1. Pursuant to the order of the High Court at the instance of the assessee, the following three question are referred to us for our determination :
'1. Whether the Tribunal erred in going into the question whether the assessee's occupation was illegal, that too when the same had not been challenged by the department before it
2. On the facts and in the circumstances of the case, whether the Tribunal was right in holding that the applicant's occupation was illegal
3. On the facts and in the circumstances of the case, was the Tribunal justified in disallowing the interest ?'
2. Prabhat Theatres Private Ltd., the assessee, carries on business of exhibiting motion pictures in a theatre called 'Kibe Theatres'. It is the case of the assessee that for the assessment year 1959-60, for which the relevant previous year was the calendar year 1958, the assessee-company was entitled to claim as a deduction an amount of interest of Rs. 34,080 paid by the it to the owner of Kibe Theatre, viz., R. M. Kibe. Two partnership firms, viz., Prabhat Film Co. and Famous Pictures, joined in partnership with the object of carrying on film exhibition business and for purpose of their partnership business obtained on lease Kibe Theatre from its owner, R. M. Kibe, for a period of five years from August 15, 1934, to August 14, 1939. the theatre was again leased out for a further period of five years from August 15, 1939, to August 14, 1944, to V. G. Damle and B. K. Pai who were the partners of the above partnership firms of Prabhat Film Co., and Famous Pictures. The lessees of the theatre did not pay lease rent. The lessor, R. M. Kibe, theatre, filed a suit in 1945 for the recovery of rent and for eviction against the partnership firms of Prabhat Film Co. and Famous Pictures and also their respective partners V. G. Damle and B. K. Paid. During the pendency of the suit, both the firms got themselves converted into limited companies. The case of R. M. Kibe was that the lessees had illegally allowed the assessee-company to occupy the use of the theatre for its business purposes. The assessee-company was, therefore, impleaded as a party defendant in the suit. The suit ended in a compromise and, as per the terms of the consent decree, the assessee-company was declared to be the lawful tenant of R. M. Kibe on condition that the assessee-company agreed to pay the rent from 1950 and compensation by was of interest. In pursuance of that decree the assessee-company paid interest of Rs. 34,080 to R. M. Kibe and claimed it as a deduction in the computation of its assessable income for the assessment year 1959-60.
3. The ITO disallowed the assessee's claim holding that the alleged expenditure was in the nature of capital expenditure. According to him, the assessee-company agreed to compromise and payment of rent and interest because it was in illegal occupation of the property and it would have been required to vacate the premises in the event of its disputing the compromise. In effect, by the consent decree, the assessee has simply managed to legalise the occupation of the building and the payment of interest is, therefore, in the nature of penalty for infraction of tenancy regulations or in the nature of payments for securing tenancy rights.
4. In an appeal by the assessee the AAC allowed the claim for deduction to the extent of Rs. 5,400. It was contended on behalf of the assessee-company before the AAC, that it was true that the right of the assessee-company to continue in occupation was questioned by the landlord, but it was not really for dislodging the assessee-company but to obtain a bargaining position in regard to the recovery of the arrears of rent that the landlord had resorted to litigation. It was also urged on behalf of the assessee that the sum of Rs. 34,080 was nothing but interest on the assessee's rent which the assessee had refrained from paying in some of the earlier years. The AAC held that there was a basic substance in the claim of the assessee-company. According to him, for reasons of litigation and misunderstanding between the tenant and the landlord, such rent was not being actually paid and by being so retained was outside money utilised in business. A legitimate quantum of interest due to the outsider on account of the use of the money so retained had, therefore, to be allowed. He, accordingly, allowed interest of Rs. 5,400 per year on the basis that the average amount of arrears of rent for the year was Rs. 90,000.
