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Petitioner: COMMISSIONER OF INCOME-TAX, BOMBAY CITY-II VS Respondent: LONDON HOTELHonorable Justice KOTVALG. N. Joshi,S. J. Mahaispurkar
1969 P T D 775
1969 P T D 775
[Bombay (India)]
Before Kotval, C. J. and V. S. Desai, J
COMMISSIONER OF INCOME‑TAX, BOMBAY CITY‑II
versus
LONDON HOTEL
Income‑tax Reference No. 68 of 1962, decided on 3lh September 1967.
Depreciation‑Demolition of part of building‑Written down value higher than scrap value of demolished part‑Excess of written down value over scrap value, whether allowa le "Building" whether includes part of a building‑Writing off in books, whether condition precedent‑Indian Income‑tax Act, 1922, S. 10(2)(vii).
Upon a plain construction of section 10(2)(vii) and consider ing that section 10(2) refers to allowances to be made in computing profits and gains of business, the word "building" in section 10(2)(vii) would include a part of the building.
Commissioner of Income‑tax v. Mir Mohammad Ali (1964) 53 I T R 165 (S C) applied.
The proviso to section 10(2)(vii) does not provide that in every case, as a matter of law, wherever "such amount" is not actually written off' in the books of the assessee, the assessee, would not be entitled to the allowance of the balancing payment contemplated by the parent clause (vii). Though it is a term or qualification for claiming the balancing payment, it is not a condition precedent and if in a given case it appears to the assessing officer that the amount could not be written off in the books of the assessee in spite of his best efforts, it is still open to the assessing officer to grant the allowance under clause (vii). The view that as a matter of law in every case wherever an amount is not actually written off in the books of the assessee, the allowance can never be granted is not correct.
Muthukaruppan Chettiar v. Commissioner of Income‑tax (193 )) 7 I T R 76 rel.
Rao Bahadur S. Ramanatha Reddiar v. Commissioner of Income‑tax (1928) 3 I T C 10 and Commissioner of Income‑tax v. National Syndicate (1961) 41 I T R 225 (S C) explained.
Akbar Manufacturing & Press Co. Ltd. v. Commissioner of income‑tax (1957) 31 I T R 59; Corporation of Calcutta v. Chairman, Cossipore and Chitopore Municipality I L R 49 Cal. 190 and Maneklal Vallabhdas Parekh v. Commissioner of Income‑tax (1959) 37 I T R 142.ref.
STATEMENT OF CASE
By this application the Commissioner of Income‑tax, Bombay City II, requires the Appellate Tribunal to refer to the High Court a question of law which is said to arise out of the Tribunal's order in I. T. A. No. 10523 of 196061. Inasmuch as, in our opinion, a question of law does arise out of the aforesaid order, we hereby draw up a statement of the case agreed to by the parties and refer it to the High Court of Judicature at Bombay, under section 66(1) of the Indian Income‑tax Act, 1922.
1. The assessee‑firm runs a hotel called "London Hotel". The premises in which this business is run was purchased by the three partners of the assessee‑firth. They contributed the consideration therefor, viz., Rs 1,15,000, equally and purchased the property on September 7, 1945. The firm claimed deduction of the rent paid for this premises in the assessments made for the assessment years 1946‑47 and 1947‑48. This was allowed but from and after assessment year 1948‑49, the premises were treated as belonging to the firm and used by it for purposes of its business. There is no assessment under section 9 with reference to this property and depreciation for the property was being given from 1948‑49 onwards, under section 10 as a business asset of the assessee and used by it for its business. However, as far as the assessee's accounts are concerned, this asset does not feature in them.
3. During the financial year ended March 31, 1957, a portion of the building, i e., to the extent of 2/3rds of it was demolished and the grounds so vacated was let out to Burma Shell for erection of a petrol pump on a monthly rental of Rs. 2,100. The rental income received from Burma Shell is added in the assessment made on the assessee.
