1970 (2) TMI 42 - HC - Income Tax

Assessee-respondent-company obtained a lease of a piece of land - tenant of land constructed building on the leased land - tenant surrendered the building with land to the lessor - held that value of building should be treated as capital receipt in the hands of the lessor

Summary

Issues:
Interpretation of lease agreement for land use and building construction, determination of whether the value of a building acquired by the assessee-company constitutes revenue or capital receipt.

Analysis:
The case involved the assessee-respondent-company obtaining a lease of land and leasing out a portion for a weaving mill to construct a building. The consideration for the lease included the expenses for building construction and the payment of rent. The tenant-weaving mill agreed to construct a building on the land and keep it in good condition, with the option for a further lease period. The lease agreement also specified the return of the building to the assessee-company at the end of the lease term.

The main issue was whether the value of the building acquired by the assessee-company upon the expiration of the lease constituted revenue or capital receipt. The revenue authorities contended that the value of the building should be treated as revenue receipt, considering it as deferred rent or a payment related to the lease agreement. However, the Tribunal held that the acquisition of the building was not a revenue receipt but a capital asset.

The court analyzed the lease agreement and the circumstances of the case. It noted that the business of the assessee-company was dye works, not dealing in immovable properties. The rent specified in the lease was not shown to be reduced rent, and there was no evidence of any premium paid for the lease. The court also highlighted that the tenant-weaving mill had exceeded the minimum construction cost specified in the lease, indicating the building's value was not merely related to rent payment.

Ultimately, the court found that there was no evidence to support the revenue's contention that the building's value constituted deferred rent or a premium related to the lease. The court concluded that the value of the building acquired by the assessee-company was not a revenue receipt but a capital asset, in line with the Tribunal's findings.

In conclusion, the court upheld the Tribunal's decision, ruling that the value of the building acquired by the assessee-company was a capital receipt and not subject to inclusion in the total income as revenue. The court directed the applicant to pay the costs of the respondent, concluding the judgment on the issue of revenue versus capital receipt in the context of the lease agreement and building acquisition.