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Petitioner: COMMISSIONER OF INCOME-TAX, GUJARAT VS Respondent: SANDESH LTD
Court Name: Gujarat High Court Judge(s): P. N. Bhagwati, J. M. Shelat Title: COMMISSIONER OF INCOME-TAX, GUJARAT vs SANDESH LTD Case No.: Income-tax Reference No, 1 of 1964 Date of Judgment:1964-10-07 Reported As: 1993 PTD 425 Result: Questions answered in the negative
JUDGMENT
JUDGMENT J.M. SHELAT, C.J.---By a deed of lease dated March 10, 1945, the assessee-company took over a plot of land admeasuring 4,059 square yards on lease for a period of ninety-nine years at an annual rent of Rs,12,685 per year and built thereupon its press where it carried on its business as printers and publishers of a daily newspaper called "Sandesh". The deed of lease gave option to both the parties, the lessor to sell the said land at a price of Rs, 4,09,959 at the rate of Rs,101 per square yard, and the lessee to purchase it at the said price, both parties agreeing to exercise their respective option during a period of five years commencing from January 1, 1948, and ending on December 31, 1953, after giving six months' notice. The deed of lease is in Gujarati and, as translated, clause (4) thereof runs as follows: "If the land leased is acquired under the provisions of the Land Acquisition Act, or the leased land is notified for acquisition and such notification is subsequently cancelled and thereafter whatever may be the balance of the lease land, either party may, within five years after the 1st January, 1948, i,e, up to the 31st December, 1953, call upon the other party by six months' notice either to sell or purchase the leased land at the price of Rs,4,09,959 calculated at the rate of Rs,101 per square yard and the other party shall be bound to sell or purchase at the said price. If the party of the first part is willing to sell the leased land at the rate calculated at Rs,101 per square yard within the hereinabove stipulated time and the party of the second part commits breach in purchasing the leased land, the party of the first part shall recover the sale price together with costs and interest thereon at the rate of six per cent. Per annum of the leased land and the structures constructed thereon, and the deficiency, if any, shall be recovered from the other properties of the party of the second part. And if the party of the second part is willing to purchase the leased land and the party
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of the first part fails to execute conveyance, the party of the second part shall deposit the said amount either with the Imperial Bank, the Central Bank or the Indian Bank in the name of the party of the first part or pay the same to the party of the first part and on such payment being made, rent shall cease and the party of the second part shall be entitled to obtain conveyance from the party of the first part and, in the said circumstances, two-thirds of the expenses shall be borne by the party of the second part and one-third expenses shall be borne by the party of the first part. If within the hereinabove stipulated period either party fails to effect the sale, the lease shall remain operative and thereafter neither party shall be entitled either to sell or purchase the leased land." On or about March 23, 1946, the assessee-company executed a sublease in respect of 1,728 square yards out of the said land at the annual rent of Rs,6,048 which sub-lease contained a similar option to sell and purchase the aforesaid 1,728 square yards at the price of Rs,1,74,528. The said sub-lease was in favour of one N.C. Bodiwala, one of the directors of the assessee-company. Thus, as against the price of Rs,4,09,959, the assessee-company was entitled to exercise its option against the said Bodiwala, and on such exercise of the option, Bodiwala was liable to purchase 1,728 square yards at the price of Rs,1,74,528 and the assessee-company thus would be liable to pay Rs,4,09,959 less Rs, 1,74,528 to the lessor for the balance of the land. The lessor exercised his option and thereupon the assessee-company became liable to purchase the leased land at the aforesaid price on and from March 1, 1951, that being the date when the six months' notice presumably expired. When called upon to purchase the land, the assessee- company made default in consequence of which the lessor filed a suit on December 31, 1952, against the assessee-company, being Suit No,244 of 1952, in the Court of the Joint Civil Judge, Senior Division, Ahmedabad, to recover the aforesaid purchase price together with interest thereupon at the rate of six per cent. Per annum from March 1, 1951. On May 8, 1954, the parties took a consent decree which, after reciting the fact of the assessee- company having withdrawn its objection to the title of the lessor to transfer the property, and the willingness of the assessee-company to purchase the said land, provided for the specific performance of the provisions of clause (4) in the