9911796707
TMI Blog1983 (3) TMI 109X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as an outgoing of business. The ITO did not accept this claim. In his view, the payment was made as premium to enable the assessee to secure the aforesaid properties of Jai Hind Cinema for a period of 16 years. For this reason, the payment constituted a capital payment made for acquiring a capital asset or an advantage of enduring value. The payment was also described in the lease agreement as premium but the AAC, to whom the assessee appealed, on a consideration of facts and circumstances brought on record, agreed with the assessee that the payment of Rs. 1,10,000 being inextricably linked with the process of earning income should be considered as a revenue payment made by the assessee in the course of carrying out his business. Since he found that payment of Rs. 27,500 was made before the accounting year, he held that this amount could not be considered for deduction during the year in issue. He allowed the claim of the assessee only in respect of Rs. 82,500 which was paid during the accounting year in issue. Therefore, both the revenue and the assessee are in cross-appeal. The revenue is in appeal against the deduction of Rs. 82,500 while the assessee is in appeal against the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h had already considered the claim for deduction of payment of premium in two similar cases relating to a lease granted by Jammu and Kashmir authority. These decisions are contained in the case of Paris Dry Cleaners, in IT Appeal No. 92 (Asr.) of 1977-78 and in that of Vijay Cigarette Stores [IT Appeal No. 554 (Asr.) of 1979]. The departmental representative submitted that this Bench already had considered in these cases claim for deduction of payment of premium. It reached a finding after ascertaining and considering facts that the payment could not be considered as the revenue payment made during the course of business carried on by the assessee. In both these cases, the Tribunal held that the payments of premium were capital payments which had secured the assessee, the lessee, an asset or in the alternative an advantage of enduring nature which facilitated carrying on the trade and business of the assessee. On the other hand, the learned counsel for the assessee placed his reliance on another string of cases, namely, M.K. Bros. (P.) Ltd. v. CIT [1972] 86 ITR 38 (SC), L.H. Sugar Factory & Oil Mills (P.) Ltd. v. CIT [1980] 125 ITR 293 (SC) and CIT v. Bombay Cycle & Motor Agency Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould reasonably claim that the tenant on a monthly basis was in possession of a capital asset or any advantage of enduring nature. What appellant had obtained was only a facility which could continue if he went on paying annual rent regularly within one month of the due date and Government had kept the terms of the agreement faithfully and the Government did not consider it necessary to acquire the property for any public purpose. Considered in this light, he submitted that the payment of Rs. 1,10,000 would not appear to be a payment of capital nature. He further submitted that clause 1 of the lease agreement called upon the appellant-lessee to make the payment of annual rent of Rs. 65,000. It was the same clause which required the appellant to make the payment of Rs. 1,10,000 which was referred to as premium. The ITO had not considered this aspect of the matter. If the object and purpose of the annual payment of rent was to enable the assessee to carry on the business, object and purpose of payment of Rs. 1,10,000 could not be different from those intended for the payment of annual rent. If the nature of rent was that of revenue payment, it was not possible to hold that payment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot hold that the assessee in obtaining the lease had acquired any asset or advantage of enduring value, if he could be evicted from the lease for any of the reasons mentioned in the agreement. If there was default in payment of annual rent beyond 30th day from the date when the payment became due, the lessor could determine the lease agreement and resume the property. It is true that the lease agreement is to continue for a period of 16 years but it is not this factor alone which should decide whether the assessee has got an asset or an advantage of enduring nature. Our attention was drawn to clause 2(b) under which the assessee was required to undertake additional expenditure for the repair and renovation of building, machinery and fixture before cinematographic exhibition could take place. In case of determination of lease, the assessee was not to get any compensation. In this view of facts, it is not possible for us to hold that where an assessee is saddled with a liability, we must still hold that he has acquired an asset or an advantage of enduring nature. Our perusal of the agreement has brought to our notice clause 2(c) which reads as under : " that the lessee shall ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e leased property idle say for want of funds or use it for any purpose other than that of running a talkie. Considered from this angle it cannot lead to a finding that the assessee had acquired any asset or advantage of enduring value. We have