J.K. Chemicals Ltd. vs Commissioner of Income Tax

Dr. B.P. Saraf, J.—This is a cross reference at the instance of the assessee as well as the revenue. The following questions of law have been referred by the Tribunal u/s 256(1) of the income tax Act, 1961 (''the Act'') to this Court for opinion:

At the instance of the assessee:

Whether, on the facts and in the circumstances of the case and on a proper consideration of Bareboat Charter Agreement dated 8-7-1970 between the assessee and Hind Shipping Agencies, the owners of the Steam Cargo Vessel ''Vardhini'', the Tribunal was right in holding that the payment of a non-refundable amount of Rs. 2,50,000 was capital expenditure?

At the instance of the revenue:

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in upholding the AAC''s order allowing the assessee- company deduction for the assessee''s claim of gratuity liability of Rs. 3,25,000 as against only Rs. 64,000 allowed by the income tax Officer, for assessment year 1971-72?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the depreciation allowable given u/s 32(1) and the deduction given u/s 32(1)(iv) /35(2)(ia) of the income tax Act were disjunctive and cumulative allowances and not alternative ones and in directing the ITO to allow to the assessee-company in respect of the assessment year 1971-72 depreciation amounting to Rs. 5,27,408 on the capital expenditure incurred by the assessee-company on scientific research, even though a full deduction u/s 35(1)(iv)/ 35(2)(ia) had been given to it with regard to the said capital expenditure in respect of an earlier assessment year and the assets in question continued to be used only for scientific research in the accounting year relevant to the assessment year 1971-72?

It is agreed by the learned counsel for the parties that so far as the questions referred at the instance of the revenue are concerned, they are covered by the decisions of the Supreme Court and they may be decided in the light thereof.

The first question referred at the instance of the revenue, which is numbered as question No. 2, is covered by the decision of the Supreme Court in the case of Shree Sajjan Mills Ltd. Vs. Commissioner of Income Tax, M.P., Bhopal and Another, . Following the same, it is answered in the affirmative, that is, in favour of the assessee and against the revenue.

The second question referred at the instance of the revenue, which is numbered as question No. 3, is covered by the decision of the Supreme Court in the case of Escorts Limited and Others Vs. Union of India and others, . Following the same, it is answered in the negative, that is, against the assessee and in favour of the revenue.

So far as question No. 1, which is referred at the instance of the assessee, is concerned, the learned counsel for the assessee submits that this question is not covered by any binding decision and the same needs consideration. We shall, therefore, deal with the said question and for that purpose set out the facts relevant for determination of the said question.

The assessee acquired a steam cargo vessel from Hind Shipping Agencies under a Bareboat Charter Agreement dated 8-7-1970. Under the said agreement, the owners chartered to the assessee vessel ''Vardhini'' for a period of 54 months from the date of delivery on monthly hire of Rs. 25,000 apart from a sum of Rs. 2,50,000 paid as "consideration for the grant of the charter upon delivery of the vessel to the assessee". This sum was not refundable to the charterer, even if the vehicle was lost (clause 10 of the agreement). The assessee claimed deduction of a sum of Rs. 26,667 on proportionate basis for the accounting year as a revenue expenditure on the ground that it was not the owner of the ship. The ITO held it to be expenditure of capital nature and disallowed the claim of the assessee. The order of the ITO was affirmed by the AAC and the Tribunal. Hence, this reference at the instance of the assessee.

The learned counsel for the petitioner submits that the payment of a sum of Rs. 2,50,000, though made in lump sum at the time of taking the ship on lease, in truth and substance was a payment in the nature of additional rent which should be spread over the charter period and the proportionate amount should be allowed to be deducted in computation of the income of the assessee for the relevant previous year.

We have considered the submission of the learned counsel. However, on a careful perusal of the terms and conditions of the Charter Agreement we find it difficult to accept the same. From the terms of the Charter Agreement, it is evident that the sum of Rs. 2,50,000 was paid by the assessee to the owner of the ship ''as lump sum consideration for the grant of the charter'' in addition to and apart from the monthly hire of Rs. 20,000. It was not refundable even if the ship was lost. It was, in effect, a payment made by the assessee not for the charter of the ship for 41/2 years but for grant of the charter itself. For user of the ship the assessee was to pay a sum of Rs. 20,000 per month during the subsistence of the lease. Under the circumstances, we are of the clear opinion that the lump sum payment made by the assessee as consideration for grant of the charter has to be treated as a capital outlay.

Accordingly, we answer the question in the affirmative, that is, in favour of the revenue and against the assessee. On the facts and circumstances of the case, we make no order as to costs.