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TMI Blog2002 (9) TMI 94X X X X Extracts X X X X X X X X Extracts X X X X ..... al question of law arises out of the appeal filed by the Department and the cross-objections filed by the assessee, they are heard together and disposed of by this common judgment. The main grievance of the Department is that the Tribunal, having held Rs. 45 lakhs to be the capital expenditure, could not have directed apportionment of the said amount as advance rent. Whereas, the grievance of the assessee is that the Tribunal erred in treating payment of Rs. 45 lakhs by the assessee as capital expenditure. According to the assessee, payment of Rs. 45 lakhs was a revenue expenditure under section 37 as it was paid to secure the benefit of reduced rent. In this connection, the assessee placed heavy reliance on the judgment of the Supreme Court in the case of CIT v. Madras Auto Service (P.) Ltd. [1998] 233 ITR 468. Facts: On June 30, 1970, an open plot of land bearing Plot No. 9 admeasuring 20,300 sq. meters in Kalva Industrial Area, Thane, was leased out by MIDC to a company known as APV Equipments Ltd. for a period of 95 years commencing from August 1, 1965, on payment of yearly rent of Re. 1 and in consideration of payment of Rs. 1,62,400 as premium. Under the lease, it was pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year 1991-92 admitting a loss of Rs. 2,95,750. The assessee filed a revised computation statement and claimed Rs. 72,18,588 as revenue expense being the cost of the land purchased from the official liquidator, High Court, Bombay. This claim was rejected by the Assessing Officer. The Assessing Officer found that the assessee had purchased the whole unit for Rs. 75 lakhs. That, out of Rs. 75 lakhs, Rs. 45 lakhs related to acquisition of leasehold land, Rs. 27,18,588 related to building and the balance related to machinery purchased by the assessee. The assessee contended before the Assessing Officer that Rs. 45 lakhs were paid as advance rent. That, APV Equipments Ltd. was entitled to use and occupy the property for 95 years on payment of Re. 1 per annum. That, on the expiry of the lease period of 95 years the plot with building thereon had to be surrendered to MIDC. That, the assessee had merely substituted itself in place of APV Equipments Ltd. This argument was rejected by the Assessing Officer. The Assessing Officer came to the conclusion that Rs. 45 lakhs were paid to the official liquidator for purchase of leasehold rights and, therefore, it was a capital expenditure. In the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... That, if the last paragraph of the impugned order is set aside then the Department supports the rest of the order. Mr. Desai relied upon several judgments in support of his submission that payment of Rs. 45 lakhs was capital expenditure. He submitted that the assessee had paid an amount of Rs. 75 lakhs to the Official Liquidator of APV Equipments Ltd. That, this payment was for purchase of the whole unit including right, title and interest in the leasehold property. He contended that even under the lease, the right, title and interest in the building continued to remain in the assessee after the expiry of the lease period of 95 years. At this stage, it may be mentioned that at the time of the impugned order dated July 25, 2000, the remainder period of the lease is 71 years. He further submitted that even on the expiry of the period of lease, there is a clause of renewal. That, even under the lease, the lessee has a right to seek renewal of the lease. That, under the lease, the lessee has a right to assign the leasehold rights subject to permission of MIDC. In the circumstances, it was submitted that the payment of Rs. 45 lakhs was a capital expenditure and, therefore, apportionment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vance rent for the remainder term of the lease of 71 years and, therefore, the said amount of Rs. 45 lakhs constituted advance rent and, therefore, the assessee was entitled to deduction as revenue expenditure. Mr. Joshi further pointed out that this assessee paid to APV Equipments Ltd. a total amount of Rs. 75 lakhs. However, the said amount of Rs. 75 lakhs was bifurcated into three parts, viz., for plant and machinery for which the assessee paid Rs. 2,81,412 lakhs; Rs. 27,18,588 were paid for the building and Rs. 45 lakhs were paid for acquisition of leasehold rights. He contended that, before the Department, this assessee had conceded that payment of Rs. 27,18,588 and payment of Rs. 2,81,412 were for purchase of machinery and building and, therefore, these two payments constituted investment in capital assets. Mr. Joshi contended that, in fact, in respect of plant and machinery and building the Department has allowed depreciation and, therefore, in this case, we are only concerned with the nature, character and purport of the payment of Rs. 45 lakhs for purchase of leasehold rights. He contended that no reasonable person could have got this huge land admeasuring 20,300 