deed of lease and payment by the assesseecompany of the purchase price together with interest thereupon at the rate of 5-1/4 per cent. Per annum on the balance due to the lessor. The decree also provided that the amount remaining outstanding could be paid by the assessee company by monthly instalments of Rs,6,000 with interest at the rate of 54/4 per cent. Per annum on the reducing balance. During the pendency of the suit, the assessee-company had paid four sums on different dates aggregating to Rs,1,43,740. The claim made in the suit was for Rs,4,81,890 which comprised the balance of the purchase price and interest thereupon from March 1, 1951. After deducting the aforesaid sum of Rs,1,43,740 the balance remaining outstanding came to Rs,3,38,150. Out of this amount, the assessee paid Rs,38,150 on the date of the consent decree, i,e,, on May 8, 1954, and, therefore, the amount remaining payable came to Rs,3,00,000 which was payable by monthly instalments of Rs,6,000 each and interest at the rate of 5-1/4 per cent. Per annum on the reducing balance. The decree expressly provided that the lessor was to execute a deed of conveyance only after the entire amount together with interest due under the decree to the lessor was fully paid. The decree also provided for a charge, not only on the aforesaid land but also on the premises built by the lessee thereon and other assets belonging to the lessee lying therein and other properties of the lessee until the decretal amount was fully paid off. For the assessm ent year 1955-56, the assessee claimed deduction in respect of two months, namely, Rs,12,486 being the amount of interest due on the balance remaining outstanding for the period from May 6, 1954 to March 31, 1955, and for an amount of Rs,17,281 being interest for the period between March 31, 1951 to May 5, 1954, which was included in the amount paid on May 8, 1954, when the decree was passed. The claim for deduction in respect of these two items was
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made primarily under clause (iii) and, in the alternative, under section 10(2), clause (xv). The Income-tax Officer allowed the item of Rs,12,486 on the ground that it comprised of interest paid by the assessee company, but disallowed the other item of Rs,17,281. As regards the item of Rs,17,281 he held that that amount, though described as interest, was not paid on the amount borrowed and utilised for the purposes of the 'business but that the assessee-company was required to pay that amount as a result of the compromise entered into between it and the lessor. He observed that the stand taken up by the assessee-company in the suit was that the amount was not payable at all and hence, it was not a debt due to the other party and, therefore, as long as the assessee did not admit the existence of the debt due to the other party, the question of allowance of interest on that debt did not arise. The assessee, aggrieved by this order, filed an appeal. The Appellate Assistant Commissioner was not only of the view that the amount of Rs,17,281 could not be claimed as allowance, but was also of the view that the other amount of Rs,12,486 had been wrongly allowed by the Income-tax Officer. He therefore issued a notice upon the assessee-company for enhancement. His view was that the amount of Rs,12,486 allowed by the Income-tax Officer was not admissible as a deduction either under clause (iii) or clause (xv) of section 10(2) as that item could be attributable only to the consideration for the price of the land and, therefore, must be regarded as capital expenditure. As regards the item of Rs,17,281, the Appellate Assistant Commissioner was of the view that that amount also was not admissible either under clause (iii) or clause (xv) of section 10(2) as the amount comprised of interest payable by the lessee to the lessor as a result of the default committed by the lessee on March 1, 1951, and the interest payable by the lessee was consequently nothing else than an addition to the cost of the land. Relying upon the decision of the High Court of Bombay in Metro Theatre Bombay Ltd. v. Commissioner of Income-tax, (1946) 14 ITR 638 he held that the transaction was of purchase of a capital asset on a long term credit with stipulation for payment of interest on reducing balance and therefore did not amount to borrowing of capital within the meaning of clause (iii) of section 10(2). He also added "the present case contains another adverse factor as the interest really is a measure of the inflation of the purchase price due to a breach of contract on the part of the appellant-company to purchase the land outright on March 1, 1951." He also dismissed the claim under clause (xv) relying upon the aforesaid decision and holding that the amount in question was not spent wholly and exclusively for the purposes of the business. The Tribunal allowed the appeal filed by the assessee-company, holding that both the amounts had been spent wholly and exclusively for