1. All these three references under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as ' the Act '), are at the instance of the assessee for the decision of some common questions of law. The five questions of law referred in Reference No. 16 of 1978 are questions Nos. 1 to 5 in Reference No. 24 of 1978 and the remaining question No. 6 in Reference No. 24 of 1978 is merely consequential. The only question referred in Reference No. 25 of 1978 is question No. 3 in Reference No. 16 of 1978. This is how all these references involve the same questions relating to the same assessee in respect of different periods of assessment.
2. Reference No. 16 of 1978 pertains to the assessment year 1965-66 for which the accounting period ended on March 31, 1965. Reference No. 24 of 1978 relates to the assessment year 1966-67 for which the accounting period ended on March 31, 1966. Reference No. 25 of 1978 relates to the assessment years 1959-60 and 1960-61 for which the accounting periods ended on March 31, 1959, and March 31, 1960, respectively. The remaining material facts which are common are stated hereunder.
3. The assessee, M/s Golcha Properties (P.) Ltd., went into voluntary liquidation on July 4, 1966. Pending the proceedings of winding up, its affairs were looked after by the official liquidator with effect from May 10, 1968. The Income-tax Officer applied to the company court under Section 446 of the Companies Act, 1956, to proceed with the assessment of the company in respect of the assessment years 1965-66 and 1966-67. The company court has stayed the assessment proceedings resulting in extension of the time for completion of assessment. Admittedly, the assessment was completed in respect of both the assessment years within the extended period. The Revenue placed reliance on the provisions of Explanation to Sub-section (1) of Section 153 of the Act for contending that the assessment for these years has been completed within the prescribed period of limitation.
4. The company had been carrying on the business of exhibiting films in a cinema house known as Maratha Mandir at Bombay and Golcha Cinema at Delhi. It is contended that it was an industrial company and was, therefore, entitled to concessional rates of income-tax by the Finance Act, 1965. The assessee claimed the benefit available to an industrial company under this provision on the ground that its business of exhibiting films amounted to business of processing of goods which was one of the requirements for treating it as an industrial company under the Finance Act, 1965.
5. The assessee had entered into an agreement with M/s Maratha Mandir Pvt. Ltd., on October 31,1955, according to which it was to complete the construction of the cinema building undertaken by Maratha Mandir Pvt. Ltd., and which had remained incomplete for want of finance. The agreement further provided that the assessee could be entitled to manage his cinema theatre for a period of 20 years on the terms and conditions contained in this agreement after which the entire immovable property along with the plant, machinery, etc., fitted therein would revert to Maratha Mandir Pvt. Ltd. There was also some litigation between the parties which related to a consent decree passed on February 25, 1959, in a civil suit at Bombay. The terms of that decree also regulated the jural relationship between the assessee and Maratha Mandir Pvt. Ltd. in respect of the cinema theatre known as Maratha Mandir at Bombay.
6. The assessee claimed depreciation and certain other deductions in respect of expenditure incurred by it under the terms of this contract. The Income-tax Officer disallowed the assessee's claim and the assessee's further appeals to the Appellate Assistant Commissioner and then to the Tribunal also failed. Aggrieved by the decision of the Tribunal, the assessee applied for a reference under Section 256(1) of the Act which has led to reference of certain questions of law in respect of the aforesaid assessment years. The questions of law referred for decision by this court in these three references are as follows :
' 1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessment order for the assessment year 1965-66 did not become time-barred under Sub-section (1) of Section 153 of the Income-tax Act, 1961, in view of the provisions of the Explanation 1 to the said section ?
2. Whether, on the facts and in the circumstances of the case, the Tribunul was justified in holding that the assessee-company is not an industrial company ?
3. Whether, on the facts and in the circumstances of the case, and on a correct interpretation of the terms of the agreement dated October 31, 1955, and the consent decree dated February 25, 1959, the Tribunal is justified in holding that the assessee is not the owner of the cinema styled as Maratha Mandir and the machinery, plant, furniture, etc., installed in the said building by the assessee-company with its own finances and no depreciation and development rebate are available to it in respect thereto ?
4. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in rejecting the alternative contention of the assessee that the amount of Rs. 20,000 spent by the assessee-company on the construction of the cinema known as Maratha Mandir and in purchasing the various movable assets installed therein out of its own funds, is neither capital nor a revenue expenditure ?
5. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the interest income of Rs. 1,15,684 had accrued and arisen to the assessee-company on its loans given to M/s Golcha Properties Pvt. Ltd., Nepalganj, Nepal, and that the resolution passed by the assessee-company on June 22, 1965, did not have the effect of making the said income non-existent in the accounting period corresponding to the assessment year 3965-66
7. We shall deal with the questions referred in Reference No. 16 of 1978 which could cover the question referred in the other two references as well.
8. The first question relates to the limitation for completing the assessment proceedings in respect of the assessment years 1965-66 and 1966-67. There is no controversy that the company court had stayed the completion of assessment proceedings by passing an appropriate order in the proceedings for winding up before it and the final order of assessment was passed by the Income-tax Officer within the extended period in each case. It is also claimed that the company court had clearly mentioned in that order that the same was made as required by Explanation 1 to Section 153 of the Act. This Explanation says that in computing the period of limitation for the purposes of this section prescribing the time-limit for completion of assessment, the period during which the assessment proceeding is stayed, by an order or injunction by a court shall be excluded. There is thus no escape from the conclusion that the assessment having been completed within the period prescribed after excluding the period of stay in computing the period of limitation, there was no defect of limitation attached to it. The first question has, therefore, to be answered in the affirmative and in favour of the Revenue.
9. The second question relates to the benefit claimed by the assessee as an industrial company under the Finance Act, 1965. As already indicated, this claim of the company was based wholly on the ground that its business of exhibiting films was a business of processing of goods. Reliance was placed on the provision only to this extent for claiming this benefit. The Tribunal has by cogent reasons intimated as to why this contention be not accepted. The expression ' processing of goods ' cannot cover the business activity of exhibiting films for the obvious reason that there is no change undergone in the films which are merely projected on a screen for public view. The expression ' processing of goods ' necessarily contemplates some kind of change in the goods itself which is obviously non-existing in the process of exhibiting the films. The Tribunal, therefore, was justified in rejecting the assessee's claim on this point as well. This question also has to be answered in favour of the Revenue.
10. Question No. 3 relates to the assessee's claim for depreciation under Section 32(1) of the Act which gives the benefit of depreciation in respect of buildings, machinery, plant or furniture 'owned by the assessee and used for the purposes of business or profession'. The contention of the assessee is that the amount spent by it in completing the construction of the cinema hall known as Maratha Mandir and in installing the machinery, etc., therein is covered by this provision and, therefore, the assessee is entitled to claim depreciation thereon. The contention of the assessee is that the entire superstructure constructed by the assessee in accordance with the terms of the agreement dated October 30, 1955, and the consent decree dated February 25, 1959, and the plant and machinery installed therein for the purpose of carrying on the cinema business, were owned by the assessee and used for the purposes of business or profession and, therefore, the benefit of Section 32(1) of the Act has to be given. The real controversy in the present case is with regard to the absence of the word ' owned ' occurring in Sub-section (1) of Section 32 of the Act since user of the building, plant and machinery, etc., by the assessee does not appear to be disputable. However, the benefit of this depreciation can be given to 'the assessee only if the same was also owned by the assessee.
11. The question really is whether the expression 'owned by the assessee' occurring in Sub-section (1) of Section 32 of the Act means exclusive ownership or merely a limited ownership so that a limited owner using the same for the purposes of business or profession can also claim the benefit of this provision. Ordinarily, the word 'owned' would mean exclusive ownership or, in other words, the right to user of the property to the exclusion of all others which obviously does not take within its ambit a limited owner. There is nothing in the context in which the expression is used which may indicate that the provision was intended to apply (sic). The plain meaning of Sub-section (1) of Section 32 of the Act is that if such building, machinery, plant or furniture belongs to the assessee as the owner and is also used for the purposes of his business or profession, then he would be entitled to the benefit of depreciation provided therein. In other words, such property of the owner which he uses himself for the purposes of his business or profession alone qualify for the benefit of this provision. Unless all these conditions co-exist, Sub-section (1) of Section 32 of the Act is net attracted.
