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Petitioner: LIBERTY CINEMA VS Respondent: COMMISSIONER OF INCOME-TAX, CALCUTTAHonorable Justice P. B. MUKHARJIN. K. Mukherjee,E. R. Meyer
1966 P T D 347
1966 P T D 347
[Calcutta (India)]
Before P. B. Mukharji and C. N. Laik, JJ
LIBERTY CINEMA
versus
COMMISSIONER OF INCOME‑TAX, CALCUTTA
Income‑tax Reference No. 10 of 1960, decided on 19th February 1963.‑
Business expenditure‑Current repairs and repairs of capital nature distinguished‑Legal expenses‑Expenses to complete title of assessee to asset purchased in Court sale‑Whether expense of capital nature‑Indian Income‑tax Act, 1922, S. 10(2) (v) & (xv).
If the assessee wants to deduct from his business profit certain items as allowance under subsection (2) of section 10 of the Income‑tax Act, the onus of proving that such allowances are permissible is upon him, and the High Court in such cases must base its answer on the facts as found by the Tribunal.
Clause (xv) of section 10(2) of the Income‑tax Act, 1922, is a residuary clause in the sense that the expenditure claimed thereunder cannot be an allowance of the nature described in any of the clauses (i) to (xiv) of section 10(2). It will, therefore, be stultifying clause (xv) and its residuary nature it' a Construction is put on it to mean that whenever an allowance fails under these clauses (i) to (xiv) that fact by itself would exclude entertainment of the claim under clause (xv).
Though a sum of money spent for repairs in a particular year can be allowed even though it is undertaken to remedy the efect of several years' wear and tear or negligence, and even though such repairs may not be necessary for several years to come after the repairs had been effected, amounts spent for repairs cannot be allowed if they are of capital nature.
The law with regard to the deduction of legal expenses as settled by the authorities is that if the legal expenses are incurred in creating, curing or completing title to the capital then it is capital expenditure. The question in each case, therefore, turns on the point whether the legal expenses in question were incurred for purposes of creating, curing or completing title:
A person purchasing property at a sale held under section 20 of the Public Demands Recovery Act really purchases an inchoate right which is completed by the sale becoming confirmed and becoming absolute under section 25 of the Act. Legal expenses in connection with an application made to set aside the sale under section 22 of the Act before the sale was confirmed or before the sale became absolute and within the time permitted by the statute cannot be allowed as business expenditure.
Obiter.‑All legal expenses relating to the protection of the capital are not capital expenditure and some of these expenses may be and very often are revenue expenditure. Litigation expenses incurred by an assessee in litigation concerning his property or capital asset may arise independently of his purchase or the document or root of his title such as attacks from a trespasser or a superior title as in the case of Southern v. Borax Consolidated Ltd. (1941) 1 K B 111. Such expenses will not ordinarily be capital expenses.
The assessee purchased the leasehold right for five years in a cinema theatre in Court‑auction with the machinery, furniture and other fixtures and had to spend in the year of account Rs. 24,498 for repairs and renovation and a sum of Rs.9,890 as legal expenses in connection with an application to set aside the auction sale and claimed these amounts as a deduction. The Tribunal found that these expenses were of a capital nature and disallowed the claim:
Held, (i) with regard to the claim of Rs. 24,498 since the Tribunal had found that the expenses incurred on this account were all of capital nature, and the onus was on the assessee to prove the facts necessary to bring him within the allowance under section 10 (2) (xv) of the Act and the assessee had failed completely to discharge that onus by producing any fact showing the nature and character of these expenses, the sum of Rs. 24,498‑12‑6 cannot be claimed under section 10 (2) (xv) or under section 10 (2) (v) of the Act;
(ii) with regard to the sum of Rs. 9,890 as the Tribunal had found that the amount had been spent for completing the title of the assessee and this finding was also correct, this sum of Rs. 9,890 also was not allowable under section 10 (2) (xv) of the Act.
[Case‑law referred].
STATEMENT OF CASE
By this application presented on 28th September 1959, the assessee requires the Appellate Tribunal to refer to the High Court certain questions of law which are said to arise out of the consolidated order of the Appellate Tribunal in I. T. A. No. 6932 of 1957‑58 dated 26th June 1959. 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 and refer it to the High Court under section 66 (1) of the Indian Income‑tax Act, 1922.