the purposes of the business of the assessee-company and were therefore allowable deductions. The principal ground upon which it arrived at this conclusion was that the amounts were in reality paid by the assessee company for the use of the land and that by the payment of Rs,17,281 the assessee-company had not brought into existence any capital asset and, therefore, the expenditure in question could not be styled as capital expenditure. The Tribunal also held that the money spent in the purchase of an asset of business was money spent for the purposes of the business and, therefore, interest paid on such amount was an allowable deduction under clause (iii) or clause (xv) of section 10(2). Though the Tribunal observed that it was difficult to define the exact nature of the item of Rs, 17,281 and did not specifically say whether it was an item of interest or an item of ground rent, it held that in either case the expenditure had not brought into existence any capital asset and, therefore, the payment was wholly and solely for the purposes of the business and was an allowable deduction. As regards the item of Rs, 12,486, that item also had not increased the value of the capital asset, namely, the land, by reason of the delay in payment of the purchase price and, therefore, could not be regarded as capital expenditure. Before we proceed to consider the question of law arising in this reference, it would be necessary to appreciate how the assessee-company arrived at the figure of Rs,17,281 in respect of which it claimed deduction under clauses (iii) and (xv) of section 10(2). It appears that on May 5, 1954, three
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Rs. 4,09,959 being the agreed sale price; 786consisting of Rs.685, that being arrears of ground rent payable on February 28, 1950. and Rs. 101 being interest thereon at the rate of 5-1/4 per cent. per annum up to December 30, 1952, the date of the filing of the suit; 39,458being interest at the rate of 5-1/4 per cent. per annum on Rs. 4,09,959 for the period from March 1, 1951 to December 30, 1952; 24,687being interest at the rate of 5-1/4 per cent. per annum from December 31, 1952 to May 5, 1954, after adjusting the interest calculated on Rs. 1,43,150 already paid by the lessee; 7,000cost of the suit payable to the lessor . 4,81,890 Total Rs. 149being interest on Rs.685, that being the arrears of ground rent payable op 28-2-50 at the rate of six per cent. per annum as provided in the deed of lease;days before the consent decree was taken, the parties had made up the accounts and according to the accounts so made up, the lessor claimed Rs,4,81,890 as being the amount due to him. That amount was made up as follows:
Pending the suit, the lessee, as aforesaid, had paid four amounts aggregating to Rs,1,43,740, namely Rs,26,055 on January 30, 1953, being the ground rent for two years plus Rs,685 due on February 28, 1950; Rs,12,685 being ground rent paid on January 1, 1953; Rs, 30,000 paid on July 10, 1953, and Rs, 75,000 paid on March 13, 1954. Since it was agreed that the lessee was bound to purchase the property as from March 1, 1951, the amounts paid as ground rent were agreed to be treated as payments towards the purchase price. The balance payable on May 5, 1954, therefore, came to Rs,4,81,890 less Rs,1,43,150, i,e, Rs,3,38,150. As the assessee-company paid on May 8, 1954 a further sum of Rs,38,150, the principal amount remaining due by the company to the lessor came to Rs,3,00,000 payable under the decree by monthly instalments of Rs,6,000 and interest at the rate of 54/4 per cent. Per annum on the reducing balance. ' The statement of account produced by the assessee-company before the Income-tax Officer explains how the amount of Rs,24,687, being interest amount for the period December 31, 1952 to May 5, 1954 was made up. First the account of interest due to the lessor was made up and that account was as follows:
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39,458being interest on Rs.4,09,959 from 1-3-1951 to 30-12-1952; 27,800being interest on the aforesaid amount from 1-1-1953 to 15-4- 1954; 1,196being interest on the aforesaid amount from 15-4-1954 to 5-5- 1954. Rs. 1,653being interest on Rs.26,055 paid on 30-1-53; 749being interest on Rs.12,685 paid on 1-1-53; 1,214being interest on Rs.30,000 paid on 10-7-53; 328 413Being interest on Rs.75,000 from 13-3-1954 to 5-5-1954. 4,357 Total Rs. 4,09,959 26,191 7,000being interest due as on 5-5-54 and costs of the suit. Total: 4,43,150 Less 1,43,150 paid pending the suit; Balance 3,00,000 Rs. 39,458being interest from 1-3-1951 to 31-12-1952; 24,687being interest from 31-12-51 to 5-5-54; 101being interest due on Rs.685 at the rate of 5-1/4 per cent. per annum . ------------
making a total of the interest amount to Rs,68,603 and adding thereto Rs,685 (arrears of ground rent) totalling to Rs,69,288. As against this amount, the lessee deducted Rs,43,097 consisting of the following amounts:
