At the instance of the assessed-company, the Income-tax Appellate tribunal (Delhi Bench 3), has referred the following question of law for the opinion of this court under section 66 (1) of the Indian Income-tax Act, 1922 :
&quto;Whether the expenditure of Rs. 1,40,780 paid as lease rent enhanced the value of the buildings constructed on the leasehold land and was, thereforee, entitled to depreciation ?&quto;
The assessed-company (hereinafter referred to as &quto;the company&quto;) was incorporated as a private limited company on January 3, 1950. On June 16, 1952, it entered into an agreement with the Delhi Improvement Trust for the lease of a plto of vacant land at Rohtak Road, at a rent of Rs. 40,000 per annum for a period of 30 years for erecting a cinema theatre. Under the terms of the lease the company was to erect upon the land within six months from the date of the approval of the building plans by competent authorities, to be submitted within two months from July, 11, 1952, a substantial cinema building. Immediately thereafter, the company commenced the construction of the cinema theatre and the construction was completed in June, 1956, and the first exhibition of the films took place on June 15, 1956. For the assessment year 1957-58, the company voluntarily filed a return showing a loss and therein it had claimed Rs. 40,000 as the rent paid for the previous year. The Income-tax Officer ignored the said return as it was filed after the expiry of the period prescribed under section 22 (2A) of the Indian Income-tax Act, 1922. For the next assessment year, viz., 1958-59, the previous year being July 1, 1956, to June 30, 1957, with which alone the reference is concerned, the books of accounts of the company showed that a ttoal payment of Rs. 1,80,780 was debited to the profit and loss account towards the rent. The Income-tax Officer, by his order dated October 20, 1960, allowed a sum of Rs. 40,000 out of this debit as a deduction, since it related to the previous year, and disallowed the balance of Rs. 1,40,780, since the sum related to earlier years. The company preferred an appeal to the Appellate Assistant Commissioner and the said Commissioner by his order dated October 31, 1961, confirmed the disallowance of the said amount by the Income-tax Officer. The further appeal preferred by the company, with reference to this amount, to the Income-tax Appellate Tribunal also failed. Hence, this reference.
The contention of the company before the Appellate Assistant Commissioner was that, since the entire amount of Rs. 1,80,780 was debited in the profit and loss account in the previous year relevant to the assessment year in question, the whole amount should be allowed and this contention was negatived by him. An alternative contention of the company was that even if the rent for the earlier years could nto be allowed during the year in question, it should be added to the capital cost of the cinema building and proper depreciation should be allowed thereon. This contention also was negatived by the Appellate Assistant Commissioner. Before the Tribunal, the company did nto challenge the disallowance of the amount but reiterated the alternative contention. Dealing with this contention, the Tribunal in its order dated October 3, 1962, stated as follows :
&quto;It is recognised that all expenditure, up to the date of production, in the case of a manufacturing concern, should be capitalised. The assesseds claim is that the expenditure prior to the date of production (in this case, date of commencement of exhibition of films) is to be capitalized. The question remains whether such expenditure is entitled to depreciation.
Depreciation is admissible only on certain types of fixed assets which are laid down in the Schedule to the Act itself. Depreciation can be allowed only on those assets and to no toher assets.
We have to find out what was the result of the expenditure incurred by the assessed in payment of the lease rent. The lease rent as such produced no asset. Even if the assessed had nto erected any buildings, he would be bound, under the terms of the lease, to pay the lease rent. The mere payment of rent does nto create any asset.
In our opinion, the word capitalised used in this context in ordinary commercial parlance is an expression loosely use. It only means that such an expenditure i.e., expenditure prior to the commencement of production, is nto a revenue expenditure. Capitalisation in this context is only taken to be a broad term as converse of revenue. The correct description of the expenditure would be preliminary expenditure or initial expenditure.
