* IN THE HIGH COURT OF DELHI AT NEW DELHI Judgment Reserved On: 2.12.2011 % Judgment Pronounced On: 16.12. 2011 + IT A 792/2008 AIRPORT AUTHORITY OF INDIA ... APPELLANT Through :. Mr. O.S. Bajpai, Sr. Advocate with Ms. Manasvini Bajpai and Mr. V.N. Jha, Advocates. VERSUS COMMISSIONER OF INCOME TAX ... RESPONDENT Through: Mr. Kamal Sawhney, Sr. Standing Counsel. CORAM:- HON'BLE THE ACTING CHIEF JUSTICE HON'BLE MR. JUSTICE RAJIV SHAKDHER HON'BLE MR. JUSTICE R.V. EASW AR A.K. SIKRI, ACTING CHIEF JUSTICE: For orders, see ITA 432/2008. DECEMBER 16, 2011 skb 1!;!':1~ ACTING CHIE; JUSTICE 7jwJ~ (RAJIV SHAKDHER) JUDGE { ~ ~~VL---, .. (R.V.EASWAR) JUDGE Digitally Signed By:AMULYA Certify that the digital file and physical file have been compared and the digital data is as per the physical file and no page is missing. Signature Not Verified * IN THE HIGH COURT OF DELHI AT NEW DELHI + ITA 432 OF 2008 ITA 433 OF 2008 ITA 437 OF 2008 ITA 517 OF 2008 ITA 792 OF 2008 ITA 1250 OF 2008 ITA 1251 OF 2008 % Judgment Reserved On: 2.12.2011 Judgment Pronounced On: 16.12. 2011 ( 1) ITA 432/2008 AIRPORT AUTHORITY OF INDIA ... APPELLANT Through :. Mr. O.S. Bajpai, Sr. Advocate with Ms. Manasvini Bajpai and Mr. V.N. Jha, Advocates. VERSUS COMMISSIONER O:F INCOME TAX ... RESPONDENT (2) IT A 433/2008 Through: Mr. Kamal Sawhney, Sr. Standing Counsel. AIRPORT AUTHORITY OF INDIA ... APPELLANT (1 l Through :. Mr. O.S. Bajpai, Sr. Advocate with M.s. Manasvini Bajpai and Mr. V.N. Jha, Advocates. ITA Nos.ITA 432/2008,433/2008,ITA 437/2008,ITA 517/2008 ITA 792/2008,ITA 1250/2008,ITA 1251/2008 Page 1 of 26 VERSUS COMMISSIONER OF INCOME TAX ... RESPONDENT Through: Mr. Kamal Sawhney, Sr. Standing Counsel. (3). ITA 437/2008 AIRPORT AUTHORITY OF INDIA ... APPELLANT Through :. Mr. O.S. Bajpai, Sr. Advocate with Ms. Manasvini Bajpai and Mr. V.N. Jha, Advocates. VERSUS COMMISSIONER OF INCOME TAX ... RESPONDENT Through: {5 1 ) ITA 517/2008 Mr. Kamal Sawhney, Sr. Standing Counsel. AIRPORT AUTHORITY OF INDIA ... APPELLANT Through :. Mr. O.S. Bajpai, Sr. Advocate with Ms. Manasvini Bajpai and Mr. V.N. Jha, Advocates. VERSUS COMMISSIONER OF INCOME TAX ... RESPONDENT ~? J ITA 792/2008 ._,_, Through: Mr. Kamal Sawhney, Sr. Standing Counsel. AIRPORT AUTHORITY OF INDIA ITA Nos.IT A 432/2008,433/2008,ITA 437/2008,ITA 517/2008 ITA 792/2008,ITA 1250/2008,ITA 1251/2008 ... APPELLANT Page 2 of 26 Through:. Mr. O.S. Bajpai, Sr. Advocate with Ms. Manasvini Bajpai and Mr. V.N. Jha, Advocates. VERSUS COMMISSIONER OF INCOME TAX ... RESPONDENT Through: Mr. Kamal Sawhney, Sr. Standing Counsel. ( 6) IT A 1250/2008 .Q Q_) AIRPORT AUTHORITY OF INDIA ... APPELLANT Through :. Mr. O.S. Bajpai, Sr. Advocate with Ms. Manasvini Bajpai and Mr. V.N. Jha, Advocates. VERSUS COMMISSIONER OF INCOME TAX ... RESPONDENT Through: Mr. Kamal Sawhney, Sr. Standing Counsel. (7) ITA 1251/2008 AIRPORT AUTHORITY OF INDIA ... APPELLANT Through:. Mr. O.S. Bajpai, Sr. Advocate with Ms. Manasvini Bajpai and Mr. V.N. Jha, Advocates. VERSUS m COMMISSIONER OF INCOME TAX ITA Nos.ITA 432/2008,433/2008,ITA 437/2008,ITA 517/2008 IT A 792/2008,IT A 1250/2008,IT A 125112008 ... RESPONDENT Page 3 of 2fi W W I ~ -- -- ----..------------------- --------1- W W f 11 W W W I I I • --T""'Y" CORAM:- Through: Mr. Kamal Sawhney, Sr. Standing Counsel. HON'BLE THE ACTING CHIEF JUSTICE HON'BLE MR. JUSTICE RAJIV SHAKDHER HON'BLE MR. JUSTICE R.V. EASWAR A.K. SIKRI, ACTING CHIEF JUSTICE: 1. In all these appeals, preferred by the singular assessee namely Airport Authority of India, two additions made by the Assessing Officer and sustained by the Tribunal are questioned. Vide orders dated 14 111 July, 2011 ~ the Division Bench of this Court referred these two additions/issues for a ~ ' , J decision by the Full Bench. At the time of arguments, it was agreed to between the parties that these issues can be decided on merits by the Full Bench. Accordingly, appeals are admitted on the following substantial questions of law:- " (i) Whether on the facts and circumstances of the case and in law, the ITAT has erred in holding that the appellant was not entitled to deduct the amount provided under mercantile system of accounting towards the liability on account of expenditure to be incurred in removal of encroachments in and around the technical area of the Airport which was necessitated out of safety and security consideration in ITA Nos.ITA 432/2008,433/2008,ITA 437/2008,ITA 517/2008 ITA 792/2008,ITA 1250/2008,ITA 125112008 I T--,i--- Page 4 of 2() T' the normal course of business of authority enjoined with the responsibilities of maintenance and operation of airports all over India? (ii)Whether on the facts and circumstances of the case and in law, the ITAT was justified in treating the amount raised in proforma invoices as income relying on its order for the assessment year 1998-99? (iii)Whether the order passed by the ITAT 1s perverse in law and on facts of the case?" 2. It is not necessary to state in detail the factual matrix. Our purpose shall be served by mentioning the material facts, that too, in brief, which touch upon the aforesaid question. 