1. This is an appeal filed by the assessee firm against the order of Commissioner of Income-tax (Appeals)-I, Hyderabad dated 29-7-1986 and it relates to assessment year 1982-83 for which the previous year ended by 31-3-1982. For this assessment year continuation of registration was granted to the assessee firm. The business of the assessee was running of a lodging house and letting out of shops and to collect the monthly rentals from the tenants. It may here itself be mentioned that M/s.
B.R. Associates entered into a lease agreement dated 7-4-1966 for a period of 33 years on a stipulation to pay. an yearly rent of Rs. 42,000. M/s B.R. Associates under the covenant of the above lease deed undertook to raise new constructions worth Rs. 7 lakhs on the leased premises. The assessee firm took on sub-lease from M/s B.R. Associates the premises bearing municipal Nos. 6-1-1082/B and shops bearing Nos.
6-1-1082/1 to 17 and residential flats bearing Nos. 6-1-1081/1 to 4 and an open area admeasuring about 2,500 sq. yards firstly for 11 months under the sub-lease dated 3-8-1971. Under sub-lease dated 23-9-1972 the sub-lease was renewed for a further period of 15 years on a stipulation to pay monthly rent of Rs. 3,000. Under the terms of the sub-lease agreement last cited, the assessee covenanted to put up constructions up to a minimum of Rs. 3,25,000. We had the occasion to consider the head-lease as well as the sub-leases and came to the following conclusion in our orders dated 6-2-1984 relating to the same assessee for assessment years 1974-75, 1975-76 and 1977-78 in ITA Nos. 1633, 1634 and 1635/Gtd/82. Our finding is as follows: - So para 2 of the preamble when read coupled with condition No. 5 of the head lease would clearly disclose that as soon as any new construction would be put up on the demised premises it would partake the character of the premises already let out by the waqf to M/s B.R. Associates. That means even during the subsistence of the lease period the waqf would become the owner of the superstructures put up either by it or by its sub-lessees. In those circumstances there is no scope for the assessee to argue that it would be the owner of the superstructure raised by it during the tenure of the lease in its favour.
In discharge of its obligations the assessee had found debited an amount of Rs. 1,57,925.46 to its Profit and Loss account under the head "constructions". The assessee claimed the amount of Rs. 1,57,926.46 as a revenue deduction and it relied upon the observations made in its own case by this Tribunal for earlier years. The Income-tax Officer however, did not agree with the contentions of the assessee and held the Tribunal's decision was rendered in a different context and Hon'ble Tribunal considered whether the pagadi or salami amounts received constitute capital receipt or revenue receipt. He also duly took into consideration the fact that the assessee itself had claimed ownership in the new constructions put up by it during the course of arguments before the Tribunal for the earlier years. He further held that simply because salami amounts were held to be part of circulated capital does not give place to an argument that anything which is constructed with such circulating capital also becomes revenue expenditure even though it is under ordinary circumstances should be considered as capital expenditure. He held ultimately that the amounts spent on the new structures raised by the assessee is a capital asset in its hands. Thus he disallowed the deduction of Rs. 1,57,925. The assessee appealed. It was argued before her on behalf of the assessee that the amount spent did not result in creating the asset of an enduring nature inasmuch as the building soon after the construction would belong to the wakf. The special attention of the learned CIT(A) was drawn to Clauses 5, 6, 10 of the head-lease. The learned CIT(A) held that the lease deed mentioned rent per month and in addition made the lease conditional on construction of buildings worth Rs. 7 lakhs. Normally the sum of Rs. 7 lakhs should also be spread over the lease period and treated as part of the rent for the premises. However, neither the lessee (B.R.Associates) nor the assessee had taken this stand at any stage. She further held that the construction of buildings on the demised premises, the assessee clearly gets title for the exercise of ownership rights over such buildings after the duration of the lease period. This is provided in the terms of the lease deed itself for the duration of the lease and therefore the appellant is the owner of the building and as such has created an asset of an enduring advantage even though the enjoyment of which is co-terminus with the lease. Ultimately she dismissed the appeal.
