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Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • Jagdish Sahai
  • R.S Pathak, JJ.
Acts
  • section 10(2)(ii) of the Indian Income-tax Act, 1922.
  • section 10(2)(ii)
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • Jagdish Sahai
  • R.S Pathak, JJ.
Acts
  • section 10(2)(ii) of the Indian Income-tax Act, 1922.
  • section 10(2)(ii)
See more information ...
Smart Summary

Concise Analytical Summary of the Provided Opinion

Factual and Procedural Background

The assessee, a private limited company, acted as the sole selling agent of Muir Mills Company Ltd. during the accounting period 12 July 1953 to 1 July 1954 (assessment year 1955–56). On the sale of each bale the assessee collected six annas described as a payment towards charity; this collection was shown separately in the bijak and credited in the assessee's books to an account styled "Marwari Society Charitable Account." For the relevant accounting year the balance in that account was Rs. 9,809.

The assessee contended in assessment proceedings that the Rs. 9,809 was not part of the sale price and therefore was not income. The Income-tax Officer rejected this contention and included the amount in the assessee's income.

Separately, the assessee claimed a deduction of Rs. 9,560 under section 10(2)(ii) of the Indian Income-tax Act, 1922, for amounts spent on converting manual latrines into flush latrines and replacing tiled roofs with cement roofs in labourers' quarters of premises it occupied as a tenant (the premises did not belong to the assessee). The Income-tax Officer rejected that claim and added the sum to the returned income.

The assessee appealed to the Appellate Assistant Commissioner and then to the Income-tax Appellate Tribunal, but was unsuccessful. The Tribunal referred two questions to the court: (1) whether Rs. 9,809 realised from customers towards charity and credited to the "Marwari Charitable Society" account was the assessee's income; and (2) whether Rs. 9,560 spent in converting the latrines and labourers' quarters was allowable as a deduction under section 10(2)(ii).

Legal Issues Presented

  1. Whether, in the facts and circumstances of the case, the sum of Rs. 9,809 realised by the assessee from its customers towards charity and credited to the account 'Marwari Charitable Society' was the income of the assessee liable to be included in its total income?
  2. Whether, in the facts and circumstances of the case, the sum of Rs. 9,560 spent in converting the latrines and the labourers' quarters was allowable as a deduction under the provisions of section 10(2)(ii) of the Indian Income-tax Act, 1922?

Arguments of the Parties

Assessee's Arguments

  • The amount of Rs. 9,809 realised from customers as "charity" did not form part of the sale price and therefore could not be included in the assessee's income.
  • The sum was credited to a distinct account labelled "Marwari Society Charitable Account" implying that it was not the assessee's income.
  • The assessee relied upon a circular issued by the Central Government directing that payments of this kind should not be treated as income (the circular was not placed before the court).
  • In respect of the Rs. 9,560, the assessee maintained the expenditure was allowable under section 10(2)(ii) as repairs/ business expenditure rather than capital expenditure; counsel also relied on several authorities (named in the opinion) in support.
  • The assessee's counsel argued that the Tribunal purported to apply the doctrine of res judicata and that such doctrine cannot be invoked in income-tax proceedings.

