1980 (2) TMI 22 - HC - Income Tax

Property's Annual Value Included in Income; Payment Deemed Unconnected to Business

The court affirmed the inclusion of the annual value of the property in the assessee's income for the entire 12 months, as the assessee voluntarily ... Annual Value, Business Expenditure, House Property Issues Involved:1. Inclusion of the annual value of property income.2. Nature of the payment made to Moti Ram Bhalla.Detailed Analysis:Issue 1: Inclusion of the Annual Value of Property IncomeFacts and Circumstances:The property in question, located at 14, Aurangzeb Road, New Delhi, was purchased by the assessee-company on December 27, 1957. The vendor was allowed to use the premises rent-free until May 31, 1959. The assessee argued that since no income was realized from this property before June 1, 1959, the property income should be taxed only for the four months from June 1, 1959, to September 30, 1959.Tribunal's Decision:The Tribunal upheld the ITO's decision to assess the property on its annual value for the full 12 months, stating that the tax under Section 9 of the Indian I.T. Act, 1922, is based on the bona fide annual value, irrespective of actual receipt of rent.Court's Analysis:The court agreed with the Tribunal, referencing the Bombay High Court decision in D.M. Vakil v. CIT, which held that tax is payable on the bona fide annual value regardless of actual income received. The court also distinguished this case from CIT v. R.B. Jodha Mal Kuthiala, where the property was vested in the Custodian of Evacuee Property, Pakistan, and the assessee had no control over it. In the present case, the assessee voluntarily allowed the vendor to remain in possession without rent, thus the property income was assessable based on its annual value.Conclusion:The court affirmed the Tribunal's decision, holding that the annual value of the property for the entire 12 months was rightly includible in the total income of the assessee-company.Issue 2: Nature of the Payment Made to Moti Ram BhallaFacts and Circumstances:The assessee-company paid Rs. 10,901 to Moti Ram Bhalla, part of a total sum of Rs. 43,861.50, claimed as brokerage for the purchase of land. The ITO disallowed this amount, considering it a payment for Bhalla's relinquishment of his partnership interest, thus treating it as capital expenditure.Tribunal's Decision:The Tribunal reversed the AAC's decision, holding that the payment was either commission or made to acquire exclusive rights to the stock-in-trade (land) for colonization, thus treating it as revenue expenditure.Court's Analysis:Judge Khanna disagreed with the Tribunal, emphasizing that the payment was for relinquishing Bhalla's partnership rights, making it capital expenditure. He referenced a recent court decision in General Auto Parts Co. v. CIT, which held that compensation for a partner's retirement is capital expenditure.Judge Ranganathan, however, supported the Tribunal's view, arguing that the payment was for Bhalla's role in facilitating the land purchase, thus a business expense. He noted that Bhalla and Prem Raj had valuable rights under the original agreement, and their cooperation was essential for the assessee to acquire the land.Chief Justice Deshpande, resolving the difference, concluded that the payment had no connection with the business of the assessee, as it was a voluntary act and not a legal obligation. Thus, it could not be considered a business expense under Section 10(2)(xv) of the old Act or Section 37(1) of the new Act.Conclusion:The court ultimately held that the payment to Moti Ram Bhalla was not an expenditure of revenue nature and was not allowable in the computation of the total income of the assessee-company.Summary:The court affirmed the inclusion of the annual value of the property in the assessee's income for the entire 12 months, as the assessee voluntarily allowed the vendor to remain rent-free. However, the payment to Moti Ram Bhalla was deemed not connected to the business, thus not allowable as revenue expenditure.