1988-VIL-409-BOM-DT

Equivalent Citation: [1990] 186 ITR 412, 48 TAXMANN 11

BOMBAY HIGH COURT

Date: 14.12.1988

IBM WORLD TRADE CORPORATION

Vs

COMMISSIONER OF INCOME-TAX

BENCH

Judge(s)  : T. D. SUGLA., S. P. BHARUCHA

JUDGMENT

The judgment of the court was delivered by

T. D. SUGLA J. -The Income-tax Appellate Tribunal has referred only one question of law to us for opinion in this case at the instance of the assessee. The question reads as under :

"Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in disallowing the amount of Rs. 1,08,088 having been written off during the previous year as a deduction in arriving at the taxable income of the company on the grounds that the same did not fall under the provisions of any section, viz. section 28 and/or section 36 and/ or section 37 of the Income-tax Act, 1961 ?"

The assessee-company is a non-resident company. It is engaged in the business of manufacture of accounting and computing machines which are sold or given on hire and of giving services in respect of the same. The assessment year involved is 1965-66. The assessee-company entered into an agreement with one Mr. Sunder Waney, the landlord of the premises, on March 2, 1969 (1960). The landlord undertook to construct factory together with a garage and a two-room flat on the plot of land situated at Kurla and to grant a lease of the said premises to the assessee-company for a period of ten years renewable for a further period of five years at the option of the assessee-company for the compensation fixed in the agreement. Three more agreements were entered into by the assessee-company with the said landlord in this connection from time to time. In order to facilitate speedy construction, the assessee-company, by one of these agreements, advanced a total sum of Rs. 99,888 to the landlord till 1963. As the landlord became insolvent, the entire amount of Rs. 1,08,088 inclusive of interest and the principal amount advanced was written off by the assessee-company.

The assessee claimed the aforesaid amount of Rs. 1,08,088 as a business loss. The claim was disallowed by the Income-tax Officer and the disallowance was confirmed by the Appellate Assistant Commissioner who, inter alia, observed that the agreement had nothing to do with the current business of the assessee and related to a capital project and in connection with the setting up of a new factory. The Tribunal agreed with the Appellate Assistant Commissioner and maintained the disallowance. According to the Tribunal, the assessee-company was not able to show from the agreements or the correspondence produced in that behalf that the amounts were paid as loans and were to be adjusted against the rent as and when due after the occupation of the said premises. It also took the view that the claim could not be allowed under section 36(2)(i)(a) as the amount was not advanced by the assessee in the course of banking or money-lending business. The claim could not also be allowed under section 37 as the amounts were advanced in the earlier years and thus could not represent the expenditure of the year.

It is stated before us by Shri Dastur, learned counsel for the asssessee, that the Tribunal failed to appreciate that the assessee needed accommodation for the expansion of its business and entered into four agreements with the landlord one after the other. The agreements are for taking the factory premises on lease as and when the construction would be complete according to the specifications given by the assessee, viz. the factory, a garage and a two-room flat for the caretaker. In pursuance of the agreements and in order to enable the landlord to complete the structure early, the assessee went on advancing money to the landlord from time to time. The amounts advanced, according to Shri Dastur, were, therefore, in connection with the acquisition of factory premises on lease as and when the required structures were ready on the plot of land. Inviting our attention to the fact that in this case, under the agreements, the lease was initially to be for period of 10 years with a renewal clause for a further period of five years, Shri Dastur stated that the acquisition of a property on lease was an acquisition of a business asset and in that sense any expenditure incurred therefor or in connection therewith was allowable as business expenditure. In order to show that the fact that the lease was to be for ten years with renewal clause for further five years was of not much consequence, Shri Dastur placed reliance on this court's decisions in CIT v. Hoechst Pharmaceuticals Ltd [1978] 113 ITR 877, where the lease was for five years, in CIT v. Bombay Cycle and Motor Agency Ltd. [1979] 118 ITR 42, where the lease was for ten years, in CIT v Cinceita Private Ltd. [1982] 137 ITR 652, where the period of the lease was 20 years and stated that in all these cases, it was held by this court that the expenditure incurred by the assessee in executing the lease deeds, i.e., on the registration of the documents, stamp duty, etc., was business expenditure. Further, Shri Dastur relied on this court's decision in Richardson Hindustan Ltd. v. CIT [1988] 169 ITR 516, where, following the abovesaid decisions, the court held that taking premises on lease for different periods ranging from 5 to 20 years did not amount to acquisition of a capital asset nor an advantage of an enduring nature.

