TMI Blog1980 (12) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee-company was formed on 3rd September, 1956, with the object of dealing in and letting out properties. On the 19th October, 1956, which fell within the assessment year 1957-58, viz., an assessment year prior to the relevant assessment year for our consideration, the assessee-company took on 91 years' lease a plot of land more than 7 bighas for the purpose, of constructing a mansion on a portion of the land to earn rent therefrom and to sublease the other portion of the land after developing it and dividing it into plots. The assessee-company spent Rs. 67,484 on development of the land which was divided into plots and sub-leased for periods up to 90 years to various sub-lessees. From these sub-leases, the assessee-company had received what was called advance lease rent and salami during the previous years relevant to those assessment years from the various sub-lessees as follows: Assessment Advance lease Salami Total year rent realised realised Rs. Rs. Rs. 1958-59 2,18,840 40,792 2,89,632 1959-60 41,240 2,421 43, 661 1960-61 23,258 4,401 27,659 ---------------- -------------- --------------- 3,13,338 47,614 3,60,952 ---------------- -------------- --- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the premises, the assessee's submission, that whatever might be the estimated cost, the same should be divided in the ratio of 8996 was justified. The Tribunal noted that the assessee bad sold major portion of the aforesaid leasehold right and received in lieu thereof certain amount. The amount received as salami was more or less the amount paid as salami or payable as lease rent and the development expenses incurred. The rent that the assessee took in one lump sum in advance was much less than the total rent the assessee was to pay to its lessor. The assessee had further taken into account amongst other facts that while it was getting a cash amount on the date of the execution of the lease it was required to pay the lease rent and to incur certain other expenses in 91 years. In any event, there being no suggestion that the transaction was collusive, the Tribunal proceeded on the basis that the assessee acted like a prudent businessman in entering into all these transactions. From this point of view, the Tribunal asked the assessee to explain the reason for entering into such transaction. It was stated on behalf of the assessee that the assessee's plan was to receive cash amount w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... what the assessee was paying in terms of its obligation retained was to be paid in 91 years, the sum total of the obligations was deducted out of the amount received on account of sub-leasing the result would be equally unrealistic, if not more. Therefore, having regard to the ratio of the decision, according to the Tribunal, of the Supreme Court in the case of Calcutta Co. Ltd. v. CIT[1959] 37 ITR 1, the Tribunal concurred with the assessee's contention that the assessee's obligations in respect of the leasehold right sold could not be ignored and their value had to be estimated, and the Tribunal was unable to accept that the total amount payable in 91 years had to be considered as such. According to the Tribunal, it would be fair and in the interests of justice if the present day value of the assessee's 91 years' obligations to its lessor or sub-lessees paid and added to Rs. 40,000 by the assessee as a lump sum to its lessor and other expenses incurred by it on the development of the land (sic). The Tribunal also observed that the assessee conceded to this proposition. The Tribunal referred to the observations of the Supreme Court in the case of Metal Box Company of India v. Thei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as held by the Supreme Court that the undertaking to carry out the developments within six months from the dates of the deeds of sale, which in view of the fact that time was not of the essence of the contract, meant a reasonable time was unconditional and the party bound itself absolutely to carry out the same. That undertaking imposed a liability on the assessee which accrued on the dates of the deeds of sale though that liability was to be discharged at a future date. It was thus an accrued liability and the estimated expenditure which would be incurred in discharging the same could be deducted from the profits and gains of the business and the amount to be expended could be debited in the accounts maintained in the mercantile system of accounting which was to be actually disbursed. The difficulty in the estimation thereof, did not convert an accrued liability into a conditional one because it was always open to the ITO concerned, the Supreme Court noted, to arrive at a proper estimate and, therefore, the Supreme Court found that the sum of Rs. 24,809 represented the estimated amount which would have to be expended by the assessee in the course of carrying on its business and wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question. Our attention was drawn to several authorities in aid of the proposition that just as an assessee is not obliged to arrange its affairs in the manner so as to attract the maximum tax liability, so also an assessee is not to get the benefit of tax liability if it arises as a consequence of law simply because it is inequitable to do so if it arranges its affairs in a particular manner. It was also emphasised on behalf of the revenue that whatever might be allowed as a good accountancy might not necessarily follow as a sound principle of law and the question whether an expenditure would be allowable or not would depend on the actual legal consequence or proposition of law. Reliance in this connection was placed on the observations of the Lord President Clyde in the case of Edward Collins Sons Ltd. v. IRC [1924] 12 TC 773 at 783 (C Sess), where the Lord President observed as follows: "But, as it appears to me, this only serves to make it plain that what they are seeking to do is to put against the actual ascertained receipts from their business in one period a loss which is neither suffered nor incurred in that period. I know of no justification for this, either under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure) incurred solely for the purpose of making or earning such income, profits or gains, provided that no allowance shall be made on account of any personal expenses of the assessee. In their Lordships' view, on the true construction of that sub-section, the allowance for any expenditure incurred must be an allowance for expenditure incurred in the year in respect of which arise the income, profits and gains forming the basis of the assessment. Upon that footing, therefore, there can be no justification for deducting from the profits and gains something in respect of expenditure, whether it be regarded as capital expenditure or not, which occurred many years before. " Learned advocate for the revenue emphasised, as was observed by Lord Morris in the case of B.S.C. Footwear Ltd. v. Ridgway [1972] 83 ITR 269 at 283 (HL), that the company's methods might make a considerable in road upon the broadly accepted principle that neither expected future profits nor expected future losses were to be anticipated. But, whatever merits there might be in the company's accountancy methods for the purpose of its internal affairs, his Lordship was not prepared to accept that these findings were ..... X X X X Extracts X X X X X X X X Extracts X X X X
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