2. Although the assessee raised several questions the questions Nos. (1) (a), (b), (d), (e) and (f) were not pressed and only the questions Nos. (1) (c) and (g) were pressed.
3. The assessee was the lessee of a cinema house belonging to one Jagannath Prosad Roy. On 18th February 1946, the said Jagannath Prosad Roy leased out the house along with the machinery, furniture and other fixtures to one Mahendra Narayan Roy for a period of five years with an option to renew the lease for another five years. On 12th May 1950, the interest of the said Mahendra Narayan Roy in the aforesaid property was sold in auction sale (on account of income‑tax demands) to the partners of the assessee firm along with two other gentlemen, Messrs Agarwalla and Advani. On 21st June 1951, the sale certificate was granted and on 26th July 1951, and 30th September 1951, the interest of Messrs Agarwalla and Advani was also purchased by the assessee firm. The assessee's accounting year for the assessment year 1953‑54 commences from 28th October 1951. The expense for the acquisition of the lease up to that date was for Rs. 68,673. It was claimed that, in the year of account, there was an additional expense of Rs. 34,388 on account of the leasehold buildings and rights and the total expense under that head was, in all for Rs.1,03,062. Against this expense, the assessee wrote off one‑fifth as, in its opinion, the lease was to run for five years. The said written‑off amount was Rs. 20,612. The assessee's claim is that in all the years under appeal, the amount of Rs. 20,612 should be allowed as an expense written off against the acquisition of the lease. In the opinion of the Appellate Tribunal, there appeared to be no provision under the Income‑tax Act by virtue of which such an expense could be allowed to the assessee. It was only writing off an asset which was acquired for a period and, therefore, not a revenue expense.
4. The assessee's second contention was that so far as the amount of Rs. 34,388 spent in the first year of account was concerned, the entire amount should be allowed as an expense in view of the fact that the expense was incurred, firstly, for renova?tion and repairs, and, secondly, for the legal expense for completing its title for the acquisition of the lease.
5. Regarding the renovation, the Tribunal understood from the assessee that the cinema hall was closed down for about seven months and the assessee had to renovate the building and furniture in order to properly start the business. It was also argued that the business was carried on from the 1st day of the accounting year and the expense incurred for such renovation was also made during the time when the exhibition of the pictures was made. The assessee claimed that this sum of Rs. 34,388 should be allowed as repairs under section 10 (2) (v) or as an expense under section 10 (2) (xv) of the Income‑tax Act. The said expense included Rs. 9,890 incurred after the commencement of the business for legal expenses in connection with the proceedings for setting aside the certificate sale and Rs. 24,498‑12‑6 incurred in the repairs and renovation of the cinema hall after the commencement of the business.
6. The Appellate Tribunal held that so far as the legal. expense was concerned, the same was expended for the purpose of completing the title of the assessee. The acquisition could be made only on the completion of the title and, therefore, that amount was, in their opinion, a part of the expense for the acquisition of a capital asset. Therefore, it held that the expense could not be allowed.
7. With respect to the repairs, it held that the buildings and furniture were renovated. That meant that it was a deferred repair. It was actually a renewal or restoration in the sense that the repairs were not attended to as and when the need for them arose. Because the particular cinema house was not in use for several months, the repairs were required to be made and such repairs were not repairs which should have been attended to as and when the need for them arose. Therefore, it held that the renovation expense claimed by the assessed was not repairs within the meaning of section 10 (2) (v) and also held that when the law had particularly allowed an expense under one head and the amount was not allowable under that head, it was not possible to allow the same kind of expense under the head of section 10 (2) (xv) and so the amount could not be allowed under section 10 (2) (xv) of the Income‑tax Act. As such, the expense could not be deducted against the income. The order of the Appellate Tribunal is made a part of this case as Annexure "A".
8. From the above facts and circumstances, the following question of law arises:‑
"Whether, on the facts and in the circumstances of the case, the sum of Rs. 24,498‑12‑6 incurred for repairs and renovation of the cinema hall and the sum of Rs. 9,890 incurred for legal expense could be allowed as expenses under any of the provisions of section 10 (2) of the Indian Income‑tax Act?"
