Kerala High Court
Trinity Pharmaceuticals (India) Pvt. ... vs Commissioner Of Income-Tax on 13 July, 1993
Equivalent citations: [1994]206ITR431(KER)
Author: K.S. Paripoornan
Bench: K.S. Paripoornan
JUDGMENT K.P. Balanarayana Marar, J.
1. As directed by this court, the following three questions of law were referred by the Income-tax Appellate Tribunal, Cochin Bench, for a decision thereon.
"(1) Whether, on the facts and in the circumstances of the case and in the light of the finding that the assessee had the liability to pay rent from August 11, 1972, and the rent of Rs. 4,000 is quite fair, the Tribunal was right in law in invoking the provisions of Section 40A(2)(a) of the Income-tax Act, 1961, to disallow part of the rent payments made for the period after August 11, 1972, at the rate of Rs. 4,000 per month?
(2) Whether the Tribunal erred in law and acted beyond the jurisdiction vested in it under Section 254(1) of the Income-tax Act, 1961, in deciding and declaring the allowable deduction on account of rent for the period even beyond March 31, 1974 ?
(3) Whether, on the facts and in the circumstances of the case and under Section 30 of the Income-tax Act, the Tribunal is right in allowing rent for the entire period August 11, 1972, to March 31, 1974, against the income chargeable for the previous year ended March 31, 1974 ?"
2. The assessee is a private limited company, The buildings occupied by the company were owned by two of the directors, viz., Shri P. K. Balakrishna Kurup and, his wife, Dr. N.P. Karthiayini Amma. A resolution was adoped by the board of directors on February 5, 1970, requesting the owners to fix the rent of the buildings occupied by the company at Rs. 3,000 per month from the date of occupation, i.e., January 1, 1970, for a period of one year and thereafter at the rate of Rs. 4,000 per month. After completing the construction of the first floor in the newly constructed main building, the rent was to be raised to Rs. 5,000 per month. A lease agreement was entered into on April 3, 1970, incorporating these terms. Rent was paid at the rate of Rs. 3,000 till August 11, 1972, on which date an agreement was entered into by the company with the owners for sale of the buildings for a total consideration of Rs. 3,45,000 out of which Rs. 1,05,000 represented the earnest money. Towards this earnest money an amount of Rs. 50,000 was paid on August 11, 1972, and the balance was agreed to be paid within four months therefrom. The balance sale consideration was agreed to be paid in monthly instalments at the rate of Rs. 15,000 commencing from September, 1972. The sale did not take place though a major portion of the sale consideration was paid by the company. Another agreement was entered into on December 22, 1973, between the owners and the company whereby the owners agreed to claim the monthly rent of Rs. 4,000 from August 11, 1972, and the company agreed to treat the amount of Rs. 2,71,228.40 paid under the agreement of sale as rent deposit. Out of this, an amount of Rs. 50,000 was agreed to be treated as security deposit for payment of rent and the balance amount to be adjusted against rents from December 1, 1973, till the entire amount was wiped off. The security deposit shall not carry interest but is liable to be repaid to the tenants at the time of surrender.
3. For the assessment year 1974-75, the Income-tax Officer completed the assessment by allowing a deduction of Rs. 11,130 out of a total amount of Rs. 78,710 claimed as deduction towards rent paid. On appeal, the Appellate Assistant Commissioner enhanced the amount liable to be deducted to Rs. 14,710 and directed allowance of a further relief of Rs. 3,580. The matter was carried in appeal before the Income-tax Appellate Tribunal by the assessee and the Revenue. By a common judgment rendered on July 21, 1980, the Tribunal found the actual rent payable to be Rs. 4,000 per month but disallowed the excess expenditure of Rs. 750 being the benefit derived by way of interest on the security amount and the unadjusted balance of Rs. 53,000. Deduction was, therefore, allowed at the rate of Rs. 3,250 per month. The Tribunal having refused to refer the questions of law as required by the assessee and the Revenue, two original petitions were filed before this court, one by the assessee and the other by the Revenue. As directed by this court in, the judgment in those original petitions the questions of law hereinbefore mentioned were referred to this court by the Tribunal under Section 256(2) of the Income-tax Act, 1961.
4. Heard counsel for the assessee, Sri P. Balachandran, and counsel for the Revenue, Sri N. R. K. Nair.
Question No. 1 : The main contention advanced by learned counsel for the assessee is that the Tribunal having found the reasonable rent payable as Rs. 4,000 per month has committed an error in making a deduction towards the benefit derivable by way of interest on the security amount and the balance outstanding with the owners of the buildings with whom the company had entered into an agreement for sale. The assessee is a company and the expenditure is incurred in respect of payment of rent to the two directors of the company who owned the buildings. While considering the amount deductible towards rent paid, the Tribunal has taken into account the benefits derivable from the security deposit and the balance outstanding with the owners in connection with the agreement of sale which did not materialise. This deduction made by the Tribunal, according to the assessee, was not proper, the assessee being found liable to pay rent at the rate of Rs, 4,000 per month from August 11, 1972. This question, according to learned counsel for the Revenue, is a question of fact and a reference to this court on that question will not lie. Counsel referred to the decision of the Supreme Court in Upper India Publishing House P. Ltd. v. CIT [1979] 117 ITR 569. The Supreme Court held that the question whether a particular expenditure on rent is excessive and unreasonable or not is essentially a question of fact and does not involve any issue of law. It is observed that, if such a question cannot form the subject-matter of a reference, then the question whether Section 40A(2)(a) of the Income-tax Act, 1961, can have any application becomes academic, unless it is first held that the expenditure on rent was excessive or unreasonable. The first question referred to us is whether the Tribunal was right in law in invoking the provisions of Section 40A(2)(a) to disallow part of the rent payments in the light of the finding that the assessee had the liability to pay rent from August 11, 1972, at the rate of Rs. 4,000 per month. In short, the question is whether the expenditure on rent is excessive and unreasonable. That has been held by the Supreme Court to be essentially a question of fact. Following the decision of the Supreme Court, we decline to answer this question.
