ORDER
D.S. Meenakshisundaram, Vice President
1. This appeal arises out of the Income-tax assessment of Atlas & Union Jute Press Co. Ltd., the appellant herein. The assessment year is 1988-89 for which the previous year ended on 30-6-87.
2. The assessee is a company in which the public are substantially interested. During this year it derived income from rent and electric charges as also from sub-letting of leasehold property at No. 6, Dilarjung Road, Calcutta. The appellant objects to certain disallowances and additions made by the departmental authorities in the computation of its income for the year under appeal.
3. I have heard Shri K.V. Singh, the learned Counsel for the appellant and Shri A. Ghosh, the learned Departmental Representative, and carefully considered their submissions in the light of the materials placed before me.
4. The assessee’s learned Counsel did not press ground No. 1 in the grounds of appeal in which the assessee has raised the plea that the income from sub-letting of leasehold properties should have been taxed under the head ‘business’ and not under the head ‘other sources’. Accordingly, this ground is rejected as not pressed.
5. In ground No. 2 the appellant contends that it is entitled to allowance of depreciation in respect of building and expenditure on property at Dilarjung Road, Calcutta. The assessee had claimed a sum of Rs. 1114 as depreciation on building at No. 6, Dilarjung Road, Calcutta but this was disallowed by the Assistant Commissioner on the ground that the assessee was only a tenant and not an owner of the property in question. The C.I.T. (Appeals) agreed with the I.T.O. and upheld the disallowance.
6. Before me Shri K.V. Singh, the learned Counsel for the assessee, relied on Explanation 1 to Section 32(1)(ii) of the Act and submitted that in the light of this provision of law the assessee is entitled to the depreciation allowance in respect of the building. He pointed out with reference to Schedule B of the 52nd Annual Report and Accounts for the year ended 30th June, 1987 that the assessee had claimed total depreciation of Rs. 4,448 in respect of the building (Union), that the Assessing Officer himself allowed depreciation of Rs. 2,534 in respect of the cost of steel tank installed in the year under appeal amounting to Rs. 25,340 @ 10 per cent as could be seen from paragraph 6 of the assessment order and that on the same line of reasoning the assessee will be entitled to balance of the depreciation of Rs. 1,914 in respect of the building as claimed by it and that there was no justification for disallowing this claim. Shri Ghosh, the learned Departmental Representative, relied on the orders of the departmental authorities to justify the disallowance in question.
7. On a careful examination of the facts of the present case, I hold that the assessee is entitled to this depreciation allowance of Rs. 1,914, under Explanation 1 to Section 32(1)(ii) of the Act.
8. In ground No. 3 the appellant objects to the disallowance of a sum of Rs. 8,870 representing interest payable by the assessee-company under Section 220(2) of the Income-tax Act. The appellant had adjusted this interest amount of Rs. 8,870 which was charged against it under Section 220(2) of the Act for non-payment of demands for the years 1980-81 and 1983-84 against the interest of Rs. 40,697 received by it as interest on delayed refunds under Section 244(1A) of the Act for the assessment years 1967-68, 1969-70, 1977-78, 1978-79 & 1979-80 and returned only the net interest of Rs. 31,827 as income under the head ‘other sources’. According to the assessee, this amount of interest paid by it would be an admissible deduction against the interest received by it from the department. This was negatived by the departmental authorities.
9. Before me Shri Singh contended that just as the department had to pay interest on delayed refunds due to the assessee, the appellant had to pay interest on delayed payments of tax under Section 220(2) and that, therefore, the appellant was entitled to deduct this interest payment against the interest received by it from the department. I am unable to agree with these submissions of the assessee’s Counsel as I find that there is no justification for any such adjustment either in law or on fact. The assessee’s learned Counsel was unable to point out the provision of law under which such adjustment is permissible under the Income-tax Act. In the circumstances, I confirm the orders of the departmental authorities on this issue and reject this ground.
