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TMI Blog1990 (3) TMI 129X X X X Extracts X X X X X X X X Extracts X X X X ..... was Rs.35,890 which was allowed as a revenue expenditure. However, during the accounting year under consideration, a lump sum payment of Rs. 4,00,000 was made by the assessee in order to relieve itself of the obligation to pay annual rent up. to 30-09-2027. As the assessee has undoubtedly procured an advantage or benefit of enduring nature once and for all by this lump sum compensation, it will be treated as capital expenditure and, therefore, disallowed ...... Rs. 4,00,000." 2. Aggrieved by this disallowance, the assessee preferred an appeal objecting to the same among other things, to the Commissioner of Income-tax (Appeals). It was argued before the C.I.T.(Appeals) that the payment of Rs. 4 lakhs had been made to Vasan Charitable Trust, who is the Head Lessor in order to ensure uninterrupted enjoyment of the leased out property, and that the assessee in its turn had obtained from it sub-lessees the rent receivable up to 30-9-2027 and offered the lump sum so received by it for taxation. It was therefore entitled to the deduction of the lump sum paid to the Head Lessor, namely Vasan Charitable Trust, in consideration of the trust waiving its right of re-entry on the demised prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment in the assessment year 1976-77. The CIT (Appeals) found that at the time of receiving this lump sum by way of future rents payable, the assessee had given up its right of re-entry on the ground of non-payment of lease rent by its sub-lessees, but that the right of the re-entry vested in the Head Lessor, namely Vasan Charitable Trust on which the property was ultimately settled, continued to exist and remained in force. As the sub-lessees desired to enjoy the leased out properties without any interruption and wanted to ensure that the holders of the property, namely Vasan Charitable Trust, did not revoke the lease in favour of the lessees and invoke the right of re-entry on the ground of non-payment of rent, the assessee, to achieve this end, had agreed and paid a sum of Rs. 4 lakhs to Vasan Charitable Trust and got the Trust to waive its right of re-entry on the ground of non-payment of annual rent. 4. On the above facts, the CIT (Appeals) held that the ratio of the decision of the Madras High Court in the case of Madras Auto Service Ltd. relied on by the assessee fully applied, to allow the assessee's claim. The CIT (A) pointed out that in the present case other things ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore heard the parties at great length and also perused the authorities and the materials relied on by them in support of their contentions. 6. According to the revenue, Vasan Charitable Trust, the lessor of the assessee, had waived its right to re-enter the property by receiving this payment of Rs. 4 lakhs from the assessee, that it represented an enduring advantage, the benefit of which was available to the assessee till 30th September, 2027, and therefore it amounted to capital expenditure. It was further argued by Shri Jha on behalf of the revenue that this sum of Rs. 4 lakhs represented expenditure of future years, which could not be allowed in this year as it was not a revenue expenditure of this year. He contended that the decision of the Madras High Court in Madras Auto Service Ltd.'s case would not apply to the facts of the present case and that further the said decision had not become final since further appeal to the Supreme Court had been filed. He further submitted that the Commissioner (Appeals) ought to have followed the decision of the Supreme Court in the case of M.K. Bros. (P.) Ltd. v. CIT [1972] 86 ITR 38. 7. Shri Jha pointed out with reference to the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itable Trust. He placed before us copies of the original lease deed dated 4-10-1967 executed by Shri T.S. Srinivasa Iyer, who was also known as S.S. Vasan, in favour of the assessee-company and pointed out that according to clause 22 of this deed the right of re-entry of the lessor on the demised premises was spelt out, not only for default in payment of rent for three months, but also for continuance of the breach of any of the covenants by the lessees. For facility of reference, the said clause is quoted below :--- " 22. Notwithstanding the period of lease hereunder granted to the lessees, it is hereby agreed that if any part of the rent hereby reserved shall be in arrears for 3 months after becoming due or if there shall be a continuance of the breach of any of the covenants by the lessee shere in contained even after notice of the same to the lessees by the lessor, the lessor may determine the lease and re-enter the demised premises." [Emphasis supplied] The learned counsel next referred to the following paragraph in the preamble of the agreement dated 22-3-1980 between Vasan Charitable Trust and the assessee, which was relied on by the department :--- " Whereas the right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his agreement made it clear that the other conditions and covenants of the original lease deed should be observed by the lessee, namely the assessee. In this connection, he referred to clauses 9 to 12,14 to 16,18 and 19 of the original lease deed dated 4-10-1967 and pointed out that for breach of any of these clauses, the right of re-entry of the lessor under clause 22 was preserved and clause 1 of the agreement only extinguished the right of re-entry of the lessor on the ground of any alleged default on account of non-payment of annual rent by the lessee. 