Income Tax Appellate Tribunal - Delhi
P.S.B. Finance Investment Ltd. vs Inspecting Assistant Commissioner on 22 June, 1990
Equivalent citations: [1990]35ITD9(DELHI)
ORDER
M.C. Agarwal, Judicial Member
1. This is an assessee's second appeal arising out of its order for asst. year 1982-83.
2. We have heard the learned counsel for the assessee and the learned Departmental Representative and have perused the papers placed before us.
3. The first ground relates to a disallowance of Rs. 3,17,126 alleged to be an expenditure incurred by the assessee by way of payment of commission/service charges to one M/s Hemkunt Chemicals Pvt. Ltd. for arranging the sale of commercial space held by the assessee in a building proposed to be constructed by M/s Skipper Construction Pvt. Ltd. and to be known as Jhandewalan Towers. The ITO disallowed the assessee's claim as he was of the view that M/s Hemkunt Chemicals Pvt. Ltd., did not render any services to the assessee. In coming to this conclusion the ITO took note of (i) that Hemkunt Chemicals Company was not a property broker; (ii) it was a company ofSardar Inderjit Singh group to which the assessee belonged; (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.DamyantKaur, the wife of the said Inderjit Singh, held 830 shares in that company. Harkishan Lal; brother of the said Inderjit Singh jointly with Smt. Damyant Kaur held 2251 shares. Mrs. Mohini Devi, the wife of Harkishan Lal held 50 shares. The total number of shares of this company as shown in the list was 9445. Thus a substantial part of the shares i.e. more than 1/3rd was held by persons closely connected with the assessee's chairman Sardar Inderjit Singh. Therefore, the observation made by the ITO that Hemkunt Chemicals was a company of the same group stands substantiated.
6. The ITO has also observed that it was not the business of Hemkunt Chemicals to arrange, purchase and sale of commercial spaces on commission basis. According to him, it was a company engaged in the manufacture of chemicals, marble dust, etc. To prove that the Hemkunt Chemicals could act as a property 'broker apart from the evidence about the transaction in question, the only assertion made on behalf of the assessee was that Hemkunt Chemicals had constructed a building of its own in Greater Kailash. That in our view cannot make Hemkunt Chemicals a property broker. As regards their role in arranging the sale of the assessee's commercial space, we would be dealing with the necessary evidence shortly afterwards.
7. Now we come to the question whether Hemkunt Chemicals rendered any services to the assessee in arranging the sale of commercial space held by the assessee in a building that was to be built and named as Jhandewalan Towers. For this the only material placed by the assessee on record consists of a few letters. The first letter is one dated 1-2-81 from Hemkunt to the assessee (page 21) by which Hemkunt offered its services for arranging the sale of space in Jhandewalan Towers on a commission of 1%. Then there is a letter dated 3-2-81 from the assessee to Hemkunt accepting the offer and stating that it was desirous of selling approximate 45,000 sq. ft. area (page 22). Then there is a letter dated 15-2-81 from the assessee to Hemkunt giving details of the space held by the assessee. In this letter the assessee mentioned the particulars on which it would be willing to sell the space on various floors. The total consideration demanded by the assessee was Rs. 3,18,55,580 for 45918 sq. ft. or space. The letter states "You shall purchase and we shall sell to you the balance 44918 sq.ft. of commercial space". It further states "You may buy these spaces in your own name orin the nameofyournomineesinoneormorelots". Then 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 in Jhandewalan Towers from M/s P.S.B. Finance and Investment Ltd." The price mentioned is Rs. 3,17,12,586 (page 26). Onthe same date i.e., 15-12-1981, the assessee sent a bill (page 27) 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 dated 6th December, 1981 from 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 dated 30-5-1981, 8-4-1981 and 17-4-1981 purporting to be from property dealers and addressed to Hemkunt Chemicals offering theirservices for the sale of space in question. These too carry little weight particularly when no supporting material has been produced. At page 107 is a letter dated 4-1-1981 from one Bharat Alums & Chemicals Ltd., to Hemkunt enquiring if Hemkunt was constructing any building in Jhandewalan, Nehru Place or Rajendra Place and expressing their interest in buying spaces in those localities. This letter too does not lend any credence to the assessee's case.
9. As is evident the major shareholders of Hemkunt were the close relatives of Sardar Inderjit Singh, the chairman of the assessee. From the correspondence it is clear that ultimately the assessee surrendered the space to the builder M/s Skipper Construction Company itself from whom the assessee had purchased the same. Thus, according to the assessee's own showing Hemkunt could not find any other buyer for the same. Skipper Construction Company was also one in which the assessee's chairman Inderjit Singh was interested. A list of the shareholders of Skipper Construction was produced by the learned counsel for the assessee and is found at page 21 of the paper book which shows that Darshanjit Singh, Tajbir Singh and Harpreet Singh hold half of the share holding of that company. The learned counsel for the assessee told us at the hearing that these three persons are the sons of Sardar Inderjit Singh. Thus Sardar Inderjit Singh was interested in all the three parties in question. It means that if the space was to be surrendered to the Skipper itself there could be no need of a broker. That Skipper and the assessee were acting in close collaboration with each other in respect of the proposed building Jhandewalan Tower is evident from a copy of the resolution of P.S.B. Finance & Investment Ltd., placed at page 129 of the paper book. This resolution reads as under :
The Chairman informed that the D.D.A. is holding an auction on 8th October, 1980 for commercial plot in Jhandewalan, New Delhi. M/s Skipper Construction Co. (P.) Ltd., would be offering a bid to buy the plot. After detailed discussion, it was decided that the company may purchase commercial space in this building. S. Gurbhajan Singh Man was authorised to negotiate and finalise the deal for purchase of such commercial space and to execute agreements etc., for the same on behalf of the company. The following directors being interested, 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 Rs. 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'sgenuine 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 Chemicals and Skipper Construction Co. to find out if any services were actually rendered by Hemkunt Chemicals in the matter. When an enquiry into the genuineness of the expenditure was undertaken, the assessee could itself offer the connected people for examination or could have filed their affidavits. The IAC(A) could certainly have summoned such people. Since a substantial amount is involved, we are of the opinion that further enquiries are necessary before it can be concluded whether the alleged expenditure was an actual expenditure and whether it was laid out wholly and exclusively for the assessee's business. We, therefore, set aside the findings of the authorities below on this point and delete the disallowance of Rs. 3,17,126 for the present. We direct the ITO/IAC(A) to re-examine this claim of the assessee in thelight of our observations made above and re-decide the issue.
