9911796707
TMI Blog1990 (6) TMI 100X X X X Extracts X X X X X X X X Extracts X X X X ..... iii) the assessee has not brought on record sufficient material to prove that any services were rendered. On appeal, the CIT(A) concurred with the views of the ITO and confirmed the disallowance of Rs. 3,17,126. 4. At the hearing before us, the learned counsel for the assessee challenged the aforesaid findings recorded by the authorities below and claimed that it was a genuine business expenditure incurred by the assessee wholly and exclusively for its business purposes. 5. The learned counsel contended that it was wrong to say that M/s Hemkunt Chemicals Pvt. Ltd. belonged to the same group or that it was a sister concern of the assessee. At our instance the learned counsel produced a list of shareholders of Hemkunt Chemicals Pvt. Ltd. He contended that while the assessee was a public limited company, Hemkunt Chemicals was a private limited company. One Sardar Inderjit Singh was at the relevant time the chairman of the assessee company. The list of shareholders of M/s Hemkunt Chemicals Pvt. Ltd. placed at pages 117 to 119 of the paper book would show that Smt. Damyant Kaur, the wife of the said Inderjit Singh, held 830 shares in that company. Harkishan Lal; brother of the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is a letter dated 15th December'. 1981 from Skipper Construction Company to Hemkunt stating "As finally resolved with you we agree to purchase the following commercial space inJhandewalanTowersfrom M/s P.S.B. Finance and Investment Ltd." The price mentioned is Rs. 3,17,12,586. On the same date i.e.,15-12-1981, the assessee sent a bill claiming Rs. 3,17,125.86 as commission. Then there is a letter dated 31-12-1981 from Skipper to the assessee stating "in accordance with your instructions we wish to inform you that we have transferred an area of 45918 sq. ft. as detailed below from time to time during the year 1981". The letter further states "We further wish to inform you on the sale of the above space profit earned thereon is Rs. 12,40,440 which we have credited to your account". 8. These are the letters between the three parties concerned that were put in evidence in proof of rendering services. There is a letter dated6th December, 1981from one M/s Prop Deals offering similar services to the assessee. This, in our view, has little relevance. At pages 100, 100A and 101 are three letters dated30-5-1981,8-4-1981and17-4-1981purporting to be from property dealers and addressed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rested, did not participate in the discussion or voting on this resolution: S. Darshanjit Singh S. Tajbir Singh" A copy of another resolution at page 127 of the paper book shows that in the meeting held on 7th October, 1986 itself, S. Gurbhajan Singh Man, a director of the assessee was authorised to advance money to M/s Skipper Construction Co. and its. 51 lakhs were ultimately advanced to the said builder in respect of the space in question. All these papers thus show that the assessee and M/s Skipper Construction Co. were acting in close collaboration with each other and one fails to understand why the assessee should engage a broker if the property was to be surrendered to Skipper itself. As already observed there is no material on record to show that Hemkunt was acting as a property broker from before or that it has executed any other similar assignment. The circumstances mentioned above, therefore, arouse one's genuine suspicion regarding the genuineness of this substantial expenditure. 10. Suspicion alone, however, cannot sustain a disallowance. The learned counsel for the assessee contended that the IAC(A) should have summoned the connected persons from Hemkunt Chemi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xecuted between the parties on the26-4-1982, that could be no reason for doubting that the accommodation had been taken on rent by the assessee from15-11-1981particularly when the assessee had spent Rs. 2,55,250 on the repairs of the building in question during the accounting year itself. 13. On the other hand, the learned Departmental Representative relied upon the arguments of the authorities below in support of the disallowance of the rent. 14. As regards the assessee's contention that the building had been taken on rent from15-11-1981, we are of the view that there is no reason to doubt the same. Although the formal lease deed was executed later on, that does not by itself create any suspicion particularly when simultaneously the assessee has been claiming that it spent substantial amount on the repairs of the building and which expenditure has been accepted by the ITO and treated as a capital expenditure. Actual use of the accommodation for business purposes right from the date on which the tenancy commences is not required and is usually not possible. When a person hires an accommodation some time is always spent before the business is shifted to that place. In the presen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,500 10 Nos. Circuits @ 150 1,500 15 Nos. Telephone Pts. @ 150 2,250 15 Nos. Ball points @ 125 1,875 Main Panel Board 5,000 Arrangement for getting Electric connection from NDMC 5,000 15 Nos. Intercom pts. @ 150 2,250 ------- 25,000 ------- 8. Provide Fixing of Panellings Partitions as detailed below Partitions 750 sq. ft. @ 30 per