Respondent / Revenue Position and Tribunal Findings

  • The Income-tax Officer treated the Rs. 9,809 as income and added it to the assessee's taxable income.
  • The Income-tax Officer rejected the Rs. 9,560 deduction as not falling within section 10(2)(ii).
  • The Tribunal found that, in a prior assessment year (1954–55), the assessee had effectively conceded that the disbursement of such collections was at the assessee's discretion and not held under any binding trust, and that there was no fresh material in the present year to justify a different conclusion.
  • The Tribunal concluded the sums credited to the "Marwari Charitable Society" were at the assessee's discretion and not held on trust for a charitable purpose; hence they were not prevented from being income.
  • The Tribunal found that the works to latrines and roofs constituted substantial improvements, not mere repairs, and thus were capital in character.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Highland Railway Co. v. Balderston (Surveyor of Taxes) (Court of Exchequer, Scotland) The case illustrates that substitution of materially different or improved items (for example steel rails for iron rails) amounts to a material alteration and permanent improvement to the heritable property, and such expenditure is a charge against capital rather than income. The court relied on the principle in this authority to hold that converting manual latrines into flush latrines and replacing tiled roofs by cement roofs constituted substantial improvements (material alterations) and therefore were capital expenditure, not deductible as repairs under section 10(2)(ii).
Commissioner of Income-tax and Excess Profits Tax v. Sri Rama Sugar Mills Ltd.; Commissioner of Income-tax v. S.B. Ranjit Singh [1955] 28 I.T.R. 14 This citation was relied upon by the assessee; the provided opinion does not state the specific rule or principle from these authorities. The court stated that, in the view it took, these cited cases were of no assistance to the assessee.
Humayun Properties Ltd. v. Commissioner of Income-tax [1962] 44 I.T.R. 73 Relied upon by the assessee; no specific principle from this case is described in the provided opinion. The court observed that this authority did not assist the assessee on the facts before it.
Dehri Rohtas Light Railway Company Ltd. v. Commissioner of Income-tax [1962] 46 I.T.R. 533 Relied upon by the assessee; the opinion does not extract or state a specific rule from this decision. The court indicated this authority was not of assistance to the assessee for the present question.

Court's Reasoning and Analysis

The court addressed each referred question in turn and explained the legal conclusions reached on the basis of the Tribunal's findings and applicable legal principles as set out in the opinion.

Analysis of First Question (Rs. 9,809)

  1. The Tribunal previously considered a similar claim for the preceding assessment year and had found that the assessee's receipt and disbursement of the sums were at the assessee's discretion and not subject to any trust or binding obligation to apply those sums to charity.
  2. On the facts before the Tribunal for the assessment year 1955–56, there was no new material to displace the earlier finding and the Tribunal perceived no reason to take a different view.
  3. The court considered the Tribunal's wording and rejected the contention that the Tribunal had applied res judicata; rather, the Tribunal considered the present facts to be essentially the same as the prior year and, in the absence of fresh material, adopted the same conclusion.
  4. The court accepted the Tribunal's factual finding that disbursement of the sums was within the assessee's discretion and that the money was not received pursuant to a trust or an enforceable obligation requiring application to a charitable purpose.
  5. Because the sum was realised from customers "as part of and in connection with the sale transactions," the court held it must be treated as income from the assessee's business and therefore includible in total income.
  6. The court noted that a Central Government circular allegedly directing that such payments should not be treated as income had not been produced; it stated the question must be decided by reference to the requirements of income-tax law and that the Tribunal rightly declined to take that circular into consideration.

Analysis of Second Question (Rs. 9,560)

  1. The Tribunal had found that the works consisted of converting manual latrines into flush latrines and replacing tiled roofs with cement roofs in labourers' quarters, and that these changes were not restorations to the property's original condition but instead amounted to substantial improvements and material change.
  2. The court explained that expenditure which effects a material improvement in the property and alters its character is capital in nature and not a mere repair (i.e., not expenditure to restore to original condition).
  3. The court relied on the Highland Railway analogy (material substitution/improvement of a property's component parts constitutes capital expenditure) to support the conclusion that the asserted "repairs" were in truth material improvements and hence capital.
  4. Consequently, the alterations could not properly be treated as deductions under section 10(2)(ii) as repairs, and the Tribunal was correct to reject the deduction claim.
  5. The court considered authorities relied on by the assessee but concluded they did not assist the assessee's position on these facts.

Holding and Implications

Holding: (1) The first question is answered in the affirmative: the sum of Rs. 9,809 realised by the assessee from its customers was income of the assessee and was liable to be included in its total income.

(2) The second question is answered in the negative: the sum of Rs. 9,560 spent on converting the latrines and on replacing the roofs was not allowable as a deduction under section 10(2)(ii) because the expenditure amounted to capital improvement rather than repairs.

Direct consequences for the parties (as stated in the opinion): The income-tax assessment for the year in question must include the sum of Rs. 9,809 in the assessee's income; the deduction claim of Rs. 9,560 is disallowed. The Commissioner of Income-tax was awarded costs of Rs. 200 and the fee of learned counsel was assessed at Rs. 200.

