Narsingdas Surajmal Properties (P.) Ltd. v. Commissioner Of Income-Tax, Assam

K. Lahiri, J.:— In compliance with the direction of this court, the Income-tax Appellate Tribunal, Gauhati Bench, Gauhati, has drawn up a statement of the case, and referred the following question formulated by the High Court for our decision:

“Whether, on the facts and in the circumstances of the case, the deduction claimed by the assessee for the sum of Rs. 12,000 each year for the assessment years 1962-63, 1963-64 and 1964-65 will be admissible deduction, although such amount was payable under an unregistered deed executed on January 5, 1961, which deed is said to be in partial modification of an earlier registered agreement dated November 11, 1955?”

2. The relevant facts necessary for disposal of the reference may be set out as follows:

The assessee is a private limited company having income from rent and service charges. For the assessment years 1962-63, 1963-64 and 1964-65, relevant previous years being the corresponding calendar years, the assessee claimed deduction of Rs. 12,000 per annum as “ground rent” in respect of the land on which the building of the assessee known as “Commercial Building” stands. In the earlier years the ground rent for this land was Rs. 500 and the department was allowing the rent as admissible deduction. The assessee took a lease for a period of 30 years with effect from November 14, 1955, under a registered deed of lease. On January 5, 1961, another agreement of lease was entered into between the assessee and the co-owners of the land, the annual rent was enhanced from Rs. 500 to Rs. 12,000, the period of lease was reduced to 5 years and it provided that after the expiry of 5 years, in case the lessors decided to terminate the lease, they would pay certain amount by way of compensation to the lessee with a promise to purchase after the end of the said 5 years the house property at Rs. 2,10,000. The assessee claimed deduction of Rs. 12,000 per annum for the (relevant) assessment years. In response to notice under s. 143(2), a director of the assessee appeared before the ITO, he was heard and the “books of account and evidence were examined The ITO did not reflect in his order that there was no entry in the books of account as to the payment of Rs. 12,000 nor was there any inkling in the orders that there was no supporting materials of payment of the annual rents. The ITO has held that the subsequent agreement dated January 5, 1961, whereby the quantum of rent was raised to Rs. 12,000 with other stipulations set out above, was compulsorily registrable under the Indian Registration Act, and, as it was not so registered, could not be considered “as a valid and operative lease agreement”. Accordingly, he held that the subsequent agreement was of no effect and the original lease continued to be operative and in force. He held that “the correct amount of ground rent legally payable by the assessee is Rs. 500 only and not Rs. 12,000 as claimed” on the ground that the deed of lease was not registered. The claim for deduction of Rs. 12,000 was rejected and only a sum of Rs. 500 was allowed in the assessment years. The assessee appealed and the AAC of Income-tax allowed the appeal holding, inter alia:

“It is contended that the payment of Rs. 12,000 per annum as lease rent is justifiable in view of the gains that would accrue to the appellant-company at the end of the years and, therefore, the increased lease rent should be allowed. There is great force in the argument of the appellant. Accordingly, the ITO is directed to allow for each of the 3 years a sum of Rs. 12,000 per year as lease rent.”

3. The revenue appealed to the Tribunal. The kingpin of the order on the basis of which the Tribunal set aside the appellate order and restored the order of the ITO is quoted:

“However, that aspect of the case does not arise for consideration because of the view which we have taken, agreeing with the Income-tax Officer, that the document being unregistered is inoperative. The claim, therefore, could have been allowed for Rs. 500 for each of these three years only.”

4. The assessee asked for a reference and set out the facts which were admitted or found by the Tribunal and which were necessary for drawing up a statement of the case under s. 256(1) of the I.T Act, 1961. The assessee claimed that the rent of Rs. 12,000 paid was a revenue expenditure and was paid for bona fide business consideration. The Tribunal rejected the prayer. Accordingly, the assessee came up before this court asking for a reference and the applications were allowed by this court. Section 256 is an avenue for taking questions of law to the High Court enabling it to give the Tribunal guidance on legal points of difficulty. Its power and jurisdiction are exclusively advisory in nature and very much constricted. The question must be a question of law, the answer must relate to the question and it must arise out of the order under s. 254 of the Act. The court is not a court of appeal. It may lay down the principles of law and it is the Tribunal, the final authority, which is to determine the case finally.

