- Bookmark
- Share
- CaseIQ
Commissioner Of Income-Tax v. M/S. Ram Krishna Steel Rolling Mills, New Delhi
Structured Summary of the Opinion (M.R.A. Ansari, J.)
Factual and Procedural Background
M/s. Ram Krishna Steel Rolling Mills (the assessee) was a firm carrying on the business of re-rolling steel which took a factory premises on lease from Ravinder Nath by a deed dated 2-4-1956 for five years from 1-4-1956 at rent of Rs. 500 per month. The lease deed did not provide a renewal option and could be terminated earlier by the lessee on one month's notice and by the lessor on breach of conditions. The lease deed contained no specific clause setting out the parties' respective liabilities for repairs; clause 10 restricted structural alterations without consent but allowed the lessee to remove its plant and machinery provided the lessee restored the premises to original condition thereafter.
In the previous year ending 31-3-1958 (assessment year 1958-59) the assessee carried out repairs to the roof at a cost of Rs. 20,807 and claimed deduction under sub-section (2) of section 10 of the Indian Income-tax Act, 1922 — specifically under clauses (ii), (v) or (xv). The Income-tax Officer and the Appellate Assistant Commissioner disallowed the claim on the grounds that no legal obligation existed under the lease to carry out the repairs and that the expenditure was capital in nature.
On appeal the Income Tax Appellate Tribunal (Delhi Bench) allowed the claim in full under section 10(2)(ii) after interpreting the lease, having regard to a letter dated 16-4-1962 from the lessor to the assessee, and considering the conduct of the parties. The Revenue, aggrieved, procured a reference by the Tribunal to this Court under section 66(1) of the Act. The question referred to this Court was stated as follows:
“Whether on the facts and in the circumstances of the case, the expense of Rs. 20,807/- incurred by the assessee in carrying out the repairs, to the roof of the factory premises is a permissible deduction?”
Legal Issues Presented
- Whether the Rs. 20,807 expenditure incurred by the assessee in repairing the roof of the leased factory premises is a permissible deduction under section 10(2) of the Indian Income-tax Act, 1922?
- If so, whether the expenditure is allowable under section 10(2)(ii) (repairs undertaken by a tenant who has agreed to bear the cost) or, alternatively, under the residuary clause section 10(2)(xv)?
Arguments of the Parties
Revenue's Arguments (as recorded)
- Learned counsel for the Revenue (Shri Dhebar) argued that clause (xv) is a general provision while clause (ii) is a specific provision; accordingly, where a specific provision deals with a particular class of expenditure (repairs by a tenant who has undertaken to bear them), the general provision (xv) should be excluded and cannot be invoked. He relied on several High Court decisions that adopted the view that a specific clause excludes the residuary clause when both are in potential application.
Assessee's Position / Relevant Factual Contentions (as recorded)
- The assessee contended that the repairs were necessary to protect its plant and machinery from rain and wind because the roof was in disrepair.
- The assessee produced a letter dated 16-4-1962 from the lessor confirming that “all repairs and renewals etc. to the sheds and buildings are your responsibility” and stating the lessor did not hold itself responsible for expenses incurred by the lessee; the Tribunal accepted that letter as genuine and relied upon it to conclude that the assessee had undertaken to bear the cost of repairs.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court in this Opinion |
|---|---|---|
| Subodhchandra Popatlal v. Commissioner of Income Tax (1953) 24 I.T.R. 566 (Bombay High Court) | Held that a specific provision (e.g. section 10(2)(x)) excludes the general residuary provision (section 10(2)(xv)); when an expenditure falls under a specific clause the tests in that clause govern and clause (xv) cannot be resorted to. | The Court noted this view but distinguished it on the facts: the present expenditure relates to repairs of premises and clause (ii) contemplates expenditure of a particular nature (undertaking by tenant). Thus the Court treated Subodhchandra Popatlal as distinguishable rather than as an absolute bar to considering clause (xv) as an alternative. |
| N.M. Rayaloo Iyer and Sons v. Commissioner of Income-tax (1954) 26 I.T.R. 265 (Madras High Court) | Followed the Bombay High Court rule that where a specific provision applies the residuary clause cannot be relied upon. | The Court observed this authority but again treated it as part of a line of decisions that could be distinguished on factual grounds in the present case; it did not adopt the broad exclusionary consequence urged by Revenue. |
