1969 (2) TMI 55 - HC - Income Tax

Whether, on the facts and in the circumstances of the case, was the company entitled to the allowance of the rent paid to the landlord for the new building - question referred to us is answered in the negative

Summary

Issues:
- Entitlement of rent allowance for a new building
- Deduction under section 30 for rent paid
- Alternative deduction under section 37 for expenditure
- Interpretation of "used for the purposes of the business"

Entitlement of Rent Allowance for a New Building:
The case involves a private limited company acting as a distributor of Fiat Cars, which entered into an agreement with landlords for a new building on rent for its showroom and workshop. The company claimed Rs. 30,000 paid as rent should be allowed as a deduction under section 30 or section 37 for business purposes. The Income-tax Officer and the Appellate Assistant Commissioner rejected the claim, stating that the building was not used for business purposes during the accounting year, and the rent essentially financed the building's construction.

Deduction under Section 30 for Rent Paid:
Section 30 of the Income-tax Act allows deductions for premises used for business purposes. The court analyzed whether the rent paid for the building should be allowed as a deduction. The finding was that the building was not actively or passively used for business during the accounting year, as the showroom and workshop were shifted after the year's close. The court emphasized the identity of interest between the landlords and the company's shareholders, indicating that the rent payment essentially financed the building's construction.

Alternative Deduction under Section 37 for Expenditure:
The company argued for an alternative deduction under section 37 for expenditure laid out wholly and exclusively for business purposes. However, the court rejected this argument, stating that section 37 does not apply to expenditures described in sections 30 to 36. Since the nature of the expenditure was rent for premises, similar to section 30, it could not be allowed under section 37 to maintain the conditions and limitations of deductions under the relevant sections.

Interpretation of "Used for the Purposes of the Business":
The court discussed the interpretation of "used for the purposes of the business" as per section 30. Referring to case law, the court clarified that for a building to be considered used for business, it must be actively or passively utilized during the accounting year. In this case, where the building was not ready for use and was being made fit for business purposes, the rent paid was not allowable as a deduction under section 30. The court emphasized that the rent essentially financed the building's construction, leading to the denial of the deduction.

Conclusion:
The court answered the question of entitlement to rent allowance for the new building in the negative, stating that the rent paid was not allowable as a deduction under section 30 or section 37. The judgment highlighted the importance of actual usage of premises for business purposes to qualify for deductions and maintained the integrity of the conditions and limitations under which deductions are permitted under the relevant sections.