The opinion does not elaborate broader legal consequences or purport to lay down a new precedent beyond applying ordinary principles distinguishing revenue expenditure (repairs) from capital expenditure (material improvements) and determining taxable receipts by reference to whether the receipt was held on trust or was part of the sale transactions.

Show full summary ...

    Kanpur Agencies Private Ltd. v. Commissioner Of Income-Tax, Lucknow

    1. The assessee is a private limited company and during the accounting period July 12, 1953, to July 1, 1954, relevant to the assessment year 1955-56, it functioned as the sole selling agent of the Muir Mills Company Ltd.

    2. On the sale of each bale, the assessee realised a sum of six annas towards charity and it is said that that was shown separately in the bijak. It appears that the sums so collected were credited in a separate account in the assessee's books which was styled as the “Marwari Society Charitable Account”. During the relevant account year this amount stood at Rs. 9,809. In assessment proceedings for the year 1955-56, the assessee claimed that the amount of Rs. 9,809 was not part of the sale price of the bales sold by it and could not be treated as part of its income. The Income-tax Officer rejected the claim and included the amount in the income of the assessee. The assessee also claimed a deduction of a sum of Rs. 9,560 on account of repairs to the premises employed by it for the purpose of its business. The premises did not belong to the assessee. It paid rent in respect of it. The sum of Rs. 9,560 was claimed to have been spent by the assessee on the conversion of some manual latrines into flush latrines and on the replacement of the tiled roofs by cement roofs in some of the labourers' quarters. The claim of the assessee was laid under section 10(2)(ii) of the Indian Income-tax Act, 1922. It was rejected by the Income-tax Officer, who added the amount to the returned income.

    3. In respect of both the claims, the assessee proceeded in appeal to the Appellate Assistant Commissioner and, thereafter, before the Income-tax appellate Tribunal, but was unsuccessful. At the instance of the assessee, the Tribunal has now referred the following two questions to this court for its opinion:

    “1. Whether, in the facts and circumstances of the case, the sum of Rs. 9,809 realised by the assessee from its customers towards charity and credited to the account ‘Marwari Charitable Society’ was the income of the assessee liable to be included in its total income?

    2. Whether, in the facts and circumstances of the case, the sum of Rs. 9,560 spent in converting the latrines and the labourers' quarters was allowable as a deduction under the provisions of section 10(2)(ii)?”

    4. As regards the first question, it appears that the same question had been raised by the assessee for the assessment year 1954-55, and before the Tribunal it was conceded on behalf of the assessee that it was entirely at the discretion of the assessee to deal as it liked with the amount collected towards charity and that the amount could be spent according to the pleasure of the assessee. The Tribunal accordingly found that the amount was not held under any trust or binding obligation requiring the assessee to apply that amount to any charitable purpose. When the appeal for the assessment year 1955-56 came on for hearing before the Tribunal, the assessee was unable to place any further material before the Tribunal and to persuade it to a different view.

    5. Shri M.P Mehrotra, learned counsel for the assessee, points out that the Tribunal applied the doctrine of res judicata and declined to go into the question whether the amount of Rs. 9,809 was liable to be included in the income of the assessee for the assessment year 1955-56, it having found against the assessee on a similar claim for the preceding assessment year. He urges that the doctrine of res judicata cannot be invoked in income-tax proceedings. Upon a perusal of the appellate order before us, we are not satisfied that the Tribunal applied the doctrine of res judicata. What the Tribunal intended to say was that the matter before it appeared to be not different from that arising in the preceding assessment year, and there was no reason why upon the facts and circumstances it should not take the same view in the instant assessment year, specially when there was no fresh or further material before it to warrant a different opinion.

    6. It is clear from the finding of the Tribunal that, although the amount was realised by the assessee from its customers apparently on the ground of charity and although the amount was said to be credited to the account “Marwari Charitable Society”, the disbursement of the amount was entirely within the discretion of the assessee, and the assessee was not bound to devote any part of that amount to the Marwari Charitable Society. It is not a case where the amount was paid by the customers specifically towards a charitable purpose and the amount was held in trust by the recipient so that there was a binding obligation to apply that amount to the charitable purpose. Indeed, Shri Mehrotra states that the case is not one where receipt of the amount results in a trust or enforceable obligation. The plea on the contrary is that the amount did not constitute part of the sale price and, therefore, could not be included in the assessee's income. As to that we are clear in our minds that the amount having been realised by the assessee from its customers as part of and in connection with the sale transactions, it must be treated as income from its business. We are satisfied that the Tribunal was right in holding that the amount of Rs. 9,809 was liable to be included in the total income of the assessee.