12. Sub-section (1A) was inserted in Section 32 of the Act subsequently 'with effect from 1st April, 1971, whereby this benefit has also been extended to a lessee or a person having any other right of occupancy. The opening words of Sub-section (1A) are 'where the business or profession is carried on in a building not owned by the assessee but in respect of which the assessee holds a lease or other right of occupancy '. It is clear that this benefit has been extended to a lessee or even a licensee who is not the owner by enacting Sub-section (1A). Obviously, such an exercise would have been unnecessary if a limited owner is covered by Sub-section (1) of Section 32 of the Act, it is continued to exist throughout (sic). This is a further indication of the legislative intent and can be relied on as an aid to the construction of Sub-section (1) of Section 32 of the Act. Learned counsel for the assessee tried to contend that Sub-section (1A) is merely declaratory in character. We are unable to accept this contention. Sub-section (1A) is a definite enacting provision and is obviously not intended to merely declare the existing law contained in Sub-section (1). A mere declaration of the existing law contained in Sub-section (1) covering also a lessee or a licensee, etc., would have been easily made by inserting an Explanation to Sub-section (1) saying so. It is, therefore, clear that not only the ordinary meaning of the word ' owned ' used in Sub-section (1) and the context in which the same has been used indicate that Sub-section (1) applies only to an absolute owner of the property, but the legislative history of these provisions also points in that direction. The Tribunal was, therefore, justified in rejecting the assessee's contention and refusing to give the benefit of Section 32(1) of the Act. This question also has to be answered in favour of the Revenue.
13. Question No. 4 relates to the alternative contention of the assessee which is based on Sections 30, 31 and 37 of the Act. In Section 30, reliance is placed on the provision giving benefit to a tenant and the rent paid for such premises. Section 31 of the Act obviously is inapplicable because it relates to the amount spent on account of current repairs and any premium paid in respect of insurance, etc., which is not the present case. Section 37 of the Act is a residuary provision relating to business expenses laid out or expended wholly and exclusively for the purposes of business or profession. The Tribunal has considered the contention based on rent to which Section 30 of the Act applies and pointed out that this amount of which the deduction is claimed by the assessee, is in addition to the rent payable for the premises as expressly mentioned in the agreement itself.
14. The argument now advanced on the basis of Section 37 of the Act for allowing it as a deduction on account of business expense does not appear to have been advanced earlier. That apart, the necessary findings to indicate that it was an expenditure laid out or expended wholly and exclusively for the purposes of business, are not present. In reality, this is a new case admitted to be set up for the first time at this stage.
15. The Tribunal has considered this contention at length on the basis of material produced by the assessee and reached the conclusion that it is a capital expenditure. We do not find any reason to take a contrary view. It may be mentioned that Sub-section (1A) of Section 32 of the Act inserted subsequently for the first time provides for such a situation by giving the benefit to the assessee who holds a lease or other right of occupancy and has incurred capital expenditure for the purposes of business or profession of this kind.
16. In our opinion, Sub-section (1A) of Section 32 of the Act also supports the conclusion reached by the Tribunal that this expenditure incurred by the assessee was in the nature of capital expenditure for which a provision has been made for the first time only in Sub-section (1A) of Section 32 of the Act which was not available at present to the assessee during the relevant assessment years. The Tribunal was, therefore, justified in rejecting even this contention of the assessee.
17. Question No. 5 relates to the assessee's claim for the deduction of the amount of interest which accrued to it as its income against the loans advanced by the assessee to M/s Golcha Properties (P) Ltd., Nepalganj, Nepal.