2. The assessee is now in second appeal before this Tribunal. We may wish to point out that the two findings of the learned CIT(A) given in para 6.4 are quite contrary to each other. In the first finding she states that the assessee gets title over the said buildings (new constructions) after the duration of the lease period. In the second finding, she states that the assessee is the owner of the building even though the enjoyment of which is co-terminus with the lease. Firstly we are unable to understand what is the definite finding of the CIT(A) with regard to the ownership of the new construction which the assessee is obliged to put up on the leased premises as per the sub-lease dated 23-9-1972. The copy of the sub-lease was furnished at pages 43 to 47 of the paper compilation filed before us. The head lease dated 7-4-1966 is furnished at pages 25 to 33. Condition No. 5 of the head lease executed between the Mumtax Yar-Ud-Dowla and B.R. Associates, reads as under : - 5. The Lessees have obtained on lease the premises consisting of buildings and shops valued approximately at Rs. 3.5 lakhs (Rupees three Lakhs and Fifty thousand Only) and the whole area of land open and constructed upon valued Rs. 2.5 Lakhs (Rupees two lakhs and fifty thousand only), inter alia for constructing thereon a building or buildings and hereby covenant that they shall spend not less than Rupees Seven Lakhs on such construction during the term of this lease.
Condition No. 4 in the sub-lease is provided at page 45 which is as follows: - 4. The second party during the period of lease shall construct or make further additions to the existing buildings up to a minimum value of Rs. 3,25,000 on the premises hereby leased.
The meaning which is to be spelt out by a conjoint reading of the head lease as well as the second sub-lease, is already considered by us in our earlier orders, and we held as extracted already by the ITO in his orders which is already extracted above. There we held that as soon as any new construction would be put up on the demised premises, it would partake the character of the premises already let out by the wakf to M/s B.R. Associates. We have also held that it means even during subsistence of lease period the wakf would become the owner of super-structure put up either by it or by the sub-lessees. In these circumstances, firstly we do not agree with the I.T.O. that we have considered the lease deeds only with reference to the salami or pagadi amounts. In our opinion the construction holds good even with regard to the ownership of the new constructions put up on the demised premises.
As regards the CIT(A)'s orders we feel that there was no proper understanding of the resultant position of a conjoint reading of the head-lease as well as the second sub-lease. Therefore, we are constrained to observe that the Lower Authorities went wrong in appreciating the correct legal position which emerges from a conjoint reading of the head lease as well as second sub-lease despite the fact that we have .already decided upon the same topic in our earlier orders in the assessee's own case for earlier years referred to supra. Now as far as facts are concerned the assessee is a sub-lessee. It had taken on sub-lease dated 23-9-1972. The lease subsist only for 15 years.
Under condition No. 4 of the sub-lease it had under taken to construct or make further additions to the existing buildings up to a minimum of value of Rs. 3,25,000. In the relevant accounting year it had made an addition of Rs. 1,57,925. As we have already held in our earlier orders that as soon as the new constructions were put up on the demised premises, they automatically partake the character of demised premises, the ownership of that buildings vests with the wakf, the original owner of the premises and even during the subsistence of the sub-lease the ownership does not vest with the assessee but only with the wakf. Under these circumstances the question is whether the amount of Rs. 1,57,925 should be considered as capital expenditure on which ground the revenue disallowed the same as a deduction or as a revenue expenditure as contended by the assessee. The learned counsel for the assessee Sri B.Satyanarayana Murthy, brought to our attention the Orissa High Court decision in CIT v. J.N.Bhowmick [1978] 111 ITR 747 and the Andhra Pradesh High Court Decision in CIT v. Singareni Collieries Co. Ltd. [1980] 121 ITR 466. In all fairness the learned Counsel brought to our notice the decision of the Andhra Pradesh High Court in Taj Mahal Hotel v. CIT [1967] 66 ITR 303. However, he contended that this decision does not apply and the distinguishing features were pointed out by the Orissa High Court in J.N. Bhowmick's case (supra). On the other hand the learned Departmental Representative relied upon Liberty Cinema v.CIT [1964] 52 ITR 153 (Cal.). Secondly he also drew our attention to the decision of the A.P. High Court in Sri Rama Talkies v. CIT [1966] 59 ITR 63. The learned D.R. further relied upon the Bombay High Court's decision in CIT v. Vasant Screens [1980] 124 ITR 835. He also invited our attention to the Delhi High Court's decision in Hotel Diplomat v.CIT [1980] 125 ITR 781. He also cited before us the decision of the Allahabad 'A' Bench in ITO v. Manorama Agencies [1984] 10 ITD 868.