    7. The assessee relies upon the circumstances that the question framed by the Tribunal assumes that the aforesaid sum of Rs. 9,809 was realised by the assessee from its customers towards charity for crediting to the account of the Marwari Charitable Society. But it seems to us that the language employed by the Tribunal in framing the question as it did was merely by way of description for the purpose of identifying the sum in question. Indeed, it is clear from the finding of the Tribunal that it considered the sum as open to such expenditure as the assessee in its discretion thought fit.

    8. Reliance has been placed by the assessee on a circular issued by the Central Government, New Delhi, directing that payments of this kind should not be treated as income. That circular has not been placed before us. We are not bound by any direction contained in the circular because, in our opinion, the question must be decided upon the requirements of the income-tax law. The Tribunal declined to take that circular into consideration and we think that the Tribunal was plainly right in doing so.

    9. Upon the aforesaid considerations the first question, in our opinion, must be answered in the affirmative.

    10. Turning to the second question it appears that the Tribunal has found that the amount of Rs. 9,560 was spent on converting the manual latrines into flush latrines and on replacing the tiled roofs of the labourers' quarters by cement roofs. This is not a case where repairs were effected for the purpose of restoring the property to its original condition. It is a case where there was a substantial improvement in the property and a material change was brought about in the property. The manual latrines were replaced by flush latrines and the tiled roofs were replaced by cement roofs. We are unable to hold that the alterations effected by the assessee were made merely to bring about the reinstatement of the property to its original condition. Consequently, it cannot be said that the alterations were merely in the nature of repairs. A case in point is that in Highland Railway Co. v. Balderston (Surveyor of Taxes)1 and decided by the Court of Exchequer (Scotland) in which the Lord President pointed out in his judgment:

    “Then when we come to the question of the alteration of the main line itself, it must be kept in view that this is not a mere relaying of the line after the old fashion; it is not taking away rails that are worn out or partially worn out, and renewing them in whole or in part along with the whole line. That would not alter the character of the line; it would not affect the nature of the heritable property possessed by the company. But what has been done is to substitute one kind of rail for another, steel rails for iron rails. Now that is a material alteration and a very great improvement on the corpus of the heritable estate belonging to the company, and so stated is surely a charge against capital. All that is done, it will be observed from the details given on page 7 with reference to this matter, is to charge the price of the weight of the rails and chairs; that is to say, the weight in addition to what was the original weight of the rails and chairs. That is the whole charge, and that is a charge made entirely for the improvement of the property, the permanent improvement of the property. Now how that can be anything but a charge against capital I am unable to see. Certainly, if you build a new house upon your land, that is an addition to the property, an improvement on the property and never becomes a charge against income. Just as little if you build up a railway upon the line which you possess, and which is a different railway and a much more valuable railway, than that which you remove, just as little can that be a charge against income. It is a material improvement in the subject and consequently must form a charge against capital.”

    11. In the circumstances, the claim of deduction under section 10(2)(ii) made by the assessee in the instant case has no force and was rightly rejected by the Tribunal. Learned counsel for the assessee relied upon Commissioner of Income-tax and Excess Profits Tax v. Sri Rama Sugar Mills Ltd., Commissioner of Income-tax v. S.B Ranjit Singh [1955] 28 I.T.R 14., Humayun Properties Ltd. v. Commissioner of Income-tax [1962] 44 I.T.R 73. and Dehri Rohtas Light Railway Company Ltd. v. Commissioner of Income-tax [1962] 46 I.T.R 533., but in the view that we are taking, these cases are of no assistance to the assessee. In our opinion, the second question must be answered in the negative.

    12. The Commissioner of Income-tax is entitled to his costs which we assess at Rs. 200. The fee of learned counsel is also assessed at Rs. 200.

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    Comments

    Kanpur Agencies Private Ltd. v. Commissioner Of Income-Tax, Lucknow
    (Jul 12, 1967)