Karnataka High Court
Bharath Earth Movers Ltd. vs Commissioner Of Income-Tax on 7 January, 2000
Equivalent citations: ILR2000KAR2975, [2000]244ITR547(KAR), [2000]244ITR547(KARN)
JUDGMENT T.N. Vallinayagam, J.
1. The Income-tax Appellate Tribunal has referred the following question of law arising out of its order dated June 5, 1995, in respect of the assessment year 1984-85.
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the aggregate cost by way of payments made to the landlords, stamp and registration costs, i.e., Rs. 26,82,462 in all was not admissible as a deduction, but rent paid in advance only by way of security so that the lessor may adjust out of the said deposit monthly rent payable at the rate mentioned in the documents ?"
2. The assessee had raised two questions which are as under :
"1. Whether, on the facts and in the circumstances and on the contentions taken, the Tribunal was right in holding that depreciation was not admissible in respect of the three flats at Calcutta for the reason that the petitioner was not an owner but holds leasehold rights in respect thereof ?
2. Alternatively, and without prejudice to the foregoing, the Tribunal was right in holding that the aggregate cost by way of payments made to the landlords, stamp and registration costs, i.e., Rs. 26,82,462 in all was not admissible as a deduction, that it was not in the nature of advance rent paid, but rent paid in advance only by way of security so that the lessor may adjust out of the said deposit monthly rent payable at the rate mentioned in the document ?"
3. In respect of the first question it was found by the Tribunal that the assessee's case is not one where the liability to pay the entire rent for the whole of ninety-nine years arose on the date of the lease and that the rent was paid in advance only by way of security so that the lessor may adjust out of the said deposit monthly rent payable by the tenant at the rate mentioned in the document itself.
4. The Tribunal considered it to be a finding of fact and referred the second question as reproduced above.
5. The facts of the case are that the assessee is a public sector undertaking. The assessment for the assessment year 1984-85 was completed under Section 143(3) on March 30, 1987, and since according to the Commissioner, the assessment was prejudicial to the interests of the Revenue, he passed an order under Section 263 of the Income-tax Act, 1961, taking the position that the assessee was not the owner of the three flats and, therefore, was not entitled to depreciation. According to him, the Assessing Officer had erroneously granted depreciation on the flats. Regarding the building at Hyderabad, the learned Commissioner observed that there should be a legal ownership even for leased property in view of the law laid down in the decision of the Supreme Court in the case of Nawab Sir Mir Osman Ali Khan (Late) v. CWT in which it was observed that the ownership passes on execution of the registered sale deed. This decision of the Supreme Court has considered its earlier decision in CWT v. Bishwanath Chatterjee and Raja Mohammad Amir Ahmad Khan v. Municipal Board of Sitapur . The decision of the Madras High Court in the case of CIT v. Tamil Nadu Agro Industries Corporation Ltd, and the Full Bench of the Kerala High Court in Parthas Trust v. CIT were also relied on and it was held that the ownership of the asset is a condition precedent to the allowance of depreciation and that persons who are merely in possession without any title to the property cannot claim depreciation. He accordingly withdrew the depreciation allowed by the Assessing Officer in respect of the Hyderabad building. Regarding depreciation on the flats situated in Calcutta, the learned Commissioner relying on the decisions of the various High Courts directed the Assessing Officer to withdraw depreciation wrongly allowed to the assessee. The alternate plea of allowing the entire amount of lease as rent was also rejected following the decision in the case of Ramakrishna and Co. v. CIT .
6. The assessee came in appeal before the Tribunal challenging the order of the Commissioner.
7. It was found that the assessee had made a payment of Rs. 26,82,462 inclusive of registration charges of Rs. 4,14,569 in respect of three flats of Calcutta over which lease of 99 years was executed. The assessee was required to make the payment of Rs. 5,000 for each of the flats after the expiry of the lease term with an option for purchasing flats. It was in these circumstances that the Assessing Officer allowed the depreciation to the assessee but the order of the assessing authority was set aside by the Commissioner in the proceedings under Section 263 on the ground that there was no registration so as to confer title on the ground that there was no legal ownership of the flat with the assessee. The Tribunal further found that the assessee is entitled to deduction of the rent payable in respect of the three flats in Calcutta for the year of account. The Tribunal also directed the Assessing Officer to calculate the aggregate of the rent payable to the three landlords at rates mentioned in the documents of lease and allow deduction accordingly. The Tribunal held that the assessee is not entitled for depreciation as it holds leasehold rights and no relief on alternate plea can be given as the entire amount paid is premium which is of capital expenditure in nature following the decision in Member for the Board of Agrl. I. T. v. Sindhurani Chaudhurani [1957] 32 ITR 169 (SC) ; CIT v. Panbari Tea Co. Ltd. ; Maharaja Chintamani Saran Nath Sah Deo v. CIT . However, the rent of one year was held allowable. Accordingly, the Tribunal reversed the order of the Commissioner. In short, the Tribunal held that depreciation was not allowable on the three flats, but the assessee was entitled to deduction of the rent payable in respect of the three flats for the year of account.
