Income Tax Appellate Tribunal - Hyderabad
Income-Tax Officer vs Lokeswara Trading Corpn. on 27 February, 1987
Equivalent citations: [1987]21ITD359(HYD)
ORDER
T.V. Rajagopala Rao, Judicial Member
1. This is a departmental appeal and it is filed against the order of the Appellate Assistant Commissioner Vijayawada dated 19-10-1984 relating to assessment year 1982-83 for which the previous year is Diwali year ended by 10-11-1981.
2. The assessee is a registered firm of 8 partners. Out of them six are majors and two are minors represented by their mother Smt. Yatirajavalli Ratna Tayaru. They have taken on lease a rice mill and raw boiled rice mill called Sri Sesharatnam Rice Mill from one Mamidi Nageswara Rao. The lease was taken under the two lease deeds dated 21-10-1980. Under the first lease deed plant and machinery was taken on lease on a stipulation to pay rent of Rs. 41,000 per year besides bearing Rs. 500 towards Panchayat and revenue taxes. Under the second lease deed the building and land were taken on lease for Rs. 1,19,000 rent per year. The period of the lease under both the leases was 5 years ending with 31-10-1985. The lessees ran the mill under the name Lokeswara Trading Corporation which is the assessee before us. The original of the lease deed dated 21-10-1980 under which plant and machinery was taken on lease was filed before us on behalf of the assessee in the paper compilation from pages 13 to 20. It may be mentioned that both the lease deeds were registered lease deeds. Para 4 of the lease deed states that if within the period of lease any part of the machinery requires repairs and the expenditure for those repairs does not exceed Rs. 200 the said expenditure should be borne by the lessees. However, if the expenditure incurred for repairs over the machinery exceeds Rs. 200, after carrying out the repairs the lessees are entitled to recover the expenditure over the repairs from out of the lease amount payable to the lessor. Clause 5 of the lease deed says that if either for political causes or as an act of his major if either the machinery in the mill or constructions in the mill require more repairs, the lessees should intimate the lessons. Thus repairs should be carried out by the lessons within 30 days, and after showing the particulars of the repairs carried out the mill should be handed over to the lessees. However, if within the 30 days no sort of repairs were carried out then in such an event after expiry of 30 days the lessees need not pay any rent whatsoever to the lessons. Clause 6 of the lease deed states that after the expiry of the lease deed the lessees are obliged to hand over vacant possession of the mill to the lessons. The expiry of the lease takes place on 31-10-1985. It is the case of the assessee that the same mill was taken on lease by it as a lessee under the same terms and conditions even in the previous years and for the immediately preceding assessment year, viz., 1981-82, the assessee claimed an amount of Rs. 1,26,388 towards mill repair expenses and they were allowed by the Income-tax Officer while completing the assessment without any demur. As per page 2 of Annexure II of the departmental paper compilation the following are the particulars of the mill repairs incurred and allowed by the Income-tax Officer subsequent to assessment year now under consideration :
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SI. Assessment Paddy worked Mitt majuries Mill repairs
No. year in the mill received in incurred
the year in the year
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Qtls. Rs. Rs.
1. 1982-83 88,624 5,74,248 1,58,206
(year under appeal)
2. 1983-84 1,11,819 8,72,468 1,61,549
3. 1984-85 1,41,452 9,37,372 1,33,782
and
32,790
4. 1985-86 74,079 7,18,789 1,36,488
5. 1986-87 1,12,417 10,74,756 1,46,080
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As can be seen from the above for the assessment year under consideration the assessee claimed Rs. 1,58,206 towards incurring expenditure for repairs and maintenance of the mill. Particulars of the repairs and maintenance expenses are as follows :
Rs. P.
1. Timber 7,065.25
2. Tapi workers 7,105.50
3. Neparallu, Cooli 4,910.00
4. Arapoosa 2,060.40
5. Boiled baskets, brooms, busk baskets, etc. 8,153.05
6. Current materials and oils 7,915.58
7. Coarse and red soil, etc. 3,062.00
8. Iron Bowls 449.62
9. Shafts 3,373.00
10. Foundry Majuri 4,805.00
11. Huller sheets 1,740.50
12. Mill Beltings and Paddy Drier Belts, etc. 16,347.56
13. Sheller, Rubbers, etc. 31,874.93
14. Iron Sheets 8,492.90
15. Bricks, Paints 4,963.00
16. Bearings, Polish sheets, Pullies, Grease, Bolts and Nuts, Bolt Buckets, Emery, Cement and Salt 58,788.29
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1,58,206.57
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Out of the above without mentioning the items the Income-tax Officer considered that an amount of Rs. 32,000 would be considered as capital investment. The Income-tax Officer took note of the fact that the assessee firm took lease of Sri Sesharatnam Rice Mill for five-years and the current year ending with 11-10-1981 would "be the first year of the lease deed. He spread over the expenditure of Rs. 30,000 for five years period and deleted Rs. 6,000 from Rs. 30,000 and added Rs. 24,000 in the taxable income of the assesses firm for assessment year 1982-83 and completed the assessment dated 10-1-1982 on a total income of Rs. 97,800 under Section 143(3).
