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Issues Involved:
1. Whether the estimated value of the assessee's obligations to the landlord and sub-lessees should be allowed as a deduction in computing the income of the assessee-company from the business of sub-leasing in lands. Issue-wise Detailed Analysis: 1. Nature of Receipts and Liabilities: The primary issue revolves around whether the amounts received by the assessee-company, a private limited company formed to deal in and let out properties, as advance lease rent and salami should be treated as capital receipts or income. The assessee argued that these receipts should be considered capital receipts and claimed deductions for liabilities such as lease rent to the lessor, expenses for street lights, sweepers, watchmen, maintenance of roads, and common passages over the period of the sub-lease (90 years). The ITO, however, treated the entire receipts as income and did not accept the assessee's contention. 2. Tribunal's Observations and Findings: The Tribunal noted that the assessee had obtained a 91-year leasehold right and developed the land for sub-leasing. The Tribunal found that the entire plot of land was developed, and the assessee retained a portion while sub-leasing the rest. The Tribunal agreed that the cost should be distributed proportionately and that the amount received as salami and advance rent should be considered in the context of the obligations the assessee had undertaken. The Tribunal concluded that the present value of the assessee's obligations over 91 years should be estimated and allowed as deductions, referencing the Supreme Court's decision in Calcutta Co. Ltd. v. CIT. 3. Supreme Court's Precedent: The judgment referenced the Supreme Court's decision in Calcutta Co. Ltd. v. CIT, where it was held that an accrued liability and estimated expenditure for future obligations could be deducted from profits and gains of the business. This principle was applied to the assessee's case, suggesting that if there was an accrued liability, it should be deducted from the income. 4. Specific Obligations and Their Treatment: The judgment analyzed three specific obligations of the assessee: - A lump sum payment of Rs. 40,000 for a 91-year lease, which was deemed to have arisen in the year of the sub-lease and could not be spread over multiple years. - An annual payment of Rs. 9,600 for 91 years, which was agreed to be allowed as a deduction. - The obligation to construct a mansion and develop the land, which required further examination to determine if the liability accrued at the time of the agreement or when the expenditure was incurred. 5. Legal and Accounting Principles: The judgment emphasized the distinction between good accounting practices and legal principles, noting that while accounting methods might be acceptable for internal purposes, they must align with legal standards for tax purposes. The court referenced several cases to support this view, including observations from Lord President Clyde and Lord Morris, highlighting that anticipated future losses or profits should not be accounted for in the current year unless they represent an accrued liability. 6. Conclusion and Directions: The court concluded that the estimated value of the assessee's liability to the landlord and sub-lessees should be allowed after considering the terms of the lease, provided these obligations had accrued in the relevant years and could be properly estimated. The Tribunal was directed to reconsider the matter in light of these observations, particularly focusing on the third item of obligation. The court held that the first item should not be allowed, while the other two items required further examination by the Tribunal. Costs: Each party was directed to bear its own costs. Agreement by Co-Judge: Sudhindra Mohan Guha J. concurred with the judgment.
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