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Petitioner: HABIB HUSSEIN VS Respondent: COMMISSIONER OF INCOME TAX, BOMBAY CITY IHonorable Justice TAMBEN. A. Palkhivala,G. N. Joshi
1969 P T D 533
1969 P T D 533
[Bombay (India)]
Before Y. S. Tambe and V. S. Desai, JJ
HABIB HUSSEIN
Versus
COMMISSIONER OF INCOME TAX, BOMBAY CITY I
Income tax Reference No. 2 of 1961, decided on 8th August 1962.
Depreciation---
----- Written down value "Actual cost to the assessee" Meaning of "actual cost" Amounts paid to another for helping assessee in preparing plans, securing permits for cement, steel, petrol, import licences, etc. Whether part of actual cost--Cost incurred after commencement of business Whether includible Actual cost determined for one year, whether conclusive for subsequent years Indian Income tax Act, 1922, S.10(2)(vi), (5) (a), (b).
In 1947, the assessee obtained a licence from the owner of a plot to enter upon the land and erect a cinema theatre, business premises and residential quarters on the land, on payment of a rental of Rs. 4,200 per month. For the purpose of erection of the theatre and starting the business the assessee entered into an agreement with the owner of the plot, who was an influential businessman, on the 4th June 1948, by which the latter agreed to help the assessee in getting prepared suitable plans and designs for the cinema theatre and other buildings, in obtaining permission from the Bombay Municipality for constructing an additional sixth floor, in procuring the required finance to enable the assessee to complete the construction of a modern theatre and other buildings, in procuring various priorities and permits for scarce materials including cement, steel and petrol for transport, in securing import licences for various goods for the purpose of the cinema theatre, in securing foreign exchange facilities to enable the assessee to import from abroad the goods required for the purpose of the theatre and other buildings and to advise the assessee from time to time during the course of construction of the cinema theatre and buildings. In consideration of the aforesaid services and assistance rendered by the owner the assessee agreed to give the latter for a period of 20 years 2 percent. Of gross annual income earned by him in his cinema business. On the 10th July 1950, a new agreement was entered into by which the parties agreed that in full satisfaction of payment of 2 percent. of the annual gross income for 20 years as provided in the agreement of 4th June 1948, the assessee should pay to the owner a sum of Rs. 3,30,000 within a period of five years by twenty quarterly instalments of Rs. 16,500. The amount of Rs. 3,30,000 was debited by the assessee at the close of the account year, viz., 31st March 1950. In the assessment years 1950-51, 1951-52 and 1952-53 the assessee claimed that the said sum should be included in the "actual cost" of the depreciable assets to the assessee for the purpose of determining the depreciation allowance allowable to him under section 10 (2) (vi) of the Act. The view of the Department was that it was an expenditure of a preliminary nature incurred for establishing the cinema business and not for the purpose of acquiring buildings, machinery, etc., for the business and at any rate as it was incurred after the business was commenced it could not be included in the actual cost:
Held, (i) that the meaning of the expression "actual cost to the assessee" as used in section 10 (5) of the Act was what the assessee had, in fact, expended or laid out for the purpose of acquiring the depreciable assets ; the expenditure incurred in getting prepared suitable plans and designs for the construction of the cinema theatre, for construction of a minute theatre, for securing various priorities and permits for scarce materials including cement, steel, piping and petrol for transport, in securing import licences for various goods for the purpose of the cinema theatre, and for securing foreign exchange facilities to enable the assessee to import from abroad goods required for the purpose of the said cinema theatre, was liable to be included in the cost of the depreciable assets to the assessee, and that, therefore, such portion of the remuneration as was attributable to these services should be included in the cost of the depreciable assets.