3. The assessee firm appealed to the Appellate Assistant Commissioner, Vijayawada. It was contended before him that for immediately preceding assessment year 1981-82 the appellant took on lease the same rice mill and a sum of Rs. 1,26,388 was claimed and allowed on account of maintenance and repairs of the mill. The agreement of lease for earlier assessment years and the clauses in the agreement for the present lease are similar, contended the assessee. There was no disallowance ordered by the Income-tax Officer in the earlier years. The Appellate Assistant Commissioner from the records stated to have gathered that the expenditure mentioned in Annexure 14 of the income-tax return filed on 23-6-1982 appeared to the Income-tax Officer capital in nature and therefore he made the disallowance under consideration. He found five items in the said annexure :
Rs.
1. Timber 7,065
2. Tapi workers 7.105
3. Neparallu Coolie 4,910
4. Iron Sheets 8,492
5. Bricks, Paints 4,963 The Appellate Assistant Commissioner held that though some of the items would last for more than 1 year that does not mean that the expenditure on those items is of capital nature. In fact, the entire amount of Rs. 1,58,207 was claimed on account of repairs of the mill. When the Income-tax Officer had accepted the fact that the appellant firm was required to spend for repairs, there is no good reason for segregating some of the items as capital expenditure. There is no provision in the Income-tax Act through which the Income-tax Officer can allow l/5th of such allowance and defer the allowance of the same for future years. The Appellate Assistant Commissioner felt either the amount claimed has to be allowed in full or to be disallowed. He further held from the fact that the assessee was required to run the rice mill throughout the year for which repairs were necessary and while repairing the rice mill there will be expenditure on some items like iron sheets, bricks, timber, etc., it is not correct to treat such expenditure as expenditure of capital nature. Therefore, the Appellate Assistant Commissioner directed the Income-tax Officer to allow the sum of Rs. 1,58,206 in full.
4. As against the said decision of the Appellate Assistant Commissioner the department came up in appeal before this Tribunal. In a ground raised by the revenue it is stated that the whole of the expenditure of Rs. 1,58,206 should have been disallowed by the Appellate Assistant Commissioner. On merits it took the stand by another ground that as per records available the Income-tax Officer ought to have disallowed the whole expenditure inasmuch as as per the terms of the lease agreement only expenditure up to 200 rupees should be borne by the assessee and exceeding that limit expenditure towards repairs though borne in the first instance by the assessee should be debited to the lease account and should be adjusted towards lease amount.
5. We have heard Shri N. Santhanam, learned departmental representative and Shri K.R. Krishnamurthy, learned representative for the assessee. At the time of hearing the assessee filed a preliminary objection stating that inasmuch as the relief granted to it by the AAC was Rs. 24,000 only that could form the subject-matter of the appeal before the Tribunal. But the ground dealing with the disallowance of the entire expenditure, vis., Rs. 1,58,207 should not be entertained by the Tribunal as it is a new ground neither processed nor considered by any of the lower authorities. On the other hand, the learned departmental representative sought to contend that he is entitled to dispute the allowance of entire amount of Rs. 1,58,207 in the second appeal before us.
6. After hearing both sides it appears to us that the assessee's counsel is perfectly justified in raising this preliminary objection. Before answering the preliminary objection either way we have to identify what is the amount of subject-matter of the appeal before us. The ITO disallowed only Rs. 24,000 from out of. Rs. 1,58 207. The assessee went in appeal and got relief even with regard to the disallowance of Rs. 24,000. Now the second appeal is filed before this Tribunal against the said decision. Therefore, it is clear that it is only Rs. 24,000 disallowance which forms the subject-matter of the appeal. We fully agree with Shri Krishnamurthy when he contended that the question of total disallowance of Rs. 1,58,207 does not arise from either of the orders of the lower authorities because it was not considered by any of them. In Chaturvedi and Patisserie's Income-tax Law, 3rd Edition, 5th volume, page 4347, the learned authors stated as follows :
It would not be permissible for the Tribunal to adjudicate or give a, finding on a question which was not agitated or in regard to which no relief was claimed before the lower authorities or which was not in dispute and which does not form the subject-matter of the appeal. It is thus clear that the Tribunal has no jurisdiction to found its decision on a question which was not the subject of dispute at any stage of the proceedings and is not the subject-matter of the appeal.