9. Copies of the draft statement of the case were sent to the parties concerned. The suggestion of the assessee has been appropriately incorporated in the statement. The Commissioner of Income‑tax suggested certain alterations in the question but as the question framed by us appears to be appropriate, no alteration is made. The draft statement is finalised.
N. K. Mukherjee for the Assessee.
E. R. Meyer and B. L. Pal for the Commissioner
JUDGMENT
P. B. MUKHARJI, J.‑This is a reference under section 66 (11 of the Indian Income‑tax Act. The reference seeks the answer of this Court to the following question:‑
"Whether, on the facts and in the circumstances of the case, the sum of Rs. 24,498‑12‑6 incurred for repairs and renovation of the cinema hall and the sum of Rs. 9,890 incurred for legal expense could be allowed as expenses under any of the provisions of section 10 (2) of the Indian Income‑tax Act?"
The assessee is the lessee of a cinema house belonging to one Jagannath Prosact Roy. Jagannath gave a lease on the 18th February 1946, of the house along with machinery, furniture and other fixtures to one Mallendra hlaravan Roy for a period of five years with an option to renew the lease for another five years. The interest of Mahendra Narayan Roy in the said property was sold on the 12th May 1950, in auction sale on account of income‑tax demands to the partners of the assessee firm along with two other gentlemen, Messrs Agarwalla and Advani. The sale was held under the Public Demands Recovery Act. A sale certificate was granted on the 21st June 1951. Thereafter, on the 26th July 1951, and the 30th September 1951, the assessee purchased the interests of Messrs Agarwalla and Advani.
The assessee's accounting year for the assessment year 1953‑54 commences from the 28th October 1951. The facts found are that the expense for the acquisition of the lease up to that date was for Rs. 68,673. In the year of account it was claimed that there was an additional expense of Rs. 34,388 on account of the leasehold buildings and rights and the total expense under the lead was, in all, for Its 1,03,062. What the assessee did was to write off one‑fifth of this amount on the ground that the lease was for five years and the amount written off was one‑fifth of Rs. 1,03,062, i.e., Rs. 20,612.
In the statement of the case it is clearly laid down as a fact that the assessee's claim in all the years under appeal was that the amount of Rs. 20,612 should be allowed as an expense written off against acquisition of the; lease. The assessee's contention was that so far as the amount of Rs. 34,388 spent in the first year of account was concerned, the entire amount should be allowed as an expense on the ground that the expense was incurred, firstly, for the renovation and repairs and, secondly, for the legal expense for, completing its title for the acquisition of the lease. This fact is found and stated in the statement of facts in this reference. It must be emphasised that the claim was, firstly, in respect of renovation and repairs and, secondly, for legal expenses for completing the assessee's title for the acquisition of the lease. The reason for emphasising these two facts will be apparent when we proceed to discuss and decide the question referred to us.
The only other fact that should be set out here is that the cinema hall was closed for about seven months and the assessee had to renovate the building and furniture in order to properly start the business. In the statement of case the argument was that the business was carried on from the first day of the accounting year and the expense incurred for such renovation was also made during the time when the exhibition of the pictures was made. The assessee claimed that the sum of Rs. 34,388 should be allowed as repairs under section 10 (2) (v) or as an expense under section 10 (2) (xv) of the Income‑tax Act. The said expense included Rs. 9,890 incurred after the commencement of the business for legal expenses in connection with the proceedings for setting aside the certificate sale and Rs. 24,498‑12‑6 and Rs. 9,890 are the subject‑matter , of the question referred to us.
