TMI Blog1962 (8) TMI 71X X X X Extracts X X X X X X X X Extracts X X X X ..... from several sources including the running of the cinema theatre known as Liberty Cinema . For the purpose of carrying on this business of Liberty Cinema , the assessee acquired several depreciable assets, such as theatre building, exhibition machinery, air conditioning machinery, electrical fittings, etc. The 'dispute between the department and the assessee centred round the determination of the written down value of these assets for the purpose of computing the depreciation allowance as provided by section 10(2)(vi) and 10(2)(via). The phrase written down value has been defined in section 10(5) and the material portion thereof is as follows: 10. (5) In sub-section (2),........written down value' means-- (a) In the case of assets acquired in the previous year, the actual cost to the assessee.... (b) in the case of assets acquired before the previous year the actual cost to the assessee less all depreciation actually allowed to him under this Act......... The real dispute between the assessee, and the department was about the determination of actual cost to the assessee within the meaning of section 10(5)(a) for the purpose of computing depreciation all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (annexure A ) sets out the different kinds of services that were to be rendered by Manu Subedar to the assessee. Briefly stated, their nature was this: Getting prepared suitable plans and designs for the cinema theatre and other buildings, building construction, obtaining permission from the Bombay Municipal Corporation for the construction of the sixth floor, procuring the required finance to enable the assessee to complete the construction of a modern cinema theatre and other buildings, procuring various priorities and permits for scarce materials such as cement, steel, etc., overcoming various difficulties in connection with cinema licence by making representation to Government and Police authorities, securing import licences for various goods required for the purpose, securing foreign exchange facilities for making imports required for the purpose of construction of the cinema theatre and other buildings, giving valuable advice and suggestions during the course of construction of the Liberty Building and contacting various public authorities concerned, carrying on negotiations with the Bombay municipal authorities for widening of Marine Lines and Hospital Lane and makin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he annual payment involved in the agreement, under the circumstances other than the sale of the Liberty Cinema. The capital sum referred to in the above reply has been subsequently determined at ₹ 3,00,000 and by reason of the said agreement between the two, a formal deed was executed between the two on the 10th July, 1950. A copy of the said agreement is marked annexure B and forms part of the case. Briefly stated, it is a document of mortgage executed with a view to securing payment of the capital sum of ₹ 3,30,000 by giving a second mortgage to Manu Subedar of certain properties including the Liberty Building and the equipment of the Liberty Cinema, such as protectors, pedestals, airconditioning plant, etc. The said sum of ₹ 3,30,000 was payable by quarterly instalments of ₹ 16,300 without interest and the first instalment fell due on October 10, 1950. A sum of ₹ 1,48,000 was actually paid during the three years that ended on March 31, 1953, and a further sum of ₹ 40,000 was said to have been paid in 1958. The controversy between the department and the assessee centres round the real nature of the said sum of ₹ 3,30,000. 5. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty Cinema and should not be considered as the cost of acquiring buildings, machinery, etc. A copy of the Income-tax Officer's order for 1950-51 is marked annexure C and forms part of the case. But for this sum of ₹ 3,30,000 there was no dispute between the assessee and the Income-tax Officer in regard to the figures adopted by him as the actual cost of the depreciable assets such as building, exhibition machinery, air conditioning machinery, etc. He computed depreciation allowance on those assets on the basis of certain figures for the assessment year 1950-51 and, on the basis of the figures adopted by him for that assessment year, he worked out the written down value of these assets for the purpose of similar allowance for the assessment years 1951-52 and 1952-33. If the figures adopted by him for the first of these three years are found to be correct, there would be no dispute between the two in regard to the future to be adopted in the assessment years 1951-52 and 1952-53. It may be stated here that it was never the assessee's case before the Income-tax Officer that the said sum of ₹ 3,30,000 should be considered as an item of expenditure in the nature o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue expenditure. 8. The assessee accepted these decisions of the Appellate Assistant Commissioner for all these three years but the department did not, and it came in appeal to the Tribunal. The common contention for all the three years raised by it was this: The Appellate Assistant Commissioner erred in holding that a sum of ₹ 2,31,000 out of ₹ 3,30,000 said to have been paid to Shri Manu Subedar in accordance with the agreement dated July 10, 1950, be allocated to (1) cinema theatre building (2) residential building, (3) exhibition machinery, and (4) air conditioning machinery in proportion of their original costs adopted by the Income-tax Officer for computing the depreciation allowance and depreciation on such enhanced costs of the said assets be allowed to the assessee for the assessment year 1950-51. There was also a contention peculiar to the assessment year 1950- 51, it being that as the liability to pay the lump sum amount of ₹ 3,30,000 arose on 10th July, 1950, as per agreement of the same date, the expenditure towards the cost of the depreciable assets could not be taken into consideration for any period before 10th July, 1950,......and as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of the Appellate Assistant Commissioner and did not come in appeal to the Tribunal and the department confined its contention only to, the sum of ₹ 2,31,000. The appropriate portion of ₹ 2,31,000 is that portion of it that would be obtained after reducing it by a sum attributed to residential building. The question as framed by the assessee is