TMI Blog1993 (10) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... ts return of income for the assessment year 1976-77. It claimed deduction of expenses and depreciation in respect of the registered office situated at Sagar Mahal, Ahmedabad. It also claimed deduction of expenses under clause (b) of section 30 of the Income-tax Act and depreciation under section 32 of the Income-tax Act with regard to the premises, which are part of Mittal Chambers, Nariman Point, Bombay. The assessee had purchased the said office premises in July, 1975. The company shifted its office in January, 1977. It is the contention of the assessee that, during the period prior to January, 1977, the work of furnishing and other decorations was required to be carried out in the premises. The assessee claimed deduction of Rs. 59,280 for maintenance charges for the period from July, 1975, to December, 1976. The Income-tax Officer disallowed the said claim. However, in appeal, the Appellate Assistant Commissioner allowed the claim of the assessee with regard to the expenses incurred for ground rent and maintenance charges of the premises at Bombay under section 37 of the Income-tax Act as they were expended wholly and exclusively for the purpose of business of the assessee-com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by learned counsel for the parties, the question is divided and reframed as under : 1. Whether, on the facts and in the circumstances of the case, the assessee was entitled to deduction of municipal tax either under section 30(b) or under section 37 of the Income-tax Act in respect of the office premises at Mittal Chambers at Bombay ? 2. Whether, on the facts and in the circumstances of the case, the assessee was entitled to depreciation under section 32 of the Income-tax Act in respect of its office premises at Mittal Chambers at Bombay ?" Learned counsel Mr. B. J. Shelat for the Department vehemently submitted that if the nature of expenditure is provided under sections 30 to 36 and the assessee is not entitled to get deduction under the said provisions, then section 37, which is a general provision, cannot be resorted to for allowing deduction. He submitted that, once the assessee is not entitled to get deduction of municipal tax under section 30(b), because the premises at Bombay were not used for the purpose of business, then it is not entitled to get deduction under the general provision on the ground that the said amount was expended wholly and exclusively for the purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hem as they are not relevant for the purposes of the present reference. Section 36 provides for deduction in respect of other matters provided therein such as the amount of any premium paid in respect of insurance against risk of damage or destruction of stocks or stores used for the purposes of the business or profession. Various other deductions are provided for various other items including bad and doubtful debts. Section 37, which is a general section, provides that any expenditure other than of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession, shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". Then there are provisions laying down the circumstances in which deductions shall not be granted. Section 37(2B) provides that no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party. Similarly, for the guest-house, sub-section (4) pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nything contained in sub-section (1), any expenditure incurred by an assessee after the 31st day of March, 1964, on advertisement or on maintenance of any residential accommodation including any accommodation in the nature of a guest-house or in connection with travelling by an employee or any other person (including hotel expenses or allowances paid in connection with such travelling) shall be allowed only to the extent, and subject to such conditions, if any, as may be prescribed. (4) Notwithstanding anything contained in sub-section (1) or sub section (3),- (i) no allowance shall be made in respect of any expenditure incurred by the assessee after the 28th day of February, 1970, on the maintenance of any residential accommodation in the nature of a guest house (such residential accommodation being hereafter in the sub-section referred to as 'guest-house') ; (ii) in relation to the assessment year commencing on the 1st day of April, 1971, or any subsequent assessment year, no allowance shall be made in respect of depreciation of any building used as a guest-house or depreciation of any assets in a guest-house ;... (5) For the removal of doubts, it is hereby declared that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lusively for the purpose of business or profession. Hence, if the expenses are not covered by the specific provisions of sections 30 to 36 and yet the said expenses are laid out or expended wholly and exclusively for the purposes of the business or profession and they are not in the nature of capital expenditure or personal expenses of the assessee, then deduction is required to be given for the said expenses. It is quite possible that with regard to some expenses there may be overlapping between sections 30 to 36 and section 37. In that set of circumstances, if the expenses are deductible under sections 30 to 36, then section 37 is not to be resorted to. But if the said expenses are not deductible under sections 30 to 36 and the conditions prescribed under section 37 are satisfied, then the said expenses are required to be deducted while computing the income unless there is a specific prohibition. The Supreme Court in the case of CIT v. Kalyanji Mavji and Co. [1980] 122 ITR 49, dealt with similar contentions for current repairs under sections 10(2)(v) for building and machinery and section 10(2)(xv) under the Indian Income-tax Act, 1922. In that case, the assessee was a register ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly. The relevant discussion is as under : "The second contention is that the claim of the assessee must be considered with reference to section 10(2)(v) and not section 10(2)(xv) of the Act. It is urged that if section 10(2)(v) is the relevant clause, being the specific provision in respect of expenditure on current repairs to buildings and machinery, there is no justification for relying on section 10(2)(xv). Section 10(2)(xv) is a residuary clause, and deals with expenditure not being an allowance of the nature described in any of the preceding clauses of section 10(2). The submission is that where repairs are effected to buildings and machinery a deduction under section 10(2) is permissible only in respect of current repairs, and repairs which are not 'current' repairs are not intended to be the subject of relief. The Act, it is contended, limits the repairs to 'current' repairs. The repairs made by the assessee, it is said, cannot be described as 'current repairs'. Now, this contention rests on the principle that if a special provision covers the case, resort cannot be had to a general provision. It seems to us that if the renovation of the building, the reconditioning