Madhya Pradesh High Court
Commissioner Of Income-Tax vs Project Automobiles on 22 June, 1987
Author: N.D. Ojha
Bench: N.D. Ojha
JUDGMENT N.D. Ojha, C.J.
1. This judgment shall govern the disposal of M.C.C. No. 369 of 1978 also. The assessee, M/s. Project Automobiles, Bhilai, is common to both these cases. In M.C.C. No. 142 of 1976, the following question has at the instance of the Commissioner of Income-tax been referred to this court for its opinion by the Income-tax Appellate Tribunal:
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that a sum of Rs. 2,235 was attributable to revenue expenditure ?"
2. This case is in respect of the assessment years 1970-71, 1971-72 and 1972-73. The aforesaid question is common with regard to all the three assessment years aforesaid with the exception that the amount involved in the assessment years 1970-71 and 1971-72 is Rs. 2,235 whereas the amount is Rs. 2,084 in the assessment year 1972-73.
3. The same question has been referred to this court by the Tribunal in M.C.C. No. 369 of 1978, with regard to the assessment year 1974-75. The amount involved in this year also is Rs. 2,084. The necessary facts for appreciating the question aforesaid may be stated in brief. The assessee, which is a registered firm, is engaged in the business of motor and automobile parts. It also carried on the business of running a petrol pump and a service station. All these businesses were carried on by the assessee on a plot of land belonging to M/s. Hindustan Steel Company Limited, Bhilai Steel Plant Project. It appears that the plot aforesaid was held by the assessee as a licensee on payment of Rs. 50 per month. On December 14, 1960, M/s. Hindustan Steel Company Limited wrote a letter to the assessee stating therein that the licence given to the assessee prior to July 9, 1959, for using the plot of land on temporary basis for petrol pump and service station was being terminated from the date of the said letter. An option was, however, given to the assessee that if it was interested in taking the plot on a permanent basis, it may make an application in the prescribed form. It was made clear in the said letter that if the assessee was not prepared to accept the terms and conditions of the proposed permanent lease, it should vacate the plot within a period of one month from the date of the said letter and hand over vacant possession to the owner. There was considerable correspondence between M/s. Hindustan Steel Company Limited on the one hand and the assessee on the other consequent on the aforesaid letter. Ultimately, however, the assessee agreed to have a permanent lease of the plot as proposed by its owner. The relevant terms of the offer of allotment of land on lease as contained in the letter dated May 18, 1962, of M/s. Hindustan Steel Company Limited to the assessee-firm were as follows :
(1) The period of lease will be 30 years. This will be with retrospective effect, i.e., from July 9, 1959.
(2) You will pay premium of Rs. 62,500 at Re. 1 per sq.ft. for a plot 250' x 250' in twelve equal annual instalments, the first instalment commencing from May 20, 1962.
(3) You will pay ground rent of Rs. 3,125 per annum at 5% of the premium commencing from July 9, 1959.
(4) At the end of every 15 years, the company will be free to revise the rent and increase it by 25%.
(5) The construction on the land so allotted would have to conform to building regulations laid down by the company and no construction will be started without first getting the building plan sanctioned by the company authorities.
(6) The leased land shall not be used for any purpose other than that for which it has been granted without the prior consent in writing of the company.
(7) You shall not sub-divide the said land or part with its possession or sublet the said land or buildings thereon, or any part thereof without the prior permission in writing of the company.
(8) The company will have the right to all mines and mineral products and buried treasure, etc., within the said land.
(9) If during the period of the lease, the premises are required by the company for its own use for a public purpose, the company shall be at liberty to take possession of the land together with all buildings, structures and appurtenances by giving 3 months' notice. You will be entitled to compensation in respect of the buildings and the structure on the demised land but shall not be entitled to any compensation for your interest in the said land except the refund of the proportion of the premium. The compensation payable under this clause shall, in case of dispute, be referred to the arbitration of the sole arbitrator agreed upon by both parties or in the absence of such agreement by two arbitrators one to be appointed by each party. The provisions of the Arbitration Act, 1940, and any statutory modification thereof shall apply to any such arbitration.
(10) You will abide by any terms and conditions that may be imposed by the company or Government, Central or State, in future.
