IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH ‘C’ KOLKATA
ITA Nos. 2393 & 2394/Kol/2016
Assessment Years: 2012-13 & 2013-14
ITA No. 89/Kol/2018
Assessment Year: 2014-15
INCOME TAX OFFICER
M/s DULICHAND SHREELAL
PAN NO: AADFD9390B
A T Varkey, JM & M Balaganesh, AM
Date of Hearing: April 03, 2019
Date of Decision: June 21, 2019
Appellant Rep by: Shri Sankar Halder, JCIT, Sr. DR
Respondent Rep by: Shri P. J. Bhide, FCA
Income Tax – Section 37 – Public Premises Act – Sections 7, 8 & 11
Keywords – Damages paid to Port Trust
The assessee is into the business of sub-leasing of property. The AO while perusing the P&L Account of the assessee firm noticed that an amount of Rs.1.87 cr was debited under the head ‘Land Rent’ which resulted in net loss of Rs 68.36 lacs for the relevant AY. The assessee firm was asked to explain the nature of such payment of Land Rent and the necessity to do so for which assessee replied that in the relevant AY the assessee had earned storage charges which the assessee has paid Land Rent which included penalty of earlier years to KPT. Further, the AO asked the assessee to quantify the quantum of penalty component in the Land Rent paid by the assessee firm, for which the representative of the assessee appeared personally before the AO and furnished WS wherein it was contended that the word ‘penalty’ mentioned by the assessee in the earlier letter was not correct and the correct word was ‘compensation’. However, even after few correspondence exchanged between the assessee and the AO, the AO held that the payments made by the assessee to KPT was penalty and, therefore, disallowable under the Act and thus, he made an addition of Rs 62.63 lacs. On appeal, the CIT(A) deleted the addition.
On appeal, the Tribunal held that,
Whether deduction can be allowed in respect of damages paid to a Port Trust, where such amount are not expenses incurred for any purpose which is an offence prohibited by law – YES: ITAT
++ it is to be noted that the relationship between Port Trust and the assessee was contractual in nature. The damages paid by the assessee to the Port Trust did not represent any expenditure incurred by the assessee for any purpose, which is an offence which is prohibited by Law. The assessee’s claim for deduction of the amount of damages actually paid to the Port Trust represented expenditure wholly and exclusively incurred by the assessee for the purpose of its business for the relevant previous year during which the assessee was running its business and retained the possession of the Port Trust land in question from which it earned income which was offered to tax. The CIT(A) has therefore rightly allowed the assessee’s claim for deduction u/s. 37;
++ further it is to be noted that the damages fixed by the Estate Officer u/s. 7 read with section 8 of the Public Premises Act is not a penalty and since the assessee overstayed the authorized tenancy, the penalty u/s. 11 cannot be imposed on the assessee as per the proviso to section 11, and the rent/damages which is a liability accrued/incurred by the assessee represented expenditure wholly and exclusively incurred by the assessee for the purpose of its business for the relevant previous year therefore, is an allowable deduction, thus, this Tribunal uphold the order of the CIT(A).
Revenue’s appeals dismissed
Per: A T Varkey:
All these appeals have been filed by the revenue against the orders of Ld. CIT(A)- 12, Kolkata dated 14.09.2016 for AYs 2012-13 & AY 2013-14; and by separate order dated 11.09.2017 for AY 2014-15. Since facts are common and grounds are identical, we dispose of all these appeals by this consolidated order for the sake of brevity.
2. We take up the appeal for AY 2012-13 as the lead case and the decision of which will be followed for the AYs 2013-14 and 2014-15.
3. The main grievance of the revenue is against the action of the Ld. CIT(A) in deleting the disallowance of Rs.1,31,00,000/- made by the AO on account of land rent paid by the assessee without appreciating that such payments were made for penalty and damages.