(ii) that column 2 of the form contained in Rule 19 of the Income tax Rules did not imply that the written down value mentioned therein was restricted only to the expenditure incurred by the assessee before the commencement of the business in acquiring the assets : on the other hand, under the column written down value has to be computed as at the beginning of the accounting period ; it was, therefore, open to the Income tax Officer to determine afresh for himself the actual cost of the depreciable assets in the assessment of each year and such portion of the sum of Rs. 3,30,000 as may be determined to be attributable to the acquisition of the depreciable assets should be included in the actual cost of these assets to the assessee in the respective year or years of account at the commencement of which the liability to pay it or part thereof had accrued or would accrue ;
(iii) that the consideration for the second agreement was the termination of the first agreement and not merely getting the assessee released from the liabilities created under the first agreement. The effect of the second agreement was that the remuneration agreed to be paid by the assessee to the owner for the services rendered by him under the first agreement was substituted by the sum mentioned in the second agreement and such part thereof as was attributable to services rendered for the acquisition of the depreciable assets must, therefore, be included in the actual cost of acquisition of the depreciable assets. In what year and what sum, or any part or parts thereof, should be allowed was a matter for the Tribunal to decide.
The written down value determined in one year does not operate as res judicata nor is it conclusive in determining the value for subsequent years, and it is open to the Income tax officer to determine afresh the original cost of the assets in the assessment of each year.
[Case Law referred].
STATEMENT OF CASE
By these three applications, which are consolidated for the sake of convenience, Shri Habib Hussein, the assessee, requires the Appellate Tribunal to refer to the High Court for each year an identical question of law, which is said to arise out of its consolidated order under section 33 (4), made on 14th April 1957, in I. T. As. Nos. 12725, 12726 and 12727, all of 1957 58. 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 of Judicature at Bombay under section 06 (1) of the Indian Income tax Act, 1922.
2. The reference matters arise out of the assessments made upon the assessee for the assessment years 1950-51, 1951-52 and 1952-53, previous years for which are the financial years that ended on 31st March 1950, 31st March 1951 and 31st March 1952, respectively. During the material account years, the assessee derived income from several sources including the running of the cinema theatre known as "Liberty Cinema". For the purpose of carrying on this business of "Liberty Cinema", the assessee acquired several depreciable assets, such as theatre building, exhibition machinery, air conditining machinery, electrical fittings, etc. The dispute between the Department and the assessee centred round the determination of the "written down value" of these assets for the purpose of computing the depreciation allowance as provided by section 10 (2) (vi) and 10 (2) (via). The phrase "written down value" has been defined in section 10 (5) and the material portion thereof is as follows:
"10. (5) In subsection (2) . `written down value' means --
(a) In the case of assets acquired in the previous year, the actual cost to the assessee . . . .
(b) in the case of assets acquired before the previous year the actual cost to the assessee less all depreciation actually allowed to him under this Act, ---------"
The real dispute between the assessee and the Department was about the determination of "actual cost" to the assessee within the meaning of section 10 (5) (a) for the purpose of computing depreciation allowance for the assessment year 1950-51 (the case having proceeded before the income tax authorities as well as the Tribunal that the account year ended March 31, 1950, is the year during which depreciable assets were first acquired), and that once this "actual cost" is determined, there is no dispute between the two as to the written down value to be taken under section 10 (5) (b) for the purpose of determining the depreciation allowance for the following two assessment years, 1951-52 and 1952-53. The material facts having bearing on this dispute are as follows
3. The assessee, Habib Hussein, desired to erect an up to date cinema theatre with air conditioning arrangements therein and other buildings for residential and business purposes on a suitable site in Bombay. Manu Subedar agreed with the Government of India by an agreement made on 1st November 1943, to take on lease a certain land at Marine Lines, Bombay. This land included composite Plot No. 41/42 on Queen's Road Estate.
