1. This is a reference under section 66(1) of the Indian Income-tax Act, 1922, to be hereinafter referred to as the 'Act'.
2. The question of law referred for the opinion of this court is :
'Whether, on the facts and in the circumstances of the case, the assesses was entitled to the deduction of Rs. 85,907 under section 10(2) (vii) or under section 10(2) (xv) and of the sum of Rs. 2,203 under section 10(2) (vi) ?'
3. The facts material for the purpose of answering the question referred to us earlier are these :
4. The assesses carries on business as an exhibitor of films at Bangalore. He is the owner of 3 theatres, one of which is 'Super Talkies'. In this case, we are concerned with that theatre. Rangaiah, the brother of the assesses, took on lease site No. 11, Belimut Road, Bangalore City, on 31st August, 1939. At that time, it was a vacant site. The aforementioned theatre was constructed on that site. The lease in question was a building lease. The lease is for a period of 20 years. Under the lease, the lease was required to raise a construction on the site, a building costing not less than Rs. 15,000. He was entitled to be in enjoyment and possession of the site leased and the building put up thereon for period of 20 years commencing from 31st August, 1939. Rent had to be paid in accordance with the terms of the deed. Clauses in the deed which are relevant for our percent purpose are 2, 3, 4, 7, and 71. They read as follows :
'2. That after stipulated period of twenty years, the party of the second part shall leave the scheduled premises with the constructions so raised by him to the second members of the first party of his legal representative or assigns absolutely and for ever and after the said period the party of the second part shall have no manner of right, title or interest in or upon the premises or the construction so raised thereon.
3. That the annual taxes payable to the municipality or any loca authority or department of Government shall be paid by the party of the second part alone so long as he is in possession of the said premises and constructions.
4. That the party of the second part shall be entitled to occupy the construction so raised by himself or let it out to another person or persons or tenants or otherwise enjoy the usufruct thereof till the stipulated period is over by putting it to such use or uses as he deems best from time to time and the party of the first part shall have no manner of right whatever in or upon the premises mentioned in the schedule or to suffer any particular mode or modes of construction or alteration in the use or uses to which the same will be put to by the party of the second part provided the party of the second part aforesaid shall pay a sum of Rs. 20 per mensem as rental regularly without default to the party of the first part after the expiry of balance of the period of lease of fifteen years. In default of regular payment for three months, a rent of Rs. 40, is to be paid for the remaining period of lease.
7. That it shall be lawful for the party of the second part to later the nature, design, extent, and mode of construction and the use or uses to which the same could be put to within the stipulated period.
11. That if by any act or omission intentionally done or suffered to be done by the party of the first part, the party of the second parties dispossessed of the construction and premises within or before the stipulated period, then, the party of the second part shall be entitled to recover from the party of the first part certain liquidated damaged in addition to the sum or sums he might have spend for raising any construction or constructions on the scheduled premises and the sum of Rs. 1,000 that shall be deposited by him with the party of the first part aforesaid.'
5. Lessee Rangaiah transferred his rights under the lease to one Kelkar. In his turn Kelkar transferred his right under the lease to the assesses on May 8, 1950, though the agreement to sell the same was entered into between the assesses and Kelkar on March 15, 1946. Kelkar sold his right under the lease to the assesses for a sum of Rs. 1,50,000, out of which Rs. 1,00,000 was fixed as consideration for the transfer of the building.
6. In the assessment year 1955-56, the assesses claimed a sum of Rs. 10,000 as lease amount paid to Kelkar. The Income-tax Officer rejected the claim observing :
'In the past the asset represented by the building was not considered to be that of the assesses under a mistaken impression that the assesses is only a lessee of the building. In fact the balance sheet of the assesses does not disclose this asset. However, when the matter was fully enquired into it was seen that the assesses is the full owner of the theatre building and the machinery therein.'