3. The appellant Airport Authority of India is a statutory Authority constituted first under the International Airports Authority of India, Act, 1972 when it took over. the Central Warehousing Corporation. After repeal of the said Act, the Airport Authorities Act of 1994 was enacted and the appellant/assessee took over the functions of management of certain airports and other allied activities. On some of these airports, illegal encroachments ~ were found in and around the security area of the airports. With the ,_) intervention of local authorities, schemes were devised to rehabilitate the ITA Nos.IT A 432/2008,433/2008,ITA 437/2008,ITA 517/2008 ITA 792/2008,ITA 1250/2008,ITA 1251/2008 llf • ---~----- ---- Page 5 of 215 encroachers and the money required for rehabilitation. For this reason, the assessee has been making provisions for the aforesaid expenditure to be incurred in removal of encroachers and has been incurring the expenditure for the said purpose from time to time. Such a provision was made in all these assessment years from 1996-97 onward which are the subject matters of these appeals. The Assessing Officer disallowed the same and added to the income of the assessee which order has been upheld till the stage of the Tribunal. 4. The assessee has also given space in the airports to various government , J: agencies like the Police Department, Post and Telegraph, Mctrological Department etc. According to the assessee, no payment is made by these government agencies to the assessee, however, on the advice of CAG the assessee has been raising proforma invoices/bills. Even when no money was received in respect of those proforma bills ever since the assessee Authority came into existence, the Assessing Officer treated the amount of those invoices/bills as income of the assessee in all these assessment years on the ground that the assessee was following mercantile system of accounting and, therefore, the income has accrued by the very fact that spaces were given to ITA Nos.IT A 432/2008,433/2008,ITA 437/2008,ITA 517/2008 ITA 792/2008,ITA 1250/2008,ITA 1251/2008 Page 6 of 26 these agencies and against those spaces proforma invoices/bills were raised. These additions have also been sustained till the stage of the Tribunal. QUESTION OF LAW NO. (i): 5. The case setup by the assessee before the authorities below was that due to influx and increase in population in metropolitan cities, the land around the airport area was illegally encroached and hutments were constructed thereon, thus, endangering the safety of aircraft while taking off or landing. The cluster of hutments also attracted vultures and birds which prove dangerous to the aircraft. Over the years the hutmcnts became slums. In ] Mumbai alone it was estimated that there were about 63 slum pockets with about 85,000 hutments. These illegal encroachments were sought to be removed with the help of the State Governments. It was iUrthcr submitted that expenditure on such removal was estimated at about Rs.200 crore in Mumbai alone. Similar situations existed in other metropolitan cities. Since removal of encroachments was a on-going process, a liability of Rs.20.00 crores was provided in each of these assessment years in the books of ·~ ' ) l) ITA Nos.ITA 432/2008,433/2008,ITA 437/2008,ITA 517/2008 IT A 792/2008,IT A 1250/2008,IT A 1251/2008 Page 7 of 2fi accounts of the assessee. It was also argued that apart from making provision certain amount was in fact paid as well every year. 6. On the aforesaid basis the case set up by the assessee was that the expenditure was only to secure the existing assets and no new assets came into existence in the books of the assessee and therefore such an expenditure was revenue in nature. It was further submitted that since the assessee was maintaining the books of accounts on mercantile method, it was necessary to take this liability in its books. Reliance was placed by the assessee in the case of Bharat Earth Movers Vs. CIT, 112 ITR 61 to argue that if a liability .