4. The written down value of the building as per the assessment records at the beginning of the relevant previous year was Rs. 91,580. The value realised on the sale of the materials on demolition of a portion of the building was Rs. 12,300. The assessee claimed that out of the aforesaid written down value 2/3rds will have to be allocated to the portion of the building destroyed and after giving adjustment for the realisation of Rs. 1 2,300, the balance of Rs 48,754 should be allowed as deduction under section 10(2)(vii). The provision so far as relevant runs as follows:
"10. (1) The tax shall be payable by an assessee under the head `profits and gains of business . . . . .' in respect of profits and gains of any business . . . . . carried on by him.
(2) Such profits or gains shall be computed after making the following allowances, viz.:‑
(vii) in respect of any such building . . . . . which has been sold or discarded or demolished or destroyed, the amount by which the written down value thereof exceeds the amount for which the building . . . . . is actually sold or its scrap value:
Provided that such amount is actually written off in the books of the assessee."
The word "such" in clause (vii) refers to the building used for the purpose of business.
5. The Income‑tax Officer disallowed this claim of the assessee observing as follows:
"The assessee‑firm further claims Rs. 48,754 as loss under section 10(2)(vii). The said loss is not at all entered in the books of account. Secondly, the loss is not under sec tion 10(2)(vii). The assessee‑firm has not completely demolished the whole building. But some part is pulled down in order to let out the ground to Burmah Shell. Exact portion of the building so pulled down is also not determinable. In order to earn more income the same has been done and, hence, it cannot be said that there is a loss under section 10(2)(vii). While computing the total income, this amount of Rs. 48,754 claimed as loss under section 10(2)(vii) is disallowed.
6. There was an appeal to the Appellate Assistant Commis sioner who, after considering the facts, came to the conclusion that half the building can be taken to have been demolished. He took the written down value of half the building viz., Rs. 45,790 and deducting from that the amount realised on sale of scrapped materials, Rs. 12,300, he arrived at the allowable loss under section 10(2)(vii) at Rs. 33,490. The first ground of disallowance given by the Income‑tax Officer was that the loss should have b en written off as contemplated by the proviso which has been extracted above. In dealing with this objection the Appellate Assistant Commissioner observed in paragraph 5 of his order as follows:
"From what has been stated above it will be seen that the partners had treated the property as not a business asset. The Income‑tax Officer treated the property as a business asset and allowed depreciation from 1948‑49. In these circumstances the property was not shown as an asset in the balance‑sheet of the appellant‑firm. Therefore, there cannot be any question of the loss on account of the demolition of the property being shown in the books of the firm. In these circumstances I hold that the appellant could not be expected to write off the loss in the books of account as there is no entry regarding the assets in the books."
7. The second ground of disallowance, according to the Income‑tax Officer was that the demolition being of a part of the property, section 10(2)(vii) does not apply to allow that loss. This was dealt with by the Appellate Assistant Commissioner in paragraph 6 of his order which runs as follows:
"Regarding the contention of the Income‑tax Officer that the demolition of a part of the property does not entitle the appellant to claim loss under section 10(2)(vit). I have not been able to find any provision to this effect in the Income‑tax Act. If any asset or part of an asset is sold, discarded, demolished or destroyed, the assessee is entitled to the benefit of section 10(2)(vii). The fact that in this particular case a part of the property has been demolished so that the appellant could earn more income is not at all relevant in determining the loss under section 10(2)(vii)."
A copy of the order of the Appellate Assistant Commissioner is annexed hereto as Annexure "A" and forms part of the case.
8. Aggrieved by the said order, the Income‑tax Officer came up on appeal before the Tribunal contending that the Appellate Assistant Commissioner should not have allowed the sum of Rs: 33,490 as loss under section 10(2)(vii). The Tribunal for the reasons stated in its order, a copy whereof is annexed hereto as annexure "B" and forms part of the case, agreed with the conclusion arrived at by the Appellate Assistant Commissioner and dismissed the appeal filed by the department.
9. On the above facts, the following question of law arises:
"Whether, on the facts and in the circumstances of the case, the assessee is entitled to the allowance under section 10(2)(vii) in respect of demolition of a part of the building, even though the loss is not actually written off in the books of the assessee?"
