TMI Blog1976 (4) TMI 109X X X X Extracts X X X X X X X X Extracts X X X X ..... ion and enjoyment of the same for 39 years without any hindrance or interruption whatsoever subject to the following terms and conditions. 1. The Lessee shall have the right to demolish at their own expenses the existing premises and appropriate to themselves all the materials thereof without paying the Lessors any compensation therefor and utilise them for any purpose they think fit and construct a new building thereon to suit the purpose of their business as per Plan approved by the lessors. The Lessee undertake to render all help to apply get the plan approved by the Corporation or other authorities concerned. 2. The Lessee shall pay a rent of Rs. 1,000 (Rupees one thousand only) per month by the 10th of the succeeding month for the first fifteen years and Rs. 1,500 (Rupees one thousand five hundred only) per month for the next ten years from the sixteenth year onwards, and Rs. 1,650(Rupees one thousand six hundred and fifty only) per month for the next ten years from the 26th year and Rs. 2,000 (Rupees two thousands only) per month for the last years of this lease period and shall pay three month s rent namely Rs. 3,000 (Rupees three thousand only as advance deposit to be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ground that there was nothing to show that the payment was by way of advance rent or any other business expenditure. 3. The AAC, on the contrary, held that the payment could not be regarded as advance rent. The deed stipulated varying rates of monthly rent for particular periods of lease. In so far as neither the assessee nor the lessor knew the expected investment in the building, the claim of advance rent based on a notional investment could not, according to the AAC, be accepted, nor could this amount be treated as business expenditure relating to the year. According to the AAC the amounts represented nothing but consideration money for obtaining the right to use the building through payment of a reduced rent for the assessee s business purposes. This constituted a capital asset. The amount expended for securing the right would be only capital expenditure. 4. Before us the learned counsel for the assessee has pointed out that the assessee is entitled to a deduction of the entire amount during these two years under appeal by way of an expenditure properly incurred for the business. In explanation of this, it is pointed out that under the agreement the assessee has to pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the lessor it was never a property of the lessee. No depreciation could be claimed. On the contrary, the matter under the agreement are so arranged that at no time any right accrued to the lessee in the property constructed. There could not thus be any transfer of property resulting in capital gain or capital loss either. There was nothing to show that the payment should be regarded as payment of advance in rent. Apart from the fact that even the nature of the construction could not be anticipated at the time of the lease the assessee could not have claimed the advance rent except in a symbolic way. Such notional rent can never be deducted under the IT Act. 7. We have considered the facts of the case. The principal controversy which arises is as to whether the assessee is the owner of any property, has transferred it for any consideration or for no consideration, is entitled to depreciation or in the alternative has correctly claimed having paid advance rent for several years. The preamble to the registered lease deed dt. 1 Feb., 1966 provides that the lessors grant the lease of the premises to the assessee for a period of 39 years commencing from 1st Jan., 1966 allowing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e continuance of the lease but at the time of vacating and giving vacant possession of the premises on the termination of the lease, such fixtures etc. are to be left in tact for the benefit of the lessor. cl. (4) and (5) thus deal with two independent items, the first with the building constructed and the second with fixtures etc. attached to that building subsequently. There is a stipulation in cl. (7) that the new building is to be completed and made fit for occupation within a period of 18 months from that date. 8. A reading of the lease deed thus makes clear the following. 9. The lease is for a period of 39 years and progressively increasing rents are to be paid for this period as per cl. (2). 10. The lessee is to construct a building and make it fit for occupation with in period of 18 months. It is not stated as to what would happen if the building is not constructed: the question is whether the lessee could continue to use the land without constructing a building. In view of the specific provisions of cl. (7) this possibly cannot be done. In other words, within the period of 18 months specified the building has to be completed; otherwise a vital condition of the agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re is nothing to show that the assessee did not get adequate consideration for the transfer of the movable property in so far as it has got the right to reside therein for the entire period of 39 years covered by the lease. Even if there is a transfer, therefore, of the movable properties, namely, the components of the building there cannot be any capital loss. This argument of the assessee s learned counsel has to be rejected. 13. In view of the position as above, specially cl. (4) of the deed, what the assessee has done is to go on investing in a building on the land belonging to the lessor. The building automatically, as and when every brick is placed towards its construction, passes on to the lessor. The real nature of the transaction, therefore, would be that the assessee has advanced amounts of Rs. 1,62,835 and Rs. 50,937 with which a building has been acquired by the lessor. In other words, the assessee only advanced the money. The construction that he did must be regarded as having been done for and on behalf of the lessor. This being so, the assessee has neither any interest in the building nor has at any time been an owner of the building. The only right is to continue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the asset which admittedly belonged to him. In other words, no provision of law has been cited to show that wherever an assessee owns an asset that asset should be absolutely unconnected and clearly detachable from all other things in order to be eligible for depreciation. If, therefore, an assessee has spent amounts on a building belonging to another or on land belonging to another and the building would entitle the owner of the land to allow depreciation on the additions had he himself made them, we cannot deny depreciation to the assessee on these additions. If, therefore, the building on the lease land could be shown to belong to the assessee, depreciation has to be granted. We have, however, found above in view of the specific provisions of the deed that the building does not belong to the assessee. The assessee s claim for depreciation, therefore, cannot be allowed. 