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TMI Blog2012 (7) TMI 282X X X X Extracts X X X X X X X X Extracts X X X X ..... and their family members. Initially, the lease rent was fixed at Rs 25,000/- p.m., which was later increased first to be Rs 50,000/- p.m. and then to Rs 1,00,000/- p.m. As on 31.12.1991, the assessee was paying lease rental of Rs 1,00,000/- p.m. to the Trust, in respect of the factory taken on lease. The assessee entered into a fresh lease deed on 18.01.1992, whereby the lease rent was enhanced to Rs 6,75,000/- per month with effect from 01.01.1992. 2. The assessee, in its return of income for the assessment years 1992-93, claimed deductions for the lease rental which it had paid to the Trust. The Assessing Officer was of the view that the assessee Company had acquired an asset of an enduring nature and accordingly disallowed the increased amount of rent on the ground that this payment was in the nature of capital expenses. In this regard, the Assessing Officer invoked the provisions of Section 40A(2) of the Income Tax Act, 1961 (hereinafter referred to as the Act). The Commissioner of Income Tax (Appeals) confirmed the assessment order. He was also of the view that the unusual increase in the rent was primarily for the purpose of reducing the tax incidence on the profits earned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure incurred by it was a revenue expenditure. The Tribunal however held that the provisions of Section 40A(2) of the Act had rightly been invoked, as there was a direct relationship between the trustees and directors of the assessee company. The Tribunal noted that 03 out of the 05 directors of the assessee company were the sons of trustee No.1 Shri Bishan Das Mehta and brother of second trustee Shri Raj Kumar Mehta. It was noted by the tribunal that the maximum share holding in the assessee company was owned by the trustees and their relatives as defined in Section 2(41) of the Act. The Tribunal however accepted the contention of the assessee that since the Assessing Officer had not recorded a specific finding that the expenditure incurred by it was excessive or unreasonable having regard to (i) the market value of goods or services, (ii) the legitimate business needs, and (iii) benefits derived by the assessee thereforom, invocation of provisions of Section 40A(2) was not proper. The Tribunal held that the reasonableness of payment of lease rent should be examined afresh by the Assessing Officer, in the light of the valuation report which the assessee had submitted before it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ITA 246/2005) "Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is correct in law in holding that the Section 40A(2) of the Income Tax Act, 1961 is applicable in respect of the lease rent paid by the Assessee to M/s Mehta Charitable Pranjnalaya Trust?" (ITA 251/2007, 253/2007 & 257/2007) 5. Vide order dated 22.6.2005, the Tribunal with respect to AY 1993-94, following its earlier order passed in respect of AY 1994-95, 1995-96 and 1996-97 held that the payment of lease rent to the trust was a revenue expenditure and that the provisions of Section 40A(2) of the Act were applicable. The Tribunal therefore directed that the matter should be restored to the Assessing Officer for fresh consideration. ITA No. 1207/2005 has been filed by the Revenue against that order. The following question of law was framed by this Court on 21.3.2007 in this appeal: "Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal was correct in law in holding that the expenditure of Rs.6,75,000/- per months paid by the Assessee to M/s Mehta Chairtable Prajnalaya Trust in terms of the agreement dated 18th January, 1992 was a reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid order. The following question of law was framed by this Court in these appeals on 20.08.2010: "Whether on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that Section 40A(2) of the Income Tax Act, 1961 is applicable in respect of the lease rent paid by the assessee to M/s Mehta Charitable Prajnalaya Turst?" 10. Vide order dated 15.11.2010 in respect of AY 2007-08, the Tribunal again followed its earlier decision for the year 2004-05 and 2005-06 and ITA No. 842/2011 has been filed by the Revenue against the said order. The following questions of law were framed by this Court in this appeal on 14.07.2011: (i) "Whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal was correct in law in deleting the addition made by the AO on account of lease charges amounting to Rs.1,14,86,544/-? (ii) Whether the order of the Income Tax Appellate Tribunal is perverse, as it has not appreciated the facts and circumstances of the case and that the lease charges are in the nature of capital expenditure and give the assessee benefiting of enduring nature? (iii) Whether on the facts and in the circumstances of the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wood in Himachal Pradesh by way of commercial dealings followed by its processing for manufacture of Katha and Cutch. It also agreed not to indulge in competition for purchase of Katha and Cutch in a radius less than 1000 kms from the premises which it had leased to the assessee. The lease deed also indicates that on the request of the assessee, the Trust made considerable modernization and improvement in the plant and machinery, including enhancement of its production capacity in the year 1989-90. 13. It would thus be seen that the lease rental was enhance from Rs 1,00,000/- to Rs 6,75,000/- for the following reasons:- (a) The Trust relinquishing its rights to purchase Khairwood in Himachal Pradesh; (b) The Trust agreeing not to indulge in competition with the assessee in a radius of less than 1000 kms. (c) The Trust having incurred expenditure in the year 1989-90 on modernization and improvement of the plant and machinery which it had leased to the assessee. Yet another factor contributing to revision of lease money could be the normal appreciation in the lease rental, in line with the lease rent prevailing in the market. 