11. The next ground raised in this appeal is about the disallowance of a sum of Rs. 45,000 paid as rent in respect of a building newly hired by the assessee. This claim has been disallowed by the ITO on the ground that the accommodation in respect of which the rent was paid was not used for business purposes. The CIT(A) has upheld this disallowance and his order shows that he has doubted the assessee's contention that the said accommodation was taken on rent from 15-11-1981.
12. The assessee took on rent accommodation in a building at L-40, Connaught Circus, New Delhi w.e.f. 15th November, 1981 on a montly rent of Rs. 30,000. The aforesaid sum of Rs. 45,000 is the rent for the period 15-11-1981 to31-12-1981. The assessee took the said building on rent for shifting its office. Before the office could be shifted to this building some repairs and alterations etc., are said to have been made to the tenanted accommodation to make it fit for the assessee's use and, therefore, the office could not be shifted to the accommodation in question right from 15-11-1981. The learned counsel for the assessee contended that when an accommodation is taken on rent for accommodating an office or a shop, some time is always spent for making the accommodation suitable to one's need and that, therefore, the time spent on the repairs etc., of the tenanted accommodation should be treated as use ofthe building for assessee's business. The learned counsel further contended that although a formal lease deed was executed between the parties on the 26-4-1982, that could be no reason for doubting that the accommodation had been taken on rent by the assessee from 15-11-1981 particularly 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 from 15-11-1981, 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 present case, the assessee was already in business and after taking the accommodation in question on rent it had to make it suitable for its own needs. The user of the building in question during the period of repairs or renovations would, therefore, amount to use for business purposes and in our view, the rent paid for that period has to be allowed as a business expenditure. We would, therefore, accept this contention ofthe assessee and direct the ITO to allow the expenditure of Rs. 45,000 as a business expenditure.
15. The third ground raised in this appeal is about an expenditure of Rs. 2,55,250 claimed to be on the repairs of the tenanted accommodation in question at L-40, Connaught Circus, New Delhi. The said expenditure is detailed in a bill dated 28-12-1981 which we would reproduce below for proper appreciation oftheextent and nature of expenditure :
Particulars Amount (Rs.) 1. Demolition of walls Lump sum 25,000 2. Providing Steel Girders in places " 30,000 3. Repair of flooring " 15,000 4. Repairs of toilets @ Rs. 15,000 30,000 2 Nos. Toilets including providing for WC, Wash Basin, Glazed tiles up to height of 7' and marble flooring, C.P. fitting of standard make. 5. Provide & Fixing one No. @ Rs. 10,000 10,000 Pantry including providing of Marble counter, Glazed tiles up to 7 ft. height, sink & C.P. Fitting of standard make. 6. Providing & Fixing of ceiling of Plaster of Paris 1500 sq. ft. @ Rs. 20 per sq. ft. 30,000 C/O -------- 1,40,000 7. Providing & Fixing Rs. 15 Nos. Power Pts. @ 125 1,875 50 Nos. Light Pts. @ 75 3,750 20 Nos. Fan Pts. @ 75 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. with frame made of Kail wood 6MM Commercial ply. 18,000 Providing & Fixing Teek/Rosewood Panelling 1650 sq. ft. @ 15 per sq. ft. 24,750 -------- 65,250 C/O 2,30,250 9. Painting/Polishing Lump sum 25,000 --------- Total 2,55,250 ----------
16. The learned counsel for the assessee contended that the building on which the amount in question has been spent does not belong to the assessee and the assessee is only its tenant for a short period and therefore, this expenditure does not confer any lasting benefit on the assessee. This expenditure, therefore, according to the learned counsel, has to be treated as revenue expenditure. The learned Departmental Representative on the other hand, contended that the tenancy of the assessee is for an indefinite period and, therefore, the heavy expenditure on the improvement of the tenanted accommodation brings about a lasting benefit to the assessee and, therefore, the expenditure has to be treated as a capital expenditure. He also relied upon Section 32(1A) of the Income-tax Act, 1961 which provides that where the business is carried on by an assessee in a building not owned by him and he incurs a capital expenditure in respect of that building, the assessee would be entitled to depreciation and also to an allowance when the structure or work is sold or discarded.
17. It is, therefore, necessary first of all to see the nature of the tenancy. A copy of the lease deed executed between the parties i.e.,Hemkunt Chemicals Pvt. Ltd., the lessor on the one hand and the assessee, the lessee, on the other is placed at pages 33 to 37 of the paper book. The relevant clause dealing with the duration of the lease is as below :
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 fora 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 expenditure on the improvement of the building. We, therefore, hold that the lease in favour of the assessee is for an indefinitely long period.
