TaxTMI 
TaxTMI 
TaxTMI 
2005 (1) TMI 605
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....out prejudice, since Learned CIT(A) has held that notional income from trucks had accrued. She ought to have allowed depreciation on the trucks. 2.1 The Learned CIT(A) erred in not adjudicating the ground regarding the disallowance to depreciation, which was specifically raised before him. 2.2 It is submitted that in the facts and the circumstances of the case, and in law, no such disallowance was called for. 3.1 The Learned CIT(A) erred in not allowing the claim of Appellant for deduction of an amount of Rs. 9,87,32,500 for repair of damages caused to the Hotel on account of bomb blast. 3.2 It is submitted that in the facts and the circumstances of the case, and in law, the disallowance was allowable while computing total income of the Appellant. 4.1 The Learned CIT(A) erred in not adjudicating the ground regarding addition of Rs. 92,27,566 made by the Assessing Officer on account of license fees receivable from ITC. 4.2 It is submitted that in the facts and the circumstances of the case, and in law, no such addition was called for." 2. We have gone through the application for admission of additional grounds. The assessee has submitted that non-incorporation of these ....
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.... owned a hotel at Bandra known as Hotel Sea Rock. After running the hotel for some time the assessee entered into an agreement with M/s. ITC in the year 1986, by which the entire running of hotel was entrusted to M/s. ITC and in lieu of that the assessee was paid annual license fees, which was office [sic.-offered] for taxation. In the year 1993, there occurred a bomb blast (12-3-1993). The hotel was damaged especially the 18th floor was severely damaged which required extensive repair. The assessee got the evaluation of the cost of repair by architects and engineers. The cost was evaluated at Rs. 14,87,32,500. The assessee made insurance claim of Rs. 5 crores and the balance amount of Rs. 9,87,32,500 was claimed as deduction being the cost of repair in the return for assessment year 1993-94. The assessee was filed return of income on 27-12-1993 declaring a loss of Rs. 5,76,13,739. The same was revised to loss of Rs. 5,81,89,890. The Assessing Officer completed the assessment on 27-12-1995 under section 143(3) and assessed the total taxable income at Rs. 4,33,19,342. The computation of total income is reproduced below : Net loss as per Profit & Loss A/c. Rs. 5,65,88,774 ....
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....ase by the assessee. It was submitted that the assessee had given certain trucks on lease to various parties. The lease rental income was being offered to tax on regular basis in the past and correspondingly depreciation being claimed on the leased trucks was also allowed in the past. Subsequently, serious disputes arose between the assessee and the lessee which led to filing of suites in the courts of law. Under the circumstances, the lessee stopped paying the rent and they did not return the trucks as well. Due to this reason the assessee did not offer any lease rental income in its return. However, since the assets continued to remain employed in leasing business, the assessee continued to claim depreciation on the said leased trucks amounting to Rs. 14,48,353. It is submitted that when the original assessment was completed the Assessing Officer did not tax such hypothetical income. It is submitted that when the issue of depreciation was set aside by the CIT(A) it was categorically mentioned by the CIT(A) that only the ownership of the vehicle is to be established. If this test of ownership is specifically explained, the assessee can be allowed depreciation notwithstanding the f....
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....nt and, therefore, it was liable to be included in the total income of the assessee. 8. We have considered the submissions from both the sides. We have also carefully perused the orders of the authorities below. In our opinion the assessee succeeds on this preliminary ground itself, that is the issue regarding the jurisdiction to tax such income in second round of appeal. A bare perusal of the direction given by the CIT(A) in the first round makes it clear that what was set aside by the CIT(A) was only the issue regarding the claim of depreciation and that too with categorical direction to confine his verification only on particular issue i.e., ownership issue. The relevant portion is reproduced below : "Needless to say that the Assessing Officer once again would call for all details of court proceedings and determine whether appellant company is actually satisfying the condition of ownership of the vehicles. If this test of ownership is satisfactorily explained and proviso the appellant can be allowed depreciation notwithstanding the fact that hire charges were not received during the year. With these guidelines this issue is referred back to the file of the Assessing Officer f....
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....onclusion either way. After mentioning the fact of ownership, the learned CIT(A) has take up the issue of hire charges and late fees income. It is submitted that the assessee has proved the test of ownership in terms of specific directions given by the earlier CIT(A)'s order, which order and direction, was final and unchallenged by the department, the claim of depreciation should be allowed on merit. The learned Departmental Representation sub- mitted that a serious litigation was going on with the lessee. The assessee had not only lost the hire charges income but lost the hire equipments. The learned Departmental Representative supported the action of the Assessing Officer by contending that since no details were filed before the Assessing Officer, the Assessing Officer was perfectly, justified in refusing the claim of depreciation of the assessee. The learned Departmental Representative read over the relevant portion of the order of the Assessing Officer to support his argument. At this stage, attention of the learned Departmental Representative was drawn by the Bench to the apparent contradiction in the stand taken by the department, more specifically by the Assessing Officer an....