18. The contention of the assessee is that this amount was given up by it on the request of the debtor after a debit note had been issued to the debtor at the instance of the debtor on account of financial exigencies which the debtor was facing. Resolution dated June 22, 1965, passed by the board of directors of the assessee company was relied on for this purpose along with correspondence exchanged between the assessee and the debtor. The Tribunal has held on the construction of resolution dated June 22, 1965, that the interest which had accrued to the assessee was really not given up by this resolution and it only had the effect of deferring recovery of that amount. Learned counsel for the assessee challenges this conclusion and places reliance on a decision of the Bombay High Court in H. M. Kashiparekh & Co. Ltd. v. CIT : [1960]39ITR706(Bom) . In our opinion, the view taken by the Tribunal is not open to interference. In the first place, the entire material on which the assessee relied for this purpose comprising of the correspondence between it and the debtor and the aforesaid agreement dated June 22, 1965, does not indicate that this amount had really been abandoned or given up by the assessee and not merely deferred for recovery as held by the Tribunal. That apart, there is not even a suggestion to indicate that this facility to the debtor, whether it was by deferring the recovery or by abandonment, was extended on the ground of commercial expediency so as to justify the assessee's claim for deduction on that basis. The Bombay decision relied on by learned counsel for the assessee itself clearly indicates that unless the amount was given up after it had accrued due for payment by the assessee under the ground of commercial expediency, the assessee was not entitled to get the benefit of such deduction. This further requirement essential for the deduction claimed in the present case was not even suggested by the assessee and for this reason obviously there is no finding of the existence thereof. This is another reason to sustain the view taken by the Tribunal on this point. This question also has, therefore, to be answered in favour of the Revenue.
19. Learned counsel for the assessee relied upon the decision of the Supreme Court in R. B. Jodha Mal Kuthiala v. CIT : [1971]82ITR570(SC) , wherein an assessee whose property remains vested in the Custodian of Evacuee Property by virtue of Section 6(1) of the Pakistan (Administration of Evacuee Property) Ordinance, 1949, as evacuee property, is not the owner of the property for the purposes of Section 9 of the Indian Income-tax Act, and it was held that the assessee cannot exercise any rights in that property except with the consent of the Custodian ; he merely has some residual beneficial interest in that property that he had left in Pakistan, and further that equitable considerations are irrelevant in interpreting tax laws. Learned counsel wants to draw an analogy from this judgment and submits that in the instant case also, since Maratha Mandir has only a residual beneficial right, it should not be considered to be the owner and the property should be considered to be owned by the assessee. In our opinion, this judgment does not help the petitioner at all. Their Lordships themselves have held in this judgment that a property cannot be owned by two persons, each one having an independent and exclusive right over it for the purpose of income-tax, and the owner must be that person who can exercise the rights of the owner not on behalf of the owner but in his own right. In the instant case, it is not in dispute that ownership has been transferred to the assessee by Maratha Mandir Private Ltd. and in this view of the matter, in our opinion, this decision instead of supporting the case of the assessee, lends support to the contention of the Revenue. Reliance was then placed on the observations made in a decision of the Calcutta High Court in CIT v. Steelcrete (P.) Ltd. : [1983]142ITR45(Cal) , wherein it has been held that the expression 'owner' has different meanings in different contexts and the owner need not always have the complete user of right of full ownership at all times. In that case, the assessee, a private limited company engaged in construction work, it secured a contract and for doing the job, imported some type of machinery which was actually imported by the Government of India and payment was also made by the Government of India. The assessee was allowed to use the machinery on the condition that the Government of India recovered the total cost of machinery from the assessee as the owner of the building during the period of the lease as he continues in possession even after the expiry of the lease. This case has no application to the facts of the present case, because in that case, the assessee's brother had taken lease of a vacant site for a period of 20 years on a monthly rent of Rs. 20 for the purposes of constructing a building thereon. On the expiry of 20 years, the building was to become the property of the lessor and the lessee was to have no manner of right over the building or the site. The assessee's brother constructed a theatre and sold his leasehold rights to a third person from whom the assessee purchased it in 1950 for a sum of Rs. 1,50,000 out of which Rs. 1,00,000 was the price of the building. Reliance was also placed on a case in Y. V. Srinivasamurthy v. CIT : [1967]64ITR292(KAR) . It was in these circumstances that it was held that the assessee was the ' owner ' of the building during the period of the lease and was, therefore, entitled to claim depreciation, but