18. The learned counsel for the assessee relied upon certain rulings to show that such expenditure is treated as revenue expenditure for the purposes of determination of the income of an assessee. He referred to the case of CIT v. J.K. Industries (P.) Ltd [1980] 125 ITR 218 (Cal.). In that case an expenditure of Rs. 9,206 was incurred on renovation of office premises which included the cost of panelling the walls with plywoods and the cost of a notice board and book case. It was held by the Hon'ble Calcutta High Court that this was a revenue expenditure. In that case, the Tribunal had held that the wooden panellings did not last long and as such were not an enduring asset. This finding was not challenged by the revenue and, therefore, the Hon'ble High Court upheld the Tribunal's decision that it was a revenue expenditure. This judgment, therefore, does not laid down any principle which may properly be applied to the facts of the present case.
19. Reliance was also placed on CIT v. Kisenchand Chellaram (India) (P.) Ltd. [1981] 130 ITR 385 (Mad.). In this case the assessee had taken on rent three buildings and had spent Rs. 51,070 on the construction of wooden partitions and wooden ladder for going to the Mezzanine floor as well as on wooden panellings of the shop to prevent moisture. Another sum of Rs. 26,362 was spent for making four cabins in another building. The Tribunal had held that the expenditure was only by way of repairs to the rented building. The Hon'ble High Court also observed that there was nothing to show that there is any long lease in respect of these properties so that the assessee would have the benefit of this expenditure over a reasonable length of time. It was on this basis that the Tribunal held that the expenditure was of a revenue nature and the Hon'ble High Court approved it. In the case before us as mentioned just now there is a lease for an indefinitely long period.
20. Reliance was also placed on a judgment of the Bombay High Court in Nila Products Ltd. v. CIT. In that case the assessee had taken a shed on lease for a period of less than 12 months and had made certain renovations and alterations. It was held that the expenditure was of a revenue nature.
21. The learned counsel for the assessee also cited case of CIT v. Madras Auto ServiceLtd. [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 counselfor the assessee also 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 the period when Section 32(1A) was not there. Further the assessee was in occupation of the premises for a long time past on a meagre rent of Rs. 340.25 per month and the total area occupied by it was 5405 sq. ft. In the case before us the expenditure has been incurred prior to actual occupation of the tenanted premises for business use and the tenancy, as already observed, is for an indefinite period.
23. Reliance was also placed on CIT v. Mehta Transport Co. [1986] 160 ITR 35 (Guj.) in which an expenditure of Rs. 16,748 on the construction of a loft in the tenanted premises was held to be revenue expenditure. The loft was constructed to accommodate the staff of the assessee as the accommodation in the tenanted premises fell short of its requirements.
24. On the other hand, the learned Departmental Representative placed reliance on Hotel Diplomat v. CIT [1980] 125 ITR 781 (Delhi) in which it was held that expenditure for construction of additional bathrooms in the tenanted premises was a capital expenditure. The assessee was a partnership firm whose partners were the co-owners of the building in which the said bathrooms were constructed and the firm had taken the building on lease from the said co-owners. The firm had let out the building to an embassy to suit whose requirements the bathrooms were built. The learned Departmental Representative also relied on a ruling in Uttar Bharat Exchange Ltd. v. CIT [1965] 55 ITR 550 (Punj.). In that case the assessee had taken on lease for a period of two years, with an option for renewal at the end of the period, the first and second floors of a hotel building. The assessee spent Rs. 17,197 for erecting sheds, partitions, etc. The Hon'ble Punjab High Court, having jurisdiction over Delhi in those days, held that the expenditure was essentially one of a capital nature and its nature was not changed by the fact that the lease was in the first instance only for a period of two years.
25. In the case before us, the tenanted premises consists of 2000 sq. ft. covered area and the amount spent on its improvement is Rs. 2,55,250, i.e., a little more than Rs. 125 per sq. ft. That shows the extent of improvement. The details of the expenditure as reproduced above would show that it is not a case of ordinary repairs but the accommodation has been extensively improved so much so that the alleged repairs of a single toilet 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 leasehold right or the right of occupation in thebuilding. 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 contended that painting and polishing expenditure of Rs. 25,000 should be treated as the revenue expenditure. Since this expenditure has been incurred for the first time for painting and polishing, inter alia, of the wooden partitions and panellings, the expenditure constitutes only a portion of the initial cost of those assets and it cannot be separated and treated as a revenue expenditure. If an asset of this type already existing and in use is polished and painted, the expenditure would certainly be of a revenue nature but not where such initial expenditure form part of the cost of an asset.
27. For the above reasons, we hold that the entire expenditure of Rs. 2,55,250 was of a capital nature and was rightly disallowed by the authorities below.
28. The next ground relates to disallowance of a sum of Rs. 1,450 out of legal expenses. The total expenditure under this head was Rs. 6,450 paid to M/s Chander Gupta Associates. Out of this Rs. 2,950 represented professional fees and Rs. 3,500 as travelling expenses. The learned ITO disallowed the excess over Rs. 5,000 in terms of Section 80W of the Income-tax Act, 1961 without mentioning that the expenditure related to any proceedings before any income-tax authority. The learned CIT(A) confirm the disallowance under the impression that it was an expenditure in connection with income-tax proceedings although it was contended before him that the expenditure was incurred in connection with the legal proceedings in getting the name Punjab & Sind Bank Ltd. changed to the present name of the assessee. The learned Departmental Representative did not deny the assertion and we would, therefore delete the disallowance of Rs. 1,450.
