Gujarat High Court
Gujarat Machinery Mfg. Ltd. vs Commissioner Of Income-Tax on 24 February, 1994
Equivalent citations: [1995]211ITR1010(GUJ)
Author: M.B. Shah
Bench: M.B. Shah
JUDGMENT M.B. Shah, J.
1. The Income-tax Appellate Tribunal, Ahmedabad Bench "B", has referred the following question for our opinion under section 256(1) of the Income-tax Act, 1961 :
"Whether, on the facts and in the circumstances of the case, the stamp, registration and other expenses of Rs. 72,776 in regard to the lease deed of land is a capital expenditure?"
2. Facts :
The aforesaid question arises in the background of the fact that in the assessment year 1976-77, the assessee, Gujarat Machinery Mfg. Ltd., Kheda, inter alia, claimed total expenses of Rs. 72,776 towards execution of lease-deed expenses including stamp and registration charges. By the said deed, the assessee-company had let out its property at Worli, Bombay, which was purchased on September 30, 1974, from Vasant Engineering Works for its business purposes. After it was purchased, it was found that the area of the land was much less than what it should be to run the business of the assessee. The assessee-company, therefore, acquired another site in Thana area at Bombay and the property which was purchased in Worli area was let out for a period of 98 years by an agreement dated March 31, 1975. In respect of this agreement, the company had claimed expenses of Rs. 72,776. The Income-tax Officer disallowed it by holding that the said expenses were of capital nature. That part of the order was confirmed by the Commissioner of Income-tax (Appeals) in the appeal filed by the assessee. Further appeal by the assessee before the Tribunal was also dismissed. The Tribunal arrived at the conclusion that the lease was not necessary in order to facilitate the existence of the business of the assessee. So far as the assessee is concerned, it was incurred the expenditure for the purpose of obtaining a capital asset and without proper registration of the deed the rights of the parties could not be said to have been perfected under the Transfer of Property Act and the Indian Registration Act. The Tribunal further held that by incurring such expenditure the assessee derived advantages of enduring nature; the income may be earned from leasing out the property but so far as the expenditure incurred by the assessee is concerned it could be called as capital in nature. Hence, this reference at the instance of the assessee.
3. Opinion :
From the facts stated above, it can be held that the assessee had let out its immovable property for the consideration of obtaining rent from the lessee. The lessor (assessee) had not spent any amount for acquisition of an asset or rights of permanent character. On the contrary, as a lessor it has parted with some of its rights as owner of the immovable property in favour of the lessee. The assessee was the owner of the property and by executing the lease deed in favour of the lessee it was not acquiring any new source of income or new asset. Therefore, the expenditure for stamp duty and registration of the lease deed cannot be said to be laid out for acquisition of any property or the rights of a permanent nature. It can be stated that the said expenditure is laid out for earning rent or is spent as part of the process of profit-earning. Hence, it can be held that the expenditure in the present case is related to carrying on or the conduct of the business or in any case of earning the income by letting out the immovable property which is already owned by the assessee.
4. Further, merely because the expenditure is referable in connection with immovable property, it cannot be said in all cases that it is capital expenditure. Therefore, the reason given by the Tribunal that without proper registration of the deed the rights of the parties could not be said to have been perfected under the Transfer of Property Act and the Indian Registration Act and hence the assessee has derived advantages of enduring nature, is without any substance. By the execution of the lease deed, it can be stated that the lease has acquired some rights or has derived advantages of enduring nature, but it is difficult to comprehend that the lessor has acquired rights of a permanent nature. Further, even assuming that by execution of the lease deed rights of the parties would be crystallised, or that the expenditure is incurred in preserving or maintaining the immovable property, it can be held that the said expenditure is not for acquiring or increasing the capital asset but is for earning the income out of the capital.
5. For advancing his contention, Mr. Shah, learned counsel for the assessee, rightly relied upon the decision of the Bombay High Court in the case of CIT v. Khandelwal Mining and Ores P. Ltd. [1983] 140 ITR 701, wherein in a similar set of circumstances the court has held that it was difficult to appreciate the contention that when the assessee entered into a contract of lease with the lessee, he was acquiring any new source of income or that the contract of lease was any new asset for the acquisition of which the amount in question was spent by the assessee. The court held that a right to lease out land is clearly an incident of ownership of land and when land is leased out to a tenant on rent, the income in the form of rent is income from land; the source of income is thus the land itself; the contract of lease cannot by any stretch of imagination be described as a source of income; the contract of lease may no doubt regulate the relationship between the lessor and the lease, but that does not serve as a source of income because rent paid is for the use of land and, therefore, the land alone is the source of income. The court further held that the expenditure incurred by the lessor or execution of the lease deed including the stamp duty and registration expenses would be of revenue nature as it was made for the purpose of earning income which was to come in the form of monthly rent for a long period of 98 years. The same view is taken by the Calcutta High Court in the case of CIT v. Katihar Jute Mills (P.) Ltd. [1979] 116 ITR 781, wherein the court has held that if on the leasing out of the business of the company the income was business income, then the sum spent in connection with the lease agreement was an expenditure or revenue nature incidental to the assessee's business.
6. In this view of the matter, in our view, the expenditure incurred by the assessee for letting out the property at Worli was of revenue nature. It was not for acquiring any capital asset. It was for earning the income by letting it out. Hence, in the facts and circumstances of the case, the stamp, registration and other expenses of Rs. 72,776 in regard to the lease deed of the land is revenue expenditure. Hence, the question is answered in the negative in favour of the assessee and against the Revenue.
7. Reference stands disposed of accordingly with no order as to costs.