G.P. Singh, J. -
(1.) THIS is a case stated under Section 256(1) of the Income-tax Act, 1961, referring for our answer the following question of law;
"Whether, on the facts and in the circumstances of the case, was the company entitled to the allowance of the rent paid to the landlord for the new building, Bombay-Agra Road, Indore ?"
(2.) THE case relates to the assessment year 1962-63, the account year being the period from 1st April, 1961, to 31st March, 1962. THE assessee is a private limited company and is a distributor of Fiat Cars at Indore. It has to maintain a workshop and showroom for the purposes of its business. THE principals of the assessee, the Premier Automobiles Ltd., wanted it to rent a modern showroom and workshop, as the then existing showroom and workshop were not suitable. To meet the demand of the principals the assessee entered into an agreement on 1st April, I960, with M/s. Goolbanu Godrej and others (an association of persons and hereinafter referred to as the "landlords"), who owned a suitable plot of land for construction of a building to house the showroom and workshop. It was agreed that the landlords will construct a suitable building and will let it out to the assessee on a monthly rent of Rs. 2,500 "with effect from the date of completion and mutual agreement". On 15th March, 1961, a resolution was passed by the board of directors of the assessee to take over the building constructed by the landlords on rent from 1st April, 1961. This resolution was confirmed in a meeting of shareholders held on 28th August, 1961. THE assessee started paying rent from 1st April, 1961, at the rate of Rs. 2,500 per month and at this rate paid in all Rs. 30,000 towards rent during the account year. In the assessment proceedings, the assessee claimed that this amount of Rs. 30,000 paid as rent to the landlords should be allowed as a deduction under Section 30 as rent for premises used for the purposes of the assessee's business or in the alternative under Section 37 as expenditure laid out or expended wholly and exclusively for the purposes of the business. THE Income-tax Officer rejected the contention of the assessee and that order was confirmed in appeal by the Appellate Assistant Commissioner. A Second Appeal preferred by the assessee was partly allowed by the Tribunal and it was held that part of the rent out of Rs. 2,500 per month which could be apportioned to the land over which the assessee installed a petrol pump during the account year should be allowed as a deduction under Section 30. As regards the rent payable for the building, the orders passed by the Income-tax Officer and the Appellate Assistant Commissioner were confirmed. On an application made by the assessee, the Tribunal referred to us the question of law that we have already set out.
The facts found are that the association of persons constituting the landlords in the relevant year consisted of members who were all shareholders in the assessee-company; they were all persons from the same family, the details of which are given in the order of the Appellate Assistant Commissioner, which forms part of the statement of the case. There was, therefore, virtual identity of interest between the landlords and shareholders of the assessee. The assessee's workshop was actually shifted to the new building in October, 1962, and the showroom was shifted in January, 1963. The workshop and the showroom were both thus shifted after the close of the material accounting year. Up to 31st March, 1961, the landlords spent two lakhs of rupees in the construction of the building. They further spent a sum of Rs. 67,000 during the period from 1st April, 1961, to 31st March, 4962. By 5th March, 1963, on which date the certificate for the completion of the building was obtained, the expenses incurred on construction had gone up to Rs. 3,28,000. On 1st April, 1961, when the building was taken on rent, it was not complete and except for the installation of a telephone, during the accounting year, nothing substantial was done by the assessee in the building.
Having regard to the identity of the shareholders in the assessee-company and the members in the association of persons constituting the landlords, and on the finding that nothing substantial was done in the building by the assessee during the accounting year, the income-tax authorities including the Tribunal came to the conclusion that it could not be said that the building was used for the assessee's business during the accounting year, and that in reality the assessee in paying Rs. 30,000 towards rent financed the construction of the building.
(3.) SECTION 30 of the Act reads as follows:
"30. In respect of rent, rates, taxes, repairs and insurance for premises, used for the purposes of the business or profession, the following deductions shall be allowed-
(a) Where the premises are occupied by the assessee-
(i) as a tenant, the rent paid for such premises; and further if he has undertaken to bear the cost of repairs to the premises, the amount paid on account of such repairs;
(ii) otherwise than as a tenant, the amount paid by him on account of current repairs to the premises;
(b) any sums paid on account of land revenue, local rates or municipal taxes;
(c) the amount of any premium paid in respect of insurance against risk of damage or destruction of the premises."
It would be seen that a deduction under Section 30 in respect of rent for premises is admissible only if the premises are "used for the purposes of the business". The only question before us is whether the rent paid in respect of the building should be allowed as a deduction. We have already stated that the finding is that the showroom and the workshop, which the assessee maintains for the purposes of its business, were shifted to the new building long after the close of the accounting year. Mere installation of a telephone in the building cannot be taken to be such a factor which may show that the building was used during the accounting year for the purposes of the assessee's business. The identity of the landlords with the shareholders of the assessee-company cannot be lost sight of. Although the initial agreement was to take the building on completion, it was actually taken on rent when it was not complete. Having regard to all these circumstances, it must be held that the Tribunal's conclusion was correct that the building was not used for the purposes of the business during the accounting year, and that the assessee in effect financed the construction of the building by using the device of payment of rent. It was argued by the learned counsel for the assessee that the user of premises within the meaning of Section 30 may be either an active user or a passive user. He has referred in this connection to the decision in Commissioner of Income-tax v. Viswanatha Bhaskar Sathe, 1937 5 ITR 621. According to the learned counsel, the building was kept ready for use during the accounting year, although it may not have been actually used, and this was enough to entitle the assessee to claim deduction under Section 30. There is no substance in this contention. Even according to the facts alleged by the assessee (which have not been accepted), the building was not kept ready for use but was being made fit for use of business by installing machinery and furnishing it. It was never ready for use during the accounting year. When a building is being made fit for use, the building cannot be said to be in use either actively or passively. In Liquidators of Pursa Ltd. v. Commissioner of Income-tax,  25 I.T.R. 265, 272-73 ; (1954] S.C.R. 767 (S.C.) their Lordships while referring to Clauses (v), (vi) and (vii) of Section 10(2) of the 1922 Act, said that the words "used for the purposes of the business" mean used for the purpose of enabling the owner to "carry on the business and earn profits in the business", and further observed as follows:
"The word used has been read in some of the pool cases in a wide sense so as to include a passive as well as active user. It is not necessary, for the purposes of the present appeal, to express any opinion on that point on which the High Courts have expressed different views. It is, however, clear that in order to attract the operation of Clauses (v), (vi) and (vii) the machinery and plant must be such as were used, in whatever sense that word is taken, at least for a part of the accounting year. If the machinery and plant have not at all been used at any time during the accounting year, no allowance can be claimed under Clause (vii) in respect of them and the second proviso also does not come into operation."