29. The next ground relates to disallowance of Rs. 2,500 out of miscellaneous expenses. The ITO has observed that a sum of Rs. 31,309 had been shown as expenditure under the head' Others'. No details were furnished for the expenses and the ITO, therefore, disallowed a sum of Rs. 2,500. This has been confirmed by the CIT(A). According to the learned counsel, the expenditure consisted mainly of salary paid to Deepak Mehta, who was taken on deputation to look after the assessee's affairs after its banking business was nationalised. The details are found at pages 9 and 10 of the paper book which is a copy of the written submissions made before the CIT(A). The learned Departmental Representative did not question the details and we find no justification for the disallowance of Rs. 2,500, which we hereby delete.
30. The last ground taken up in this appeal challenges the charging of interest Under Section 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 on 15-6-1981 estimating 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
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Rs. 3,97,083
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Later a revised estimate was filed on 23-12-1981 estimating the total income at Rs. 20 lakhs and the tax payable on the basis of this estimate amounted to Rs. 13,32,500. No amount of advance tax was paid in pursuance of this estimate. However, later, before the assessment could be made, the assessee paid Rs. 8,41,100 as below :
30-5-1983 Rs. 1,00,000
2-6-1983 Rs. 2,00,000
2-6-1983 Rs. 2,00,000
6-7-1983 Rs. 3,41,000
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Rs. 8,41,100
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The ITO has charged the aforesaid interest on the deficiency in payment of advance-tax.
31. The learned counsel for the assessee contended that the assessee had duly filed an estimate of advance tax on 23-12-1981 though it failed to pay within the prescribed time the balance of the tax above Rs. 3,97,083. According to the learned counsel interest Under Section 215 of the Act can be charged where the tax paid by an assessee on the basis of his own estimate falls short of the required percentage of assessed tax but not where the assessee having filed an estimate fails to pay tax in accordance therewith. According to the learned counsel, where the assessee having filed an estimate does not pay tax in accordance therewith the remedy of the revenue lies in treating the assessee in default and taking proceedings for recovery. For this, thelearned counselrelied upon a judgment of the Calcutta Bench 'A' of this Tribunal in Bengal Electric Lamp Works Ltd. v. ITO [1984] 8 ITD 349, in which a similar view was taken. We are in respectful agreement with the views expressed in that case but that does not help the assessee. In this case, the assessee had paid two instalments of advance tax on 7-8-1981 and 1-10-1981 amounting to Rs. 1,97,083 and Rs. 2 lakhs respectively in pursuance of its estimate filed on 15-6-1981. The tax so paid was apparently less than 83 1/3% of the assessed tax and, therefore, interest was chargeable in accordance with Section 215 of the Act. It is important to note that it is the revised estimate filed on 13-12-1981 in 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 Under Section 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 dated 23-12-1981. In our view, therefore, interest Under Section 215 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 Under Section 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 contended that while framing the assessee's assessment for the following year i.e., asst. year 1983-84, the ITO disallowed a sum of Rs. 85,450 in respect of interest on bank overdrafts for the reason that this amount related to the period relevant to asst. year 1982-83. This point does not arise out of the orders of the authorities below. The learned counsel for the assessee admitted that an application Under Section 154 of the Act has already been moved before the IAC(A) to make the necessary adjustments. There is, therefore, no justification for us to entertain this new ground in present appeal. We accordingly reject the assessee's prayer to that effect.
34. In the result, the appeal stands partly allowed as discussed above.
Narayanan, A.M.-I have read the order of my learned brother. I would add the following.
2. I find that the disallowance of Rs. 3,17,126 (commission claimed as deduction as paid to M/s. Hemkunt Chemicals Pvt. Ltd.), has been made without making certain basic enquiries. As observed by my learned brother suspicion can never take the place of evidence, direct or circumstantial. My learned brother has sent the matter back to the Income-tax Officer for a fresh enquiry. I fully agree with this. I would notice here some features because of which we find it necessary to send the matter back to the Income-tax Officer even though suspicion did arise.
3. The Income-tax Officer observed in his order of assessment as under :-
H.C.L. is a private limited company and is assessed with the ITO, Company Circle-II, New Delhi. As stated above the company is engaged in the manufacture of chemicals, Marble dust, Nails & screws and in other trading activities. It also constructed a Building at B-83, Greater Kailash, New Delhi. HCL's Issue & subscribed paid-up capital at the end of 1980-81 was Rs. 8,92,500. Smt. Damyant Kaur wife of S. Inderjit Singh, S. Darshanjit Singh and S. Tejbir Singh sons of S. Interjit Singh and other close relatives of S. Inderjit Singh are promoters of HCL. Alistof theshare holding of this company as on 31-12-1981 (List placed at pages 295-341) revealed that Smt. Damyant Kaur was holding 830 shares of Rs. 10 each in her own name and 2251 shares in the joint names of herself and Shri Harkishan Lal. HCL is a company belonging to S. Inderjit Singh Group of cases arid this ground owns companies under the names of 'Skipper' and'Hemkunt'. 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 on 31-12-1981. 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 specifically brought to the notice oftheIAC(Asst.) by letter dated 16-3-1985 (p. 65 of the Paper Book). [The LAC (Asst.) accepted this claim but the Commissioner (A) recorded an adverse view].
(iv) The assessee company is a public limited company with the total number of shares being 9,000. The commission paid to HCL was for negotiating the sale in question. HCL was never summoned by the authorities and examined on this aspect. Disallowance was based on purely subjective approach and suspicion.
4. Apparently, the 2251 shares of Sh. Harkishan Lal had been mixed up with Smt. Damyant Kaur without any justification. At any rate there is no material on record to hold that Smt. Damyant Kaur was at any time the beneficial owner of these shares. See p. 65 of the Paper Book. In other words the Income-tax Officer's finding that HCL was a company of the same group requires reconsideration to say the least. Nor does the fact that HCL is engaged in the manufacturing of chemicals preclude by itself services having been rendered by HCL for which it earned commission. HCL may put through even one such transaction especially if within the object clauses of its memorandum and commission paid therefor has to be allowed. That would depend on the material on record. The commission cannot be disallowed simply on the suspicion that a chemicals manufacturing company cannot put through a property deal.
