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1979 Supreme(All) 511
High Court Of Allahabad
C.S.P. Singh, R.R. Rastogi, JJ.
Commissioner Of Income-Tax – Appellant
Versus
Modi Spinning And Manufacturing Mills Co. Ltd. – Respondent
Income Tax Reference 89 of 1975
Decided On : Sep 05,1979
R.K. Gaulati, R.S. Dhawan, A. Gupta
The annual value of a property for the purpose of taxation under Section 23(1) of the I.T. Act, 1961, is the sum for which the property might reasonably be expected to let from year to year, or the amount received or receivable by the owner as rent, whichever is higher. However, where the letting out of a property is subject to the limitation provided under a rent control enactment, and there is nothing on the record to show that the agreed rent is not fair and reasonable, then the actual rent received by the assessee should be regarded as the fair annual letting value of the property concerned.
Headnote:
INCOME TAX - Entertainment expenditure - Whether entertainment expenditure incurred by the company on the entertainment of customers and clients at its various offices was in the nature of entertainment expenditure within the meaning of Section 37(2) of the Act - Whether the assessee was entitled to exemption under Section 84 of the I.T. Act, 1961 - Whether one-half of the profits of the previous years should be added to the capital computation for purposes of calculating the relief under Section 84 - Whether the ITO was justified in estimating the annual letting value of the premises in question at Rs. 96,000 notwithstanding the fact that the quarters had already been let out to the Modi Industries Ltd., for a rent of Rs. 27,462.
Fact of the Case:
The assessee, a public limited company, incurred entertainment expenditure on customers, merchants, and agents who came to its mill. The ITO disallowed half of the said expenses as entertainment expenditure under Section 37(2) of the I.T. Act, 1961. The assessee also claimed exemption under Section 84 of the Act for a new ginning press mill, which was set up during the relevant previous year. The ITO disallowed the claim on the grounds that the mill was not formed by the reconstruction of an already existing business and that the capital employed was nil. The assessee further claimed that one-half of the profits of the previous years should be added to the capital computation for purposes of calculating the relief under Section 84. The ITO disallowed the claim. The assessee also challenged the ITO's estimation of the annual letting value of certain quarters, which were let out to Modi Industries Ltd., at Rs. 96,000, contending that the fair rent should be the rent agreed upon between the parties, which was Rs. 27,462.
Finding of the Court:
The Tribunal held that the entertainment expenditure incurred by the assessee was in the nature of entertainment expenditure within the meaning of Section 37(2) of the Act. The Tribunal also held that the assessee was entitled to exemption under Section 84 of the Act for the new ginning press mill, as it was a separate and independent unit and not formed by the reconstruction of an already existing business. The Tribunal further held that one-half of the profits of the previous years should be added to the capital computation for purposes of calculating the relief under Section 84. The Tribunal also held that the ITO was not justified in estimating the annual letting value of the quarters at Rs. 96,000, and that the fair rent should be the rent agreed upon between the parties, which was Rs. 27,462.
Issues: 1. Whether the entertainment expenditure incurred by the assessee was in the nature of entertainment expenditure within the meaning of Section 37(2) of the Act? 2. Whether the assessee was entitled to exemption under Section 84 of the I.T. Act, 1961? 3. Whether one-half of the profits of the previous years should be added to the capital computation for purposes of calculating the relief under Section 84? 4. Whether the ITO was justified in estimating the annual letting value of the premises in question at Rs. 96,000 notwithstanding the fact that the quarters had already been let out to the Modi Industries Ltd., for a rent of Rs. 27,462?