sq. ft. 22,500 With frame made of Kail wood with 6 MM commercial Ply Panelling 900 sq. ft. @ 20 per sq. ft. 18,000 with frame made of Kail wood 6MM Commercial ply. Providing Fixing Teek/ Rosewood Panelling 1650 sq. ft. @ 15 per sq. ft. 24,750 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e lessee shall be desirous of having the lease renewed, for a further term of four years, the lessee shall, at least three months before the expiration of the term of tenancy granted, give to the lessors a notice in writing of such intention and the lessor will grant fresh lease of the demised premises for a further period of four years from the date of expiration of the term hereby, granted at the same terms and conditions excepting that the monthly rent will be enhanced only by 15% over the rent being paid in the previous lease deed. In this way the lease will be for a continuing period." The above clause will show that the lease deed is not for a very short period. The initial period of lease is 4 years and there is provision for its subsequent renewals one after the other. There is also a provision for enhancement in rent @ 15% on every renewal. The use of the words "In this way the lease will be for a continuing period" clearly indicates that it is a lease for an indefinitely long period. The heavy expenditure incurred by the assessee also points out to the intention of the assessee. Had it been a lease for a very short period, the assessee would not have incurred such heavy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The learned counsel for the assessee also cited case of CIT v. Madras Auto Service Ltd. [1983] 13 Taxman 378 (Mad.). In that case the assessee had taken on rent land and building on long term lease on a very low rent. As per lease agreement with the landlord the assessee demolished the old building and constructed the new one at his own cost but the ownership of such building was to remain with the landlord. The total expenditure incurred on the building was Rs. 1,62,335 in the first year and Rs. 50,937 in the next year. It was held that the assessee incurred the expenditure because of savings in rent charges and therefore, the expenditure was of a revenue nature. 22. The learned counsel for the assessee cited Instalment Supply (P.) Ltd. v. CIT [1984] 149 ITR 52 (Delhi). In that case the assessee was in occupation of a building for over 25 years and spent a sum of Rs. 47,186 in asst. year 1965-66 for redesigning, marble floorings, better fittings and wood work. The Tribunal had held that Rs. 30,000 of the aforesaid expenditure was of capital nature. The Hon'ble High Court, however, held that the entire expenditure was of a revenue nature. As would appear, this ruling relates to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... involved expenditure of Rs. 15,000. There is no allegation or proof to show that the things installed in the building would not last long. It also does not appear that the assessee acquired the premises in question on any concessional rent. The rent observed under the lease agreement is a fancy amount of Rs. 30,000 p.m. and rent for 24 months amounting to Rs. 7,20,000 had to be paid in advance. It is also clear, as discussed above, that the lessor and the lessee are interested in each other. 26. It was contended by the learned counsel for the assessee that expenditure of Rs. 25,000 on the demolition of walls did not bring about any lasting asset and must be treated as revenue expenditure. This, in our view, is not correct. The expenditure has been incurred to improve an asset, i.e., the lease hold right or the right of occupation in the building. As expenditure on digging of foundations does not bring about any tangible asset the demolition of walls also does not bring into existence tangible assets but the work does improve and add to the utility and usefulness of the asset as a whole. This expenditure too, therefore, has to be treated as a capital expenditure. It was also conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not question the details and we find no justification for the disallowance of Rs. 2,500, which we hereby delete. 30. The last round taken up in this appeal challenges the charging of interest u/s 215 of the Income-tax Act, 1961, which amounts to Rs. 2,44,670. The facts are that initially the assessee filed an estimate of advance-tax on15-6-1981estimating its total income at Rs. 10 lakhs. The advance tax due thereon worked out to Rs. 5,91,250. In pursuance of this estimate, the following amounts of tax were paid: 7-8-1981 Rs. 1,97,083 1-10-1981 Rs. 2,00,000 -------- Rs. 3,97,083 -------- Later a revised estimate was filed on23-12-1981estimating the total income at Rs. 20 lakhs and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n13-12-1981in pursuance of which the assessee did not make any payments during the relevant financial year but the default in respect of the earlier estimate was there. The estimate of advance tax filed on 23-12-1981 purporting to be u/s 209A(4) of the Act was not a valid estimate as it was filed after the 15th December on which date the last intalment of advance tax was payable by the assessee. Therefore, nothing hinges on the default of the assessee in not paying the amount in pursuance of its estimate dated23-12-1981. In our view, therefore, interest u/s 2l5 could be charged from the assessee. We may mention that the calculation of interest was not disputed before us. We, therefore, hold that the IAC(A) was right in levying interest u/s 215 of the Income-tax Act, 1961. The last ground, therefore, will fail. 32. During the course of hearing, the learned counsel for the assessee sought our permission to raise an additional ground as under : "Appellant company is entitled to deduction for interest amount of Rs. 85,450 claimed as deduction in assessment proceedings for 1983-84 and disallowed by IAC(A) in that year as pertaining to asst. year 1982-83." 