The assessee-company added to this amount the two amounts of Rs,26,055 and Rs,12,685 paid as ground rent on January 30, 1953 and January 1, 1953 and these made up the total of Rs,43,097. The interest thus payable to the lessor on making up the accounts came to Rs,69,288 less Rs, 43,097, that is Rs,26,191. The account as made up by the parties then was as follows:
The easiest way to understand the calculations made by the assessee company would appear to be as follows:
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Total 64,246 Less38,055being the ground rent for three years already paid; Equal to 26,191
The assessee then debited from out of the amount of Rs,26,191, Rs,8,910 being interest payable by Bodiwala on the purchase price of Rs,1,74,528 payable by him in respect of the aforesaid 1,728 square yards. The balance thus came to Rs,17,281 which, as aforesaid, was the amount claimed for deduction. The statement of account shows that the parties adopted this computation on the basis that the assessee-company became bound under clause (4) of the deed of lease to purchase the aforesaid land and to pay the aforesaid purchase price on March 1, 1951, and hence interest was added to the purchase price from March 1, 1951, up to the date of the making up of the accounts i,e, May 5, 1954. Though these two items of Rs,17,281 and Rs, 12,685 were claimed originally as deductions allowable under clause (iii) and in the alternative under clause (xv) of section 10(2), Mr. Nanavati appearing for the assessee company made it clear before us that he was supporting the Tribunal's judgment more on clause (xv) than on clause (iii) and, therefore, we shall proceed to consider the case from the point of view first of clause (xv). Section 10(2)(xv) runs as follows: "10. (2) Such profits or gains shall be computed after making the following allowances, namely:---... (xv) any expenditure (not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation." The first question that would arise is whether the two amounts of interest payable under the deed of lease and the decree respectively and having to be paid by the assessee-company by reason of its failure to pay the purchase price when it became due on March 1, 1951, and by reason of the asseseeecompany being given the facility to pay the decretal amount by instalments, in other words by reason of the judgment-creditor foregoing his right to demand the decretal amount all at once, can be said to be expenditure laid out or expended wholly and exclusively for the purposes of the business of the assessee-company. The learned Advocate-General argued that the two sums of Rs,17,281 and Rs,12,685 cannot be legitimately called expenditure wholly and exclusively expended or laid out for the purpose of the business of the assesse company as they became payable as a result of the default on the part of the assessee-company to carry out the provisions of the deed of lease. Such a default, he argued, was totally unconnected with the business of the assesee company which was that of printers and publishers of a daily newspaper. The learned Advocate-General relied on Metro Theatre Bombay Ltd. v. Commissioner of Income-tax (1946) 14 ITR 638, which was a decision in a case nearest to the one before us. The assessee-company there had also claimed deduction of an amount of Rs,9,825 under clause (iii) and clause (xv) and the question was whether that amount was allowable under either of the two clauses. The assessee had entered into a building agreement with the Government by which in consideration of the company agreeing to build upon the land and to pay a sum of three lakh and odd rupees, it was to receive a lease for 99 years. The agreement provided for the payment of the amount by six monthly instalments with interest on the instalments outstanding from time to time, and it was in respect of Rs,9,825, which was the interest payable in the relevant year, that the claim for deduction was made by the assessee. The agreement which was entered into by the assessee, inter alia, provided that in consideration of the licensee agreeing to pay Rs,3,81,796 by instalments with interest as therein provided for, the Government agreed to grant to the assessee a licence and authority to enter upon the piece of land described in the first schedule thereto for the purpose of building and executing works thereon as therein set out. Clause 2 provided, inter alia, that the