15. Thus we find that the assessee is not entitled to depreciation on the building; it is not entitled to claim capital loss on the same. The question is whether the payment could be regarded as advance rent for the building and if so a proportionate part of it for each year or the entire amount in one year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee from the liability to make an annual revenue payment is revenue expenditure. Thus, a sum paid by an assessee to free himself from a disadvantageous agency agreement, or a sum paid to an employee in computation of an annual pension, is revenue expenditure, because it frees the assessee from the liability to make annual revenue payments." 17. The Supreme Court, after consideration of the tests laid down in various cases to determine the nature of the expenditure, summarised the principles in Assam Bengal Cement Co. vs. CIT.(4) as under: "In cases where the expenditure is made for the initial outlay or for extension of a business or a substantial replacement of the equipment, there is no doubt that it is capital expenditure. A capital asset of the business is either acquired or extended or substantially replaced and that outlay whatever be its source whether it is drawn from the capital or the income of the concern, is certainly in the nature of capital expenditure. The question however arises for consideration where expenditure is incurred while the business is going on and is not incurred either from extension of the business or for the substantial replacement of its equipme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the Court" have been laid down: "(i) If the expenditure is for the initial outlay or for acquiring or bringing into existence an asset or advantage of an enduring benefit to the business that is being carried on, or for extension of the business that is going on, or for a substantial replacement of an existing business asset, it would be capital expenditure." If, on other hand, the expenditure though for the purpose of acquiring asset or advantage, is for running of the business or for working out that asset with a view to produce profit, it would be revenue expenditure. the outgoing is so related to the carrying on or the conduct of the business that it may be regarded as an integral part of the profit earning process or operations, and not for the acquisition of an asset of a particular character, the possession of which is a condition precedent for the running of the business, then it would be expenditure of a revenue nature. (4) Special knowledge, or technical knowledge, or a patent, or a trade mark, is an asset and if it is acquired for payment for use and exploitation for a limited period and what is acquired is not an asset or advantage of an enduring nature and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e an expenditure wholly and exclusively for the purposes of the business of the assessee company it was held to be capital expenditure. In Uttar Bharat Exchange Ltd. vs. CIT(7) the assessee took on lease the first and second floors of a hotel building for a period of two years. The expenses incurred by him for erecting shades, partitions and other temporary structures for carrying on his exchange business were held to be capital in nature even though the lease was only for a short period. The payment was also not held to be an addition to the rent payable. In Taj Mahal Hotel vs. CIT(8) likewise, a sum of Rs. 60,000 spent for putting up new rooms in a hotel building taken on lease was held to be of enduring advantage and not deductible. It was neither rent nor premium. In Orissa Road Transport Co. Ltd. vs. CIT(9) the compensation paid by the assessee, a road transport company, to private concerns whose routes were taken over by the assessee was held to be of capital nature, the assessee company having acquired the unexpired portion of the permits of those private concerns and thereby having got rid of competition from them. 20. As against these, there are other cases where amounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice or the hire paid typewriting machine. It is an outgoing means of which the company procure use of thing by which it makes a deducted from the receipts, to ascertain the taxable profits and gains which the company earns. Were it otherwise they might be taxed on assumed profit when in fact, they made a loan." The Lordships observed that, "where there was express prohibition, an outgoing means of which an assessee procuring use of a thing by which it makes is deductible form the receipts business to ascertain taxable On the facts of this case, the secured by the loan was the thing for use of which this expenditure made". They also held (see page 62 of the report under: "We are unable to agree that a obtained can be treated as an advantage for the enduring benefits the business of the assessee. A loan liability and has to be repaid and, opinion, it is erroneous to liability as an asset or an within the test laid down by Cave and approved and applied Court in many cases." Summarising the position their Lordships held: "We are of the opinion that : (a) the loan obtained is not an asset or advantage of an enduring nature; (b) that the expenditure was made for securing the use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to leave the premises, it may be that he can sublet the property and get an income but not use the premises for his business. The use of the property for his business. The use of the property for his business, therefore, may not be for any period, much less a period as long as 39 years. Even here the decision in India Cement s case helps the assessee, Secondly, what the assessee has done is to part with the two sums of Rs. 1,62,835/- and Rs. 50,937/- He cannot recover the same. He can at best be a tenant in the premises whether it does him good or bad. such a possession cannot be said to be an advantage of an enduring nature to the business of the assessee. Also in Anglo-Persian Oil. Company s case the expression "enduring" has been said not to connote a benefit that endures in the sense that for a good number of years it relieves the assessee of a revenue payment. In the present case, if the assessee continues to stay in the premises, he may not have to pay any rent for the same. If a monthly or annual rent is paid that will be clearly a Revenue expenditure. The sum paid under clause (2) of the lease deed cannot be said to be a rent paid for the premises with a floor area of nea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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