33. The learned counsel c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emkunt'. HCL was never engaged in the business of real estate and the assessee has not brought on record the services rendered by HCL in the sale of this space. Commission payable to HCL is held to be a payment made not for business consideration and is, therefore, disallowed." The Income-tax Officer's conclusion is that HCL belongs to the "Inderjit Singh group". The list of shareholders of this HCL is available at pp. 117-120 of the Paper Book. Smt. Damyant Kaur held 830 shares as on31-12-1981. It was pointed out for the assessee before us that the following aspects were not kept in view by the authorities below :--- (i) Smt. Damyant Kaur did not have a substantial interest in HCL within the meaning of section 2(32) of the Act. (ii) M/s. Hemkunt Investment Ltd. held 800 shares in HCL but that company had nothing to do with S. Inderjit Singh and his wife Smt. Damyant Kaur. (iii) 2251 shares were held in the joint names of Sh. Harkishan Lal (elder brother of S. Inderjit Singh) and Smt. Damyant Kaur. Sh. Harkishan Lal was a sick individual. Hence Smt. Damyant Kaur's name was added as second name. She was never the beneficial owner of these shares. This position was specifical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This question can be answered only if HCL and Skipper Construction Co. had been examined by the authorities below. It does not follow as a matter of course -that Skipper Construction colluded with HCL to help the assessee. The burden is on him who asserts a position contrary to the apparent. That .burden remains to be discharged. The fact under its Resolution dated 7-10-1980 the assessee authorised a deal for purchase of commercial space in Jhandewalan Tower and the fad that under its Resolution of 28-12-1981 it was recorded that on 7-10-1980 itself money was authorised -to be lent to M/s. Skipper Construction in respect of the above space do not by themselves establish collusion between Skipper Construction Co. and/or HCL/assessee. What remains therefore, is suspicion. I would therefore, agree with my learned brother's observations in paragraph 10 of his order that suspicion alone cannot sustain a disallowance. The matter will go back to the ITO for a de novo enquiry. 7. I am unable to agree with my learned brother that the expenditure of Rs. 2,55,250 that was claimed by the assessee to have been spent on the repairs of the tenanted accommodation was rightly disallowed as capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f by additional pillars. As in the earlier years the Income-tax Officer estimated and allowed Rs. 7,787 towards repairs and disallowed the balance of Rs. 30,000. The Tribunal upheld the disallowance of Rs. 30,000 as capital expenditure. In its view the expenditure was not small but effected a complete change of structure, that the amount spent on marble flooring brought into existence an asset of enduring benefit and the amount spent on woodwork could not be said to be current repairs or replacement. 8. TheDelhiHigh Court did not agree with the above reading of the expenditure. It held that the approach of the Tribunal was erroneous in law. It made the following points in this regard :--- (i) The question of repairs has to be considered in the larger context of business necessity or expediency. If the expenditure incurred by the assessee is so related to the carrying on or to the conduct of the business that it has to be regarded as an integral part of the profit-earning process, then it was not for the purposes of securing a capital asset. (ii) Conversion of a large number of small rooms into a big hall enabled the assessee to carry on business more profitably and efficientl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... possession; and in those cases the deduction is restricted in respect of the "current repairs" to the premises. So far as a tenant is concerned, it is the "repairs" to the premises and if the assessee had undertaken to bear the cost of the repairs to the premises, then those repairs may be even in the nature of capital expenditure. Such an expenditure incurred by the assessee if it is in relation to the commercial activity would be in the nature of revenue expenditure. 9. The above decision, in my view, totally supports the assessee's claim for deduction. The assessee took on lease L-14,Connaught Place,New Delhion15-11-1981. A copy of the Lease Deed is at pp. 33-37 of the Paper Book. The deed is dated26-4-1982. It says that the Lessor (HCL) demised to the assessee (the lessee) 2000 sq.ft. out of the total area of the said flat No. L-40, from15-11-1981for an initial term of four years at a rent of Rs. 30,000 per month. The other important terms of this lease deed are as under :--- (a) The lessee is not to make any addition or alteration in the demised premises, without the written consent of the lessor which shall not be delayed unreasonably by the lessors provided, however, tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scraped and re-plastered; thereafter wall panelling was done in the entire premises. 