10. In ground No. 4 the appellant objects to the addition of Rs. 14,526 as its income in the year under appeal. This amount represented unclaimed security deposits due to the assessee’s tenants which it had written back in its books of account. The assessee claimed that this amount represented capital receipt and that further the assessee’s liability continued to subsist to repay the security deposit whenever claimed by the tenants as it was only a unilateral entry passed by the assessee in its books of account. The departmental authorities disagreed with this submission of the assessee and held that taxability of this amount could not be escaped by merely describing it as a capital receipt and by the fact that the said amount still would be refundable by the assessee to the tenants. The departmental authorities pointed out that the tenants to whom these amounts were refundable had left the premises long ago and their whereabouts were not known. They, therefore, concluded that this amount was chargeable to tax and that as it was not relatable to any of the sources such as salary, business, it was chargeable to tax under the head ‘other sources’. This was upheld by the C.I.T. (Appeals).
11. Before me it was contended by Shri Singh that this amount of Rs. 14,526 was made up of various amounts due to six parties who were formerly the tenants of the appellant, that these amounts were not received by the assessee in the year under appeal, that these amounts represented the unclaimed balances in the security deposit accounts of these six parties which had been written back. The learned Counsel submitted that the assessee’s liability to repay these amounts continued to subsist as they were refundable deposits, as the entries passed by the assessee in its books of account were purely unilateral entries which did not confer any right on the assessee to retain these amounts and that, therefore, these amounts could not be considered as the income of the assessee as they represented capital receipt. Further, as these amounts were not received during the year under appeal, they could not also be charged to tax as the income of the assessee for the year under appeal. In support of his submissions the learned Counsel relied on the particulars at pages 1 to 5 of its compilation and also on the following two decisions:
(1) CIT v. Sugauli Sugar Works P. Ltd. [1983] 140 ITR 286 (Cal.)
(2) ITO v. Omega Bright Steel (P.) Ltd. [1985] 11 ITD 404 at pages 417 & 418 (Delhi).
12. Shri Ghosh for the Revenue relied on the findings of the departmental authorities and argued that the amounts in question were received by the assessee as security deposit of rent as could be seen from the letters at pages 2 & 4 of the assessee’s compilation and that, therefore, they could not be regarded as capital receipts as contended on behalf of the assessee. The learned Departmental Representative further argued that the very fact that the appellant chose to write back these amounts in its books of account after such a long period of time would show that the alleged liability on its part to refund these amounts had ceased and that, therefore, these amounts were rightly brought to charge as the assessee’s income in the year under appeal.
13. The amount of Rs. 14,526 which has been written back by the assessee in its Profit & Loss Account is made up of the following six amounts due to the six parties mentioned against each:
(1) R.F.C.C. Ltd. Rs. 136.13
(2) Kanpur Calcutta Goods Rs. 950.00
(3) East India Electricals Rs. 10,000.00
(4) Tagore Commercial Corpn. (P.) Ltd. Rs. 1,115.00
(5) Ramdeo Satya Narayan Rs. 405.00
(6) Vishwa Karma Construction Co. P. Ltd. Rs. 1,920.00
Rs. 14,526.13
14. There is no dispute that these persons were formerly the tenants of the assessee and that these amounts were also received by the assessee as security deposits at the time of commencement of the tenancy. There is also no dispute that these tenants had vacated the premises long back, that they have also not claimed this amount from the assessee over a long period of years and that the appellant now does not know their whereabouts. It is in the above context that the appellant has written back these amounts by debiting the accounts of these parties and crediting its Profit & Loss Account. There can hardly be any dispute that these entries passed by the assessee are purely unilateral entries and are not based on any agreement between the assessee and the six parties referred to above. It cannot also be disputed that these amounts were not received by the assessee in the year of account in order to hold that these amounts were received as income by the assessee during the previous year under appeal. Further, the original nature of these receipts was as security deposits which were refundable at the termination of the tenancy. This is clear from copies of letters at pages 2 to 5 of the assessee’s compilation. These two letters dated 11th March, 1968 and 7th June, 1970 have been filed by the assessee as illustrative examples to prove the nature of the security deposits received by the assessee from its tenants. In fact, Shri Ghosh, the learned Departmental Representative vehemently argued that these security deposits represented two months’ rent in advance as could be seen from these two letters and that, therefore, they could only be regarded as revenue receipts and not as capital receipts. I find myself unable to accept this contention of the Revenue because the nature of the deposit is only a security deposit which was refundable on termination of the tenancy and what is the amount of security deposit to be made by each tenant was measured by the amount of monthly rent payable by each tenant and two months’ rent was taken as the measure for determining the refundable security deposit received from each tenant. Thus, it would be seen that the nature of this security deposit was fixed even at the time when this amount was received by the assessee from its tenants. If the tenants had chosen to adjust this amount against the rent payable by them in the last months of tenancy, then no amount would be refundable to them as the rental income would always be taxable. The very fact that no such adjustment was made shows that all these parties had paid their rents due from them till the expiry of the tenancy and that, therefore, the appellant had to refund these amounts to these six parties. The mere fact that the appellant has written back these amounts in its books of accounts would not wipe out its liability in law to refund these amounts to its former tenants if they make a claim for the same.
