Sabyasachi Mukharji, J. - (1.) The assessee is a limited company. The reference relates to the assessment years 1968-69 and 1969-70. The assessee-company was incorporated on 18th May, 1961, with the object of carrying on the business of hotels, restaurants, cafes, holiday camps, etc. Later on, by an order of the High Court at Calcutta passed on 21st November, 1963, M/s. A. Firpos Ltd. was amalgamated with the assessee-company and in this way the assessee-company took over the hotel business of M/s. A. Firpos Ltd. with effect from 1st November, 1963. There was a building belonging to the Life Insurance Corporation of India at No. 12, Chowringhee Road, and No. 1 Chowringhee Place, which was formerly leased out to M/s. Ritz Pvt. Ltd. for a period of 15 years with effect from 1st December, 1958. There was an agreement between the Life Insurance Corporation of India and the Ritz Pvt. Ltd. whereby the Life Insurance Corporation of India had agreed to effect additions and alterations to the building at the cost of Rs. 30,00,000 in return from Ritz Pvt. Ltd. for giving vacant possession of the premises with effect from 1st August, 1960, and the Life Insurance Corporation of India not charging any rent from the date of vacation of the premises by an agreement dated 6th March, 1961. Later on, this agreement was cancelled and the assessee-company simultaneously entered into an agreement with the Life Insurance Corporation of India on 30th May, 1963, whereby the Life Insurance Corporation of India agreed to reconstruct, remodel and enlarge the existing building at the cost of approximately Rs. 52,00,000 which was to be given on lease to the assessee-company on completion on the terms and conditions mentioned in the agreement. The recital of the agreement, inter alia, provided as follows : " 9. Ritz will pay to the LIC interest at the rate of 3% per annum on all amounts expended or deemed to be expended by LIC from 1st August, 1960, in respect of and on such reconstruction at the end of every quarter until new and remodelled building shall be complete in all respects, the interest to be chargeable on the monthly.' balance of such expense at the end of every month as certified by LIC."
(2.) The agreement further provided, inter alia, as follows : " 6. The rent of the remodelled and enlarged building shall on the remodelling and enlargement work being completed be calculated and worked out at such an amount as is equivalent to : (a) A net yield of 7 per cent. per annum on the total costs, charges and expenses incurred (or which may be incurred as provided hereafter or which may be deemed to be incurred) by the LIC in the remodelling and enlargement of the building and the construction work consequent thereupon including the several items referred to in these presents in Clauses 4 and 5 hereof and to be included in the costs of remodelling and enlargement and also all other costs, charges and expenses in relation to or in respect of this agreement or the lease of the premises and also all architectural and engineering charges including the professional fees of all consultants, specialists and supervisors appointed by the LIC and also the LIC's own Buildings Department costs and office charges attributable in the opinion of the LIC to the work to be carried on subject in the case of said Buildings Department costs and office charges to a minimum of 121/2% of the total costs. (b) The sum of Rs. 5,482 (rupees five thousand four hundred and eighty-two) per month (which was the rent received by the LIC from Ritz Private Limited) and Rs. 483.87 (Rupees four hundred and eighty-three and eighty-seven naye paise only) per month which was the rent received from four tenants who have vacated and the difference between the rent of Rs. 2,500 (Rupees two thousand five hundred) per month paid by the Kashmir Emporium and the rent or fee per month which it has agreed to pay for the premises in the remodelled building to be offered to it. (c) The following payments shall be in addition to the aforesaid rent, namely : (i) Sinking Fund contribution payable until 100% of the cost is covered at the rate of 0'34610 per cent. per annum on the total costs, charges and expenses incurred except in regard to the costs, charges and expenses incurred for Jjfts and water pumps, sanitary and plumbing' installation, electric wiring, air conditioning ducts, transformers and switch gear, tube-well and water softening plant and the fixing thereof on the premises. (ii) Sinking Fund contribution payable until 100% of the total cost is covered at the rate of 3.53611 per cent. per annum on the total costs, charges and expenses incurred for all lifts, transformers and water pumps and the fixing thereof on the premises. (iii) Sinking Fund contribution payable until 100% of the cost is covered at the rate of 5.1835 percent, per annum on the total costs, charges and expenses incurred for switch gear, water supply and sanitary fittings and electrical wiring and the fixing thereof on the premises. (iv) Sinking Fund contribution payable until 100% of the cost is covered at the rate of 8.58414 per cent. per annum on the total costs, charges and expenses incurred for air conditioning ducts, tube-well and water softening plant and the fixing thereof on the premises. The Fourth Schedule hereto shows the Sinking Fund contribution to be made in respect of the various items mentioned above. (v) Insurance premium to cover risks of fire, tempest, earthquake and riot and civil commotion with the Oriental Fire and General Insurance Company Limited, in such amount as will enable the LIC to rebuild the premises or replace any damage done (i.e., replacement value). (vi) The rates, assessments, cesses and taxes (including any increase that may be made therein from time to time), whether levied by the Government or any other authority, municipal, local or other and whether payable by the landlord or tenant in respect of the whole of the said property and the costs, charges and expenses (between attorney and client) of all appeals against any such assessments or other proceedings in connection with the same."
(3.) It appears that one of the terms of the agreement was that the assessee-company had to pay to the Life Insurance Corporation of India interest at the rate of 3% on all amounts spent or deemed to have been spent by the Life Insurance Corporation of India from 1st August, 1960, in respect of and on such construction at the end of every quarter until a new and remodelled building was complete in all respects when it was to be given to the assessee-company on lease for a period of 15 years commencing from the date the building was certified fit for occupation and possession was given to the assessee-company. The building was completed early in 1971 and was given on lease to the assessee-company some time in March, 1971. The interestat 3% which came to Rs. 88,910for the assessment year 1968-69 and Rs. 1,08,648 for the assessment year 1969-70 were described by the assessee-company as rent in the profit and loss account and the amounts were claimed as such as deduction in the computation of business income.;