TMI Blog1978 (2) TMI 81X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ritz Pvt. Ltd. whereby the Life Insurance Corporation of India had agreed to effect additions and alterations to the building at the cost of Rs. 30,00,000 in return from Ritz Pvt. Ltd. for giving vacant possession of the premises with effect from 1st August, 1960, and the Life Insurance Corporation of India not charging any rent from the date of vacation of the premises by an agreement dated 6th March, 1961. Later on, this agreement was cancelled and the assessee-company simultaneously entered into an agreement with the Life Insurance Corporation of India on 30th May, 1963, whereby the Life Insurance Corporation of India agreed to reconstruct, remodel and enlarge the existing building at the cost of approximately Rs. 52,00,000 which was to be given on lease to the assessee-company on completion on the terms and conditions mentioned in the agreement. The recital of the agreement, inter alia, provided as follows : " 9. Ritz will pay to the LIC interest at the rate of 3% per annum on all amounts expended or deemed to be expended by LIC from 1st August, 1960, in respect of and on such reconstruction at the end of every quarter until new and remodelled building shall be complete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng thereof on the premises. (ii) Sinking Fund contribution payable until 100% of the total cost is covered at the rate of 3.53611 per cent. per annum on the total costs, charges and expenses incurred for all lifts, transformers and water pumps and the fixing thereof on the premises. (iii) Sinking Fund contribution payable until 100% of the cost is covered at the rate of 5.1835 per cent. per annum on the total costs, charges and expenses incurred for switch gear, water supply and sanitary fittings and electrical wiring and the fixing thereof on the premises. (iv) Sinking Fund contribution payable until 100% of the cost is covered at the rate of 8.58414 per cent. per annum on the total costs, charges and expenses incurred for air conditioning ducts, tube-well and water softening plant and the fixing thereof on the premises. The Fourth Schedule hereto shows the Sinking Fund contribution to be made in respect of the various items mentioned above. (v) Insurance premium to cover risks of fire, tempest, earthquake and riot and civil commotion with the Oriental Fire and General Insurance Company Limited, in such amount as will enable the LIC to rebuild the premises or replace any d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is purpose the legal character of the transaction should not be ignored. The Tribunal was unable to accept the contention that the amounts were in the nature of rent. The Tribunal further observed that the payments to the Life Insurance Corporation of India were in connection with the setting up of the new hotel which actually started in July, 1971, under the name of Ritz Continental and not for the extension or expansion of the existing hotel business under the name of A. Firpos Ltd. The Tribunal further held that these expenses could not be said to be in connection with the expansion of the existing business and these expenses, according to the Tribunal, were in connection with the business which had not commenced till the end of the previous year under consideration. Therefore, the Tribunal came to the conclusion that the amounts could not be treated as expenditure relating to the business which had commenced. The Tribunal, therefore, came to the conclusion that the expenditure in computing the income from the existing hotel business was rightly disallowed by the Income-tax Officer and, on this aspect, the Tribunal, therefore, dismissed the appeal of the assessee. Under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the acquisition of a plantation and interest paid on capital borrowed for the purpose of existing plantations. There, however, no question arose as to whether the new plantation was part of the existing business carried on by the assessee or not. Reliance was also placed on the decision in the case of India Cements Ltd. v. Commissioner of Income-tax [1966] 60 ITR 52 (SC). There the assessee had obtained a loan of Rs. 40 lakhs from the Industrial Finance Corporation and secured the same by a charge on its fixed assets. In connection therewith it had spent a sum of Rs. 84,633 towards stamp duty, registration fee, lawyer's fees, etc., and it had claimed that amount as business expenditure. It was held that the amount spent was not in the nature of capital expenditure and was laid out or expended wholly and exclusively for the purpose of the assessee's business and was, therefore, allowable as a deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922. The court further held that the act of borrowing money was incidental to the carrying on of business. The loan obtained was not an asset or an advantage of enduring nature. The expenditure was made for securing the use of mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s carried on by the assessee in the year in question but were in connection with the setting up of a new hotel which had not commenced business at the end of the relevant previous year. It is well settled that in order to be allowable the expenses must partake the source of profit which is taxable. In order to be allowable as expenses it should be in respect of business which was carried on by the assessee and the profits of which are computed and assessed and should be incurred after the business is set up. Here the Tribunal has found that the expenses were in connection with or related to a business which was yet to commence and which actually commenced business in July, 1971. Whether the business of running the restaurant of A. Firpos Ltd., which the assessee had taken over in the relevant year, was the same business carried on by the assessee was a question or a contention not raised before the Tribunal. At this stage, therefore, it is not possible to entertain this argument urged on behalf of the assessee that the business in effect that was carried on by the assessee in running the restaurant in the name of A. Firpos Ltd., was the same business that the assessee was carrying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce before the Tribunal to hold that the assessee-company had set up its business as from 1st September, 1946, In the case of L. M. Chhabda Sons v. Commissioner of Income-tax [ 1967] 65 ITR 638 the Supreme Court was considering this aspect of the matter. There the assessee was carrying on the business of exhibiting cinematograph films in Ahmedabad and Bombay. The lease in respect of one cinema theatre, the Prakash Talkies, had expired in 1952, and thereafter the landlord had filed suit in ejectment against the appellants and obtained a decree for possession and an order for payment of mesne profits. Out of the mesne profits paid by the appellants, they had claimed deduction of the sum of Rs. 92,240 in determing their business income for the calendar year 1954, relevent to the assessment year 1955-56. The Income-tax Officer disallowed the claim on the ground that the business of Prakash Talkies was not carried on by the assessee during the year 1954. The Tribunal affirmed the disallowance holding that the cinema theatres acquired by the assessee from time to time on lease or otherwise were run independently of one another and with separate identifiable books and that the opening o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss activities could make no difference to the particular phenomenon involved in the process of ascertaining the profits from each business activity. In the case before the Madras High Court, the disallowance by the departmental authorities and the Tribunal of the claim of the assessee-firm to set off a sum of Rs. 31,820 paid in discharge of a decree in respect of its country craft route agency business, which had been discontinued, against the profits of its petroleum agency business, which had not been discontinued, was upheld by the High Court. So far as the question of borrowing is concerned, in the case of Bombay Steam Navigation Company (1953) P. Ltd. v. Commissiner of Income-tax [1965] 56 ITR 52, the Supreme Court held that the expression " capital " used in section 10(2)(iii) of the 1922 Act, similar to section 36(1)(iii) of the present Act, meant money and not any other asset. There was in truth no capital borrowed by the assessee in that case where an agreement to pay the balance of consideration due by the purchaser did not in truth give rise to a loan. Therefore, the claim for deduction of the amount of interest under section 10(2) (iii)of the 1922 Act was not admissib ..... X X X X Extracts X X X X X X X X Extracts X X X X
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