15. In the case of Sugauli Sugar Works P. Ltd. (supra) the Calcutta High Court has held that there can be a cessation of liability of a debt by the bilateral acts of both the creditor and the debtor or by the refusal of the debtor to honour his liability when pressed for the dues or by the discharge of the debt by making a payment of the dues and that in no case can a debtor bring the liability to an end on his own volition. Their Lordships were considering the assessment of a sum of Rs. 2,56,529 which was sought to be included in the total income of the assessee under Section 41(1) of the Income-tax Act, 1961 in that case. Their Lordships held that Section 41(1) of the Act treated as income what had earlier been allowed as a deduction and that it creates a liability to tax only in those cases where an allowance had been actually granted. Though this is a case under Section 41(1) of the Act, still the principles of this decision of the Calcutta High Court are equally applicable to the facts of the present case. Admittedly, the security deposits which are refundable by the assessee were not allowed to the assessee in any of the earlier years. Therefore, the question of bringing to charge this amount under Section 41(1) does not arise as rightly held by the Assessing Officer. At the same time, the nature of this receipt as a capital receipt does not get altered or affected by the mere unilateral entry passed by the assessee in its books of accounts so as to convert it into a revenue receipt and income of the assessee in the year under appeal.
16. The decision of the Delhi Bench ‘E’ of the Appellate Tribunal in the case of Omega Bright Steel (P.) Ltd. (supra) at pages 417 & 418 fully supports the assessee’s contentions. I, therefore, respectfully follow these two decisions and hold that the sum of Rs. 14,526 is not the income chargeable to tax in the hands of the assessee, much less in the year under appeal. Accordingly, I delete the addition of Rs. 14,526.
17. This takes me to the last ground in which the assessee objects to the assessment of a sum of Rs. 50,000 which was received by it as premium or salami for leasing out its property as income taxable in its hands. The I.T.O. did not accept the assessee’s contention that this amount was a capital receipt and, therefore, not taxable. He distinguished the decision of the Supreme Court relied on by the assessee, namely, Durga Das Khanna v. CIT [1969] 72 ITR 796 as the assessee-company had not made any construction of the godown leased out later. He held that his enquiry showed that the rent of the godown situated in the area was much higher than the amount of the rent of the godown leased out by the assessee to M/s. Goutam Engineers Ltd. He pointed out that the assessee had leased out total covered area of godown of 10470 sq. ft. for a rent of Rs. 1000 per month under the two lease deeds which worked out to 9 paise per sq. ft. His enquiry showed that the rent of godown occupied by M/s. Kanak Transport Co. at Kaliprasanna Sinha Road, Calcutta was Rs. 1200 per month for the area covering 3,300 sq. ft. at 36 paise per sq. ft. He pointed out that this godown was taken on rent by M/s. Kanak Transport Co. in the year 1972-73. Similarly, he referred to the rent of godown of Ajanta Transport (P.) Ltd. taken on rent in the year 1974-75 at Rs. 925 per month for an area of 2100 sq. ft. which worked out to 44 paise per sq. ft. He further pointed out that the rent of this godown was subsequently increased to Rs. 1017 per month i.e. at Rs. 0.48 paise. On these materials the I.T.O. concluded that it was abundantly clear that the rate of rent of the godown of the said area was much higher than the rent for the godown of the said area fixed by the assessee-company which went to show that the salami or premium received by the assessee-company was in consideration of lowering the rate of rent. In other words, the assessee-company had received this amount of Rs. 50,000 in consideration of reducing the monthly rent and that, therefore, it was a revenue receipt liable to tax under the head ‘other sources’.
