1993-VIL-657-CAL-DT

Equivalent Citation: [1994] 210 ITR 222, 123 CTR 179, 81 TAXMANN 517

CALCUTTA HIGH COURT

Date: 22.12.1993

COMMISSIONER OF INCOME-TAX

Vs

AUTO DISTRIBUTORS LIMITED

BENCH

Judge(s)  : AJIT KUMAR SENGUPTA., NURE ALAM CHOWDHURY 

JUDGMENT

AJIT K. SENGUPTA J. -- In this reference made at the instance of the Revenue, the following questions have been referred by the Tribunal for the opinion of this court under section 256(1) of the Income-tax Act, 1961 :

" 1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that any expenditure incurred in the course of the assessee's business has to be treated as business expenditure and merits deduction ignoring the provisons of section 37(1) of the Income-tax Act, 1961, which provides that any business expenditure of capital nature is not allowable as a deduction ?

2. Whether, on the facts and in the circumstances of the case and in view of the ratio of the decision of the Calcutta High Court in Chloride India Ltd. v. CIT [1981] 130 ITR 61, the Tribunal was justified in law in holding that the expenditure of Rs. 6,96,288 incurred for acquiring a right to vacant possession is an allowable business expenditure ? "

The facts as found by the Tribunal are as under :

This reference relates to the income-tax assessment of the assessee-company for the previous year ending January 31, 1983, corresponding to the assessment year 1983-84. The assessee-company is engaged, inter alia, in the business of taking properties on lease and letting these out for the purpose of earning income by way of rent. In the course of its aforesaid business, the assessee-company took on lease premises at 18A, B and C, Jawaharlal Nehru Road, Calcutta (commonly known as " FIRPO Building "). The assessee-company had let out different portions of the said property to various persons and the entire income by way of rent derived by the assessee-company was being assessed to tax in its hands as business income. A portion of the first floor of the said FIRPO building measuring about 3,600 sq. ft. and 6,266 sq. ft., respectively, had been let out by the assessee-company to Sri Diresh Chakraborty in terms of two separate agreements executed on April 9, 1981, and July 27, 1981, respectively. Under both these two agreements, the tenant, Sri Chakraborty, had the right to sub let the premises let out to him by the assessee-company. In terms of the two agreements dated July 27, 1981, which were executed in respect of 6,266 sq. ft. in the first floor of the said premises, the tenant, Sri Chakraborty, had made a deposit of Rs. 4 lakhs with the assessee-company.

It appears that on or about February 1, 1992, the tenant, Sri Chakraborty, entered into an agreement with Laxmi Textile Mills Pvt. Ltd., for obtaining a loan of Rs. 10 lakhs. In order to secure the said loan, the tenant, Sri Chakraborty, handed over the vacant possession of 6,266 sq. ft. in the first floor of the said FIRPO building to Laxmi Textile Mills Pvt. Ltd., and also offered his tenancy rights held by him in the first floor of the said FIRPO building in terms of the said two agreements dated April 9, 1981, and July 27, 1981. The tenant, Sri Chakraborty, also executed an irrevocable power of attorney in favour of the said Laxmi Textile Mills Pvt. Ltd. On May 29, 1982, Sri R. L. Gaggar, solicitor and advocate, acting for the said Laxmi Textile Mills Pvt. Ltd. issued a public notification in the newspaper indicating for general information that his clients, Laxmi Textile Mills Pvt. Ltd., were in exclusive possession of 6,266 sq. ft. of first floor of FIRPO building in place of Sri Chakraborty. On June 3 and 4, 1982, the tenant, Sri Chakraborty, sought to revoke his tenancy rights in terms of the two tenancy agreements with the assessee-company executed on April 9, 1981, and July 27, 1981, respectively. Sri Chakraborty requested the assessee-company to hand over the balance of his security deposit after due adjustments of his outstanding including arrears of rent, etc., to Laxmi Textile Mills Pvt Ltd.

