Commissioner of Income Tax vs R. Ramanathan Chettiar

Ramanujam, J.—The Revenue in this reference petition seeks a direction from this court to the Tribunal to refer the following two questions

for the opinion of this court :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the expenses incurred by the

assessee by way of travelling, stationary, salary, repairs to building aggregating in all to Rs. 67,339 were wholly and exclusively laid out for the

purpose of transfer and, hence, are to be allowed as a deduction in computing the capital gains ?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that only the net interest income from

Indian Overseas Bank, Colombo, after deduction of tax deducted at source should be included in the assessee''s case and not the gross interest ?

However, after hearing the counsel on both sides at some length, we consider that question No. 1 does not require any reference, though there

is a justification for directing a reference on the second question on the facts and circumstances of this case.

The assessee derived income from business and certain other sources. In the previous year relevant to the assessment year 1976-77, the

assessee sold certain lands after plotting out as house sites. The assessee while admitting capital gains of Rs. 4,31,579 sought to deduct an amount

of Rs. 53,992 as cost of improvement as well as expenses incurred for plotting out the land. The assessee during the accounting year relevant to

the assessment year 1976-77 also received a sum of Rs. 29,373 representing interest from Indian Overseas Bank, Colombo. The assessee while

returning the income, claimed deduction of Rs. 9,522 being foreign exchange entitlement charges and a sum of Rs. 12,090 representing tax

deducted at source by the Ceylon Government. The ITO rejected both the contentions of the computations of the assessee while completing the

assessment. In regard to the computation of capital gains, the ITO found that out of the sum of Rs. 2,53,992 claimed as deduction by the assessee,

an amount of Rs. 67,339 representing travelling expenses, stationary, salary and repairs to buildings cannot either be allowed as cost of

improvement or as expenses incurred solely in contention with the transfer of the land. In regard to the interest receipt, the ITO held that the gross

amount of interest accrued to the assessee had to be taxed and not the net amount after deducting the foreign exchange entitlement charges as well

as the tax deducted at source by the Ceylon Government. On appeal, the Commissioner of Income Tax (Appeals) held that the assessee will be

entitled to deduction of fifty percent of the expenses incurred towards stationary, the Commissioner of income tax(Appeals) held that the interest

income ought to be assessed on accrual basis and, since the entire interest income accrued to the assessee before deduction of tax at source, the

tax paid to the foreign Government cannot be deducted. In a further appeal to the Income Tax Appellate Tribunal, it held that the assessee is

entitled to claim allowance on the sum of Rs. 67,339 and the deduction of Rs. 12,190 which is the tax paid to the Ceylon Government on the

interest income which accrued to the assessee is also justified. Aggrieved by the order of the Tribunal, the Revenue has come forward with this

reference petition seeking a reference on the two questions set out above.

So far as the first question is concerned, it is seen that originally the assessee has claimed a sum of Rs. 67,339 as cost of improvements made to

the land transferred. He put forward an alternative claim that even it cannot be treated as cost of improvement, it should be treated as expenses

solely incurred for the purpose of the transfer. It is not in dispute that the assessee has in fact prepared a layout and got it approved from the

requisite authority and he sold the land as house plots. The sale of the Land, as it was, would not have fetched such price which the assessee

actually got now after converting the land into house sites. Therefore all the expenses incurred in connection with the preparing of the layout and

getting it sanctioned should be taken to be expenses solely incurred for the transfer of the land for a better price. The other expenses such as the

salary aid to a clerk who was attending to the preparation of the layout and also for finding suitable purchasers should also be taken to be expenses

incurred exclusively for the transfer of the land. The learned counsel for the Revenue does not dispute the fact that if certain expenses had been

incurred solely in connection with the transfer of the land, then such an expenditure could be a deductible expenditure for the purpose of asserting

the net capital gains. However, the contention of the Revenue appears to be that the expenses had not been solely incurred in connection with the

transfer of the land. but the Revenue is not able to point as to what is the other purpose for which the said expenditure has been incurred if it is not

exclusively incurred for the transfer of the land. It appears that the assessee is living far away from the land sold and, therefore had to maintain a

small office for the purpose of preparing a layout and also for finding out suitable purchasers for the house sites. The maintenance of an office

which has to be located in a building situated in the land itself by making some improvements should also be taken to be exclusively for the purpose

of transfer of the land. We, therefore, agree with the finding of the Tribunal that the sum of Rs. 67,339 representing the travelling expenses,

stationary, salary and repairs to the building where the office was located, should be taken to be an expense sole. It incurred in connection with the

transfer of the land and, therefore, it is liable to be deducted in computing the capital gains. We do not, therefore, see any justification for referring

question No. 1.

However, on the second question, the view taken by the Tribunal is that only the net income received by the assessee after payment of tax to the

Ceylon Government should be taxed as against the view expressed by the Commissioner of Income Tax (Appeals) that even before the tax is

deducted at source by the Ceylon Government, the interest income has accrued and when an assessment is made on an accrual basis, the payment

of tax on such accrued income cannot come for deduction. We are of the view that the second question needs a detailed consideration by this

court. Hence, there will be a direction to the Tribunal to state a case and refer the second question for the opinion of this court. No costs.