5. Evidence was produced by the assessee by way of certain correspondence entered into by the parties concerned for the sale of commercial space in Jhandewalan Tower. These letters are referred to in paragraphs 7 and 8 of my learned brother's order. In my opinion this evidence required a closer look before rejection. It cannot be assumed that all the parties had entered into a conspiracy to help the assessee in getting a deduction. Such evidence cannot perhaps be rejected on mere suspicion. It could be rejected only if that was indicated after the said parties were questioned. Thus the onus shifted to the Income-tax Officer and this onus remained undischarged.
6. Perhaps it cannot be asserted that HCL was a company of the same group as the assessee, if we leave out the 2251 shares held in the joint names of Harkishan Lal and Damyant Kaur. Then the question arises, why pay brokerage to an intermediary, when 3 sons of Sardar Inderjit Singh held about 50% of the shares of Skipper Construction Co. ? 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 fact 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. 2,55,2,50 that was claimed by the assessee to have been spent on the repairs of the tenanted accommodation was rightly disallowed as capital expenditure. The details of this expenditure have been given in paragraph 16 of my learned brother's order and there is no need to reproduce them. In my view the expenditure is allowable in view of the authority of the Delhi High Court in Instalment Supply (P.) Ltd.'s case (supra). In that case the assessee was a private company. Its business was as agents for sale of Tata Mercedes trucks as well as hire-purchase finance. It had no premises of its own. It took on lease certain premises which had been occupied by it for over 25 years and for which it was paying at the relevant time a rent ofRs. 340 per month. It spent Rs. 47,186 during the previous year relevant for the assessment year 1965-66. Out of this it capitalised a sum of Rs. 19,399 and claimed the balance of Rs. 37,787 as revenue expenditure. The details of this expenditure were as under :-
Rs.
(i) Sanitary fittings 4,257.61
(ii) Designing & supervision 750.00
(iii) Layout drawings & sketches 300.00
(iv) Consultation fee for structural work 4,000.00
(v) Flooring 10,993.43
(vi) Cement 635.79
(vii) Painting 791.06
(viii) Wood work 5,417.31
(ix) Masonry work 3,513.82
(x) Electrical fittings 6,933.92
Miscellaneous 194.66
-----------
37,787.59
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The renovation consisted of additional and modified construction of a large number of small rooms into one big hall more suited for office purpose and the expenditure included consultation fees to a structural engineer who was required to consider the safety of the whole building of which the premises let to the assessee was only a part at the time of removal of walls or for supporting the roof 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. The Delhi High 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 efficiently and hence the expenditure can be regarded as revenue expenditure.
(iii) The expenditure on the repairs of the building which ultimately belongs to the owners and not to the assessee cannot also said to be in the nature of capital expenditure. The structural changes made by the assessee and the conversions of small rooms into one big hall cannot be in the nature of creation of a capital asset.
(iv) The assessee did obtain an advantage in a commercial sense by redesigning the premises and providing better fittings, better material and marble flooring. The advantage obtained was for the purposes of the business of the assessee and not for the acquisition of a capital asset. No doubt an expenditure of Rs. 4,000 as consultation fee for structuralwork was incurred but it was incurred by the assessee in view of the structural changes made in the tenanted premises, i.e., smaller rooms converted into one big hall more suited for office purposes necessarily involving removal of certain walls. The engineer was obliged to consider the safety of the whole building following such removal of walls or for supporting the roof by additional pillars.
(v) By relaying the marble floor at a cost of Rs. 10,993 the assessee did get a benefit. But that benefit was for attracting more customers and for facility in the trading operations of the assessee. So was the case with the amounts spent on wood-work, electrical fittings and sanitary fittings. The old asset was remodelled for commercial expediency and the expenditure incurred therefor would be revenue expenditure. It would not be capital expenditure as the premises did not belong to the assessee.
(vi) The argument for the department was that the term "repair" means (Section 30) bringing the premises to its original shape which had deteriorated because of wear and tear or damage of the original condition: it cannot mean structural additions or alterations. However, the language of Section 30(a)(i) and 30(a)(ii) has to be kept in view. A tenant is entitled to the deduction of amount spent on account of the cost of the repairs to the premises if that liability is his. If the amount is spent by the assessee otherwise than as a tenant, the amount paid by him only as "current repairs" is allowable. The latter provision applies to assessee occupying the premises otherwise than as atenant, i.e., as an owner ormortgagee in 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 Delhi on 15-11-1981. Acopy of the Lease Deed is at pp. 33-37 of the Paper Book. The deed is dated 26-4-1982. 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, from 15-11-1981 for an initial term of four years at a rent ofRs. 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, that the lessee may erect temporary partitions for making any cabins and/or may remove or alter the walls, fittings, doors and windows, etc., at their own cost. (Clause 9).
(b) To deliver the said premises at the end or on the termination of the said terms, together with the lessors, fittings and fixtures in such repairs or condition as is consistent with the covenants and conditions of this arrangement (Clause 11).
(c) The lessors have already got white-washed and painted the demised premises before occupation. They shall also white-wash and paint the premises every alternate year (Para II, Clause 5).
(d) Day-to-day repairs such as fuses, leakages of water-taps, shall be done by the lessee at their own cost, major repairs such as leakages in electricity, sanitary, water pipes, or cracks etc. will be attended to by the lessors at their cost immediately on notification (Para II, Clause 6).