The assessee-company negotiated with Laxmi Textile Mills Pvt. Ltd. for the purpose of securing vacant possession of 6,266 sq. ft. at the first floor of FIRPO building which was in their possession and which had been originally let out by the assessee-company to Sri Chakraborty in terms of the tenancy agreement executed on January 27, 1981. Laxmi Textile Mills Pvt. Ltd. agreed to hand over vacant possession of the said 6,266 sq. ft. of the first floor of the said FIRPO building provided they were paid all their dues receivable by them from Sri Chakraborty. The Income-tax Officer found that the balance of security deposit which was refundable by the assessee-company to its tenant, Sri Chakraborty, was Rs. 2,66,612.50 after making adjustments as to all charges including rent, etc. The assessee-company had to pay a sum of Rs. 6,96,288 in addition to the said sum of Rs. 2,66,612.50 to Laxmi Textile Mills Pvt. Ltd. in order to get vacant possession of 6,266 sq. ft. on the first floor of the said FIRPO building. The assessee-company claimed the payment of Rs. 6,96,288 made to Laxmi Textile Mills Pvt. Ltd. as a business expenditure. After getting vacant possession from Laxmi Textile Mills Pvt. Ltd., the assessee-company was able to hire out the said 6,266 sq. ft. at the first floor of FIRPO building to a bank at a much higher rent and it also received substantial deposits from the new tenant, viz., the bank. The Income-tax Officer held that the expenditure of Rs. 6,96,288 was purely gratuitous and it had no legal obligation to make any payment to Laxmi Textile Mills Pvt. Ltd. According to the Income-tax Officer, this expenditure of Rs. 6,96,288 could not be said to have been incurred out of commercial expediency. He, therefore, disallowed the said claim for Rs. 6,96,288 in computing the business income of the assessee-company for the assessment year 1983-84. This action of the Income-tax Officer was subsequently confirmed by the Commissioner of Income-tax(Appeals). On further appeal by the assessee, the Tribunal held and observed that the assessee-company was admittedly engaged in the business of letting out properties. In the course of this business, it was usual for the assessee to get vacant possession from the old occupants and let out the same at a higher rent to new tenants. According to the Tribunal, the payment of Rs. 6,96,288 was made by the assessee-company to Laxmi Textile Mills Pvt. Ltd. on grounds of commercial expediency in order to get vacant possession from unauthorised occupants, who entered into the premises through authorised channel. The assessee-company was very much interested to protect its interest in the premises and for the purpose it was necessary to pay compensation to Laxmi Textile Mills Pvt. Ltd. The Tribunal found support in the decision of the Kerala High Court in Commr. of Agrl. I.T. v. Bombay Burmah Trading Corporation Ltd. [1981] 131 ITR 154 and distinguished the decision of this court in Mather and Platt (India) Ltd. v. CIT [1987] 168 ITR 533. The Tribunal held that the payment of Rs. 6,96,288 made by the assessee-company was clearly a business expenditure and the same was deductible in computing its total income for the assessment year 1983-84.

Before proceeding to consider the submissions made before us by counsel appearing for the assessee as well as the Revenue in this case, we would like to make some comments as to the two questions referred by the Tribunal in this court. The first question referred by the Tribunal at the instance of the Revenue in this case proceeds on the presumption that the Tribunal allowed deduction of Rs. 6,96,288 in this case as a business expenditure under section 37(1) of the Income-tax Act, 1961, even though capital expenditure was not deductible under the said section. We have gone through the order of the Tribunal and we did not find any arguments advanced on behalf of the Revenue to the effect that the expenditure in question was a capital expenditure. In fact, the Tribunal has nowhere held that a business expenditure although capital in nature is deductible under section 37(1) of the said Act. Neither the Income-tax Officer nor the Commissioner of Income-tax(Appeals) nor even the Tribunal had ever held the said payment of Rs. 6,96,288 was a capital expenditure. Therefore, the first question referred by the Tribunal at the instance of the Revenue, in our view, does not arise out of the order of the Tribunal in this case.

The second question raised by the Revenue in this case proceeds on the presumption that the Tribunal allowed the payment of Rs. 6,96,288 as a business expenditure ignoring the decision of this court in Chloride India Ltd. v. CIT [1981] 130 ITR 61. On a close reading of the decision of the Tribunal, we did not find any reference being made by the Revenue to the decision of this court in Chloride India Ltd.'s case [1981] 130 ITR 61. In fact, the decision in Chloride India Ltd.'s case [1981] 130 ITR 61 (Cal) was neither cited nor referred to or considered by any of the authorities including the Income-tax Officer, the Commissioner of Income-tax (Appeals) as well as by the Tribunal. In that view, even the second question proceeds on an erroneous presumption which is contrary to the facts and records. While the present reference was being heard, we find that the Revenue had made another application under section 256(2) of the Income-tax Act, 1961. On the said application, we issued a rule on May 31, 1993, on the following question :

" Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the expenditure of Rs. 6,96,288 is an allowable business expenditure ? "

The aforesaid rule was appearing in our list as " hearing of rule ". Simultaneously, the aforesaid reference also came up in our list and was heard. In our view, the proper question for reference, in this case, should be the question as was framed by us while issuing the rule on the application made by the Revenue under section 256(2) of the said Act by our order of May 31, 1993. We proceed to answer the said question as set out in the preceding paragraph.

