9911796707
TMI Blog1964 (10) TMI 109X X X X Extracts X X X X X X X X Extracts X X X X ..... 53 after giving six months' notice. The deed of lease is in Gujarati and, as translated, clause (4) thereof runs as follows : "If the land leased is acquired under the provisions of the Land Acquisition Act, or the leased and is notified for acquisition and such notification is subsequently cancelled and thereafter whatever may be the balance of the leased land, either party may within five years after he 1st January 1948, i.e., up to the 31st December 1953, call upon the other party by six monthly notice either to sell or purchase the leased land at the price of ₹ 4,09,959/- calculated at the rate of ₹ 10/- per square yard and the other party shall be bound to sell or purchase at he said price. If the party of the first part is willing to sell the leased land at the rate of calculated at ₹ 10/- per square yard within the herein above stipulated time and the party of the second part commits breach in purchasing the land, the land of the first part shall recover the sale price together with costs and interest thereon at the rate of six percent per annum of the leased land and the structures constructed thereon, and the deficiency, if any, shall be recove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company having withdrawn its objection to the title of the lessor to transfer the property, and the willingness of the assessee company to purchase the said land, provided for the specific performance of the provisions of clause (4) in the deed of lease and payment by the assessee company of the purchase price together with interest thereupon at the rate of 5-1/4 per cent per annum on the balance of due to the lessor. The decree also provided that the amount remaining outstanding could be paid by the assessee company by monthly instalments of ₹ 6,000/- with interest at the rate of 5-1/4 per annum on the reducing balance. During the pendency of the suit the assessee company had paid four sums on different dates aggregating to ₹ 1,43,740/-. The claim made in the suit was for ₹ 4,81,890/- which comprised of the purchase price and interest thereupon from March 1, 1951. After deducting the aforesaid sum of ₹ 1,43,740/- the balance remaining outstanding came to ₹ 3, 38,150/-. Out of this amount, the assessee paid ₹ 38,150/- on the date of the consent decree, i.e., on May 8, 1954 and therefore, the amount remaining payable came to ₹ 3,00,000/- whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e (iii) or clause (xv) of S.10 (2) as that item cold be attributable only to the consideration for the price of the land and therefore, must be regarded as capital expenditure. As regards the item of ₹ 17,281/- the appellate Assistant Commissioner was of the view that that amount also was not admissible either under cl.(iii) or cl.(xv) of S.10 (2) as the amount comprised of interest payable by the lessee on March 1, 1951 and the interest payable by the lessee was consequently nothing else than an addition to the cost of the land. Relying upon the decision of the High Court of Bombay in Metro Theatre, Bombay Ltd. v. Commissioner of Income Tax, (1946) (Bom) he held that the transaction was of purchase of a capital asset on a long term payment of interest on reducing balance and therefore, did not amount to borrowing of capital within the meaning of clause (iii) of S.10(2). He also added "The present case contains another adverse factor at the interest really is a measure of the inflation of the purchase price due to a breach of contract on the part of the appellant company to purchase the land outright on 1-3-111951. He also dismissed the claim under cl.(xv) relying up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 52, the date of the filling of The suit; ₹ 39,458/- being interest at the rate of 5( per cent per annum on ₹ 4,09,959/- for the period from 1-3-51 to 30-12-52. ₹ 24,687/- being interest at the rate of 5( per cent per annum from 31-12-52 to 5-5054 after adjusting the interest calculated on ₹ 1,43,150/- already paid by the lessee; ₹ 7,000/- costs of the suit payable to the lessor. --------------- Total ₹ 4,81,890/- ----------------- Pending the suit, the lessee, as aforesaid had paid four amounts aggregating to ₹ 1,43,740/-, namely, ₹ 26,055/- on 30-1-53 being the ground rent for two years plus ₹ 685/- due on 28-2-1950; ₹ 12,685/- being ground rent paid on 1-1-53; ₹ 30,000/- paid on 10-7-53 and ₹ 75,000/- paid on 13-3-54. Since it was agreed that the lessee was bound to purchase the property as from March 1,1951, the amounts paid as ground rent we agreed to be treated as payments towards the purchase price. The balance payable on May 5, 1954 therefore came to ₹ 4,81,890/- less ₹ 1,43,150/- i.e., ₹ 3,38,150/-. As the assessee company paid on May 8, 1954 a further sum of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 24,687/- being interest from 31-12-51 to 5-5-54; ₹ 101/- being interest due on ₹ 685/- at the rate of 5-1/4 per cent per Annum. ------------ Total ₹ 64,246/- Less ₹ 38, 055/- ------------- Equal To ₹ 26,191/- ------------- The assessee company then debited from out of the amount of ₹ 26,101/- ₹ 8,910/- being interest payable by Bodiwala on the purchase price of ₹ 1,74,528/- payable by him in respect of the aforesaid 1,728 square yards. The balance thus came to ₹ 17,281/- which, as aforesaid, was the amount claimed for deduction. The statement of account shows that the parties adopted this computation on he basis of that he assessee company became bound under clause (4) of the deed of sale to purchase the aforesaid land and to pay the aforesaid price on March 1, 1951, and hence interest was added to the payable price from March 1,1951 up to the date of making of