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assessee company should pay to the Government the purchase money and the instalments therein set out, and further provided that if the assessee-company were to make any default in the payment of any instalment, it would be lawful for the Government to recover the sum under the Bombay City Land Revenue Act of 1876, and after notice of demand as if the arrears were arrears of land revenue due in respect of the said land. Clause 3 provided that as soon as the assessee- company certified that all buildings had been erected in accordance with the terms set out in the licence and provided that the company shall have paid all sums payable under the licence and shall have observed all the stipulations and conditions contained therein, the Government would grant and the company or its approved nominee would accept the lease of the said land and the buildings erected thereupon for a term of 99 years at the yearly rent of rupee one. After negativing the claim under clause (iii) on the ground that purchase of a capital asset on a long-term credit with the stipulation for payment of interest on the reduced balance did not amount to borrowing of capital within the meaning of that clause, the learned Chief Justice negatived the claim for deduction under clause (xv) also by observing that interest payable on unpaid instalments could not be said to be payment wholly or exclusively for the purposes of such business. He also observed that, no doubt, payment of interest on arrears of purchase price of the leasehold interest in which the business was carried on might be said to be for the purposes of the business, but it was not wholly and exclusively for the purposes of the business, and illustrated that proposition by stating that if the cinema business had to be closed down, the assessee would still have to make the payment unless he was prepared to have the licence forfeited. Kania J., as he then was first dealt with clause (iii) and observed that on a scrutiny of the agreement in that case, it was clear that till the lease was obtained the assessee was merely a licensee. He had agreed to purchase the property on payment of Rs,3,81,796 and was given some facility in payment of the same by instalments as provided in clause 2. The obligation was to pay the whole amount and therefore for the facility granted for deferred payments, interest had to be paid by the assessee in respect of the balance which remained unpaid. The minimum amount of instalments was also stipulated but the assessee had the right, if he chose, to pay a larger amount and reduce his liability to that extent, both for the payment of the principal and interest. On the terms of the agreement he found himself unable to accept the contention that the transaction amounted to capital borrowed for the purposes of the business. He also stated that the transaction was neither a loan transaction nor was it for the purposes of the business. As regards the claim for exemption under clause ()di) which as it stood then, was similar to the present clause (xv), he held that the assessee could not get the exemption claimed under that clause also. The business was of showing cinema films. That business could be conducted in rented premises and it could not be argued that the amount was payment of rent. The payment again could in no event be stated to be an expenditure wholly and exclusively for the purposes of the business. If the interest was not paid, the result would be not necessarily stoppage of the business of showing cinema films, but the assessee would not acquire the lease of the property. The basis of this reasoning was that the business of the assessee there was of exhibiting cinema films and not of owning property or buildings and, therefore, the interest payable under the agreement between the assessee and the Government had nothing to do with the business of exhibition of cinema films and, therefore, it was not an expenditure laid out or expended wholly and exclusively for the purposes of the business. This decision has been recently followed by the High Court of Bombay in Bombay Steam Navigation Co. v. Commissioner of Income-tax (1963) 48 ITR 476. The question there also related to two payments which the assessee-company had made in the assessment years 195556 and 1956-57 and which it claimed as deductions under the Act. The company was incorporated in August, 1953, and under a scheme of amalgamation, the Bombay Steam Navigation Company Limited was amalgamated with the Scindia Steam Navigation Company with effect from June 30, 1952. The scheme, inter alia, provided
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that the Scindias would be entitled to float and establish a joint stock company with the object of taking over passenger services in the Bombay harbour and certain other places which were formerly carried on by the Bombay Steam Navigation Company. Pursuant to this object, the assessee-company was floated in August, 1953. On August 12, 1953, the assessee-company entered into an agreement with the Scindias under which the assessee-company took over certain assets for a price and that price was to be paid by issue and allotment of twenty-nine thousand and odd shares, credited as fully paid up, of the face value of Rs,100 each in the share capital of the assessee-company and the balance was to be treated as a loan granted by the transferor company and secured by a promissory note executed by the transferee company, and until that loan was repaid in…
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