1980 (4) TMI 23 - HC - Income Tax

Summary

Issues Involved:
1. Nature of the payment of Rs. 50,000: Revenue or Capital expenditure.
2. Validity of sub-tenancy agreements.
3. Legal effect of the consent decree dated June 15, 1964.
4. Impact of Ordinance No. III of 1959 on sub-tenancy status.

Detailed Analysis:

1. Nature of the Payment of Rs. 50,000: Revenue or Capital Expenditure
The primary issue was whether the payment of Rs. 50,000 made by the assessee to M/s. Gorakhram Gokalchand (M/s. G.G.) was of a revenue nature and thus an allowable deduction. The Income Tax Officer (ITO) initially held that the payment was of a capital nature, as it brought a bundle of rights to the assessee-firm. However, the Appellate Assistant Commissioner (AAC) disagreed, stating there was no foundation for this finding and allowed the deduction. The Tribunal upheld the AAC's decision, concluding that the payment was mainly for commission due to M/s. G.G. and thus an allowable deduction. The Tribunal also found that the agreements of 1952 and 1955 had created a sub-tenancy, not a commission agency, and thus the payment was not for acquiring a sub-tenancy but for preserving an existing one.

2. Validity of Sub-Tenancy Agreements
The Tribunal examined the agreements dated June 30, 1952, and June 23, 1955, and concluded that they created a sub-tenancy in favor of the assessee, despite being worded as commission agency agreements. This finding was crucial because it established that the assessee was already a sub-tenant since June 30, 1952, and not merely a licensee or agent.

3. Legal Effect of the Consent Decree Dated June 15, 1964
The consent decree was a result of a compromise in a suit filed by M/s. G.G. against the assessee. The decree acknowledged that the assessee was in lawful possession of the shop as a sub-tenant since June 30, 1952. The Tribunal found that the payment of Rs. 50,000 was not for acquiring a sub-tenancy but for settling claims of commission, compensation, and damages. The Tribunal's interpretation of the consent decree was that it did not create a new sub-tenancy but merely recognized an existing one.

4. Impact of Ordinance No. III of 1959 on Sub-Tenancy Status
The Ordinance No. III of 1959 played a significant role in this case. It recognized and protected sub-tenancies created before its enactment. The Tribunal noted that the assessee's sub-tenancy was validated and protected by this Ordinance, thereby curing any defects in the title. Consequently, the payment of Rs. 50,000 could not be considered as an expense for acquiring a new sub-tenancy but rather for maintaining an existing one.

Conclusion:
The High Court affirmed the Tribunal's findings that the payment of Rs. 50,000 was of a revenue nature and thus an allowable deduction. The court held that the sub-tenancy was created by the agreements of 1952 and 1955 and validated by the Ordinance No. III of 1959. The consent decree did not create a new sub-tenancy but recognized the existing one. Therefore, the expenditure was not of a capital nature. The answer to the referred question was in the affirmative and in favor of the assessee, with the revenue ordered to pay the costs of the reference.