| Birla Gwalior Private Ltd. v. Commissioner of Income-tax (1962) 44 I.T.R. 847 (Madhya Pradesh High Court) | Held that if an allowance is specifically dealt with by any one of the clauses (i) to (xiv) of section 10(2), the residuary clause (xv) cannot be resorted to. | The Court recorded this view and treated it as part of the conflicting High Court decisions; it did not allow that principle to preclude consideration of clause (xv) on the present facts where clause (ii) might not strictly cover the expenditure. |
| J.K. Woollen Manufacturers Pvt. Ltd. v. Commissioner of Income-tax (1963) 44 I.T.R. 346 (Allahabad High Court) | The Allahabad High Court dissented from the Bombay rule and observed that the specific clause and the residuary clause may lay down different tests and both may be relevant; an expenditure not satisfying tests under a specific clause may still be allowable under clause (xv). | The Court discussed this dissenting position and ultimately took the view that later Supreme Court authorities supported the position that clause (xv) remained available in appropriate cases; the Court therefore did not accept the absolute rule that a specific clause excludes clause (xv). |
| Regal Theatre v. Commissioner of Income-tax (1966) 59 I.T.R. 449 (Punjab High Court) | Held that expenditure on panelling to cover cracks was revenue expenditure and deductible under section 10(2)(xv) even though the lease required the lessor to carry out repairs. | The Court cited this decision as an example where a High Court allowed repair-type expenditure under clause (xv) despite lease terms; it supported the proposition that clause (xv) can operate in favour of a lessee in suitable circumstances. |
| Commissioner of Income-Tax v. Jagat Cinema (1971) 81 I.T.R. 488 (Delhi High Court, Division Bench) | Considered claims under both section 10(2)(ii) and 10(2)(xv); held that amounts restoring premises to their pre-damage state were repairs and allowable, and that additional amounts for improvements could be allowable under clause (xv) (not capital). | The Court relied on this decision to show that amounts can be apportioned between repairs (ii) and other allowable revenue expenditure (xv); it treated Jagat Cinema as supporting allowance under clause (xv) for the portion that was not capital. |
| Bombay Steam Navigation Co. Pvt. Ltd. v. Commissioner of Income-tax (1965) 56 I.T.R. 52 (Supreme Court) | Held that interest payments closely related to commencement and carrying on of business could be revenue expenditure under section 10(2)(xv); articulated the test that revenue expenditure is to be viewed in the larger context of business necessity or expediency. | The Court cited this Supreme Court authority for the proposition that clause (xv) may allow revenue expenditure closely related to carrying on the business, applying the “integral part of the profit-earning process” test to the present facts. |
| Commissioner of Income-tax v. Mahalakshmi Textile Mills Ltd. (1967) 66 I.T.R. 710 (Supreme Court) | Upheld allowance where expenditure (introduction of a conversion system) was allowable as current repairs / revenue expenditure under a relevant clause of section 10(2). | The Court used this Supreme Court decision as further illustration that expenditures of the relevant character may be allowable under section 10(2) (including under clauses for repairs or analogous provisions). |
| Badridas Daga v. Commissioner of Income Tax (1958) 34 I.T.R. 10 (Supreme Court) | Held that section 10(2) enumerates admissible deductions but is not exhaustive; when a deduction has no specific provision it may still be allowed under section 10(1) according to ordinary commercial and trading principles. | The Court relied on this authority to support the proposition that where no specific clause admits an expenditure, accepted commercial principle may justify allowance — reinforcing that clause (xv) (or s.10(1) principles) can be invoked where appropriate. |
Court's Reasoning and Analysis
The Court first analysed the language of section 10(2)(ii): the clause allows repairs where the assessee is tenant and "has undertaken to bear the cost of such repairs." The Court observed that clause (ii) does not require that the repairs be for carrying on the business nor does it exclude capital nature if the undertaking is present.
Turning to the lease deed, the Court noted the deed contained no explicit obligation on either party to effect repairs except clause 10, which only allowed the lessee to remove plant and machinery provided the lessee restored the premises to original condition thereafter. The lessee did not claim the roof repairs were for restoring premises after removal of plant; rather, it claimed repairs were necessary to protect its plant and machinery from rain and wind.