Lastly, Shri Dastur referred to the Supreme Court's decision in CIT Mysore Sugar Co. Ltd. [1962] 46 ITR 649, and relied upon the following observations at page 653:

"To find out whether an expenditure is on the capital account or on revenue, one must consider the expenditure in relation to the business. Since all payments reduce capital in the ultimate analysis, one is apt to consider a loss as amounting to a loss of capital. But this is not true of all losses, because losses in the running of the business cannot be said to be of capital. The questions to consider in this connection are : for what was the money laid out ? Was it to acquire an asset of an enduring nature for the benefit of the business, or was it an outgoing in the doing of the business? If money be lost in the first circumstance, it is a loss of capital, but if lost in the second circumstance, it is a revenue loss. In the first, it bears the character of an investment, but in the second, to use a commonly understood phrase, it bears the character of current expenses."

He also referred to the Allahabad High Court's decision in CIT v. Jwala Pd. Radha Kishan [1977] 107 ITR 540, where the difference of Rs. 44,234 representing the amount along with interest advanced by an assessee, a sole selling agent, to the company and the shares that it got in lieu thereof was treated as a bad debt. Reliance was also placed on the Calcutta High Court's decision in CIT v. Baldeoram Beharilal [1975] 99 ITR 108. In that case, the amounts advanced by the assessee to an under-broker from time to time to be adjusted against his under-brokerage were written off as loss in a subsequent year in which the under-broker had expired. Shri Dastur also referred to and relied on the Madras High Court's decisions in CIT v. Textool Co. Ltd. [1982] 135 ITR 200 and CIT v. Madras Auto Service Ltd. [1985] 156 ITR 740. Lastly, Shri Dastur stated that the principles as regards the question whether an expenditure results in an advantage of enduring nature and whether every advantage of enduring nature is to be disallowed as a capital expenditure are found in the Supreme Court decision in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1, where it was held that every advantage of enduring nature acquired by an assessee does not bring the case within the principle laid down in that case. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test.

Shri Dastur thus summed up his argument by saying that the amounts were advanced by the assessee for enabling him to acquire the factory premises with some other structure thereon, on lease, that, ordinarily acquisition of an immovable property on lease is not a capital asset and that, therefore, the moneys advanced for such a purpose will be an advance on business account. Consequently, if such an amount is lost for some reason, the loss will also be business loss.

Dr. Balasubramanian, learned counsel for the Department, on the other hand, stated that the basic fact, viz., that the factory was to be, acquired by the assessee for its existing business has not been found by the Tribunal nor is there any material on record to show that the factory premises were required by the assessee for the purpose of its existing business. His alternative argument is that assuming that the factory premises were required by the assessee for its existing business, the factory being not in existence at the time of the agreements, and the advances having been made for the construction of the factory, a garage and a flat thereon, the amounts advanced had no proximate connection with the carrying on of the business. There is, if at all, a remote connection. Therefore, if, for any reason, the amounts so advanced by the assessee were lost, the loss would be a capital loss. As regards the decisions relied upon by Shri Dastur, Dr. Balasubramanian pointed out that all the decisions of this court refer to expenditure on lease which was actually executed and not to expenditure in connection with a lease that would be executed in future. The Allahabad and Calcutta High Court decisions, according to him, were distinguishable as in those decisions, the connection between the expenditure and the business was very proximate. For instance, in the Allahabad case CIT v. Jwala Pd. Radha Kishan [1977] 107 ITR 540, the assessee was a sole selling agent and was earning huge profits from the persons from whom he had received shares in lieu of the amounts advanced and interest thereon. In the Calcutta case, CIT v. Baldeoram Beharilal [1975] 99 ITR 108, the amounts were admittedly advanced for the purchase of raw material. According to Dr. Balasubramanian, the Supreme Court decision in CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 and Uttar Bharat Exchange Ltd. v. CIT [1965] 55 ITR 550 (Punj) and the Andhra Pradesh High Court decision in Taj Mahal Hotel v.. CIT [1967] 66 ITR 303, were applicable in this case. In the case of CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 (SC), it was stated that the assessee-company had to pay estate duty payable by a shareholder. The Supreme Court rejected the claim for deduction on the ground that the expenditure Was not for the purpose of the assessee's business. The expenditure justifying the claim for deduction should have been incurred by the assessee as a person carrying on the business. It cannot include sums spent by the assessee as the agent of a third party. In Uttar Bharat Exchange Ltd. v. CIT [1965] 55 ITR 550 (Punj), the expenditure was incurred on erecting sheds, partitions and other temporary structures on the premises taken on lease. The expenditure was disallowed as being one of a capital nature. So is the ratio of the Andhra Pradesh High. Court decision.