noted further that a lease is generally transferable and assignable but in this case the terms of the lease deed provided that it was not assignable or transferable by the assessee at his instance. There was no provision whatsoever for the renewal of the lease agreement. A leasehold agreement which runs for several years generally provides a clause by which the leasehold agreement is renewable. But there was no provision for renewal of lease agreement in this case. There could not be any possibility either. If the assessee desired to continue to hold the property, he had to make the highest bid in the auction to be held for the purpose after the expiry of the lease. Only then he could continue to occupy the property under a fresh lease agreement as distinct from a renewed agreement. In this view of our finding based on a perusal of the terms of the agreement, we cannot hold that the assessee had obtained any capital asset or even a capital ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cility or an opportunity to earn income from carrying on his business. Nothing prevented him from providing for payment of premium separately in words which could show that intention of payment of premium was to enable the assessee to enter an agreement to acquire an asset or any advantage of capital value. Therefore, in this view of our finding, the finding of the AAC that payment of Rs. 1,10,000 was a payment of the revenue nature is to be upheld. We refrain from discussing the different authorities cited by both sides for the obvious reason because those decisions were on the facts of those cases. Still we cannot resist the temptation of referring to two decisions of the Supreme Court. In the case of M.K. Bros. (P.) Ltd., their Lordships observed, "the answer to the question as to whether an amount paid is a revenue expenditure or capital expenditure depends not so much upon the fact as to whether the amount paid is large or small or whether it has been paid in lump sum or by instalments, as it does upon the purpose for which the payment has been made and expenditure incurred. It is the real nature and quality of the payment and not the question or the manner of the payment whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esides the payment of monthly rent. The Tribunal after a consideration of facts held that the amount of 'Nazrana' was a capital payment. We have found from an examination of the finding that the lease agreement did not provide for any expenditure to be undertaken by the lessee for the development or renovation of the shop. Failure to pay the rent in time was not to be immediately visited with the determination of the lease agreement but the lessee was obliged to pay interest for the period of delay caused in making payment of the rent. No doubt failure to pay rent for three consecutive months only could entitle the lessor to resume the lease, but it was not to be likened with the default in making the payment of the rent beyond a period of 30 days from the due date which could entitle the lessor to determine the lease in the present case. It was only when default period continued for 3 consecutive months the question of determining the lease was to arise. There was a further provision for extending the terms of the lease and there was also a provision for the renewal of the lease. These provisions for extension or renewal of lease were lacking in the present agreement. In the prese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal found that payment was made to enable the assessee to enter into the agreement of lease. Looked at from this standpoint also the payments were undoubtedly payments of capital nature. In the present case, as has been reiterated by the learned counsel, payment was made under the agreement being provided in clause 2 which also provided for the payment of annual rent. As we have indicated there is no material on record which may enable us to distinguish but the two payments made under clause 2. Therefore, we uphold the finding of the AAC that payment being linked with the process of earning income was a payment for carrying out the business. As far deduction is concerned, acting on the same principle, we uphold his finding that the assessee is entitled to claim deduction of Rs. 82,500 only made during the accounting year and is not entitled to claim the deduction of Rs. 27,500 made before the commencement of the accounting year. This disposes of the appeal of the revenue and also the appeal of the assessee partly in respect of claim of deduction of Rs. 82,500 and Rs. 27,500 respectively. 6. The assessee has also made a claim for deduction of Rs. 8,596 which were admittedly pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase possession of the cinema hall was to be surrendered. If the conditions laid down by the Government were not satisfied, the Government could re-auction the lease. 