The Tribunal had relied upon a letter dated 16-4-1962 from the lessor confirming that "all repairs and renewals etc. to the sheds and buildings are your responsibility" and disclaiming responsibility for amounts already or to be spent by the lessee. The Tribunal accepted the letter as genuine and the Appellate Assistant Commissioner did not doubt its genuineness. The Court held that the letter's recitals did not contradict or vary the lease but expressed the parties' agreement on a point on which the lease was silent. The Court therefore considered the letter together with the conduct of the parties (including that the assessee had carried out substantial repairs in the second year of a five-year tenancy and that the expenditure was large relative to the rent) as sufficient material to conclude the assessee had undertaken to bear the repair costs.
The Court expressly declined to decide whether section 108 of the Transfer of Property Act imposed a legal obligation to carry out repairs, saying it was unnecessary to resolve that issue in view of the written evidence (the lessor's letter) and the parties' conduct.
On this basis the Court held the assessee's claim was allowable under section 10(2)(ii).
The Court proceeded, however, to consider the alternative argument under clause (xv) (the residuary clause), because the assessee had also claimed under clause (xv) and the Tribunal by implication had rejected the claim under clause (xv). The Court reviewed conflicting High Court authorities and Supreme Court decisions concerning whether a specific provision excludes the residuary clause. After analysing the case law, the Court concluded that clause (xv) remained available where a specific clause did not, on its own terms, admit the expenditure, and that well-established principles permitted consideration of clause (xv).
Applying the legal tests drawn from the cited authorities, the Court found that the roof repairs were necessary for carrying on the assessee's business, that the tenancy was short-term (five years terminable earlier), and that the expenditure (incurred in the second year) could not fairly be characterized as capital in nature. Consequently, even if the Court's finding under clause (ii) were wrong, the expenditure (or a portion) satisfied the conditions of clause (xv) and was allowable as revenue expenditure.
The Court quantified the permissible deduction and answered the referred question in favour of the assessee.
Holding and Implications
Holding: The Court answered the reference in favour of the assessee and held that a portion of the expenditure is a permissible deduction. Specifically, the Court concluded that Rs. 9,418/- is a permissible deduction in computing the assessee's income. The assessee was also awarded costs of the reference and counsel's fee was fixed at Rs. 250/-.
Immediate Consequences for the Parties
- The referred question was answered in favour of the assessee and against the Revenue.
- The assessee may claim deduction of Rs. 9,418/- in respect of the roof repairs for the assessment year in question.
- The assessee is awarded the costs of the reference; counsel's fee fixed at Rs. 250/-.
Broader Implications
The opinion analyses and applies existing decisions of various High Courts and the Supreme Court on the relationship between specific deduction clauses and the residuary clause in section 10(2). The Court reaffirmed that where the conditions of a specific clause are not satisfied, clause (xv) may still afford relief in appropriate circumstances. The opinion does not purport to lay down a new general principle beyond its application to the facts of this case.
Reference Answered accordingly.
M.R.A Ansari, J.:— M/s. Ram Krishna Steel Rolling Mills (hereinafter referred to as the assessee) is a firm carrying on the business of re-rolling steel. It took on lease the factory premises from one Ravinder Nath under a lease deed dated 2-4-1956. The lease was for a period of five years commencing from 1st April, 1956. The rent payable for the premises was Rs. 500/- per month. The lease deed did not contain any term giving the option to the assessee to renew the lease for a further period. On the other hand, the lease was terminable before the expiry of the lease period at the instance of the assessee by giving one month's notice. The lease was also terminable at the instance of the lessor on the breach of any of the conditions of the lease. The lease deed did not contain any specific term with regard to the liability of the lessor or the lessee in respect of the repairs to the factory premises. But clause 10 of the lease provided that during the period of the lease, the lessee shall not without the consent of the lessor make any structural or other alterations in the buildings provided that the lessee may at, any time remove the steel rolling plant and machinery belonging to it from the premises and for that purpose, to dig out any portion of the floor, walls or other structure. But, at the same time, the lessee was bound to do all that was reasonably necessary and requisite for restoring the floor, wall and other structure to their original condition after removing the plant and machinery.
