A two-judge bench of the Calcutta High Court has held that the payment made to resume the sub-tenanted portion of the property is not business expenditure as the same amount to capital in nature, and therefore, no deduction can be allowed under the provisions of the Income Tax Act, 1961.
In the instant case, the appellant was the sub-lessee of, inter alia, the third and fourth floors of Wallace House, Kolkata. The head lessee, one Joseph Issac Hyam expired on 30th June 1984. With it, all rights of the sublessee came to end.
The appellant claiming themselves as a monthly tenant, on 4th April, 1985, sub let the fourth floor to M/s Satya Sai Properties Limited. There was further sub-letting to M/s. Anam Corporation which in turn let in Allahabad Bank. The appellant says that this was done without their permission. Thereafter, legal proceedings were commenced, inter alia, by a trustee to the wakf for eviction of the appellant. In the suit filed by him, on 18th September, 1996, An order was made by this Court directing the appellant to pay a sum of Rs.32,000/- per month as occupation charges to the wakf estate as an interim measure.
The revenue disallowed the said expenditure by observing that the same amount to capital in nature. The assessee maintained that deduction is allowable as the same was incurred for its own business use.
While upholding the Assessment order, the division bench comprising Justice I.P.Mukerji and Justice Amrita Sinha said that “the principles are plain that when one is examining an expenditure in connection with property, one has to see what is the dominant purpose of making this expenditure. If it results in the acquisition of any right to property, whether freehold, leasehold or a mere right to possession, having some kind of permanence and of enduring nature the expenditure is capital. But if the expenditure is pre-dominantly for expansion of business although it results in the acquisition of some capital, then the business purpose of the expenditure is paramount. The expenditure has to be taken as revenue.”
“In the present case, it is just not established how the business of the assessee was perceived to grow out of the property acquired by them by negotiating the eviction of the said occupants. In fact, through the negotiation the assessee acquired some kind of an enduring right of possession over the occupied area of the said premises surrendered to them by those occupants. It had the incidents of permanence. In those circumstances we agree with the revenue that the expenditure was capital in nature,” the bench said.
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