3. Now before distinguishing the case of Taj Mahal Hotel (supra) we have to see what are the facts of the case and what is the ratio held on those facts. The assessee in that case firstly took up a hotel building on lease for 10 years in 1956 on a rent of Rs. 1300 per month with an option to renew the same for another 10 years on a rent of Rs. 1400. Under the terms of the lease deed, the assessee was given liberty by the lessor to make alterations or new constructions with the permission of the lessor and it was stipulated that the lessor could not demand any enhanced rent. On termination of the lease, the assessee was to take away fittings and fixtures like fans, wash basins, wooden screens etc. while the structures would remain the property of the lessor. In the accounting year relevant to assessment year 1966-67 the assessee put up new rooms for the comfort and convenience of guests and claimed the expenditure incurred viz., Rs. 60,000 as allowable deduction. The department disallowed the same on the ground that it is capital expenditure. The High Court held on the above facts that the improvements effected by the assessee were of an enduring advantage, though not everlasting, for the assessee's business during the period of the lease; the expenditure was neither "rent" nor "premium" and the department was right in treating it as capital expenditure. In J.N.Bhowmick's case (supra) the facts are as follows: - The assessee is an individual. The assessment year is 1969-70. The previous year ended with 31-3-1969. During the year the assessee ran a hotel known as Sagarika Hotel located on the sea beach at Puri.
The hotel premises were taken on lease by the assessee. Under the covenant of lease dated 13-7-1967 the assessee undertook to erect within 18 months from the date of the lease, masonry structures on the two sides of the vacant plot of land in- front of existing building known as Ashu Bhavan as per plan to be approved by the lessors and the building was to be of very good type and the expenditure was estimated at Rs. 60,000 in the minimum. This masonry structure undertaken to be built by the assessee was to vest in the lessor on the expiry of the term of the lease (i.e. 12 years 11 months) and it was further expressly stipulated that failure to raise the construction within the time indicated would entail forfeiture of the lease. During the year, assessee claimed deduction of a sum of Rs. 38,397 said to have been spent on the aforesaid head and the same was pressed to be accepted as revenue expenditure. The I.T.O. treated it as capital expenditure and rejected the claim for deduction. The A.A.C. confirmed the order of the I.T.O. He also declined to accept the deduction. The Tribunal while confirming the finding of the Lower Authorities treated capital expenditure however allowed depreciation calculated at 1/11th of the expenditure reckoned with the year of construction as deferred revenue expenditure. The question referred to the High Court was whether the Tribunal was justified in allowing depreciation at 1/11th of the expenditure reckoned with the year of construction as deferred revenue expenditure.
The Orissa High Court had reviewed the whole of the case law during the course of which they have also considered the A.P. High Court Decision in Taj Mahal Hotel's case (supra). They have extracted the discussion portion from pages 313, 314 and 315. They found out that in the case of Taj Mahal Hotel (supra) the assessee was given an option either to raise new building or not. However, that is not the case on hand. The lease deed itself cast an obligation on the assessee-lessee to raise the structures. We have already quoted para 4 of the sub-lease in the above paras which obliges the assessee to spend a minimum of Rs. 3.5 lakhs over the new construction in order to continue as a tenant for a period of 15 years. This makes all the difference. In so many words the Orissa High Court held it so at p. 754: - It is thus clear that the construction undertaken by the assessee was an obligation which the lessee had undertaken to perform in order to keep up the lease hold where the hotel business was being run. This, in our view, brings about a substantial distinction and, therefore, the Andhra Pradesh decision referred to above would not assist in resolving the dispute arising on the facts of this case.
The fundamental point of distinction brought about by the Orissa High Court in order to distinguish Taj Mahal Hotel's case (supra) equally applies to the facts on hand before us. Ultimately on the facts before them the Orissa High Court held as follows: - Held, that the construction raised by the assessee was an obligation which he had undertaken to perform in order to keep up the leasehold where the hotel business was being run. If the expenditure had not been incurred the lease itself would have stood forfeited thereby depriving the assessee of the source of income. Though in a way the benefit obtained by the new construction was an enduring asset to last as long as the lease subsisted, that cannot be the sole guideline for all types of cases. When an overall picture is taken on the facts of the case it would be appropriate to hold that the expenditure was incurred for keeping up the business and, therefore, was revenue expenditure.