7. On the basis of that finding, the Income-tax Officer allowed depreciation on the building at 2 1/2% For working out the depreciation, he took the original cost at Rs. 1,00,000 as on March 31, 1951, and the deemed depreciation at 2 1/2% to have been allowed since 1951-52. The assessment year 1956-57 was also dealt with in the same manner, rejecting the assesses's claim for deduction of Rs. 10,000 as rent paid.
8. The assesses appealed against the assessment orders to the Appellate Assistant Commissioner. Therein, he gave up the claim for the deduction of Rs. 10,000 and confined his claim for depreciation on the value of the building. The Appellate Assistant Commissioner, while allowing depreciation on the building in question, directed the Income-tax Officer to compute the same on the basis of the original cost and not on the written down value, which means taking its value at Rs. 1,00,000 for the assessment year 1955-56. Thereafter, the Income-tax Officer recomputed the depreciation as per the direction of the Appellate Assistant Commissioner. On March 31, 1959, the assess wrote off in his books the written down value of the building. That value was computed at Rs. 85,907 after deducting the depreciation of Rs. 2,203 in respect of the accounting year 1959-60.
9. In the relevant year's return, the assesses claimed a sum of Rs. 85,907 as balancing allowance under section 10(2) (vii) of the 'Act'. While the Income-tax Officer allowed the depreciation allowance of Rs. 2,203, he rejected the claim for the deduction of Rs. 85,907 with the following remarks :
'assesses has debited a sum of Rs. 85,907 under the head 'loss' on expiry of 'theatre building rights'. As stated in the assessment order for 1955-56 the assesses got the lease of the theatre for a period of 20 years on payment of Rs. 1 lakh. No depreciation was claimed prior to 1955-56. assesses wants to charge off a part of this payment to revenue. This is not permissible. The loss is capital loss.'
10. In appeal, it was contended before the Appellate Assistant Commissioner that the sum of Rs. 85,907 should have been deducted as 'loss' either under section 10(2) (vii) or under section 10(2) (xv) of the 'Act'. The Appellate Assistant Commissioner rejected that claim. He came to the conclusion that the assesses is not entitled to the benefit of section 10(2) (vii) as he was not the owner of the building. In regard to the submission of the assesses that the department themselves had treated that asset as belonging to the assesses and had granted the depreciation from 1955-56 onwards, he held that that contention was untenable as the rule of estoppel is not applicable in the matter of assessments under the 'Act'. The Appellate Assistant Commissioner's order does not deal with the claim under section 10(2) (xv), evidently because that claim was not urged before him. The Appellate Assistant Commissioner directed the withdrawal of the depreciation allowance of Rs. 2,203 allowed by the Income-tax Officer.
11. In appeal, the Income-tax Appellate Tribunal affirmed the order of the Appellate Assistant Commissioner. It agreed with the Appellate Commissioner that the assesses was not the owner of the building in question. Therefore, he is not entitled to the benefit of section 10(2) (vii). It further came to the conclusion that in the instant case it cannot be said that the assesses had 'sold or discarded or demolished or destroyed' the building in question; hence, his case does not fall within the ambit of section 10(2) (vii). It also rejected the claim of the assesses for depreciation allowance under section 10(2) (vi), on the ground that the assesses is not the owner of the building.
12. The claim under section 10(2) (xv) was not urged us. It is obviously an unsustainable claim. The loss in question cannot be considered as expenditure laid out or expended wholly and exclusively for the purpose of the business of the assesses. Unless the assesses is able to establish that his case falls within section 10(2) (vii), he is clearly not entitled to the allowance claimed by him. Therefore, in dealing with that part of the assesses's case, all that we have to see is whether the claim for the deduction of Rs. 85,907 made by him comes within the scope of section 10(2) (vii).
