the land
use. The petitioner firm , paid a sum of Rs.11,63,391/-
WP(C) No. 3094/2013 4
towards conversion charges and Rs.63,117/- as
property tax in the year 2007-08. The petitioner
claimed this sum of Rs.12,26,508/- (Rs.11,63,391/- +
Rs.63,117/-) as revenue expenditure and debited the
same in the profit and loss account.
11. This claim of the petitioner was rejected by the
Assessing Officer, while framing the assessment for
the year 2008-09.
12. Aggrieved by the disallowance of the said expenditure,
the petitioner filed the application under section 264 of
the Act, seeking revision of the assessment order and
setting aside of the disallowance of the said sum of
13. The Com missioner of Income Tax partly allowed the
revision petition. The annual property tax paid by the
petitioner of Rs.63,117/- was allowed as an
expenditure, however, Rs.11,63,391/- paid towards
WP(C) No. 3094/2013 5
conversion charges was disallowed. It is this part of
the order that the petitioner impugns in the present
14. The property, from where the petitioner was operating,
was a residential property. It is the admitted case of
the petitioner that the property owned by the partners
of the petitioner , was not contributed by the partners
as capital in the firm and the building is also not shown
in the books of accounts as an asset owned by the
firm. The property continues to be owned by the
partners in their individual capacity.
15. In M.C. Mehta's case (supra), Ministry of Urban
Development framed the policy for conversion of the
property to mixed land use and further notified the
roads, on which the property situated could be
converted to mixed land use. Pursuant to the policy
framed by the Ministry of Urban Development, the
properties situated on the said notified road could be
WP(C) No. 3094/2013 6
converted and put to comme rcial use, subject to
payment of conversion charges. This resulted and
permitted change of land use for future.
16. As per the policy only those owners, who apply and
pay the conversion charges, were permitted to put
their residential properties to commercia l or mixed use.
Once a property stands converted to
commercial/mixed land use , there was substantial
enhancement and increase in value of the said
property. There being an enduring benefit from the
17. The conversion charge paid for conversio n of the
property from residential to commercial was a one
time charge and not a recurring expenditure incurred
from year to year. The one time conversion charge for
conversion of the property from residential to
commercial use is distinct and different f rom annual
house tax paid at commercial rates. Annual house tax
WP(C) No. 3094/2013 7
paid on commercial rate is paid for the use during the
financial year. It is an annual and reoccurring payment
which the land lord, tenant or the occupant must make
under the applicable statu te. The one time conversion
charge permanently converts the use of the property
from residential to commercial/mixed land use . Once
the property is converted, the benefit of the same will
enure to the owners of the property. It enhances and
adds to the va lue of the capital asset i.e. the property
18. In the present case, the owners of the property are the
partners in their individual capacity and as such the
enduring benefit of conversion from residential to
commercial enures to the owners. In case the
petitioner assessee were to discontinue its business,
even then the partners i.e. the owners of the property
in their individual capacity would still have the right to
put the property to commercial /mixed land use. This
advantage and benefit that the property has acquired
WP(C) No. 3094/2013 8
by payment of conversion charges will continue to
enure to the individual partners irrespective of the
assessee discontinuing to do the business of guest
house from the said property. Thus, this expenditure is
a capital expenditure and has brough t about an
advantage of an enduring nature, and this advantage
is attached to the property. Since the advantage of
enduring nature is attached to the property, the benefit
of the same will enure to the owners of the said
property. The expenditure for acquiring the said
advantage is an expenditure incurred purely for the
individual partners. Had this expenditure been incurred
by the individual owner , it would have been a capital
and not a revenue expense. There is no justification
and reason, why the petitioner firm made the said
payment and on what terms/ basis payment was made.
The said expenditure cannot be treated as running
business expenditure and cannot be claimed as a
deduction under Section 37 of the Act by the
WP(C) No. 3094/2013 9
petitioner/assessee. At best it would b e payment on
behalf of and at the behest of the owners, who were
also partners of the petitioner.
19. Individual owners and the partnership firm are two
distinct tax en tities for the purpose of the Act and are
liable to pay income tax on their income after red ucing
revenue expenditure. But in the facts of the present
case while deciding the question of enduring benefit,
we cannot be oblivious and ignore the practical reality
that unless the partners of the petitioner want the
partnership firm i.e. the petitioner cannot continue to
operate and run the guest house. Therefore, while
determining and deciding the question whether the
expenditure was capital or revenue in nature, the fact
and also the position that the expenditure should have
been incurred by the owners cannot be ignored.
20. We are of the considered view that the nature of
expenditure is clearly capital and incurred on account
WP(C) No. 3094/2013 10
of the individual partners and is neither a capital nor
revenue expenditure of the partnership firm
respondent assessee. We find no infirmity in the order
rejecting the application of the petitioner under Section
264 of the Act, refusing to interfere in the assessment
order, whereby the said expenditure has been
21. The present petition is accordingly dismissed. There
shall be no orders as to costs.
SANJEEV SACHDEVA, J.
February 21, 2014 SANJIV KHANNA, J.
WP(C) No. 3094/2013 11