Income Tax Appellate Tribunal - Mumbai
Govik Electricals (P.) Ltd. vs Joint Cit, Special Range-15 on 27 December, 2004
Equivalent citations: [2005]96ITD70(MUM)
JUDGMENT
Mukul Shrawat, (JM) This is an appeal filed by the assessee arising out of the order of CIT(A)-XLIV, Mumbai dated 12-9-2000. As many as three grounds have been raised, out of which Ground No. 3 is argumentative referring only a case law hence need no separate adjudication. The substantial Ground Nos. 1 and 2 are reproduced below:
"1. The CIT(A) was not justified in confirming the order of Joint Commissioner of Income-tax in respect of not considering the payment of Rs. 27,00,000 made to Maharashtra Industrial Development Corporation and interest of Rs. 43,263 paid to bank of Baroda as a revenue expenditure.
2. The CIT(A) did not appreciate the fact that the disclosure of the above payments as capital expenditure in the accounts and the claim of the same as revenue expenditure under the Income Tax Act has no relevance!
2. This is the case of a company and during the course of assessment proceedings it was observed by the assessing officer that the assessee has entered into an agreement with Maharashtra Industrial Development Corporation (in short MIDC) on 2-8-1996 for granting lease of plot of land at TTC Industrial Area, Navi Mumbai on payment of premium of Rs. 27 lakhs. On execution of the lease agreement, the possession of the plot was handed over to the company on the same date. It is also placed before assessing officer that a sum of Rs. 13,50,000 was borrowed from bank of Baroda for making the payment. On the said borrowed amount expenditure of interest incurred was of Rs. 43,263. In the books of account the said amount of premium paid to MIDC along with interest totalling Rs. 27,43,263 was disclosed in the schedule of fixed assets under the head "land lease hold" as per the balance sheet drawn for the assessment year 1997-98. The claim of the assessee was that the amount of premium paid of Rs. 27 lakhs was nothing but rent paid in advance instead of paying the rent periodically, hence, to be treated as revenue or business expenditure, Similarly interest paid on borrowed amount was also claimed as revenue expenditure. In support a decision of Karnataka High Court in the case of CIT v. HMT Ltd. (No. 3) (1993) 203 ITR 820 (Kar) was cited. The matter was discussed in detail and it was observed by the assessing officer that the lease period is 95 years which is further subject to renewal of lease as per clause (7) of the impugned agreement. So the issue was whether the premium paid for acquiring the lease hold right to be treated as capital or revenue expenditure and to answer this question the assessing officer has relied upon CIT v. Panbari Tea Co. Ltd. (1965) 57 ITR 422 (SC). He has held that substantial premium was paid as a price for transfer of light to enjoy the property and the rent was fixed only at Re. 1 per annum hence the nominal rent' was fixed deliberately, however, the assessee has enjoyed the complete right over the property for 95 years hence not entitled for claim of the amount of premium as revenue expenditure. This issue was carried to the first appellate authority.
3. Almost on identical lines learned CIT(A) has discussed the facts of the case and given a finding that there was no material to hold that the premium of Rs. 27 lakhs was paid to MIDC as an advance rent as per the terms of lease agreement. He has also made an observation that the case laws cited from the side of the appellant of CIT v. HMT Ltd. (No. 3) (1993) 203 ITR 820 (Kar.) is distinguishable on facts , hence could not be relied upon. Rather he has relied upon a decision of Hon'ble Bombay High Court in the case of CIT v. Project Automobiles (1984) 150 ITR 266 (Bom) and another decision of Madras High Court in the case of Sri Krishna Tiles and Potteries Madras (P) Ltd. v. CIT (1988) 173 ITR 311 (Mad). Finally relying upon the Panbari Tea Co. Ltd's case (supra) and Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 167 (SC) he has held that the amounts claimed should be capitalized. With the result the disallowance was confirmed and the expenditure was considered as capital in nature. Being aggrieved now the appellant is further in appeal.
4. From the side of the appellant learned A.Rs. Shri T. Pooran and Ms. Heena Doshi appeared. On the basis of the given facts learned A.R. has heavily relied upon the case of CIT v. HMT Ltd. (N6. 3) (1993) 203 ITR 820 (Kar.) and another decision of CIT v. Madras Auto Service (P.) Ltd. (1998) 233 ITR 468 (SC). The main emphasis of the argument was that the expenditure was incurred for the purpose of business and the plot was acquired to be utilized for the factory and for that purpose also money was borrowed from bank of Baroda. The expenditure was revenue in nature because it was incurred for the purpose of business and it was nothing but the rent paid in advance. It was argued that instead of paying rent periodically for the period of lease the rent was paid at a time hence it was nothing but revenue in nature. In support copy of the agreement with MIDC dated 2-8-1996, an opinion of a Senior counsel on the subject and the submissions filed before appellate authority are also placed on record.
