Conversion charges on factory land for using it for other commercial activities is revenue expenditure

P. Dam Kanunjha for the Appellant. R.M. Mehta, Adv. for the Respondent.

ORDER

Chandramohan Garg, Judicial Member – This appeal has been filed by the Revenue against the order of the Commissioner of Income-tax (Appeals)-IX, New Delhi, dated November 25, 2011, in Appeal No. 26/10-11 for the assessment year 2008-09. Although the Revenue has raised as many as five grounds in this appeal but except main ground No. 2, other grounds are argumentative and supportive to the main ground No. 2 which reads as under :

“2. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) has erred in allowing the deduction of interest of Rs. 1,36,17,335 as revenue expenditure even though the same was never claimed by the assessee in the return of income.”

2. Brief facts giving rise to this appeal are that the assessee-company was engaged in the business of manufacturing of precision instruments mainly for the Ministry of Defence, Government of India, British Aerospace, U.K. and for GE med. The assessee filed a return of income on September 27, 2008, declaring an income of Rs. 3,97,79,640 and the same was processed under section 143(1) of the Income-tax Act, 1961. Subsequently, the case was selected for scrutiny through CASS and statutory notices under sections 143(2) and 142(1) of the Act, along with detailed questionnaire, were served on the assessee. The Assessing Officer noticed that the assessee paid Rs. 2,66,97,900 towards permission from the Government under a new policy allowed the land to be used for any other purpose besides running a factory including the commercial/service activities on payment of certain amount. The said amount of instalment was inclusive of interest of Rs. 1,36,17,335. The Assessing Officer also noticed that the assessee did not make claim in the return of income but later put forth the claim of interest as revenue expenditure though a letter filed during the assessment proceedings as it was not claimed in the profit and loss account. The Assessing Officer after detailed deliberations held that the amount of instalment inclusive of interest was capital in nature and cannot be allowed as revenue expenditure to the assessee. The Assessing Officer also observed that the claim of revenue expenditure pertaining to interest paid in the instalment had not been made in the return, therefore, the same is not allowable.

3. Being aggrieved by the above assessment order, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals) which was allowed on this issue. Now, the aggrieved Revenue is before this Tribunal with the main ground as reproduced hereinabove.

4. We have heard arguments of both sides and carefully perused the relevant material placed on record before us. The learned Departmental representative submitted that in view of decision of the hon’ble Supreme Court in the case of Goetze (India) Ltd. v. CIT [2006] 284 ITR 323 the Assessing Officer is not empowered to entertain any claim of the assessee which could not be placed in the return of income or by way of a revised return. The learned Departmental representative further submitted that the Commissioner of Income-tax (Appeals) erred in allowing the deduction of interest as revenue expenditure even though the same was never claimed by the assessee, either in the return of income or by way of revised return of income. The learned Departmental representative further contended that the assessee could have claimed it by way of a revised return during the course of assessment proceedings only and the Commissioner of Income-tax (Appeals) was not empowered to allow the same during the first appellate proceedings. The learned Departmental representative vehemently contended that the Commissioner of Income-tax (Appeals) was not justified in allowing the interest as revenue expenditure even though the same has been incurred in respect of capital asset as per facts and circumstances of the case. The learned Departmental representative finally prayed that the impugned order may be set aside by restoring that of the Assessing Officer.

5. Replying to the above, learned counsel for the assessee supporting the impugned order submitted that in the case ofGoetze (India) Ltd. (supra) the hon’ble apex court did not impinge on the power of the Tribunal and the first appellate authority. Learned counsel further contended that the asset was already in existence and the business of the assessee was running from the same factory, therefore, the interest paid along with instalment towards conversion charges of land cannot be capitalised. Learned counsel has further drawn our attention and submitted that the payment of interest on the instalment of principal amount in this case is akin to the payment of the same on loans taken for the acquisition of fixed assets like vehicle, machinery, etc., and, therefore, interest paid on loans taken for fixed asset is allowable as revenue expenditure.