The assessee lost before the income‑tax Officer, the Appellate Assistant Commissioner and also before the Tribunal. But the claim of the assessee at these different stages changed from time to time. It will be necessary, therefore, to refer to the orders of these three authorities. The Income‑tax Officer finds as a fact that from the 1st July 1951, to the 27th October 1951, there was no business as the cinema hall was renovated and arrangement for exhibition of the films was finalised The actual show started on the 29th October 1951. There was no activity from the 12th May 1950, when the properties in the cinema were sold by auction on the 1st July 1951, in connection with the litigation concerning the certificate sale. The actual certificate of sale was granted on the 21st June 1951. The assessee debited all expenses in connection with the starting of the cinema in an account under the head "leasehold building account" but charged proportionate amount for the relevant assessment year. It was found as a fact by the Income‑tax Officer that these expenses were of capital nature and related to the period prior to the starting of the business. Therefore, he disallowed the amount charged to revenue account. If the finding is that these expenses were all of capital nature, very little remains of this reference so far as the assessee is concerned. The Appellate Assistant Commissioner emphasised the fact that these expenses were of capital nature and had been incurred before the commencement of the business of the firm as found by the Income‑tax Officer. But he records the fact that the assessee did not seriously contest those findings of the Income‑tax Officer that the expenses were all of capital nature. There was a refinement of the assessee's case before the Appellate Assistant Commissioner. The refinement is that it was contended that even though the expenses were of capital nature, some part of the expenses which were incurred during the accounting year should be allowed. At that time the claim for repairs and renovation was made by the assessee under section 10 (2) (v) of the Income‑tax Act and there was no question of making any claim under section 10 (2) (xv) of the Income‑tax Act. The facts found and the conclusion reached by the Appellate Assistant Commissioner are that the repairs and renovation expenses incurred in the relevant year were all of capital nature and, therefore were not covered by section 10 (2) (v) of the Income‑tax Act. He added a further reason to come to that conclusion by recording the fact that the assessee was claiming the current repair expenses separately under a different head called "hall maintenance account" as distinguished from the "leasehold building account". Therefore, the Appellate Assistant Commissioner enforced his conclusion that the repairs and renovation expenses claimed in the leasehold building account could not be claimed as current repairs under section 10 (2) (v) of the Act. He, therefore, rejected the appeal of the assessee and confirmed the assessment.
Before the Appellate Tribunal for the first time the assess made a case in the alternative under section 10 (2) (xv) of the Income‑tax Act for allowances of these expenses. The order of the Tribunal makes it clear that the renovation expenses claimed by the assessee were not current repairs within the meaning of section 10 (2) (v). It is true that the tribunal refers to this claim as a claim for a "deferred repair", yet the Tribunal was clear enough to say "it was actually a renewal or restoration in the sense that the repairs were not attended to as when the need for them arose". The Tribunal, therefore, disallowed the claim of the assessee. On the point of the claim for legal expense the Tribunal confirms and finds the fact that this expense was incurred "for the purpose of completing the title of the assessee". It being found as a fact that the amount was a part of the expenses for the acquisition of the capital asset it could not be allowed as a legal expense.
But the Tribunal in dealing with the alternative claim made for the first time before it under section 10 (2) (xv) gave a wrong reasoning in disallowing it, when it said:‑
?. . . . . . .when the law had particularly allowed an expense under one head and the amount was not allowable under that head, it was not possible to allow the same kind of expense under the head of section 10 (2) (xv) and so the amount could not be allowed under section 10 (2) (xv) of the Income‑tax Act."
This part of the reasoning of the Tribunal cannot be upheld. If the law allows an expense, then how can it be disallowed A bare reference to section 10 (2) (xv) of the income‑tax Act makes it quite clear that one of the conditions to be satisfied there is:‑
? . . . . . . . the expenditure should not be allowance of the nature described in any of the clauses (i) to (xiv) inclusive."
That being so it is only when the allowance does not come under any of the previous sub‑clauses (i) to (xiv) that a claim can at least aspire to come under clause (xv) of section 10 (2) of the Act and not otherwise. It, therefore, cannot be said that because a claim fails under clauses (i) to (xiv) of section 10 (2) of the Act, therefore, it must fail under section 10 (2)(xv). We respectfully agree with the view expressed in a recent decision of the Division Bench of the Allahabad High Court in J. K. Woollen Manufactures. Private Ltd. v. Commissioner of Income‑tax ((1963) 48 I T R 346), where it is laid down that under section 10 (2) (xv) of the Income‑tax Act as it stood before the words "not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive" were added to the clause, even if an amount was held not to be allowable under section 10 (2) (x), it might still be considered whether it was allowable under section 10 (2) (xv).