8. The arguments of both learned counsel for the parties heard.
9. In Member for the Board of Agrl. I. T. v. Sindhurani Chaudhurani [1957] 32 ITR 169 (SC) it was observed that "salami" was described by Lord Wright in Kamakshya Narain Singh (Raja Bahadur of Ramgarh) v. CIT [1943] 11 ITR 513 (PC), a case of a grant of a mining lease for a period of 999 years in the following words (page 175) :
"The salami has been, rightly in their Lordships' opinion, treated as a capital receipt. It is a single payment made for the acquisition of the right of the lessees to enjoy the benefits granted to them 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 a payment on capital account."
10. In Maharaja Chintamani Saran Nath Sah Deo v. CIT , it was held that the principles on which the courts have acted whenever a question has arisen whether a payment described as a salami is capital or revenue receipt are well-settled. 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 a payment on capital account. But, merely because a certain amount paid to the lessor is termed as salami it does not follow that no inquiry can be made to determine whether it has or has not an element of revenue receipt in the shape of advance payment of royalty or rent. The onus, however, is upon the income-tax authorities to show that there exist facts and circumstances which would make payment of what has been called salami income. The position may be summed up in this way. When the interest of the lessor is parted with for a price the price paid is premium or salami but the periodical payments made for the continuous enjoyment of the benefits under the lease are in the nature of rent ; the former is a capital receipt and the latter a revenue receipt. Parties may camouflage the real nature of the transaction by using clever phraseology and, therefore, it is not the form but the circumstance (see CIT v. Panbari Tea Co. Ltd. ). In Parthas Trust v. CIT [FB], reference was made to the observations of Lord Justice Fox in the case reported in Stokes v. Costain Property Investments Ltd. [1984] 1 All ER 849 (CA), page 855 as under (page 347) :
"The purpose of the statutory provisions is evidently to encourage investment in machinery and plant."
11. Sections 41 and 44 of the Finance Act, 1971, dealt with allowances, the first year allowance and written down allowance subject to the condition that the machinery or plant belonged to the assessee. The Court of Appeal had occasion to consider the scope and amplitude of the term "belonging to" in that context. Commenting on the expression "belonging to" in the 1878 Act, Fox L.J. observed (page 854) :
"The requirement of 'belonging' first appears in the legislation on this subject in Section 12 of the 1878 Act. In that section, it is difficult to suppose that the word 'belonging' can have been intended to mean anything other than absolute ownership." and later (page 854) :
"I agree that 'belong' and 'belonging' are not terms of art. They are ordinary English words. It seems to me that, in ordinary usage, they would not be satisfied by limited interests. For example, I do not think one would say that a chattel 'belongs to X' if he merely had the right to use it for five years. Nor do I think it is an apt use of language to say that the landlord's fixtures 'belong' to the leaseholder."