14. There is no dispute that the normal lease rental ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a new building at a low rent and, therefore, from business point of view, the assessee got benefit of reduced rent on account of such expenditure. The Court was of the view that saving in expenditure was saving in revenue expenditure in the form of rent and whatever substitutes for revenue expenditure should normally be considered as revenue expenditure. In the case before us, even the expenditure on improvement and modernization of plant and machinery was carried out by the Trust and not by the assessee. On determination of lease, the modernized plant and machinery was to revert back to the Trust. Hence, the case of the asseesse before us stands on a much stronger footing. 17. Similarly, if there was any appreciation in the market in the lease rentals of such properties, the enhancement in the lease rent of the property to the extent it is attributable to such normal appreciation in the lease rentals prevailing in the market, would be a revenue expenditure. Again, it would be for the Assessing Officer to determine whether there was any such appreciation in lease rentals, and if so, to what extent. 18. The distinction between capital expenditure and revenue expenditure is a ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by Lord Cave (LC) in Atherton v. British Insulated and Helsby Cables Ltd.: (1925) 10 TC 115:- "........... when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital." The Court also referred to the following observations made by Lord Radcliffe in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd.: (1965) 58 ITR 241:- "...........There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the land on which Khair wood trees stood in the State of Himachal Pradesh and those leasehold rights were surrendered in favour of the assessee. This is also not the case of the revenue that certain specified trees or specified area having Khair trees on it had been allocated to the Trust and it had the right to cut and remove them at any time during a stated period of say 10, 20 or 30 years. We, therefore, assume that the Trust was not entitled either to any particular piece of land with Khair trees on it or to specified Khair trees with right in the further growth of those trees, for a substantially long period. Therefore, this case is not akin to a case of acquiring land with standing trees or the trees with right to cut them at any point of time, during a stated period. What we gathered during the course of arguments was that in the absence of right to purchase Khairwood from the Government, the assessee would have to purchase them from the open market and, therefore, relinquishment of the right of the Trust to purchase Khair tree resulted in better availability of material besides making it available to the assessee at a cheaper price, which, in turn, had the effect of inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct which was acquisition of tendu leaves and tendu leaves alone, and it was observed that even if this right of going on the land and plucking the leaves was not expressed in the contract, it would have been implied by law. The Privy Council, inter alia, concluded as under: "if the tendu leaves had been stored in a merchant‟s godown and the appellant had bought the right to go and fetch them and so reduce them into their possession and ownership it could scarcely have been suggested that the purchase price was capital expenditure. Their Lordships see no grounds in principle or reason for differentiating the present case from that supposed." That case thus involved no right in land or trees; the licence to be on the land was merely an accessory right; the right of cultivation was insignificant. The term was short, and the collection of leaves was seasonal. Leaves once collected, the operation pro tempore was over till the fresh crop came. There was thus no acquisition of an enduring asset in the way capital endures; it was more a purchase of crops of two or three successive years skewered on an agreement to ensure the supply of raw materials. In the case before Privy Council ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght over a long period from a producer of the expenditure to secure his stock-in-trade is not of the same character as the price he pays in the first illustration. By that payment, he secures an enduring advantages and an asset which is a capital asset of his business. In the same way, if a manufacturer buys his raw materials he makes a revenue expenditure, but when he acquires a source from which he would derive his raw materials for the enduring benefit of his business, he spends on the capital side. Thus, a manufacturer of woollen goods who buys his wool buys his raw materials, but when he buys a sheep farm, he buys a capital asset. There is then no difference between a purchase of a factory and the purchase of the sheep farm, because both are capital assets of an enduring nature. x x x x We may now pass on to the facts of the case before us. The respondent carried on the business of selling chanks. It obtained its supplies from divers, from whom it purchases the chanks, and having got them, perhaps cheap, it resold them at a profits. This is one mode in which it carried on its business. In this business, it was directly buying its stock-in-trade for resale. The other method was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw material and not the source of the raw material. In the case, relied upon by the learned counsel for the Revenue, the assessee had acquired the source of raw material itself, when it was granted exclusive right and authority to fish for and take and carry all chanks shells in a specified