TMI Blog1973 (3) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... t therein. A premium of Rs. 84,375 was paid. The plot was later transferred to the Hindu undivided family on receipt of the premium amount plus Rs. 5,049 being initial expenses. The Hindu undivided family constructed a building on the plot at an expense of Rs. 5 lakhs and odd. The ground floor of the building was let out by the Hindu undivided family to USIS for Rs. 80,000 on 21st February, 1957. The Hindu undivided family requested the Government of India to permit the plot being transferred to the name of its karta, R. B. Sohan Lal, but the Government did not permit this. Thereupon, the family transferred the land and building to the assessee-company at its book value of Rs. 5,14,282.57 which was treated as a loan payable to the Hindu undivided family at 10% interest effective from 1st January, 1959. The company passed a resolution No. 8 of 1st February, 1959, in respect of this transaction. After the transfer, the assessee used half the building for its own business and the other half was let to USIS at a rent of Rs. 80,000 per annum. Under the terms of the lease with the Government of India, the assessee was under an obligation not to create any sub-interest or to under-let t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fence Ministry on account of non-return of Government paper supplied to the assessee. The assessee had also claimed enhanced ground rent for the period 27th February, 1957, to 31st December, 1960, in the assessment year 1961-62. The total claim was Rs. 24,302 ; out of this 50 per cent. was claimed against business income and the balance against property income. The assessee also claimed interest on enhanced ground rent which amounted to Rs. 5,086 against business income and half against property income. Also, the assessee claimed interest at 6 per cent. per annum on the additional premium, the total claim being Rs. 58,535. Half, again, was claimed against the business income and half against the property income. In the assessment year 1962-63, the assessee repeated his claim made in the assessment year 1961-62 and in addition claimed a deduction of additional ground rent, half against property income and half against business income. The Income-tax Officer allowed this claim against the property income but not against the business income. For this year, interest on ground rent and interest on additional premium were also claimed. The interest on ground rent was disallowed, but th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per annum from 1-1-1960 to 31-12-1960 is allowable under section 9(1)(iv) of the Indian Income-tax Act, 1922 ?" For the assessment year 1962-63, there are two questions at the instance of the assessee-company and two at the instance of the Commissioner of Income-tax. The questions referred at the instance of the assessee-company are : " 1. Whether, on the facts and circumstances of the case, the following amounts are allowable as deductions against the property income :-- (a) enhanced ground rent from 20-2-1957 to 31-12-1959 Rs. 9,034. (b) interest on enhanced ground rent Rs. 2,796. (c) interest on enhanced premium Rs. 21,663. 2. Whether, on the facts and circumstances of the case, the following amounts are allowable as deductions against the business income : (a) enhanced ground rent from 20-2-1957 to 31-12-1961 Rs. 15,315. (b) interest on enhanced ground rent Rs. 2,796. (c) interest on enhanced premium Rs. 36,861 ? " The questions referred at the instance of the Commissioner of Income-tax are : " Whether, on the facts and in the circumstances of the case, the interest on additional premium of Rs. 2,53,125 at 6% per annum is allowable under section 9(1)(iv) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enhanced ground rent for the period 20th February, 1957, to 31st December, 1959, amounting to Rs. 9,034 should be allowed. It is noteworthy that the enhanced ground rent appertaining to the calendar year 1960, which is the accounting period for this year, has been allowed as a deduction and the only claim of the assessee now relates to the earlier ground rent, i.e., the ground rent relating to years before the relevant accounting period. The interest on enhanced ground rent has been completely disallowed. This also relates partly to the accounting year in question as well as to interest on the ground rent for the earlier period. The interest on the enhanced premium for this year has been allowed in full, but the interest relating to the earlier period has been disallowed and, hence, the assessee claims Rs. 21,663 which is the interest on the enhanced premium relating to the period 20th February, 1957, to 31st December, 1959. For the assessment year 1962-63, the claim for enhanced ground rentis the same and so also the claim for interest on enhanced premium. However, the interest on enhanced ground rent is slightly more, because it includes the interest payable in the calendar year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ention, it is urged that there are various portions of section 9(1) indicating the manner in which the allowances are to be deducted. For instance sub-clause (i) provides that one-sixth of the annual value has to be allowed as cost of repairs when the owner has undertaken to bear the cost of repairs of property let to a tenant. This means that the cost of repairs has to be allowed whether the owner actually effects repairs or not. Similarly, sub-clause (ii) deals with the case where the tenant has undertaken to bear the cost of repairs. On the other hand, sub-clause (iii) allows the annual premium paid for insurance of the property being deducted. Here, it is stressed that it is not a hypothetical amount but the actual amount paid as premium. It is also pointed out that in section 24 of the new Act, the