In Singareni Collieries Co. Ltd.'s case (supra) the facts before the A.P. High Court were the following : - Under the provisions of Coal Mines Labour Fund Act, 1967, the Coal Mines Labour Housing Board was constituted for construction of low cost houses for persons employed in coal mines. In pursuance of a scheme prepared by the said Board, the assessee-collieries entered into an agreement with the said Board for construction of quarters for its labourers. As per the specifications laid down by the Board, the Board was to pay a maximum amount of Rs. 3,100 per house to the assessee-company. According to the Scheme, the buildings shall be durable for an estimated life of 15 years and buildings and site shall belong to the Board. The agreement with the Board shall be with 15 years during which period a nominal amount of Re. 1 per month per tenement shall be paid by the company to the Board. In pursuance of the said scheme, the assessee-company constructed quarters in the assessment years 1964-65 and 1965-66 by incurring an expenditure of Rs. 45,20,723 and Rs. 42,25,420. However, the Board had paid the assessee an amount of Rs. 44,14,400 and Rs. 39,70,317 calculated at the rate of Rs. 3,100 per quarter. The balance sum of Rs. 1,06,323 for assessment year 1964-65 and Rs. 2,55,103 for assessment year 1965-66 was claimed as revenue expenditure by the assessee-company. The I.T.O. negatived the claim of the assessee and it was confirmed by the AAC. However, the Tribunal upheld the claim of the assessee. The Andhra Pradesh High Court on these facts while confirming the Tribunal's view held the following: - Held, in deciding whether an expenditure is of a capital or revenue nature, each case has to be decided on its own merits mainly with reference to the aim, object and result of the expenditure. Though the expenditure was incurred by the assessee-company for the construction of the houses once for all, that circumstance by itself cannot be a ground to hold that the expenditure was capital in nature. A capital expenditure must be incurred with a view to bring into existence an asset or advantage for the enduring benefit of the trade. "Enduring benefit" is a relative term of contextual interpretation. In the light of possible and probable long span of the company's life, the indirect benefit which the company may derive through contented workman for a limited period of just 15 years, cannot constitute a lasting benefit so as to classify the expenditure as capital in nature. The expenditure was incurred primarily for the welfare of the employees of the assessee-company.
The consideration whether the assessee was acting voluntarily or whether the expenditure was incurred in pursuance of its statutory obligation would not make any difference. The extra-expenditure had to be incurred by the assessee because it could not construct the quarters according to the specifications of the Board with the amount allotted by the Board. Therefore, the expenditure incurred by assessee was not for the purpose of bringing into existence an enduring benefit for its business but for carrying on its business profitably. Hence, the expenditure incurred is revenue in nature.
While applying the above ratio to the facts of our case it can as well be argued that the new constructions at the cost of Rs. 1,57,925 was incurred by the assessee for carrying on of its business profitably besides the fact that it was obligatory on the part of the assessee to spend the amount according to the terms of the lease. If it tails to keep up the terms of the lease there is every likelihood of forfeiture of the lease. In such a case the whole income earning apparatus would not be available. The only benefit which the assessee would contemplate, is, that it is entitled to let out the additional accommodation created by the new constructions can also be let out and thus the main object of its carrying on of its business more profitably can be achieved. This argument of Sri. B. Satyanarayana Murthy, learned counsel for the assessee is to be accepted. In our opinion the case law cited by the D.R. is clearly distinguishable and therefore the ratios of those of the case laws cited by the learned D.R. in our opinion, do not apply to the facts on hand. Firstly let us take up in Liberty Cinema's case (supra). The Calcutta High Court in that case laid down that in a case where the deduction from business profits are to be claimed under Sub-section (2) of Section 10 of the I.T. Act, the onus of proving that such allowances are permissible is upon the .assessee and the High Court in such cases must base its answer on the facts as found by the Tribunal. We respectfully follow the above proposition as correct. Having laid the above they went into the facts of the case which are as follows: - The assessee purchased the leasehold right for five years in a cinema theatre in Court auction with the machinery, furniture and other fixtures and had to spend in the year of account Rs. 24,408 for repairs and renovation and a sum of Rs. 9,890 as legal expenses in connection with an application to set aside the auction sale and claimed these amounts as a deduction. The Tribunal found that these expenses were of a capital nature and disallowed the claim. The High Court held, (i) with regard to the claim of Rs. 24,498, since the Tribunal had found that the expenses incurred on this account were all of capital nature, and the onus was on the assessee to prove the facts necessary to bring him within the allowance under Section 10(2) (xv) of the Act and the assessee had failed completely to discharge that onus by producing any fact showing the nature and character of these expenses, the sum of Rs. 24,498 cannot be claimed Under Section 10(2)(xv) or Under Section 10(2)(v) of the Act.