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....ssing Officer. His action in this regard is wholly upheld." It is submitted that the above finding of the CIT(A) was not challenged by the department. But the assessee carried the matter before the ITAT. When the matter was heard by the Tribunal in the first round, the learned Departmental Representative filed certain materials which indicated that there was dispute between the assessee and M/s. ITC about the liability of the repairs and this material was in the form of suit filed by M/s. ITC. The learned Departmental Representative drew our attention to the order of ITAT which is placed at pages 17 to 20 of the paper-book. He read out a portion of paras 3 and 4 of the Tribunal order which is reproduced below : "3. The CIT (Appeals) held that the expenditure may be of a revenue nature but disallowed the claim of deduction of Rs. 9,87,32,500 on the ground that the amount was not actually spent on repairs. 4. The department is not in appeal against the finding of the CIT (Appeals) that the expenditure may be of a revenue nature. During the course of hearing, the learned counsel for the assessee mentioned that when the case came up for hearing before an earlier Bench, the learne....
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....ackground, the learned AR submitted that the issue to be adjudicated is whether, the claim of the assessee be denied just because, according to the department, the question as to who is to bear the burden of repairs had not reached a finality. According to the learned AR this is the only issue that survives for consideration, which is in conformity with the stand taken by the department itself in the earlier proceedings. The learned counsel referred to the suit No. 1877 of 1995 filed by M/s. ITC which is placed in the paper-book. The learned AR submitted that the suit was filed by ITC against the assessee asking for compensation by way of damages from the assessee amounting to Rs. 117.86 crores, in respect of administrative expenses incurred by ITC as well as loss suffered by ITC to the assessee not carrying out the necessary repairs in time. It is submitted that it is the claim of ITC that the responsibility for carrying out the repairs is that of the assessee, which the assessee had itself admitted and due to the failure on the part of the assessee to carry out the contractual obligations, ITC had suffered loss in the form of loss of profit due to shrinkage in its business. For t....
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....han what has been claimed and allowed in this year, the difference in the amount could always be brought to tax as per the provisions of section 41(1) of the Act. It is submitted, that, as such, the interest of the revenue is fully safeguarded, even if the claim is allowed in this year and the interest of the assessee is not at all safeguarded, if the claim is not allowed in the year under consideration, 14. Referring to the observation of the Assessing Officer that no income has accrued to the assessee and no amount has been paid, the learned counsel drew our attention to section 43(2), which defines the term paid and reads as under : "paid" means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head "Profits and gains of business or profession" Thus it is submitted that the Act itself deems even accrual of liability or incurring a liability/expenses as paid for the purposes of sections 28 to 41 which includes, so far as the present appeal is concerned, section 31. In view of this, it is submitted that the reason given by the department that the claim is not allowable because no amount was paid ....
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....n the assessee, which was admitted so and, in fact, carried out by the assessee. (ii) As against that, M/s. ITC has flatly denied its liability in this regard and in fact has filed the suit against the assessee, asking for compensation for loss of profit due the shrinkage in its business. (iii) Even out of commercial expediency, the assessee being owner of the hotel, it was prudent on the part of the assessee to ultimately to take the responsibility for the repairs and bear the liability. (iv) The liability had actually arisen, the damage had already occurred, which was required to be undertaken in any case to restore the business to its normalcy. As such, nothing was contingent or uncertain. (v) Even the amount was quantified scientifically, which was done by well-known and reputed architects and engineers. As such, the amount of claim was not ad hoc amount. (vi) The actual work of repairs was undertaken by the appellant under supervision of the court receiver appointed by the High Court. (vii) While the interest of the revenue is adequately safeguarded if the claim is allowed this year the appellant may lose the entire claim if the claim is not allowed in this year." ....
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....rned, the liability was on the revenue field. Now coming to the issue about litigation, we have perused the entire suit papers, as well as the other correspondences and evidence filed by the assessee in the paper-book. On perusal of the suit filed by M/s. ITC against the assessee, it becomes clear that not only ITC had flatly denied having anything to do with the liability for the repairs, but the assessee itself had agreed to carry out the repairs. This is clear from the fact as reflected in the suit, more specifically from pages 8, 9, 10, 15, 17 and 21. This fact is duly supported by the actual correspondences exchanged between the assessee and M/s. ITC. We have also perused such correspondences, which are annexed as various Exhibits in the said plaints. What emerges on perusal of all these record is that it was purely to safeguard its own business interest that the assessee had volunteered to undertake the work of repairs so as to avoid any delay and loss of profit. This is evident from the letters of the assessee dated 21-6-1993 (p. 56 of the paper-book), letter dated 12-8-1993 (p. 55 and 56 of the paper-book), letter dated 30-8-1993 (p. 57 of the paper-book), letter of M/s. IT....
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....rous judgments and various aspects especially the judgment of the Hon'ble Supreme Court in the case of Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 , is worth mentioning. This decision has been followed subsequently in various other judgments, which have also been referred to by the learned counsel in this legal note, submitted separately. The relevant portion of the decision in the case of Calcutta Co. Ltd. is as under : "Inasmuch as the liability which had thus accrued during the accounting year was to be discharged at a future date the amount to be expended in the discharge of that liability would have to be estimated in order that under the mercantile system of accounting the amount could be debited before it was actually disbursed. The difficulty in the estimation thereof again would not convert an accrued liability into a conditional one, because it is always open to the income-tax authorities concerned to arrive at a proper estimate thereof having regard to all the circumstances of the case." In view of the above discussion, we are of the opinion that the claim of the expenditure for repairs made by the assessee is clearly allowable. Accordingly the Assessing Officer is di....