1970 (11) TMI 7 - HC - Income Tax

Land taken on lease but not taken possession - compensation paid to owner of land - payment was not an expenditure wholly and exclusively for business - so it must be treated as capital expenditure

Summary

Issues Involved:
1. Whether the payment of Rs. 1,70,000 made by the assessee is an admissible revenue deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Issue-Wise Detailed Analysis:

1. Nature of Payment: Revenue or Capital Expenditure
The primary issue is whether the payment of Rs. 1,70,000 made by the assessee to Delhi Glass Works Ltd. as compensation for the cancellation of a lease agreement qualifies as a revenue expenditure or a capital expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Arguments and Findings:
- Income-tax Officer's View: The Income-tax Officer rejected the claim, stating that the payment was not an expenditure incurred for the normal conduct of the business but was in respect of acquiring a fixed capital asset intended for a long-term lease.
- Appellate Assistant Commissioner's View: The Appellate Assistant Commissioner upheld the assessee's claim, arguing that the payment was for saving future recurring expenditure and thus covered by the term "commercial expediency."
- Tribunal's View: The Tribunal reversed the Appellate Assistant Commissioner's order, holding that the payment was not an expenditure laid out wholly and exclusively for the purpose of business and was a capital expenditure.

Legal Precedents and Principles:
- Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax: The Supreme Court held that payments for acquiring a right to conduct business are capital expenditures, not for producing profits in the conduct of the business.
- Tata Hydro-Electric Agencies Ltd. v. Commissioner of Income-tax: The Privy Council emphasized distinguishing between the acquisition of an income-bearing asset (capital expenditure) and the process of earning income (revenue expenditure).
- Cowcher v. Richard Mills and Co. Ltd.: Payments made to surrender a lease were held not to be revenue deductions as they were not incurred in the course of carrying on the business.
- Mallett v. Staveley Coal & Iron Co. Ltd.: Payments for surrendering leases were considered capital expenditures as they were made to get rid of a permanent disadvantage or onerous liability.
- Union Cold Storage Co. Ltd. v. Simpson: Payments to terminate a lease were held to be capital payments, not revenue payments.
- Benarsidas Jagannath, In re: Payments for obtaining long-term leases were held to be capital expenditures if they amounted to acquiring an asset of enduring advantage.

Conclusion:
The court concluded that the payment of Rs. 1,70,000 was not an expense laid out or expended wholly and exclusively for the purpose of the business. It was a capital expenditure made to get rid of a permanent disadvantage or onerous liability related to the lease, which was a permanent asset of the business.

Judgment:
The question of law was answered in the negative, against the assessee. The payment of Rs. 1,70,000 made by the assessee was not an admissible revenue deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922. The assessee was also ordered to pay Rs. 250 as costs.