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Commissioner of Income-tax Vs. East India Development Co. (P.) Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 415 of 1970
Judge
Reported in[1979]120ITR655(Cal)
ActsIncome Tax Act, 1961 - Section 57
AppellantCommissioner of Income-tax
RespondentEast India Development Co. (P.) Ltd.
Appellant AdvocateB.L. Pal and ;Ajit Sengupta, Advs.
Respondent AdvocateR.N. Bajoria, ;S.K. Bagaria and ;A.K. Bagaria and A.K. Dey, Advs.
Excerpt:
- .....comprising of about 2,700 sq. ft. 3. before the ito, the assessee claimed deduction from its rental income of rs. 17,974 and rs. 31 on account of expenses incurred for the said suit. the ito held that the said expenses were capital in nature as the assessee incurred the same for obtaining possession of a portion of its office premises, a capital asset, and not for the purpose of earning any rental income and rejected the claim of the assessee. 4. being aggrieved, the assessee appealed to the aac and contended that as its income from sub-letting had been assessed in the past assessments as ' profits and gains of business or profession ', the ito was not justified in treating the same as income from ' other sources'. the assessee admitted that the said suit had been filed for.....
Judgment:

C.K. Banerji, J.

1. This reference arises out of the I.T. assessment of M/s. East India Development Co. (P.) Ltd., the assessee, for the assessment year 1965-66, the relevant previous year being the year ending on the 31st March, 1965. The facts found by and/or admitted before the Tribunal are shortly as follows :

2. The assessee, a company, carries on business of share dealings. It also has income by way of commission from managing agency and from subletting a portion of its office premises at No. 9, Brabourne Road, Calcutta. The assessee is a lessee of the said premises at an annual rent of Rs. 42,000. A portion of the said premises is Sub-let by the assessee to M/s. Kusum Products Ltd., a company managed by the assessee, and another portion thereof is Sub-let to Standard General Assurance Co. Ltd. In 1963, the assessee instituted a suit for ejectment of its Sub-tenant, Standard General Assurance Co. Ltd. The suit was ultimately settled and the said Sub-tenant surrendered and vacated a portion of its Sub-tenancy comprising of about 2,700 sq. ft.

3. Before the ITO, the assessee claimed deduction from its rental income of Rs. 17,974 and Rs. 31 on account of expenses incurred for the said suit. The ITO held that the said expenses were capital in nature as the assessee incurred the same for obtaining possession of a portion of its office premises, a capital asset, and not for the purpose of earning any rental income and rejected the claim of the assessee.

4. Being aggrieved, the assessee appealed to the AAC and contended that as its income from Sub-letting had been assessed in the past assessments as ' profits and gains of business or profession ', the ITO was not justified in treating the same as income from ' other sources'. The assessee admitted that the said suit had been filed for eviction of the said subtenant as the assessee wanted the portion Sub-let for its own use. The claim for deduction of the said expenses was reiterated. The AAC rejected the contentions of the assessee and upheld the assessment.

5. The assessee preferred a further appeal to the Income-tax Appellate Tribunal. Before the Tribunal it was urged on behalf of the assessee that as a result of the said suit the said Sub-tenant not only vacated 2,700 sq. ft. but also increased the rent of the portion still occupied by it from Rs. 2,587 per month to Rs. 3,386 per month and the space so vacated was Sub-let by the assessee to the said Kusum Products Ltd, and the rent payable by it was thereby increased from Rs. 1,225 to Rs. 6,412 per month. As a result of the said litigation the rental income of the assessee in aggregate increased from Rs. 3,812 to Rs. 9,800 per month. It was, therefore, contended that the said litigation expenses were incurred wholly and exclusively for increasing the rental income of the assessee and was an allowable deduction.

6. On behalf of the revenue, it was contended on the other hand that the expenditure incurred on litigation was not directly related to the earning of the rental income, being an income from other sources, but was at the most an expenditure incidental to it and the same could not, therefore, be allowed.

7. The Tribunal found that the expenditure in issue was incurred solely for the purpose of earning enhanced rental income and was not in the nature of a capital expenditure or personal expenses of the assessee and was, therefore, an allowable expenditure under the head ' Income from other sources '.

8. On an application by the CIT, West Bengal-II, Calcutta, under Section 256(2) of the I.T. Act, 1961, the Tribunal, pursuant to the direction of this court, has drawn up a statement of case and has sent up the following questions for the opinion of this court :

' 1. Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the expenditure of Rs. 17,974 and Rs. 31 was incurred to increase the rental income was unreasonable and perverse

2. If the answer to question No. 1 is in the affirmative then whether the Tribunal was right in holding that the said expenditure wasallowable under section 57 of the Income-tax Act, 1961, as an expenditure which was not in the nature of capital expenditure and was laid out or expended wholly and exclusively for the purpose of earning the rental income '

9. At the hearing, Mr. B.L. Pal, learned counsel for the revenue, contended before us that the said expenses were not allowable deductions from income arising from ' other sources ' being rental income and he referred to Section 57 of the I.T. Act, 1961, relevant portion whereof is set out below :

' 57. Deductions.---The income chargeable under the head 'Income from other sources' shall be computed after making the following deductions, namely:--......

(iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income. '

10. Mr. Pal urged that it was not established that the said expenses were incurred by the assessee wholly and exclusively for the purpose of making or earning the rental income. The object of the suit filed by the assessee was only to recover possession of part of the premises from the Sub-tenant and utilise the same for the assessee's own use. He urged that the assessee's contention to the contrary before the Tribunal could not be accepted in view of the clear admission of the assessee before the AAC. Mr. Pal contended further that the deductions allowed from ' Income from other sources ' were more restricted than those allowed from income from business, and even if there was some indirect connection between the said expenses and the earning of the rental income, the same would not be allowable under Section 57(iii) of the Act.

11. In support of his contention Mr. Pal cited a decision of the Privy Council in IRC v. A.W. Davith Appuhamy [1964] 54 ITR 548. Here the assessee had purchased a business with all its assets and goodwill. Persons claiming to be members of a syndicate, of which the vendor was also a member, subsequently instituted a suit against the assessee claiming share in the profits of the said business on the allegation that the vendor had acted as an agent of the members of the said syndicate. The assessee incurred expenses in the said litigation and claimed the same as deduction under the Income-tax Ordinance (Ceylon) C. 188 (Legislative Enactments of Ceylon, 1956, Rev. C. 242), Their Lordships of the Privy Council, after considering the provisions of Sections 9 and 10 of the said Ordinance and the facts and circumstances of the case, observed as under (p. 553) :

' By Section 9 it is provided that ' there shall be deducted, for the purpose of ascertaining the profits or income of any person from any source, all outgoings and expenses incurred by such person in the production thereof;' and by Section 10 no deduction is to be allowed in respect of 'any disbursements or expenses not being money expended for the purpose of producing the income.' If, then, these litigation expenses related to an issue whose outcome would not have affected the profits of the business one way or the other but would have affected only the respondent's share as owner of them, how can they be said to have been expended in the production of the profits from this taxable source, so as to satisfy the requirements of Sections 9 and 10?'

12. Mr. R. N. Bajoria, learned counsel for the assessee, contended on the other hand that the revenue was not entitled to challenge the findings or the conclusions of the Tribunal as perverse. It was not disputed before the Tribunal that the said legal expenses were incurred for earning the rental income, the only contention being that the same was not directly related to the earning of the said income but was incidental to it.

13. Mr. Bajoria next contended that question No. 2 was a corollary to and wholly dependent on the answer to question No. 1 and if the answer to the question No. 1 was in favour of the assessee, the question No. 2 should necessarily be answered in favour of the assessee. Mr. Bajoria further contended that the specific finding of the Tribunal was that the said expenditure had been incurred solely for the purpose of earning enhanced rental income which was not challenged by the revenue but another incidental fact found by the Tribunal to come to its conclusion has been challenged under question No. 1. Mr. Bajoria contended that in view of the aforesaid and there being no challenge to the purpose of the said expenditure, the facts found and the conclusions reached thereupon by the Tribunal could not be disturbed. Mr. Bajoria submitted that even if the said expenses were incurred indirectly for the purpose of making or earning the rental income the same were allowable deductions under Section 57(iii) of the Act.

14. In support of his contentions, Mr. Bajoria relied on the following observations of the Supreme Court in Seth R. Dalmia v. CIT 0043/1977 : [1977]110ITR644(SC) :

'In Commissioner of Income-lax v. H.H. Maharani Vijaykuverba Saheb of Morvi : [1975]100ITR67(Bom) , a Division Bench of the Bombay High Court held that the deduction which is permissible under Sub-section (2) of Section 12 is an expenditure incurred solely for the purpose of making or earning the income which has been subjected to tax and the dominant purpose of the expenditure incurred must be to earn income. It was further held that the connection between the expenditure and the earning of income need not be direct, and even an indirect connection could prove the nexus between the expenditure incurred and the income. We fully agree with the view taken by the Bombay High Court. '

15. In A.W. Davith Appuhamy [1964] 54 ITR 548, the litigation expenses did not affect the profits of the business one way or the other but affected only the share of the assessee in such profits and as such, in our opinion, the said decision has no application to the facts and circumstances of this case.

16. The decision of the Supreme Court in Seth R. Dalmia 0043/1977 : [1977]110ITR644(SC) , gives a quietus to the contention of Mr. Pal that indirect connection between the said expenses and earning of the rental income does not fulfil the conditions for deduction laid down in Section 57(iii) of the Act of 1961.

17. On the relevant facts before it the Tribunal has held that the said expenses were incurred wholly and exclusively for making or earning rental income. It is not disputed that the said ejectment suit has ultimately led to a substantial increase of the rental income of the assessee. The only contention of the revenue before the Tribunal was that the said expenses were not directly related to the earning of the rental income but were at the most incidental thereto.

18. The conclusion of the Tribunal on the facts before it that the said expenses were allowable as deduction under Section 57(iii) of the Act of 1961, therefore, cannot be said to be perverse.

19. The questions referred are accordingly answered as follows :

(a) Question No. 1 is answered in the negative and in favour of the assessee.

(b) Question No. 2 is answered in the affirmative and also in favour of the assessee.

20. There will be no order as to costs.

Dipak Kumar Sen, J.

21. I agree.


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