1978 (8) TMI 65 - HC - Income Tax

Summary

Issues Involved:
1. Whether the expenditure incurred for the execution of a temporary lease for five years was capital expenditure or revenue expenditure.

Summary:

Issue 1: Nature of Expenditure (Capital vs. Revenue)
Gobind Sugar Mills Ltd., the assessee, leased another sugar factory at Matihari for five years, incurring expenses of Rs. 54,824 on stamp fees, registration charges, and solicitor's fees. The assessee claimed this as revenue expenditure for the assessment year 1971-72. The ITO rejected the claim, deeming it capital expenditure for acquiring the right to run the factory.

Appeal to AAC:
The AAC, referencing the Supreme Court decision in India Cements Ltd. v. CIT [1966] 60 ITR 52, ruled in favor of the assessee, stating the expenditure was for the use of property under a leasehold for a limited period, facilitating the business.

Tribunal's Decision:
The revenue appealed, arguing the expenditure was capital in nature as it created a capital asset. The Tribunal found:
(a) The assessee did not acquire any other sugar factory post-lease.
(b) The expenditure was a one-time payment, not recurring.
(c) The expenditure was akin to a premium, creating a capital asset.
The Tribunal reversed the AAC's decision, holding the expenditure as capital.

High Court's Analysis:
The High Court examined the Tribunal's reasoning and the arguments presented by both sides. The assessee argued the expenditure was for an existing business and did not create an enduring advantage. The revenue countered that a leasehold interest is a capital asset, making related expenditures capital in nature.

Cited Cases:
- CIT v. Hoechst Pharmaceuticals Ltd. [1978] 113 ITR 877 (Bom): Held that lease expenses for five years were revenue expenditure.
- India Cements Ltd. [1966] 60 ITR 52: Discussed the deductibility of expenses for obtaining a loan.
- East India Commercial Co. Private Ltd. v. CIT [1964] 54 ITR 81 (Cal): Held stamp duty for lease renewal as capital expenditure.
- CIT v. Bengal Assam Investors Ltd. [1969] 72 ITR 319 (Cal): Legal expenses for shareholding alterations were capital expenditure.
- Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34: Protection fee under a lease was capital expenditure.

Conclusion:
The High Court concluded that the lease created a capital asset under the Transfer of Property Act, making the expenditure capital in nature. The Tribunal's decision was upheld, and the question was answered in favor of the revenue.

Final Judgment:
The expenditure incurred for the execution of the temporary lease was capital expenditure, not revenue expenditure. The High Court answered the question in the affirmative and in favor of the revenue, with no order as to costs.