As can be seen from the above the High Court very much relied upon the finding of fact given by the Tribunal that the expenditure of Rs. 24,498 was capital in nature. It also took into consideration the failure of the assessee to prove necessary facts which would bring him within the allowance under Section 10(2)(xv). However, this is not the case here. The Tribunal already found that the assessee would not be the owner as soon as the constructions were completed and it would form part of the demised premises whose owner would be the lessor under head lease. Therefore, the Calcutta decision does not help the revenue.
4. Now let us deal with the Sri Rama Talkies' case (supra). In that case the assessee was a tenant of the land and he had taken the cinema hall on lease. The Landlord filed a suit for eviction. A conditional stay of execution of the decree pending the appeal, was passed according to which the assessee has to pay a sum of Rs. 6,991 as mesne profits for 7 years from the date of termination of the term of lease up to the date of the stay order. The assessee claimed Rs. 6,991 as rent paid in the assessment year and also claimed a further allowance of Rs. 15,275 spent on extensive renovations to the theatre. The reason for disallowing Rs. 15,275 by the High Court is stated pithily in the head note of the decision at p. 63 as follows : - Held further, that the amount of Rs. 15,275 was not allowable as expenditure for current repairs or as revenue expenditure under Section 10(2) (v) or 10(2) (xv) of the Act. The expenditure could not be allowed Under Section 10(2)(v) as the amount was not spent in current repairs to the theatre but on improvements of great magnitude carried out for giving an enduring advantage to the assessee to keep pace with or outstrip in the competition with a new theatre which had recently sprung up, and the expenditure did not fall within the scope of Section 10(2) (v) of the Act. It was not allowable Under Section 10(2)(xv) as substantial improvements were made to the building and the land appurtenant thereto, with the sole object of getting an enduring benefit for the business and the expenditure must be deemed to be in the nature of a capital expenditure.
As can be seen from the above that the finding of fact given on which the High Court confirmed the finding that it was capital expenditure, was, that the amount was not spent in current repairs to the theatre but on improvement of great magnitude carried out for giving an enduring advantage to the assessee to keep pace with or outstrip in the competition with a new theatre which had recently sprung up and the expenditure did not fall within the scope of Section 10(2) (v) of the Act. However, no such facts are present in the case before us. In Sri Rama Talkies' case (supra) there was no obligation on the part of the assessee-lessee to construct by investing any amount whatsoever. In fact the assessee is not even the lessee but a tenant holding over.
Thus the facts of Sri Rama Talkies' case (supra) and the facts of the present case are at great variance and the ratio given in Sri Rama Talkies case (supra) is confined only to the facts of that case and it cannot have universal application.
5. In the Bombay case in Vasant Screens (supra) 'R' the owner of a godown entered into a lease with the assessee under which he had taken on lease with the godown together with lands on both sides. Under the terms the godown was converted into an 'A' class theatre for exhibiting films. Under the agreement the assessee was to incur an expenditure of Rs. 40,000 to Rs. 50,000 with a right to get reimbursement from the rent. The lease was for a period of ten years and extended for further period of two years. The expenditure incurred by the assessee far in excess of Rs. 50,000. Disputes arose between the lessor and the lessee (assessee) and they were all settled in 1963 and under the settlement 'R' agreed to allow the reimbursement of Rs. 80,000 and the balance of Rs. 49,009 had to be borne by the assessee. The assessee claimed the sum of Rs. 49,009 as business expenditure for the assessment year 1964-65. In those circumstances it was held by the Bombay High Court that the assessee could not have commenced the business of exhibiting films without spending the sum of Rs. 49,009. Part of the expenditure was for converting the godown into a cinema theatre. The expenditure brought into existence an enduring benefit or advantage to the assessee during the period of lease. It was held to be capital expenditure.
6. However, in the facts of our present case there is no question of income earning apparatus itself beginning with a new construction which the assessee obliged to make under condition No. 4 of the sub-lease. In our present case, in order to preserve the income earning apparatus which in our case is the subsistence of the lease the amount is to be spent, whereas in Bombay case the amount is to be spent in order to create the income earning apparatus itself, viz., exhibiting of cinema films. That makes a vital distinction and therefore, the Bombay High Court's decision does not apply to the facts of the case.