(e) If the lessee was so desirous the lease shall be renewed for a further term of 4 years provided the lessee gives 3 months' notice in writing to the lessor of such intention. Thereupon a fresh lease of the demised premises for a further period of 4 years from the date of expiry of the first lease deed shall be granted on the same terms and conditions except that the monthly rent shall be enhanced by 15% over the rent being paid in the previous lease period. "In this way the lease will be for a continuing period." (Clause No. 1 of Para III).
10. On facts it was pointed out to the IAC (Asst.) that the expenditure had been incurred on various items such as 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, main panel boards; intercom points, providing and fixing of panelling partitions; and painting and polishing. It was specifically brought to the notice of the IAC (Asst.) (p. 38 of the Paper Book) that the premises taken over were in a dilapidated condition. The roof was leaking. The assessee could not carry on business under a leaking roof. The leaking roof was repaired and the entire premises were overhauled in the interest of the business which was paramount. Without such repairs, the assessee company could not have carried on its business. It was further pointed out that initially the walls of the said office premises were 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 capital expenditure. This argument does not appeal to me. The assessee does not own the premises. It had a lease and that lease was only for four years. There was no doubt a stipulation in the lease deed that if the assessee wanted it, it could have a further lease again but for only 4 years and at 15% higher rent. Even assuming the assessee had got a lease right for 8 years, it would be difficult to describe the benefit that the assessee got as enduring. It is perhaps more correct to hold (in the words of the Delhi High Court) that the benefit or the advantage obtained by the assessee from the above expenditure was for the purposes of business of the assessee and not for the acquisition of a capital asset, i.e., the expenditure was so related to the carrying on or to the conduct of the business so as to be regarded as "an integral part of the profit-earning process".
13. There is of course Section 32(1A). This was introduced by the Taxation Laws (Amendment) Act, 1970 with effect from 1-4-1971. It is to the effect that where the business or profession is carried on in a building not owned by the assessee but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to and by way of renovation or extension of, or improvement to, the building then, in respect of depreciation of such structure or work a deduction at the prescribed percentage shall be allowed on the value of the structure or work. I have considered this provision. It appears to represent the desire of the Legislature to make available a certain benefit, also to assessee of a certain class by way of a deduction under the Income-tax Act removing legal restrictions in that regard. Before the assessment year 1971-72 no depreciation was allowable in respect of capital expenditure incurred by an assessee on any asset belonging to a third Party. Section 32(1A) provides an exception to this rule but is confined to buildings only and does not extend to plant, machinery or furniture. The point is, before the assessment year 1971-72, if the authorities found a certain expenditure to be capital expenditure incurred by the assessee on any asset belonging to a third party it had to be disallowed straightaway. No depreciation 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. (supra) 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 (supra) 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] 58I TR 241 (PC), Empire Jute Co. Ltd. v. CIT [1980] 124ITR 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 has already been noted, the advantage or the benefit that resulted was for the purposes of business of the assessee and was not for the acquisition of a capital asset. I would, therefore, allow the expenditure as revenue expenditure.
ORDER UNDER SECTION 255 :
Narayanan, A.M. -A difference of opinion having arisen. We would refer the issue below to the President of the Income-tax Appellate Tribunalfor resolution by a Third Member:-
Whether on the facts and in the circumstances of the case the authorities below were justified in disallowing the expenditure of Rs. 2,55,250 as capital expenditure instead of allowing the assessee's claim that it represented revenue expenditure, allowable as a deduction in computing its business profits for the assessment year 1982-83 ?
ORDER
1. The learned Members of Delhi Bench 'B' have differed in opinion on the following point which is referred to me as a Third Member for my opinion :
Whether, on the facts and in the circumstances of the case, the authorities below were justified in disallowing the expenditure of Rs. 2,55,250 as capital expenditure instead of allowing the assessee's claim that it represented revenue expenditure, allowable as a deduction in computing its business profits for the assessment year 1982-83 ?
2. I have heard the case at length, perused the records, the orders passed by my learned Brothers and after considering the issues involved and the relevant law as enunciated by the Delhi High Court and the Supreme Court, I have come to the conclusion that the view expressed by the learned Accountant Member is reasonable and justified and deserves to be upheld. The learned Judicial Member's order contains the relevant facts over which there is no dispute and I, therefore, refer to them in order to have appropriate appreciation of the issues involved.
3. The assessee is a limited company, engaged in the business of financing and investments. This company came into existence after the nationalising of the Punjab & Sind Bank, by the Government of India w.e.f. 15-4-1980. For the purpose of carrying on business, the assessee company had taken on lease premises at L-40, Connaught Place, New Delhi from M/s Hemkunt Chemicals Pvt. Ltd., under a lease agreement dated 26-4-1982. M/s Hemkunt Chemicals Pvt. Ltd., had taken 2,400 sq. ft., of area on lease from M/s Seth Properties, a partnership concern assessed at Bombay. It was out of that lease that 2,000 sq.ft. of area was leased out to theassessee w.e.f. 15-11-1981 on arent 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 Nos.) : Rs. 30,000
5. Providing & fixing of one No. Pantry
including providing of marble counter,
glazed tiles up to 7 ft. height, sink &
C.P. fittings of standard make : Rs. 10,000
6. Providing & fixing of ceiling of plaster
of paris 1500 sq. ft. : Rs. 30,000
7. Providing & fixing of power points,
telephone points, main panel boards etc. : Rs. 25,000
8. Providing fixing of panelling partitions
etc. : Rs. 65,250
9. Painting/Polishing : Rs. 25,000
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Rs. 2,55,250
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The assessee claimed that this amount incurred as above should be allowed as a deduction towards repairs. The IAC (Asst.) on enquiries found that the assessee had carried out extensive repairs by demolishing the old structure and old walls and, therefore, the entire expenditure on reconstruction or remoulding the building fell outside the purview of repairs within the meaning of Section 30(a)(i) of the Income-tax Act. Relying upon the judgment of the Hon'ble Punjab &Haryana High Court in the case of Uttar Bharat Exchange Ltd. (supra), the entire claim was disallowed by the IAC (Assessment). He also considered whether it could be allowed Under Section 37(1) of the Income-tax Act and held that it being capital expenditure, could not be allowed even under that section.