13. Section 10(1) provides that tax shall be payable by an assesses under the head 'Profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him. But section 10(2) prescribes the manner of computing profits or gains referred to under section 10(1). The sub-section permits deduction of certain allowances in computing the assessable profits. One such allowance is that provided under section 10(2) (vii). That section reads :
'In respect of any such building, machinery or plant which has been sold or discarded or demolished or destroyed, the amount by which the written down value thereof exceeds the amount for which the building, machinery or plant, as the case may be, is actually sold or its scrap value;
Provided that such amount is actually written off in the books of the assesses :
Provided further that where the amount for which any such building, machinery or plant is sold whether during the continuance of the business or after the cessation thereof, exceeds the written down value, so much the excess as does not exceed the difference between the original cost and the written down value shall be deemed to be profits of the previous year in which the sale took place....'
(The remaining provisos are not relevant for our present purpose).
14. In order to succeed in his claim under section 10(2) (vii) the assesses must establish among other things : (1) that he was the owner of the building in question; and (ii) that the same had been sold or discarded or demolished or destroyed. It must be remembered that in this case we are considering whether the allowance claimed is permissible and not the exigibility of any profit to tax. Hence, it is for the assesses to establish that he is entitled to the allowance claimed. The burden is on him to show that his claim comes within section 10(2) (vii).
15. As mentioned earlier, the controversy between the department and the assesses centres round two questions, namely, (1) whether the assesses was the owner of the building in question; (2) and whether, on the facts established, it can be said that the building in question was 'sold or discarded or demolished or destroyed'.
16. It was not urged on behalf of the assesses either before this court or before the authorities below that the building in question was 'demolished or destroyed'. Therefore, we need not go into the true connotation of those words.
17. Both before the Appellate Assistant Commissioner and the Tribunal, it appears the contention of the assesses was that the said building was 'discarded'. Both those authorities rejected that contention. From the records of the case it is clear, and that fact is admitted, that the assesses is still in possession of the theatre in question. He continues to exhibit pictures in that theatre. He has refused to surrender possession of the same to the lessor. The lessor had instituted Original Suit No. 53 of 1959 on the file of the District Judge, Bangalore, claiming the possession of that building on the strength of the lease deed executed on August 31, 1959. The assesses is resisting that suit on the ground that, in view of the huge investment made by him in putting up a costly theatre, he is entitled to continue in possession of the building. In these circumstances, the contention that the assesses, in law, must be deemed to have 'discarded' that building appears to have no basis.
18. On the facts of this case it is unnecessary for us to consider whether the expression 'discarded' found in section 10(2) (vii) should be given a wide meaning so as to include the abandonment of a building by an assesses due to compulsion of law or otherwise. The assesses in this case is continuing his business in the premises in question. Hence, he cannot be said to have discarded the same either in law or in fact.
19. Before the authorities below it does not appear that the assesses contended that the building in question must be deemed to have been 'sold' by him to the lessor. As seen earlier, he is in possession of that building. His contention before the civil court appears to be that he has existing rights over that building. The stand taken by him in the civil court is not consistent with that taken in these proceedings. It is true that the terms of the lease have come to an end. As per the stipulations therein, the lessor is entitled to resume possession of the leasehold including the theatre. Therefore, it is urged on behalf of the assesses that he must be deemed to have 'sold' the building to the lessor on the expiration of the terms of the lease and his present possession must be deemed to be that of a lessee of the building as well as that of the site.
20. It was contended by Mr. Swaminathan, the learned counsel for the assesses, that during the continuance of the lease the assesses was the owner of the theatre, but, in view of the contract of lease, he had to give up his ownership at the end of the lease period though he continues to be in possession of the same. He further contended that in view of the termination of the lease, the assesses must be considered to have 'sold' the building to the lessor. According to him, the consideration for the sale of the building is the low rent fixed under the lease agreement. It must be borne in mind that the alleged sale can only be that of the superstructure-movable property.
