M.R.A. Ansari and D.K. Kapur, JJ.
(1) The assessed took over the business of Hindu undivided family of M/s Gulab Singh and sons w.e.f. 1.11.61 taking the machinery and premises on lease from the family at a monthly rent of Rs. 6,500.00. A plot of land was also taken on perpetual lease on 28.9.53 from the Government of India on payment of Rs. 84,375.00 as premium. The plot was later transferred to the Hindu Undivided Family on receipt of a premium amount of Rs. 5,041.00 The Hindu undivided family constructed a building over it at a cost of about Rs. 5 lacs and ground floor was let out to U.S.I.S., at an annual rent of Rs. 80,000.00 on 21.2.57. Hindu undivided family requested the Government of India to permit the plot being transferred to name of its Karta which was refused' There upon, the Hindu undivided family transferred the land and the building upon it to the assessed company at its book value of Rs. 5,14,282. 57 which was treated as a loan payable to the Hindu undivided family at 10% interest w.e.f. 188.8.131.52. After the transfer, the assessed used half of the building for its own business and the other half was let out to U.S.I.S., at an annual rent of Rs. 80,000.00.-
(2) Under the terms of the lease, the assessed could not create any sub-interest in the premises. This condition was infringed and the Government sought to cancel the lease. A compromise was arrived at by which the assessed undertook to pay the Government an additional premium of Rs. 3,75,000.00 per acre with 6% from the date of sub letting. The revised premium was fixed at Rs. 3,37,500.00 the additional premium being Rs. 2,53,125.00 The assessed was also to pay an additional ground rent @ 2(r)% per annum on the additional premium together with 6% for payments made after due date. A revised agreement of lease was executed on 5th December, 1962 incorporating the new agreement and conditions of lease. The original ground rent was Rs. 2109.37, under the new agreement it was enhanced to Rs. 8,437-87, thus the enhancement was Rs. 6,321.50 The additional ground rent was payable from 20th February, 1957 i.e, the date of sub-letting, which became payable by virtue of the agreement dated 5th December, 1962.
(3) The assessed claimed certain deductions during the years 1961-62 and 1962-63. For the assessment years 1961-62, the Income Tax Officer disallowed interest amounting to Rs. 29,267.00 which was payable on the additional premium @6% per annum while computing income from property and also disallowed the same for the assessment year 1962-63. In the latter year, the Income Tax Officer also disallowed a claim for Rs. 4,319.00 which was c;aimed by the assessed as have been deducted by the defense Minister on account of non-return of Government paper supplied to. the assessed.
(4) The assessed had also claimed enhanced ground rent for the period 7th February, 1957 to 31st December, 1960. In the assessment year 1961-62 the total claim was Rs. 24,302.00. Out of this 50% was claimed against business income and the balance against property income The assessed also claimed interest on enhanced ground rent which amounted to Rs- 5,086.00 i.e. half against business income and half against property income. Also the assessed claimed interest at 6% per annum on the additional' premium, the total claim being Rs. 58,535.00. Half again was claimed against the business income and half against the property income.
(5) In the assessment year 1962-63, the assessed repeated his claim made in the assessment 1961-62 and in addition claimed deducttion of additional ground rent half against property income and half against business income. For this year interest on ground rentand interest on additional premium were also claimed. The interest on ground rent was disallowed but the interest on the additional premium as far as it appertained to the property income amounting to Rs. 7,594.00 was allowed.
(6) The Income Tax Officer held that the claims of the assessed for deductions were based on its own defaults and, thereforee, the deductions claimed were in the nature of penalties which were not allowable.
(7) On appeal to the Appellate Assistant Commissioner, the enhanced ground rent amounting to Rs. 3,117.00 for the 1960 was allowed against the property income. The interest on the ground rent and interest on the additional premium were disallowed both against the property as well' a s business income.
(8) On further, appeal by the assessed, the Tribunal held that the assessed's claim for interest on the additional premium amounting to Rs. 2,53,12.5 at 6% per annum for the calendar years 1960 and 1961 was allowable The Tribunal held that the amount of additional premium was a mortgage or capital charge and hence the interest on the premium was payable under Section 9(1) (iv) of the Indian Income Tax Act, 1922. The Tribunal also deleted the addition of Rs. 4,319.00 referred to above on the ground that though it was not a bad debt it should be considered as allowable under Section 10(1) of the Act. On the above facts and ..circumstances, on an application by the Commissioner of Income Tax as well as the assessed company, a number of questions of law have been referred to this court which are three in number. First two were referred at the instance of the assessed company while 3rd at the instanle of Commissioner Income Tax, were :-
1. Whether on the facts and circumstances of the ease, the following amounts are allowable as deductions agaist the property income :- (a) enhanced ground rent for the period 20-2-1957 to 31-12-1959, Rs, 9,034.00. (b) interest on enhanced ground rent Rs.2,543.00, (c) interest on enhanced premium Rs. 29,267.00.
2. Whether on the facts and circumstances of the case, the following amounts are allowable as deductions against the business income :- (a) enhanced ground rent for the period 20-2-1957 to 31-12-1960. Rs. 12,151.00 (b) interest on enhanced ground rent Rs. 2,543.00. (c) interest on enhanced premium Rs. 29,267.00.
3. 'Whether on the facts and in the circumstances of the case, the interest on additional premium of Rs. 2,53,125.00 at 6% per annum from 1-1-60 to , is allowable under Section 9(i)(iv) of the Indian Income Tax Act, 1922'.
