TMI Blog2012 (7) TMI 282X X X X Extracts X X X X X X X X Extracts X X X X ..... d modernization of plant and machinery carried out by the Trust - enhancement of lease rental from Rs.1 lac p.m. to Rs.6,70,000/- p.m., to the extent it is attributable to the expenditure incurred by the trust in the year 1989-90 on modernization and improvement of the plant and machinery which the lessee had taken on lease, would be a revenue expenditure, since it would have the effect of enhancing the lease rent of the plant and machinery in the open market Enhancement in lease rent attributable to normal appreciation in line with the lease rentals prevailing in the market - 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. Thus it would be for the AO to determine whether there was any such appreciation in lease rentals, and if so, to what extent. Payment of non-compete fees - Increase in lease rent relatable to elimination of competition from the Trust constitutes capital expenditure as the Trust had leased whole of its production unit which was a prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ust. 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 by the assessee Company and not for a business consideration and therefore was not allowable. The Income Tax Appellate Tribunal (hereinafter referred to as the Tribunal ) vide its order dated 16.2.1999 upheld the order of CIT (Appeals) and held that the enhanced lease rent amounting to Rs.17,25,000/- for the period from January to March, 1992 was a capital expenditure and therefore not allowable as a deductible expenditure. ITA No. 53/2000 has been filed by the assessee company, challenging the order of the Tribunal in respect of the Assessment Year (AY) 1992-93. The following question of l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 and other evidence available on record. ITA No. 223/2002 has been filed by the Assessee, whereas ITA No. 247/2002 has been filed by the Revenue challenging the order of the Tribunal dated 25.2.2002 in respect of the Assessment Years 1994-95, 1995-96 and 1996-97. The following questions of law were framed by this Court in ITA No. 223/2002 and ITA No. 247/2002 on 11.12.2002: Whether 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 revenue expenditure? 6. Vide its order dated 28.9.2007, passed in respect of Assessment Year 2000-01 and 2001-02, the Tribunal deleted the entire disallowance. ITA No. 361/2008 and 482/2008 have been filed by the Revenue against orders for AY 2000-01 and 2001-02 respectively. The following question of law was framed by this Court in these cases on 20.3.2009/25.9.2008. Whether on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the expenditure of Rs.99,22,500/- per month paid by the assessee to M/s Mehta Charitable Prajnalaya Trust in te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estions 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 case, the ITAT is correct in law in not 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 Trust? 11. The following three issues arise for our consideration in these appeals:- (i) whether the lease rent of Rs 6,75,000/- per month paid by the assessee to the Trust was a capital expenditure or revenue expenditure or partly capital and partly revenue expenditure; (ii) whether the payment made by the assessee to the Trust or part of it comes within the purview of Section 40-A(2) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 in this case would be a revenue expenditure and not a capital expenditure, as the ownership of the property as well as the plant and machinery continued to vest in the trust and in any case the lease granted to the assessee company was neither a perpetual lease nor a lease for such a long term as would bring it at par with a perpetual lease. 15. There can be no dispute that enhancement of lease rental from Rs.1 lac p.m. to Rs.6,70,000/- p.m., to the extent it is attributable to the expenditure incurred by the trust in the year 1989-90 on modernization and improvement of the plant and machinery ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 vexed question of fact and law which has baffled the Courts to such an extent that even a toss has been suggested, to decide whether an expenditure is a capital expenditure or a revenue expenditure. Though broad parameters for distinguishing capital expenditure from the revenue expenditure have been laid down from time to time, no uniform test which would provide an appropriate answer in all the cases in which such a question comes up for consideration of the Court, however, has been possible. The Courts, therefore, are required to apply the broad tests laid down in various judicial pronounceme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 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 advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. The Court also referred to the following observa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 increasing its profit. Therefore, it cannot be said that by obtaining relinquishment of the right to purchase Khair wood, the assessee had acquired the source of raw material itself. It only got a right to participate in the process of purchase of Khair wood from the Government in the State of Himachal Pradesh, which facilitated acquisition of raw material by it. In Empire Jute Mills (supra), the Supreme Court, while culling out the distinction between revenue expenditure and capital expenditure, inter alia, held as under:- Take a case where acquisition of raw material is regulated by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the area of the forests from which tendu leaves could be plucked were limited by the Schedule but the assessee was granted no interest in the land or in the trees or plants. It was the tendu leaves and nothing but the tendu leaves that were acquired. In the case before us, the Turst did not have any right either in the land on which khair wood trees had grown nor did it have any right in specified khair wood trees. The limited right which the assessee acquired under the lease was the right to purchase khair wood trees from the Government in the State of Himachal Pradesh. The central portio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en 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 to acquire exclusive right to fish for chanks by employing drivers and nets. The business then changed to something different. The sale was now of the product of another business, in which divers and equipment were first employed to get the shells. It thus took leases of extensive coastline with all the right to fish for chanks for some years. The shells were not the subject of the bargain at all, as were tree tendu leaves; but the bargain was about the right to fish. There can be no doubt that what it paid the divers when it bought