We would consider the aforesaid question as reframed by us as the only question which arises out of the order of the Tribunal and which incorporates the entire controversy involved in this case.

Counsel appearing for the Revenue reiterated before us that the amount of Rs. 6,96,288 paid by the assessee by way of compensation to Lakshmi Textile Mills Pvt. Ltd. was a gratuitous payment made voluntarily and without any legal obligation and for considerations other than commercial expediency. The assessee-company obtained benefit or advantage of an enduring nature by making the aforesaid payment and, therefore, the expenditure in question was capital in nature and not deductible in computing the business income. Reliance on behalf of the Revenue was placed on the two decisions of this court in Chloride India Ltd. v. CIT [1981] 130 ITR 61 as well as in Mather and Platt (India) Ltd. v. CIT [1987] 168 ITR 533. It was also contended on behalf of the Revenue, relying upon the decision of the Karnataka High Court in CIT v. Joy Ice-creams (Bangalore) Pvt. Ltd. [1993] 201 ITR 894, that if the receipt of compensation by a tenant for surrender of tenancy rights was a capital receipt in the hands of the tenant, the payment by the landlord to the tenant to obtain vacant possession must be considered as a capital expenditure.

Mr. Murarka, learned counsel appearing for the assessee, on the other hand, drew our attention to the findings of fact recorded by the Tribunal to the effect that the payment of Rs. 6,96,288 in question was made by the assessee-company on grounds of commercial expediency and in the course of its business of letting out premises to different tenants and earning rental income therefrom. The assessee was able to let out the same space to the bank at a higher rent soon after getting the area vacated from Laxmi Textile Mills Pvt. Ltd. and had also received substantial deposits. The assessee-company could do so only by getting vacant possession from Laxmi Textile Mills Pvt. Ltd. on payment of Rs. 6,96,288. By making payment of the said amount, the assessee did not acquire any leasehold and/or tenancy rights in the said property. The assessee was already occupying the said property on lease. The two decisions of this court, relied upon by counsel appearing for the Revenue, were, therefore, clearly distinguishable. Sri Murarka submitted that the decision of the Kerala High Court in Commr. of Agrl. I. T. v. Bombay Burmah Trading Corporation Ltd. [1981] 131 ITR 154 clearly supported the case of the assessee. He also further submitted that the nature of a receipt in the hands of the payee was wholly irrelevant to decide the nature of the expenditure in the hands of the person making the payment and in this respect he drew our attention to the decision of the Supreme Court in CIT v. Ashok Leyland Ltd. [1972] 86 ITR 549. Sri Murarka also submitted that the payment in question was made by the assessee to remove the recurring disadvantage of having Laxmi Textile Mills Pvt. Ltd. with whom the assessee-company had no contractual relationship and, therefore, the expenditure in question was nothing but revenue in nature.

We have considered the submissions made on behalf of the Revenue as well as the assessee. At the outset, we would like to deal with the various cases cited before us on behalf of the assessee as well as the Revenue.

