1. At the instance of the assessed, J. N. Sharma & Sons, the Income-tax Appellate Tribunal, Delhi Bench 'A', has referred under s. 66(1) of the Indian I.T. Act, 1922, the following question for opinion of this court :
'Whether, on the facts and in the circumstances of the case, the interest of Rs. 55,515 payable to the Government could be treated as a deductible revenue of the assessed ?'
2. The assessment year involved was 1961-62, the relevant previous year which ended on December 31, 1960. The assessed has been a registered firm carrying on the business of manufacturing lanterns, stoves, glass lamp holder, radio chassis, etc.
3. The controversy pertains to the amount of Rs. 55,515 which had been shown by the assessed in its balance-sheet as provision made towards interest accrued. This concerned the immovable property consisting of land and building where the assessed was operating its factory. It was held on lease from 1955 from the Faridabad Development Board which was a the body working under the Ministry of Rehabilitation. It seems that since the assessed was interest to effect purchase of this entire property, the Settlement Officer by a letter dated December 13, 1960, informed the assessed that the property including the factory and the land could be transferred to it at the value of Rs. 4,42,223. The cost of the land was stated to be Rs. 70,800 and of the superstructure, Rs. 3,87,638. Total of these came to Rs. 4,58,438.
4. Since the assessed had been paying rent for the property to the Faridabad Development Board from August 4, 1955, an adjustment of the same against the price was to be allowed and at the same time the assessed was to be saddled with liability for payment of interest @ 4.5% w.e.f. August 4, 1955, to December 31, 1960. The total interest thus came to Rs. 1,18,617 for that period. As against that, it was found that the assessed had already paid Rs. 1,34,832. In this way, the balance due for the transfer of the entire property to the assessed came to Rs. 4,42,223. The assessed was, thereforee, given the option to effect purchase of the property at this price. Admittedly, however, till this date the transfer has not been effected and the assessed has not paid the price thereof including the interest in dispute.
5. During the present year, the assessed showed in the balance-sheet, a provision made for Rs. 55,515 as interest accrued on the price at which the property was purported to be purchased. The ITO, however, felt that this entire amount could not be allowed reduction in the present year and the proper course for the assessed was to have made an equitable distribution of interest in the past years. He, thereforee, allowed an amount of Rs. 19,890 only for the present year as simple interest calculated @ 4.5% on the outstanding balance cost of the property.
6. When the assessed took the matter before the AAC against the disallowance of the rent of the interest amount, the ITO urged before him that even the allowance of Rs. 19,890 was not proper. The AAC then observed that the interest claimed by the Govt. actually formed part of the capital cost to be charged from the assessed as a consideration for transfer of the factory building and the land. The assessed was, thereforee, held not entitled to the claim of interest as a revenue expenditure.
7. The assessed, thereafter, felling aggrieved, moved the Appellate Tribunal in second appeal. The Tribunal, then, in the course of its order, sustained the decision of the AAC with the following : observation :
'The appellant is not yet the owner of the property and, thereforee, it cannot be said that appellant was claiming interest on borrowings invested in the purchase of the factory building and site. The interest claimed by the Government actually forms a part of the capital cost to be charged from the appellant as a consideration for the transfer of the factory building and the land. thereforee, whatever payments are required to made by the appellant on this account to the Ministry of Rehabilitation in order to become the owner of the building would be in the nature of a capital expenditure and not a revenue expenditure and, thereforee, this claim cannot be allowed. We are, thereforee, in full agreement with the views expressed by the Appellate Assistant Commissioner that the amount of Rs. 55,515 claimed on behalf of the assessed cannot be admitted as revenue expenditure as it is clearly an investment of a capital nature as it is going to bring an asset of an enduring nature to the assessed.'