~ I >' had been incurred, the deduction should be allowed even though it may ) have to be quantified and discharged at a future date. It was also argued that in any case some specified amounts had been paid in these assessment years. For example, as per the assessee in the assessment year 1998-99 a sum of Rs. 16.01 crores had in fact been paid. The Tribunal, however, did not accept the aforesaid submissions of the assessee giving its own reasons. We will advert to these reasons at a later stage. Before that, we would like to point out that a () Division Bench of this Court in its decision dated 15th October 2001 passed in 1{ ) the case of the assessee itself, in a case related to the assessment year 1997-98 ITA Nos.IT A 432/2008,433/2008,ITA 437/2008,ITA 517/2008 ITA 792/2008,ITA 1250/2008,ITA 1251/2008' Page 8 of 24> f - -- - - - --- --· -------- held that such an expenditure was capital in nature. Therefore, it would be necessary to take note of that judgment and first decide the issue as to whether the expenditure in question, if incurred would be capital or the revenue in nature. 7. For identical purpose namely for removal of hutments/ encroachers, the assessee had paid a sum of Rs. 19.89 crores to the DDA for development of an alternate site for the residents of that area who were vacated as their lands were acquired for expanding of International Airport of Delhi. The Assessing Officer and the Tribunal held that the expenditure was capital in nature. -~ (' Reference was made to the High Court on the following question:- --.../ "Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the expenditure of' 19.89 crores was a capital expenditure as it gave the assessee addition of enduring nature?" 8. This Court answered the aforesaid question in the affirmative i.e. in favour of the Revenue and against the assessee. It had referred to the judgment of Supreme Court in V. Jaganmohan Rao Vs. Commissioner of :) Income Tax, 751 !TR 373 where money was paid to perfect a title or as l) • consideration for getting rid of a defect in the title or a threat of litigation the ITA Nos.IT A 432/2008,433/2008,ITA 437/2008,ITA 517/2008 IT A 792/2008,IT A 1250/2008,IT A 1251/2008 • Page 9 of 26 f(b ! payment would be a capital payment. Two more decisions of Supreme . Court in Sitalur Sugar Works Ltd. Vs. Commissioner of Income Tax 491 !TR 160 and Bombay High Court in Hardiallia Chemicals Ltd. Vs. C/1~ 218 !TR 598 were noted wherein the Court had held that where expenditure was incurred by the assessee for shifting the factory from one place to another to improve the business, the same was capital expenditure in nature. 9. However, at the time of arguments nobody had appeared on behalf of the assessee. An application was filed for setting aside the aforesaid ex parte order which was allowed by this Court vide a detailed judgment which is ~· _J reported in 286 !TR 323. Thereafter, the reference was heard afresh. After '.J hearing the counsel for the parties, the Division Bench of this Court passed orders dated 6 1h October, 2006 reiterating the ex parte view taken by the Division Bench in its order dated 15th October, 2001. While deciding the question in the aforesaid manner the discussion which ensued is as under:- "We have heard learned Counsel for the Revenue. There is no appearance on behalf of assessed in spite of notice. Learned Counsel for the Revenue submitted that the Tribunal has analysed the factual position and has come to hold that the expenditure incurred resulted in bringing into existence an enduring benefit ITA Nos.ITA 432/2008,433/2008,ITA 437/2008,ITA 517/2008 IT A 792/2008,IT A 1250/2008,IT A 125112008 Page 10 of ;~6 u 10. and, Therefore, was rightly held to be capital m nature. In V. Jaganmohan Rao v. Commissioner of Income Tax [1970]75ITR373(SC) it was held that where money is paid to perfect a title or as consideration for getting rid of a defect in the title or a threat of litigation the payment would be a capital payment and not a revenue payment. In Sitalpur Sugar Works Ltd. v. Commissioner of Income Tax [1963]49ITR160(SC) it was held that where expenditure was incurred by the assessed for shifting the factory from one place to another to improve the business, same was capital expenditure in nature. Similar view was also expressed by the Bombay High Court in Hardiallia Chemicals Ltd. v. CIT ( 1996) 218 ITR 598. Above being the position, the conclusion of the authorities below and the Tribunal are in order. We answer the question referred in the affirmative, m favor of the Revenue and against the assessed." In fact, a perusal of orders dated 6th October, 2006, revealed that earlier order is reproduced in its entirety. Thereafter, certain contentions raised by the counsel for the assessee