Ratio Decidendi: 1. The entertainment expenditure incurred by the assessee was in the nature of entertainment expenditure within the meaning of Section 37(2) of the Act, as it was incurred on customers, merchants, and agents who came to the assessee's mill. 2. The assessee was entitled to exemption under Section 84 of the Act for the new ginning press mill, as it was a separate and independent unit and not formed by the reconstruction of an already existing business. 3. One-half of the profits of the previous years should be added to the capital computation for purposes of calculating the relief under Section 84, as provided under Rule 19(5) of the I.T. Rules, 1962. 4. The ITO was not justified in estimating the annual letting value of the quarters at Rs. 96,000, as the fair rent should be the rent agreed upon between the parties, which was Rs. 27,462, in accordance with the provisions of the U.P. (Temporary) Control of Rent and Eviction Act (U.P. Act 3 of 1947).
Final Decision: The court answered the questions referred to it as follows: 1. Question referred at the instance of the assessee: Against the assessee and in favour of the department. 2. Question referred to at the instance of the Commissioner: 1. In the affirmative, in favour of the assessee and against the department. 2. In the affirmative, in favour of the assessee and against the department. 3. In the negative, in favour of the assessee and against the department.
R.R. Rastogi, J.
1. THE Income-tax Appellate Tribunal, Delhi Bench "A", has referred the following questions for the opinion of this court. By the assesses :
"Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the sum of Rs. 7,016 estimated to be the expenditure incurred by the company on the entertainment of customers and clients at its various offices was in the nature of entertainment expenditure within the meaning of Section 37(2) of the, Act ? "
By the Commissioner :
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Abohar Ginning Unit had not been formed by the reconstruction of an already existing business but was entitled to exemption under Section 84 of the I.T. Act, 1961 ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the one-half of the profits of the previous years should be added to the capital computation for purposes of calculating the relief under Section 84 ?
(3) Whether, on the facts and in the circumstances of the case, the ITO was justified in estimating the annual letting value of the premises in question at Rs. 96,000 notwithstanding the fact that the quarters had already been let out to the Modi Industries Ltd., for a rent of Rs. 27,462?"
2. M/s. Modi Spinning and Weaving Mills Co. Ltd., Modinagar, hereinafter referred to as the assessee, is a public limited company carrying on business at Modinagar. The assessment year involved is 1965-66, the corresponding accounting period ended on April 30, 1964. The ITO made several additions and disallowed certain expenses claimed by the assessee, one of which was entertainment expenditure and the question referred at the instance of the assessee relates to the same. The assessee had debited a sum of Rs. 1,14,448 to the mess account in the accounts of its head office and of different units. Out of that amount a sum of Rs. 32,016 had been paid to the local restaurants and hotel for tea, etc., and it was claimed that that expenditure had been incurred by the assessee on the members of the staff. It was, however, admitted that that amount also included expenses incurred in entertaining the customers, merchants, and agents who came to the assessee's mill at Modinagar. In the absence of proper details, the ITO disallowed half of the said expenses being expenses incurred for the entertainment of the customers. The disallowance was upheld by the AAC on appeal. On further appeal before the Appellate Tribunal, it was urged that similar expenditure claimed by the assessee in the preceding year had been allowed by the Appellate Tribunal. In that year, the expenses claimed by the assessee had only been in respect of tea provided to the members of the staff while in the year under consideration this amount included expenditure incurred in entertaining the customers, merchants and agents as well. Hence, in the absence of fuller details and on a comparison with the figures of the earlier year, the Appellate Tribunal estimated Rs. 25,000 as expenditure incurred on the members of the staff and the balance of Rs. 7,016 as expenditure incurred on guests and occasional visitors. The disallowance was, thus, sustained at Rs. 7,016.
So far as this disallowance is concerned, the matter is covered by a decision of this court rendered in Brij Roman Dass andamp; Sons v. CIT [1976] 104 ITR 541. Entertainment expenditure incurred on customers was held to be governed by Section 37(2A) of the I.T. Act, 1961. The corresponding provision is now contained in Section 37(2) and respectfully following that decision we agree with the view taken by the Appellate Tribunal in regard to the amount of Rs. 7,016.
3. NOW, coming to the questions, referred at the instance of the Commissioner, in regard to question No. 1 the facts briefly stated are that during the relevant previous year the assessee had set up a ginning press mill at Aboharand it started