chanks from them with the view of reselling them was e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere 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 direct competition was prejudicial to the interest of both the parties and therefore ought to be avoided. Admittedly, it is the trustees of the Trust and their family members who owned and controlled the assessee company. Shri Bishan Dass and Shri Raj Kumar, who were the directors and shareholders of the assessee company, were also the trustees of the Trust. Three out of five directors of the assessee company were the sons of the trustees. Bulk of the shares of the assessee Company were admittedly held by the trustees and their family members. Considering the fact that the Trust as we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 within the area, it was a protection acquired by the company for its business as a whole. The Court observed that the expenditure was not a part of the working of the business but went to appreciate the whole of the capital asset and make it more profit yielding. As regards payment of protection fee of Rs.35,000/- per year, for a period of 05 years, the court was of the view that though the payment was limited to five years, the advantage which the company got as a result of the payment was to endure for its benefit for the whole of the period of the lease unless determined in the manner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osition 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 shorts and not to compete with the assessee in the business of exhibition of advertisements in four southern States for a period of 9 years in consideration of the assessee paying a sum of Rs. 1,50,000. Relying upon the decision of the Supreme Court in Coal Shipments P. Ltd. (supra), it was held that since the assessee had not only warded of the business rivalry but also acquired the business of the rival for a period of 9 years in a specified area, it had not only derived an advantage by eliminating the competition but also acquired the business which actually generates income. It was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 payment made to ward off competition in business to a rival dealer would constitute capital expenditure if the object of making that payment is to derive an advantage by eliminating the competition over some length of time, the same result would not follow if there is no certainty of the duration of the advantage and the same can be put to an end at any time. How long the period of contemplated advantage should be in order to constitute enduring benefit would depend upon the circumstances and the facts of each individual case. However, in the case before us, despite the termination clause c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 payment as Revenue Expenditure. Another reason given by the Tribunal in this regard was that the non-compete fees was to be paid in equal installments over a period of time, Mr. Vijay Kalya Jha was to be paid in 10 equal monthly installments whereas Mr. Sujit was to be paid in 05 equal monthly installments. Rejecting the appeal filed by the Revenue, this Court held that in coming to the decision holding the payments to be a revenue expenditure, the Tribunal had not ignored any relevant material or taken into account irrelevant material. In Sawpipes Limited (supra), the assessee had spent about ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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, which is attributable to elimination of competition from the Trust, cannot be said to be revenue expenditure. 26. The learned Counsel for the assessee has also referred to CIT v. HMT Ltd. 203 ITR 820 (Kar), CIT v. Lahoty Bros. 19 ITR 425 (Cal), CIT v. Nchanga Consolidated Copper Mines Ltd.: 58 ITR 241 (Privy Council), V.Damodaran v. CIT Kerala 64 ITR 26(Ker.), Champion Engineering Works Ltd. v. CIT (1971) 81 ITR 273 (Bom), CIT v. Bowrisankara Stemp Ferry Co. (1973) 87 ITR 650 (AP), CIT v. Late G.D.Naidu and Ors. (1987) 165 ITR 63 (Mad), DCIT v. McDowell Co. Ltd. 291 ITR 107 (Kar.), CIT v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ished 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 lieu thereof it had agreed to compensate the Trust for the loss that would be caused to it by stopping such commercial dealings. Therefore, this was a case of takeover of the business, coupled with elimination of competition from the rival. It is also evident from a perusal of the lease deed dated 18.01.1992 that the previous lease deed executed between the parties was repealed simultaneous with the execution of the new lease deed on 18.01.1992. Therefore, technically speaking in this case, acquisition of assets of the trust and elimination of competition from the Trust took place simultaneously. In fact, the w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 is carried on by a company, such person is, at any time during the previous year, the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) carrying not less than twenty per cent of the voting power; and (b) in any other case, such person is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the profits of such business or profession. 29. The objective behind Section 40-A of the Act is to address evasion of tax under the cloak or guise of permissible deductions by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 action . Therefore, association of persons would mean an association in which two or more persons join with a common purpose or for a common action. Though in view of the explanation inserted by Finance Act, 2002 w.e.f. 1.4.2002 to Section 2(31) such association need not be formed with the object of deriving income profit or gains, it is difficult to say that either the trustees or beneficiaries of a trust come altogether and form an association for a common purpose or to take a common action. As observed by a Division of this Court in CIT v. Sae Head Office Monthly Paid Employees Welfare Trust (2004) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, 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 attributable to improvement and modernization of plant and machinery carried out by the Trust in the year 1989-90, constitutes revenue expenditure. 3. The enhancement in lease rent, if any, which is attributable to normal appreciation, if any, in line with the lease rentals prevailing in the market constitutes revenue expenditure. 4. The enhancement in lease rent, which is attributable to Mehta Charitable Trust agreeing not to indulge in competition with the assessee within a radius less than 1000 kms from the demises property, constitutes capital expenditure. 5. Since, the trust is not an associati ..... X X X X Extracts X X X X X X X X Extracts X X X X
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