During the previous year ending on 31-3-1958, which was relevant to the assessment year 1958-59, the assessee carried out repairs to the roof of the factory premises at a cost of Rs. 20,807 and claimed allowance for this amount under clauses (ii), (v) or (xv) of sub-section (2) of section 10 of the Indian Income-tax Act, 1922 (hereinafter referred to as the Act). The assessee's claim was rejected by the Income-tax Officer as well as by the Appellate Assistant Commissioner on the ground that there was no legal obligation cast on the assessee under the lease deed to carry out the repairs of the factory premises and also that the expenditure in question was of a capital nature. The assessee thereupon preferred an appeal before the income tax Appellate Tribunal, Delhi Bench (hereinafter referred to as the Tribunal) and the Tribunal allowed the assessee's claim in full under section 10 (2) (ii) of the Act holding on an interpretation of the lease deed as well as a letter dated 16-4-1962 which had been produced by the assessee before the Appellate Assistant Commissioner and also on a consideration of the conduct of the assessee and its lessor that there was a legal obligation on the assessee to carry out the repairs. At the instance of the Revenue, however, the Tribunal has referred the following question to this Court under section 66 (1) of the Act: —
“Whether on the facts and in the circumstances of the case, the expense of Rs. 20,807/- incurred by the assessee in carrying out the repairs, to the roof of the factory premises is a permissible deduction?”
The Tribunal has allowed the assessee's claim under section 10 (2) (ii) of the Act which reads as follows: —
“ (2) Such profits or gains shall be computed after making the following allowances, namely, —
(ii) in respect of repairs, where the assessee is the tenant only of the premises, and has undertaken to bear the cost of such repairs, the amount paid on account thereof, provided that, if any substantial part of the premises is used by the assessee as a dwelling-house, a proportional part only of such amount shall be allowed.”
From a reading of clause (ii), it is clear firstly, that the assessee is entitled to the allowance of the cost of the repairs only if he has undertaken to bear the cost thereof and secondly, such repairs need not necessarily be undertaken for the purpose of carrying on the business of the assessee. In other words, if the assessee has undertaken to effect the repairs of the premises of which he is the tenant, he is entitled to allowance of the cost of the repairs even if the repairs be of the nature of capital expenditure or even if the repairs have no connection with the business of the assessee. Whether the repairs were in the nature of capital expenditure or whether they were necessary for the purpose of carrying on the assessee's business will be relevant for consideration only if the cost of the repairs was claimed under section 10 (2) (xv) of the Act and they are not relevant for the purpose of determining the assessee's claim under section 10 (2) (ii) of the Act.
As already stated, the lease deed itself does not contain any specific term in respect of the liability either of the lessor or of the lessee for effecting repairs to the factory premises. In our view, clause 10 of the lease deed cannot be construed as casting any liability on the assessee to effect any repairs to the factory premises except for the purpose of restoring it to its original condition after the assessee removed the plant or the machinery from the premises. It is not the assessee's case that the repairs in question were effected for the purpose of restoring the premises to their original condition after removing the plant or the machinery. On the other hand, it is the assessee's case that these repairs were necessary for protecting its plant and machinery from rain and wind, as the roof of the factory premises was in a state of dis-repair. The Tribunal has, however, relied upon the letter dated 16-4-1962 which forms part of the record of the case. This is a letter addressed by the lessor of the factory premises to the assessee. The relevant portion of this letter reads as follows: —
“This is to confirm that in accordance with the terms of the lease deed dated 2-4-1956 entered into between us, all repairs and renewals etc. to the sheds and buildings are your responsibility. Any amounts you have therefore spent in respect of such repairs from the date of the above lease are therefore deemed to have been spent on your own responsibility in accordance with the terms of the lease and we do not hold ourselves responsible for any expenses so far incurred by you or to be incurred by you in future. We ourselves have not spent any amounts so far in respect of the repairs of the above premises from the date it was leased to you.”
The Tribunal has accepted this letter as being genuine. From the order of the Appellate Assistant Commissioner, it would appear that the genuineness of this letter was not doubted even by the Appellate Assistant Commissioner. The recitals in this letter do not in any way vary or contradict the terms of the lease deed. The letter only expresses the agreement of the parties on a point on which the lease deed itself was silent. The fact that the assessee carried out the repairs at a cost of Rs. 20,807 during the second year of the period of the lease, the lease itself being for a period of five years, without first requiring the lessor in the first instance to carry out such repairs and the fact that the cost of the repairs was disproportionately high to the amount of rent lends support to the view taken by the Tribunal that even at the time of the lease deed the assessee had undertaken to carry out the repairs of the factory premises. The Tribunal has also sought support for its view from the provisions of section 108 of the Transfer of Property Act. We do not consider it necessary to express our opinion whether the provisions of section 108 of the Transfer of Property Act cast a legal obligation on the assessee to carry out these repairs. It would be sufficient to decide the assessee's claim on the basis of the letter dated 16-4-1962 and the conduct of the parties referred to above, and on the basis of the said material, we hold that the assessee's claim is allowable under section 10 (2) (ii) of the Act.
