Capital expenditure and accrued income principles: initial hotel equipment costs were non-deductible, and later write-offs could not reduce taxable licence-fee income.

Expenditure on linen, blankets and uniforms acquired at the commencement of a hotel business was capital in nature because it formed part of the initial equipment of the income-earning apparatus, not a recurring revenue outlay, and the method of accounting could not change that character. Licence fees from stall-holders had accrued in full during the accounting year because no enforceable arrangement reducing them existed at that time; later resolutions and book entries did not defeat accrual. An amount written off as a likely reduction in licence fees could not be excluded where the income had already arisen, so the sum remained taxable.

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Issues: (i) Whether the expenditure on linen, blankets and uniforms purchased at the commencement of the hotel business was revenue expenditure deductible under section 10(2)(xv) of the Income-tax Act, 1922. (ii) Whether the assessee had, during the accounting year, an enforceable right to receive the full licence fees from stall-holders notwithstanding the later provision made in the accounts. (iii) Whether Rs. 80,752 could be excluded from income on the footing that it was written off as a likely reduction in licence fees.

Issue (i): Whether the expenditure on linen, blankets and uniforms purchased at the commencement of the hotel business was revenue expenditure deductible under section 10(2)(xv) of the Income-tax Act, 1922.

Analysis: The expenditure was incurred for the initial equipment of the hotel business. Linen, blankets and uniforms were treated as part of the income-earning apparatus of a luxury hotel, and their initial acquisition formed part of the initial outlay rather than the recurring process of earning profits. The method of accounting adopted by the assessee could not alter the true character of the expenditure.

Conclusion: The expenditure was capital in nature and was not deductible.

Issue (ii): Whether the assessee had, during the accounting year, an enforceable right to receive the full licence fees from stall-holders notwithstanding the later provision made in the accounts.

Analysis: On the last date of the accounting year the assessee had already credited the full licence fee and there was then no decision or enforceable arrangement reducing the amount. The later board resolution and subsequent accounting entries were post facto and did not affect the accrual of income during the relevant year.

Conclusion: The assessee had an undisputed right to receive the full licence fees during the accounting year.

Issue (iii): Whether Rs. 80,752 could be excluded from income on the footing that it was written off as a likely reduction in licence fees.

Analysis: The case did not involve a pre-existing agreement to receive a reduced amount within the accounting year, nor was it a case where income had not arisen at all. The amount had accrued and any later remission or book adjustment could not prevent its taxation as income that had already arisen.

Conclusion: Rs. 80,752 was taxable and could not be excluded.

Final Conclusion: The reference was answered against the assessee on all referred questions, and the expenditure claims as well as the attempted reduction of licence-fee income failed.

Ratio Decidendi: Expenditure incurred for the initial equipment of a business is capital expenditure, and income that has already accrued cannot be escaped by a subsequent remission or mere book-entry adjustment.

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