12. On the date of auction, the assessee agreed to pay a premium of Rs 1,10,000 and an annual rent of Rs. 65,000. The assessee being the highest bidder, a lease deed was executed in favour of the assessee and under the said deed the assessee could hold the cinema building on lease for sixteen years. It was provided that at the expiry of each lease year the annual rent of Rs. 65,000 was to be paid within 30 days. The lessee had to incur necessary expenses for repair, maintenance, etc., as well as for improvement. It was further stipulated that the lessee shall have to engage the ex-employees of Amresh and the Regal Talkies, Srinagar, which had been destroyed by fire. The lease was not transferable without the sanction of the lessor and the security of Rs. 10,000 was paid for continuing cinema theatre by the lessee. 13. When this matter came before the Tribunal, the Tribunal passed an order in this case on 19-11-1981. The learned Judicial Member speaking for the Bench observed as under : " 5. We have perused the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s no doubt that such payment is of the nature of capital expenditure. In our view, the premium of Rs. 1,10,000 for acquiring the lease represented capital expenditure and was not deductible from the profit of the assessee for the year in issue. We have already held that the lease agreement has not put in the possession of the assessee a source of raw material where the lump sum payment as premium might be considered as payment for the purpose of acquiring the raw material. Therefore, the finding of AAC is liable to be vacated and we vacate it. We may here deal also with the issue raised by the assessee in respect of his claim for further deduction of Rs. 27,500. As we have held that the payment of the premium was capital expenditure and was not liable to be deducted, the claim of the assessee for deduction of Rs. 27,500 cannot succeed and we, therefore, uphold the finding of the AAC disallowing the claim. " The assessee's appeal against the disallowance of the balance of Rs. 26,500 by the AAC was also dismissed. This order of the Tribunal was restored for fresh hearing on the plea of the assessee that he could not be represented on the date of hearing due to certain unavoidable re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Under the lease agreement the lessee obtained the cinema building for a period of 16 years and got the right to carry on business in those premises in accordance with the terms and conditions of the agreement. The right to get the possession of the building for carrying on business for the period of lease and having the right to carry out improvements and adjustments in the premises was certainly an advantage of enduring nature and formed the nucleus and the hard core of the business which was to be carried on by the assessee. The fact that certain conditions were laid down on the assessee for employing the ex-employees of certain cinema houses which had been destroyed and other conditions of following the rules and conditions could not have the effect of changing the nature of the enduring advantages given by the assessee as a result of the payment of premium. 18. In the case of H. Dear & Co. (P.) Ltd. v. CIT. [1966] 60 ITR 546, it was held by the Supreme Court that the amount paid in addition to the stipulated royalty with a view to pursuade the authority to grant a lease was in the nature of capital expenditure and was not deductible. The Supreme Court had held that while roya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the start of the business which enabled the assessee to carry on business for the period of lease the payment was certainly of a capital nature. 20. In the course of hearing, the departmental representative relied upon an order of the Amritsar Bench in the case of Paris Dry Cleaners. The learned Judicial Member has referred to this order in para 4 of his order. According to the discussion, it appears that in his view the facts of that case were materially different from the present case. With respect, however, I do not find any such difference in the essentials. The differences which have been mentioned regarding the various clauses in the agreement could not change the nature of the payment of premium or Nazrana. The fact that the assessee had the right to make improvement in the building for the purpose of carrying on of his business which right was not there in Paris Dry Cleaners' case would not in my opinion have any bearing on the capital or revenue nature of the payment of Rs. 1,10,000. The fact that in the case of Paris Dry Cleaners the lease could be resumed on failure of three months' rent whereas in the present case it could be resumed on the default is also of no av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um (Salami) is a single payment made for the acquisition by the lessee of the right to enjoy the benefits granted to them by the lease and that general right may properly be regarded as a capital asset and the money paid to purchase it may properly be held to be payment on capital account. These authorities one of Privy Council and the two of the Supreme Court namely 11 ITR 513, 32 ITR 169 and 82 ITR 464 have been relied upon by the learned author. At page 494 while dealing with section 37 the learned author has again stated that a premium paid by the lessee for the grant of renewal of lease is clearly capital expenditure, whether it is payable in a lump sum or in instalments over the whole period of the lease along with rent. 7. We may also deal with the question of forfeiture of lease on non-fulfilment of lease conditions as contained in the agreement. To our mind this issue is not at all relevant