THOMAKUTTY M O Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is a reference made under section 66(2) of the Indian Income-tax Act, by the Income-tax Appellate Tribunal, Madras Bench, in consequence of the order of this court in O.P. Nos. 228 and 229 of 1955. The reference related to the assessment of one M.O. Thomakutty, Trichur, for the years 1950-51 and 1951-52 (accounting periods being the Malabar Years 1124 and 1125). Original Petition No. 228 of 1955 was for requiring the Tribunal to state a case in respect of the assessment for 1951-52 and Original Petition No. 229 of 1955 was for requiring the Tribunal to state a case in respect of the assessment for 1950-51. The questions referred as a result of Original Petition No. 228, i.e., in respect of the assessment of 1951-52, are (1) whether on the facts and circumstances of the case the disallowance of the expenditure s capital in nature was justified in law and (2) whether on the facts and in the circumstances of the case the Tribunal was justified in making presumption on facts and holding that the expenditure was capital in nature unless proved to be otherwise. Only one question had to be referred in pursuance of Original Petition No. 229 of 1955, i.e., in respect of the assessment of 1950-51, and that is whether on the facts and circumstances of the case the disallowance of the expenditure as capital in nature was justified in law. After hearing counsel for both sides we consider that only question No. (1) relating to the assessment to 1951-52 and the question relating to the assessment 1950-51 need be answered in this case. The said two questions are practically the same and we are dealing only with that question in this judgment.

(2.) THE assessee was a lessee of the Government of Cochin for a salt factory which is situated in Malipuram and which was originally started by the said Government. An area of 200 acres was set apart by the Government for this factory and a portion of it was also worked by the Government for some time. THEy had constructed outer bunds for the entire area, made channels for letting in sea water and some reservoirs, salt pans, condensers, etc. It is the common case of the Department as well as the assessee that Rs. 61,247 was spent by the Government of Cochin as capital outlay for the factory and that the Government was working it till the year 1120, when production was suspended. Subsequently, the Government called for tenders foe leasing the factory and finally the tender of Thomakutty was accepted and 20 acres out of the 200 acres was leased to him in the month of Kanni 1124. THEre was a provision in the lease deed that Thomakutty would have an option to take up on lease the balance area of 180 acres and that if he exercised that option he should pay to Government Rs. 62,500 in twenty annual instalments, that amount being the Government s original capital outlay of Rs. 61,247 and the expenditure they incurred in respect of the factory between the date of the tender and the date of the actual lease. In pursuance of this lease Thomakutty started working the 20 acres immediately after the lease. Towards the end of 1124 itself he obtained from the Government a further area of 15 acres which also he started working in that year. In the next, 1125, the obtained a still further area of 20 acres and all the 55 acres were worked in 1125. For the assessment of 1950-51 (accounting period 1124) Thomkutty claimed deduction of Rs. 82,816-10-6 as revenue expenditure incurred in respect of the two plots of 20 acres and 15 acres. In the report of the assessees auditors Messrs. Varmah and Varmah, the capital expenditure was shown as Rs. 60,493-2-5 and the revenue expenditure s 53,416-12-6. For the assessment of 1951-52 (accounting period 1125) Thomakutty claimed deduction of Rs. 66,999 as revenue expenditure incurred for the working of the 35 acres. THE Income-tax Officer disallowed the claim for both years holding that the revenue expenditure claimed was very high and was really of the nature of capital expenditure. On appeal the Appellate Assistant Commissioner confirmed the Income-tax Officers order in respect of the assessment for 1950-51 and modified his order as regards the assessment of 1951-52. For that assessment he allowed Rs. 60,000 as revenue expenditure and disallowed only the balance claim of the assessee, i.e., Rs. 6,999. Both the assessee and the Department filed appeals before the Appellant Tribunal against the order of the Appellate Assistant Commissioner, and the Appellate Tribunal cancelled the Appellate Assistant Commissioners orders and allowed the Departments appeal. Since the Appellate Tribunal also dismissed the assessees application s for the reference to this court under section 66(2) he filed O.P. Nos. 228 and 229 of 1955 in this court and obtained orders requiring the Appellate Tribunal to make the reference.

(3.) THE Appellate Assistant Commissioner says in his order :