the accounts, i.e., May 5, 1954. (7) Though these two items of Rs,17,281/- and ₹ 12,685/- were claimed originally as deductions allowable under clause (iii)and , in the alternative under clause (xv) of Section 10(2). Mr. Nanavati appearing for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receive a lease for 999 years. The agreement provided for the payment of the amount by six monthly instalments with interest on the instalments outstanding from time to time, and it was in respect of ₹ 9,825/- which was the interest payable in the relevant year, that the claim for deduction was made by the assessee. The agreement which was entered into by the assessee inter alia provided that in consideration of the licensee agreeing to pay ₹ 3,81,796/- by instalments with interest as therein provided for, the Government agreed to grant to the assessee a licence and authority to enter upon the piece of land described in the first Schedule thereto for the purpose of building and executing works thereon as therein set out. Clause 2 provided inter alia that the assessee company should pay to the Government the purchase money and the instalments therein set out, and further provided that if the assessee company were to make any default in the payment of any instalment, it would be lawful for the Government to recover the sum under the Bombay City Land Revenue Act of 1876 and after notice of demand as if the arrears were arrears of land revenue due in respect of the said la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction was neither a loan transaction nor was it for the purposes of the business. He also stated that the transaction was neither a loan transaction nor was it for the purposes of the business. As regards the claim for exemption under clause (xii) which, as it stood then was similar to the present clause (xv), he held that the assessee could not get the exemption claimed under that clause also. The business was of showing cinema films. That business could be conducted in rented premises and it could not be argued that the amount was payment of rent. The payment again could in no event be stated to be an expenditure wholly and exclusively for the purposes of the business. If the interest was not paid, the result would be not necessarily stoppage of the business of showing cinema films, but the assessee would not acquire the lease of the property. The basis of this reasoning was that the business of the assessee there was of exhibiting cinema films and not of owning property or buildings and therefore, the interest payable under the agreement between the assessee and the Government had nothing to do with the business of exhibition of cinema films and therefore, it was not an ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR638(Bom) held that the interest amounts were not in respect of moneys borrowed for the purposes of the business as it was clearly not a case of borrowing in view of the position clarified by the supplemental agreement. They also held that the claim could not be made under clause (xv), for the price paid for the acquisition of a capital asset was undoubtedly capital expenditure and the amount or payment which was required to be made by way of interest on the purchase price of the capital asset, if the price was paid in full in time, was an amount paid towards acquisition of the capital asset and in the nature of capital expenditure. They held that interest which the assessee company paid on the balance of the price of the capital asset purchased by it was, therefore, expenditure of a capital nature and did not fall under clause (xv). Negativing the contention of the assessee company that payment made by the assessee by way of interest was not for the acquisition of capital asset but for the maintenance of the capital asset in the business of the assessee, for unless interest was paid, the capital assets being in hypothecation with the Scindias, would have been proceeded against \ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he amount of ₹ 13,000 was capital expenditure. It was an amount expended for the purchase by the company of the medicine and as such, would be assessable and would not be a lawful deduction under clause (ix) of section 10 (2) which was similar to the present clause (xv). (8) Mr.Nanavati however argued that the interest payable as a result of the stipulation providing deferred payments was not capital but revenue expenditure and was expenditure wholly and exclusively expended for the purpose of the business of the assessee company. In support of his contention, he relied upon State of Madras v. G.J.Coelho [1964]53ITR186(SC) where, on the facts of that case, the Supreme Court held that interest paid by the respondent on borrowings made by him for the purpose of purchasing a plantation would not constitute capital expenditure as no new asset was acquired or enduring benefit obtained as a result of payment of interest and that it was entitled to exemption. The assessee there purchased an estate in 1950 known as Silver Cloud Estate consisting of tea, coffee and rubber plantations. Out of the sale price of ₹ 3,10,000 he borrowed ₹ 2,90,000 with interest varying from se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e amount borrowed for the purpose of plantations and the purchase of the plantations were to be viewed as an integrated whole the payment of interest was so closely related to the plantations that the expenditure could be said to have been laid out or expended wholly and exclusively for the purpose of the plantation. The Supreme Court also observed that looking to the transaction in the case, it was impossible to dissociate the character of the assessee as the owner of the plantations and as a person