area for a specified period. The case before us is akin to the case of Mohanlal Hargovind (supra) where the right to pick tendu leaves was acquired by the lessee. This judgment to our mind could have been of help to the Revenue, had the trust been having rights in the land on which khairwood trees were grown and had it surrendered those rights in favour of the assessee, in consideration of enchancement of lease rent. Elimination of Competition 22. As regards that part of the enhancement of the lease rental which is attributable to the trust agreeing not to compete with the assessee in manufacture and sale of katha and Cutch in a radius of less than 1000 kms from the premises which it had leased to the assessee, we find upon a perusal of the lease deed that the trust was earning sufficient profits from these activities. It further shows that both the trust as well as the assessee felt that such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion fee, in consideration of which the lessor undertook not to grant to any person any lease, permit or license for limestone, without a condition that no limestone should be used for the manufacturer of cement. The appellant also agreed to pay Rs.35,000/- per annum for 05 years as a further protection fee, in consideration whereof the lessor gave an identical undertaking in respect of the whole of the district. The question which arose before the Supreme Court was as to whether the aforesaid payments were capital expenditure or revenue expenditure. It was observed that consideration of Rs.5,000/- per annum, which was to be paid to the lessor during the whole period of the lease, was to endure for the whole period of the lease. It was an enduring benefit for the benefit for the whole of the business. The Court felt that the fact that it was a recurring payment was immaterial, because one had to look into the nature of the payment, which, in turn, was determined by the nature of the asset which the company had acquired and since the asset acquired by the company was in the nature of a capital asset, the right to carry on its business, unfettered by any competition from, outsiders w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny capital asset by making the payment of non-compete fees and merely eliminated competition for a limited period of 05 years, the expenditure could not be treated as capital in nature. This Court noted that the Special Bench of the Tribunal in the case of M/s Tecumesh India Private Limited v. Additional CIT 132 TTJ 129 had taken a view that warding off competition in business even to a rival dealer, would constitute capital expenditure and that to hold them to be capital expenditure it is not necessary that non-compete fees was paid to create monopoly rights. The Court noted that the position in the case before it was almost identical and that is why even the learned Counsel for the assessee had conceded before the Tribunal that the matter was covered by the aforesaid Special Bench decision. This Court therefore answered question no.1 in the appeal by holding that the deduction of expenditure towards non-compete fees could not be allowed to the assessee. In Blaze & Central (P.) Ltd. v. Commissioner of Income-tax (1979) 120 ITR 33 (Mad), the assessee entered into an agreement with M/s. Saraswathi Publicities under which the latter agreed to part with its business of exhibiting film ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unds that the arrangement was not for a fixed term but could be terminated at any time and the payments were related to actual shipment of coal and were not related to or tied up to any fixed sum agreed to between the parties. As regards payments made to H.V. Low and Co. Ltd. for assistance in procuring coal for shipment to Burma, the Supreme Court noted that it was admittedly an item of revenue expenditure. As regards that part of payment which was attributable to HV Low and Co. Ltd. agreeing not to export coal to Burma during the subsistence of the agreement, the Court accepted that since there was no certainty of the duration of the arrangement, which could be revoked at any time, the advantage could not be said to be of enduring character and therefore, the expenditure could not be held to be of a capital nature. The Court in this regard observed that although an enduring benefit need not be an ever-lasting character, it should not, at the same time be so transitory or ephemeral that it can be terminated at any time at the violation of any of the parties. As regards payments made to eliminate competition, the Court inter alia observed as under:- "Although we agree that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r how long the restrictive covenant was to last, but it was neither permanent nor ephemeral. In that sense, the advantage was not of an enduring nature. There is also nothing to show that the amount of Rs. 4 crores was drawn out of the capital of the assessed. On a cumulative appreciation of these facts, it must be held that the CIT (A) and the Tribunal did not err in concluding that the payment of non-compete fee by the assessee was a business expenditure and not a capital expenditure." In Career Launcher India Limited (supra), the Assessee had paid a non-compete fees of Rs.6,00,000/- to its faculty members Mr. Vijay Kalyan Jha and Mr. Sujit, who had agreed not enter into a business similar to business of the assessee company upto 31.12.2005. The Assessing Officer was of the view that the payment made to them was in the nature of a capital expenditure. The Tribunal on analysis of the agreement between the parties, concluded that the period involved, during which Mr. Vijay Kalyan Jha and Mr. Sujit were not to compete with the Assessee was only a short period of 12 months and, therefore, there could be no enduring benefit enduring to the Assessee and accordingly allowed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elied