Collection of sinking fund is a capital receipt and not liable to be taxed as revenue receipt

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH “A”, NEW DELHI

BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER

AND

SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER

I.T.A. No. 1063/Del/2011

A.Y.: 2007-08

Alpha Services,

23, Barakhamba Road,

New Delhi – 110 001

(PAN: AAKFA7883R)

(Appellant)

Vs.

Dy. Commissioner of Income Tax,

Circle 31(1), CR Building,

IP Estate, New Delhi -110002

 (Respondent)

Assessee by: Sh. Vidur Puri, CA

Department by: S h. U.C. Dubey, Sr. D.R.

ORDER

PER SHAMIM YAHYA: AM

This appeal by the assessee is directed against the order of the Ld. Commissioner of Income Tax (Appeals)-XXVI, New Delhi dated 16.12.2010 pertaining to assessment year 2007-08.

2. The grounds raised in the assessee’s appeal read as under:-

“1. The Ld. Commissioner of Income Tax (Appeals) erred in law and on facts in enhancing the income by `35,49,091/- received as sinking fund for specific purpose of replacement of capital goods and treating it as revenue receipts.

2. The Ld. Commissioner of Income Tax (Appeals) erred in law in treating `35,49,091/- as revenue receipt being the amount received from the flat owners and / or tenants for replacement of capital assets and shown as sinking fund in accounts which was considered and treated as capital receipt by the appellant since its inception and the same was duly accepted by the Assessing Officer in the earlier assessments.

3. The Ld. Commissioner of Income Tax (Appeals) erred in law and on facts in not allowing the expenditure of `40,88,455/- incurred on replacement of air conditioning plant of the building owners by treating it’s as a capital expenditure of the appellant and allowing the depreciation on the same.

4. The Ld. Commissioner of Income Tax (Appeals) erred in law and on facts by observing that –

i) Sinking fund amounts have no by actually put to use for the purpose for which the fund was created (para 7.2).

ii) The receipts of sinking fund @ `2/- are being utilized for day to day activities / expenditure (para 8.2).

The appellant craves leave to add, amend, modify, delete and or change all or any of the ground on or before the date of hearing.”

3. In this case assessee is a partnership firm engaged in the business of providing management, maintenance and repair services of commercial complexes known as ‘Narain Manzil’ situated at 23, Barakhamba Road, New Delhi. Assessee filed its income tax return on 31.10.2007 and declared NIL income after set off the unabsorbed business loss of `31,25,260/- and claimed carried forward of unabsorbed business loss of `1,18,32,320/-. The assessment was completed u/s. 143(3) of the IT Act on business income of `34,04,790/- after making the addition of notional interest of `2,79,532/-.

4. Upon assessee’s appeal Ld. Commissioner of Income Tax (Appeals) deleted the addition, however, enhanced the income by ` 35,49,091/- by treating the receipt as revenue receipt. Ld. Commissioner of Income Tax (Appeals) has held as under:-

“8.1 In the above background for deciding this ground, it is essential to discuss the nature of receipts in the Sinking Fund, the responsibility of the appellant to replace the capital assets including plant & machinery such as Chiller Plant and whether the Sinking Fund receipts are capital receipts or revenue receipts in the hands of the appellant and the related admissibility of the interest expenditure.

8.2 As per the appellant, the Sinking Fund receipts are capital receipts - because the flat owners/ occupants are making payment of Rs. 2 per sq. ft. for capital expenditure. This payment of Rs. 2 per sq. ft. is being made along with payment of Rs. 14 per sq. ft. as maintenance charges. Appellant is treating these receipts as capital receipts and is accounting for them under the head 'Sinking Fund'. However, the amounts placed in the Sinking Fund a/c are placed in the common pool of funds available with the appellant. Sinking Fund amounts have not been segregated or kept out of circulation for exclusive use. The receipts @ Rs. 2 per sq. ft. are being utilized for day to day activities/expenditure of the appellant. Though accounting of these receipts is done under a separate head, but in reality the appellant treats the receipts as its regular business receipts/funds.

8.3 A copy of the maintenance agreement entered into by the appellant (Maintenance Agency) and M/s Prudential lClCI Asset Management Company Ltd. (user of the premise) dated 16.2.06 has been filed by the appellant. As per the agreement it is entirely the responsibility of the maintenance agency i.e. the appellant firm to replace the capital goods. For replacement of the capital goods the appellant firm is charging Rs. 2 per sq. ft. and the amount is inclusive in Rs. 16 per sq. ft that is being charged from all users. The relevant portion of the agreement is reproduced below:

