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TMI Blog1968 (8) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... s framed are : " Whether, on the facts and in the circumstances of the case, the Tribunal has rightly held that the assessee-company had an undisputed right to receive full licence fees in spite of its having reserved a sum of Rs. 80,752 in the accounts ? (ii) Whether, on the facts and in the circumstances of the case, the Tribunal has rightly held that the amount of Rs. 80,752 was wrongly written off in the year ending September 30, 1957, and hence it is not allowable? " For facility of reference those questions will be numbered as questions Nos. 2 and 3 respectively. The assessee is a public limited company. It owns what is described as a five star luxury hotel under the name of Ashoka Hotels in New Delhi. It started functioning in October, 1956. Accounts for the first year were closed on 30th September, 1957, i.e., within the previous year ending on March 31, 1958. In the accounts for the first year the assessee claimed in amount of Rs. 1,79,904 as the price of linen and blankets issued for use in the rooms of the hotel. It also claimed an expense of Rs. 1,96,931 as the cost of uniforms of the employees. In the course of assessment proceedings it was explained that, acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. On the question of disallowance of the assessee's claim regarding Rs. 80,752, however, the Appellate Assistant Commissioner upheld the decision of the Income-tax Officer. Against the order of the Appellate Assistant Commissioner two appeals were preferred before the Income-tax Appellate Tribunal, one by the assessee against his disallowance of its claim regarding Rs. 80,752 and the other by the Income-tax Officer with regard to the amounts spent by the assessee on the purchase and issue of linen, blankets and uniforms. The Tribunal by its order dated the 14th September, 1965, rejected the assessee's contentions in respect of all the three deductions claimed by it thereby dismissing the appeal filed by the assessee and accepting the department's appeal against the order of the Appellate Assistant Commissioner. The assessee's application for reference of the questions of law as formulated by the assessee was partially accepted and the question relating to expenditure on linen, blankets and uniforms only was referred to this court. With regard to the other two questions, which related to the reduction of licence fees, the assessee's request for a reference was declined. A sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces." In the case of Assam Bengal Cement Co. Ltd. the Supreme Court reviewed the leading cases, Indian as well as English, and summarised the broad tests laid down therein. It is, therefore, neither necessary nor desirable to attempt a fresh survey of those cases as the broad principles which should govern the decision of this case are no longer in doubt. It should, however, be borne in mind that, even after setting out those principles, their Lordships observed : " These tests are thus mutually exclusive and have to be applied to the facts of each particular case in the manner above indicated. It has been rightly observed that in the great diversity of human affairs and the complicated nature of business operations it is difficult to lay down a test which would apply to all situations. One has, therefore, got to apply these criteria one after the other from the business point of view and come to the conclusion whether on a fair appreciation of the whole situation the expenditure incurred in particular case is of the nature of capital expenditure or revenue expenditure in which latter event only it would be a deductible allowance under section 10(2)(xv) of the Income- tax A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid to have been wholly equipped without its furniture and fixtures, etc., it cannot be said to be fully equipped without the linen, blankets and the uniforms which form an integral part of the income earning apparatus. In the case of a hotel it is not the building and certain fixtures only which constitute initial outlay. Items of furniture, curtains, crockery, cutlery, cooking utensils, linen, blankets and uniforms of stewards, peons and bearers, all form the essential initial equipment of a hotel, more so, in the case of a hotel which, according to the assessee's own claim, is a five star luxury hotel. The Tribunal is, therefore, right in holding that the expenditure incurred on the initial issue of linen, blankets and uniforms is expenditure on the initial equipment of the income earning apparatus and is, therefore, not a permissible deduction under section 10(2)(xv) of the Act, being of a capital nature. In support of his argument on behalf of the assessee, its learned counsel, Mr. Veda Vyasa, bases himself on the same decisions on which reliance is placed by Mr. Kirpal for the revenue. What Mr. Veda Vyasa contends is that the real criterion for determining whether a parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the whole situation. One of the tests also is that " outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for substantial replacement of equipment ". (Vide Lord Sands in Commissioners of Inland Revenue v. Granite City Steamship Co.) I have already said that the outlay in this case was made for initiation of the hotel business. Mr. Veda Vyasa has next argued that the income-tax authorities had no right to reject the system of accountancy adopted by the assessee. According to the learned counsel, the linen, blankets and uniforms were written off by the assessee at the time they were issued and not when they were purchased. The issue of these articles was during the course of the business and thus the expenditure should be treated as expenditure incurred in the process of earning of the profits. I do not think that the question in this case is one relating to the method of accountancy which the revenue cannot reject or rectify. I also fail to see how a particular method of accountancy can render an expenditure which is essentially of a capital nature into an expenditure of a revenue nature and vice versa. I, therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hedule D. It claimed that the expenditure on knives and lasts qualified for an investment allowance, on the grounds that the knives and lasts were " plant or machinery " as well as " implements or utensils " and that the expenditure was on capital account. For the Crown it was contended that the expenditure was on revenue account and that they were not plant or machinery. The argument on behalf of the Crown was based on the opinion of Lord president Ciyde in Hyam v. Commissioners of Inland Revenue . There shop fittings were scrapped and now fittings were purchased and a claim for a deduction under rule 3 of the Rules applicable to Cases I and II of Schedule D of the Income Tax Act, 1918, was disallowed. Before the rule was amended in 1926, deduction was prohibited " beyond the sum usually expended for those purposes according to an average of three years preceding the year of assessment ". What the Lord President held was that certain expenditure (apparently capital expenditure) which does not recur annually should not be allowed as a deduction under this provision. Lord Reid did not regard this reasoning as a satisfactory criterion of whether expenditure is or is not capital expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... now before us, therefore, is what was the amount recoverable by the assessee as licence fees on September 30, 1957. In other words, the question for consideration in whether any enforceable obligation had been incurred by the assessee by or before September 30, 1957, to give up its claim to the extent of Rs. 80,752. It may be pointed out that even by its resolution dated May 15, 1958, the assessee did not take a firm decision to relinquish its claim to the extent of the amount in question. Whatever might have been the intention of the assessee on May 17, 1958, and whatever might have been the actual decision taken by it later on, the position as it stood on September 30, 1957, was that the assessee had an undisputed right to receive the full fees of Rs. 2,95,215. The licensees had agreed to pay this amount and had thus incurred a liability in favour of the assessee. The board of directors had taken no decision during the accounting period that any portion of this amount be remitted. Even on May 17, 1958, no firm decision to remit any portion of the amount appears to have been taken. All that the resolution says is that an amount to the extent of 30% of the licence fee " due " is li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to accept 2 1/2% as commission instead of the original 10% commission, and gave up 75% of its earnings. The income-tax department sought to assess the amounts thus given up by the assessee on the ground that commission at the rate of 10% had already accrued to the assessee in the year of account and the agreement in December, 1948, after the close of the previous year, to give up a portion of that income, could not save that portion from liability to income-tax. It was held that this was not a case of a gift by the assessee to the managed companies of a portion of income which had already accrued, but an agreement to receive a lesser remuneration than what had been agreed upon was actually arrived at between the assessee and the managed companies and the assessee had in fact received only the lesser amount in spite of the entries in the account books. This lesser amount alone was, therefore, taxable. A close examination of the case, however, shows that the actual agreement to receive the reduced commission was arrived at between the assessee and the managed companies within the accounting period because the offer to receive commission at the rate of 2 1/2% instead of the original ..... X X X X Extracts X X X X X X X X Extracts X X X X
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