(11) You will be required to execute a formal lease deed as and when desired by the project authorities. In pursuance of the terms aforesaid, the assessee paid to M/s. Hindustan Steel Company Limited towards instalments the total premium of Rs. 62,500, the respective amounts in the assessment years aforesaid, and claimed deduction thereof on the assertion that the amounts of premium paid by it should be treated as revenue expenditure.
4. At this place, it may be mentioned that the same plea had been raised by the assessee in the assessment years 1964-65 to 1969-70 also with regard to the instalment of premiums paid in those years. The Income-tax Officer repelled the contention of the assessee and took the view that the payments made by the assessee towards premium represented capital expenditure and not revenue expenditure. On appeal, the Appellate Assistant Commissioner agreed with the view of the Income-tax Officer and sustained the disallowance of expenditure. The matter being taken up before the Tribunal, difference of opinion arose between the judicial member and the accountant member. Whereas the judicial member was of the view that the amount of premium represented payment of advance rent and the expenditure was, therefore, of a revenue nature, the accountant member was of the view that the payment of the premium was by way of price for securing a right of an enduring nature over the plot aforesaid and, consequently, the expenditure was of a capital nature. In view of the difference of opinion between the two members, the matter was referred to a third member who agreed with the view of the judicial member. Thereafter, on an application being made by the Commissioner of Income-tax, a question as to whether the stipulated payment of premium or any part thereof was of a revenue nature was referred to the High Court. This reference with regard to the assessment years 1964-65 to 1969-70 was pending in the Bombay High Court and we have not been informed about the ultimate decision in the aforesaid reference.
5. The claim made by the assessee that the instalments of premium paid in the assessment years 1970-71, 1971-72, 1972-73 and 1974-75 which are the relevant assessment years in these two cases should be treated as revenue expenditure was repelled by the Income-tax Officer but, on appeal, the Appellate Assistant Commissioner relying on the decision of the Tribunal in the cases in regard to the assessment years 1964-65 to 1969-70 allowed the claim of the assessee. The appeals preferred by the Department before the Tribunal were dismissed. However, on applications being made by the Commissioner of Income-tax in this behalf, the Tribunal made the two references to this court as already stated above.
6. It has been urged by the standing counsel appearing for the Department that, on the facts of the instant case, the terms subject to which permanent lease was granted by M/s. Hindustan Steel Company Limited to the assessee indicated that a clear distinction was maintained in regard to the amounts to be paid by the assessee towards premium for obtaining permanent lease on the one hand and the ground rent which was to be paid by it on yearly basis on the other. According to him, on a reading of the terms of the lease as a whole, there was no manner of doubt that the sum of Rs. 62,500 stipulated to be paid as premium was in the nature of price paid for acquiring permanent lease of the plot which was a benefit of an enduring nature and the Tribunal committed an error in taking the view that the said amount also represented advance rent. Learned counsel for the assessee, on the other hand, submitted that the view taken by the Tribunal that the amount of premium paid was an expenditure of a revenue nature inasmuch as the premium in substance represented advance rent was correct.
7. In order to appreciate the respective submissions made by counsel for the parties, it would be useful to refer to certain decisions laying down principles for determination of the question as to whether a particular expenditure was in the nature of capital expenditure or of revenue expenditure. In Indore Municipal Corporation v. CIT [1981] 132 ITR 540 (MP), the facts were that the assessee which was a local body and derived income from sale of manure prepared out of waste and night soil dumped in the trenches dug on grounds outside the municipal limits claimed before the Income-tax Officer deduction of a sum incurred on the construction of metal roads to the trenches dug on grounds as revenue expenditure on the ground that the expenditure was incurred wholly and exclusively for the purposes of the assessee's business. The claim of the assessee was repelled and it was held that since the assessee was the owner of the land, the expenditure incurred by it on the construction of the metal roads to the trenches dug on grounds was expenditure incurred to gain an enduring benefit and the same was capital in nature and was not deductible as revenue expenditure.