12. In CIT v. Tamil Nadu Agro Industries Corporation Ltd., it was observed that (page 66) "we may now refer to some decisions dealing with the scope of Section 47 of the Registration Act. In Ram Saran Lall v. Mst. Domini Kuer, , on January 31, 1946, a sale was executed and the completion of the process of registration of document was done on February 9, 1946. The suit for pre-emption filed on September 9, 1946, was decreed by the courts below, but the Hig'h Court was pesuaded to take a different view resulting in the dismissal of the suit. Reliance before the Supreme Court was placed on Section 47 of the Registration Act to contend that once a document is registered, it begins to operate from the time it would have otherwise operated and, therefore, the sale became operative and completed on January 31, 1946. In pointing out the scope of Section 47 of the Registration Act, the Supreme Court, by a majority, stated that Section 47 of the Registration Act permits a document, when registered, to operate from a certain date which may be earlier than the date when it was registered, but that had nothing to do with the completion of sale when the instrument is one of sale. It was also further pointed out that a sale which is admittedly not complete until the registration of the instrument of sale is completed, cannot be said to have been completed earlier because by virtue of Section 47 of the Registration Act, the instrument by which it is effected after it has been registered commences to operate from an earlier date and in that view, the Supreme Court held that the sale in that case could not be said to have been completed on January 31, 1946, but only on February 9, 1946. Again in Hiralal Ayarwal v. Rampadarath Singh, , the Supreme Court pointed out that registration is complete only when the certificate under Section 60 of the Registration Act is given and the endorsement and copying out the said certificate under Section 61 of the Registration Act are made and reiterated the decision of the majority in Ram Saran Lall v. Mst. Domini Kuer, . On the effect of Section 47 of the Registration Act that the sale in that case was complete only when registration of the sale deed was completed as contemplated by Section 61 of the Registration Act and, therefore, the Talab-i-mowasibat made before the date of completion of registration was premature and a suit based on such a demand of the right of pre-emption was premature and must therefore, fail. Reference was also made to Radhakishan Laxminarayan Toshuiwal v. Shridhar Ramchandra Alshi, , to state that the right of pre-emption accrues only when transfer of property takes place and such transfer is not complete except through a registered deed and transfer became effective through a registered deed. Ultimately, the Supreme Court held that it cannot be argued that once registration is effected, the title relates back to the date of execution of the sale deed so as not to render the application under the Bihar Act 1962 (12 of 1962), presented prior to completion of registration as premature. In Amarchand J. Agariwal v. Union of India [1983] 142 ITR 402 (Bom), the court had to consider the question when a sale would be complete taking into account Section 47 of the Registration Act. In that case, the sale deed was executed on November 7, 1972, and it was registered on September 21, 1977. The competent authority served a notice on June 26, 1978, on the vendor to show cause why proceedings under Section 269C of the Act should not be initiated for the acquisition of the property. A writ petition was filed challenging the issue of the notice contending that the conveyance was executed on November 7, 1972, though it was completed by its registration on September 21, 1977, and in view of the provisions of Section 47 of the Registration Act, 1908, the transfer would operate from the date of the execution of the document viz., November 7, 1972, and the competent authority had, therefore, no jurisdiction to initiate proceedings under Section 269C of the Act. In dealing with this question, the Bombay High Court pointed out that the mere fact that the transfer operates from the date of execution is not sufficient to conclude that the title itself passes on the date of execution and that there is no distinction between the transfer of title and the completion of the sale and title passes only when the document is registered under the provisions of the Registration Act. The right of the competent authority, it was pointed out, to initiate the proceedings under Section 269C of the Act accrued on the registration of the document and, therefore, the proceedings initiated by the competent authority were not barred by limitation or lack of jurisdiction. This view was also affirmed on appeal in Amarchand Jainarain Agarwal v. Union of India [1983] 142 ITR 410 (Bom).
13. In (Late) Nawab Sir Mir Osman Ali Khan v. CWT , the expression "belonging to" was interpreted. It was observed that (page 894) :
"In the instant appeal, however, we are concerned with the expression 'belonging' to' and not with the expression 'owner'. This question had come up before this court before a Bench of five learned judges in CWT v. Bishwanath Chatterjee of the report, this court referred to the definition of the expression 'belong' in the Oxford English Dictionary, 'to be the property or rightful possession of. So it is the property of a person, or that which is in his possession as of right, which is liable to wealth-tax. In other words, the liability to wealth-tax arises because of the belonging of the asset, and not otherwise. Mere possession, or joint possession, unaccompanied by the right to be in possession or ownership of property, would, therefore, not bring the property within the definition of 'net wealth' for it would not then be an asset 'belonging' to the assessee. The first limb of the definition indicated in the Oxford Dictionary may not be applicable to these properties in the instant appeal because these lands were not legally the properties of the vendees and the assessee was the lawful owner of these properties. The vendees were, however, in rightful possession of the properties as against the vendor in view of the provisions of Section 53A of the Transfer of Property Act, 1882. The scheme of the Act has to be borne in mind. It has also to be borne in mind that unlike the provisions of the Income-tax Act, Section 2(m) of the Wealth-tax Act uses the expression 'belonging to' and as such indicates something over which a person has dominion and lawful dominion and he should be the person assessable to wealth-tax for this purpose."
14. In CWT v. Trustees of H. E. H. Nizam's Family (Remainder Wealth) Trust , the question as to what is the meaning of the expression "belonging to" was raised (page 594 of the report) but the court did not decide whether the trust property belonged to the trustee and whether the trustee was liable under Section 3 of the Act apart from or without reference to Section 21 of the Act. The case was disposed of in terms of Section 21 of the Act.