also misconceived in another respect. Neither the sum of ₹ 3,30,000 nor the sum of ₹ 2,31,000 has been held by any appellate authority as the original cost of the cinema building. As already stated, the Appellate Assistant Commissioner allocated the sum of ₹ 2,31,000 to as many as four different assets. In our opinion, on the facts and circumstances of the case, the question of law that arises is: Whether the appropriate part of ₹ 2,31,000 (i.e., after excluding that portion of it that is attributable to residential building) apportioned by the Appellate Assistant Commissioner to cinema theatre building, exhibiting machinery and air conditioning machinery on appropriate basis can be considered for the purpose of section 10(5)(a) as part of the actual cost to the assessee in acquiring those ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness, the assessee had requested Manu Subedar to help and assist him in getting prepared suitable plans and designs for the cinema theatre and other buildings, in obtaining permission from the Bombay Municipality for constructing an addition sixth floor, in procuring the required finance to enable the assessee to complete the construction of a modern theatre and other buildings, in procuring various priorities and permits for scarce materials including cement, steel and petrol for transport, in securing import licences for various goods for the purpose of the cinema theatre, in securing foreign exchange facilities to enable the assessee to import from abroad the various goods required for the purpose of the theatre and other buildings. The assessee had also requested Manu Subedar to advise him from time to time during the course of construction of the Cinema theatre and buildings, and also enter into negotiations with the Bombay Municipal Corporation to get the adjoining roads widened. Manu Subedar responded to these requests made by the assessee and had rendered him assistance in the aforesaid matters. On 4th of June, 1948, an agreement was arrived at between Manu Subedar and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at liberty to assign, transfer, sell or let out the said cinema theatre free from all claims of the party of the second part under this Agreement and the same shall stand terminated on such payment as aforesaid. The theatre and the building were completed before 1st April, 1949, and the assessee started his business on 1st April, 1949. The assessee desired certain variations in the matter of exercising the option given to him by the aforesaid clause (5) of the agreement made on June 4, 1948, and, therefore, on 15th March, 1950, he addressed a letter to Manu Subedar, the material part of which is in the following terms: As I desire to leave my affairs as clear as possible for my son, may I request you to consider whether you would not allow the operation Page No : 0871 of this clause of capital payment exactly as it is stated to be, to take place not merely in the event of sale of the Liberty Cinema, but also otherwise at may option any time within the next twelve months. By his letter dated 17th March, 1950, Manu Subedar informed the assessee as follows: I am agreeable if you wish to buy out for a capital sum the annual payment involved in the agreement under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assistant Commissioner. He took the view that a part Page No : 0872 of the said amount of ₹ 3,30,000 pertains to the cost of residential property and the land on which the buildings stand and a part pertains to the cost of the depreciable assets. He allocated the payments on an estimate basis as under: ₹ 66,000 he allocated on account of the payment of services obtained for the setting up of the business; ₹ 33,000 he allocated as payment made for services obtained for improvement of the land and the balance of ₹ 2,31,000 he allocated as payments made for and in connection with the acquisition of (i) cinema theatre building, (ii) residential building, (iii) exhibition machinery, and (iv) air conditioning machinery. In this view of the matter he allowed the appeal partially and remanded the case to the Income- tax Officer directing him to modify the assessment in the light of the observation made by him in his order. Against this order, the income-tax authorities took further appeals to the Income-tax Appellate Tribunal. These three appeals were consolidated and were disposed of by a common order by the Tribunal. It appears that two contentions were ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iable to be taken into account in determining the actual cost to the assessee, the proper sum would be ₹ 2,31,000. Similarly, it also has expressed no opinion as to whether in the event any part is so liable to be included it could not be included for the assessment year 1950-51. For these reasons, we reframe the question in the following terms to bring out the controversy between the parties arising out of the order of the Tribunal: Whether any part of the amount of ₹ 3,30,000 is attributable towards the actual cost of the assessee for acquiring the depreciable assets for running his cinema business and, therefore, liable to be included in determining the depreciation allowance allowable under section 10(2)(vi) read with section 10(5) of the Act? Mr. Palkhivala, appearing for the assessee, contends that the Tribunal was in error in holding that no part of the said sum of ₹ 3,30,000 was attributable towards the cost of the acquisition of depreciable assets. Manu Subedar has rendered very valuable services to the assessee in securing the sanction of the municipality for the buildings, in obtaining licences and permits for the assessee, for getting scarce ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder the head 'Profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him. (2) Such profits or gains shall be computed after making the following allowances, namely :--..... (vi) in respect of depreciation of such buildings, machinery, plant or furniture being the property of the assessee, a sum equivalent.... to such percentage on the written down value thereof as may in any case or class or cases be prescribed.... Provided that-- (a) the prescribed particulars have been duly furnished..... (5) In sub-section (2).....'written down value' means-- (a) in the case of assets acquired in the previous year, the actual cost to the assessee...... (b) in the case of assets acquired before the previous year the actual cost to the assessee less all depreciation