8. In Taj Mahal Hotel v. CIT [1967] 66 ITR 303 (AP), the assessee which was carrying on hotel business took a fresh lease of a hotel building for ten years on rent with an option to renew the lease for another ten years. It was given liberty by the lessor to make any alterations or new constructions with the permission of the lessor and it was stipulated that the lessor could not demand enhanced rent. On the termination of the lease, the assessee was to take away the fittings and fixtures while the structures were to remain the property of the lessor. The assessee put up new rooms and claimed deduction of the expenditure incurred on the ground that it was revenue expenditure. Repelling this plea, it was held that the improvements effected by the assessee were of enduring advantage though not everlasting for the assessee's business during the period of the lease and the Department was right in treating it as capital expenditure.
9. New Precision (India) Private Ltd. v. CIT [1969] 72 ITR 657 (MP) was a case where a certain sum was paid by the assessee-company in order to have the benefit and use of the services, technical knowledge and experience of an employee. It was held that since the amount in question has been paid by the assessee once and for all for procuring the benefit of the services, technical knowledge and experience of the employee concerned, the payment was of a capital nature.
10. In Board of Agricultural Income-tax v. Sindhurani Chaudhurani [1957] 32 ITR 169 (SC), it was held that the payments by way of salami are made by the prospective lessees anterior to the constitution of the relationship of landlord and tenant as the price for the lessor agreeing to the parting of his rights in an agricultural holding in favour of the proposed lessee. Thus, salami is a payment by the tenant as a present or as price for parting by the landlord of his rights under the lease of a holding. It is a lump sum payment as consideration for what the landlord transfers to the tenant. When a tenant pays salami, he does so in order to get in return an estate in the land owned by the zamindar. Salami is, therefore, not rent because it is a payment to the landlord by the tenant as a consideration for the transfer of a right in zamindari lands owned by the landlord. It has, therefore, all the characteristics of a capital payment and is not revenue.
11. In Pingle Industries Ltd. v. CIT [1960] 40 ITR 67 (SC), the assessee under certain leases acquired the right to extract stones from quarries. The stones were not lying on the surface but were to be extracted methodically and skilfully before they were dressed and sold. For the lease, the assessee paid a certain amount in lump sum and the rest was to be paid in easy monthly instalments. The assessee claimed deduction in respect of the lease money paid by him as revenue expenditure. It was held that the assessee acquired by his long-term lease a right to win stones and the leases conveyed to him a part of land. The stones in situ were not the assessee's stock-in-trade in a business sense but a capital asset from which after extraction he converted the stones into his stock-in-trade. The payment, though periodic in fact, was neither rent nor royalty but a lump sum payment in instalments for acquiring a capital asset of enduring benefit to his trade and was capital expenditure.
12. In Durga Das Khanna v. CIT [1969] 72 ITR 796 (SC), the assessee had taken on lease certain premises for a term of 99 years with the right to assign the lease and alter the structure of the premises so as to convert it into a cinema house. He entered into a lease by which the building was demised to the lessees for 30 years. The lessees agreed to pay Rs. 55,200 to the assessee towards the cost of erecting the cinema house. The rent agreed to be paid was Rs. 2,100 per month. The lease did not contain any condition or stipulation from which it could be inferred that the sum of Rs. 55,200 had been paid by way of advance rent. Nor was there provision for its adjustment towards rent or for its repayment by the assessee. The lessees entered into possession after the cinema house was completed, which was subsequent to the date of the lease. The plea of the assessee was that the sum of Rs. 55,200 was in the nature of a premium or salami and was a capital payment. The Tribunal, however, held that the receipt of the sum aforesaid was in the nature of advance payment of rent. This view was upheld by the High Court on a reference. On appeal to the Supreme Court, this view was reversed and it was held that in the absence of any material on record to that effect, the Tribunal and the High Court were in error in holding that the sum of Rs. 55,200 was an advance payment of rent. It was further held that the aforesaid sum was in the nature of a premium or salami and had all the characteristics of a capital payment and was not revenue.
13. In Aditya Minerals (P.) Ltd. CIT [1987] 167 ITR 774 (AP), the assessee-company secured lease of land belonging to a private individual on an annual rental of Rs. 10,752 for the purpose of excavation to win manganese ore lying deposited under the land. The assessee had secured rights from the mining department of the Government to excavate the deposits of manganese ore lying in the land and it was for that purpose the lease agreement was entered into by the assessee with the lessor. The manganese ore deposits did not belong to the lessor and he could not have granted any rights to win the ore as that right could be conferred only by the Government through the mining department in whom the deposits lying under the earth vest and royalty was payable separately to the Government in respect of manganese ore extracted by excavating the land. It was held that the expenditure involved in payment of rent by the assessee to the lessor was one which was incurred for acquiring an asset or advantage of enduring character to the business of the assessee and must, therefore, be held to be capital in nature and hence was not allowable as business expenditure.
