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March, 29th 2014

%          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,



                           Through: Mr. Balbir Singh with Mr.
                                    Rupender Sinhmar and Mr.
                                    Abhishek Singh Baghel,




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

      said conversion.

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
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