5. From the side of the revenue, learned D.R. Shri Amrish Bedi has strongly supported the view taken by the authorities below and in addition to the precedents cited in the impugned orders he has also relied upon a decision of R.K. Palshikar (HUF) v. CIT (1988) 172 ITR 311 (SC).
6. We have heard the submissions of both the sides at length in the light of the orders of the authorities below as well as the precedents cited. We have also carefully examined the terms and conditions of the impugned lease agreement dated 2-8-1996. There is no dispute about the factual matrix of the case that the company has entered into a lease agreement with MIDC, in respect of grant of lease of a plot situated at TTC Industrial Area, Navi Mumbai. A premium of Rs. 27 lakhs was agreed to be paid and the same was paid on two dates as follows:
Date Amount 4-7-1996 Rs. 13.50 lakhs 25-7-1996 Rs. 13.50 lakhs On one hand, the claim of the assessee is that the payment of said premium was nothing but rent in advance and instead of paying the rent periodically the same was paid in lump sum at the time of entering into the agreement effective for a period of 95 years lease. On the other hand, the objection of the revenue is that the said lump sum payment of premium of Rs. 27 lakhs was nothing but a consideration paid for acquiring rights over the property described in the lease agreement hence the expenditure for acquiring certain rights was nothing but capital expenditure. Undisputedly the lease is for a period of 95 years which in our opinion is a substantial period for holding the property. In addition to this long period assigned in favour of the lessee, additionally one of the clauses of the lease deed provides further extension of period in favour of the assessee. Once a lumpsum payment of Rs. 27 lakhs was made than the assessee-company is required to pay yearly rent of Re. 1. On execution of the agreement the possession of the plot was handed over which was utilized for the factory purpose. The statement of facts in the case reveals that the construction of the factory was started in December, 1996 and completed in June, 1997. In the premises, so constructed, the plant and machinery, etc., were also installed and the commercial production commenced from June, 1997. Under these circumstances, now the question is, whether a rent of Re. 1 was at all required to be mentioned in the lease agreement. In any case if there is a clause of payment of rent of Re. 1, for our purpose the same is negligible because for all intents and purposes the assessee-company had become the owner so naturally need not to pay any rent for a property possessed in the capacity as good an owner. This negligible amount of Re. 1, in our opinion, does not restrict the rights of the assessee-company in any manner over the impugned property. The assessee-company has acquired enduring advantage for a long period of 95 years which is also in a way a perpetual right conferred on the assessee. The argument from the side of the assessee is that the lumpsum payment represented an advance rent, but it is pertinent to mention that none of the terms of the impugned lease agreement mention any such condition. We also want to add that there is no classification on the basis of which it can be presumed that there was any clause of proportionate spread over of the said lumpsum ,amount into the period of lease of 95 years. The first appellate authority has also given a categorical finding that on careful examination of the terms of lease agreement, there is no material to hold that the premium was paid towards advance rent. So we have to bear this relevant aspect very much in mind while deciding the issue of character of expenditure whether capital or revenue in nature.
7. The issue as to whether an expenditure is of revenue or capital has always cast a problem and this is almost a never ending controversy. It is always a vexed question as to what constitute capital expenditure and what does not. However, to resolve the present issue raised as per the grounds, we have to take shelter of some of the rulings dealing this issue. The decision of Hon'ble Karnataka High Court in the case of CIT v. HMT Ltd. (No. 3) (1993) 203 ITR 820 (Kar) has been heavily relied upon by the appellant. No doubt that in that case also the assessee had entered into a lease agreement with MIDC, granting lease of a plot of land. In that case also the period of lease was 95 years upon payment of Re. 1 per annum and the assessee had paid a lumpsum premium for acquiring the lease hold. The agreement entered into by MIDC in that case is not before us naturally the appellant is not supposed to go to that extent, but what we have observed from this order is that the Hon'ble court has considered the terms and conditions of that lease agreement and thereupon opined that the use of the term 'premium' in the said agreement was in respect of the advance rent paid and nothing more than rent paid in advance instead of paying the same in future periodically. it was further observed by the Hon'ble court that there was absolutely no indication in the agreement that the amount paid by the assessee could be considered as a consideration paid for being let into possession of the premises while reserving a separate or economical rate of rent to be paid periodically thereafter. This is not the situation in lease agreement now placed before us dated 2-8-1996. We have already noted some of the clauses of the impugned agreement in above paras. There is no indication in the lease agreement in question that said amount of Rs. 27 lakhs is towards rent paid in lump sum instead of periodical payment. The character of this payment as can be visualized and the terms of the agreement also construe that the lease is for a long tenure and on payment of lump sum amount though termed as premium the assessee has acquired an enduring benefit which is traceable to the payment of lump sum amount as premium. In our humble opinion, this is the fine difference between the case law cited and the appeal in hand hence distinguishable.