14. In Maharaja Chitamani Saran Nath Sah Deo v. CIT [1971] 82 ITR 464 (SC), it was held by the Supreme Court that salami is a single payment made for the acquisition of the right of the lessor by the lessee to enjoy the benefits granted to him by the lease. That general right may properly be regarded as a capital asset and the money paid to purchase it may properly be held to be on capital account.
15. In CIT v. Bombay Burmah Trading Corporation [1986] 161 ITR 386 (SC), the facts were that the assessee-company carried on business of selling timber and in that connection, it had to enter into contracts of forest leases with the Government of Burma. These leases were for the duration of 15 years and in respect of large areas, and the assessee-company was authorised to fell the teak treas and convert them into logs and upon completion of extraction thereof, to remove the logs after payment of royaliy to the Government of Burma for its own purposes. A clause in these leases authorised the assessee-company even after the expiry of the period of 15 years of the lease to remove the logs in respect whereof extraction had been completed upon payment of royalty. The Union of Burma came into existence from January 4, 1948. Under the Constitution of Burma, there was a directive for nationalisation of forest exploitations. The Government of Burma in order to take over exploitation of forests entered into an agreement with the assessee. The agreement was made on the footing that the forest leases of the assessee had already expired. Under the agreement, the assessee was to surrender its residuary rights under the forest leases and all its assets pertaining to forest leases to the Government of Burma and the Government of Burmah was to hand over to the assessee certain tons of logs. It was contended that forest leases constituted the capital assets of the company. The assessee was prevented from carrying on its business upon the nationalisation of forest resources and the consequential acquisition of the residuary rights and assets pertaining to the forest leases belonging to the assessee. The compensation paid for acquisition of the residuary rights and other diverse assets was, therefore, for the sterilisation of the company's business and, therefore, a capital receipt. It was held by the Supreme Court that the forest leases entered into by the assessee were not ordinary commercial contracts made in the course of carrying on their trade or for the disposal of their products but affected the very structure of the operation of the assessee's business. The forest leases thus constituted capital asset of the assessee and the payments made for cancellation or sterilisation of the rights under these leases would be capital receipts.
16. The cases referred to above are those on which reliance has been placed by learned counsel for the Department.
17. We may now consider the cases on which reliance has been placed by learned counsel for the assessee. Reference was made by him to a decision of the Andhra Pradesh High Court in Rajah Manyam Meenakshamma v. CIT [1956] 30 ITR 286. It was a case where the assessee had granted two mining leases, one for a period of 30 years and the other for 25 years. In the first lease, Rs. 12,000 and in the second lease, Rs. 23,000 in lump sum were fixed" as royalty for the whole period of the lease". It was held on the facts of that case that the two sums paid as royalty were consolidated advance payments of the amounts which would otherwise be payable periodically for the occupation of the mines and were consequently revenue receipts. It was pointed out that the word "royalty" meant rent, though on the facts of a particular case the mere use of the word may not be decisive on the question of the character of payment. It would be seen that in that case apart from the payment of royalty in lump sum, no other payment as annual rent was contemplated. It was pointed out that the lessees were persons conversant with the terms under which the leases of the mines were given and with that knowledge when they used the term " royalty ", which term has the recognised meaning of rent for the occupation or working of the mines, prima facie, it must be held that the word was used in the accepted sense of the term. The facts of that case are clearly distinguishable inasmuch as in the instant case, as seen above, the sum of Rs. 62,500 was payable as premium in addition to the amount payable as annual rent.