For the assessment year 1962-63, there are 4 questions, first 2 at the instance of the assessed assessed company and other two at the instance of the Commissioner of Income Tax.
1. Whether on the facts and circumstances of the case, the following amounts are allowable as deductions against the property income :-- (a) enhanced ground rent from 20.2.1957 to 31.12.1959. Rs. 9,024.00. (b) interest on enhanced ground rent . Rs.2,797.00 (c) interest on enhanced premium Rs.21,663.00
2. Whether on the facts and circumstances of the ease, the following amounts are allowable as deductions against the business income :- (a) enhanced ground rent from 20.2.1957 to31.12.1961, Rs, 15,315.00 (b) interest on enhanced ground rent. Rs. 2,790.00 (c) interest on enhanced premium. Rs. 36,861.00 1. Whether on the facts and in the circumstances of the case the interest on additional premium of Rs.2,53,125.00 at 6% per annum is allowable under Section 9(i)(iv) of the Indian Income Tax Act, 1922 2. Whether on the facts and in the circumstances. of the case, the Tribunal was legally justified, in holding that the claim of the assessed amounting to Rs. 4,312.00 is admissible under section 10(l) of the Income Tax Act, 1922'.
(9) Property Income (Question No. 1 for both years) referred at the instance of the assessed). Dealing with the deductions from property income it was held on consideration of 69 I.T.R. 38 and 2 I.T.R. 328 that the allowance mentioned in section 9 of the Act are of various types. Some of the allowances are dependent on actual payments and some are hypothetical nature. In the case of ground rent, the rent rnay be payable in monthly Installments or yearly Installments and may not be paid in any particular year, But still the ground rent is chargeable in every year if the property is subject ground rent. It clearly seems to be the intention of the legislature to allow the ground rent relating to the period under consideration. Thus, in the calendar year 1960 which is relevant foa the assessment year 1961-62, the ground rent would be the figure for that year irrespective of whether It was paid or not. The other items of ground rent relate to different assessment years, i.e. to earlier assessment years. These sums could only have been allowed in those earlier years. They cannot be carried forward because the principles which govern business accounting do not apply to the allowances mentioned in section 9(l)(iv) of the Act. The same argument holds true of the assessment year 1962- 63. Hence the Court answered question No. 1 for both years, referred at the instance of the assessed in the negative i.e. against' the assessed and in favor of the revenue.
(10) Business Income (Question No. 2 for both years referred at the instance of the assessed).
The Income Tax Act of 1922 and 1961 charge income lax under the charging section, Section. 4 of the Act, 1922 and sections of the Act, 1961, which is received or deemed to be received', or 'accrues or arise, or is deemed to accrues, or aries to him'. The same holds true of deductions. The assessed is entitled to deduct amounts paid by him or deemed to be paid by him or liabilities or amounts concerning which the liability has accrued or arisen or deemed to have accrued or arisen be during the periods in question. It cannot be said in .the present case that the liability in question had either accrued or can be deemed to have accrued or arisen during the periods in question or before it was finally incurred in the agreement dated 5th December, 1962. Consequently, the amounts, in question are not admissible deductions in the assessment year in question. It is unnecessary-to deal with the question of interest because of the conclusion that there was no accrual of liability in the years in question. Thus, question No. 2 for both the years referred at the instance of the assessed. is answered in the negative i.e. against the assessed arid in favor of the Department.
(11) Interest on additional premium question No. 1 for both years referred at the insurance of the Commissioner).
(12) In the case of an annual charge, the total amount is allowable as a deduction under the statute, but in the case of a capital charge only the interest is allowable. If the enhanced premium can be considered to be a capital charge, it entitles the assessed. to claim the interest as an allowance. If the enhanced premium is not a capital charge, the allowance has to be disallowed.
(13) In determining whether the liability to pay the premium is a capital charge or not the Court is entitled to take into consideration the relief that is available to the holder of the disputed charge, in case of failure by the assessed to make the payment in question.
(14) Hence, in this case, if the assessed company does not pay the enhanced premium, the Chief Commissioner can take possession, of the property and thus, the property can be said to be charged with the payment of the money i.e. the enhanced premium, because it is available to the holder of the charge not only for the realisation of its claim but also absolutely. The relationship creates a capital charge on the property for in case of failure to pay the amount not only does the assessed lose the lease, but also loses the ownership of the property. This means that the Government must be held. to hold a capital charge against the property, and the interest payable on that capital charge, namely, the interest on the enhanced premium must be treated as interest payable on a capital charge, and hence allowable under section 9(1)(iv) of the Indian Income Tax Act, 1922. The same holds true for the year 1962-63 as the provision of section 24(1)(iii) of the Income Tax Act, 1961, permit the identical allowance under the new Act, The answer to these questions has, thereforee, to be in favor of the assessed.
(15) Claim for non-return of Government paper (question No. 2 for the year 1962-63 referred at the instance of the Commissioner).
(16) This item viz Rs. 4,3l9.00 was deducted by the Government from the assessed's bills on account of the fact that the Government paper supplied to the assessed was not returned by him, and has been claimed by the assessed as an admissible deduction under section 10(1) of the Act, which was allowed by the Tribunals as such.
(17) That there is no material to show that in fact some paper was retained by the assessed company and in the absence of such a finding or determination, it is not possible to say that either the whole of the sum of Rs. 4,319.00 or any part of it should have been disallowed. Consequently, there is no material to answer the question differently from the way the Tribunal has dealt with it. This question has, thereforee, to be answered in favor of the assessed and against the Department.