In reply, Shri Dastur invited our attention to clause JX(i)(j) of the agreement dated March 2, 1960, and clause (2) of the agreement dated October 23, 1962, which are parts of the statement of the case to show that the assessee intended to take the factory premises on lease for the purpose Of its normal business of assembling parts of machines, testing machines and for starting their work of printing punch cards and servicing, overhauling and storing their equipment. He also referred to para 6 of the Tribunal's order to show that the assessee's claim for deduction in this behalf was rejected by the Tribunal not on the ground that the loss had not arisen out of the existing business of the assessee, but on the ground that the amounts having been advanced in the earlier years, the loss, if any, would have been treated as suffered by the assessee in the earlier years.

We have carefully gone through the statement of the case and the annexures, particularly the four agreements dated March 2, 1960, March 24, 1961, June 7, 1962, and October 23, 1962, entered into between the assessee and the landlord of the premises in question. It is seen that the assessee is carrying on the business of manufacturing accounting and computing machines. It is also selling them as well as hiring them and also giving service after sales. The factory premises, as the clause relied upon by Shri Dastur, viz., clause IX(i)(j) of the agreement dated March 2, 1960, arid clause (2) of the agreement dated October 23, 1962, clearly indicated, was being acquired for its existing business. Moreover, as pointed out by Shri Dastur, the Income-tax Appellate Tribunal has rejected the claim of the assessee for a reason other than this reason. Accordingly, we proceed on the assumption that the factory premises were being acquired by the assessee on lease for the purpose of its existing business.

The lease was going to be initially for a period of ten years. There was, of course, a clause for renewal at the option of the assessee for a further period of five years. In view of this court's decision in Richardson Hindustan Ltd. v. CIT [1988] 169 ITR 516, in which, following the earlier decisions in CIT v. Hoechst Pharmaceuticals Ltd. [1978] 113 ITR 877, CIT v. Bombay Cycle and Motor Agency Ltd. [1979] 118 ITR 42 and CIT v. Cinceita Private Ltd. [1982] 137 ITR 652, this court held that the period of lease was not of much relevance and that the expenditure incurred for acquiring premises on lease was allowable as a business deduction, we hold that the amounts advanced by the assessee for the purpose of acquiring the factory on lease is an advance for the purpose of the assessee's business.

The question that arises for consideration is whether the fact that in the present case the amounts have been advanced to the landlord in pursuance of the agreement before the execution of the lease deed would make any difference. In our opinion, it will not. It is not disputed that the assessee required factory premises for its business and that it did not get ready factory for that purpose. It took a business decision to enter into agreements with the landlord who owned the land which did not have the factory shed and other structures required by the assessee. The landlord expressed difficulty in constructing the factory building and other structures. The assessee, in pursuance of other agreements entered into, advanced moneys which were in the beginning to be adjusted against the future rents, but subsequently were agreed to be refunded to the assessee on a fixed date. It is true that if the landlord had failed to construct the factory building and other structures as agreed to, the agreements would have fallen through and there was no penalty clause as such. However, one cannot get away from the fact that all this was done by the assessee with view to acquire the factory premises on lease. The mere fact that the factory would be ready in a year or so would not make any difference.

We are in agreement with Shri Dastur that the principles in this regard are laid down by the Supreme Court in its judgment in CIT v. Mysore Sugar Co. Ltd. [1962] 46 ITR 649. The relevant observations in this case have already been noted by us earlier in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC). Apart from the fact that this court had already held that the length of the lease agreement is not very material for the purpose of determining the nature of the expenditure incurred on lease agreements, the Supreme Court has clearly laid down in Empire Jute Co. Ltd. [1980] 124 ITR 1, that even assuming that a lease for a period of 10, 15 or 20 years would amount to an advantage of enduring nature, it is not that every advantage of enduring nature would result in a capital outlay. What is required to be seen is whether the advantage of enduring nature is in the capital field. As the acquisition of premises on lease would not ordinarily be in the capital field, we have no hesitation in holding that the moneys advanced by the assessee in pursuance of these agreements to the landlord for the purposes of and in connection with the acquisition of the premises on lease were for the purpose of business. Naturally, therefore, when such advances are lost to the assessee, the loss would be a business loss and not a capital loss. The decisions relied upon by Dr. Balasubramanian, according to us, have no bearing on the question involved herein. In the Supreme Court decision, the question was of a third party's liability to pay estate duty and the discharge by an assessee. It was obviously a purpose unconnected with the business of the assessee. The other two decisions, viz., Uttar Bharat Exchange Ltd. v. CIT [1965] 55 ITR 550 (Punj) and Taj Mahal Hotel v. CIT [1967] 66 ITR 303 (AP) refer to the expenditure incurred by an assessee on alterations and additions made by an assessee in leasehold premises. No doubt, such expenditure was held to be of capital nature. We fail to understand how those decisions have any bearing on the point in issue before us.

Having regard to the above discussion, the question posed before us is answered in the affirmative and in favour of the assessee. No order as to costs.

 

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