21. It was urged on behalf of the assesses by Mr. Swaminathan that the apparent object of section 10(2) (vii) is that in the case of property depreciation of which is made by the 'Act' an allowable deduction because of the relation of the property in the taxpayer's hands to the production of his assessable income, the whole of that portion of the cost of the property which the taxpayer fails to recover when the property becomes no longer available to him for the production of assessable income shall be deductible in the assessment of his taxable income and that to that end, subject to the other provisions of the 'Act', it shall be the subject of a deduction under section 10(2) (vii). In support of this argument reliance was placed on the decision of the Australian High Court in Henty House Proprietary Ltd. v. Federal Commissioner of Taxation. On the authority of that decision Mr. Swaminathan wanted us to give an extended meaning to the word 'sold' found in section 10(2) (vii) so as to include transactions like the one before us.
22. We think that Mr. Swaminathan is right in his contention that the assesses should be considered as having been the owner of the superstructure till the period of the lease came to an end. It was observed by Tendolkar J. in Laxmipat Singhania v. Larsen and Toubro Ltd. that the effect of the provision in section 108(h) is that the lessee is the owner of the building put up by him, although it is put on the land belonging to the lessor. This review was accepted as correct by the Supreme Court in Dr. K. A. Dhairyawan v. J. R. Thakur. The facts of the case before the Supreme Court are somewhat similar to the case before us. Therein, the learned judges came to the conclusion that during the term of the lease, the lessee was the proprietor of the building put up by him. Therefore, we hold that the assesses was the owner of the superstructure put up by him during the period of the lease.
23. We have already come to the conclusion that the assesses cannot be said to have 'discarded' that building. Therefore, all that we have to see is whether he can be said to have 'sold' the same.
24. The word 'sale' is not defined in the 'Act'. Therefore, it must be given its ordinary grammatical meaning. According to the Oxford Dictionary, 'sale' means 'an act of selling or making over to another for a price'. It has also been defined as an exchange of a thing for a price. The ordinary conception of 'sale' of a movable is that something is handed over for a price as the result of negotiation and agreement. In a 'sale' there is an agreement between the parties whereby one person known as the seller hands over a thing or property to the other person known as the buyer for a consideration usually in terms of money which has been agreed between the parties. That is the ordinary English conception of a 'sale'. The word 'sell' is also defined in the English Dictionary as 'to give up or hand over something to another for money' - see the decision in Calcutta Electricity Supply Corporation Ltd. v. Commissioner of Income-tax.
25. The transaction with which we are concerned in this case does not square up with the meaning of 'sale' referred to above. As seen earlier, the theatre in question continues to be in the possession of the assesses. It was not the case of Mr. Swaminathan that the transaction in question can be considered as 'sale' within the meaning of that word under the Indian Sale of Goods Act. In view of the fact that the theatre in question still continues to be in the possession of the assesses, we have not thought it necessary to go into the contention of Mr. Swaminathan that the delivery of the theatre contemplated under the lease agreement was for a consideration, the consideration being the low rent fixed. All that we need say is that there is no evidence before us as to what was the proper rent for the site leased.
26. We do not think that we can extend the rule laid down in Henty House Proprietary Ltd. v. Federal Commissioner of Taxation to the facts of this case. The language of the corresponding Australian Act is not in pari materia with the language of section 10(2) (vii). The expression 'disposed of' found in section 59 of the Australian Income Tax Assessment Act is wider in scope than the word 'sold' found in section 10(2) (vii). That apart, what is of importance in this case is that the assesses continues to be in possession of the theatre. Under these circumstances, we are unable to uphold the contention of the assesses that he must be deemed to have 'sold' the theatre to the lessor.
27. We have earlier opined that he cannot be considered as having 'discarded' the theatre in question. We have also come to the conclusion that the assesses was the owner of the building in question during the accounting year 1958-59. Hence, the assesses is entitled to the allowance for depreciation provided under section 10(2) (vi).
28. Our answer to the questions referred to us is that, on the facts and in the circumstances of this case, the assesses is 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 is entitled to deduct a sum of Rs. 2,203 under section 10(2) (vi) of the 'Act' as allowance for depreciation.
29. As the assesses as well as the department have partly succeeded and partly failed in this case, we make no order as to costs.