4. There was then an appeal before the Commissioner of Income-tax (Appeals)-I, New Delhi. He confirmed the view taken by the IAC (Asst.). He, in particular, held that there was an apparent contradictions in the explanations furnished by the assessee before the IAC (Asst.) and before him, that the assessee was not entitled to the deduction, more for the reason 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 a long 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 applying those principles to the facts of the case, came to the conclusion that the expenditure was capital in nature and was rightly disallowed by the authorities below. According to him the expenditure was incurred to improve an asset i.e. the leasehold right or the right of occupation of the building and since the expenditure was incurred for the first time for carrying out extensive repairs, building of partition walls, removing walls, marble flooring, etc., the entire expenditure could not but be treated as capital expenditure. He observed that if the lease had been for a shorter duration, such a heavy expenditure incurred on complete renovation could have been of a revenue nature but since in this case the lease was for an indefinite period, the advantage that enured was of an enduring nature coterminus with the indefinite duration of the lease and, therefore, the expenditure could only be of capital in nature. This was the main conclusion drawn by the learned Judicial Member after review of the case law relied upon by the learned counsel for the assessee before the Tribunal.
6. The learned Accountant Member held to the contrary. According to him, the expenditure was allowable in view of the authority of the Delhi High Court in the case of Instalment Supply (P.) Ltd. (supra), which is the jurisdictional High Court. After referring extensively to the facts of that case and the principles of law laid down therein, the learned Accountant Member held that the assessee's case fell squarely within the Rule laid down by the Delhi High Court and consequently the expenditure should be allowed as revenue expenditure. He also referred to the terms of the lease which according to him proved the fact that the assessee had to bear the repairs so as to make the dilapidated condition of the building into a habitable place of business suitable to its needs. He laid emphasis on that term of the lease which provided that the assessee has to deliver the said premises at the end or on the termination of the said terms, together with the lessors' fittings and fixtures in such condition as is consistent with the covenants and conditions of this arrangement. Referring to that clause, which according to the Judicial Member gave the assessee the power to continue the lease for an indefinite period, the learned Accountant Member held that this clause only permitted the assessee to use 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 df pans, 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 was introduced by the Taxation Amendment Act, 1970 w.e.f. 1-4-1971 based upon which it was urged that the assessee was only entitled to depreciation and the capital expenditure incurred and not for the allowance of the whole of the amount as revenue expenditure. Dealing with this argument, the learned Accountant Member pointed out that before the introduction of the section the law was that assessee who takes on lease business premises was not entitled to any depreciation on the amount spent for renovation or extension or improvement and that it was to provide certain benefit to the assessee by way of deduction, removing the legal restrictions, that this provision was introduced to allow depreciation on the amount of such expenditure and the depreciation must be allowed only when the expenditure incurred was of capital expenditure and if the expenditure incurred was not of capital expenditure, the question of allowing any depreciation would not arise and, therefore, Section 32(1A) could not come in the way of the assessee's claim to allow the exependiture as revenue expenditure. He also discussed about the meaning of the expression "enduring benefit" and following the judgment of the Supreme Court in the case of Empire Jute Co. Ltd. (supra) observed that that was not always the acid test of capital expenditure and in certain cases even that test should break down depending upon expediency of business. Proceeding thus the learned Accountant Member held that the entire expenditure was of revenue nature. Hence the difference of opinion, which was referred to me for my opinion.
8. As I have already mentioned in the beginning of this opinion, I was inclined to agree with the view expressed by the learned Accountant Member. I do not have to refer to the details of the expenditure incurred by the assessee as it is already given above and not to as seen from the learned Accountant Member's order, the purpose for which the expenditure was incurred. A close reading of the orders of the learned Judicial Member and that of the learned Accountant Member revealed to me that the first and foremost basis for the difference of opinion is as to whether the lease is for an indefinitely long period as held by the Judicial Member or for a short duration of 8 years as interpreted by the Accountant Member. The Judicial Member was influenced by that term of the lease agreement which according 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 the lease shall be for a continuing period of 8 years after the lease was expended to 8 years and does not provide that it could be continued even after 8 years. Had it been the intention of the parties to reduce to writing their agreement providing for the indefinite period of leasing the wording of the clause would have been totally different. The reference to continuing the period in the above covenant refers only to the period of 8 years and not to any period subsequent thereto. "Continuing period" is different from "continuing the period of the lease even after 8 years". The learned Accountant Member, therefore, seemed to me to be right in his observation that the interpretation of this clause does not give the lessee the lease for an indefinitely long period. This seemed to be the premise for the difference between the learned Members. Of this, I am inclined to resolve in favour of the view expressed by the learned Accountant Member. I am unable to think that by exercising the power reserved under clause, the lessee shall be able to continue the lease ever thereafter. It may be that in actual conduct the lessee was allowed to occupy the premises even after the period of 8 years that I am not aware of nor is it the matter on which there was any debate or difference of opinion. The bare interpretation of this covenant according to me does not vest the lessee with the power of extending the Iease beyond 8 years. Therefore, the advantage that accrued to the assessee by incurring this expenditure could not be said to be of enduring nature as is available for an indefinite period.