G. N. Joshi with R. J. Joshi for the Commissioner. S. J. Mahaispurkar for the Assessee.
JUDGMENT
KOTVAL, C. J.‑The following question of law has been referred for our decision at the instance of the Commissioner of Income‑tax, Bombay City II:
"Whether, on the facts and in the circumstances of the case, the assessee is entitled to the allowance under section 10(2)(vii) in respect of demolition of a part of the building, even though the loss is not actually written off in the books of the assessee?"
The question has arisen with reference to the assessment year 1957‑58, and upon the following facts: Messrs London Hotel, Bombay, are a firm and they run a hotel called "London Hotel". The premises in which this hotel was being run were originally purchased by the three partners of Messrs London Hotel on 7th September 1945, for a sum of Rs. 1,15,000. They contributed to the consideration equally and when the London Hotel was started they treated the premises as being let out to the firm, the proprietary right vesting in the three partners jointly. The rent paid by the firm to the three individuals was debited in the books of the firm and the firm claimed the amount as a deduction in the years 1946‑47 and 1947‑48, and the deduction was allowed. Thus the property was treated as the private property of the three persons who had purchased it, although they were partners in that firm.
This position, however, was not accepted by the department in the assessment year 1948‑49. The Income‑tax Officer held that the premises in which the business of Messrs London Hotel was being run were really a business asset of that firm and was liable to assessment as such in the hands of the firm. Consequent upon this order, depreciation on the property was being granted to the firm from the assessment year 1948‑49 onwards under section 10 as a business asset of the assessee. However, so far as the account books of the assessee‑firm were concerned, the asset was not shown as part of their assets, because the three partners of the firm always regarded it as their personal asset.
During the financial year ending 31st March 1957, a portion of the building, which has been found by the tax authorities to be two‑thirds of it, was demolished and the land underneath which thus became vacant was let out to Messrs Burmah Shell for the erection of a petrol pump on a monthly rental of Rs. 2,100. The rent received from the Burmah Shell has been added by the authorities as the business income of the assessee firm.
We are concerned in this reference with a claim made by the assessee‑firm in respect of the balancing payment due to them under section 10(2)(vii) of the Indian Income‑tax Act and that claim was made on the basis of the following facts: The written down value of the building, according to the previous assessment orders, at the beginning of the relevant previous year was Rs. 91,580. When a part of the building was demolished the value realised on the sale of the materials or scrap after demolition was 12,300. The assessee claimed that out of the written down value two‑thirds will have to be allocated to the portion of the building thus demolished and after giving an adjustment for the realisation of the scrap value, namely, Rs. 12,300, the balance would come to Rs. 48,754. They claimed that that amount should be allowed to them as a deduction under section 10(2)(vii).
Section 10(1) and (2), clause (vii), run as follows:
"10. (1) The tax shall be payable by an assessee under the head "Profits and gains of business, profession or vocation" in respect of the profit and gains of any business, profession or vocation carried on by him.
(2) Such profits or gains shall be computed after making the following allowances namely: . . . . .
(vii) in respect of any building, machinery or plant which has been sold or discarded or demolished or destroyed, the amount by which the written down value thereof exceeds the amount for which the building machinery or plant, as the case may be, is actually sold or its scrap value:
Provided that such amount is actually written off in the books of the assessee."
With the rest of the provisions of the subsection we are not here concerned.
The Income‑tax Officer disallowed the assessee's claim on two grounds. He first of all held that, having regard to the proviso to section 10(2)(vii), the assessee had not complied with it because "the said loss is not at all entered in the books of accounts" and therefore the assessee was disentitled to claim the balancing allowance altogether. Secondly, the Income‑tax Officer held that the loss was not one which fell under section 10(2)(vii) for the reason that the building had not been fully demolished and only two‑thirds of it had not been demolished. The reasoning on this part of the case of the Income‑tax Officer was:
"The assessee‑firm has not completely demolished the whole building. But some part is pulled down in order to let out the ground to Burmah Shell. Exact portion of the building so pulled down is also not determinable. In order to earn more income the same has been done and hence it cannot be said that there is a loss under section 10(2)(vii). While computing the total income, this amount of Rs. 48,754 claimed as loss under section 10(2)(vii) is disallowed."
