Section 43B and income classification: sanctioned adjustment entries may count as actual payment, while rent receipts remain non-business income.

Entertainment tax collected under a State scheme was treated as a revenue receipt, and deduction under section 43B was available where the statutory liability was discharged through adjustment entries sanctioned by the competent authority. Rent and service charges from the bank portion of the building were assessed as income from other sources, not business income, because the letting was primarily for rent and only incidental facilities were provided. Depreciation on the cinema portion required proper apportionment of combined building cost, while the plea to treat the cinema building as plant was remitted for reconsideration. The disallowances on travelling, directors' remuneration, repair and maintenance, and interest-free advance were substantially deleted or reduced on the facts.

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Issues: (i) Whether entertainment tax collected under the State scheme was taxable as a revenue receipt and whether the assessee was entitled to deduction under section 43B on the footing of payment through adjustment entries; (ii) Whether rent and service charges from the bank portion of the building were assessable as business income or under other heads; (iii) Whether the cost of the cinema portion had to be properly apportioned for depreciation and whether the cinema building was to be treated as plant for the rate of depreciation; (iv) Whether the disallowance out of travelling and conveyance expenses for assessment year 1986-87 was justified; (v) Whether the disallowance out of directors' remuneration, travelling and conveyance expenses, repair and maintenance expenses and interest-free advance for assessment year 1988-89 was justified.

Issue (i): Whether entertainment tax collected under the State scheme was taxable as a revenue receipt and whether the assessee was entitled to deduction under section 43B on the footing of payment through adjustment entries.

Analysis: The collection of entertainment tax was made under the charging scheme of the State enactment and the assessee was not exempt from liability under the exemption provision. The scheme did not waive the statutory collection and deposit obligations, but only permitted part of the tax to be adjusted by way of grant-in-aid entries, while the balance was required to be deposited in the treasury. The statutory expression "actually paid" in section 43B was read in the context of the permitted mode of discharge under the scheme. Payment through the adjustment mechanism sanctioned by the State authority was treated as a real discharge of liability and not as a mere book entry lacking substance.

Conclusion: The entertainment tax formed a revenue receipt, but the assessee was entitled to deduction under section 43B on the facts. The issue was decided in favour of the assessee.

Issue (ii): Whether rent and service charges from the bank portion of the building were assessable as business income or under other heads.

Analysis: The lease deed showed that the premises were let out for earning rent, with only incidental facilities provided to the lessee. The letting was not part of a commercial exploitation scheme of the property in the sense required to treat the receipts as business income. The common passages or the connection with the cinema business did not change the character of the receipt. The facts were distinguished from cases where the assessee carried on an organised commercial activity in providing composite services to tenants.

Conclusion: The rent and service charges were not assessable as business income. The issue was decided against the assessee.

Issue (iii): Whether the cost of the cinema portion had to be properly apportioned for depreciation and whether the cinema building was to be treated as plant for the rate of depreciation.

Analysis: The assessee was entitled to apportion the combined building on a proper cost basis for the purpose of computing depreciation. On the separate plea that the cinema building should be treated as plant, the matter required factual verification in the light of the applicable legal test and was not finally determined on the existing record. The dispute on depreciation rate was therefore sent back for fresh examination.

Conclusion: Proper apportionment for depreciation was directed, and the plea to treat the cinema building as plant was restored for reconsideration. The issue was partly in favour of the assessee.

Issue (iv): Whether the disallowance out of travelling and conveyance expenses for assessment year 1986-87 was justified.

Analysis: The expenditure claimed was lower than the amount disallowed, and the revenue authorities had not properly verified the actual figures. The record supported the assessee's explanation and did not justify the addition sustained in appeal.

Conclusion: The disallowance was deleted. The issue was decided in favour of the assessee.

Issue (v): Whether the disallowance out of directors' remuneration, travelling and conveyance expenses, repair and maintenance expenses and interest-free advance for assessment year 1988-89 was justified.

Analysis: The directors' remuneration increased only because the relevant accounting period was longer and there was no increase in monthly remuneration. The travelling disallowance was not supported once the available details were examined under the applicable travel-expense limits. The repair expenditure was on maintenance of plant-related items and did not call for disallowance. The advance to the sister concern was not shown to have come from borrowed funds and the required nexus for disallowance was not established.

Conclusion: The disallowances of directors' remuneration, repair and maintenance expenses and interest-free advance were deleted, and the travelling disallowance was reduced. The issue was decided substantially in favour of the assessee.

Final Conclusion: The appeals succeeded on the major taxability and deduction questions and also obtained substantial relief on the disallowance issues, while the bank-rent issue was decided against the assessee and one depreciation issue was sent back for reconsideration.

Ratio Decidendi: Payment of a statutory liability through a mode expressly sanctioned by the competent authority under the governing scheme can amount to "actual payment" for section 43B, even where the discharge is effected by adjustment rather than by direct cash remittance.

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