1969 (5) TMI 6 - HC - Income Tax

Payment of dead rent (minimum royalty payable under the deed of lease) and development rebate - payment of dead rent is allowable as a deduction in determining its profits - further assessee was entitled to a deduction on account of development rebate

Summary

Issues Involved:
1. Tax liability on income earned prior to 1st April, 1960.
2. Deductibility of dead rent paid by the assessee.
3. Entitlement to development rebate for the assessment year 1961-62.

Issue-wise Detailed Analysis:

1. Tax Liability on Income Earned Prior to 1st April, 1960:
The first issue concerns whether the assessee was liable to tax on its income earned prior to 1st April, 1960. The court held that Parliament is competent to enact laws with prospective or retrospective effect. The assessee's argument that it was immune from taxation under section 14(3) of the Act, as amended by the Finance Act, 1960, was dismissed. The court referenced Rai Ramkrishna v. State of Bihar and Commissioner of Income-tax v. Isthmian Steamship Lines to support its decision. Consequently, the court answered this question in the affirmative, confirming that the assessee was liable to tax on its income earned prior to 1st April, 1960.

2. Deductibility of Dead Rent Paid by the Assessee:
The second issue pertains to whether the amount of Rs. 5,343 paid as dead rent by the assessee was allowable as a deduction. The court noted that dead rent is akin to a minimum royalty payable under the lease deed. The Supreme Court in Gotan Lime Syndicate v. Commissioner of Income-tax had established that rent and royalty should be deducted as revenue expenditure. This point was conceded by the department's counsel. Therefore, the court answered this question in the affirmative, allowing the deduction of the dead rent.

3. Entitlement to Development Rebate for the Assessment Year 1961-62:
The third issue involves the assessee's entitlement to a development rebate of Rs. 13,239 for the assessment year 1961-62. The court examined section 10(1) and (2)(vib) of the Act, which outlines the conditions for claiming development rebate. The department argued that the assessee did not meet the requirement of debiting 75% of the development rebate to the profit and loss account and crediting it to a reserve account by the relevant deadline.

The court clarified that the preparation of the profit and loss account typically occurs after the close of the accounting year, and there is no statutory time limit for making the necessary entries. The court opined that these entries could be made any time before the completion of the assessment proceedings. The court emphasized that the assessing authority has the discretion to permit the assessee to make the required entries even after submitting the return, provided it is done before the final assessment.

In this case, the Tribunal allowed the development rebate, noting that the defect of not creating the necessary reserve had been rectified with the creation of a specific reserve of Rs. 11,000. The court supported this lenient approach, referencing Veerabhadra Iron Foundry v. Commissioner of Income-tax, where the Andhra Pradesh High Court held that the reserve fund account need not be credited before the close of the accounting year, as long as it is done before the final assessment.

The court disagreed with the stricter interpretation in Commissioner of Income-tax v. Veeraswami Nainar and Indian Overseas Bank Ltd. v. Commissioner, Income-tax, asserting that the development rebate could be allowed if the necessary entries are made before the assessment is completed. Thus, the court answered this question in the affirmative, confirming the assessee's entitlement to the development rebate.

Conclusion:
The court answered all three questions in the affirmative:
1. The assessee was liable to tax on income earned prior to 1st April, 1960.
2. The amount of Rs. 5,343 paid as dead rent was allowable as a deduction.
3. The assessee was entitled to a development rebate of Rs. 13,239 for the assessment year 1961-62.