as he continued to be in possession even after the expiry of the lease, he cannot be deemed to have ' sold or discarded or demolished or destroyed ' the building within the meaning of Section 10(2)(vii) of the Income-tax Act. Consequently, on the facts and circumstances of the case, the assessee was not entitled to the deduction of Rs. 85,907 claimed by him either under Section 10(2)(vii) or under Section 10(2)(xv) of the Act, but he was entitled to deduct the sum of Rs. 2,203 under Section 10(2)(vi) of the Act as allowance for depreciation. The aforesaid judgment in no way supports the case of the assessee. Reliance was then placed on Addl. CIT v. Lawlys Enterprises (P.) Ltd. : [1975]100ITR369(Patna) . In this case, the assessee constructed a third floor on the building and was running his hotel business. He was the lessee of the building. Under the terms of the lease, he had a right to make additions and alterations to the building and on the expiry of the lease he was to deliver back the possession to the lessor in its original condition. He claimed depreciation on the floor added by him which was allowed holding that the third floor was owned by him and was used for the purpose of business under Section 32 of the Income-tax Act. In this case, the position was different because the assessee was obliged to remove the additions before handing back the possession of the building at the end of the lease and during the period of the lease, he was the owner of the entire third floor. In those circumstances, the court held that full ownership for a period does not militate against the concept of ownership in jurisprudence. However, in the same judgment, the court had added that it is not unknown that a lessee of a land may construct a building at his own expense but at the same time the ownership in it, according to the indenture of lease, may vest in the lessor. Since the time of construction, the lessee merely may pay rent for it adjusting it towards the amount spent on the construction. In such a case, the lessee will not be the owner of the building even for a limited period and these observations in fact apply to the present case and as such, the observations in this case support the case of the Revenue rather than the assessee.
20. Reliance was then placed on CIT v. Chandra Agro P. Ltd. : [1979]117ITR251(All) . This was a case regarding certain expenditure made on improvement of a building and in fact no law has been discussed in this case. Thus, it neither applies on facts nor on law to the instant case. Learned counsel thereafter cited Saiffuddin v. CIT . This case has no bearing on the facts of the present case as, firstly, it arises from a matter under Section 22 of the Income-tax Act and, secondly, that was a case of joint ownership with the brothers. Reliance was then placed on CIT v. Kanaiyalal Nimani : [1979]120ITR892(Cal) , which too is a case under Section 22 of the Income-tax Act and was in respect of construction of a certain stall. This has no application to the facts of the present case. Reliance was then placed on Addl. CIT v. U. P. State Agro-Industrial Corporation Ltd. : [1981]127ITR97(All) , where their Lordships of the Allahabad High Court held that the expression ' building owned by the assessee ' in Section 32 of the Act has not been used in the sense of property, complete title in which vests in the assessee. But, in the same judgment, their Lordships have held that the assessee will be considered to be owner of the building under Section 32 of the Act if he is in a position to exercise the rights of the owner not on behalf of the person in whom the title vests but in his own right, which is not the position in the present case. There, the assessee was put in possession of the properties without any reservation with right to dispose of them as if it was the owner, while in the instant case, according to the terms of the agreement, the assessee is only a financier having right to use the property for limited years. Thus, the observations in this case help the Revenue rather than the assessee. Thus, none of the cases cited by learned counsel for the assessee is applicable to his advantage in the instant case.
21. For the aforesaid reasons, these questions are answered against the assessee and in favour of the Revenue as under :
Reference No. 16 of 1978.
22. The Tribunal was justified in holding that the assessment order for the assessment year 1965-66 was made within the prescribed period of limitation in view of Explanation (1) to Section 153 of the Act.
23. The Tribunal was justified in holding that the assessee is not an industrial company.
24. The Tribunal was justified in holding that the assessee is not the owner of the cinema styled as Maratha Mandir and the machinery, plant, etc., installed in such building by the assessee with its own finance and no depreciation and development rebate are available to it in respect thereto.
25. The Tribunal was justified in rejecting the alternative contention of the assessee that the amount spent by the assessee on the construction of the cinema theatre known as Maratha Mandir and in purchasing the various movable assets installed therein out of its own funds was revenue expenditure.
26. The Tribunal was justified in holding that the interest income of Rs. 1,15,684 which accrued and arose to the assessee on the loans given to M/s Golcha Properties (P.) Ltd. Nepalganj, Nepal, at the resolution passed by the assessee company on June 22, 1965, did not have the effect of making such income non-existent in the accounting period corresponding to the assessment year 1965-66.