In our opinion, this expenditure, viz., the expenditure incurred for the payment of rent, did nto create any asset. It did nto enhance the value of the building in any way. We are, thereforee, of the opinion that the contention, viz., that this expenditure enhanced the value of the building and, thereforee, is entitled to depreciation, must fail.&quto;
Recently, the Supreme Court in Commissioner of Income-tax v. Alps Theatre had occasion to consider the question :
&quto;Whether the cost of land is entitled to depreciation under the Schedule to the Income-tax Act along with the cost of the building standing thereon ?&quto;
The Supreme Court, on considering the provisions of the Indian Income-tax Act in this behalf, came to the conclusion that the word &quto;building&quto; occurring in section 10 (2) (vi) of the said Act, does nto include land. Faced with this decision of the Supreme court, Shri. N. D. Karkhanis, the learned counsel for the company, with a view to steer clear of the same, submitted that his contention was nto that depreciation should be allowed on the cost of the land also but that the company was entitled to capitalise the amount of rent paid and add the same to the cost of the building for the purpose of depreciation. The learned counsel further sought to distinguish the decision of the Supreme court on the ground that the Supreme Court was concerned with a case in which the assessed was the owner of buth the building and the site, and in the present case, the company is the owner of the theatre only and nto the site, and, consequently, that decision of the Supreme court does nto preclude the company from putting forward the present contention. The learned counsel said that a building cannto be conceived without a site on which it is erected and whatever expenditure an assessed incurs for bringing the building into existence must form part of the cost of that building to the assessed; just like the architects fees or some toher expenses of that nature directly going into the cost of the construction of a building and depreciation being allowed on the same, the amount paid by way of rent for the site must also be taken to go into the cost of construction and depreciation allowed. The learned counsel further contended that, just as in the case of a machinery and plant, the cost of its freight, insurance and toher landing charges, the pay of the engineer and the staff who erect the machinery, and who put it in working order and carry out experiments to test it, and the toher erection costs go into the cost of the plant and machinery and depreciation allowed thereon, the rent paid by the company for the site must also be accorded the same treatment. The counsel on buth the sides agreed that, apart from the decision of the Supreme Court, referred to above, there is no direct decision of any court on this point. However, while the learned counsel for the company contended that the decision of the Supreme court did nto apply to and cover the case of the company before us, the learned counsel for the department argued that the principle laid down by the Supreme court in the decision referred to above, will directly apply to the claim of the company and negative the same.
We are of the view that the contention of the counsel for the revenue is correct.
Mr. Karkhanis placed strong reliance on a decision of the Calcutta High Court in Commissioner of Income-tax v. Standard Vacuum Refining Co. of India Ltd. In that case, the Standard Vacuum Refining Company of India Limited was incorporated on July 5, 1952, and commenced its business from September, 1954. In June, 1953, it borrowed four cores of rupees on debentures at the rate of 5 1/4% interest from the public, the interest to run from June, 1953. This sum together with twelve crores of rupees financed by the company was used in setting up the refinery for which plant and machinery were imported from abroad. The refinery started work from September 1, 1954, from which date depreciation began to be calculated. The company capitalised all the expenses incurred during the period of construction including the interest of Rs. 23,53,284 which had accrued from the date of borrowing to the commencement of the business on the aforesaid debenture loans and claimed that depreciation must be allowed on the full amount. The only point that came up for consideration before the Calcutta High Court was whether the aforesaid amount of Rs. 23,53,284 paid as interest from the date of borrowing to the date of commencement of business, on the aforesaid debentures, could be said to form part of the actual cost of the refinery. The Calcutta High court held that just like expenses incurred by the assessed in paying for toher materials including machinery for the construction and in paying remuneration to erection engineers, architects, designers, etc., and in respect of machinery imported from the harbour to the factory site, form part of the actual cost to the assessed in acquiring the capital assets, where an assessed cannto acquire a plant except with the aid of a loan, the loan is essential to him for the acquisition of the plant and payment of interest being essential to the procurement of loan, the payment of interest too must be regarded as essential to the acquisition of the plant and must be held to form part of the cost of the asset to the assessed. The learned judges further observed :
&quto;On general principle there is scarcely any distinction between payment made to a supervisor who supervises the erection of a plant and the payment made by way of interest on the amount borrowed for the acquisition of the capital asset. If payment to a supervisor is an element in the actual cost incurred by the assessed in having the plant, there is no reason why payment of interest should nto be an element in such cost.&quto;
In the end, the learned judges held that the said interest formed part of the actual cost to the assessed of the refinery. In support of their conclusion, the learned judges relied upon commercial practice as well.
We are of the view that this decision of the Calcutta High Court does nto advance the case of the company. The Supreme Court has clearly pointed out that, when section 10 (2) (vi) of the Indian Income-tax Act, 1922, provided for the allowance for depreciation on a &quto;building&quto;, the word &quto;building&quto; did nto include the land on which it is constructed. Consequently, the relevant provisions of the Indian Income-tax Act, make a distinction between the land on which a building is constructed and the building itself. thereforee, any general conception or ntoion of one nto being able to think of a building without the site on which it stands, will nto be of any assistance in interpreting or construing the scope of the relevant statutory provisions. In our view, so long as the relevant provisions of the Indian Income-tax Act make a distinction between the land on which a building is constructed and the building itself, and allows for depreciation only on the building, any item of expenditure incurred by an assessed, directly referable to the land and nto referable to the building, as distinct from the land, cannto constitute a part of the cost of the construction of the building for the purpose of allowance of depreciation. It may be possible to capitalise expenses incurred for the acquisition or construction of a depreciable capital asset like a building or for erection, etc., of plant and machinery and add those to the cost of the asset for depreciation. Those expenses would be directly related to and necessary for bringing the depreciable asset into being. But that is nto the case here. The Calcutta High Court, in the decision referred to, was considering the expenses incurred in relation to the sole depreciable asset. viz., refinery. In this case, whether the company acquired antoher asset or nto in the form of the site by paying the rent, still the payment of rent was an item of expenditure incurred with reference to the land treated separately and distinctly from the building, under the provisions of the Indian Income-tax Act, 1922, as interpreted by the Supreme Court in the decision referred to already. Consequently, we are of the view that the decision of the the Calcutta High Court relied upon by the learned counsel for the company is nto of any avail to support his contention.