18. This was affirmed by the C.I.T. (Appeals) who agreed with the I.T.O.
19. Shri K.V. Singh, the learned Counsel for the appellant, placed before me copies of the two lease deeds dated 6-8-86 executed by the assessee-company in favour of Goutam Engineers Ltd. and submitted that these two lease deeds were for a period of 99 years commencing from 1st August, 1986, that the first lease deed was for the lease of open land measuring 7 Cottahs 4 Chittaks and 20 sq. ft. while the other lease deed was for the lease of a pucca godown measuring 5,230 sq. ft. He pointed out that Rs. 25,000 was reserved as the premium or salami in each of these lease deeds in consideration of which the assessee-company leased out these two properties to the lessee for a period of 99 years. He further pointed out that the monthly rent agreed to be paid under each of these two lease deeds was Rs. 500 payable on the 7th day of the succeeding month. Shri Singh submitted that as per the terms of this lease deed the assessee had received a sum of Rs. 50,000 by two cheques as salami on 6-8-86 from the lessee Goutam Engineers Ltd. and that this amount was credited to the General Reserve as could be seen from the Balance Sheet of the assessee-company as on 30th June, 1987. He also referred to Note No. 2 of Schedule ‘E’ of the final accounts of the assessee-company and further pointed out that the lessee also had treated this amount of salami of Rs. 50,000 together with the registration charges of Rs. 10,837 as a capital asset as could be seen from its final accounts at page 31 of the assessee’s compilation. The assessee’s learned Counsel submitted that the assessee and Goutam Engineers Ltd. are both public limited companies and there was no connection between them and that the lease deeds were registered documents which specifically described the amount of Rs. 25,000 as premium or salami. He submitted that this amount was a nonrecurring payment and it was not refundable to the assessee nor can it be adjusted against any rent payable by the assessee. He, therefore, submitted that this amount of Rs. 50,000 had all the ingredients of a capital receipt as held by the Supreme Court in Durga Das Khanna’s case (supra) which was followed by the Calcutta High Court in the case of CIT v. Purnendu Mullick [1979] 116 ITR 591. The learned Counsel, therefore, argued that the departmental authorities erred in rejecting the assessee’s contentions by relying on comparable cases of leasehold godown in the area but ought to have followed these two decisions and excluded this amount from the income of the assessee.
20. Shri Ghosh, the learned Departmental Representative, relying on the findings of the I.T.O. contended that the amount of Rs. 50,000 was rightly brought to charge as a revenue receipt as the rent payable under the two lease deeds was ridiculously low compared to the rent prevailing for the godown area in that locality as brought out by the I.T.O. He submitted that the decisions relied on by the assessee’s learned Counsel were not applicable to the facts of the present case and that, therefore, the orders of the departmental authorities should be upheld.
21. In its Balance Sheet as on 30th June, 1987 the assessee showed this sum of Rs. 50,000 as part of the General Reserve with the following narration:
Add : Salami on Property leased
(vide Note No. 2 in
Schedule) Rs. 50,000.00
Note No. 2 in Schedule 'E' reads as follows:--
The company has received Salami for leasing out part of its property for 99 years. As per legal opinion obtained, the receipt being of capital nature, the same has been directly credited to General Reserve.
22. The lessee Goutam Engineers Ltd. had capitalised these payments made to the assessee as could be seen from pages 24 & 31 of the assessee's compilation. At page 24 the following narration is found:
Details of Leasehold land as on 31-12-86 - Schedule 'C
6-8-86 - Paid by cheque No. 016976 & 016977 both dated 6-8-86
for Rs. 25,000 each to M/s. Atlas &
Union Jute Press Co. Ltd. being salami for lease out the land
and open space at 1A, K.P. Sinha
Street, Cossipore 50,000.00
Registration charges incurred 10,837.00
Total Rs. 60,837.00
At page 31 which is Schedule C containing the particulars of the fixed assets, the sum of Rs. 60,837 is shown under the head 'Leasehold Land & building'.