10. The learned counsel submitted that the decision of the Madras High Court in Madras Auto Service Ltd.'s case fully applied to the facts of the present case and was rightly followed by the CIT(A) to allow the assessee's claim. The learned counsel next submitted that the decision of the Supreme Court in the case of M.K. Bros (P.) Ltd. relied on by the learned departmental representative was a case of application of income for the purpose of acquiring a sole selling agency and was therefore inapplicable to the facts of the present case. The learned counsel submitted that in the present case the assessee-company secured no fresh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned counsel for the assessee is right in his submission that the entire agreement dated 22-3-1980 entered into between Vasan Charitable Trust and the assessee should be read as a whole and we should not confine ourselves only to the opening part of the preamble on which reliance is placed by the department to determine the true nature of the payment made by the assessee. Clauses 1 and 2 of this agreement, which are relevant for our purpose, are quoted below :--- " 1. In consideration of the Party of the Second Part having paid to the Party of the First Part a sum of Rs. 2,50,000 (Rs. Two Lakhs fifty thousand only) and a sum of Rs. 1,50,000 (Rs. One lakh fifty thousand only) (the payment thereof the Party of the First Part hereby admit and acknowledge) the Party of the First Part do hereby agree that the Party of the Second Part shall not be liable to pay any rent reserved and fixed under the Deed of Lease dated 4-10-1967 and renewal thereof by deed of lease dated 22-9-1975 for the remaining lease period, viz., 1-4-1980 to 30-9-2027. 2. Except for the covenant for payment of rent, the Party of the Second Part shall be liable to observe and perform the other terms and condi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal negatived the alternative submission of the revenue that even if the expenditure was to be considered as revenue expenditure, the entire expenditure could not be taken into account in computing the income of a particular assessment year, as they related to the right of the assessee to remain in possession for a long number of years. The Tribunal rejected this argument by relying on the decision in the case of Hindustan Commercial Bank Ltd., In re [1952] 21 ITR 353 (All.). Finally, the Tribunal justified the allowance of this amount of Rs. 1,80,000 under sec. 37 of the Act in para 12 of their order in the following words ;---- " 12. There is also a justification for this in the provisions of the Act itself. The expenditure in question is allowable as an expenditure laid out or expended wholly and exclusively for the purpose of the business u/s. 37, such expenditure. That section does not limit the expenditure to that incurred for the purpose of earning the income of the year. As long as it is laid out for the purpose of business the fact that the assessee may derive some benefit from that expenditure for a period of more than a year does not detract from the eligibility of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure as revenue expenditure. The I.T.O. disallowed the amount holding it as capital expenditure on the basis that as a result of this expenditure, the company derived an advantage of an enduring nature, namely that it would not have to pay Municipal taxes for a period of 15 years. On appeal by the company, the AAC allowed the deduction holding that the amount was the payment of a composite sum of the revenue outgoings for the following 15 years. In the appeal by the revenue, the Tribunal passed an order directing the Income-tax Officer to scrutinise the expenditure and allowed the deduction of the expenditure to the extent that it did not result in the company becoming the owner of any asset. The High Court answered the question referred at the instance of the Commmissioner against the revenue. On appeal by the Commissioner, the Supreme Court affirmed the decision of the Bombay High Court and held that the advantage secured by the respondent-company in that case by incurring the expenditure was absolution or immunity from liability to pay municipal rates or taxes for a period of 15 years ; that if these liabilities had to be paid the payments would have been on revenue accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even though it is made not in lump sum but by instalments over it period of time. On the contrary, payment made in the course of and for the purpose of carrying on business or trading activity would be revenue expenditure even though the payment is of a large amount and has not to be made periodically." Again, after referring to their earlier decision in the case of Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 at 45 (SC). Their Lordships held as follows at page 43 : " The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence." Applying the aforesaid ratio of this decision of the Supreme Court also, it has to be held that the sum of Rs. 4 lakhs paid by the assessee was only revenue expenditure and cannot be regarded as capital expenditure. 17. Similarly, the ratio of the decision of the Madras High Court in Pioneer Engg. Syndicate's case is only in favour of the assessee, far from supporting the revenue's case, as could be seen from the head note itself. 18. We, therefore, respectfully follow the two dec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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