word "annual" has been omitted from the re-enacted provision. In sub-clause (v) the sum paid on account of land revenue is allowable. Again, this is the amount of land revenue actually paid. Then under sub-clause (vi) a collection charge is allowed which should not exceed the prescribed maximum. Thus, the legislature has indicated that in some cases actual payments are to be allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned in section 9 of the Act are of various types. Some of the allowances are dependent on actual payments and some are hypothetical in nature. For example, the repairs allowance is one-sixth of the annual value irrespective of whether the repairs are effected or not. This is based on the legislature's view that this represents a kind of recurring charge. Thus, in any particular year the owner may not effect repairs but he may have to effect heavier repairs in some other year. In the case of ground rent, the rent may be payable in monthly instalments or yearly instalments and may not be paid in any particular year, but still the ground rent is chargeable in every year if the property is subject to ground rent. It clearly seems to be the intention of the legislature to allow the ground rent relating to the period under consideration. Thus, in the calendar year 1960, which is relevant for the assessment year, 1961-62, the ground rent would be the figure for that year irrespective of whether it was paid or not. This amount has been allowed by the Income-tax Officer. The other items of ground rent relate to different assessment years, i.e., to earlier assessment years, These sums could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s well as payments in relation to earlier periods. It is urged by learned counsel that on a proper application of the rules of accountancy, the assessee had rightly placed these amounts in the assessment years in question. It is necessary to reproduce counsel's argument. It is urged that the accounts for the two years in question remain open even after the period is actually over, and if it is possible to include the amounts relating to the years in question, even after the accounting year is over, such an entry can be made in the accounts. There is apparently a recommended mercantile practice to make entries even after the accounting period is over, if the entries in question can be related to the period in question. This problem is not althogether a novel one and a number of decisions have been referred to us to show that entries can in some cases be made earlier and in some cases later than the period to which the entries relate. I now turn to the case law. In Kedarnath Jute Manufacturing Co. Ltd. v. Commissioner of Income-tax there was a claim against the assessee-company on account of sales tax amounting to Rs. 1,49,776, which was disputed by the assessee. The accounts were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cotton and Flour Mills P. Ltd, the Supreme Court dealt with a case in which the assessee had to pay a substantial sum by way of profit bonus to its employees for the calendar year 1947. The amount was actually determined by an award made in January, 1949, under the Industrial Disputes Act. The company debited the amount in the profit and loss account for the year 1948, although the payment was not made till 1949. The question arose whether the deduction was to be allowed in the year 1948 or 1949. It was held that the assessee was entitled to make the deduction in 1949 when the payment was made. The reason for this was that the mercantile system of accounting only permitted the entry to be made when the liability was incurred or had actually been disbursed. The court observed that the liability only arose after the award had been pronounced by the Industrial Tribunal. It noted with approval the observations in Keshav Mills Ltd. v. Commissioner of Income-tax which were : " That system brings into credit what is due, immediately it becomes legally due and before it is actually received, and it brings into debit expenditure the amount for which a legal liability has been incurred bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tually made debit entries in the relevant accounting period and the managing agency agreement had been acted upon even without the approval of the Government. In the present case, the position is quite the reverse. Without there being an agreement of lease in December, 1962, the previous agreement between the parties was operative. It did not provide for payment of any enhanced ground rent or enhanced premium or interest on either of these It was, therefore, not possible for the assessee to say that there was a legal liability to pay the amounts in question which could enable it to make entries in its account books or to claim a deduction. The next relevant case is Calcutta Co. Ltd. v. Commissioner of Income-tax. In this case, an estimate of a liability to be discharged at a future date was given effect to and a debit entry made in the accounts. The assessee-company bought land and sold it by developing plots and providing a lay-out for roads, drainage, light, etc. The assessee had received part of the total consideration for the land sold by it. In accordance with the mercantile system of accounting it credited into its accounts the entire sum receivable as the fall consideratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itled to deduct amounts paid by him or deemed to be paid, by him or liabilities or amounts concerning which the liability has accrued or arisen or deemed to have accrued or arisen during the periods in question. It cannot be said in the present case that the liability in question had either accrued or can be deemed to have accrued or arisen before it was finally incurred in the agreement dated 5th December, 1962. Consequently, the