upon by the learned counsel for the assessee on this issue are clearly distinguishable on facts, they are of no help to the assessee. The learned counsel for the assessee, placing emphasis on the fact that the lease executed by the Trust in favour of the assessee was determinable at any point of time contended that it cannot be said that any advantage of an enduring nature was acquired by the assessee on account of relinquishment of the right to purchase Khairwood, in Himachal Pradesh or eliminating direct competition from the Trust in sale and purchase of katha and Cutch in a specified radius. In support of his contention, the learned counsel for the assessee placed reliance upon Alembic Chemical Works (supra), Commissioner of Income Tax v. Madras Auto Services (supra) and CIT vs. HMT Limited, 203 ITR 820(Kar). However, the facts of the case before us are quite different. As noted earlier, considering the common control of the Trust and the assessee-company, coupled with the fact that the lease had lasted for about 22 years in all, and for more than 08 years after its last renewal. Hence, in the facts and circumstances of the case, that part of the increase in lease rent, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssets of „Mahesh Udoyog‟, managed by the assessee, Shankar Trading Company, filed by the learned counsel for the assessee, would show that the fixed assets which were leased to the assessee-company and were managed by it, included machinery, shed, laboratory equipments, truck, furniture & fixtures, electricity fittings, fans, cooler, typewriter, refrigerator, water geyser, scooter, car, cooling tower, generator, boiler, transformers, water pollution equipment, Photostat machine, etc. Even the liability towards gratuity of the employees of the Trust was taken over. The Trust had also relinquished its rights to purchase khairwood from the Government in favour of the assessee. This is not the case of the assessee that even after lease deed dated 18.01.1992, the Trust continued with the business of manufacture and trading of Katha and Cutch in areas beyond 1000 kilometres from the leased premises. Therefore, the business being carried by „Mahesh Udyog‟ was practically taken over by the assessee-company for an indefinite period. The lease deed also shows that the lessee had approached the Trust that it should stop commercial dealings in Katha and Cutch and in lie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member; (v) a company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the assessee; or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member; (vi) any person who carries on a business or profession,- (A) where the assessee being an individual, or any relative of such assessee, has a substantial interest in the business or profession of that person; or (B) where the assessee being a company, firm, association of persons or Hindu undivided family, or any director of such company, partner of such firm or member of the association or family, or any relative of such director, partner or member, has a substantial interest in the business or profession of that person." Explanation.-For the purposes of this sub-section, a person shall be deemed to have a substantial interest in a business or profession, if,- (a) in a case where the business or profession ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time, during the previous year, was the beneficial owner of shares carrying not less than 20% of the voting power. The Tribunal has not given any finding with respect to exact shareholding of the trustees in the assessee-company during the relevant previous years, and we have no material before us to indicate the exact shareholding of the trustees in the assessee-company during the years to which these appeals pertain. 31. Since Clause (v) of Section 40A (2) of the Income Tax Act refers to a company, firm, association of persons or Hindu Undivided Family and the Trust is not a company, firm or HUF. The only question which comes up for consideration is as to whether it is an association of persons within the meaning of clause (v) of Section 40A(2)(b) of the Income Tax Act? The term "association of persons" has not been defined in Income Tax Act, though it is mentioned in Section 2(31) of the Act which defines the expression "person" to include "an association of persons". In CIT v. Indira Balakrishna: 1960 (39) ITR 546, the Supreme Court, while considering what constitutes an "association of persons", observed that by "association" means "to join any common purpose or to join an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , neither the trustees nor the beneficiaries can be considered as having come together with the common purpose of earning income. It was observed that the beneficiaries have not set up the trust and the trustees derive their authorities under the terms of the trust deed. Therefore, neither the trustees nor the beneficiaries come together for a common purpose, they are merely in receipt of income. It was further held that the mere fact that the beneficiaries or the trustees, being representative-assessees, are more than one, cannot lead to the conclusion that they constitute "an association of persons". We, therefore, hold that since Mehta Charitable Trust is not "association of persons" within the meaning of Section 40(A)(2) of Income-tax Act, the aforesaid provision is not attracted to the transaction which is the subject-matter of these appeals. 32. For the reasons stated hereinabove we answer the questions as below: 1. That part of the enhancement of lease rent, which is attributable to Mehta Charitable Trust surrendering its right to purchase khair wood in favour of the assessee company constitutes revenue expenditure, 2. That part of the enhancement of lease rent, which is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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