5. Against the order of the AAC disallowing the rest of the amount of interest the assessee preferred a second appeal before the Tribunal. The Tribunal found that the claim for deduction of any amount of interest was unjustified. In the first place, the Tribunal in its order pointed out that neither the ITO nor the AAC was careful enough to bring on record full and complete facts. None of the leases that were executed from time to time was filed. Only the consent decree in Civil Suit No. 1758 of 1955 was filed and in accordance with the normal practice of the mofussil courts such a consent decree contained a substantial portion of the plaint. However, plaints in the other suits were not filed nor were the written statements in any of the other suits filed. It was only one suit that resulted in a compromise in respect of which the compromise decree above referred to was arrived at. The counsel who appeared on behalf of the assessee before the Tribunal informed the Tribunal that one suit was dismissed. The counsel was unable to state before the Tribunal that one suit was dismissed. The counsel was unable to state before the Tribunal how and when the occupation of the theatre by the assessee commenced. In view of this position, the Tribunal had been careful enough to point out that on scanty and incomplete material that was on record it was compelled to pass the final order. On the material on record, the Tribunal found that the assessee failed to establish that it was in occupation of the theatre as a tenant from the very beginning. Before the Tribunal, the counsel on behalf of the assessee relied upon the provision of s. 15 of the Bombay Rents, Hotel and Lodging House Rates Control Act, 1947 (hereinafter referred to as 'the Rent Act'), but the Tribunal pointed out that, in the absence of any facts being brought on record, it was not possible for it to come to the conclusion whether the benefit of the provisions of s. 15 of the Rent Act, even after amendment, was available to the assessee-company or not. In fact it has not recorded any finding on the plea as regards s. 15 of the Rent Act in the whole of its order. Lastly, having regard to the facts that were brought to the notice of the Tribunal it came to the conclusion that the amount of interest was paid by the assessee in order to legalise the assessee's right to occupation and not for preserving its tenancy right. In that view of the matter, the payment of interest, according to the Tribunal, would be capital expenditure which was not allowable as a business expenditure.
6. It is from this order of the Tribunal that the above three questions have been referred to us for our determination at the instance of the assessee pursuant to the order of the High Court.
7. So far as the first two questions are concerned, they can be disposed of very shortly. There is no finding given by the Tribunal to the effect that the sub-letting in favour of the assessee-company was in contravention of the provision of s. 15 of Rent Act. In fact, it has been careful enough to point out in its order that no sufficient material was on record and that a plea as regards s. 15 had to be considered because it was urged by the counsel on behalf of the assessee before the Tribunal. Strictly speaking, neither of the two questions would arise from the order of the Tribunal.
8. So far as question No. 3 is concerned, the Tribunal has been careful enough to point out that there was not material on record to indicate the time from which the assessee-company started occupying the Kibe Theatre. Without knowing the time when the assessee-company was in occupation of the theatre it will be difficult for the Tribunal to come to a definite finding as regards the liability for an amount of Rs. 34,080 which was described as the amount of interest in the consent decree. It will not be out of place to refer to the fact that the claim in the suit for arrears of interest was Rs. 70,500 while in the consent decree that amount was reduced to Rs. 44,600. In the plaint an amount of Rs. 9,500 was claimed by way of interest while in the consent decree a sum of Rs. 40,822 was agreed to be paid by way of interest and court expenses. How those figures were arrived at is not made clear by the contents of the compromise decree nor was it made clear by other material brought on record on behalf of the assessee before the taxing authorities and the Tribunal. In that view of the matter, the Tribunal came to the conclusion that this sum of Rs. 34,080 was agreed to be paid under the compromise decree in order to legalise the assessee's right for occupation and not for preserving its tenancy rights. Actually it found that even the deduction of Rs. 5,400 that was allowed by the AAC was unjustified but as there was no appeal by the revenue that finding could not be disturbed. So far as the claim for the remaining part of the interest was concerned, it was disallowed in view of this conclusion of the Tribunal interest was in fact capital expenditure which was not allowable as a business expenditure.
9. In the result, our answers to the questions referred are as under :
Question No. 1 : in the negative
Question No. 2 : in the affirmative.
Question No. 3 : in the affirmative.
10. The assessee shall pay the costs of the revenue.