4. Brief facts of the case are that the assessee is into the business of sub-leasing of property. The AO while perusing the P&L Account of the assessee firm noticed that an amount of Rs.1,87,29,321/- was debited under the head ‘Land Rent’ which resulted in net loss of Rs.68,36,870/- for the relevant assessment year. The assessee firm was asked to explain the nature of such payment of Land Rent and the necessity to do so for which assessee replied vide letter dt. 10.11.2014 that in the assessment year under consideration the assessee had earned storage charges to the extent of Rs.1,29,83,914/- against which the assessee has paid Land Rent which included penalty of earlier years to the extent of Rs.1,87,29,321/- to Kolkata Port Trust (hereinafter ‘KPT’). Pursuant to the reply of the assessee, the AO asked the assessee to quantify the quantum of penalty component in the Land Rent so paid by the assessee firm for which on 02.03.2015 the AR appeared personally before the AO and furnished Written submission wherein it was contended that the word ‘penalty’ mentioned by the assessee in the earlier letter dated 10.11.2014 was not correct and the correct word was ‘compensation’. However, even after few correspondence exchanged between the assessee and the AO, the AO held that the payments made by the assessee to KPT to the tune of Rs.62,63,130/- was penalty and, therefore, disallowable under the Act and, therefore, he made an addition of Rs.62,63,130/- (Rs. 1,31,00,000/- – Rs.68,36,870/-), which was challenged before the Ld. CIT(A) who was pleased to delete the same. Aggrieved, the revenue is before us.
5. We have heard rival submissions and gone through the facts and circumstances of the case. We note that the chronological events of facts as per the dates of events is discernible from page 5 of the Ld. CIT(A)’s order which would give a bird’s eye view of the facts are as under:
|01.09.1955||KPT granted lease for 30 years for Plot No.D-3381.|
|17.12.1962||KPT granted another lease for 22 years 8 months and 15 days for Plot NO.D3401l.|
|31.08.1985||Both the leases expired.|
|01.04.1988||The occupiers were treated as holding over on month to month basis w.e.f. 01.09.1985. But, the Rent Bills were issued and paid. KPT stopped issuing Rent Bills.By letter dated 09.07.2010, the Estate Department of KPT stated that the Appellant have been in unauthorized occupation of the Plots of land since 01.04.1988 for which they are liable to compensation to KPT.KPT alleged that the rent for the period July 1976 to March 1988 is unpaid.KPT states that the Appellant failed to pay the compensation of Rs.3,26,96,68S/- for the period April 1988 to May 2010 for the Plot Nos.D- 3381 and D340/1.KPT states that the Appellant has unauthorizedly parted with the possession, which is incorrect.|
|31.08.2010||In view of the foregoing, KPT stated that it will re-enter upon the plots and relationship with the Appellant, came to an end w.e.f. 01.04.1988.Since that date, the Appellant liable to pay compensation, mesne profit and/or damages for unauthorized use and occupation of the public premises.This will be paid till handing over the possession.The matter was placed before the Estate Officer, who is the Adjudicating Authority under the Public Premises (Eviction of Unauthorized Occupants) Act, 1971.The Notice accompanying Form-35 as Annexure-A, nowhere mentions that what has been demanded by KPT, is penalty. On the other hand, the Notice speaks of compensation, mesne profits and/or damages. The amount thereof is to be determined by the Estate Officer.|
|02.12.2010||The Estate Officer fixed the damages etc payable by the Appellant at Rs.3,66,49,969.34. This amount has been quantified as per KPT’s rent schedule. Therefore, the amount, though termed as compensation, was nothing but rent payable. But, the amount payable by the Appellant to KPT is rent. Till such Order, the Appellant did not and could not, therefore, quantified and/or make entries in its Books of Accounts for the rent payable to KPT.|
|10.03.2011||The Appellant’s Advocate submitted to the Estate Officer, a Schedule with a copy to KPT. He also paid Rs.20 Lakh to KPT as ad-hoc payment. KPT duly accepted Rs.20 Lakh.As on date, the matter is still pending before the Estate Officer. The Appellant has cleared the entire principle dues of land rent/compensation and continues to be in possession and enjoyment of the plots of land in question.|
6. The AO taking note that the assessee being an unauthorized occupant of the property had to make payment which according to him is nothing but a penalty and consequently is not an allowable claim. We note that the KPT is a Statutory Corporation, established by the Central Government under the Port Trust Act. Its jurisdiction is specified as the areas of land on both the Banks (East & West) of the river – Hooghly from Shyamnagar to Haldia and beyond up to the sand head. The Port Commissioners have from time to time either on lease basis or on tenancy basis inducted lessees or tenants and have authorized them to carry on legal business on the pieces of land owned by the Port Trust. The assessee’s predecessor M/s. Dulichand Omraolal was first such a lessee, who in the mid-twentieth Century obtained leasehold rights of Port Trust land situated on Remount Road off at Diamond Harbor Road, Kolkata. In the year1976 the assessee firm M/s. Dulichand Shreelal succeeded the erstwhile firm M/s. Dulichand Omraolal. During the tenure of the lease, the Respondent/assessee was paying rent to the Port Trust. On expiry of the lease, the Respondent/assessee continued to occupy the leased premises, but became unauthorized occupier under the Public Premises Act. The assessee continued to pay the rent as before.