sq. meter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... That, this assessee had bought the unit from the Official Liquidator and not from MIDC. That, only MIDC could have insisted on payment of premium. He, therefore, contended that Rs. 45 lakhs did not constitute premium. Findings: As stated hereinabove, the Tribunal has come to the conclusion vide impugned order that the payment of Rs. 45 lakhs was for purchase of the whole unit and, therefore, it was a capital expenditure. However, in the last paragraph, without giving any reasons, the Tribunal opined that for benefit of proportionate amount relatable to each year, the rate of Rs. 63,380 per annum may be allowed as deduction to the assessee for 71 years since the benefit would get exhausted over the said period. The Department has filed this appeal only against this last paragraph of the judgment. We find merit in this appeal filed by the Department. Having come to the conclusion that the payment of Rs. 45 lakhs was a capital expenditure, one fails to understand the basis on which the Tribunal has directed the Department to apportion the amount relatable to each year. This direction could have been given only if the Tribunal had come to the conclusion that the payment of Rs. 45 l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eady in existence, the land as well as the building, including plant and machinery. That was not so when APV Equipments Ltd. entered into lease for open land with MIDC as far back as June 30, 1970. The original lessee, APV Equipments Ltd., paid the premium amount of Rs. 1,62,400. However, this assessee has paid Rs. 75 lakhs including Rs. 45 lakhs for the whole unit. Therefore, the Department is right in saying that the payment of Rs. 45 lakhs constituted capital expenditure. It has been vehemently argued on behalf of the assessee that on the facts and circumstances of the case, payment of Rs. 45 lakhs was not by way of premium and, therefore, it should be treated as revenue expenditure. However, the Tribunal has nowhere stated that the payment of Rs. 45 lakhs was on account of premium. It is true that the Assessing Officer has treated the payments of Rs. 2,81,412 and Rs. 27,18,588 as investments in capital assets for purposes of depreciation. However, that was as per the assessee's own admission. As stated above, in such cases, allocation by the assessee in its books is not conclusive. We have to go by the substance of the transaction. The Tribunal came to the conclusion that, in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the land. The assessee claimed the expenditure as capital loss. In the alternative, the assessee claimed deduction for the payments as business expenditure or as extra rent for the lease. The Tribunal held that the expenditure of the aforestated amounts was for the construction of a new building and, therefore, it was in the nature of business expenditure for proper carrying on of the business of the assessee. Therefore, the Tribunal treated these amounts as revenue expenditure. Being aggrieved, the Department carried the matter to the Supreme Court in appeal. On the facts, the Supreme Court found that by payment of the aforestated amounts, no capital asset was brought into existence. That, the new construction continued to belong to the lessor. That, the new construction did not belong to the assessee. That, even on the expiry of the lease, the new construction was to remain with the lessor and not with the assessee. That, the assessee, in that case, had no right, title and interest in the new construction. That, the expense was incurred by the assessee for the purposes of conducting the business profitably. That, in that case, the assessee got the business advantage of using mode ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re occupied by the assessee as a tenant and such assessee is required to pay rent. Such rent would be revenue expense. Similarly, if such assessee undertakes to incur cost of repairs to the premises, then such assessee would be entitled to deduction because the expense for the repair would be a revenue expenditure. Therefore, we have to read the judgment of the Supreme Court in the light of section 30 of the Income-tax Act. In that matter, the assessee had to incur expense to repair/reconstruct the existing structure. He incurred the expenditure which was in the nature of revenue expenditure and consequently he got the benefit of reduced rent. Therefore, the Supreme Court has held that the payment of reduced rent was a substitute for revenue expenditure. Therefore, the judgment of the Supreme Court has no application to the facts of our case. Therefore, there is no merit in the cross-objections. Accordingly we hold as follows: (a) That payment of Rs. 45 lakhs by the assessee was a capital expenditure and, therefore, the Tribunal erred in directing the Department to apportion/spread over the said amount for 71 years on proportionate basis, relatable to each year at the rate of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X
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