Although the assessee's claim is allowable under section 10 (2) (ii) of the Act, we shall proceed to consider whether the assessee's claim is allowable in the alternative under section 10 (2) (xv) of the Act as the assessee had claimed allowance of the cost of the repairs also under section 10 (2) (xv) of the Act and as by implication, the Tribunal has rejected the assessee's claim under section 10 (2) (xv) of the Act. Sub-clause (xv) reads as under: —
“Any expenditure not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purpose of such business, profession or vocation.”
Clause (xv) is a residuary clause which provides for the allowance of an expenditure which does not fall within the scope of clause (i) to (xiv). Shri Dhebar, learned counsel for the Revenue, contends that clause (xv) is in the nature of a general provision; whereas clause (ii) is in the nature of a special provision and that the special provision excludes the operation of the general provision. According to the learned counsel, a claim for allowance of repairs effected by an assessee who is a tenant can be allowed, if at all, under clause (ii) allowance of repairs cannot be allowed under clause (xv) even if the conditions prescribed in clause (xv) are satisfied. In support of this contention, the learned counsel has referred to a number of decisions. In Subodhchandra Popatlal v. Commissioner of Income tax (1953) 24 I.T.R 566 (i) the assessee had claimed allowance of the amount of bonus paid to the manager of the assessee-firm. The claim was made both under section 10 (2) (x) as well as under section 10 (2) (xv) of the Act. A portion of the assessee's claim was disallowed by the Income-tax authorities as well as by the Tribunal on the ground that the amount paid to the manager was unreasonable. The Bombay High Court, however, allowed the assessee's claim in full even under section 10 (2) of the Act holding that the amount paid to the manager was reasonable. Having held that the assessee's claim was allowable in full under section 10 (2) (x) of the Act, the Bombay High Court proceeded to make the following observations: —
“The first question is whether it is possible to take the view that the case of the assessee firm falls under section 10 (2) (xv). section 10 (2) (x) deals with a special case where a sum is paid to an employee over and above his salary as bonus or commission for services rendered. Section 10 (2) (xv) deals with a case where an expenditure is laid out or expended wholly or exclusively for the purpose of business, and according to well established canons of construction when a statute deals with a special case it is not permissible to contend that the special case would also fall under the general provision in the statute. Section 10 (2) (xv) deals with all those cases of expenditure laid out or expended wholly or exclusively for the purpose of business which do not fall under any other sub-section of section 10 (2). When an expenditure falls under section 10 (2) (x) in the sense that it is an expenditure in the nature of bonus or commission paid to an employee for services rendered, then its validity can only be determined by the test laid down in section 10 (2) (x) and not the test laid down in section 10 (2) (xv).”
In the next case relied upon by the learned counsel for the Revenue, namely, N.M Rayaloo Iyer and Sons v. Commissioner of Income-tax (1954) 26 I.T.R 265 (2), which is also a case of a claim of bonus paid by the assessee to some of its employees, the claim for allowance of the bonus was made alternatively under section 10 (2) (x) and section 10 (2) (xv) of the Act and Rule 12 of the First Schedule of the Excess Profits Tax Act. The Madras High Court following the rule laid down by the Bombay High Court in the case of Subodhchandra Popatlal held that as there was a specific provision in the Act circumscribing the limits under which a commission or bonus paid to an employee was to be allowed as a deduction, that specific provision must prevail and resort could not in those circumstances be had to section 10 (2) (xv) of the Act. In Birla Gwalior Private Ltd. v. Commissioner of Income-tax (1962) 44 I.T.R 847 (3), the Madhya Pradesh High Court following the rule laid down in Subodhchandra Popatlal's case and in the case of N.M Rayaloo Iyer and Sons held that it is well settled that if an allowance is specifically dealt with by any one of the clauses (i) to (xv) of section 10 (2), then clause (xv) which is the residuary clause cannot be resorted to.