7. Now let us come to the Delhi High Court decision in Hotel Diplomat's case (supra). In the Delhi case the firm comprising of four partners were no other than the co-owners of the building which the firm had taken on lease for an indefinite period on 25-11-1962. Under the lease terms any structural alterations or additions were to become the property of the co-owners. By a supplemental agreement the firm was to give six months' notice before determining the lease. The firm let out the building to an Embassy. Under the terms of the rent deed dated 19-2-1963 initially it was for a period of two years. It was extended for another period of two years under the terms of rent deed dated 1-10-1964. Pursuant to the terms of the rent deed with the Embassy, the assessee incurred expenditure during the accounting period relevant to the assessment year 1963-64, out of which the sum of Rs. 3,361 represented expenses for construction of additional bathrooms. The question was whether this amount spent for construction of additional bathrooms is to be considered as capital expenditure or revenue expenditure as claimed by the assessee. The Tribunal held that it was capital expenditure as the improvements were of an enduring nature and they would be available to the assessee even if the Embassy vacated the premises. The Tribunal also took into consideration the facts that the partners of the firm owned the property which fact ensured continuity of its tenure for the foreseeable future. The Delhi High Court confirmed the Tribunal's decision. In the above Delhi's case the lessee firm comprises of only partners who are co-owners of the building which it had taken on lease. However, in our present case wakf was the real owner. M/s. B.R. Associates was the original lessee and M/s Krishna Hotel was the sub-lessee. Under the circumstances the facts are so divergent and that the ratio of the Delhi High Court does not apply to the facts before us.
8. Now remains the Allahabad Tribunal's decision in Manorama Agencies case (supra). The Allahabad Tribunal's decision also is distinguishable as the lessees were under no obligation to spend any amount whatsoever either on renovation or on reconstruction. However, in order to let out the building for bank and in order to suit the requirements of the bank, the assessee therein constructed a mazzanine floor and made other structural changes. In those circumstances the Tribunal held that the expenditure was capital in nature. However, the facts before the Allahabad Tribunal were quite different from the facts before us. In the facts before us there was an obligation on the part of the lessee to Spend Rs. 3.5 lakhs over new constructions in the lease premises as a condition for preserving the lease, which is the income earning apparatus or machinery.
9. Thus we hold that the decisions cited by the learned Departmental Representative are quite distinguishable and their ratios do not apply to the facts on hand. On the other hand the decisions cited by the learned counsel for the assessee are nearer to the facts before us and therefore, the ratio of the Orissa and Andhra Pradesh High Court decisions aptly apply in our opinion to the facts on hand, according to which we have to hold that the amount of Rs. 1,57,925 should be allowed as revenue expenditure. We reverse the finding of the Lower Authorities and allow the assessee's appeal on this point.
10. Thus ground No. 6 of the appeals is answered in favour of the assessee. Now let us take up ground No. 7. The assessee complains that though it had denied its liability to pay interest either under Section 139(8) or under Section 217 the learned Commissioner did not make even a mention of it besides not dealing with the same ground before her.
The I.T.O. imposed interest of Rs. 32,568 under Section 139(8) and an amount of Rs. 16,800 under Section 217. The truth of the contention was not denied by the learned Departmental Representative. However, what he contends is that this is not a reassessment but it represents the first and original assessment itself. It is no doubt true, argues the learned D.R. that Section 148 notice to be issued to the assessee called upon him file a return. He argues that every assessment made Under Section 148 need not be considered as a reassessment. Even an original assessment can be validly made Under Section 148 for the reason that Section 147(a) applies when there was failure on the part of the assessee to file a return and under Section 148(1) the Legislature contemplated that before making assessment a notice containing all or any other requirements which may be included in notice under Sub-section (i) to Section 139 should be issued. Sri B. Satyanarayana Murthy requested us to direct the learned CIT (A) to dispose of this matter in view of the latest A.P. High Court decision in CIT v. Padma Timber Depot [1988] 169 ITR 646 wherein it is held that Section 139(8) Explanation (2) has been added with effect from 1-4-1985 which states that an assessment made for the first time under Section 147 must be regarded as a regular assessment. However, this came into effect only from 1-4-1985 relevant to assessment year 1985-86 and it does not apply to the assessment years preceding it. In the case before us the assessment year is 1982-83 the previous year for which ended by 31-3-1982. The return can be filed within 31-7-1982. However it was filed in pursuance to Section 148 notice on 9-8-1984. The question is whether the assessment which was made is a regular assessment. In Padma Timber Depot's case (supra) for assessment year 1976-77 the return was filed on 1-6-1979. The ITO held that the said return cannot be considered as a return Under Section 139 as it was not filed within lime specified Under Section 139. The I.T.O. therefore issued notice Under Section 148 on the basis that the assessee failed to file its return of income within the time allowed Under Section 139. In response to the said notice the assessee informed the I.T.O. that the return filed already on 1-6-1979 might be treated as one filed in response to notice Under Section 148. The I.T.O. made an addition to the income returned and completed the assessment and also levied interest Under Section 139(8) and 217. The assessee objected to the levy of the interest and filed an appeal against it. The AAC cancelled the interest and this was upheld by the Tribunal. The High Court held that since there was a total denial of liability to interest, the assessee was entitled to dispute the levy of interest in the appeal filed by it.