On January 6, 1947, Manu Subedar gave the assessee a licence to enter upon the said land, agreed to be leased to him by the Government of India, for erecting thereon buildings, cinema theatre, show rooms, shops, business premises and residential quarters at a rent of Rs. 4,200 per month and Manu Subedar also agreed to give a sub lease for the residue of the term of 999 years which he would get from the Government. As a matter of fact, on October 4, 1949, Manu Subedar gave a sublease to the assessee of the said plot at a rent of Rs. 4,200 per month. In due course, the building programme, as envisaged, was carried out and the building known as "Liberty Building" was constructed and the assessee started to carry on in a portion thereof the running of a cinema theatre known as "Liberty Cinema". The income from this source fell to be assessed for the first time for the assessment year 1950-51, the account year for which ended on March 31, 1950,On June 4, 1948, agreement was entered into between the assessee and the said Manu Subedar, a copy of which is marked Annexure "A" and forms part of the case. In accordance with that agreement, Manu Subedar had to render to the assessee, "valuable and material help, assistance and service prior to the construction and throughout the construction of the said cinema theatre and other buildings". Clause 1 of the said agreement (Annexure "A") set out the different kinds of services that were to be rendered by Manu Subedar to the assessee. Briefly stated, their nature was this:-
Getting prepared suitable plans and designs for the cinema theatre and other buildings, building construction, obtaining permission from the Bombay Municipal Corporation for the construction of the sixth floor, procuring the required finance to enable the assessee to complete the construction of a modren cinema theatre and other buildings, procuring various priorities and permits for scarce materials such as cement, steel etc., overcoming various difficulties in connection with cinema licence by making representation to Government and Police authorities, securing import licences for various goods required for the purpose securing foreign exchange facilities for making imports required for the purpose of construction of the cinema theatre and other buildings, giving valuable advice and suggestion "during the course of construction" of the Liberty Building and contacting "various public authorities" concerned, carrying on negotiations with the Bombay municipal authorities for widening of Marine Lines and Hospital Lane and making the said Hospital Lane into a two way street. The consideration agreed to be paid for the above services was "2% of the gross annual income earned" by the assessee "on the cinema business excluding other rents of the property and buildings other than the said theatre", vide clause 2 of Annexure "A". The payment was to be made for a period of 20 years commencing from the date when the first picture was to be exhibited in the cinema theatre. Clauses 2, 3 and 4 provided for making payments in certain contingencies but it is not necessary to refer to them except to state the fact that the burden of the said payment was to "attach to and run with the said cinema theatre known as the Liberty Cinema in whosoever hands the said cinema theatre shall be for running cinema shows" (clause 4 of Annexure "A"). Clause 5 is important and is reproduced below:
5. Subject to what is stated in clause 4 above, the party of the first part shall not assign, transfer, sell, or let out the said cinema theatre during the currency of this contract. Provided however that if the party of the second part a lump sum computed at the rate of Rs. 1,250 per month for the then unexpired (portion) of the said period of twenty years plus ten percent. on such aggregate lump sum then only the party of the first part shall be at liberty to assign, transfer, sell or let out the said cinema theatre free from all claims of the party of the second part under this agreement and the same shall stand terminated on such payment as aforesaid."
4. The assessee desired a certain variation in the matter of exercising option given to him by the said clause 5 of the agreement made on June 4, 1948, and hence on 15th March 1950, he addressed a letter to Manu Subedar to that effect. After referring to clause 5 of the said agreement (Annexure "A") he wrote as follows:
"As I desire to leave my affiairs as clear as possible for my son, may I request you to consider whether you would not allow the operation of this clause of capital payment exactly as it is stated to be, to take place not merely in the event of sale of the Liberty Cinema, but also otherwise at my option any time within the next twelve months."
By his letter dated March 17, 1950 Manu Subedar informed the assessee as follows:
"I am agreeable if you wish to buy but for a capital sum the annual payment involved in the agreement, under the circumstances other than the sale of the Liberty Cinema."
The "capital sum" referred to in the above reply has been subsequently determined at Rs. 3,30,000 and by reason of the said agreement between the two, a formal deed was executed between the two on the 10th July 1950. A copy of the said agreement is marked Annexure "B" and forms part of the case. Briefly stated, it is a document of mortgage executed with a view to securing payment of the capital sum of Rs. 3,30,000 by giving a second mortgage to Mann Subedar of certain properties including the "Liberty Building" and the equipment of the Liberty Cinema, such as projectors, pedestals, air conditioning plant, etc. The said sum of Rs. 3,30,000 was payable by quarterly instalments of Rs. 16,500 without interest and the first instalment fell due on October 10, 1950. A sum of Rs. 1, 8,000 was actually paid during the three years that ended on March 31, 1953, and a further sum of Rs. 40,000 was said to have been paid in 1958. The controversy between the Department and the assessee centres round the real nature of the said sum of Rs. 3,30,000.