The assessee appealed, and the Appellate Assistant Commis sioner negatived both the above grounds raised by the Income -tax Officer. As to the second ground mentioned in his order, he observed:
"Regarding the contention of the Income‑tax Officer that the demolition of a part of the property does not entitle tile appellant to claim loss under section 10(2)(vii), I have not been able to find any provision to this effect in the Income‑tar Act. If any asset or part of an asset is sold, discarded, demolished or destroyed, the assessee is entitled to the benefits of section 10(2)(vii). The fact that in this particular case a part of the property has been demolished so that the appellant could earn more income is not at all relevant in determining the loss under section 10(2)(vii)."
Taking this view, the Appellate Assistant Commissioner proceeded to determine the amount of the loss under sec tion 10(2)(vii) and he arrived at the allowable loss at Rs. 33,490. It is unnecessary for the purpose of this reference to mention the details of the computation as contained in paragraphs 7 and 8 of his order, because neither the figure arrived at by the Appellate Assistant Commissioner nor the mode of his computation is at all in dispute upon the question referred.
As regards the first ground in the order of the Income‑tax Officer that the loss was not entered in the books of account of the assessee, the Appellate Assistant Commissioner pointed out that there was a clear explanation why the loss could not be entered in the books of account of the assessee as follows;
"From what has been stated above it will be seen that the partners had treated the property as not a business asset. The Income‑tax Officer treated the property as a business asset and allowed depreciation from 1948‑49. In these circumstances the property was not shown as an asset in the balance‑sheet of the appellant‑firm. Therefore, there cannot be any question of the loss on account of the demolition of the property being shown in the books of the firm. In these circumstances I hold that the appellant could not be expected to write off the loss in the books of account as there is no entry regarding the assets in the books."
The department took the matter in appeal to the Income‑tax Appellate Tribunal and before the 'Tribunal the above grounds were reagitated. As to the ground that since only a part of the building had been demolished the assessee could not claim the allowance under section 10(2)(vii), the decision in Maneklal Vallablidas Parekh ((1959) 37 I T R 142) was relied on. The Tribunal distinguished it and pointed out that there was to direct authority for the proposition that, when the words were used in the section "in respect of any such building", the building must be taken as a whole and if only a part of the building was demolished, the provisions of section 10(2)(vii) would not come into operation at all. They also referred to the provisions of section 10(3) in this connection and observed:
"it was faintly suggested that only a part of the `building' is demolished and it will be extremely difficult to ascertain the written down value attributable to it so as to arrive at the correct amount of allowance to be made under the substantive part of section 10(2)(vii). If that is the grievance of the depart ment, it is a factual one and can only mean that the amount of Rs. 33,000 odd as determined by the Appellate Assistant Com missioner was not correctly determined by him."
As to the first point in the order of the Income‑tax Officer that the figure of loss was not shown in the books of the assessee, tire Tribunal observed somewhat harshly:
"We believe that in taking this contention, the department is trying to strain at a gnat when it had already swallowed a camel. It was the partners' case all along in the past that particular building that was used for the partnership hotel business did not belong to the partnership as such though there was identity amongst the co‑owners of the property and the three partners of the assessee‑firm carrying on the business of London Hotel. Nevertheless, when it suited the department, it took the view that the particular building was a business asset and used by the firm as such for the purpose of its business. It was on that footing that from 1948‑49 assessment year onwards, it allowed depreciation in respect of the said building and now comes the time to allow the claim under section 10(2)(vii). The depart mental representative did not go to tile length of taking an inconsistent position in regard to the ownership of the asset, viz., the said building, but he merely submitted that the amount was not actually written off in the account books of the assessee. In the circumstances of the case, the assets‑account could not be found in the books of the assessee‑firm for the reasons given by the Appellate Assistant Commissioner in paragraph 5 of his order. We see no reason to differ from the view taken by him. Quite apart from this, this objection is extremely technical and it could have been got over by making suitable entries in the account books if the assessee‑firm was so minded. We, therefore, reject the first of these two submissions."