In CIT v. Krishna Mining Co. [1977] 107 ITR 702 (AP), at pp. 707-708 the facts are that the Income-tax Officer made an addition of Rs. 99,984 on account of under-valuation of closing stock. The first appeal there against was substantially rejected. On further appeal the Tribunal adopting a method of revaluation concluded that a sum of Rs. 10,644 alone is to be added. Thereafter the assesses filed a rectification petition. In disposing of the rectification petition the Tribunal observed that according to the method adopted by it the computation would result in a deduction of profit of Rs. 83,169 instead of an addition. But the relief granted to the assessee was restricted only to the addition of Rs. 99,984 as it was not competent to go further into the matter and give a greater relief to the assessee than it had asked for. Ultimately the Tribunal's order was upheld by the High Court.
7. We uphold the objection and hold that the subject-matter of the appeal is confined only to consider whether there was justification for disallowance of Rs. 24,000 towards mill repairs. The learned departmental representative promptly brought to our notice Clause 4 and Clause 5 of the lease deeds which we have translated and extracted in the above paras. In view of those two terms of lease deed it was argued that repairs require to the machinery over and above Rs. 200 should be borne by the lessons and when such is the condition in the lease deed the assessee who is only a lessee of the mill cannot claim deduction of Rs. 24,000. On the other hand, Sri Krishnamurthy brought to our notice an affidavit dated 16-3-1985 filed by the lessons as well as the lessees. It was affirmed that Clause 4 of the lease deed is ill-drafted. The real understanding between the parties is that the mill must be handed over to the owners at the end of the lease period in the same working condition and order as it was taken on lease by the lessees. In view of this position Clause 4 was never adhered to and remained as a dead letter. It is also stated that if the said clause was followed literally it would have given rise to an anomalous situation hereunder the owners of the mill might "have to pay substantial amounts to the lessee firm every year far exceeding the annual rental of Rs. 41,000. It is also reiterated that Clause 4 is a hollow and casual reproduction of similar clauses in the lease deeds normally written by the scribe since long past without proper understanding of the real intention of the partners concerned. He also brought to our notice that the Income-tax Officer who raised objection for allowing a mere Rs. 24,000 for assessment year 1982-83 allowed much more sums towards repairs expenses incurred in the subsequent assessment years as already shown in the table furnished in the above paras. Therefore, it is sought to be contended that Clause 4 of the lease deed was never acted upon or intended to be acted upon and it was provided in a routine manner by the scribe without gathering the intention of the parties or without himself knowing the implications thereof and so it? should be ignored.
8. Having heard both sides we cannot accept the arguments that the recitals in the registered lease deed can be ignored at the mere asking or simply because an affidavit of the parties to the deed was filed before the Income-tax Officer. The lease deed evidences the agreed terms at the time of the lease. Men may lie but circumstances would not. Therefore we have to give greater importance to the documents rather than to the oral versions sought to be adopted for the purpose on hand. However, even if we give effect to Clause 4 of the lease agreement in the absence of the Income-tax Officer mentioning the particulars of the items representing Rs. 24,000 it is difficult to arrive at a finding whether those Rs. 24,000 really represent repair expenditure or expenditure incurred for bringing an asset into existence which is very essential for the conduct of the business of the assessee and in which case it must be considered as revenue expenditure in his hands. The Appellate Assistant Commissioner held that the following five items might have been considered by the Income-tax Officer while disallowing Rs. 24,000.
Rs.