"In pursuance of the said agreement and in consideration of the Maintenance Agency having agreed to manage, administer, maintain, upkeep and preserve the said Commercial Building, named as "Narain Manzil" operation of common  services therein, supply of water and also maintenance, repair and replacement of equipment/machinery for providing common services and facilities and replacement of capital goods such as lifts, pump sets, water mains, electric cables installed, emergency electricity standby generators, fire fighting/protection/ detection equipments, air-conditioning plant etc., the user hereby agrees and binds himself to pay to the Maintenance Agency maintenance and service charges at the rate of Rs. 16 (Sixteen) per sq. ft. of the Super Area of the said premises as mentioned in the said Lease Agreement per month to be utilized by the Maintenance company for the purposes mentioned above and to cover the costs, expenses and outgoings in respect inter . alia of the matters specified in the Schedule attached to this Agreement. The rates of maintenance charges which also include charges for providing airconditioning, 100% power back-up for Central Air-conditioning and supply of power for Central Air-Conditioning and Sinking Fund of Rs. 2/- per sq. ft. per month of the Super area for replacement of Capital Goods for the said premises. The maintenance charges of Rs. 16 per sq. ft. of Super area has been fixed in the context of the current prices of the commodities and services, official levies, fees and taxes etc. including water and electricity charges consumed on running of lifts, air-conditioning plant, water boosting pumps, fire pumps or the running of machinery equipments installed in the Building and also electric points installed in common passages, lobbies, entrance, staircases, lifts etc. and service charges of the

Maintenance Agency."

The agreement clearly lays down the scope and meaning of maintenance of multi storey commercial building by way of XVI items of duties and responsibilities of the maintaining agency as enumerated in the Schedule to the agreement.

Item No. XII & XIV state as under:

"XII: Replacement of capital goods/fixed assets like lifts, generators, pumps, air conditioning plants, electric cables etc.

XIV: Operation and maintenance of central air conditioning/heating plant and other equipment”

8.3.2 Thus, as per the agreement, it is entirely the responsibility of the appellant firm to replace the capital assets including air conditioning plants. As it is the appellant's duty to replace the air conditioning plant, it has during the p. yr. relevant to A.Y. 2007-08 incurred an expenditure of Rs. 40,88,455/- on purchase of the Chiller Plant. While cost of the plant cannot be debited to the profit & loss account, the interest paid by way of finance charges in the hire purchase agreement relating to previous year 2006-07 has been claimed as an expenditure. As the appellant was required to replace the Chiller Plant, since the appellant did not have adequate funds available in the Sinking Fund as on 31.5.06, it went in for the hire purchase agreement. On account of the liability of the appellant to replace the capital assets for which it is being paid maintenance charges, in my view the claim of deduction of interest of Rs. 2,20,578 as a legitimate business expenditure by the appellant, is admissible. However, this admissibility of the claim as revenue expenditure is inter-linked with the fact that the receipt of Rs. 2 per sq. ft. is a revenue rece.ipt and not a capital receipt.

8.4 The user is making a payment of Rs. 16 per sq. ft. as Maintenance and Service charges. Out of this, Rs. 2 is being given as Sinking Fund contribution or replacement of capital goods. It is not expected that payment of Rs. 2 per sq. ft. by each 'user' will be sufficient to meet the capital goods replacement as and when it arises - but it is being raised from the user with the intention that as and when the capital goods are to be replaced some funds are available for utilization for this purpose, and that the appellant firm charges from the 'user' as part of its maintenance receipts a cost for replacement of the capital goods. Thus, in my view as the replacement of the capital. goods is solely and exclusively the responsibility of the appellant firm for which it is already levying charges on the user, the receipt of Rs. 2 per sq. ft. is also a revenue receipt as it is a part of the total maintenance receipts. The bifurcation of the receipts by the appellant does not change the inherent characteristic nature of the receipts i.e. payment by the flat owners/users for provision of facilities and services by the appellant. The maintenance charges receipts (including those bifurcated as Sinking Fund receipts) thus an integral are part of the total business receipts of the appellant.

8.5 Even the appellant by its conduct shows that the receipt is a revenue receipt. It has totally merged the receipts with its other maintenance receipts. The receipts have been included in the common pool of funds to meet day to day business needs. It has not exclusivity or over-riding title.

8.6 It is further seen that the cost of the plant purchased as on 1.6.06 is Rs. 40,88,455. The appellant has raised finance of Rs. 29,84,960. Thereby showing that only Rs. 11,03,495 of own funds were used. Thus as on 31.5.06 despite funds of Rs. 16,87,149 being available in Sinking Fund, only Rs. 11,03,495 were used, rest were raised through financial arrangement. With each month, the appellant received money in Sinking Fund and the Fund continued to increase but appellant did not use this amount to reduce its, loan-cum interest liability as discussed in para 7.2 (supra). This shows that despite the bifurcation, the Sinking Fund receipts were not entirely put to use for the purpose that they are allegedly meant.

Therefore, as the receipt is clearly a revenue receipt,the appellant was issued notice of enhancement dated

8.11.10 requiring it to show cause why the Sinking Fund receipt should not be treated as a revenue receipt.

