1972 (4) TMI 14 - HC - Income Tax

Payment for acquisition of a capital asset i.e. for acquiring right, title and interest in lease - formal transaction which the parties have chosen will be relevant in the determination of whether the payments were capital or revenue in nature held that payments made in this case are capital in nature

Summary

Issues Involved:
1. Deduction of Rs. 9,375 as business expenditure under Section 10(2)(xv) of the Income-tax Act, 1922.
2. Nature of the payment of Rs. one lakh-whether it is capital expenditure or revenue expenditure.

Issue 1: Deduction of Rs. 9,375 as Business Expenditure
The assessee-firm, Ramakrishna and Company, returned an income of Rs. 42,138 for the assessment year 1960-61 and claimed a deduction of Rs. 9,375 as a part of the consideration of Rs. one lakh paid to Viswanathan. This amount was claimed as a proportionate rent under Section 10(2)(xv) of the Income-tax Act, 1922. The Income-tax Officer disallowed the claim, stating that the Rs. one lakh paid was a capital expenditure aimed at acquiring an enduring advantage. The Appellate Assistant Commissioner upheld this view, emphasizing that the amount was not for the preservation of the business but for acquiring it, thus constituting capital expenditure. The Appellate Tribunal also affirmed this decision, noting the lack of proof for the payment and the partnership's existence at the time of the assignment. The Tribunal assumed a payment of Rs. 48,000 but still ruled that the expenditure was not for business purposes, thereby disallowing the deduction.

Issue 2: Nature of the Payment of Rs. One Lakh
The court examined whether the payment of Rs. one lakh was capital expenditure or revenue expenditure. Section 10(2)(xv) of the Income-tax Act, 1922, allows deductions for expenditures "laid out or expended wholly and exclusively for the purpose of such business," excluding capital expenditures. The court referred to various precedents to determine the nature of the expenditure.

In Vallambrosa Rubber Co. Ltd. v. Farmer, Lord Dunedin suggested that capital expenditure is spent once and for all, while income expenditure recurs annually. Viscount Cave L.C. in Atherton v. British Insulated and Helsby Cables Ltd. proposed that expenditure aimed at acquiring an enduring advantage is capital expenditure. The court also considered the Supreme Court's judgment in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax, which stated that expenditure for acquiring an enduring benefit is capital expenditure, while expenditure for running the business is revenue expenditure.

Applying these principles, the court found that the Rs. one lakh was paid to acquire leasehold rights in the cinema theatre, which enabled the assessee to conduct its business. This payment was akin to a premium for acquiring a capital asset, not a recurring rental expense. The court cited similar cases, such as Mac Taggart B. & E. Strump and Green v. Favourite Cinemas Ltd., where lump-sum payments for lease renewals were deemed capital expenditures.

The court rejected the assessee's argument that the payment was essentially advance rent, emphasizing the formal nature of the transaction. The court also dismissed the argument that the lease's 10-year term made it non-enduring, clarifying that the term "enduring benefit" does not imply perpetual benefit but rather a benefit for the business as a whole.

Conclusion
The court concluded that the Rs. one lakh payment was a capital expenditure, not a revenue expenditure, and thus not deductible under Section 10(2)(xv) of the Income-tax Act, 1922. The reference was answered in the negative, against the assessee, with costs awarded to the revenue.