Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1959-60 - Assessee-company carried on business of exhibiting pictures in theatre - Theatre was taken on lease by two lessees who did not pay lease rent - Consequently, lessor filed a suit for recovery of rent and for eviction against lessees - It was case of lessor that lessees illegally allowed assessee to use said theatre for its business and, therefore, assessee was impleaded as party defendant in suit - Suit ended in a compromise and as per terms of cosent decree, assessee was declared lawful tenant on condition that assessee agreed to pay rent including arrear and compensation by way of interest - Tribunal held that sum of interest was agreed to be paid under compromise decree in order to legalise assessee's right for occupation and not for preserving its tenancy rights and disallowed same as capital expenditure - Whether Tribunal was justified in disallowing interest - Held, yes FACTS The assessee-company carried on business of exhibiting motion pictures in a theatre. Said theatre was originally taken on lease by two lessees who failed to pay lease rent. Consequently, the lessor filed a suit in 1945 for recovery of rent and for eviction against the lessees. It was the case of the lessor that the lessees had illegally allowed the assessee to occupy and use the theatre for its business purposes and, therefore, the assessee was impleaded as a party defendant in the suit. The suit ended in a compromise. As per the terms of the consent decree, the assessee was declared to be the lawful tenant on condition that the assessee agreed to pay the rent from 1950 and compensation by way of interest. In pursuance of that decree the assessee paid certain interest to the lessor and claimed it as a deduction in the computation of its assessable income for the assessment year 1959-60. The ITO disallowed the assessee's claim holding that the alleged expenditure was in the nature of capital expenditure. According to him, the assessee agreed to compromise and payment of rent and interest because it was in illegal occupation of the property and it would have been required to…

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