Law: Income Tax Act, 1922

Section: 10(2)(xv)

Income-tax-Business expenditure -- Hotel business - Initial issue of linen, blankets and uniforms-Expenses whether allowable Licence fees from stall-holders-Resolution after end of accounting year that licence fees likely to be reduced-Provision made in accounts as likely bad debt-Whole licence fees whether accrue during year-Indian Income-tax Act, 1922, S. 10(2)(xv). The assessee-company, which owned a luxury hotel, started functioning in October 1956. Its accounts for the first year were closed on, September 30, 1957. It purchased the linen and blankets for use in the rooms of the hotel and the uniforms for its employees for the first tine at or before the commencement of the hotel business Instead of showing the expenditure incurred on the purchase of these articles as and when the purchases were actually made, the assessee adopted a method of accounting whereby the blankets and linen were treated in its books as written off at the time of issue of those materials for actual use from the stock and likewise the price of uniforms was written off at the time when they were issued from the stock to the employees. During the first accounting year the assessee incurred an expenditure of Rs. 1,79,904 on the initial issue of linen and blankets and Rs. 1,96,931 on the initial issue of uniforms and the ground that the expenses were of a capital nature as they related to the first year of the business. In the beginning of the first year of its business the assessee let out by public auction various stalls on the ground floor of the hotel building for a period of three years on fixed licence fees for a total sum of Rs. 2,95,215. After the licences were so granted the stall-holders represented to the assessee that the licence fees be reduced as their expectations about the volume of business had not materialised. On May 17, 1958, the board of directors resolved: "A provision of 30 % of amount due as licence fees from shopkeepers be made as an amount that is likely to be reduced in view of the revision of the terms of licence." On September 30, 1957, the last date of the accounting year, the assessee credited the full amount of the licence fees of Rs. 2,95,215…