Though the question referred to us is one, both the contentions which were throughout advanced before the income tax authorities and the Income‑tax Tribunal are clearly reflected in it. The first ground is reflected in the question by the "words whether . . . . . the assessee is entitled to the allowance under section 10(2)(vii) in respect of demolition of a part of the building" and the second question is reflected by the words " . even though the less is not actually written oft' in the books of the assessee". Really, there should have been two separate questions but the question as framed sufficiently reflects the nature of the contentions and the controversy between the parties. Both these contentions were pressed before us by Mr. Joshi on behalf of the Commissioner.
Turning to the first contention, namely, that since only a part of the building was demolished in the instant case, clause (vii) of section 10(2) would not be attracted, stress was laid upon the words in the clause "in respect of any such building" and it was said that when the clause says "building" it was the intention of the Legislature to annex the allowance only to the complete building and not to any part of it. Normally, where a whole is mentioned the part would be included in it, but since this is a taxing statute it is necessary to go a little further and examine this clause in the context of its total provisions. The clause speaks of the balancing allowance "in respect of any such building, machinery or plant which has been sold or discarded or demolished or destroyed". In the context there is no distinction made so far as the grant of this allowance is concerned between building, machinery or plant and whether it is sold, discarded, demolished or destroyed. It is plain that machinery or plant in use in a business is never wholly discarded but, in almost every case, is discarded piece‑meal. Indeed the very purpose of this allowance is to compensate the assessee when machinery‑ becomes old and has to be discarded and it is clear that all machinery cannot become obsolete or unusable and be discarded at one and the same time. Yet the clause makes no distinction in the generality of its words between building, machinery and plant, which has been sold, discarded, demolished or destroyed. In the context of machinery or plant to be discarded, obviously, the clause can have no meaning if it is confined to the whole of the machinery or plant. The word building is used in the same context. We, therefore, think that necessarily in the context in which the word "building" is used it must also include part of the building.
The second ground upon which we think that this is the only possible interpretation to be put upon this sub‑clause is the use of the word "destroyed" in the context of building, machinery or plant. Obviously, where a case is contemplated of destruction of a building, machinery or plant, the provision would make no sense if we were to confine its operation to the whole or total destruction of the building, machinery or plant. On the other hand, having regard to the fact that this is a business allowance and granted as a balancing payment to an assessee running a business, it would be available to the assessee even though part of the building, machinery or plant was destroyed.
Curiously enough, there is no decision on the question whether within the meaning of the word "building" in clause (vii) of section 10(2) a part of a building is included or not. But so far as plant and machinery are concerned, there is some authority. In Commissioner of Income‑tax v. Mir Mohammad Ali ((1964) 53 I T R 165 (S C)), a diesel oil engine was fitted to a motor vehicle in replace ment of an already existing engine on that motor vehicle and the question was whether the additional depreciation contemplated in clause (via) of section 10(2) in respect of new buildings erected or newly installed machinery or plant could be granted. The deduction claimed was disallowed on the ground that the installation of the new engine was an accretion of a capital nature and the Supreme Court pointed out that the very meaning of "machinery" was "mechanical contrivances which, by themselves or in combination with one or more other mechanical contri vances, by the combined movement and inter dependent operation of their respective parts generate power, or evoke, modify, apply or direct natural forces with the object in each case of effecting so definite and specific a result". (See page 171.) (From the Privy Council decision in Corporation of Calcutta v. Chairman, Cossipore and Chitpore Municipality (1 L R 49 Cal. 190 (P C))). No doubt the latter case was not a tax case, but their Lordships applied that definition for purpose of the Income‑tax Act also. Upon that definition a part of a machine would be included in machinery with the result that even if a part of a machine be destroyed or discarded, it would still be machinery that was destroyed or discarded. Some reference was also made to a decision of this Court in Akbar Manufacturing & Press Co. Ltd. v. Commissioner of Income‑tax ((1957) 31 I T R 99‑107), but there the contention raised by counsel was of a different nature. The contention there raised was that under the relevant proviso to section 10(2)(vii) if the undertaking is…
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