of mac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness or profession and in that case the deduction for rent, local rates or municipal taxes and premium can be granted. It would not cover a case where the premises are not used for the purposes of the business but are used for carrying on the business and incidental to it. In that situation, section 30 would have no application and the expenditure on that count would not be of the nature described in section 30. In such a case, section 37 would be applicable. Further, in the present case, the premises in Mittal Chambers at Bombay were kept wholly and exclusively for the purposes of business by the assessee. Normal commercial practice and trade principles would be that an item of business expenditure must be deducted in order to arrive at the true figure of profits and gains for tax purposes. A prudent businessman would naturally take into consideration this type of business expenditure before arriving at the true figure of his profits and gains. In this context, it would be appropriate to refer to the following succinct observations made by Chagla C. J., in the case of Aruna Mills Ltd. v. CIT [1957] 31 ITR 153, 163 (Bom) ; "Now, we have had occasion to point out in several d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 to be incidental to it. If that is established, then the deduction must be allowed, provided of course there is no prohibition against it, express or implied, in the Act. " (emphasis supplied) Further, the Supreme Court in the case of Madhav Prasad Jatia v. CIT [1979] 118 ITR 200, while considering the scope of section 10(2)(xv), has held that its range being wide, may take in not only the day-to-day running of a business but also the rationalisation of its administration and modernisation of its machinery ; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title ; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commencing or for the carrying on of a business ; it may comprehend many other acts incidental to the carrying on of the business. The relevant observations are as under : "Proceeding to consider the claim for deduction made by the assessee under section 10(2)(iii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilarly, in the case of Dehra Dun Tea Co. Ltd. v. CIT [1973] 88 ITR 197 (SC), the court dealt with payment of tax by the assessee-company on the tea garden lands under the U. P. Large Land Holdings Tax Act, 1957, and held that if the expenditure laid out by the assessee is as an owner-cum-trader and the expenditure is really incidental to the carrying on of his business, it must be treated to have been laid out by him as a trader and as incidental to his business and held that the lands owned by the assessee companies are their business assets and the tax paid thereon under the U. P. Act is an item of expenditure laid out by the assessee companies as traders and as incidental to their business. Consequently, the same must be treated as an item of expenditure under section 10(2)(xv) of the Act. Similar contention with regard to gratuity is dealt with by the Kerala High Court in the case of CIT v. High Land Produce Co. Ltd. [1976] 102 ITR 803. The court considered the provisions of sections 36 and 37 of the Income-tax Act in the context of the assessee's claim for deduction towards the liability for gratuity under the Kerala Industrial Employees' Payment of Gratuity Act, 1970. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpended wholly and exclusively for the purposes of the business or profession, which expenditure is not capital in nature or personal expenses of the assessee ; (c) it may take into account not only the day-to-day running expenses of a business but also the rationalisation of its administration and modernisation of its machinery ; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process and assertion of hostile title ; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commencing or for the carrying on of a business ; it may comprehend many other acts incidental to the carrying on of the business ; (d) unless there is express or implied prohibition under other provisions of Act, if the expenditure is covered by the provisions of section 37, then the necessary deduction is required to be given ; (e) the words "profits and gains" in trade are to be understood in their natural and proper sense, i.e., in a sense in which it is understood by a prudent businessman. Therefore, unless the Legislature intended a departure from the principle that an expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o January, 1977, the said premises were used for the purpose of the business because before commencing business from that premises, some repairs and furnishing were required to be carried out and the said activities were in the course of carrying on the assessee's business and, therefore, it should be held that the premises at Mittal Towers in Bombay were used by the assessee for the purpose of business. For this purpose, reliance is placed on the decision of this court in the case of Sarabhai Management Corporation Ltd.v. CIT [1976] 102 ITR 25. In that case, the court observed that in each case, the matter is required to be considered from the angle as to what was the business of the assessee and in particular what were the activities which constituted such business. The court further pointed out the confusion which is likely to be created by the two concepts, setting up the business for the particular business concern and the commencement of the business of the particular assessee. For this purpose, the court referred to the decision of the Bombay High Court in the case of Western India Vegetable Products Ltd. v. CIT [1954] 26 ITR 151, wherein the Bombay High Court had held : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he business of a boarding and lodging house. The partner placed his building at the disposal of the firm as his capital contribution. He allowed the use of the first, second, third and fourth floors of the building for the purposes of the business. Expenses were incurred in installing lights, making the building more ventilated, etc. The hotel was formally inaugurated in February, 1968. The Tribunal upheld the disallowance on the grounds that (i) the business had commenced only from February, 1968, and the expenses had been incurred prior to the commencement of business, and (ii) the expenses were of a capital nature. On a reference, this court held that it would be de hors the commercial sense to assert that it was only when one reached the stage of receiving customers that one could be said to have set up a hotel business. The court observed that certain preliminary activities have got to be carried out before it can be said that the business has commenced in the popular sense. For the purposes of starting the business of a boarding and lodging house, the assessee has got to obtain a suitable building where it can, with minor changes as little as possible, make the building more ..... X X X X Extracts X X X X X X X X Extracts X X X X
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