TMI Blog1964 (10) TMI 109X X X X Extracts X X X X X X X X Extracts X X X X ..... 31, 1953 after giving six months' notice. The deed of lease is in Gujarati and, as translated, clause (4) thereof runs as follows : If the land leased is acquired under the provisions of the Land Acquisition Act, or the leased and is notified for acquisition and such notification is subsequently cancelled and thereafter whatever may be the balance of the leased land, either party may within five years after he 1st January 1948, i.e., up to the 31st December 1953, call upon the other party by six monthly notice either to sell or purchase the leased land at the price of ₹ 4,09,959/- calculated at the rate of ₹ 10/- per square yard and the other party shall be bound to sell or purchase at he said price. If the party of the first part is willing to sell the leased land at the rate of calculated at ₹ 10/- per square yard within the herein above stipulated time and the party of the second part commits breach in purchasing the land, the land of the first part shall recover the sale price together with costs and interest thereon at the rate of six percent per annum of the leased land and the structures constructed thereon, and the deficiency, if any, sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich, after reciting the fact of the assessee company having withdrawn its objection to the title of the lessor to transfer the property, and the willingness of the assessee company to purchase the said land, provided for the specific performance of the provisions of clause (4) in the deed of lease and payment by the assessee company of the purchase price together with interest thereupon at the rate of 5-1/4 per cent per annum on the balance of due to the lessor. The decree also provided that the amount remaining outstanding could be paid by the assessee company by monthly instalments of ₹ 6,000/- with interest at the rate of 5-1/4 per annum on the reducing balance. During the pendency of the suit the assessee company had paid four sums on different dates aggregating to ₹ 1,43,740/-. The claim made in the suit was for ₹ 4,81,890/- which comprised of the purchase price and interest thereupon from March 1, 1951. After deducting the aforesaid sum of ₹ 1,43,740/- the balance remaining outstanding came to ₹ 3, 38,150/-. Out of this amount, the assessee paid ₹ 38,150/- on the date of the consent decree, i.e., on May 8, 1954 and therefore, the amount rem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer was not admissible as a deduction either under clause (iii) or clause (xv) of S.10 (2) as that item cold be attributable only to the consideration for the price of the land and therefore, must be regarded as capital expenditure. As regards the item of ₹ 17,281/- the appellate Assistant Commissioner was of the view that that amount also was not admissible either under cl.(iii) or cl.(xv) of S.10 (2) as the amount comprised of interest payable by the lessee on March 1, 1951 and the interest payable by the lessee was consequently nothing else than an addition to the cost of the land. Relying upon the decision of the High Court of Bombay in Metro Theatre, Bombay Ltd. v. Commissioner of Income Tax, (1946) (Bom) he held that the transaction was of purchase of a capital asset on a long term payment of interest on reducing balance and therefore, did not amount to borrowing of capital within the meaning of clause (iii) of S.10(2). He also added The present case contains another adverse factor at the interest really is a measure of the inflation of the purchase price due to a breach of contract on the part of the appellant company to purchase the land outright on 1- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on February 28,1950 and ₹ 101/-being Interest thereon at the rate of 5( per cent per annum Up to December 30, 1952, the date of the filling of The suit; ₹ 39,458/- being interest at the rate of 5( per cent per annum on ₹ 4,09,959/- for the period from 1-3-51 to 30-12-52. ₹ 24,687/- being interest at the rate of 5( per cent per annum from 31-12-52 to 5-5054 after adjusting the interest calculated on ₹ 1,43,150/- already paid by the lessee; ₹ 7,000/- costs of the suit payable to the lessor. --------------- Total ₹ 4,81,890/- ----------------- Pending the suit, the lessee, as aforesaid had paid four amounts aggregating to ₹ 1,43,740/-, namely, ₹ 26,055/- on 30-1-53 being the ground rent for two years plus ₹ 685/- due on 28-2-1950; ₹ 12,685/- being ground rent paid on 1-1-53; ₹ 30,000/- paid on 10-7-53 and ₹ 75,000/- paid on 13-3-54. Since it was agreed that the lessee was bound to purchase the property as from March 1,1951, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... follows : ₹ 4,09,950/- ₹ 26,191/- being interest due as on May 5, 1954, and ₹ 7,000/- costs of the suit; --------------- Total ₹ 4,43,150/- Less ₹ 1,43,150/- ----------------- Balance ₹ 3,00,000/- ------------------ The easiest way to understand the calculation made by the assessee company would appear to be as follows : ₹ 39,458/- being interest from 1-3-51 to 31-12-52; ₹ 24,687/- being interest from 31-12-51 to 5-5-54; ₹ 101/- being interest due on ₹ 685/- at the rate of 5-1/4 per cent per Annum. ------------ Total ₹ 64,246/- Less ₹ 38, 055/- ------------- Equal To ₹ 26,191/- ------------- The assessee company then debited from out of the amount of ₹ 26,101/- ₹ 8,910/- being interest payable by Bodiwala on the purchase price of ₹ 1,74,528/- payable by him in respect of the aforesaid 1,728 square yards. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany to carryout the provisions of the deed of lease. Such a default, he urged was totally unconnected with the business of the assessee company which was that of printers and publishers of a daily newspaper,. The learned Advocate General relied on (1946) 14 I T (Bom), which was a decision in a case nearest to the one before us. The assessee company there had also claimed deduction for an amount of ₹ 9,825/- under clause (iii) and clause (xv) and the question was whether that amount was allowable under either of the two clauses. The assessee had entered into a building agreement with the Government by which, in consideration of the company agreeing to build upon the land and to pay a sum of three lacs and odd rupees, it was to receive a lease for 999 years. The agreement provided for the payment of the amount by six monthly instalments with interest on the instalments outstanding from time to time, and it was in respect of ₹ 9,825/- which was the interest payable in the relevant year, that the claim for deduction was made by the assessee. The agreement which was entered into by the assessee inter alia provided that in consideration of the licensee agreeing to pay ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to purchase the property on payment of ₹ 3,81,796/- and was given some facility in payment of the same by instalments as provided in clause 2. The obligation was to pay the whole amount and therefore for the facility granted for deferred payments, interest had to be paid by the assessee in respect of the balance which remained unpaid. The minimum amount of instalments was also stipulated but the assessee had the right, if he chose to pay a larger amount and reduce his liability to the extent, both for the payment of the principal and interest. On the terms of the agreement he found himself unable to accept the contention that the transaction amounted to capital borrowed for the purpose of the business. He also stated that the transaction was neither a loan transaction nor was it for the purposes of the business. He also stated that the transaction was neither a loan transaction nor was it for the purposes of the business. As regards the claim for exemption under clause (xii) which, as it stood then was similar to the present clause (xv), he held that the assessee could not get the exemption claimed under that clause also. The business was of showing cinema films. That busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplemental agreement in which it was stated that it was not the intention of the parties to make the transaction appear as a loan by the transferor company to the transferee company and since that intention had not been properly stated in the original agreement a new cl.3(b) was substituted therein. Under this agreement, the assessee company paid ₹ 2,74,610/- to the Scindias as interest on the outstanding balance for the period ending June 30, 1954 and another sum of ₹ 2,86,823/- as interest for the year ending June 30, 1955, and it was in respect of these two amounts that deductions were sought under clauses (iii) and (xv) of section 10 (2). The learned Judge, following the decision in Metro Theatre Bombay Ltd. [1946]14ITR638(Bom) held that the interest amounts were not in respect of moneys borrowed for the purposes of the business as it was clearly not a case of borrowing in view of the position clarified by the supplemental agreement. They also held that the claim could not be made under clause (xv), for the price paid for the acquisition of a capital asset was undoubtedly capital expenditure and the amount or payment which was required to be made by way of interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss than ₹ 16,000 a year with effect from April 1, 1928, and after the expiry of five years the assessee company had to pay royalty of eight annas on every bottle of medicine sold by it to Dr.Varadarajulu Naidu as long as the company was in existence. In the year of account, the company paid to Dr.Varadarajulu Naidu the sum of ₹ 13,000 and odd representing eight annas for every bottle of the medicine sold by the company on the ground that it was a payment made by it solely for the purpose of earning profits or gains of the business which, in the year of account, amounted to ₹ 28,000. The Special Bench held that taking the two clauses together, they provided for the consideration of the purchase of the medicine and the amount of ₹ 13,000 was capital expenditure. It was an amount expended for the purchase by the company of the medicine and as such, would be assessable and would not be a lawful deduction under clause (ix) of section 10 (2) which was similar to the present clause (xv). (8) Mr.Nanavati however argued that the interest payable as a result of the stipulation providing deferred payments was not capital but revenue expenditure and was exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e it has stated that the expression for the purpose of business was wider in scope than the expression for the purpose of earning profits , but where at the same time the Supreme Court had also observed that however wide the meaning of the expression might be, its limits were implicit in it. The purpose should be for the purpose of the business, that is to say, the expenditure incurred should be for the carrying on of the business and the assessee should incur it in his capacity as a person carrying on the business. The Supreme Court held that it was not possible to dissociate the character of the assessee as the owner of the plantation and as a person working them