In Chloride India Ltd. v. CIT [1981] 130 ITR 61 (Cal), the assessee-company had taken on lease certain premises which were occupied by Messrs. Gasper and Co. In order to obtain vacant possession of the premises, the assessee paid Rs. 4,50,000 to Messrs. Gasper and Co. and claimed it as revenue expenditure. The Tribunal found that before the assessee took on lease the said premises, Messrs. Gasper and Co. were already occupying the same as tenant under the lessor and its tenancy had not been terminated. Messrs. Gasper and Co. had the right to be in possession in view of section 108(c) of the Transfer of Property Act, 1882. This was a legal right to possession and the same was with Messrs. Gasper and Co. This legal right to possession was a capital asset and this the assessee had acquired by incurring an expenditure of Rs. 4,50,000. This court held that this was nothing but a capital expenditure. The facts of this case, in our view, are clearly distinguishable from the present case. There a third party induced the existing lessee to assign the lease in favour of the third party and became the lessee in place of the existing lessee. The assessee in this reference was all along holding the leasehold rights in respect of the FIRPO building. At the relevant time, Laxmi Textile Mills Pvt. Ltd. were not in occupation of any portion of FIRPO building. In fact, the assessee had let out the area in question to Sri Dhiresh Chakraborty as a tenant under the lease. Sri Chakraborty, in his turn, sought to assign his tenancy right in favour of Laxmi Textile Mills Pvt. Ltd. In fact, on June 3 and 4, 1982, the original tenant of the assessee, Sri D. Chakraborty, had already revoked his tenancy rights in terms of the two tenancy agreements entered into with the assessee-company on April 9, 1981, and July 27, 1981. In these circumstances, the continuation of Laxmi Textile Mills Pvt. Ltd. in the aforesaid premises which were held by the assessee-company on lease was nothing but an impediment to the carrying on of the business of letting out by the assessee-company. By clearing the leasehold right of unauthorised occupancy the assessee did not acquire any new right or title as such. In fact, this court in Chloride India Ltd.'s case [1981] 130 ITR 61 held and observed as under at page 72 of the report :

" It is true that if the petitioner had a right to possession aliunde or independently of the transaction with Messrs. Gasper and Co., which is the subject-matter here, then by incurring the expenditure, the assessee would not have acquired any title or right, as such. The assessee would have merely removed the impediment to its carrying on of the business or fully neutralised their asset. But, in the instant case, the Tribunal has found that Gasper was, in fact, a tenant and it has not been found that the tenancy of Gasper had, in fact, been terminated by the original lessor before the transaction with the assessee took place. Therefore, it has not been found by the Tribunal that Messrs. Gasper and Co. was continuing as one whose tenancy had expired and it was merely holding over under the Transfer of Property Act. . . . On the other hand, the Tribunal is categorical in its finding, in view of section 108(c) of the Transfer of Property Act, that Messrs. Gasper and Co. had the right to be in possession. "

The aforesaid observation makes it quite clear that the decision in Chloride India Ltd.'s case [1981] 130 ITR 61 (Cal) far from supporting the Revenue actually supports the respondent-assessee in this case. As already mentioned earlier, the respondent-assessee was holding FIRPO building on leasehold basis. It was the respondent-assessee who had let out a portion of the first floor of the said premises to Sri Chakraborty. This tenancy had also been revoked by Sri Chakraborty on June 3 and 4, 1982. Laxmi Textile Mills Pvt. Ltd. had no privity of contract with the respondent-assessee. In these circumstances, the removal of Lakshmi Textile Mills Pvt. Ltd. who had been inducted by Sri Chakraborty was nothing but an attempt on the part of the assessee-company to remove the impediment to the carrying on of its business.

The next decision cited by counsel appearing for the Revenue is the decision of this court in Mather and Platt (India) Ltd. v. CIT [1987] 168 ITR 533. In this case, the assessee incurred expenditure aggregating Rs. 15,082 with the object of securing two leases of premises at Delhi and Calcutta. The said leases were for the respective periods of 15 and 20 years and the leasehold premises were intended to be used by the assessee as its business offices. Fees were paid to the lawyers of the assessee in connection with the said leases and for the registration of the lease of the premises at Calcutta, the assessee incurred further expenditure. All these expenses were claimed by the assessee as revenue in nature. This court held that under a lease the lessee obtains a right to property under the Transfer of Property Act and such property is a capital asset. Expenditure incidental to the acquisition of the lease would be expenditure of a capital nature. The primary and dominant object of the assessee in incurring the said expenditure was to acquire benefits of a right to property under the leaseholds. The periods of the two leases were sufficiently long and resulted in an enduring benefit to the assessee. The expenditure was, therefore, held to be of capital nature. The facts as set out by us hereinabove would clearly indicate that the decision of this court in Mather and Platt (India) Ltd. [1987] 168 ITR 533 is also distinguishable. The respondent-assessee, in this case, did not acquire any leasehold rights in the FIRPO building by making the payment to Laxmi Textile Mills Pvt. Ltd. The respondent-assessee was, in fact, already holding such leasehold rights. By making payment to Laxmi Textile Mills Pvt. Ltd., the respondent-assessee was only able to remove the unauthorised occupant creating an impediment to the commercial exploitation of the lease right. Therefore, the decision in the case of Mather and Platt (India) Ltd. [1987] 168 ITR 533 (Cal) has no application in the facts and circumstances of the case.