18. Reliance was then placed by counsel for the assessee on a decision of the Supreme Court in M.A. Jabbar v. CIT [1968] 68 ITR 493. That was a case where the assessee was carrying on the business of supplying lime and sand. He took a lease for a term of 11 months whereby he obtained exclusive lease and liberty to enter, occupy and use for quarrying purposes and to raise, render marketable, carry away, sell and dispose of sand within, or under or upon, land constituting the beds of a river and certain nullahs specified in the lease. The lease money was paid by the assessee in two sums in the account years relevant to the assessment years 1955-56 and 1956-57. It was found as a fact in that case that it was a contract for removal of sand lying on the surface of the river beds, that all the sand that could be removed was lying on the surface, and that no excavation or skilful extraction was to be performed on the land before obtaining it. It is on these facts that it was held that the assessee acquired under the lease merely the right to remove the sand lying loose on the land within the short period of 11 months to the extent to which he could do so. He did not acquire any fixed or capital asset of an enduring nature by obtaining the lease and, consequently, the sums were expenditure of a revenue nature. Apparently, this case is also clearly distinguishable inasmuch as in the instant case the assessee had acquired a right of enduring nature over the plot on the basis of the permanent lease granted in its favour.
19. Reliance was then placed on CIT v. Kisenchand Chellaram (India) P. Ltd. [1981] 130 ITR 385 (Mad). This case also, in our opinion, is distinguishable. Here, the assessee had taken three buildings on lease and effected improvements to them by construction of partition walls, wall panelling, show windows, etc. The amount spent was claimed for deduction as revenue expenditure. This claim was negatived by the Income-tax Officer and the Appellate Assistant Commissioner. The Tribunal, however, held that as the assessee was not the owner of the premises and as there was no long lease in its favour, it could not be said to have obtained an enduring benefit and accordingly directed the allowance. On these facts, the High Court held that the Tribunal was right in its conclusion that the amounts spent were revenue expenditure.
20. Counsel for the assessee then placed reliance on C1T v. Cinceita Private Ltd. [1982] 137 ITR 652 (Bom). In this case, the assessee had taken on lease for an initial period of 20 years a building on a monthly rental of Rs. 3,500, with an option for a renewal of the lease at a higher rent, to be used as business premises of the assessee. For the relevant assessment year, the assessee claimed as deduction an expenditure of Rs. 10,700 towards registration fees, stamp duty and solicitors' fees in connection with the drawing up of the lease deed. The Income-tax Officer and the Appellate Assistant Commissioner disallowed the entire expenditure on the ground that it had been incurred by the assessee for acquiring a benefit of an enduring nature and hence was capital expenditure. On further appeal, however, the Tribunal held that the amount was allowable as revenue expenditure. On a reference, it was held by the Bombay High Court that though the period of the lease was for 20 years with an option for renewal at a higher rent, yet the expenditure claimed by the assessee was the only expenditure required for drawing up a proper and effective lease deed, namely, the expenditure in respect of stamp duty, registration charges and professional fees paid to solicitors, who prepared and got the lease deed registered. There was no element of premium in the amount claimed as expenditure for acquiring the leasehold premises. Moreover, the expenditure would have been the same even if the lease was for a shorter duration provided the period of the lease was more than one year. In this view, the High Court upheld the order of the Tribunal holding that the sum claimed by the assessee was allowable as revenue expenditure. Apparently, this case also is clearly distinguishable. The facts and the reasons which weighed with the High Court in that case for holding that the amount claimed by the assessee was allowable as revenue expenditure are entirely different from those of the instant case.
21. Counsel for the assessee also placed reliance on Shanker Dass Sethi and Sons v. CIT [1986] 157 ITR 770 (Delhi). Here, the assessee, who was carrying on business as a building contractor and also running a brick-kiln, took on lease various parcels of land for excavation of earth for manufacture of bricks and for installation of a brick-kiln. Under the lease agreements, the assessee could excavate earth up to a total depth of six feet over a period of seven years. On the expiry of the period, the land was to revert to the lessor. It was stipulated that the assessee could make use of the land for erection of the bhatta and temporary huts but would have no right whatsoever to the ownership of the land and could do nothing more than use the land and dig up earth up to a depth of six feet fo/ manufacture of bricks. The assessee was allowed to put a tube-well for his brick-kiln but had to leave the same on the expiry of the lease. The assessee had no right or interest in the trees standing on the land. If the area of the land turned out to be less than that specified, due allowance was to be given to the assessee in the payment of the lease amount for the shortage in the area. The assessee paid a total amount of Rs. 44,822 and claimed deduction of one-seventh thereof for each of the assessment years 1967-68 and 1968-69 as revenue expenditure. It also claimed deduction of the expenditure incurred on the construction of a chimney and a well. The deduction was allowed by the Tribunal as regards the lease money which it held was just an advance payment in lump sum for obtaining the raw material. The claim for deduction of cost of the chimney and the well was disallowed. Cases were referred to the High Court on the applications of the assessee as well as the Department. It was held affirming the decision of the Tribunal that the payment of Rs. 44,822 was made by the assessee in, advance to ensure regular supply of earth over a period of seven years. The assessee had no right or interest in the land and was to deliver back possession on the expiry of the stipulated period. The expenditure incurred by the assessee was thus a revenue disbursement. This case is again distinguishable inasmuch as the terms on which the permanent lease was granted in favour of the assessee in the instant case were entirely different. Here a right of an enduring nature was created in favour of the assessee. He was allowed to make constructions and in case of resumption was to be paid compensation in respect of the buildings and the structures on the demised land.