7. We note that Term “Unauthorised Occupation” is defined by Section 2(g) of the Public Premises (Eviction of Unauthorized occupation) Act, 1971 (hereinafter the 1971 Act.) From the definition, it is clear that the term “Unauthorized Occupation” covers two cases viz. :
i. Where a person occupies public premises without authority for occupation; or
ii. Where the person has authorisedly entered into possession of the public premises, the continuance in such occupation of the public premises by any person after the authority (whether by way of grant or any other mode of transfer) under which he was allowed to occupy the premises has expired or has been determined for any reason whatsoever.
8. We note that the assessee/Respondent is covered by above clause (ii). On expiry of the lease, the appellant became unauthorized occupant of the leased premises and was therefore liable to pay to the Port Trust Authority it damages, for such unauthorized occupation. It was submitted by the ld. AR that as per the judgment of the Hon’ble Karnataka High Court, reported in ILR 1987 Karnataka page 667 and of the Hon’ble Himachal Pradesh High Court, reported in AIR 2013 H.P. 9, what the Respondent/assessee continued to pay and was liable to pay to the Port Trust Authority was not rent but Damages.
9. Our attention was also brought to sections 7 and 11 of the Public Premises (Eviction of Unauthorized Occupants) Act, 1971, which read as under:
“Section 7. Power to require payment of rent or damages in respect of public premises.-(1) Where any person, is in arrears of rent payable in respect of my public premises, the estate officer may, by order, require that person to pay the same within such time and in such instalments as may be specified in the order.
(2) Where any person is or has at any time been, in unauthorized occupation of any public premises, the estate officer may, having regard such principles of assessment of damages as may he prescribed, assess damages on account of the use and occupation of such premises and may by order, require that person to pay the damages within such time and in instalments as may be specified in the order.
(2A) While making an order under sub-section (1) or sub-section (2) the estate officer may direct that the arrears of rent or, as the case may damages shall be payable together with [compound interest] at such rate as may be prescribed, not being a rate exceeding the current rate of within the meaning of the interest Act, 1978.
(3) No order under sub-section (1) or sub-section (2) shall be made any person until after the issue of a notice in writing to the person upon him to show cause within seven days from the date of issue why such order should not be made, and until his objections, if any evidence he may produce in support of the same, have been by the estate officer.
(4) Every order under this section shall be made by the estate as expeditiously as possible and all endeavour shall be made by him to the order within fifteen days of the date specified in the notice.
Section 11. Offences and penalty – (1) If any person unlawfully occupies public premises, he shall be punishable with simple imprisonment for a term which may extend to six months, or with fine which may extent to five thousand rupees, or with both;
Provided that a person who, having been lawfully in occupation of any public premises by virtue of any authority (whether by way of grant, or by any other mode whatsoever) continues to be in occupation in premises after such authority has ceased to be valid, shall not be of such offence.”
