D.K. Kapur, J.
1. The questions referred to us in these two income-tax references which both relate to the assessment year 1969-70 are connected with capitalisation of certain expenses incurred by the assessed towards the construction of Kamal Theatre which is a cinema constructed by the assessed which is a registered firm. The three items involved are ground rent paid for the plot, corporation tax and house tax.
2. The facts of the case are that a sum of Rs. 15,28,933 was shown as the cost of building in the accounts of the assessed. According to the Income-tax Officer, the following items were not to be taken into consideration for the purpose of allowing depreciation :
(1) Tax paid prior to start of the cinema 30,899
(2) Interest paid to banks 1,48,525
(3) House tax 11,345
(4) Ground rent 57,200
3. These amounts were not included by the Income-tax Officer for the purpose of computing the actual cost of the building. The Appellate Assistant Commissioner on appeal allowed the claim regarding interest paid to banks on the basis of the judgment in CIT v. Standard Vacuum Refining Co. of India Ltd. : 61ITR799(Cal) .
4. On appeal by the assessed to the Tribunal, the Tribunal allowed the assessed to capitalise the corporation tax and the house tax but not the ground rent. This has led to these two references, one at the instance of the assessed and the other at the instance of the Commissioner of Income-tax.
5. The two questions referred to us are as follows :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the ground rent of Rs. 57,200 could not be added to the cost of the cinema for the purpose of allowing depreciation specially when the plot had been acquired by the assessed for constructing a cinema
2. Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in directing that the corporation tax of Rs. 30,899 and the house tax of Rs. 11,345 paid prior to the start of the cinema be capitalise and whether it formed part of the actual cost of the cinema building for the purpose of depreciation allowance under the Act as directed by the Tribunal '......
6. The question that has intrigued us is whether the Tribunal was right in holding that the tax could be capitalised. As far as we can see, the Tribunal merely followed the judgment of the Calcutta High Court to hold that the tax could be capitalised. But, in our view, the tax appears to be payable whether or not the building is built. A tax is not a part of the cost. We have not been able to find any judgment to support the conclusion of the Tribunal.
7. It was contended for the assessed that this case was covered by the judgment of the Supreme Court in Challapalli Sugars Ltd. v. CIT : 98ITR167(SC) . In actual fact, that case merely confirms the judgment of the Calcutta High Court in CIT v. Standard Vacuum 1966 161 ITR 799. The amount, which was in question, was the interest paid on borrowed money. It was held that accountancy practice had to be followed. The Supreme Court stated the proposition as follows (p. 173 of 98 ITR) :
'In finding the answer to the question mentioned above, we have to bear in mind that it arises in the context of profits or gains of business and the permissible deductions on account of depreciation and development rebate relating to the machinery and plant of the assessed. As the expression 'actual cost' has not been defined, it should, in our opinion, be construed in the sense which no commercial man would misunderstand. For this purpose it would be necessary to ascertain the connotation of the above expression in accordance with the normal rules of accountancy prevailing in commerce and industry.'
8. The court then analysed the method by which the actual cost of a capital asset might be worked out. It was observed that when a company raises a share capital and defrays the expenses for the construction of a building, the company may pay interest and charge to capital the sum paid by way of interest.
9. If we look at the facts of this case, we have to find out if ground rent paid for the building prior to the completion of the cinema can be treated as a part of the capital cost of the cinema. Similarly, the amount of tax paid to the corporation by way of house tax and other corporation taxes have to be considered. Do these expenses partake the cost in relation to the building The cinema is built on a leasehold plot for which ground rent is to be paid. This ground rent has to be paid for the entire period of the lease. We do not see how this can be considered to be a part of the actual cost of the building. Similarly, the house tax and corporation tax paid prior to the construction of cinema is a tax charged by the Corporation in relation to the plot. The exact nature of the other taxes is not set out in the statement of the case. These taxes have to be paid in any event whether the cinema is built or not. So, we cannot see how they can be treated as part of the cost of the building, i.e., the cinema itself.
10. No principle of accountancy has been brought to our notice which would allow the ground rent or the house tax or other corporation taxes being treated as a part of the actual cost of the cinema.
11. Numerous other cases were cited before us. But, in each case, there was some nexus between the expenses and the actual cost. We are unable to discover the nexus between the ground rent, house tax and the corporation tax and the construction cost of the building.
12. Learned counsel for the assessed urged that under the terms of the lease, a cinema building had to be constructed within a fixed period, so the tax paid during the construction period as well as the ground rent should be treated as a part of the cost of construction of the building. We do not think that the tax can be treated as part of the cost in this sense. They are to be paid whether or not the building is to be built.
13. Similarly, the ground rent has to be paid for the plot whether or not the building is built. The value of the plot does not go up by the payment of the house tax or the ground rent. So, we are unable to hold that these amounts can be capitalised.
14. We would accordingly answer question No. I referred to us in the affirmative, in favor of the Department and against the assessed and we would answer question No. 2, in the negative, in favor of the Department and against the assessed, but we would leave the parties to bear their own costs as the questions do not appear to be covered by any previous reported authority.