actually allowed to him under this Act, or any Act repealed thereby, or under executive orders issued when the Indian Income-tax Act, 1886 (II of 1886), was in force. These provisions indicate that in the computation of the tax payable by an assessee under the head Profits and gains of the business, Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 20 years. The services, help and assistance rendered are detailed in paragraph 1 as under: At the request of the party of the First Part (the assessee), the party of the Second Part (Manu Subedar) has rendered to the party of the First Part valuable and material help, assistance and services prior to the construction and throughout the construction of the said cinema theatre and other buildings in the manner following, that is to say: Page No : 0876 (a) For getting prepared suitable plans and designs for the said cinema theatre and other buildings, construction of which was started by the party of the first part on the said plot of land described in the Schedule hereto and for suggesting and making amendments in the said plans and designs. (b) In obtaining permission from the Bombay Municipality for constructing an additional sixth floor on a portion of the said premises for the purposes of a minuet theatre. (c) In procuring the required finance to enable the party of the First Part to complete on the said plot of land a modern cinema theatre and other buildings with air-conditioning arrangements. (d) For procuring various priorities and permits for scarce ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ma theatre and for securing foreign exchange facilities to enable the assessee to import from abroad various goods required for the purpose of the said cinema theatre, are liable to be included in the cost of the depreciable assets to the assessee. Manu Subedar has rendered assistance to the assessee in these matters. The genuineness of the agreement remunerating Manu Subedar for rendering help in these and other matters has not been challenged and there is nothing to hold that the remuneration paid to Manu Subedar was not a legitimate remuneration. In these circumstances we see no reason why a portion of the remuneration that is attributable to the help, assistance and services rendered by Manu Subedar in the acquisition of the depreciable assets should not be included in the cost of the depreciable assets. In our opinion, therefore, it would be necessary to ascertain what portion out of ₹ 3,30,000 could reasonably be attributable to portions of the services mentioned in clauese (a), (d), (f) and (g), which are attributable to the acquisition of depreciable assets, which, as already stated, are buildings, plant, machinery and furniture used by the assessee for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the written down value mentioned therein restricted only to the expenditure incurred by the assessee before the commencement of the business in acquiring the assets. The heading of the column itself does not say so, but on the other hand, it says written down value as at the beginning of the accounting period . We have already referred to the definition of written down value contained in clauses (a) and (b) of sub- section (5) of section 10 of the Act, and that definition would show that the written down value of the assets acquired during the previous year is the actual cost to the assessee and in the case of assets acquired before the previous year, the actual cost to the assessee less the depreciation actually allowed. It would thus appear that what the written down value is has to be determined in each year in the light of the two definitions contained in clauses (a) and (b) of sub-section (5) of section 10. It has been held in Karnani Industrial Bank Ltd. v. Commissioner of Income-tax [1954] 25 I.T.R. 558 that the written down value determined in a year does not operate as res judicata nor is it conclusive in determining the written down value of the subsequent years. Thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision in Minister of National Revenue, Canada v. Catherine Spooner [1933] 1 I.T.R. 299 (P.C.) may come very near it. In that case the assessee entered into an agreement with an oil company by which she sold to the company 20 acres of her land. In consideration of the sale the company agreed to pay her a certain sum of money in cash on the execution of the agreement, to issue to her a certain number of fully paid shares in the company and to deliver to her order a royalty of 10 per cent. of all the oil produced from the said lands. The question arose whether the amount paid to her by way of royalty was income or part payment of the instalments of the price of the land sold by her and it was held by their Lordships of the Privy Council that the share of the oil reserved to the assessee was not a royalty in the ordinary sense familiar in the case of mining leases, but was in effect payment by instalments of part of the price of the lands which she had sold to the company. It was, therefore, not income but a capital receipt and the amount paid to the assessee was not taxable in her hands. Mr. Palkhivala argued that, in business, instances could be found, where newly patented machi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... akes this position clear: AND WHEREAS the Mortgagor (assessee) has requested the Mortgagee (Manu Subedar) to release the Mortgagor from the burden created under the said Agreement dated the 4th day of June, 1948, and to terminate the same on receiving from the Mortgagor a sum of Rupees three lakhs thirty thousand, being the capital value of the said Agreement for the yearly payments payable to the Mortgagee under the said Agreement dated the 4th June, 1948, for a period of 20 years, which the mortgagor would pay to the Mortgagee within a period of five years from the date hereof as hereinafter mentioned and in the meantime to accept from the Mortgagor a Second Mortgage of the Mortgagor's said properties described in Schedules A and B hereunder written subject to the said prior Mortgages. Later it has been recited: AND THIS INDENTURE ALSO WITNESSETH that in pursuance of the said Agreement and for the consideration aforesaid the hereinbefore recited Agreement dated the 4th day of June, 1948, and made between the Mortgagor of the one part and the Mortgagee of the other part has been terminated from the date hereof and all the liability of the Mortgagor under the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