amounts in question are not admissible deductions in the assessment years in question. The Tribunal also dealt with the question whether these taxes could be allowed under section 10(2)(iii) and following the decision of the Bombay High Court in Metro Theatre Bombay Ltd. v. Commissioner of Income-tax came to the conclusion that the interest in question was not an allowable deduction under that provision. It is unnecessary to deal with that question because of the conclusion that there was no accrual of liability in the years in question. This would mean that the answer to question No. 2 framed at the instance of the assessee in the two years in question will have to be in the negative, against the assessee and in favour of the department. Thus, all the fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... President shall be void and the said security so deposited as aforesaid shall be forfeited to the President and may be retained by him and shall belong to him absolutely without prejudice to all other legal rights and remedies of the President against the said intended lessee." It is the contention that even if this power of the Chief Commissioner is assumed, it does not amount to a capital charge. It is necessary now to deal with some of the material contentions raised in this behalf. Section 100 of the Transfer of Property Act, 1882, defines charge. The language used in the section may be conveniently reproduced: Charges.-Where immovable property of one person is by act of parties or operation of law made security for the payment of money to another, and the transaction does not amount to a mortgage, the latter person is said to have a charge on the property ; and all the provisions hereinbefore contained which apply to a simple mortgage shall, so far as may be, apply to such charge. Nothing in this section applies to the charge of a trustee on the trust-property for expenses properly incurred in the execution of his trust, and, save as otherwise expressly provided by an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... created for the realisation of a capital sum, i.e., a charge to secure the discharge of a liability of a capital nature". The judgment then proceeded to analyse the provisions of the City of Bombay Municipal Act, 1888, and section 22 of the Bombay Finance Act, 1932, under the terms of which the two taxes in question were imposed on the property. It was held that the two Acts showed that the taxes were in the nature of an annual levy on the property and, further, it was found that, if the liability to pay the taxes was not discharged, the property was liable to sale. From the nature of the charge, the court concluded that the liability to pay taxes was an annual charge not being a capital charge. The principal question we have to deal with is whether the power of the Chief Commissioner of Delhi to re-enter the property and take possession of the building can also be treated as equivalent to creating a capital charge for the purpose of the present case. This is a matter which is not covered by an authority and the decision of the Supreme Court referred to, supports the view that the term "annual charge" and "capital charge" used in the section is really not restricted to the charges ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts which do not involve the property in any way, the amount will not be a charge. If, on the other hand, the holder of the claim is entitled to realise the amount by having recourse to the property in question, it will be a charge. From the terms of the contract between the parties incorporated in the agreement of lease dated 5th December, 1962, it clearly appears that if the assessee-company does not pay the enhanced premium, the Chief Commissioner can take possession of the property and, thus, the property can be said to be charged with the payment of the money, i.e., the enhanced premium, because it is available to the holder of the charge not only for the realisation of its claim but also absolutely. It, therefore, appears that the agreement of lease in favour of the assessee-company contains a term which places the lessor, i.e., the President of India, in a better position than an ordinary unpaid creditor. In this sense, the relationship create a capital charge on the property for, in case of failure to pay the amount not only does the assessee lose the lease, but it also loses the ownership of the property. This means that in the peculiar circumstances of this case, the Gove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debits the same in the relevant year of account. In view of the accepted position that the assessee did not get this sum from the Defence Ministry, it was clearly an allowable debit entry in the accounts of the assessee. It was another matter that the Income-tax Officer might have made a credit entry on account of the value of the paper. There is no material to show that in fact some paper was retained by the assessee-company and in the absence of such a finding or determination, it is not possible to say that either the whole of the sum of Rs. 4,319 or any part of it should have been disallowed. Consequently, there is no material to answer the question differently from the way the Tribunal has dealt with it. This question has, therefore, to be answered in favour of the assessee and against the department. From this analysis, the answers to the questions referred to us at the instance of the Commissioner of Income-tax which are three in number have to be in the affirmative, in favour of the assessee and against the department. In view of the answers given being against the assessee, in the case of questions referred at the instance of the assessee and against the department, in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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