THE C.I.T. B.C-IV,BOMBAY vs. M/S.AIRLINES HOTEL PVT. LTD. BOMBAY

Mhi 1 ITR-102-95 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX REFERENCE NO. 102 OF 1995 The Commissioner of Income-tax Bombay City-IV, Bombay. ... Applicant Vs. M/s. Airlines Hotel Pvt.Ltd. ... Respondent Mr. Vimal Gupta for the Applicant. Ms.Aasifa Khan i/b. Mr. K.B.Bhujle & Mr. Atul Jasani, for the Respondent. CORAM: DR.D.Y.CHANDRACHUD AND M.S.SANKLECHA, JJ. DATE : 30th March, 2012. JUDGMENT : (PER DR.D.Y.CHANDRACHUD,J.) 1. This reference under Section 256(1) of the Income-tax Act, 1961 at the behest of the Revenue seeks the opinion of this Court on the following question of law :- “Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the settlement charges of Rs.5,50,750/- and legal expenses of Rs.1,65,500/- incurred by the assessee for getting a Consent Decree from the High Court ?” The assessee was owning and conducting a hotel. The bar and CNR No : HCBM020033181995 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:41:49

Mhi 2 ITR-102-95 restaurant of the hotel was handed over by the assessee to one Jairam N. Shetty pursuant to an agreement dated 11 July 1976, to be managed and conducted by him against a monthly payment of Rs.8,500/- as royalty. The agreement was initially for a period of 15 years with an option of renewal for 5 years. In 1979, litigation ensued between the assessee and the conductor. In a suit which was instituted before the City Civil Court, consent terms were arrived at in terms whereof, a consent decree was passed on 23 April 1983. Under the consent terms, the assessee paid a total sum of Rs.10 lakhs to the conductor of the business inclusive of Rs.5,50,750/- which was treated as settlement charges. The assessee also incurred legal expenses of Rs.1,65,500/-. The assessee’s claim for deduction of these two items was disallowed by the departmental authorities, but was allowed in appeal by the Tribunal. 2. The submission which has been urged on behalf of the Revenue is that the amount of Rs.10 lakhs was paid by the assessee to the conductor of the business for securing vacant possession of the premises. The agreement was to be valid initially for a term of 15 years and as a result of the consent terms, the assessee obtained vacant possession. This, according to the Revenue, would constitute a benefit of enduring nature and would, therefore, be expenditure on the capital account. Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:41:49

Mhi 3 ITR-102-95 3. On the other hand, it has been urged on behalf of the assessee that in the present case, the assessee had been conducting and managing the restaurant even prior to the agreement with the conductor that was entered into in 1976. The agreement dated 11 July 1976 was a conducting agreement by which the business which was carried on by the assessee was continued to be carried on by the conductor. The licences of the business stood in the name of the assessee and had to be renewed by the assessee. Accordingly, when disputes arose, upon which a suit was instituted before the City Civil Court, the assessee could remove the hindrance and obstruction in the conduct of the business in the premises by payment of the settlement amount. This was a matter of commercial expediency and since the obstruction in the conduct of the business was removed by payment of the settlement charges, the expenditure was of a revenue nature. 4. Under the agreement dated 11 July 1976, the assessee granted a licence and permission to the conductor to conduct and manage the restaurant business. The agreement records that the assessee had been carrying on the business of running the restaurant for some years and had acquired goodwill therein. Under the agreement, the assessee granted to the conductor a licence and permission to conduct and manage the restaurant together with benefits of existing Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:41:49

Mhi 4 ITR-102-95 permits, licences, registration certificates and the furniture and fixtures and other items belonging to the business. This was on payment of royalty of Rs.8,500/- per month. The assessee was required under the terms of the agreement to comply with all the terms and conditions of the licences and permissions issued by various authorities. The assessee was required to pay all the licence fees in respect of the various licences, except the beer licence fee. The agreement contained a declaration that it did not constitute an agreement of tenancy and it did not confer any right upon the premises in the conductor. In this behalf, it is evident that the assessee carried on the business of conducting and managing the restaurant even prior to the agreement dated 11 July 1976. The agreement conferred upon the conductor a licence and permission to conduct and manage the business against the payment of royalty. Disputes arose between the parties which resulted in the filing of a suit before the City Civil Court in which consent terms were arrived at and a decree was passed by consent on 23 April 1983. The payment which the assessee made to the conductor included settlement charges of Rs.5,50,750/- as recorded in the statement of account. This payment was a payment which the assessee effected for resolving disputes and removing the hindrance which was caused in the management and conducting of the restaurant. The conductor was a bare licensee and had no interest by way of tenancy or otherwise in respect of the premises. Consequently, the payment which was made by the assessee was one Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:41:49

Mhi 5 ITR-102-95 which in the true sense of the term was for removing the obstruction or hindrance in conducting and managing the restaurant and must be regarded as a matter of commercial expediency. The legal expenses in the amount of Rs.1,65,500/- are also clearly an allowable deduction for the same reason. 5. In this view of the matter, the view which has been taken by the Tribunal is correct. The question of law is accordingly answered in the affirmative in favour of the assessee. The Reference is accordingly disposed of. There shall be no order as to costs. (DR.D.Y.CHANDRACHUD, J.) (M.S.SANKLECHA,J.) Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:41:49

Mhi 6 ITR-102-95 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:41:49 Powered by TCPDF (www.tcpdf.org)