6 cabins were made by partition. 4 were small ones for executives; one for the Managing Director and the 6th (the largest) was for the Board and other meetings. A Reception lounge was also made. The entire floor was covered with PVC tiles. The entire electric wiring and socket points were repaired and some were replaced. Telephone sockets were provided. False ceiling had to be made. A few girders were replaced. 11. A further point stressed was that the assessee was not the owner of the property and the lease was not for a long period being only for 4 years. Hence there was no enduring benefit in the matter. It was repeated that the expenditure incurred was for carrying on the business in the rented premises. 12. I have considered the factual position in this case in the light of the principles laid down by the Delhi High Court. Looking to the nature of the assessee's business the expenditure incurred by it in this regard is in my view allowable as revenue expenditure. The Departmental Representative said that the assessee had got an enduring benefit out of this expenditure. Hence it must be a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reciation was also allowable thereon. This difficulty was removed by the Legislature. This provision would not affect allowance of an expenditure found as revenue expenditure by the authorities. In the instant case applying the ratio of Instalment Supply (P.) Ltd. I find the expenditure in question has to be allowed as revenue expenditure. 14. A word about "enduring benefit". In Madras Auto Service Ltd.'s case a similar issue was under the consideration of the Court. The Court noticed the decisions in Atherton v. British Insulated Helsby Cables Ltd. [1925] 10 TC 155 (HL), Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (PC), Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC) and Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC). The Court noted that the test of "enduring benefit" is not always the acid test of capital expenditure ; that wisdom lay in adopting that test which was most appropriate to the nature of the case. No doubt a benefit accrued to the assessee here but that could hardly be described as "enduring", as on the facts on record at the relevant time, the lease would be only for a period of 8 years at the most. Secondly, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tnership concern assessed at Bombay. It was out of that lease that 2,000 sq.ft. of area was leased out to the assessee w.e.f.15-11-1981on a rent of Rs. 30,000 per month under the above said agreement. The said premises was in a dilapidated condition, when it was taken on lease by M/s Hemkunt Chemicals Pvt. Ltd. It was in need of extensive repairs including demolition of walls, and some girders had to be provided to strengthen the roof. It was this building that the assessee had taken on lease agreeing to renovate it. The renovation process was started and in about 7 months'. time, it was completed at a cost of Rs. 2,55,250 which was incurred under the following heads : "1. Demolition of walls : Rs. 25,000 2. Providing of steel girders in places : Rs. 30,000 3. Repairs of flooring : Rs. 15,000 4. Repairs of toilets including providing for W.C., Wash Basin, Glazed tiles up to height of 7 fts. and marble flooring, C.P. fittings of standard make Rs. 15,000 per toilet (2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that the above expenditure was in the nature of capital expenditure, incurred prior to usage of the said building and for the purpose of making it fit for use of business purpose meaning thereby that if the expenditure was incurred after the premises was occupied for business purposes, the expenditure could be allowed as revenue expenditure as a deduction. 5. The assessee then filed further appeal before the Tribunal and both the Members could not agree on the conclusion. After noting the details of the expenditure, the learned Judicial Member referred to the agreement to find out whether the lease is for a short duration or along duration and came to the conclusion that the lease was for an indefinitely long period because the lease agreement gave the assessee the power to renew the lease, subject to certain conditions, each time for a period of four years for a continuing period, which according to the, learned Judicial Member meant a power reserved by the assessee for the continuation of the lease for an indefinite period. He then referred to the various cases cited before the Bench to examine whether the expenditure incurred is revenue expenditure or capital expenditure and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the terms for only 8 years and a period of 8 years could not be said to be such a long period as to enure to the assessee a benefit of long standing nature so as to say that an asset was acquired. 