8.6.2 In response thereto the very same terms of the agreement referred to in para 8.3 have been relied upon for stating that the appellant is merely a custodian of the Sinking Fund and that it was obliged to incur expenditure for the replacement of the capital goods. It was submitted that without prejudice to the claim of Sinking Fund receipt being capital receipts, if the Sinking Fund receipt of Rs.35.49 lacs in A.Y. 2007-08 is treated as revenue receipt, then the expenditure of Rs 40.88 lacs should also be allowed as an admissible expenditure, thereby allowing a net loss of Rs. 5.30 lacs.

8.7 For the reasons discussed in paras 8 to 8.6 (supra) thereceipts shown under the head Sinking Fund is treated as a 'revenue receipt', liable to be included in appellant's business income for the A.Y. 2007-08. The appellant's alternative plea that it be allowed the entire expenditure of Rs. 4O.88 lacs is neither factually nor legally admissible. As discussed, factually only Rs. 15,12,000 (including Excise Duty credit) and installment of Rs. 15,15,151 (11 installments) i.e. Rs.30,27,151 is the expenditure incurred during the year including cost of finance at RS.2,20,578

legally. While the interest cost is otherwise allowable as revenue expenditure for this year as discussed in para 8.3.2 (supra), but in view of the overriding provisions of section 40(a){ia}- it is to be disallowed. The cost of the asset being capital expenditure cannot be allowed u/s 37 of the IT Act, 1961. The balance claim normally would be either admissible depreciation or hiring charges as the asset has been put to business use during the year. The appellant states that it is not the owner of the asset; however as per the hire purchase agreement the ownership is to devolve to the appellant. Therefore, appellant is entitled to depreciation @ 15% being the admissible rate for plant and machinery. The depreciation @ 15% at RS. 6,13,267 is held allowable. Thus the net effect of this enhancement will be RS.35,49,091-Rs.6,13,267 i.e. RS. 29,35,824. The sum of Rs.293582/- is thus added to the appellant's income for A.Y. 2007-08.”

5. Against the above order the assessee is in appeal before us.

6. It has been contended by the ld. counsel of the assessee that the Ld. Commissioner of Income Tax (Appeals) has erred in treating ` 35,49,091/- as revenue receipt being the amount received from the flat owners and / or tenants for replacement of capital assets and shown as sinking fund in accounts which was considered and treated as capital receipt by the assessee since its inception and the same was duly accepted by the Assessing Officer in the earlier assessments. Ld. counsel of the assessee further contended that as per contract with the owners/ tenants of ‘Narain Manzil’ assessee is responsible for replacement for regular maintenance of the building besides the replacement of the equipment, plant and machinery and accessories and for structural repairs of building. Due to natural wear and tear over a period of time, equipment, machinery and plant having limited life, the assets installed at building require not only regular repairs but also major repairs and in certain cases replacements also. The replacement of assets require large outlays of funds the owners / tenants are not willing to bear the large cost at one go. Thus as per contract the assessee is collecting `2 per sq.ft. payment from the owners for replacement of assets beside ` 14 per sq. ft. area charged to the owners of flats in respect of regular maintenance. The amount recovered for replacement of assets is kept as sinking fund and cost of replacement of assets is being utilized out of this fund. In our considered opinion, the system being followed by the assessee is cogent one. ` 2/- sq.ft. being collected by the assessee is put in a sinking fund utilized for replacement of assets. This system is being followed since a large number of years. Revenue has accepted it in those years. There is no change in facts or law during the current assessment year. There is no doubt that the responsibility is of the assessee to replace the capital asset. But for that a mechanism is in operation, whereby ` 2/- is being collected and held in a sinking fund. Capital repairs and replacements are to be met out of this fund. In the agreement it is specifically mentioned that ` 2/- is being collected for the sinking fund in this regard. It is settled law that revenue cannot inter into the shoes of a businessman and decide how he should conduct the business. We have found no infirmity in the accounting and conduct of the assessee, which will warrant an inference that ` 2/- being collected for the sinking fund for replacement of asset is a revenue receipt.

6.1 Thus, we find that Ld. Commissioner of Income Tax (Appeals) has erred in holding that `2 sq.ft. received by the assessee is also a revenue receipt and is a part of total maintenance receipt. Accordingly, we hold that ` 3549091/- collected during the year being sinking fund contribution is a capital receipt and not liable to be taxed as revenue receipt. The expenditure of ` 40,88,455/- incurred for replacement of Air conditioners of the building owners has to be adjusted from the sinking fund and the same cannot be allowed as revenue expenditure. Thus, we hold that an amount of `35,49091/- received towards sinking fund for replacement of assets is a capital receipt and not liable to be taxed.

7. In the result, the appeal filed by the assessee stands partly allowed.

Order pronounced in the open court on 04/5/2012.

                                                            Sd/-                                     Sd/-

                                           [RAJPAL YADAV]             [SHAMIM YAHYA]

                                          JUDICIAL MEMBER     ACCOUNTANT MEMBER

Date 04/5/2012

“SRBHATNAGAR”

Copy forwarded to: -

1. Appellant

2. Respondent

3. CIT

4. CIT (A)

5. DR, ITAT

TRUE COPY

By Order,

Assistant Registrar,

ITAT, Delhi Benches