Decided on September 16,1966



Hegde, J. - (1.)THIS is a reference under section 66(1) of the Indian Income-tax Act, 1922, to be hereinafter referred to as the "Act".
(2.)THE question of law referred for the opinion of this court is :
"Whether, on the facts and in the circumstances of the case, the assessee was entitled to the deduction of Rs. 85,907 under section 10(2) (vii) or under section 10(2) (xv) and of the sum of Rs. 2,203 under section 10(2) (vi) ?"

The facts material for the purpose of answering the question referred to us earlier are these :

The assessee carries on business as an exhibitor of films at Bangalore. He is the owner of 3 theatres, one of which is "Super Talkies". In this case, we are concerned with that theatre. Rangaiah, the brother of the assessee, took on lease site No. 11, Belimut Road, Bangalore City, on 31st August, 1939. At that time, it was a vacant site. The aforementioned theatre was constructed on that site. The lease in question was a building lease. The lease is for a period of 20 years. Under the lease, the lease was required to raise a construction on the site, a building costing not less than Rs. 15,000. He was entitled to be in enjoyment and possession of the site leased and the building put up thereon for period of 20 years commencing from 31st August, 1939. Rent had to be paid in accordance with the terms of the deed. Clauses in the deed which are relevant for our percent purpose are 2, 3, 4, 7, and 71. They read as follows :

"2. That after stipulated period of twenty years, the party of the second part shall leave the scheduled premises with the constructions so raised by him to the second members of the first party of his legal representative or assigns absolutely and for ever and after the said period the party of the second part shall have no manner of right, title or interest in or upon the premises or the construction so raised thereon.

3. That the annual taxes payable to the municipality or any loca authority or department of Government shall be paid by the party of the second part alone so long as he is in possession of the said premises and constructions.

4. That the party of the second part shall be entitled to occupy the construction so raised by himself or let it out to another person or persons or tenants or otherwise enjoy the usufruct thereof till the stipulated period is over by putting it to such use or uses as he deems best from time to time and the party of the first part shall have no manner of right whatever in or upon the premises mentioned in the schedule or to suffer any particular mode or modes of construction or alteration in the use or uses to which the same will be put to by the party of the second part provided the party of the second part aforesaid shall pay a sum of Rs. 20 per mensem as rental regularly without default to the party of the first part after the expiry of balance of the period of lease of fifteen years. In default of regular payment for three months, a rent of Rs. 40, is to be paid for the remaining period of lease.

7. That it shall be lawful for the party of the second part to later the nature, design, extent, and mode of construction and the use or uses to which the same could be put to within the stipulated period.

11. That if by any act or omission intentionally done or suffered to be done by the party of the first part, the party of the second parties dispossessed of the construction and premises within or before the stipulated period, then, the party of the second part shall be entitled to recover from the party of the first part certain liquidated damaged in addition to the sum or sums he might have spend for raising any construction or constructions on the scheduled premises and the sum of Rs. 1,000 that shall be deposited by him with the party of the first part aforesaid."

(3.)LESSEE Rangaiah transferred his rights under the lease to one Kelkar. In his turn Kelkar transferred his right under the lease to the assessee on May 8, 1950, though the agreement to sell the same was entered into between the assessee and Kelkar on March 15, 1946. Kelkar sold his right under the lease to the assessee for a sum of Rs. 1,50,000, out of which Rs. 1,00,000 was fixed as consideration for the transfer of the building.
In the assessment year 1955-56, the assessee claimed a sum of Rs. 10,000 as lease amount paid to Kelkar. The Income-tax Officer rejected the claim observing :

"In the past the asset represented by the building was not considered to be that of the assessee under a mistaken impression that the assessee is only a lessee of the building. In fact the balance sheet of the assessee does not disclose this asset. However, when the matter was fully enquired into it was seen that the assessee is the full owner of the theatre building and the machinery therein."

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