The views expressed by the Bombay, Madras and Madhya Pradesh High Courts in the decisions cited above are at variance with those of some of the other High Courts as well as of the Supreme Court to which we shall presently refer. But assuming for the moment that they are correct and also assuming for the purpose of considering the assessee's claim in the alternative under section 10 (2) (xv) of the Act that our finding that the allowance claimed by the assessee satisfied the conditions laid down in clause (ii) is not correct, these decisions can be distinguished on the ground that the amount in question in the case before us does not come within the category of repairs under clause (ii) of sub-section (2) of section 10 of the Act. Clause (ii) contemplates an expenditure of a particular nature, namely, expenditure incurred by a tenant by virtue of an undertaking given by him. If the tenant has given such an undertaking, then the cost of the repairs is allowable under clause (ii) irrespective of the fact whether these repairs were of capital nature or were necessary for carrying on his business. Expenditure incurred for effecting repairs which are necessary for carrying on his business but in respect of which no undertaking has been given by him does not come within the scope of clause (ii). There is, therefore, no bar to a consideration of the assessee's claim under the general clause (xv). We shall now refer to the decisions of some of the High Courts and of the Supreme Court which are at variance with the decisions of the Bombay, Madras and Madhya Pradesh High Courts, already cited. In J.K Woollen Manufacturers Private Ltd. v. Commissioner of Income-tax (1963) 44 I.T.R 346 (4), the Allahabad High Court expressed its dissent with the rule laid down by the Bombay High Court in Subodhchandra Popatlal's case. The dissent was expressed in the following words: —
“In that decision it was laid down that section 10 (2) (x) dealt with a special case and section 10 (2) (xv) (prior to its amendment) was a general provision and according to well established canons of construction when a statute dealt with special case it was not permissible to contend that the special case would also fall in the general provision in the statute. Accordingly, it was held that when an expenditure fell under section 10 (2) (x), then its validity could be determined only by the tests laid down under section 10 (2) (x) and not by the tests laid down in section 10 (2) (xv). With great respect it is not possible to agree entirely with the view that whereas section 10 (2) (x) dealt with a special case section 10 (2) (xv) was a general provision. One may agree that section 10 (2) (x) was specific to this extent that it dealt with bonus or commission alone and section 10 (2) (xv) dealt with all classes of business expenditure including bonus or commission which are also business expenditure. If the matter had rested there it would have been possible to say that section 10 (2) (x), the specific provision, excluded the operation of section 10 (2) (xv), the general provision, what seems to have been overlooked in the Bombay decision is the fact that the two provisions lay down different tests and by reasons of those tests the two provisions might very well constitute different categories and not merely the one a special category and the other a general category. This may be explained by pointing out that if an amount of commission paid to an employee does not satisfy the tests laid down under section 10 (2) (x) it might still fall for consideration under section 10 (2) (xv) and may be allowable if it satisfied the test of having been laid out or expended wholly and exclusively for the purpose of the assessee's business. It may also be pointed out that a portion of the commission may be allowable under section 10 (2) (x) if the finding is that that portion is reasonable having regard to the conditions laid down there and so far as the balance is concerned it may also be allowable if it satisfies the conditions in section 10 (2) (xv). It appears that it was for this reason that an allowance of the nature provided for in clauses (i) to (xiv) was expressly excluded from the purview of section 10 (2) (xv) by amending the section. It follows that thus even though a contractual commission may also be liable to be considered under section 10 (2) (x) the whole or a portion of it might not be allowable under that section. It is, therefore, necessary to consider its allowability under section 10 (2) (xv).”
It would appear from the above observations that the Allahabad High Court has considered that the rule laid down by the Bombay High Court in Subodhchandra Popatlal's case could be correct after the amendment of section 10 (2) (xv) by the addition of the words “not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive”. The correctness of this view has again to be examined in the light of some of the decisions of the Supreme Court.