are dealt and rejected and it is held that the view expressed earlier was correct. This decision is reported as Airport Authority of India Vs. CIT, 303 ITR 433. ITA Nos.ITA 432/2008,433/2008,ITA 437/2008,ITA 51712008 IT A 792/2008,IT A 1250/2008,IT A 1251/2008 Page 11 of 26 11. The argument of Mr. Bajpai was that identical issue had fallen for consideration in Bikaner Gypsum Vs. Commissioner of Income-Tax (1991) 187 !TR 39 and the Supreme Court had held such an expenditure to be the revenue in nature. It would, therefore, be necessary to find out the ratio of Bikaner (supra). . In that case the assessee company had taken over a lease of 4.27 square miles for mining gypsum for a period of 20 years with provision for renewal for a further period of 20 years and carried on the business of mining gypsum in accordance with the terms and conditions of the lease. One of the clauses in the lease deed provided that no mining operation shall be carried on in or under the lands within a distance of l 00 [) yards from any railway, reservoir, canal or other public works or any buildings, etc., except with previous permission. The railway authorities extended the railway area on the leased land by laying down fresh track, providing railway siding and also constructing quarters. The suit of the appellant for ejecting the railway was dismissed. Thereafter, under an agreement with the Government, the Railway Board and the Sindri Fertilisers to whom the appellant company supplied gypsum, the railway station, track, :] etc. were removed lo another area offered by the appellant company. Out of the total expenses of Rs. 12 lakhs incurred by the railway for shifting, the ITA Nos.ITA 432/2008,433/2008,ITA 437/2008,ITA 517/2008 ITA 792/2008,ITA 1250/2008,ITA 1251/2008 I ,- -.r-- Page 12 of ;~6 - - W \I tW • appellant company paid Rs. 3 lakhs as its share under the agreement. The appellant claimed deduction of the sum of Rs. 3 lakhs in computing its profits. The Appellate Tribunal held that the sum was allowable as a deduction as it was a revenue expenditure. But the High Court, on a reference, held that the amount was capital expenditure. On appeal to the Supreme Court, the decision of the High Court was reversed holding that the amount was spent on the removal of a restriction which obstructed the carrying on of the business of mining within a particular area in respect of which the appellant had already acquired mining rights. The payment of Rs. 3 lakhs was not made for initiating the business of mining operations or for acquiring any right; the I' I l_j payment was made for shifting the railway station, track, etc, i.e. to remove .] W WTW W an obstruction to facilitate the business of mining, and it did not bring into existence any advantage of an enduring nature. The expenditure was on revenue account. The Supreme Court took note of its various judgments in earlier cases decided by it and noted the following simple test laid down by it in Assam Bengal Cement Co. Ltd. Vs. CIT (1995) 25 ITR 34 for determining the nature of expenditure:- "if the expenditure is made for acqmnng or bringing into existence an asset or advantage for the enduring benefit of the business it is properly ITA Nos.IT A 432/2008,433/2008,ITA 437/2008,ITA 517/2008 IT A 792/2008,IT A 1250/2008,ITA 1251/2008 -.- .....-- - Page 13 of 26 attributable to capital and is of the nature of capital expenditure If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business s is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure." 12. Applying the text to the crux of the case before it, the Court was influenced by the fact that the assessee had already been granted a mining lease and under that lease it had acquired full rights to caITy on mining operations in the entire area including the railway area. The payment of Rs. 3 lacs was not made for grant of permission to carry on mining operation with[n the railway area, instead it was made towards the cost of removing the construction which obstructed the mining operation. In this premise, the expenditure was treated to have been made in relation to carrying on business in a profitable manner and was, therefore held to be on revenue account. A Division Bench of this Court, authored by one of us (Rajiv Shakdher,J.) has ITA Nos.IT A 432/2008,433/2008,ITA 437/2008,ITA 517/2008 IT A 792/2008,ITA 1250/2008,IT A 1251/2008 Page 14 of 26 ~l 1 succinctly culled out the printiple/factors which go into determining the nature of the expenditure in the case of Commissioner of Income-Tax Vs. J.K.Synthetics Limited, (2009) 309 !TR 03 71, in the following manner:- "Broad principles