6. On a careful consideration of the above rival submissions, at the outset, we note that the Commissioner of Income-tax (Appeals) allowed the appeal of the assessee on this issue with following observations, findings and conclusion :

“4.10 I have considered the findings recorded by the learned Assessing Officer as per the assessment order, the submissions made by the learned authorised representative and the facts of the case on record. The main issue is as to whether the interest of Rs. 1,36,17,335 is revenue or capital in nature ? As explained above it is admitted that the interest was paid in respect of the conversion charges payable for the land, where the only factory of the appellant from which the business is carried on and continues to be carried on till date, is situated. The amount of conversion charges have already been capitalised and the issue at hand is only as regards the allowability of the interest paid on the instalments of the principle amount. The appellant submitted that the appellant’s factory is situated on the Industrial site No. 143B in Industrial Area Phase I Chandigarh. The Chandigarh U.T. Administration under a new policy allowed the land to be used for any other purpose besides running a factory including the commercial/service activities on payment of a certain sum of money. As it was a scheme open for a fixed time, the appellant thought it commercially prudent to avail of the scheme. The appellant decided to opt for the scheme as it would give it greater flexibility to add additional area in the factory for its office and other use. There was no plan for demolishing or stopping the operation of the factory at the aforesaid land and the production is continuing from the same place till date. It is pertinent to note that the appellant’s business is in existence and the very land for which conversion fee was paid is the only manufacturing/production facility of the appellant from where the business is being run for the last over 30 years.

4.11 The capitalisation of the conversion charges was made as the land is capable of being used for commercial and other purposes. But as the asset is already in existence and the business is running from the same very factory, the interest paid cannot be capitalised. Instead it is a revenue expense and hence the sum of Rs. 1,36,17,335 is allowed to be deducted from the total income. The payment of interest on the instalments of principal amount in this case is akin to the payment of the same on loans taken for acquisition of fixed assets like vehicles, machinery, etc. When the interest paid on loans taken for fixed assets, is allowed as revenue expenditure, I see no reason as to why the same should be treated of capital in nature on the case under consideration. It is trite that notwithstanding treatment of a particular item in the books of account, whether the expense is revenue or not has to be decided on the nature of the expense. Therefore, even though said interest amount was capitalised in the books of account erroneously, which was later rectified in the books of account during financial year 2009A-10, the nature of the expense is revenue and the same is a deductible expenditure. The Assessing Officer is, therefore, directed to allow the claim of Rs. 1,36,17,335 on account of interest made by the appellant. Ground No. 2 is accordingly allowed to the appellant.”

7. Under peculiar facts and circumstances of the present case and the conclusion of the Commissioner of Income-tax (Appeals), as mentioned hereinabove, it is not in dispute that the assessee paid installment towards conversion charges of land and the asset was already in existence and the business of the assessee was running from the very same factory premises. Learned counsel of the assessee fairly accepted that the assessee neither made any claim in the original return nor filed any revised return and the interest was also not found placed in the profit and loss account but the assessee pressed his claim by way of letter filed before the Assessing Officer during the assessment proceedings. In view of the decision of the hon’ble apex court in the case of Goetze (India) Ltd. (supra), the Assessing Officer is not empowered to entertain any claim out of return of income which could not find place in the original return of income or otherwise than by revised return but in the same decision, the hon’ble apex court made it clear that this did not impinge on the power of the Tribunal. However, we are of the considered opinion that since the asset, i.e., factory premises was already in use of the assessee, therefore, the interest paid along with instalment towards conversion of charges of land cannot be treated as capital expenditure and the same cannot be held to be capital expenditure. Thus, we are of the opinion that the Commissioner of Income-tax (Appeals) was right in holding that the interest expenditure cannot be capitalised and the same was allowable as revenue expenditure. Accordingly, we are of the considered opinion that the Commissioner of Income-tax (Appeals) was right in allowing the appeal of the assessee on this issue and we are unable to see any ambiguity, infirmity or any other valid reason to interfere with the order of the Commissioner of Income-tax (Appeals).

8. In the result, the appeal of the Revenue is dismissed.