5. In the course of the assessment proceedings for the assessment year 1950-51, the "previous year" for which ended on March 31, 1950, the assessee claimed depreciation allowance on several depreciable assets such as, theatre buildings, exhibition machinery, air conditioning machinery, electrical fittings, furniture and fixtures, etc. used for the purpose of the business of "Liberty Cinema". The year ended March 31, 1950 being the first year in which these assets A ere considered to have been acquired, the Income tax Officer had to determine the "actual cost to the assessee" as provided by section 10(5)(a). The total cost incurred on the construction of "Liberty Building" was known but it was not possible to ascertain the exact portion of it that could be taken as cost of that portion of the building which was used for the purpose of running the cinema theatre. Hence, it was agreed between the Department and the assessee that the total cost of the Liberty Building should be apportioned in the ratio of 1 : 3 as between "cinema building" on the one hand and the "residential buildings" on the other hand. Depreciation is allowable only on the former and not on the latter. Now, even though the terms of the agreement made on June 4, 1948, were varied by an agreement made on the 10th July 1950, (i.e. after the close of the account year ended March 31, 1950), the assessee debited the capital sum of Rs. 3,30,000 wholly to the "cinema building account" (as distinguished from that portion of the Liberty Building" used for residential and other purposes) in the account year ended March 31, 1950, itself and claimed that that amount should be considered as part of the "actual cost" to the assessee for his acquiring the "cinema building" for the purpose of section 10(5)(a). The Income tax Officer rejected this contention on the ground that having regard to the nature of the services that Manu Subedar rendered to the assessee "prior to the construction and throughout the construction" of the cinema theatre and other buildings, the said sum should not be considered as "debitable" specifically to the building account or any other account, such as machinery, etc., which would entitle the assessee to a depreciation in respect of such expenses. He took the view that the capital sum represented a payment" one of a preliminary nature incurred for establishing business of Liberty Cinema" and should not be considered as "the cost of acquiring buildings, machinery, etc." A copy of the Income tax Officer's order for 1950-51 is marked Annexure "C" and forms part of the case. But for this sum of Rs. 3,30,000 there was no dispute between the assessee and the Income tax Officer in regard to the figures adopted by him as the actual cost of the depreciable assets such as building, exhibition machinery, air conditioning machiney, etc. He computed depreciation allowance on those assets on the basis of certain figures for the assessment year 1950-51 and, on the basis of the figures adopted by him for the assessment year he worked out the written down value of these assets for the purpose of similar allowance for the assessment years 1951-52 and 1952-53. If the figures adopted by him for the first of these three years are found to be correct, there would be no dispute between the two in regard to the future to be adopted in the assessment year 1951-52 and 1952-53. It may be stated here that it was never the assessee's case before the Income tax Officer that the said sum of Rs. 3,30,000 should be considered as an item of expenditure in the nature of revenue expenditure.
6. Being aggrieved by the Income tax Officer's decision, the assessee went in appeal to the Appellate Assistant Commissioner for all the three years. By his main order made for the assessment year 1950-51 on 14th January 1958, a copy of which is marked Annexure "D" and forms part of the case, he came to the conclusion that the major portion of the payment of Rs. 3.30 lakhs was "attributable to the cost of the cinema theatre, exhibition machinery and air conditioning machinery used for the purpose of the appellant's business and also to the cost of the residential property and the land on which it stands". He, therefore, held that the Income tax Officer was not justified in ignoring the entire amount altogether while arriving at the "original cost" (sic) of the business assets on which depreciation was allowed. On the view he took, he proceeded to dissect the sum of Rs. 3.30 lakhs into six constituent parts on estimate "having regard to the nature of the help, assistance and services" rendered by Mann Subedar to the assessee in accordance with clause 1 of the agreement dated June 4, 1948 (Annexure "A"). His allocation was as follows:
"(a) Rs. 66,000 being 1/5th of the whole, representing payment on account of services obtained for setting up the business;
(b) Rs. 33,000 being 1/10th of the whole representing payment made for services obtained for improvement of the land ;
(c) Rs. 2,31,000 being the balance representing payment made for and in connection with the acquisition of (i) cinema theatre building, (ii) residential building, (iii) exhibition machinery, and (iv) air conditioning machinery."