Counsel for the assessee drew our attention to the decision of the Kerala High Court in Commr. of Agrl. I.T. v. Bombay Burmah Trading Corporation Ltd. [1981] 131 ITR 154. In this case, it was found by the Tribunal that the assessee had incurred an expenditure of Rs. 5,312.35 in the previous year relevant to the assessment year 1968-69 under two heads, viz., for the eviction of a tenant from a building within the estate promises, and, secondly, for filing a writ petition challenging the legality of the levy of some toll. The Tribunal took the view that the first item aforementioned was an expenditure incurred to protect the appellant's title to the property. The Kerala High Court, on a reference, agreeing with the Tribunal, held that the eviction of a quondam tenant who was in occupation of a shop situated within the estate of the assessee, was a step necessary for the protection of the estate from which income was being derived by the assessee and for the preservation of the undisturbed rights of the assessee to peacefully collect the income from the said estate and as such it had a direct nexus with the earning of the agricultural income. This case clearly supports the assessee. In this reference too, it has been found by the Tribunal that by making a payment of Rs. 6,96,288 to Laxmi Textile Mills Pvt. Ltd., the assessee was able to obtain possession of the portion of the first floor of FIRPO building which was in the occupation of Laxmi Textile Mills Pvt. Ltd. without there being any contract with the respondent-assessee. The assessee was able to let out the same space to the bank at higher rates soon after getting the area vacated by Laxmi Textile Mills Pvt. Ltd. By making payment of the said amount, the assessee did not acquire any leasehold and/or tenancy rights in the said property. Therefore, the payment of Rs. 6,96,288 made by the respondent-assessee was an expenditure incurred on grounds of commercial expediency and was revenue in nature. In CIT v. Ashok Leyland Ltd. [1972] 86 ITR 549 (SC), the assessee-company had appointed Car Builders Ltd. as their managing agents under an agreement dated October 18, 1948, for a term of 14 years from the date of its registration. The managing agents were to be paid at the rate of Rs. 2,000 per month as office allowance and ten per cent. of the annual profits with a minimum of Rs. 18,000 per annum in respect of inadequacy and/or in the absence of profit. On January 29, 1955, by means of an agreement between the company and the managing agents, the managing agency agreement was terminated on payment of compensation of Rs. 2,50,000. This compensation was claimed by the assessee-company as a revenue expenditure laid out wholly and exclusively for the purpose of business. It was held by the Supreme Court that the compensation paid for termination of the services of the managing agent was a payment made with a view to save business expenditure in the accounting period as well as a few subsequent years ; it was not made for acquiring any enduring benefit or income-yielding asset. By avoiding certain business expenditure, the company could not be said to have acquired enduring benefit or any income-yielding asset. The expenditure was of a revenue nature and was an allowable deduction in computing the profits of the assessee-company. This case also supports the respondent-assessee in this reference. If the assessee-company had taken legal proceedings against Laxmi Textile Mills Pvt. Ltd., it could have incurred huge legal expenses and substantial time might have been spent in getting the leasehold premises vacated from Laxmi Textile Mills Pvt. Ltd. By making payment of the said sum of Rs. 6,96,288, the assessee-company was able to remove Laxmi Textile Mills Pvt. Ltd. forthwith and to let out the very same space to the bank at a much higher rent and also receive substantial deposits from the new tenant. These facts clearly go to support the case of the respondent-assessee that the expenditure in question was a revenue expenditure and was laid out wholly and exclusively for the purpose of the business of letting of properties. The assessee did not acquire any new asset, right or advantage of an enduring nature by making the payment of Rs. 6,96,288 to Laxmi Textile Mills Pvt. Ltd. We do not consider it necessary to deal with the various other cases cited on behalf of the assessee in this case.

The first question does not arise out of the order of the Tribunal and we, therefore, decline to answer the first question.

The second question as reframed is answered in the affirmative and in favour of the assessee.

There will be no order as to costs.

NURE ALAM CHOWDHURY J. -- I agree.

 

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