23. I have perused copies of the two registered lease deeds dated 6-8-86 at pages 8 to 23 of the assessee’s paper book. The first lease deed is for the lease of the vacant land measuring 7 Cottahs 4 Chittaks and 20 sq. ft. while the other lease deed is for the lease of a pucca godown covering an area of 5,230 sq. ft. Both the lease deeds are for a period of 99 years commencing from 1st of August, 1986.
24.1 quote below the operative portion of one of the lease deeds for facility of reference:
NOW THIS INDENTURE WITNESSETH that in consideration of the premium or salami of Rs. 25,000 (Rupees twenty five thousand) only and the rent hereby reserved and the covenants and conditions and agreements hereinafter contained and on the part of the Lessee to pay, observe and perform, the Lessor Both hereby demise up to the Lessee All That piece and parcel of land measuring 7 Cottahs, 4 Chittaks and 20 sq. ft. be the same a little more or less, together with pucca godown, Tin Shed, Durwan Quarters, Latrines, Urinals and other structures built and for erected thereon situate lying at and being divided portion of premises No. 1A, Kali Prasanna Sinha Street, Calcutta, Police Station Chitpur, Sub-Registry Office Dum Dum, Cossipore in the City of Calcutta, fully described in the schedule hereunder written and delineated in the map or plan annexed hereto and thereon bordered and hereinafter called the ‘demised premises’ together with all easements, passages and appurtenances thereto TO HAVE AND TO HOLD the demised premises and every part thereof unto the Lessee for a term of 99 years commencing from 1st August 1986 and ending on the last day of July 2085 both days inclusive, if not determined sooner, as provided herein YELDING AND PAYING therefor unto the Lessor during the said term the Rent of Rs. 500 per month to be paid by the 7th day of the month next following the month for which the same may be due and subject to the terms and conditions hereunder contained.
25. There is a similar clause in the other lease deed also by which the godown is leased out by the assessee. The other terms and conditions of these two lease deeds entitled the lessee to deal with the leasehold rights in the properties to its best advantage by mortgaging or by putting up addition construction or by sub-letting the leased premises. In other words, it would be clear that what the assessee had given, was a long-term lease of the properties covering a period of 99 years which entitled the lessee to absolute possession and enjoyment of the properties in question.
26. There is nothing in the lease deeds which would show that this premium or salami amount of Rs. 25,000 each was paid for the purpose of lowering the rent as contended for the Revenue. On the contrary, the payment of the premium was the consideration for granting the lease of the vacant land and the godown to the assessee. This was the consideration for bringing about the relationship of landlord and tenant or lessor and lessee, between the assessee-company and Gautam Engineers Ltd. There is no dispute that these two are public limited companies and that they have no connection with each other. There is no material or circumstance which would show that these premium amounts were refundable or were liable to adjustment against any future payment of rent by the lessee. On the contrary, on the expiry of the lease period the lessee was bound to give vacant and peaceful possession of the demised premises to the lessor together with all additions and alterations made thereon. In my view, the two premium amounts received by the assessee do not have any of the characteristics of revenue receipt as contended for the Revenue.
27. In the case of DurgaDas Khanna(supra), the Supreme Court held that prima facie premium or salami is not income and that it is for the income-tax authorities to show that facts existed which would make it a revenue payment. This decision followed the principles laid down by the Supreme Court in their earlier judgment in the case of Member for the Board of Agricultural Income-tax v. Sindhurani Chaudhurani [1957] 32 ITR 169. This decision of the Supreme Court was followed by the Calcutta High Court in the case of Purnendu Mullick (supra) which was also a case of 99 years’ lease of a property. In my view the ratio of these three decisions relied on by the assessee’s learned Counsel is directly applicable to the facts of the present case. I find myself unable to agree with the contentions of the Revenue that the rents fixed under the two lease deeds were ridiculously low and that these premium amounts were paid for the purpose of lowering the rent because I find no material which would justify such a conclusion. I do not know the full facts and circumstances relating to the two comparable cases referred to in the assessment order, to find out whether they were cases of such a long-term lease under registered deeds as in the present case. 1, therefore, respectfully follow the three decisions referred to above and hold that the sum of Rs. 50,000 received by the assessee as premium or salami is a capital receipt which is not liable to tax. Accordingly, I delete the addition of Rs. 50,000.
28. In the result, the appeal is partly allowed.