1990 (3) TMI 129 - AT - Income Tax

Summary

Issues Involved:
1. Classification of Rs. 4 lakhs payment as capital or revenue expenditure.
2. Applicability of previous Tribunal and court decisions to the current case.
3. Impact of the lump sum payment on the lessee's obligations and rights.
4. Assessment of the expenditure's nature and purpose.

Issue-wise Detailed Analysis:

1. Classification of Rs. 4 lakhs payment as capital or revenue expenditure:
The primary issue is whether the payment of Rs. 4 lakhs made by the assessee to Vasan Charitable Trust should be treated as capital expenditure or revenue expenditure. The Income-tax Officer (ITO) disallowed the claim, treating it as capital expenditure because the payment procured an advantage of enduring nature. The CIT (Appeals) reversed this decision, holding that the payment was revenue expenditure, as it substituted a recurring revenue expenditure with a lump sum payment, thereby removing a recurring disadvantage. The Tribunal upheld the CIT (Appeals)'s decision, stating that the payment did not create any new capital asset or right but absolved the assessee from its liability to pay annual rent, thus classifying it as revenue expenditure.

2. Applicability of previous Tribunal and court decisions to the current case:
The assessee relied on the decision of the Madras High Court in CIT v. Madras Auto Service Ltd. and the Tribunal's decision in the case of Gemini Arts (P.) Ltd. The CIT (Appeals) and the Tribunal found these decisions applicable, as they involved similar circumstances where lump sum payments substituting annual rents were treated as revenue expenditure. The Tribunal noted that the earlier decision in Gemini Arts (P.) Ltd. fully answered the objections raised by the revenue, reinforcing the classification of the payment as revenue expenditure.

3. Impact of the lump sum payment on the lessee's obligations and rights:
The payment of Rs. 4 lakhs was made to ensure uninterrupted enjoyment of the leased property by sub-lessees and to waive the lessor's right of re-entry due to non-payment of rent. The Tribunal emphasized that the payment did not confer any new right or capital asset to the assessee but merely extinguished the liability to pay annual rent. The agreement preserved the right of re-entry for breach of other covenants, indicating that the payment was made to facilitate the business's efficient running rather than acquiring a capital asset.

4. Assessment of the expenditure's nature and purpose:
The Tribunal assessed the expenditure's nature and purpose, concluding that it was made for the convenient and economical running of the business. The payment was aimed at ensuring uninterrupted enjoyment of the leased property by sub-lessees, which was a recurring revenue expenditure in a lump sum form. The Tribunal referenced the Supreme Court's decision in CIT v. Associated Cement Cos. Ltd., which supported the view that expenditures securing immunity from liabilities, which would otherwise be revenue in nature, should be treated as revenue expenditure.

Conclusion:
The Tribunal upheld the CIT (Appeals)'s decision, allowing the deduction of Rs. 4 lakhs as revenue expenditure. The Tribunal found that the payment did not create a new capital asset or right but substituted a recurring revenue expenditure, aligning with the principles established in previous judicial decisions. The appeal by the revenue was dismissed, confirming the assessee's claim for deduction.