8. It is in these circumstances that the assessed has now obtained the aforesaid question for the opinion of this court.
9. We have heard the parties and given our due consideration to all the circumstances. It is apparent from the narration of facts above that the assessed sought to purchase the factory premises from the Faridabad Development Board in the year 1960. The factory building and the land there belonged to the Board, and it computed their total value at Rs. 4,58,438. Since, however, the assessed was the lessee under that board of this property from 1955, and had been paying rent to the board and had also effected payments of some Installments towards the cost of property, the arrangement that was arrived at was that the amounts of rent and Installments which the assessed had paid were to be adjusted against the cost but at the same time the assessed would pay interest @ 4.5% on the total investment which the board had made in that property. It was as such that the figure of Rs. 4,42,223 was arrived at on the payment of which the assessed was to get to property transferred in its favor. This, however, it appears, it did not do and, thereforee, transfer has till this day not been effected. No occasion for the payment of interest for which provision in the accounts was made during the present year, thereforee, has arisen.
10. With this view of the matter, both the AAC and the Tribunal have come to the clear findings that the interest amount claimed by the Govt. actually formed part of the capital cost to be charged from the assessed as considerable for the transfer of the building and the land. Any such payment or the provision thereof was held to be in the nature of capital expenditure and not a revenue expenditure allowable as deduction. This conclusion in our considered opinion was eminently sound and reasonable The basic character of this interest being appurtenant to the capital cost of the property which was still to be acquired, rendered it to partake the same character as was attributable to the cost price thereof. Since the latter was capital in nature, the interest payable for belated completion of the transfer had to be treated in a similar manner. It was not a case of borrowings which the assessed effected for purchasing a property and on which interest was purported to be paid after the transfer had been completed. Instead the computation of interest on adjustment of rent and Installments which the assessed had already paid was taken into account for finally determining the cost consideration of Rs. 4,42,223. This included the amount of Rs. 55,515 about which the assessed had purported to make provision in the present year. There could, thereforee, be no escape from the conclusion that this interest amount being part of the sale consideration for which the property was made available for transfer had to be treated as capital in character. No interference, thereforee, is called for in the conclusion arrived at by the Tribunal.
11. The assessed had by the purported transfer of the property in its favor, attempted to acquire a benefit of enduring nature in the form of acquisition of immovable property. No borrowings were effected by it for meeting the cost. Rather the cost was sought to be related to the year 1955 and an adjustment against the price of the rent which the assessed had already paid, was being obtained. It was, thereforee, not unusual for the Govt. to require computation of interest from that year since the purchase was being effected in the year 1960. The interest amount was plainly part of the cost of the property computed at Rs. 4,42,223. It was at this price that the assessed was to effect purchase of the property. The same had, thereforee, to be treated as capital investment. Moreover, when the assessed has not till this date effected purchase of this property and this fact is so patent and not disputed, it had never any occasion to pay the amount of interest of Rs. 55,515. Its attempt thereforee, to claim deduction thereof must be held as misconceived.
12. We, thereforee, answer the question referred in the negative. The revenue will be entitled to the costs.
13. I agree that I would rest my conclusion on a very narrow ground that the assessed has failed to place necessary material on record to show that the payments in question were really in the nature of interest on purchase price. The two letters dated July 28, 1960, and December 13, 1960, placed before us are consistent with the position that the computation of interest was only as a measure of fixing the price at which the Govt. was prepared to sell the property to the assessed. The original lease deed has not been produced and there is nothing to show that the lease deed itself contained a clause whereunder the assessed was entitled to purchase the land with a liability to pay interest for delay in paying the price. On the other hand, it seems that the Govt. agreed to sell the land only in 1959-60 and that the payment in question, though described as interest, is only part of the price at which the Govt. was prepared to sell. I would, thereforee, express no opinion on the question, (a) whether, if the payments were in the nature of interest on purchase price, they would be disallowable, and (b) what effect the fact mentioned to us by the counsel for the assessed at the hearing and not forming part of the case, that eventually the whole transaction of sale has fallen through, would have on the claim of the assessed for deduction of interest on accrual basis.
14. Question answered in the negative.