7. Then referring to the items of expenditure incurred he found that it was on demolition of walls, providing of girders, repairs of flooring, repairs of toilets, providing and fixing of ceiling with plaster of paris, providing and fixing of power points, telephone points, intercom points, painting and polishing and none of this expenditure is individually or collectively can be said to have given the assessee an enduring advantage so as to describe the expenditure incurred as capital expenditure. He also found that the roof was leaking at the time when the premises was taken over on lease and no one would be expected to carry on business under a leaking roof, unless the roof was repaired. He held eventually that the benefit and the advantage obtained by the assessee by incurring the above expenditure was for the purpose of the business of the assessee and not for the acquisition of a capital asset. There was an argument addressed based upon section 32(1A) of the Income-tax Act which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding to him provided for an indefinite period of lease. The said covenant was in the following terms : "III. It is hereby mutually agreed as follows : 1. That if the lessee shall be desirous of having the lease renewed, for a further term of four years, the lessee shall at least three months before the expiration of the term of tenancy granted, give to the lessors a notice, in writing of such intention and the lessor will grant fresh lease of the demised premises for a further period of four years from the date of expiration of the term hereby, granted at the same terms and conditions excepting that the monthly rent will be enhanced only by 15% over the rent being paid in the previous lease deed. In this way the lease will be for a continuing period." I am unable to think that this clause would permit the lessee, i.e., the assessee to take on the premises on lease for an indefinite period as held by the learned Judicial Member. Except for the last sentence which provided "In this way the lease will be for a continuing period", there is no other stipulation which gave the right to the lessee to extend the period of lease. The last sentence in my opinion only describes that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the lease. It appears to be the unanimous view of several High Courts in the country that if the expenditure is incurred to bring an asset into use from its disuse or from the position of its disuse the expenditure so incurred is revenue expenditure. In Empire Jute Co. Ltd.'s case that the test of enduring nature has been re-examined by the Supreme Court, and it was pointed out in no unmistakable terms that in certain cases where expenditure even if incurred for obtaining an advantage of enduring benefit may nonetheless be of revenue account and the test of enduring benefit may break down. The Supreme Court pointed out in this case that "it is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in the commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently, more profitably ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and in those cases the deduction is restricted in respect of the 'current repairs' to the premises. So far as a tenant is concerned, it is the 'repairs' to the premises and if the assessee had undertaken to bear the cost of the repairs to the premises, then those repairs may be even in the nature of a capital expenditure. Such an expenditure incurred by the assessee if it is in relation to the commercial activity would be in the nature of revenue expenditure". Though in the case before the Delhi High Court, there was no definite agreement providing for the assessee tenant to bear the cost of repairs, the High Court inferred such an agreement from the facts of the case and held as above, i.e., a tenant is entitled to deduction of the amount spent on account of the cost of the premises when he has undertaken to bear the cost of the repairs. But if the amount is spent by an assessee not as a tenant but as an owner, he is entitled to deduction only of current repairs. Elaborating on this point, it would be seen from the above extract that the Delhi High Court held that a tenant who has undertaken to bear the cost of the repairs of the premises would be entitled to the deduction eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of revenue nature, applying the principles laid down by the Supreme Court, it cannot be said that expenditure incurred by the assessee in this case only on repairing the building to make it utilitarian for office purpose is of capital expenditure. 11. Another case in Puran Chand Seth v. CIT [1986] 157 ITR 231 the Delhi High Court held that extensive changes made to a cinema hall to conform to the requirements of law was of revenue nature. Here in this case, the assessee was engaged in film exhibition business and had taken a Cinema Hall on monthly rent. The District Magistrate had pointed out certain defects in the building which are to be removed in order to get a renewal licence of the cinema licence. A substantial amount was spent on repairs for providing : (a) automatic flush type latrines, (b) shifting of ladies latrines, (c) replacement of staircase, (d) reconstruction of the floor of the auditorium, (e) provision of ceiling to the auditorium, (f) reconstruction of the balcony (g) replacement of the Junglas, and (h) shifting of ladies waiting rooms to some other place. The Delhi High Court held, following the rule laid down by the Supreme Court in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X
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