11. In view of the authoritative pronouncement of the A.P. High Court the learned CIT (A) is wrong in not even dealing with this specific ground raised before her with reference to the denial of liability to pay any interest Under Section 139(8) or Under Section 217. Therefore, we direct the CIT (A) to give her finding thereon in view of the A.P.High Court decision referred to supra. Thus we dispose of the seventh ground in the appeal.
12. Grounds 4 and 5 in the appeal grounds go together and they concern themselves with a disallowance of Rs. 12,209. The total interest payable on the borrowed funds by the assessee was Rs. 1,56,982. It is the case of the I.T.O. that out of the borrowed funds an amount of Rs. 89,227 was diverted for non-business purposes. The assessee claimed that no direct link between the borrowed funds and advance for non-business purposes was established. In fact it is the contention of Sri B,. Satyanarayana Murthy that no amount of borrowed fund was diverted for non-business purposes. Further he filed the balance sheet as on 31-3-1981 and also on 31-3-1982. An amount of Rs. 52,329.18 was appearing as a liability due to municipal corporation. He says that it was only a provision made and the amount was never paid to the municipality. Ordinarily before a provision is made in the accounts the amount of a provision would be debited to the profit and loss account and credited to the provision account. The balance as on 31-3-1981 and 31-3-1982 provided at pages 49 and 51 respectively disclosed the amount of Rs. 52,329.18 as a liability. That means to our understanding the amount was never paid but remained in the provision account. The amount of debit in the profit and loss account to the extent of the provision would certainly have an impact on the partners account balances. Sri B.Satyanarayana Murthy, learned counsel for the assessee also argued that in our orders for assessment years 1974-75,1975-76 and 1977-78 a copy of which is furnished at pages 1 to 23 dated 6-2-1984 we held that salami amounts were revenue receipts in the hands of the assessee.
However, the assessee had treated it as capital receipt and had credited them to the building construction account. If due regard is had to the nature of the receipt held by us then the amount of Rs. 52,000 would go reduce the debit balances in the partners accounts.
Thus it is the argument of Sri B. Satyanarayana Murthy that the above two amounts totalling Rs. 1,03,329 wiped of Rs. 89,227 which was held to have been diverted for non-business purposes from out of the borrowed capital. Sri P. Radhakrishna Murthy, learned Departmental Representative only relied upon the orders of the learned C.I.T. (A).
13. After considering the arguments on both sides, we are inclined to accept the argument of Sri B. Satynanrayana Murthy and hold that in view of the fact that Rs. 1,03,329 should be taken to be the amount available with the assessee, we cannot uphold the finding of the ITO or the learned CIT (A) that there was diversion of Rs. 89,227 for non-business purposes. Hence we delete the addition of Rs. 12,209. As already stated in our orders dated 6-2-1984 in ITA Nos. 1633, 1634 and 1635/H/82 for assessment years 1974-75,1975-76 and 1977-78 we held that salami amounts received for allowing a person to be a tenant in a vacant shop, in the tenanted premises, belonging to the assessee, should be considered to be a revenue receipt. As already stated copy of our orders are furnished at pages 1 to 23 of the paper compilation. The question arose in this is that there were two old tenants called Hussain Ali and K.P. Ranga Rao who were occupying the shops in the tenanted premises from a long time paying only nominal rent. If they vacate and if the two mulgies occupied by them were to be given to new tenants then the rents can be increased substantially and the profit derived by the assessee can also be increased. Sri Hussain Ali and Sri K.P. Ranga Rao are demanding amounts to vacate their respective shops taking advantage of the fact that they statutory tenants. The assessee paid Rs. 6,000 to Hussain Ali and Rs. 1,000 to K.P. Ranga Rao. The I.T.O added the two amounts. The learned CIT (A) was unable to give credence to the arguments advanced on behalf of the assessee that when the amounts received from the tenants at the time of entering into the premises they were to be treated as income ex-hypothesis the amounts paid to the tenants for vacating the premises should also be allowed as a deduction. The learned CIT (A) going into the logic which prompted the Tribunal to hold that salami received was "revenue expenditure" held the Tribunal took the said view for the reason that the assessee could not be treated as the owner of the properties and therefore, the income cannot be treated as capital receipt since it was the appellants intention obviously to collect the salami from every new lessee and it was the intention of the appellant to treat the rented