In Regal Theatre v. Commissioner of Income-tax (1966) 59 I.T.R 449 (5), the assessee had taken on lease, for a period of 10 years, a cinema building with all furniture, fittings, heating and cooling plants, the bar and residential suites attached to it, along with cinema machines, projectors, fans and other appliances, newly installed. Under the lease deed the lessee could not make any additions or alterations and it was the lessor who had to carry out annual white washing and colour washing and repairs to the building. In order to cover up cracks and ugly spots on the walls, the assessee spent a sum of Rs. 16,323/- for panelling i.e, fixing a thin layer of teak plywood to the walls, in the lounge, the stair case and in the restaurant. The wooden panels on removal were not of much value and could not be re-installed in the same condition elsewhere. The assessee claimed allowance of this amount under section 10 (2) (xv) of the Act. The assessee's claim was disallowed by the Income-tax Officer but was allowed by the Appellate Assistant Commissioner. The Revenue preferred a second appeal before the Tribunal and the latter reversed the decision of the Appellate Assistant Commissioner and disallowed the assessee's claim on the ground that the amount spent by the assessee was in the nature of capital expenditure. The Punjab High Court disagreed with the finding of the Tribunal and allowed the assessee's claim in full holding that it was a revenue expenditure which was deductible under section 10 (2) (xv) of the Act. Although the Punjab High Court was not called upon to consider whether the assessee's claim in that case could be allowed under section 10 (2) (xv) of the Act when the claim had to be considered strictly under section 10 (2) (ii) of the Act, still the fact remains that the claim of the assessee in that case was in respect of the repairs to the premises which the assessee had taken on lease. The assessee's claim was allowed by the High Court notwithstanding the fact that under the terms of the lease deed it was the lessor who had to carry out the repairs to the building.
In Commissioner Of Income-Tax… v. Jagat Cinema… (1971) 81 I.T.R 488 (6), a Division Bench of this Court was called upon to consider an assessee's claim under section 10 (2) (ii) as well as under section 10 (2) (xv) of the Act. In that case, the assessee took on lease a cinema hall for a period of five years. Under the terms of the lease, the assessee had to remove the talkie equipment and fittings on the termination of the lease and the repairs, annual white-washing and painting had to be made by the assessee, the lessor contributing a fixed sum of Rs. 120/- towards the annual white-washing and painting. During the period of the lease, it so happened that the lintel near the stage of the cinema hall collapsed causing damage to the screen and the stage. The assessee spent a sum of Rs. 11,418/- towards reconstruction of the lintel and restoration of the stage and the screen, and while doing so, the assessee increased the dimensions of the screen and the stage. Out of this amount, the Income-tax Officer only allowed a sum of Rs. 2,000 towards repairs and disallowed the balance as capital expenditure. The Tribunal, however, on appeal allowed the entire expenditure. On a reference of the question whether the balance of the expenditure, namely, Rs. 9,418 was a permissible deduction, this Court held —
(i) that so much of the amount as was spent on the reconstruction of the lintel and restoration of the stage and the screen to the state in which they were before the collapse could legitimately be held to have been incurred on repairs; and
(ii) that the balance of the amount spent for widening the screen and the stage was not capital expenditure and was allowable under section 10 (2) (xv) of the Act.
In Bombay Steam Navigation Co. Private Ltd. v. Commissioner of Income-tax (1965) 56 I.T.R 52 (7), the Supreme Court considered an assessee's claim for allowance of interest either under section 10 (2) (iii) or section 10 (2) (xv) of the Act. The facts of that case were that pursuant to a scheme of amalgamation between two shipping companies, the assessee-company was incorporated on August 10, 1953, to take over certain passenger and ferry services carried on by one of the former. On August 12, 1953, the assessee-company took over assets, which were finally valued at Rs. 81,55,000 and agreed that the price was to be satisfied partly by allotment of 29,990 fully paid up shares of Rs. 100 each and the balance was to be treated as a loan and secured by a promissory note and hypothecation of all movable properties of the assessee-company. The balance remaining unpaid from time to time was to carry simple interest at 6 per cent. By a supplemental agreement the original agreement was modified to the effect that the balance shall be paid by the assessee-company and until it was paid in full the assessee-company shall pay simple interest at 6 per cent per annum on so much of the balance as remained due. The balance was also to be secured by hypothecation of all the movable properties of the assessee-company. During the relevant accounting years the assessee paid interest on the balance outstanding and claimed allowance of the same either under section 10 (2) (iii) or section 10 (2) (xv) of the Act. The Supreme Court held that the assessee's claim was not allowable under section 10 (2) (iii) of the Act inasmuch as the expression “capital” used in section 10 (2) (iii) in the context in which it occurred, meant money and not any other asset and that there was in truth no capital borrowed by the assessee in this case. The Supreme Court, however, held that the assessee's claim was allowable under section 10 (2) (xv) of the Act on the ground that the transaction of acquisition of the assets was closely related to the commencement and carrying on of the business and the interest paid on the amount remaining due must in the normal course be regarded as expended for the purpose of the business, which was carried on in the accounting periods. It observed as follows: —
“In considering whether expenditure is revenue expenditure, the Court has to consider the nature and the ordinary course of business and the object for which the expenditure is incurred. The question whether a particular expenditure is revenue expenditure incurred for the purpose of the business must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on or conduct of the business. That it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition to the carrying on of the business, the expenditure may be regarded as revenue expenditure.”