15. In CIT v. Nawab Mir Barhat Ali Khan [1974] Tax LR 90, it was held by the Andhra Pradesh High Court that when a vendor had agreed to sell his property as in the instant case and had received consideration thereof but had not executed a registered sale deed, his liability to pay tax on income from that property did not cease. His position as "owner" of the property within the meaning of Section 9 of the Indian Income-tax Act, 1922, and section 22 of the Income-tax Act, 1961, did not thereby change. According' to the said decision, the agreement to sell and the receipt of consideration by the assessee, the Nizam of Hyderabad, did not create any beneficial ownership according to Indian law in the purchaser, nor did it create any equitable ownership in him. The ownership did not change until the registered sale deed was executed by the vendor. The term "owner" in Section 9 of the 1922 Act or Section 22 of the 1961 Act did not mean beneficial or equitable owner, which concept was not recognised in India.
16. In CIT v. H. M. T. Ltd (No. 3) , it was held that premium was advance rent and it was held allowable as revenue expenditure.
17. In Empire Jute Co. Ltd. v. CIT , the Supreme Court has laid down certain guidelines to determine whether, in a given case, the expenditure incurred is in the nature of revenue or capital expenditure. It is held thus (page 10) :
"This test, as the parenthetical clause shows, must yield where there are special circumstances leading to a contrary conclusion and, as pointed out by Lord Radcliffe in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (PC), it would be misleading to suppose that in all cases, securing a benefit for the business would be, prima facie, capital expenditure 'so long as the benefit is not so transitory as to have no endurance at all'. There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case . . ."
18. It is further held that what is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process. The question must be viewed in the larger context of business necessity or expediency.
19. In CIT v. Madras Auto Service (P.) Ltd. , the lease was for 39 years. The new building was constructed by the assessee at his own expense which belonged to lessor. It was held that the assessee did not acquire any capital asset. The only advantage which the assessee derived by spending the money was that it got the lease of a new building at low rent. Reference was made to Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155 (HL), wherein it was held that when an expenditure is made, not only once and for all but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital (page 473) :
"1. Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment.
2. Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade ... If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether."
20. Reference was made to Lakshmiji Sugar Mills Co. P. Ltd. v. CIT ; L. H. Sugar Factory and Oil Mills (P.) Ltd. v. CIT ; CIT v. Associated Cement Companies Ltd. ; CIT v. Bombay Dyeing and Manufacturing Co. Ltd. [1996] 219 ITR 521 (SC), and it was finally observed that (page 475 of 233 ITR) "all these cases have looked upon expenditure which did bring about some kind of an enduring benefit to the company as a revenue expenditure when the expenditure did not bring into existence any capital asset for the company. The asset which was created belonged to somebody else and the company derived an enduring business advantage by expending the amount. In all these cases, the expenses have been looked upon as having been made for the purpose of conducting the business of the assessee more profitably or more successfully. In the present case also, since the asset created by spending" the said amounts did not belong to the assessee but the assessee got the business advantage of using the modern premises at a low rent, thus saving considerable revenue expenditure for the next 39 years, both the Tribunal as well as the High Court have rightly come to the conclusion that the expenditure should be looked upon as revenue expenditure."
21. The arguments of both learned counsel for the parties heard.
22. It is not in dispute that the sale deed was not executed but the manner in which the payment has been made and the balance which is to be received giving it a colour of lease is nothing but conferring ownership right on the assessee. The assessee was entitled to exercise all the rights in respect of the three flats as the owner and, therefore, the Tribunal was no justified in upholding the order of the Commissioner which was passed under Section 203. Before us the question which has been raised is for the reason that depreciation was not allowed and rent was allowed. The asses-see claimed the expenditure as revenue expenditure in respect of the entire payment of Rs. 26,82,462. The expenditure cannot be considered to be revenue expenditure nor the assessee could claim the deduction treating the said amount as an advance rent.
23. In Mysore Minerals Ltd. v. CIT , it was held that the claimant need not be the owner of the asset in the legal sense. The person in whom for the time being rests dominion over the building and who is entitled to use it in his own right can claim depreciation. In CIT v. Podar Cement (P.) Ltd. [1997] 226 ITR 625, it was observed by the apex court that the owner for the purpose of Section 22, is the person who is entitled to receive the income from the property in his own right. The requirement of registration of the sale deed in the context of Section 22 is not warranted.
24. Accordingly, the question which has been referred is answered in the affirmative in favour of the Revenue. While giving effect to the order of this court, the Tribunal will take into consideration the observations made above and more particularly that the property has to be considered as in the legal ownership of the assessee on which he is entitled for depreciation. Appropriate order in that respect may be passed by the Tribunal.