2012 (3) TMI 321 - HC - Income Tax

Court rules on taxation of infrastructure funds and interest income in revenue expenditure case

The court concluded that the expenditure on constructing flyovers and pedestrian facilities was considered revenue expenditure. The amounts transferred to ... Capital or revenue expenditure - enduring nature - 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 - held that the expenditure incurred on construction of flyovers etc was revenue expense and not capital expense - Decided in favor of the assessee. Regarding diversion - 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, (1960 -TMI - 49527 - SUPREME Court) - 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 - 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 said 95 paise was not transferred or paid by the assessee to the Delhi Administration - held that the amount standing in TIUF was not diverted at source by way of overriding title and, therefore, was to be included in the taxable income of the assessee - Decided against the assessee. Taxability of part of sale proceeds kept in separate account - held that:- Mere fact that the amount was retained in the bank account of the assessee under the head ‘OGES’, does not show or prove that it was the income of the assessee. Mere realization of an amount in course of trading was not determinative whether the amount received was income. The court/authorities must determine the nature and character of the receipts before the amount can be taxed as income. This part of the sale consideration i.e. OGES was kept in a deposit unrelated to the business of the respondent assessee. The assessee did not exercise dominion over the said fund/deposit and deal with the said fund/deposit. Keeping in view the aforesaid elucidation of law and applying the same to the factual matrix, noting the nature and character of the OGES, it has to be held that the same was not taxable income of the assessee. The same has to be excluded from the profit. The aforesaid receipts were not income earned and do not have character of income earned by the assessee over which it had dominion or right. Issues Involved:1. Diversion of income by overriding charge.2. Classification of expenditure on flyovers and pedestrian facilities as revenue or capital expenditure.3. Taxability of amounts transferred to Transport Infrastructure Utilization Fund (TIUF).4. Taxability of interest earned and transferred to TIUF.5. Taxability and treatment of Other General Economic Services (OGES).Issue-wise Detailed Analysis:1. Diversion of Income by Overriding Charge:The primary issue was whether certain sums constituted a diversion by overriding charge. The court examined the nature of the obligations and found that the amounts received remained with the assessee and were used for specific purposes like construction of flyovers. The court concluded that there was no diversion of income by overriding title as the amounts were not transferred to any third party but were retained by the assessee for specific uses.2. Classification of Expenditure on Flyovers and Pedestrian Facilities:The court addressed whether the expenditure on constructing flyovers and pedestrian facilities should be treated as revenue or capital expenditure. The tribunal and CIT (Appeals) had held that the expenditure was revenue in nature. The court agreed, noting that the assessee was not the owner of the constructed structures and did not derive an enduring benefit from them. The expenditure was incurred as a condition for conducting the liquor trade, thus qualifying as revenue expenditure under Section 37 of the Income Tax Act.3. Taxability of Amounts Transferred to TIUF:The court examined whether the amounts transferred to TIUF were diverted at source by overriding title and thus not taxable. It was determined that the amounts were retained by the assessee and used for specific purposes mandated by the Delhi Administration. The court found no diversion of income at source and held that the amounts were taxable as they were not transferred to a third party but used by the assessee itself.4. Taxability of Interest Earned and Transferred to TIUF:The court addressed the taxability of interest earned on amounts in the TIUF. It was held that the interest earned and transferred to TIUF was income of the assessee and thus taxable. The tribunal's decision to treat the interest as non-taxable was reversed, aligning with the principle that income retained and used by the assessee is taxable.5. Taxability and Treatment of OGES:The court evaluated whether the sale proceeds under OGES were taxable. It was noted that the sale proceeds were transferred to the Delhi Administration as per the letter dated 5th February 1992. The court concluded that the amounts under OGES were not taxable income of the assessee as they did not have dominion or control over these amounts. The amounts were treated as deposits meant to be transferred to the Delhi Administration, thus not forming part of the assessee's income.Conclusion:The court answered the questions of law raised by the Revenue and the assessee, affirming that:- The expenditure on flyovers and pedestrian facilities was revenue expenditure.- The amounts in TIUF were taxable as they were not diverted at source.- The interest earned on TIUF was taxable.- The amounts under OGES were not taxable as they were not income of the assessee.The appeals were disposed of with no orders as to costs.