COMMISSIONER OF INCOME TAX Vs. NEW GARAGE LIMITED

JUDGEMENT

(1.) THIS is a reference at the request of the CIT by the Tribunal. The respondent -assessee is New Garage Ltd., which is now under winding up. The reference relates to the asst. year 1962 -63.

(2.) THE assessee is a limited company. The business of the assessee during the previous year relevant to the asst. year 1962 - 63 was that of repairing vehicles, selling tractors, implements and spares purchased from M/s Escorts Ltd. For the purpose of this business, the assessee -company maintained a show -room at No. 11, Scindia House, New Delhi.

(3.) THE landlord of the above premises filed a suit against the assessee -company for eviction. Subsequently, the suit was compromised and the assessee agreed to pay a sum of Rs. 10,000. While completing the assessment for 1962 -63, the ITO refused to give the assessee a deduction of the sum of Rs. 10,000 on the ground that it had not been paid for any legitimate business needs of the company. On appeal, the AAC took the view that the amount was inadmissible as it was of capital nature. However, on further appeal by the assessee, the Tribunal pointed out that in the present case there had been no change in the company itself, though there had been a change in the shareholding. The assessee - company was and continued to be the tenant of the premises and the tenancy rights which were very valuable were in jeopardy when the landlord filed an eviction suit. The assessee was merely protecting the danger to its capital assets in the shape of tenancy rights. The amount was thus spent to maintain the existing capital assets. The Tribunal pointed out that the case would have been substantially different if the assessee had paid Rs. 10,000 to acquire a new lease. In that case, the amount would have been a capital expenditure. But, in the present case, what turned the scales in favour of the assessee was the fact that it was an old tenant which continued the tenancy. The Tribunal, therefore, held that the assessee was entitled to the deduction of the sum of Rs. 10,000 in computing its business income.