1. Timber 7,065
2. Tapi workers 7,105
3. Neparallu, Cooli 4,910
4. Iron sheets 8,492
5. Bricks, paints 4,963 In whatever way either the timber, iron sheets, or Napa slabs and bricks and paints were used. It cannot be said that they were intended only for repairs. We are of the opinion that much is to be read into the facts as to why the Income-tax Officer did not elaborate his reasons for disallowance of expenditure worth Rs. 24,000 even after obtaining the particulars from the assessee for the expenditure of Rs. 1,33,781.65. Page 3 of the paper compilation filed by assessee would show that the Income-tax Officer sought the particulars constituted by the total of mill repair account by the letter dated 16-1-1985. Extension of Kallam may strictly come under the repairs of the existing Kallam. But however as the assessee is only a lessee we have yet to consider whether such extension even if it secures advantage for some years is a revenue expenditure or a capital expenditure. In CIT v. Kirkend Coal Co. [1970] 77 ITR 530 (SO) the question was whether a company which carried on the business of coal mining and which incurred expenditure on stowing operations was entitled to for its deduction as business expenditure. The Tribunal found it as a fact that stowing is an operation carried out in the process of extraction of coal and unless it is carried out extraction of coal is not possible irrespective of whether depillaring had been done or not. The Supreme Court held that expenditure incurred by the assessee in stowing operations is a revenue expenditure allowable as a deduction. In CIT v. Rama Krishna Steel Rolling Mills [1974] 95 ITR 97 (Delhi) a lease was taken for a period of five years, without option for extension. There was no provision in the first instance in the lease deed regarding liability of assessee for repairs. However there was a subsequent letter to the effect that the repairs were the assessee's responsibility (lessee's). There was heavy expenditure on repairs to the roof of the premises in the second year. The question is whether the expenditure is allowable as repairs and as business expenditure. The Delhi High Court held on the facts that the recitals in the lessor's letter did not in any way vary or contradict the terms of the lease deed taut only expressed the agreement of the parties on a point on which the lease deed itself was silent and taking into account the fact that the assessee without requiring the lessor in the first instance to carry out the repairs had expended the disproportionately high amount of expenditure on repairs during the second year of the lease, the lease itself being for five years, along with the letter, the Tribunal could, have come to the conclusion that even at the time of the lease deed the assessee had undertaken to carry out the repairs of the factory premises and that, therefore, the assessee's claim was allowable under Section 10(2)(ii) of the I.T. Act.
9. It is contended before us that in fact the expenditure was incurred for repairs of some of the machinery as well as the building. The repairs were carried out in order to put the mill in working condition and hence the expenditure incurred should be allowed to the assessee as revenue in nature. Shri Krishnamurthy also cited the decision of the Madras High Court in CIT v. Dasa-prakash [1978] 114 ITR 210. In that case the assessee was doing hotel business and expenses were incurred in putting decorated mirrors on the walls, plaster moulded roof, plywood panels, etc., in reception-cum-dining halls with the object to keep the place fit and attract customers. It was held that the expenditure was only revenue in nature and allowable as deduction. He also cited and relied upon the Allahabad High Court decision in Girdhari Dass & Sons v. CIT [1976] 105 ITR 339. In that case the assessee was carrying on business in the rented building and he carried out repairs to the building with the consent of the landlord. The cost of repairs amounted to Rs. 10,000 and odd in the assessment year 1964-65, Rs. 9,000 in assessment year 1965-66 and Rs. 1,000 in 1966-67. The Tribunal recorded % finding that the assessee must have made some structural changes in the shop and held that the expenditure was allowable neither as an expenditure on current repairs under Section 37 as it was an expenditure of capital nature. The Allahabad High Court held that expenditure incurred by the assessee on renovating, furnishing or remodelling of a business premises can be allowed as a deduction under Section 37 if the expenditure is not a capital expenditure. When an owner incurs expenditure on addition or alteration in the building it enhances its value and the expenditure can be of a capital nature. But if a tenant incurs an expenditure on a rental building on its renovation and alteration he does not acquire any capital asset, because the building does not belong to him. Ordinarily, such expenditure would be of a revenue nature.
10. On the other hand, the learned departmental representative contended that we are not concerned in this case whether the expenditure is capital or revenue but we are concerned as to whether Clause 4 of the lease agreement executed between the parties which governs the treatment of the expenditure. Whether it should be allowed in the hands of the assessee who is a lessee or the lessons. When the assessee is entitled to get reimbursement from the lessons where is the question of allowing it as a revenue expenditure, the learned departmental representative asks.
11. After considering the arguments on both sides we are of the view that the case law cited by Shri Krishnamurthy is besides the point and does not govern the real point in issue. In this case we cannot ignore Clause 4 of the lease deed. Admittedly the expenditure was incurred towards mill repairs. If so, the assessee is entitled to get reimbursement of the expenditure from the lessons. In such an event the same expenditure cannot be allowed as revenue expenditure in the hands of the assessee. We, therefore, set aside the order of the Appellate Assistant Commissioner and hold that Rs. 24,000 should be disallowed in the hands of the assessee and it should be added to the total income of the assessee for assessment year 1982-83.
In the result, the appeal is allowed.