22. Lastly, reliance was placed by learned counsel for the assessee on the decision of the Supreme Court in Madnani Development Corporation (P) Ltd, v. CIT [1986] 161 ITR 165 (SC). The assessee, in that case, was a private company carrying on business as a contractor. It entered into a contract in April, 1964, with the railway administration for the execution of earth work, bridge work, etc., for a new railway yard. As it was required to supply earth outside the railway yard, the assessee bought two pieces of land in 1964 and 1965 from which earth could be excavated and conveniently taken to the work site. The two pieces of land were shown as fixed assets by the assessee in its balance-sheet. Soon after the work was over, the assessee sold both the lands sustaining a loss of Rs. 45,241. Treating this loss as the value of the earth excavated, the assessee apportioned the amount between the assessment years 1965-66 to 1967-68. The claim for deduction of Rs. 30,045 so apportioned for the assessment year 1966-67 was disallowed, but the Tribunal allowed the claim on the ground that the land formed a wasting asset and by constant digging of the earth, the land had become unserviceable. On a reference, the High Court held that the loss was a capital loss. On appeal to the Supreme Court, the decision of the High Court was affirmed and it was held that the land was not the stock-in-trade of the assessee. It was found that the assessee was the full proprietor of the two pieces of land for an indefinite period. The reason for acquiring the land was no doubt to provide a ready supply of earth to the work site, but there was nothing to prevent the assessee from continuing as owner of the land after the railway contract had been executed and putting it to any other use. The land was treated by the assessee as its fixed asset. Therefore, the two pieces of land had to be regarded as capital assets and the loss incurred by their sale was a capital loss. In our opinion, this decision apparently is of no assistance to the assessee in the instant case.
23. In view of the foregoing discussion, we are of the opinion that the principles laid down in the cases relied on by learned counsel for the Department are applicable to the facts and circumstances of the instant case. From a perusal of the various terms, subject to which the permanent lease was granted by M/s. Hindustan Steel Company Limited in favour of the assessee, it is apparent that the assessee obtained a right of an enduring nature in the plot in question and in order to obtain this right it had to pay a sum of Rs. 62,500 as premium. On the terms of the contract, it is again apparent that ground rent in the sum of Rs. 3,125 per annum was payable by the assessee in addition to the premium of Rs. 62,500. The amount of premium, in our opinion, could not, on the facts of the instant case, be treated as advance rent. The fact that facility of paying the amount of premium in instalments was provided to the assessee will, in our opinion, in no way derogate from the nature of the amount payable as premium. The payment of the sum of Rs. 62,500 was apparently in the nature of a salami payment in order to obtain the right of an enduring nature in the plot in question. In our opinion, the clause contemplating resumption of possession by the lessor if the premises were required by it for its own use for a public purpose on the conditions stated in the said clause would also not make much of a difference. Firstly, that is a clause which normally finds place in such leases and, secondly, the contingency contemplated was such which may or may not happen. In the instant case, it is not the case of the assessee that the said contingency has happened and the lessor has resumed possession over the plot in question. In this view of the matter, the amount of premium paid by the assessee was obviously in the nature of capital expenditure and the Tribunal was not right in holding it to be revenue expenditure.
24. In the result, the question referred to us in each of these two cases is answered in the negative, in favour of the Department and against the assessee. In the circumstances of the case, however, there shall be no order as to costs.