5. The central focal point for determination was the entitlement of the assessee to get the deduction claimed by him. The subject-matter of deduction was “ground rent”, that is, the enhanced rent paid by the assessee to its lessors. The assessee claimed that it had paid rent. In support thereof it produced its books of account and other materials before the authorities. It is indubitable that neither the ITO nor the Tribunal has expressed that there was no material to hold that the expenditure was not incurred by the assessee, nor is there any finding that the assessee did not expend the amounts claimed by it as bona fide business expenditure. The sum and substance of the order of the Tribunal is that as the payments were not based on a legal document, all transactions made, expenditure incurred, rights and liabilities accrued were illegal and non est. It is not the case of the Tribunal that the expenditure was not incurred by the assessee. The Tribunal has held that though the amounts were paid at the rate of Rs. 12,000 per annum, yet the assessee was not legally liable to pay the amount as the written agreement had not been registered. The conclusions arrived at must be tested from two angles. First, whether the Tribunal is correct in holding that the agreement being compulsorily registrable under s. 17 of the Registration Act was inadmissible for all practical purposes and cannot be received as evidence of any collateral transaction including the nature and character of the lessee's possession as a tenant. Secondly, whether the Tribunal is justified in holding that as the payments were made on the basis of an inadmissible evidence the assessee was not entitled to deduction under ss. 32 to 37 of the Act although in actuality the expenditure had been incurred by it.

6. Let us consider whether the Tribunal is justified in holding that merely because the agreement was compulsorily registrable under s. 17 of the Registration Act, it was inadmissible for all practical purposes and could not be looked at in support of the plea that the lessee's position was that of a tenant and that it was paying rent therefor. Section 17 of the Registration Act needs to be considered along with the provisions contained in s. 49 of that Act, as they are supplementary as well as complementary to each other. We quote the relevant extract of s. 49 of the Registration Act:

“No document required by section 17 or by any provision of the Transfer of Property Act, 1882, to be registered shall—

(a) affect any immovable property comprised therein, or

(c) be received as evidence of any transaction affecting such property or unless it has been registered:

Provided that an unregistered document affecting immovable property and required by this Act or the Transfer of Property Act, 1882, to be registered may be received as evidence of any collateral transaction not required to be effected by registered instrument.”

7. In Rana Bidya Bhusan Sing v. Ratiram, [1969] UJ (SC) 21 a similar unregistered agreement was put in evidence in support of the plea that the lessee's possession was that of a tenant. The Supreme Court held that notwithstanding non-registration of the document compulsorily registrable under s. 17 of the (Registration) Act, it could be used in support of the plea that the lessee's possession was that of a tenant and the lessee was entitled under s. 49 of the (Registration) Act to rely on the recitals contained in the agreement. It has held that, no doubt, such a document required by law to be registered compulsorily, if unregistered, is inadmissible in evidence of a transaction affecting immovable property “but it may be admitted as evidence of collateral facts, or for any collateral purpose, that is, for any purpose other than that of creating, declaring, assigning, limiting or extinguishing a right to immovable property”, Therein, their Lordships quoted an extract from Mullet's Indian Registration Act, 1908, 7th edn., p. 189, which is set out hereinbelow:

“The High Courts of Calcutta, Bombay, Allahabad, Madras, Patna, Lahore, Assam, Nagpur, Pepsu, Rajasthan, Orissa, Rangoon and Jammu & Kashmir, the former Chief Court of Oudh, the Judicial Commissioner's Court of Peshawar, Ajmer and Himachal Pradesh and the Supreme Court have held that a document which requires registration under section 17 and which is not admissible for want of registration to prove a gift or mortgage or sale or lease is nevertheless admissible to prove the character of the possession of the person who holds under it.”

