1982 (10) TMI 82 - AT - Income Tax

Business Expenditure, Business Premises, Capital Or Revenue Receipt, Capital Receipt, Expenditure Incurred, Income From House Property, Payments Not Deductible

Summary

Issues Involved:
1. Deductibility of shifting expenses.
2. Disallowance of provision for gratuity.
3. Allowance of collection charges.
4. Taxability of compensation received for termination of tenancy.
5. Claim of depreciation on additional charges for commercial use of building.

Detailed Analysis:

1. Deductibility of Shifting Expenses:

The assessee, a newspaper publisher, incurred expenses for shifting its plant and machinery to a new building due to the expiration of its lease. The ITO and Commissioner (Appeals) disallowed these expenses, citing the Supreme Court decision in Sitalpur Sugar Works Ltd. v. CIT [1963] 49 ITR 160, which held that such expenses are capital in nature. However, the Tribunal found that the assessee was compelled to shift due to the lease expiry and not for obtaining an enduring advantage. The Tribunal concluded that the expenditure was necessary for continuing the business and allowed it as revenue expenditure, referencing the Supreme Court decision in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1, which states that not all enduring benefits result in capital expenditure.

2. Disallowance of Provision for Gratuity:

The assessee claimed a provision of Rs. 10,55,400 for gratuity for non-journalist employees, which was disallowed by the ITO and Commissioner (Appeals) due to non-compliance with section 40A(7) of the Income-tax Act, 1961. The Tribunal upheld this disallowance, stating that statutory conditions must be fulfilled for such claims and referenced the Special Bench decision in Soft Beverages (P.) Ltd. v. ITO [1982] 1 SOT 311 (Mad.--Trib.).

3. Allowance of Collection Charges:

The assessee paid Rs. 1,63,968 to Orient Investment (P.) Ltd. for securing tenants and ensuring rent collection for its newly constructed building. The ITO disallowed this claim, but the Commissioner (Appeals) allowed it, recognizing the services rendered by Orient Investment (P.) Ltd. The Tribunal upheld this decision, noting that the payment was for both securing tenants and ensuring rent collection, thus qualifying as collection charges under section 24(1)(viii) of the Act.

4. Taxability of Compensation Received for Termination of Tenancy:

The assessee received Rs. 8,64,000 as compensation for terminating a tenancy in its London office. The ITO treated this as revenue receipt, but the Commissioner (Appeals) and the Tribunal held it to be a capital receipt, as it was compensation for parting with a capital asset (tenancy right). The Tribunal emphasized that the compensation was not a reimbursement of expenses but a lumpsum payment for relinquishing tenancy rights.

5. Claim of Depreciation on Additional Charges for Commercial Use of Building:

The assessee paid Rs. 34,96,516 as additional premium for using its newly constructed multi-storeyed building for commercial purposes and claimed depreciation on this amount. The ITO disallowed this claim, treating the payment as related to land cost. However, the Commissioner (Appeals) and the Tribunal allowed the claim, stating that the payment was for better exploitation of the land by constructing a multi-storeyed building, thus forming part of the building's cost. The Tribunal dismissed the reliance on a letter from the Land Development Officer and an opinion from the Law Ministry, emphasizing the substance of the matter.

Conclusion:

The Tribunal allowed the assessee's appeals for the assessment years 1974-75 and 1975-76 regarding shifting expenses and depreciation claims, respectively, while dismissing the revenue's appeals on all counts.