Question No. 3 : This question was referred at the instance of the Revenue. The assessee claimed deduction of an amount of Rs. 78,710 towards rent for the period from August 11, 1972, to March 31, 1974. The Tribunal allowed deduction for this period at the rate of Rs. 3,250 per month. The contention of the Revenue appears to be that the Tribunal was not right in allowing deduction of rent for the entire period from August 11, 1972, to March 31, 1974, against the income chargeable for the assessment year 1974-75 corresponding to the previous year ending on March 31, 1974. On August 11, 1972, the company had agreed to purchase the buildings occupied by them. Considerable portion of the sale consideration was also paid before the stipulared date. The sale did not materialise on account of the failure of the purchaser to pay the balance consideration. As per the terms of the agreement, the purchaser was liable to pay monthly rent at the rate of Rs. 3,000 from the date of default up to the date of completion of sale in case default was made by the purchaser in completing the sale on the date fixed. Such payment was to be made as per the stipulation contained in the rent agreement dated January 3, 1970. After the agreement fell through, a subsequent agreement was entered into between the parties on December 22, 1973, by which the owners agreed to claim monthly rent at the rate of Rs. 4,000 from August 11, 1972, and the company agreed to treat the amount of Rs. 2,71,228.40 paid by them as rent deposit from August 11, 1972. Adjustment of the rent payable from August 11, 1972, to November 30, 1973, was made first. The arrears of rent payable from December 1, 1972, was agreed to be adjusted from out of this amount till the balance amount was wiped off. The Tribunal allowed deduction of rent for the entire period from August 11, 1972, to March 31, 1974. The Revenue challenges the legality of the deduction for the entire period against the income chargeable for the year ending March 31, 1974.
5. Section 256(1) of the Income-tax Act, 1961, enables the assessee or the Commissioner to require the Appellate Tribunal to refer to the High Court any question of law arising out of such order. A question of law can be said to arise out of the order of the Tribunal only if it is dealt with by the Tribunal after it is raised before the Tribunal but not decided by it. A question of law which has not been raised before the Tribunal and not dealt with by it in its order cannot be said to be a question arising out of the order even if, on the facts stated, the question may arise. The question whether the rent for the entire period from August 11, 1972, to March 31, 1974, is liable to be adjusted or not does not arise out of the order of the Tribunal. That question is not seen to have been raised before the Tribunal nor considered by it.
6. While considering the identical provisions contained in the Indian Income-tax Act of 1922, the Supreme Court in New Jehangir Vakil Mills Ltd. v. CIT [1959] 37 ITR 11, held that the scope and subject-matter of the reference under Section 66(2) is co-extensive with that of the reference under Section 66(1) of the Income-tax Act and the High Court has no power or jurisdiction under Section 66(2) to travel beyond the ambit of Section 66(1). The same question was considered by the Supreme Court again in CIT v. Anusuya Devi [1968] 68 ITR 750. It was held that the High Court may decline to answer a question of fact or a question of law which is purely academic or has no bearing on the dispute between the parties or though referred by the Tribunal does not arise out of its order. The Supreme Court further observed that there is no ground for restricting that power when, by an erroneous order, the High Court has directed the Tribunal to state a case on a question which does not arise out of the order of the Tribunal. It is held that the High Court is not bound to answer the question without considering whether it arises out of the order of the Tribunal, whether it is a question of law, or whether it is academic, unnecessary or irrelevant. That this court, in the judgment in the original petition filed by the Revenue, has directed the Tribunal to state a case on the question and thereafter to refer question No. 3 to this court for a decision thereon is no reason to hold that this court is bound to answer that question. Since question No. 3 does not arise out of the order of the Tribunal, we decline to answer that question.
Question No. 2 : This question arises from the observation of the Tribunal that, after December 31, 1974, the benefit would be restricted to the non-payment of interest by the owners on the deposit of Rs. 50,000, i.e., Rs. 500 per month as the advance rental would have been liquidated by then and the further observation that what, if any, is the disallowance to be made in later years was left open. According to the assessee, the Tribunal has erred in deciding and declaring the allowable deduction on account of the rent for the period even beyond March 31, 1974. Under Section 4 of the Income-tax Act. The subject of charge is the income of the previous year and each previous year is a distinct unit for the purposes of assessment. The previous account of the liabilities or losses incurred before or after the relevant previous year are immaterial in assessing the profits of that year. In the present case, the Tribunal was concerned only with the profits and gains for the assessment year 1974-75 and not profits and gains and liabilities, if any, after March 31, 1974. The Tribunal has, therefore, erred in its observation that the question of disallowance to be made in later years in respect of the benefit derivable by way of interest by the owners on the deposit of Rs. 50,000 was left open.
Question No. 2 is answered in the affirmative, i.e., in favour of the assessee and against the Revenue. We decline to answer questions Nos. 1 and 3.
7. A copy of this judgment under the signature of the Registrar and the seal of the court shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.