1968 (8) TMI 35 - HC - Income Tax

Assessee public limited company owns a five star luxury hotel - expenditure on linen and blankets and expenditure on the uniforms expenditure incurred on the initial issue of linen, blankets and uniforms was expenditure on the initial equipment of the income earning apparatus and was therefore, not a permissible deduction u/s 10(2)(xv)

Summary

Issues Involved:

1. Permissibility of deduction for expenditure on linen, blankets, and uniforms under section 10(2)(xv) of the Income-tax Act, 1922.
2. Right to receive full license fees despite reserving a sum in the accounts.
3. Allowability of writing off the reserved amount as a deduction.

Detailed Analysis:

1. Permissibility of Deduction for Expenditure on Linen, Blankets, and Uniforms:

The primary issue was whether the expenditure of Rs. 1,79,904 on linen and blankets and Rs. 1,96,931 on uniforms was deductible under section 10(2)(xv) of the Income-tax Act, 1922. The assessee, a public limited company owning a five-star luxury hotel, claimed these expenses as revenue expenditure, arguing that the items were written off when issued for use rather than when purchased. The Income-tax Officer rejected this claim, categorizing the expenses as capital expenditure since they related to the first year of business.

The Tribunal upheld the Income-tax Officer's decision, stating that the expenditure on these items was part of the initial equipment of the hotel, thus constituting capital expenditure. The Tribunal emphasized that items such as linen, blankets, and uniforms are integral to the income-earning apparatus of a hotel, especially a five-star luxury hotel, and therefore, the expenditure on their initial issue is capital in nature and not deductible under section 10(2)(xv).

The court referenced various legal precedents, including Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax, which outlined principles distinguishing capital and revenue expenditure. The court concluded that the expenditure on linen, blankets, and uniforms was for the initiation of the business, making it capital expenditure. The method of accountancy adopted by the assessee could not change the nature of the expenditure from capital to revenue.

2. Right to Receive Full License Fees Despite Reserving a Sum in the Accounts:

The second issue was whether the assessee had an undisputed right to receive the full license fees of Rs. 2,95,215 despite making a provision of Rs. 80,752 as a likely bad debt. The assessee had credited the full amount of the license fees in its books on September 30, 1957, but later, on May 17, 1958, resolved to make a provision for a likely reduction in fees.

The Tribunal found that as of September 30, 1957, the assessee had an undisputed right to receive the full license fees. The resolution to make a provision for a likely reduction was passed after the accounting year ended and did not constitute an enforceable obligation to relinquish any portion of the fees during the relevant accounting period. Therefore, the full amount of Rs. 2,95,215 was recoverable and taxable.

3. Allowability of Writing Off the Reserved Amount as a Deduction:

The third issue was whether the amount of Rs. 80,752 reserved as a likely bad debt was wrongly written off and hence not allowable. The Tribunal upheld the Income-tax Officer's decision, stating that the provision made after the accounting year could not justify reducing the taxable income for the relevant period.

The court referenced the Supreme Court decision in Commissioner of Income-tax v. Shoorji Vallabhdas & Co., which held that income-tax is levied on real income, not hypothetical income. However, in the present case, the income had already accrued during the accounting period, and any subsequent decision to give up a portion of it did not affect its taxability. The assessee's claim to write off the amount was thus disallowed.

Conclusion:

The court answered all three questions in favor of the Commissioner of Income-tax and against the assessee. The expenditure on linen, blankets, and uniforms was deemed capital expenditure and not deductible. The assessee had an undisputed right to receive the full license fees, and the provision for a likely bad debt made after the accounting year was not allowable. The Commissioner was awarded costs of Rs. 250.