In Commissioner of Income-tax v. Mahalakshmi Textile Mills Ltd. (1967) 66 I.T.R 710 (8), the assessee, which carried on the business of manufacture and sale of cotton yarn, spent a sum of Rs. 93,215/- for introduction of the “Casabalanca conversion system” in its spinning plant and claimed allowance of this amount either as a development rebate under section 10 (2) (vi-b) or as current repairs under section 10 (2) (xv) of the Act. The assessee's claim was disallowed by the Income-tax Officer as well as by the Appellate Assistant Commissioner on the ground that it was not admissible as development rebate since the introduction of the “Casabalanca Conversion system” did not involve installation of new machinery. The Tribunal held that though the assessee's claim was not admissible as development rebate under section 10 (2) (vi-b) it was admissible as current repairs under section 10 (2) (v) of the Act. This view of the Tribunal was upheld both by the High Court as well as by the Supreme Court.
The decisions of the Punjab and Delhi High Courts and of the Supreme Court, referred to above, indicate that even after the amendment of clause (xv) if an expenditure cannot be allowed under any of the specific clauses of sub-section (2) of section 10 of the Act on the ground that the conditions prescribed in these specific provisions have not been satisfied, still the expenditure may be allowed under the general clause (xv) of sub-section (2) of section 10 of the Act and that there is no general rule that a claim which may be considered under the specific provisions but which cannot be allowed on the ground that it did not satisfy the conditions prescribed therein, could not at all be considered under the general clause (xv). In fact the Supreme Court has also held in the case of Badridas Daga v. Commissioner Of Income Tax (1958) 34 I.T.R 10 (9) that when a claim is made for a deduction for which there is no specific provision under section 10 (2), the deduction may be allowed in computing the profits or gains of a business under section 10 (1) of the Act. The Supreme Court observed as follows: —
“While section 10 (1) of the Indian Income-tax Act, 1922 imposes a charge on the profits or gains of a business, it does not provide how these profits are to be computed. Section 10 (2) enumerates various items which are admissible as deductions but they are not exhaustive of all allowances which could be made in ascertaining the profits of a business taxable under section 10 (1). Profits and gains which are liable to be taxed under section 10 (1) are what are understood to be such under ordinary commercial principles, xx. xx. xx, xx. xx. xx. When a claim is made for a deduction for which there is no specific provision under section 10 (2), whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and be incidental to it.”
In the light of the decisions of the Supreme Court referred to above, there does not appear to be any justification for the view taken by the Allahabad High Court in the case of J.K Woollen Manufacturers Private Ltd. that after the amendment of clause (xv) the position was in any way different from what it was prior to the amendment and that the dissent expressed by the said High Court with the rule laid down by the Bombay High Court in Subodhchandra Popatlal's case is applicable even after the amendment of clause (xv). Therefore, the assessee's claim can be considered both under clause (ii) as well as clause (xv) of sub-section (2) of section 10 of the Act and if the assessee's claim cannot be allowed under clause (ii), it can be allowed under clause (xv) if it satisfies the requirements of the latter clause. The question referred to us is in general terms and it permits the consideration of the assessee's claim both under clause (ii) as well as clause (xv) of sub-section (2) of section 10 of the Act. There can be no doubt in this case that the expenditure incurred by the assessee for repairing the roof of the factory premises was an expenditure which was necessary for the carrying on of the assessee's business. In view of the fact that the assessee was not the owner of the premises and that the tenancy was only for a period of five years which was terminable even earlier and the expenditure was incurred in the second year of the lease, it cannot be said that the expenditure was of a capital nature. Therefore, the assessee's claim is allowable under section 10 (2) (xv) of the Act if it cannot be allowed under section 10 (2) (ii) of the Act. We are, therefore, of the opinion that the sum of Rs. 9418/- is a permissible deduction in computing the assessee's income. The question referred to us is accordingly answered in the affirmative, i.e, in favour of the assessee and against the Revenue. The assessee is also entitled to the costs of the reference. Counsel's fee is fixed at Rs. 250/-.
Reference Answered accordingly.
Alert