This Allahabad decision, however, dissented from the view taken by the Bombay High Court in Subodchandra Popatlal v. Commissioner of Income‑tax ((1953) 24 I T R 566). In this connection it has to be emphasised that we in this reference are not concerned with this conflict between the Allahabad decision and the Bombay decision and we must also emphasise that the Allahabad decision was concerned with a situation before amendment of clause (xv) of section 10 (2) of the Income‑tax Act by the addition of the words: "not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive." The point that we wish to emphasise here is that clause (xv) of section 10 (2) of the Income-?tax Act as it stands now is a residuary clause in the sense that the expenditure claimed there under cannot be an allowance of the nature described in any of the clauses (i) to (xiv) of section 10 (2). If it be held that it is not an allowance of the nature described in any of these clauses from (i) to (xiv) it is only then that it satisfied one of the conditions under which the claim can come under section 10 (2)(xv) of the Act. It will be, therefore, stultifying sub‑clause (xv) of section 10 (2) and its residuary nature if a construction is put on it to mean that, whenever an allowance fails under these clauses (i) to (xiv), that fact by itself would exclude entertainment of the claim under clause (xv) of section 10 (2) of the Act.
The difficulties of the assessee in this reference are insuper?able because the facts found are all against the assessee's contention and the claim. He has given no particulars and no details of the so‑called expenses for repairs. What these repairs actually were are not to be found. Indeed as indicated already it has been found as a fact and even conceded by the assessee before the Appellate Assistant Commissioner that all these expenses were of capital nature and that they were all incurred before the commencement of the business. Even 'the current lease has not been supplied by the assessee and what appears as a lease is the expired lease.
If the assessee wants to deduct from his business profits certain items as allowance under subsection (2) of section 10 of the Income‑tax Act the onus of proving that such allowances are permissible is upon him. The Supreme Court decision in Commissioner of Income‑tax v. Calcutta Agency Limited (1) is an authority in support of this proposition, where Kania, J., at page 196, observed
"Now it is clear that this being a claim for exemption of an amount, contended to be an expenditure falling under section 10(2) (xv), the burden of proving the necessary facts in that connection was on the assessee . . . ."
It is also an authority for the proposition that the High Court in such reference must base its answer on the facts as found by the Tribunal as pointed out by Kania, C. J., on the same page of the reports, where the learned Chief Justice observed
"It is, therefore, the duty of the High Court to start by looking at the facts found by the Tribunal and answer the questions of law on that footing. Any departure from this rule of law will convert the High Court into a fact‑finding authority, which it is not under the advisory jurisdiction."
Judged by this test and taking the two central facts stated in the statement of case and in the different orders of the Income tax Officer, the Appellate Assistant Commissioner and the Appellate Tribunal, viz., ((1951) 19 I T R 191) all these expenses are of a capital nature and (2) that they are all incurred before the commencement of the business, the assessee must fail in this case and the answer to the question referred to us must be to the negative.
We must record here that Mr. Mukherjee, learned Advocate for the assessee before us, abandoned all claims of the assessee under section 10 (2)(v) of the Act and claimed the sums mentioned in the question under section 10(2)(xv) of the Income‑tax Act. Even in making this claim under section 10(2)(xv) of the Act his difficulty remains in the finding of fact that the sum of Rs. 24,498‑12‑6 which he claimed for repairs did in fact relate to capital expenditure. One of the conditions to be satisfied under section 10 (2)(xv) is that the expenditure must not be "in the nature of capital expenditure."
It will be appropriate at this stage now to refer to some of the arguments and citations made at the Bar.
In support of his claim for the allowance of Rs. 24,498‑12‑6 on account of repairs, the assessee relied on the decision of the Punjab High Court in Commissioner of Income‑tax v. S. B. Ranjit Singh ((1955) 28 I T R 14), for the proposition that a sum can be allowed as the cost of repairs and can be held not to be a capital expenditure even though the expenditure in r: particular year is incurred on the ground that it is undertaken to remedy the effect of several years' wear and tear or negligence and also in spite of the fact that such expenditure may not be necessary for several years to come after repairs had been effected. This case is…
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