In other words, he considered that only the sum of Rs. 2,31,000 out of the total capital sum of Rs. 3,30,000 could be attributed to the cost of depreciable assets and to the residential house mentioned in item (c) above. He, therefore, directed the Income tax Officer to allocate the said sum of Rs. 2,31,000 "in proportion of their original costs adopted by the Income tax Officer for the purpose of computing depreciation allowance in his assessment order".
7. On the view he took he did not find it necessary to consider an alternative contention, raised for the first time before him that the sum of Rs. 3,30,000, if not considered as capital expenditure, should be considered as "revenue expenditure".
8. The assessee accepted these decisions of the Appellate Assistant Commissioner for all these three years but the Department did not, and it came in appeal to the Tribunal. The common contention for all the three years raised by it was this:
"The Appellate Assistant Commissioner erred in holding that a sum of Rs. 2;31,000 out of Rs. 3,30,000 said to have been paid to Shri Manu Subedar in accordance with the agreement dated July 10, 1950, be allocated to (1) cinema theatre building (2) residential building, (3) exhibition machinery, and (4) airconditioning machinery in proportion of their original costs adopted by the Income tax Officer for computing the depreciation allowance and depreciation on such enhanced costs of the said assets be allowed to the assessee for the assessment year 1950-51."
There was also a contention peculiar to the assessment year 1950-51, it being that "as the liability to pay the lump sum amount of Rs. 3,30,000 arose on 10th July 1950, as per agreement of the same date, the expenditure towards the cost of the depreciable assets could not be taken into consideration for any period before 10th July 1950, . . . .and as such no depreciation in this respect was in any case allowable in the assessment year 1950-51".
9. The Tribunal disposed of the appeals for all the three years by its consolidated order of April 14, 1959, a copy of which is marked Annexure "E" and forms part of the case. It rejected the assessee's contention that the commuted amount has been agreed to be paid for services to be rendered by Manu Subedar in the course of the acquisition of various assets enumerated therein, inter alia, and to the extent that it could be allocated to each asset on any reasonable basis, the cost of the asset to the assessee has become enhanced." The Tribunal, for reasons given by it in its order (Annexure "E"), held that no portion of the sum of Rs. 3,30,000 can "form part of the original cost" of the depreciable assets, such as cinema building, exhibition machinery and the air conditioning machinery. (It may be mentioned here that the phrase "original cost" that occurs in section 10(2)(vi) is not used in connection with depreciable assets with which one is concerned with in these assessments, the appropriate words being "the written down value", a phrase which has been defined in section 10(5) of the Act.
10. Being aggrieved by the view taken by the Tribunal, the assessee has filed these three reference applications requiring the Tribunal to refer to the High Court the following identical question of law for all the three years, viz.
"Whether on the facts and in the circumstances of the case, the Tribunal was justified in law or misdirected itself in law in reducing the original cost of the cinema building by the amount paid to Mr. Manu Subedar in ascertaining the actual cost under section 10(2)(vi) of the Income tax Act on the grounds set out in its order?"
In the first place, the question is completely silent as to the amount by which it is alleged that the Tribunal reduced the "original cost" of the cinema building. The amount paid to Manu Subedar is Rs. 3,30,000 but even the Appellate Assistant Commissioner did not hold that the whole of it could be considered for the purpose of depreciation. He only considered a part of it viz., Rs. 2,31,000 as "attributable to the cost of the cinema theatre, exhibition machinery and air conditioning machinery . . . and also to the cost of the residential property." The assessee had no grievance against the said decision of the Appellate Assistant Commissioner and did not come in appeal to the Tribunal and the Department confined its contention only to the sum of Rs. 2,31,000. The appropriate portion…
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