which emerge on reading of various authorities An overall view of the judgments of the Supreme Court, as well as, of the High Courts would show that the following broad principles have been forged over the years, which require, to be applied to the facts of each case: (i) the expenditure incurred towards initial outlay of business would be in the nature of capital expenditure, however, if the expenditure is incurred while the business is on going, it would have to be ascertained if the expenditure is made for acquiring or bringing into existence an asset or an advantage of an enduring benefit for the business, if that be so, it will be in the nature of capital expenditure. If the expenditure, on the other hand, is for running the business or working it, with a view to produce profits, it would be in the nature of revenue expenditure; (ii) it is the aim and object of expenditure, which would, determine its character and not the source and manner of its payment; (iii) the test of 'once and for all' payment i.e., a lump sum payment made, in respect of, a transaction is an inconclusive test. The character of payment can be determined by looking at what is the true nature of the asset which is acquired and not by the fact ITA Nos.ITA 432/2008,433/2008,ITA 437/2008,ITA 517/2008 IT A 79l/2008,IT A 1250/2008,IT A 125112008 Page 15 of ;rn • • I 1--r whether it is a payment in 'lump sum' or in an instalment. In applying the test of an advantage of an enduring nature, it would not be proper, to look at the advantage obtained, as lasting forever. The distinction which is required to be drawn is, whether the expense has been incurred to do away with, what is a recurring expense for running a business, as against, an expense undertaken for the benefit of the business as a whole; (iv) an expense incurred for acquisition of a source of profit or income would in the absence of any contrary circumstance, be in the nature of capital expenditure. As against this, an expenditure which enables the profit making structure to work more efficiently leaving the source or the profit making structure untouched, would be in the nature of revenue expenditu~e. In other words, expenditure incurred to fine tune trading operations to enable the management to run the business effectively, efficiently and profitably leaving the fixed assets untouched would be an expenditure of a revenue nature even though the advantage obtained may last for an indefinite period. To that extent, the test of enduring benefit or advantage could be considered as having broken down; (v) expenditure incurred for grant of License which accords 'access' to technical knowledge, as against, 'absolute' transfer of technical knowledge and information would ordinarily be treated as revenue expenditure. In order to sift, in a manner of speaking, the grain from the chaff, one would have to closely look at the attendant circumstances, such as: (a) the tenure of the Licence. ITA Nos.IT A 432/2008,433/2008,ITA 437/2008,ITA 517/2008 ITA 792/2008,ITA 1250/2008,ITA 125112008 Page 16 of :26 1 IT~ • I 11 ---,--- -1 ---1-1 ---,-------r----,-- W W W I. ttW \1 ; \ \ (b) the right, if any, in the licensee to create further rights in favour of third parties, ( c) the prohibition, if any, in parting with a confidential information received under the License to third parties without the consent of the licensor, ( d) whether the Licence transfers the 'fruits of research' of the licensor, 'once for all', ( e) whether on expiry of the Licence the licensee is required to return back the plans and designs obtained under the Licence to the licensor even though the licensee may continue to manufacture the product, in respect of, which 'access' to knowledge was obtained during the subsistence of the Licence. ( f) whether any secret or process of manufacture was sold by the licensor to the licensee. Expenditure on obtaining access to such secret process would ordinarily be construed as capital in nature; (vi) the fact that assessee could use the technical knowledge obtained during the tenure of the License for the purposes of its business after the Agreement has expired, and in that sense, resulting in an enduring advantage, has been categorically rcj ected by the courts. The Courts have held that this, by itself, cannot be decisive because knowledge by itself may last for a long period even though due to rapid change of technology and huge strides made in the field of science, the knowledge may with passage of time become obsolete; (vii) while determining the nature of expenditure, given the diversity of human affairs and complicated nature of