The learned counsel then referred to two decisions, viz., that of the Privy Council in Commissioner of Income-tax v. Buckingham and Carnatic Co. Ltd. and that of the Supreme Court in Kalooram Govindram v. Commissioner of Income-tax. In the former case, the Buckingham and Carnatic Co. Ltd. acquired the business of five toher companies and took over their buildings and machinery. The ttoal cost of the buildings and machinery of the said five companies was about Rs. 91 lakhs, but they were taken over by the assessed-company at their written down value on the date of the purchase which was about Rs. 34 lakhs. To qutoe the judgment of the Privy Council :
&quto;The main question arising for determination in this appeal is whether the allowance to be made to the respondent company in respect of depreciation of buildings and machinery used by them for the purposes of their business should be calculated by reference to the cost thereof to the respondent company or by reference to the original cost thereof to certain companies from which such buildings and machinery were acquired by the respondent company.&quto;
After referring to the provisions contained in section 10 (2) (vi) of the Indian Income-tax Act, 1922, the Privy Council pointed out that there cannto be any ambiguity with regard to the meaning of the provisions and the provisions talked of &quto;the original cost thereof to the assessed&quto; and the assessed being the Buckingham and Carnatic Co. Ltd., it was the cost to that company that was contemplated by the said section and held that the Buckingham and Carnatic Co. Ltd. was entitled, under section 10 (2) (vi) of the Act, to depreciation allowance on the assets taken over from the five predecessor companies, calculated on the value at which those assets were taken over by the assessed from the predecessor companies, and nto upon the original cost of those assets to such predecessor companies. The second case was concerned with the partition in a Hindu undivided family. One of the items of property of the family was a sugar factory which was put up for sale by competitive bidding between the members of the family and the same was knocked down in favor of the assessed in the case for a sum of Rs. 34 lakhs. After partition was effected in respect of all the properties, the assessed continued to run the factory. The question that came up before the Supreme Court was whether the assessed was entitled to claim depreciation, under section 10 (2) (vi) of the Act, on the amount of Rs. 34 lakhs for which value the factory was knocked down in his favor or on the original cost of the factory to the undivided family. The Supreme Court held that, if the valuation of the property for the purpose of partition was nto ntoional, but was real and that was the basis for allocating properties for different members, the cost of a property alltoted to a member cannto be that at which it was purchased by the joint family in the remtoe past, but would be the value given to it for the purpose of the partition. The Supreme Court observed :
&quto;In substance we do nto see any difference in the matter of ascertaining the cost of an asset to an assessed whether he is a donee, purchaser, legatee, successor or a divided member of a joint Hindu family...... The cost of the property to the member at the date of partition would be the value given to it for the purpose of alltoment, provided it was real, or the price at which he purchased it in auction or the value of it ascertained toherwise........
That depreciation allowance should be computed on the basis of the valuation at which the assessed took over the assets.&quto;
We are of the view that neither of these two decisions in any way touches the point in issue. The learned counsel for the company cited these decisions to show that in buth the case, it was the cost of the asset to the depreciation and that cost would have included the value of the land as well as the superstructure and no distinction was sought to be made in those cases between the value of the land and the value of the superstructure, when computing the depreciation allowance on the actual cost to the assessed of the entire asset. The fact that in those two cases, no point was raised that the land was separate from the building and under the provisions of the Indian Income-tax Act, 1922, depreciation was allowable only in respect of the building exclusive of the land, and no decision was rendered on such a point, does nto and will nto obliterate the existence of the difference between the two, viz. the land and the building standing thereon and the position that depreciation is allowable only in respect of the building and nto the land, as decided by the Supreme Court in the decision referred to already.
Under these circumstances, we are of the opinion that the amount of Rs. 1,40,780 paid by the company to the Delhi Improvement Trust by way of rent for the site for the earlier years cannto be taken to be a part of the cost of construction of the cinema theatre for the purpose of the company claiming depreciation thereon. We may point out here that the question, as referred to this court by the Tribunal, does nto bring out the real point of controversy between the parties, and we reframe the question as follows and answer the same in the negative and against the assessed :
&quto;Whether the sum of Rs. 1,40,780 paid as rent for the years earlier to the previous year in question can be added to the cost of the building constructed on the leased land for the purpose of the claim of the assessed to depreciation allowance, under section 10 (2) (vi) of the Indian Income-tax Act, 1922 ?&quto;
The Commissioner is entitled to his costs of this reference and the counsels fee is fixed at Rs. 250.
Question reframed and answered in the negative.