10. Our attention was also drawn to the decision of the Hon’ble Himachal Pradesh High Court in CIT Vs. C. Baljee & Sons 191 ITR 165 wherein a similar issue came up before Hon’ble High Court and their Lordships held as under:
“During the relevant assessment years covered by the orders of the Appellate Tribunal, the assessee had incurred a liability for payment of Rs.1,05,100 each year by way of damages for use and occupation of the premises where he was carrying on the business of running the Grand Hotel. The Income-tax Officer had allowed rent only at the rate of Rs.49,812 and added a sum of Rs.55,288 in the total income of the assessee for each of these years. It is clear from the facts stated by the Tribunal in its order that the rent of Rs.49,812 related to a prior period when the lease in favour of the assessee subsisted. -The Estate Officer of the Government of India had determined damages for use and occupation of the premises by the assessee at Rs.1,05,100 per year. This amount clearly falls under section 37(1) of the Incometax Act and is a permissible deduction. Since the whole amount of Rs.1,05,100 is a permissible deduction, no question of interest under sections 139, 215 or 217(lA) arises in this case. We, therefore, answer the first question in the negative and the second question in the affirmative, both the questions in favour of the assessee and against the Revenue.”
11. We note that Section 7 (2) of the 1971 Act empowers the Estate Officer to direct any unauthorized occupant to pay damages within such time in such installment when unauthorized occupation continues. According to the said provision, the Estate Officer may having regard to the principles of assessing damages as may be prescribed determine the damages on account of use and occupation of such premises and may, by order, require the unauthorized occupier to pay the damages. And such damages may be directed to be paid with compound interest. We note that the Estate Officer is not authorized to impose penalty on unauthorized occupant. However we note that for imposition of such penalty only the competent Jurisdictional Magistrate is entitled to impose the penalty u/s 11 of the said 1971 Act for unlawfully occupying the public premises. We note that assessee was a lawful occupant from its predecessor M/s. Dulichand Omraolal which was the original lessee and in year 1976 the assessee succeeded and became the lessee which facts have not been questioned. We note that the Assessing Officer’s case is not that liability arose from orders of Magistrate u/s 11 of the Act.
12. In nutshell from the facts it is clear that the assessee was an authorized occupant ie lessee, which after the lease period expired became an unauthorized occupant of the Port Trust land. For such unauthorized occupation, the assessee was liable to pay damages and interest as determined by the Estate Officer. It has to be kept in mind that legislature apreciates the difference in the meaning between the two terms, viz – “Penalty” and “Damages”. And in the Act of 1971, the legislature in its wisdom has used the term” Damages” when the order is passed by Estate Officer in the case of assessee and avoided use of the term” Penalty” . Moreover in the 1971, the power to levy penalty is conferred upon the Jurisdictional Magistrate u/s 11 of the Act 1971, which is in contradiction to the word “Damages” given in section 7(2) of 1971 Act.
13. We note that the relationship between Port Trust and the assessee was contractual in nature. The aforesaid damages paid by the assessee to the Port Trust did not represent any expenditure incurred by the assessee for any purpose, which is an offence which is prohibited by Law. The Respondent’s claim for deduction of the amount of damages actually paid to the Port Trust represented expenditure wholly and exclusively incurred by the assessee for the purpose of its business for the relevant previous year during which the assessee was running its business and retained the possession of the Port Trust land in question from which it earned income which was offered to tax. The Ld. C.I.T.(Appeals) has therefore rightly allowed the assessee’s claim for such deduction u/s. 37 of the Act.
14. In the light of the above, we note that the damages fixed by the Estate Officer u/s. 7 read with section 8 of the Public Premises (Eviction of Unauthorized Occupants) Act, 1971 is not a penalty and since the assessee overstayed the authorized tenancy, the penalty u/s. 11 cannot be imposed on the assessee as per the proviso to section 11, and the rent/damages which is a liability accrued/incurred by the assessee represented expenditure wholly and exclusively incurred by the assessee for the purpose of its business for the relevant previous year therefore, is an allowable deduction, so we uphold the order of the Ld. CIT(A) and we find no infirmity in his order and, therefore, dismiss all these appeals of the Revenue.
15. In the result, all the appeals of the revenue are dismissed.
(Order is pronounced in the open court on 21.06.2019)