working the plantations. The assessee had bought the plantations for working it as a plantation, the payment of interest, therefore, was closely connected with the plantation itself and therefore such interest would fall within the purview of section 5 (e) of the Act. on behalf of the State of Madras, reliance however, was placed on the Bombay decisions in [1946]14ITR638(Bom) . The Supreme Court distinguished that case on the ground that the interest claimed to be deducted in the Bombay case and which was disallowed was in respect of the amount borrowed for acquiring land on 999 years' lease on which the cinema was subsequently built. There was therefore, no immediate connection be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he payment of interest where so closely connected that they formed an integrated transaction and that therefore , the payment of interest by the assessee company must be regarded, as was done in Coelho's case [1964]53ITR186(SC) as revenue expenditure and an expenditure incurred wholly and exclusively for the purpose of the business of the assessee company. For that purpose, he relied upon a statement made by the tribunal in Para 2 of the Statement of the case where it is stated that the assessee company had taken on lease land admeasuring 4059 square yards "for the purpose of its business" at an annual rent of ₹ 12, 685-/- upon which it had built a printing press. He also relied upon an observation made by the commissioner off Income tax in his application for reference in Para 1 of which it has been stated that the assessee built a press upon the land so acquired and carried on the business of publishers in that press. In spite of these statements, the question still is whether the land was agreed to be purchased by the assessee company for the purpose of its business i. e. the business of carrying on a daily newspaper and the business as printers and publisher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rly as 1946, the assessee had agreed to sell 1728 square yards to Bodiwala which would mean that the assessee company did not at any rate require the whole of the land for the purpose of its business, and (2) the building had already been put up by the assessee company for housing the press when it still occupied the land as the lessee. These facts clearly distinguish the present case from the one before the Supreme Court where, on the facts before it, the Supreme Court held that the transaction was one integrated scheme for the purpose of cultivating and running the plantation, that is, (1) the borrowing by the assessee, (2) the purchase of the plantation with the borrowed moneys, (3( running the plantation and lastly, (4) the payment of interest on the moneys borrowed from a third party by the assessee. In that case, the purchase of the capital asset, namely, the plantation, was vital and essential for the very running of the plantation which was the business or vocation carried on by the assessee. That cannot be said to be the case here and, on the facts before us, we are of the view that the decision in Metro Theatre Bombay Ltd. [1946]14ITR638(Bom) would be applicable. It will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id. Rowlatt J. held that the money that the company got by selling its land was not income but was realised capital, but negatived the contention urged on behalf of the company that interest, which was interest paid in respect of the company forbearing to collect for a certain tie its purchase money, i.e., interest on unpaid purchase money, was not income but was capital. This contention was repelled on the ground that if the company had collected the money, it would have invested that money and got interest. The purchaser had not paid it and he therefore, paid interest until he paid it and therefore, the interest which the company received was interest which the company would have earned if it had collected the entire money and invested in some securities. Relying upon this decision, Mr. Nanavati urged that the interest paid by the assessee company, being interest in the hands of the vendor, it would be revenue expenditure when it was paid by the assessee company. But the converse of the what was held by Rowlatt J. was not always be correct. A receipt in the hand of a vendor may be income but it may be expenditure of a capital nature when it is paid by the purchaser, depending upo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action of loan. It is the order for specific performance which placed the assessee company under an obligation to purchase the property at the price specified therein and payable in the manner set out therein. Even if the assessee company were not to take a deed of conveyance from the lessor the obligation to pay the purchase price was founded upon the assessee company's liability arising from the decree and not out on the basis of any borrowing or loan. But Mr.Nanavati relied upon an expression used in he decree namely, "outstandings due to the plaintiff"(.....) showing that the transaction embodied in the decree was a transaction of loan. We do not agree with any such construction of the decree, for the expression clearly means that the outstanding not out in the decree were the outstanding which arose a result of the decree for specific performance passed by the Court and under which the assessee company became liable to pay the purchase price. The transaction, therefore, cannot amount to borrowing within the meaning of clause (iii). The contention urged on the basis of that clause must, therefore, be rejected. (13) In our view, neither of the two sums can be clai ..... X X X X Extracts X X X X X X X X Extracts X X X X
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