to determine the nature of expenditure incurred on payment of Nazrana or premium to the Municipal Council. The Nazrana was paid only for the grant of tenancy rights and once these are granted the purpose of payment of Nazrana is over. A lease is granted on certain conditions and if the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee that the premium could be considered as an advance payment of rent or any part of it. It was further observed in that order that the assessee had acquired an asset of advantage of enduring value. It has further been observed as a finding that there was no doubt that such payment was of the nature of capital expenditure. I see no reason in the arguments of the learned counsel for the assessee which may persuade me to depart from the categorical finding and observations made in the earlier order of the Bench. I, therefore, hold that the AAC erred in allowing the deduction of Rs. 82,500 in the computation of the assessee's income. 22. The nature of the payment of Rs. 27,500 being the same and the payment having not been made in this year and the liability also having not arisen in this year has rightly not been allowed by the AAC as a deduction. On this point, therefore, I agree with the conclusion of the AAC. 23. On the other points dealt with in paras 6, 7 and 8 of his order, I respectfully agree with the learned Judicial Member. In the result, the departmental appeal is allowed whereas the assessee's appeal is dismissed. ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the State Government. 2. At the time of the assessment proceedings, the assessee claimed Rs. 1,10,000 which is the premium paid by it as a revenue expenditure apart from the annual rent of Rs. 65,000. The ITO disallowed the claim of deduction of the premium. The AAC, however, accepted the assessee's claim. Thereupon, the revenue came up in appeal and the main point in the appeal filed by the revenue was about the allowability of the premium of Rs. 1,10,000. 3. The learned members, who heard the appeal differed in their views, the learned Accountant Member holding that it is not allowable while the learned Judicial Member holding it to be allowable and that is why the following difference of opinion arose : " Whether, on the facts of the case, the claim of Rs. 82,500 was to be allowed as revenue expenditure or was to be treated as capital expenditure ?" The matter has been placed before me by the President under section 255(4). 4. The matter was heard at considerable length. The learned departmental representative obviously relied on the order of the learned Accountant Member and he also cited number of authorities and relied on the decisions which are referred to by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m. 7. In this case there is no other document nor any material to find out the nature of the payment except the notification issued by the Divisional Commissioner on behalf of the State Government. That notification obviously spells out the payment towards premium and payment towards rent annually. In other words, the auction contemplated payment of both premium and rent. If we apply the concept premium and rent as given under the Transfer of Property Act which undoubtedly has to be looked into, there should be no manner of doubt that the premium paid in this case is for the purpose of getting property on lease and the rent for the use thereof. Therefore, the premium paid by the assessee in this case cannot be treated as revenue expenditure. There is no material placed on record by the assessee that the premium is in the nature of rent. The parties may try to camouflage the transaction but the real purpose and the nature of payment have to be seen. In the absence of any material placed on record that the amount paid towards premium is also in the nature of rent, a distinction has to be kept between the premium and the rent. In this case, the sum of Rs. 1,10,000 paid by assessee mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emium or salami. But the periodical payments made for the continuous enjoyment of the benefits under the lease are in the nature of rent. The former is a capital receipt and the latter are revenue receipts. There may be circumstances where the parties may camouflage the real nature of the transaction by using clever phraseology. In some cases, the so-called premium is in fact advance rent and in others rent is deferred price. It is not the form but the substance of the transaction that matters. The nomenclature used may not be decisive or conclusive but it helps the court, having regard to the other circumstances, to ascertain the intention of the parties. " In my view the above passage fully supports what is stated by me and if we apply the test laid down by their Lordships my conclusion is fortified that the amount in question cannot be treated as a revenue expenditure. 9. Coming to the decisions cited by Mr. Sharma, let me take one by one. In Indian Aluminium Co., their Lordships were dealing an altogether a different issue but as already pointed out by me the general principles are of importance. This decision recognises the principle that there must be a direct and intimate ..... X X X X Extracts X X X X X X X X Extracts X X X X
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