8. Before we proceed to examine the precedents cited, it is necessary to quote that each case depends on its own facts and a close similarity between one case and another is not enough because even a single significant detail may alter the entire aspect. In deciding such controversial issue one must not simply adopt an approach of matching of colours but deeply examine the ratio laid down therein within the edifice of facts. Doctrine of precedents is meant to be used as a guiding factor to arrive at a judicial conclusion.
9. One more case law was cited by learned Counsel, namely, CIT v. Madras Auto Service (P.) Ltd. ( 1998) 233 ITR 468 (SC), wherein the finding was that right from the inception, the building was of the ownership of the lessor and by spending the money the assessee did not acquire any capital asset. The Hon'ble Apex court has observed that the only advantage which the assessee derived by spending the money was that it got the lease of a new building at a low rent. It was held that from the business point of view, the assessee got the benefit of reduced rent hence the same was considered as obtaining a business advantage and the expenditure was considered as revenue expenditure. Evidently this is not the situation in the instant appeal. The appellant in this appeal earlier had no right over the property leased out by MIDC and there was no question of benefit of reduced rent. The case laws which were cited and considered by the Hon'ble Apex court have looked upon an 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 assessee. In that background it was held that expenditure should be looked upon as revenue expenditure. So it is manifest that the factum of the instant appeal is somewhat not akin rather due to special circumstances pointing to the contrary. In the instant case, it is worth mentioning that the lump sum payment brings in a capital asset, i.e., the leased property over which the assessee got an enduring advantage for almost an unending period, i e., 95 years and onwards.
10. In this regard we have further examined few more cases and one of them is Aditya Minerals (P) Ltd. v. CIT (1999) 106 Taxman 337 (SC), wherein there was a lease deed and the assessee was required to pay rent of Rs. 35 per acre per month. The assessee was also required to pay in advance the rent calculated at this rate for the entire period of lease, i.e., 15 years in the form of deposit. The deposit was by way of guarantee for due performance of the said lease deed for 15 years. It was adjustable against the rent of each month. The Hon'ble court has observed that it is true that if a capital sum is arrived at and payment is made every year by chalking out the capital amount in various instalments, the payment does not lose its character as a capital payment if the sum determined was capital in nature. In that decision the Hon'ble court has relied upon Pingle Industries Ltd. v. CIT ( 1960) 40 ITR 67 (SC) and dismissed the appeal of the assessee by holding that the expenditure would not be allowable as revenue expenditure. To arrive at a right conclusion we have further gone in detail and perused the order of Hon'ble Apex court in the case of Pingle Industries Ltd v. CIT (1960) 40 ITR 67 (SC) and have found that the assessee got the right to extract stones from specified lands for 12 years and the consideration was allowed to be paid in monthly instalments. Number of cases were cited but the Hon'ble court has observed that all those cases turn on different facts so hardly help in the solution of the case in hand. The court has concluded that the assessee had acquired a long-term lease right to extract the stones and the land was not a stock-in-trade but a capital asset from which after extraction, stones were converted into stock-in-trade. The payment, though periodical was neither rent nor royalty but a lump sum payment in instalments for acquiring a capital asset of enduring benefit. Finally it was affirmed that the High Court was right in treating the outgoings as on capital account. We cannot resist ourselves to comment at this juncture that the case of revenue in the present appeal is even on stronger footing because here the payment is one time and not even periodical. Though in the case of Pingle Industries Ltd. (supra), the payment was periodic but even then it was held that the said lump sum payment was towards. acquiring a capital asset of enduring benefit.
11. On the basis of the elaborate discussion and on appreciation of the factual matrix of the instant appeal though the distinction between capital and revenue is almost a perennial problem in Income-tax law but even then the distinction is well recognized based upon certain principles laid down by several judicial authorities. To ascertain the nature of an expenditure a general principle is laid down 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 then held a very good reason for treating such an expenditure as properly attributable, not to revenue, but to capital, unless and until some special circumstances lead to the opposite conclusion. Now in the present appeal the circumstances are such which directly indicate that the expenditure is nothing but capital in nature. At the cost of repetition the circumstances can be summarized that the appellant has the advantage of 95 years of lease of the land over which a factory was constructed on one time payment of Rs. 27 lakhs with a condition of Re. 1 annual rent, however, with a right of further renewal of lease. This shows that the property was acquired for all indents and purposes in the capacity of an owner and the lump sum payment was made as a consideration for acquiring the rights over the property. There is nothing in the clauses of the lease agreement to show that the lump sum payment was adjustable towards rent, rather used the term premium in a way construing as consideration. One cannot extend the scope of presumption to that extent to consider the amount of premium as advance rent deposited at one go. In the absence any such clause in the terms of the lease agreement, we cannot persuade ourselves to accept this arguments of the appellant. Resultantly, we find no force in the ground raised and dismiss the same.
12. We are also not inclined to interfere with the finding of learned CIT(A) in respect of interest pertaining to the period when land was not exploited for the purpose of business so the interest was held to be capitalized. We order accordingly.
13. In the result, the appeal of the assessee is dismissed.