Expenses for Removal of illegal encroachments

Q Whether 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 the normal course of business of authority enjoined with the responsibilities of maintenance and operation of airports all over India is Capital Expenditure or Revenue Expenditure?

Income Tax : Expenditure incurred by Airport Authority towards removal of illegal encroachments in and around security area of airports and towards rehabilitation of encroachers would be allowed as revenue expenditure

Section 37(1) of the Income-tax Act, 1961

Subject : Allowability of Business expenditure

 Assessment years 1996-97 onwards

Brief Summary –

Assessee authority, engaged in management of certain airports and allied services, had been making provisions for incurring expenditure towards removal of illegal encroachments in and around security area of airports and towards rehabilitation of encroachers .Assessing Officer disallowed said provision holding that expenditure, if any incurred, was of capital nature

Since expenditure so incurred was to facilitate smooth functioning of assessee’s business, i.e., in relation to carrying on business in a profitable manner, and, therefore, it was revenue in nature. However, deduction was to be allowed on actual payment basis only .

HIGH COURT OF DELHI (Full bench)

Airport Authority of India

v.

Commissioner of Income-tax*

A.K. SIKRI, ACTG. CJ. RAJIV SHAKDHER AND R.V.EASWAR, JJ

IT APPEAL NOS. 432, 433, 437, 517, 792, 1250 & 1251 OF 2008

DECEMBER 16, 2011

FACTS – I

The assessee, a statutory authority, was engaged in 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 encroachers and the money was required for rehabilitation. For that reason, the assessee had been making provisions for the aforesaid expenditure to be incurred in removal of encroachers and had been incurring the expenditure for the said purpose from time-to-time. 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 disallowed the provision so made holding that the expenditure, if any incurred was of capital nature. On reference, the order of the Tribunal was upheld by the Division Bench of the High Court.

On reference to Full Bench;

HELD – I

Applying the test laid down in CIT v. J.K. Synthetics Ltd. [2009] 309 ITR 371 / 176 Taxman 355 (Delhi) as well as the ratio of Bikaner Gypsums Ltd. v. CIT [1991] 187 ITR 39/[1990] 53 Taxman 279 (SC) to the facts of instant case, a conclusion would be that the expenditure in question by the assessee was revenue in nature. It is not in dispute that the land belongs to the assessee. Certain encroachers in all these airports had encroached upon the part of the land. In the schemes formulated by the Government for removal of these encroachers and rehabilitate them at other places, if the assessee had paid the amount, that amount is not for acquisition of new assets. The payment was made to facilitate its smooth functioning of the business, i.e., in relation to carrying on the business in a profitable manner. [Para 13]

Therefore, such an expenditure, if incurred by the assessee, would be on revenue account and is not capital in nature. [Para 14]

The Tribunal, however, proceeded to discuss the case on the basis that only a provision for such an expenditure was made and in fact there was no payment made in the assessment year(s) in question. It, thus, went on to determine whether it was a contingent liability to be accrued at a future date on the happening of certain events. The Tribunal first observed that the liability was not statutory in nature. If at all, it was contractual. Thereafter, it addressed the issue as to whether the liability was contractual in nature and was capable of fair ascertainment. Taking note of Bikaner Gypsums Ltd. (supra ), the Tribunal held that such an expenditure, if incurred in the year, would be revenue in nature. [Para 15]

However, the Tribunal stated that no such liability had been incurred or crystallized. It held that though various meetings had taken place between the assessee and the Government, apart from making certain recommendations and estimating the likely expenditure, no agreement came into existence between the assessee and the hutment dwellers with or without the involvement of any third party and as no agreement between the assessee and hutment dwellers has been filed, no legally enforceable liability was fastened on the assessee in relevant year and, therefore, even under mercantile system of accounting, the assessee is not entitled to deduct the impugned amount simply because a provision was made. The Tribunal also took note of the submission of the assessee that it had, in fact, released a payment of Rs. 16.01 crore, but rejected this plea on the ground that the date of release of the money and the person to whom the money had been paid had not been stated. [Para 16]

No doubt, having regard to the judgment of the Supreme Court in Bharat Earth Movers v. CIT [2000] 112 Taxman 61, which laid down that the liability should have been actually incurred in the year and it should be capable of reasonable ascertainment, the assessee is to prove that such a liability had actually been incurred and was capable of reasonable ascertainment. A finding of fact is arrived at that no such ascertainment of liability could be proved by the assessee. To that extent, the order of the Tribunal cannot be faulted with. However, it would be necessary to mention at this stage that certain documents were produced to show that amount of Rs. 16.01 crores in the assessment year 1998-99 was, in fact, paid and similar amounts were paid in other years as well. Once it is held that such amounts are paid, these are admissible deductions being revenue in nature. The deduction would be allowed by the Assessing Officer only after the assessee furnishes proof of having made such a payment in the different assessment years in question. [Para 17]

The criteria laid down by the Tribunal that for admissibility of the expenditure there has to be an agreement between the assessee and the hutments dweller is clearly wrong. It is a matter of record that in these schemes no such agreement is actually arrived at between the persons who make the payment like the assessee herein and the hutments dwellers. Therefore, even if in a given case the assessee is able to show that rehabilitation scheme was formulated by the Government and the assessee as beneficiary was asked to make the payment under the said scheme, that would be sufficient evidence to claim the deduction of expenditure as held by the Supreme Court inBikaner Gypsums Ltd. (supra ). However, it is found that in the instant case, a finding of fact is recorded by the Tribunal that no such scheme could be furnished by the assessee for which the assessee was supposed to make the provision. To that extent, therefore, the Tribunal is correct in its view. At the same time, following Bikaner Gypsums Ltd. (supra), this finding has become irrelevant as the deductions on the basis of actual payment, are to be allowed. [Para 18]