8. Their Lordships relied on an earlier decision of the Supreme Court in Padma Vithoba Chakkayya v. Mohd. Multani, [1963] 3 SCR 229; AIR 1963 SC 70. In Padma Vithoba the Supreme Court held that such an unregistered lease was admissible in evidence to show “the character of possession of the lessee” under s. 49 of the (Registration) Act. Non-registration of a compulsorily registrable document is inadmissible as evidence of a transaction affecting immovable property. But it may be admitted and made use of as evidence of collateral facts or for any collateral purpose, that is, for any purpose other than that of creating, declaring, assigning, limiting or extinguishing a right to immovable property. We are constrained to hold that the document in question was admissible as evidence of collateral facts or for any collateral purpose. It was admissible to prove the nature and character of the lessee's possession as well as to show that he was a tenant in occupation of the land on payment of rent. In this view of the matter, we hold that the learned Tribunal was not justified in rejecting the document as inadmissible for all intents and purposes. It will be for the learned Tribunal to consider the effect of the provision contained in s. 49 of the (Registration) Act, in the light of the observations made above and to decide how far and to what extent the document can be used by the assessee under s. 49 of the Registration Act.

9. We consider it to be our duty to point out, in exercise of our advisory jurisdiction, that it has been held by the Supreme Court in a very recent decision in Cit Patiala v. Sri Piara Singh ., [1980] 124 ITR 40, that even when an assessee carries On smuggling activities, the loss arising out of confiscation of property in such transaction was admissible deduction under s. 10(1) of the Indian I.T Act, 1922. If a loss is occasioned in pursuing the business it is “a business loss”. As the loss arose directly from the carrying on of the business and was incidental to it, the Supreme Court has held that the deduction must be allowed notwithstanding the plea that the transaction itself was illegal. We are of the opinion that in a case of expenditure as wall, it matters little whether an expenditure has been incurred on the basis of a valid or invalid document; the only question to be asked and answered is whether the expenditure was incurred in the assessment year. If it was an expenditure actually made for the purpose of the business and if it attracts the provisions of a legitimate deduction permissible under ss. 30 to 37 of the I.T Act; the assessee shall be entitled to deduction. However, it will be for the learned Tribunal to consider whether the payment of the ground rent falls under s. 30 of the Act or under some other provisions of the Act. If the learned Tribunal holds that the deduction claimed falls under s. 37 of the Act, it will undoubtedly consider as to whether the expenditure was laid out or expended wholly or exclusively for the purpose of the business bearing in mind the six golden rules for allowing such allowance under the said section. If it is held to be a business expenditure under s. 37 of the Act, which the assessee claims as a revenue expenditure, the learned Tribunal shall bear in mind the principles laid down by the Supreme Court in Eastern Investments Ltd v. Commissioner Of Income Tax, West Bengal, [1951] 20 ITR 1, that in the absence of fraud, the question whether a transaction had the effect of reducing the assessee's taxable income or whether it was a prudent or judicious transaction or whether it was indispensable or necessary for the assessee to enter into the transaction, are all irrelevant in determining whether the expenditure relating to that transaction should be allowed under s. 37 of the Act. In our opinion, the said principle and considerations are directly applicable while considering the question of “business expenditure” under s. 37 of the I.T Act. To back up the view, we rely on N.M Rayaloo Iyer and Sons v. CIT, [1954] 26 ITR 265 (Mad), F.E Dinshaw Ltd. v. CIT, [1959] 36 ITR 114 (Bom) and Raja Ram Kumar Bhargava v. CIT, [1963] 47 ITR 680 (All). In the result, we hold that, on the facts and circumstances of the case, the learned Tribunal was not justified in holding that merely because the document was unregistered the assessee was not entitled to the deduction claimed by it. Accordingly, we answer the question against the revenue and in favour of the assessee. However, we make no order as to costs.

10. Let a copy of the judgment be sent under the seal of the court and signature of the Registrar to the learned Tribunal which shall pass such orders as are necessary to dispose of the case conformably to the judgment.