premises as trading assets and to derive income therefrom. However, the learned CIT (A) held that as far as the payment to a tenant for the purpose of making him vacate the premises is concerned, this cannot be treated as revenue expenditure. There is no logic as to why that is so. It is simply her ipse dixit. In our opinion the ipse dixit of learned CIT (A) is not correct under law whereas the argument of Sri B. Satyanarayana Murthy that when once a salami collected is considered as a revenue receipt the salami payment to a tenant to vacate the shop, should also be considered in the same vein should be accepted as correct. If the salami receipt is considered as revenue receipt on the ground that it augments the income from the business of the assessee ex-hypothesi the very purpose of getting vacated the old tenants paying meagre amounts of rents after paying same salami amounts is also with a view to get good sums from the time of their vacation towards rent. Therefore, we are unable to see why salami receipt and salami payment should not be treated alike. In our opinion the salami payment should be taken to be a revenue expenditure incurred out of business compulsion. Therefore, we hold that the amount of Rs. 7,000 should not have been disallowed by the Lower Authorities. Then" orders are hereby set aside and the amount is allowed as a deduction.
14. Now we are left with the only contention regarding the telephone deposit. An amount of Rs. 9,257 was claimed as a deduction. However, it was disallowed and added back to the income of the assessee. The learned CIT (A) states that even though a ground was taken before her in respect of this addition, no arguments were furnished to show that this amount is an allowable expenditure when the matter came to second appeal stage before this Tribunal, a petition is filed to admit a certified copy of the bill given by the Telephone Department. The petition is supported by the affidavit of M/s. B. Rangaswamy one of the partners of M/s. Krishna Hotel - the assessee. He states that an amount of Rs. 9,257 represent the charges claimed by the telephone department in respect of the provision of 5 + 20 PMBX board and incidental charges for additional lines provided by the telephone department. This includes an amount of Rs. 9,250 paid to the telephone department and Rs. 7 charges incurred towards the telephone deposit. However, 'this amount was wrongly debited to the telephone deposit account in their accounts. But at the time of assessment it was claimed as a deduction.
There was a search and seizure operation in the premises of the assessee on 3-8-1982 and all the books and records were seized by the department and were kept in the custody of the department for quite some time. In confusion most of the bills were either misplaced or not located. Therefore the original bill for payment of Rs. 9,250 was not produced for verification. They have since obtained an attested copy from the telephone department. The non-submission of the original bill before the Lower Authorities is not due to wilful default. Since the document filed along with the petition to admit additional evidence is a public document whose authenticity cannot be doubted and which was issued in regular course of transactions by a public office and since it is crucial document on the basis of which this issue can be decided, the delay is hereby condoned and the document is admitted into evidence. The cash bill issued by the Telephone Department dated 2-5-1981 contains the following items: -Provision of (5 + 20 PMBX) board Rs.Annual rent for 5 + 20 PMBX board 3,000-00Installation charges 700-00Annual rent for 1-5 (1) @ 200 3,000-00Installation charges for 15 @ 150 2,250-00Conversion of 3 direct lines into Jn. lines @ 100 300-00 ---------(Rs. Nine thousand two hundred & fifty only) 9,250-00 --------- Therefore, it is clear from above document of unimpeachable nature that the amount was not spent for getting any tangible asset of enduring nature to the assessee firm. On the other hand the amounts were representing annual rent payable, installation charges and conversion of direct lines into junction lines. In our opinion all these items represent only revenue expenditure and not one item of it represents capital expenditure. Lower Authorities had not the advantage of the documents now produced before us and therefore, on a misconception they held that the whole of Rs. 9,250 represents capital expenditure, simply because this item of Rs. 9,250 was entered under the head 'telephone deposit' in the accounts of the assessee firm. Therefore, the Lower Authorities held that this expenditure secures an enduring advantage to the assessee. But as we have seen from the cash bill the amount spent only mostly for yearly rent and hence revenue in nature. Therefore, the disallowance of Rs. 9,250, in our opinion, should be cancelled.
15. As all the points are held in favour of the assessee, the appeal is allowed.