as plantations and that, if the payment of interest on the amount borrowed for the purpose of plantations and the purchase of the plantations were to be viewed as an integrated whole the payment of interest was so closely related to the plantations that the expenditure could be said to have been laid out or expended wholly and exclusively for the purpose of the plantation. The Supreme Court also observed that looking to the transaction in the case, it was impossible to dissociate the character of the assessee as the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he interest paid and the conduct of the cinema business, and it was to distinguish that case that reliance was placed on the aforesaid observation of Kania J., as he then was. (9) Since the decision in Metro Theatre Bombay Ltd. [1946]14ITR638(Bom) has not been disapproved of or dissented from in Coelho's case [1964]53ITR186(SC) that decision is binding upon us unless Mr.Nanavati distinguishes it from the present case as it was done before the Supreme Court. Mr.Nanavati urged that the instant case was similar to the one before the Supreme Court in Coelho's case [1964]53ITR186(SC) and argued that the purchase of the land, the conduct of the business of printers and publishers and conducting a newspaper and the payment of interest where so closely connected that they formed an integrated transaction and that therefore , the payment of interest by the assessee company must be regarded, as was done in Coelho's case [1964]53ITR186(SC) as revenue expenditure and an expenditure incurred wholly and exclusively for the purpose of the business of the assessee company. For that purpose, he relied upon a statement made by the tribunal in Para 2 of the Statement of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, this distinction appears in an accentuated form by reason of the fact that interest became payable by the assessee, not because he had borrowed moneys for the purchase of the property but because of breach of the agreement by him. If the assessee company had agreed to purchase the land as being a necessity for his business and as part of his scheme of carrying on that business, as was the case in [1964]53ITR186(SC) is it possible that instead of purchasing the property as soon as the lessor exercised his option,, the assessee would commit default of clause 4 of the deed of lease and agree to purchase he land only when a suit had to be filed? In this connection, it would be pertinent also to remember tow facts, (1) that as early as 1946, the assessee had agreed to sell 1728 square yards to Bodiwala which would mean that the assessee company did not at any rate require the whole of the land for the purpose of its business, and (2) the building had already been put up by the assessee company for housing the press when it still occupied the land as the lessee. These facts clearly distinguish the present case from the one before the Supreme Court where, on the facts before it, the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an agreement containing a stipulation for payment by instalments would be interest and not capital in the hands of the vendor. The assessee company in that case sold part of the land which possessed upon terms that the purchase money was payable by instalments and that in addition to each instalment, there was to be paid a further sum for interest on the balance of capital outstanding at the date when an instalment became due and was paid. The agreement was that the purchaser was to pay a certain sum due when the contract was signed and when the next instalment came to be paid, he would pay interest on the full purchase money less the amount which was paid down when the contract was signed and so on until the last of the instalments was paid. Rowlatt J. held that the money that the company got by selling its land was not income but was realised capital, but negatived the contention urged on behalf of the company that interest, which was interest paid in respect of the company forbearing to collect for a certain tie its purchase money, i.e., interest on unpaid purchase money, was not income but was capital. This contention was repelled on the ground that if the company had collecte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p between the parties as a judgment-creditor and a judgment-debtor, that the judgment-debtor under the decree was given the facility to pay the decretal amount by instalments and the therefore, that transaction recorded in the consent decree amounted to a transaction of borrowing. In our view, this contention has no merit. The relationship between of a judgment creditor and a judgment debtor resulted in a consequence of the consent decree taken by the parties and sanctioned by the Court. The purchase price which is made payable by the assessee company was on the ground that the decree had made the assessee company liable to specifically perform the agreement contained in clause 4 of the deed of lease and had nothing to do with any such thing as a transaction of loan. It is the order for specific performance which placed the assessee company under an obligation to purchase the property at the price specified therein and payable in the manner set out therein. Even if the assessee company were not to take a deed of conveyance from the lessor the obligation to pay the purchase price was founded upon the assessee company's liability arising from the decree and not out on the basis o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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