The next limb of difference of opinion is about the quality and nature of expenses. The details of the expenditure incurred show that it was on a variety of items namely demolition of walls, providing of girders, repairs of flooring, repairs of toilets, providing ceiling with plaster of paris; fixing power points, telephone points, painting and polishing. This kind of expenditure is common to any building which is in a dilapidated condition. But what is to be seen is after the expiry of the period of lease, the lessee has to leave the premises by leaving the repairs etc. along with fixture and fittings to the lessor. The assessee is thus neither the owner of the building nor of the fittings or fixtures, because all of them have to revert to the lessor after the expiry of the term of 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 (supra) 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 while leaving the fixed capital untouched the expenditure would be on revenue account even though the advantage may endure for an indefinite future. The test of enduring benefitis, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case, (underline by us). The enunciation of the law on the subject by the Supreme Court show that even though the advantage that accrues to an assessee on the incurring of an expenditure may endure for an "indefinite future", still if the advantage consisted merely in facilitating the assessee's business to be carried on more efficiently or profitably without leaving the fixed capital untouched, the advantage would be of revenue nature. It is no more the law of the land that the test of enduring benefit as considered by the English Courts and followed by our Courts in the earlier point of time is the test to be applied and that in any case it should not be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. In this case, in my opinion, the lease deed not having provided for an indefinite period of lease and the expenditure was to bring the leased premises into a workable position by incurring expenditure on strengthening the walls, roofs etc. and to provide such necessities as are needed to carry on business would not be said to be of an enduring benefit.
9. Further more the Delhi High Court in Instalment Supply (P.)Ltd.'s case (supra) has pointed out perhaps for the first time the distinction between the provisions of Section 30(a)(i) and Section 30(a)(ii) in response to the argument raised before it on the phraseology used in Section 10(2)(v)of the Income-tax Act, 1922. The Delhi High Court pointed out: (quoting from Section 59 of the report):
In our opinion, the Legislature has used different language in the provisions of Section 30(a)(i) and 30(a)(ii). A tenant is entitled to the deduction of the amount spent on account of the cost of the repairs to the premises when he has undertaken to bear the cost of the repairs. If the amount is spent by the assessee otherwise than as a tenant, the amount paid by him on account of only 'current repairs' is allowable. The latter provision applies to the assessee occupying the premises otherwise than as a tenant, as an owner or mortgagee in 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 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 even if the repairs were of the nature of capital expenditure because it is a case of the repairs to the premises that the tenant would be entitled to deduct Under Section 30(a)(i) and not the current repairs as in the case of the owner. What is, therefore, relevant to see is whether the tenant, i.e., the assessee has undertaken to bear the cost of the repairs under the terms of the agreement. The agreement clearly provided that the assessee has to bear the cost of the repairs. When the assessee agreed to bear the cost of the repairs according to the Delhi High Court decision, the cost of repairs even if they are in the nature of capital expenditure, must be allowed as deduction. Assuming, therefore, for the sake of argument, that the learned Judicial Member was right in saying that the expenditure was of capital nature, still since the assessee as a tenant agreed to bear the cost of the repairs, the entire amount has to be allowed as deduction, applying the rule laid down by the Delhi High Court, which is binding on me as it is the jurisdictional High Court.
10. The Madras High Court in a recent casein Madras Auto Service Ltd.'s case (supra) held that when an assessee-company had taken on lease land and building in Bangalore for housing its branch in that city and when the building was old and when the assessee entered into an agreement with the landlord agreeing to demolish the building and construct a new one and when the sums of Rs. 1,62,835 and Rs. 50,937 were spent in the assessment years 1968-69 and 1969-70 respectively and claimed deduction thereof as revenue expenditure and when the Tribunal held that the amounts were deductible as business expenditure, the view of the Tribunal was upheld by the Madras High Court. The Madras High Court pointed out after referring to Anglo-Persian Oil Co. v. IRC [1931] 16 TC 253 (CA), Assam Bengal Cement Co. Ltd. 's case (supra), Atherton's case (supra) and the Supreme Court decision in Empire Jute Co. Ltd. 's case (supra) that in the instant case no tangible or intangible asset came into existence as a result of the amounts spent by the assessee in demolishing the old building and constructing a new one. I do not think there can be a more appropriate case than this to hold that the expenditure incurred by the assessee could be said to be of revenue nature. When the expenditure incurred on demolishing the old building and constructing the new one was held to be 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 case of CIT v. Kalyanji Mavji & Co. [1980] 122 ITR 49 that the changes made by the assessee did not alter the cinema which remained a cinema, that there was no additional benefit to the assessee and that the entire expenditure was a kind of repair and all that happened was that after the repairs, the cinema stood renovated and, therefore, no benefit of an enduring nature other than the existing cinema had resulted. When the assessee is not the owner and is only a monthly tenant, the principle applied by the Supreme Court in the case of KalyanjiMavji & Co. (supra) was the most appropriate rule to be applied. I think this ruling of the Delhi High Court further re-enforces the view that I am inclined to take that by incurring the expenditure, the assessee did not acquire any enduring benefit or an asset which could be called capital expenditure.
12. For the above reasons and for the reasons given by the learned Accountant Member, I agree with his view and hold that on the facts and in the circumstances of this case the expenditure of Rs. 2,55,250 cannot be said to be capital expenditure and that it represented revenue expenditure allowable as a deduction in computing the business profits of the assessee for the assessment year 1982-83.
13. The matter will now go before the regular Bench for disposing of the appeal in accordance with the opinion of majority.