TMI Blog1962 (7) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... elates to two classes of money paid: (1) the lease money; and (2) the rent. It may be stated that in the fifteen leases which are under consideration in these cases a certain sum of money was paid by the assessee in a lump sum at the time of the execution of the lease, and this has been described in the question as lease money. Another sum of money was payable by the assessee year after year and this has been described in the question as rent . In the second and the third references the questions referred are stated respectively as follows: Whether, on the facts and in the circumstances of the case, part of the initial lease amount paid by the applicant to its lessors and adjusted during the year in question, is a permissible deduction within the meaning of clause (xv) of sub-section (2) of section 10 of the Income-tax Act? and Whether, on the facts and circumstances of the case, the sum of ₹ 1,215 and ₹ 1,630 representing the lease amounts paid in the assessment years 1954-55 and 1955-56 by the applicant to its lessors are permissible deductions within the meaning of clause (xv) of sub-section (2) of section 10 of the Income-tax Act? Whether the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ks and set up an engine for manufacture of lime, surkhi, build a workshop, use the land in any manner they wish and transfer their rights under the lease. 3,760 150-6-0 2. Mst. Raj Dulari 24-4-46 10 yrs do. 12,760 508-6-0 3. Sarswati Pd. 10-10-46 Dig earth up to a specified depth of 10 ft., construct wells pucca and katcha. Construct buildings without foundation for the residence of employees, construct roads, construct kilns, manufacture tiles, and set up an engine for manufacture of lime, build a workshop, use the land in any manner they wish and transfer their rights under the lease. 6,400 40-6-0 4. Ashrafali 25-2-41 5 yrs. Construct katcha and pucca wells, roads, kilns, houses for employees and labourers, stock bricks and tiles, dig earth up to a depth of 12 ft., cultivate the land and sublet it. 1,170 47-12-0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -0-0 It will appear from the aforesaid table that leases at Nos. 12, 13, 14 and 15 do not refer to the extraction of any clay from the land. It appears from those lease deeds that what was given to the assessee was a right to construct roads, possible approach to the other neighboring plots taken on lease by the assessee. In leases at Nos. 10 and 11, there ?as no contract between the lessor and the assessee about the annual payments by way of lease money nor was there any contract about the depth up to which clay could be extracted from the land. Those documents also show that there was a contract between the assessee and the lessors whereby the assessee could construct thatched sheds, dig wells, or construct kilns and use the land for any purpose it might choose. Lease deeds at Nos. 1 to 9 show that the assessee could dig earth up to a particular depth. Those documents further show that the assessee could construct wells, buildings for the residence of employees, and also construct roads and kilns. Under those contracts, the assessee could also set up an engine for the manufacture of lime and use the land in any other manner which the assessee liked. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an interest in the land and the payments made by it to the lessors were not the purchase price of raw material as claimed by the assessee but was an item of expenditure of a capital nature. It will be noticed that neither the assessee nor any of the authorities below made any distinction between the two classes of payments, the lump sum payments initially made by the lessee at the time of the execution of the lease and the annual payments made or to be made by it for the duration of the lease. In the assessment year 1953-54 which is under consideration in the second reference the Income-tax Officer disallowed both classes of payments on the ground that the entries made in respect thereof were merely adjustment entries and the payments was not of a revenue nature. In appeal the Appellate Assistant Commissioner also disallowed the expenditure of both the classes following the view of the Income-tax Appellate Tribunal in the appeals relating to the earlier assessment years that the interest acquired by the assessee was an interest in the land itself and the amount paid by it was not merely the purchase price of raw material and as such confirmed the disallowance by the Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the Lahore High Court referred to above, namely, Benarsidas Jagannath's case [1947] 15 I.T.R. 185 (F.B.). I am in respectful agreement with the view taken in that case in regard to this matter. At page 203 of the ruling the Lahore Full Bench observed as follows: I would like to observe that in deciding a border line case like this it is relevant to consider how a tradesman in this business treats such an expense in his accounts. If I may say so with respect the observation is very proper in judging of the nature of an expenditure to which one cannot apply an empirical or subjective standard. The expenditure has to be judged from the point of view of a businessman and it is relevant to consider how a businessman himself treats a particular item of expenditure, whether as revenue expenditure or as capital expenditure. The nature of an expenditure whether revenue or capital is in the ultimate analysis a question of fact. Before an assessee can ask the High Court to consider the quality of an expenditure he should raise that question at least before the final fact finding authority, viz., the Tribunal, and obtain the finding of that authority on that point. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e findings recorded by the Income-tax Appellate Tribunal and the materials in support of those findings including the nature and effect of the lease deeds and the proper construction thereof it may be stated that the description by a party of the nature of the transaction in the document under consideration is not conclusive. The description given by a party to a transaction may be inaccurate or may have been influenced by the desire to disguise the transaction. It is for the court in every case upon a consideration of the entire document to pronounce upon its real nature. I may refer to an observation by Lawrence J. in Stratford v. Mole Lee and Old Silkstone Colleries Ltd. v. Marsh [1941] 24 Tax Cas. 20, 34. Referring to the argument of Mr. Grant, counsel in that case, that it was obvious from the very words used that the intention of the party was to make a sale of goods and not to create a profit a prendre or any other interest in land , Lawrence J. observed: As to that, although it may be possible for parties to effect that purpose by the terms of the contract into which they enter, it depends upon what they really want to do and what they really intend to do, not only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly key to resolve the issue in the light of the general principles, which are followed in such cases. The nature of the business of the assessee-company in this case is the business of the manufacture and sale of tiles and bricks, lime and surkhi. From a perusal of the fifteen leases which are part of the paper book it is also clear that the modus operandi of the assessee is to erect kilns for burning tiles and bricks, to set up engines for the manufacture of lime and surkhi and to build workshops for these purposes on plots of land taken on lease in the usual course of its business. It is also necessary for it for carrying on its business to construct roads for purposes of transport and temporary structures to house its employees and workmen and to dig katchha and pucca wells to supply it with water for its manufacturing processes and for its employees and workmen. The nature of its expenditure over the leases with which alone we are concerned is that the expenditure is incurred over leases of plots of lands for periods extending up to 15 years. In the case of the first nine leases, except in the case of one lease where the period is five years, the period of the others i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to enjoy the property by a particular name cannot alter the nature of the payment. It may be merely a device to describe the lump sum payment as a price to disguise the real nature of the acquisition as the purchase of the stock-intrade and not as the acquisition of an asset of an enduring nature. Here the lump sum payment was for the entire area. If the earth of the entire area up to a certain depth was bought, what for was the annual payment made? The annual payment was not illusory. Substantial interest in the land had been acquired. It is clear that the description of the lump sum payment as price of the earth alone was illusory and a disguise. This leads to the consideration of the nature of the rights acquired by the assessee under the leases. Under the first eleven leases there was no substantial difference between the nature of the rights acquired. The rights were to dig earth, to erect brick kilns for manufacturing tiles and bricks, to set up engines for the manufacture of lime and surkhi, to build workshops, to construct roads, katchha and pucca wells, to put up temporary structures for the residence of employees and workmen. Besides these rights which were specifical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Benarsidas Jagannath [1947] 15 I.T.R. 185 (F.B.), 2. Mohanlal Hargovind v. Commissioner of Income-tax [1949] 17 I.T.R. 473 (P.C.), 3. Abdul Kayoom v. Commissioner of Income-tax [1953] 24 I.T.R. 116 (the Full Bench case of the Madras High Court in Abdul Kayoom and Hussain Sahib v. Commissioner of Income-tax [1953] 24 I.T.R. 116 has been reversed by the Supreme Court in Abdul Kayoom v. Commissioner of Income- tax [1962] 44 I.T.R. 689 (S.C.)) and 4. Stow Bardolph Gravel Co. v. Poole [1955] 27 I.T.R. 146 (C.A.) and at page 74 he observed (re. the case of Benarsidas Jagannath [1947] 15 I.T.R. 185 (F.B.)). It is worthy of note that this decision was approved by this court in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax [1955] 27 I.T.R. 34 (S.C.) and again at page 75 referring to the observations of Bhagwati J. at page 45 of the report of Assam Bengal Cement Co's case [1955] 27 I.T.R. 34; [1955] 1 S.C.R. 972 he observed as follows: I do not read these observations as merely indicating an approval of certain general principles but not necessarily an approval of the actual decision in Benarsidas Jagannath [1947] 15 I.T.R. 185 (F.B.). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain leases for digging out earth for his manufacture. Under the deeds which gave him this right, he could dig up to a depth of 3 ft. to 3? ft. He had no interest in the land, and as soon as the earth was removed his right was at an end. The learned judge also observed at page 87 that the contracts in the case before them were long term contracts, implying thereby that it may be different where the term of the contracts is a short one as in the case of Benarsidas Jagannath [1947] 15 I.T.R. 185 (F.B.) and even though the term may not be a determinative factor it was a relevant factor. From these observations it appears to be clear that even though not expressed in so many words the majority view of the Supreme Court was not an approval of the actual decision in Benarsidas Jagannath's case [1947] 15 I.T.R. 185 (F.B.). Assuming, however, that the Supreme Court did not overrule the case of Benarsidas Jagannath let us examine the facts of that particular case to see how far it can be of assistance to the learned counsel in this case. There were several leases of lands containing brick earth in that case. Two of these leases on the special terms of which the decision turn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he leases in our case confer substantial rights in the land. The main purpose of the leases is not merely to provide the lessee with earth which is the raw material for his manufacturing business but of providing him with an interest in land for setting up brick kilns, engines, work-shops and residences for carrying on his manufacturing business. In other words the leases provide him with an asset of an enduring nature. Here we have a transfer of property in a real sense and not merely as being incidental to the right of digging the earth. The rights extend also to using the land in any other way that it may choose to use it and even to cultivate the land. It has also acquired the right of subletting the land. In the absence of demarcation of the area for digging from the area for other uses the mere specification of depth did not result in quantification of the earth to be dug. In Benarsidas case [1947] 15 I.T.R. 185 (F.B.) itself a distinction was drawn between leases exhibits TG and TH and lease exhibit TD. With regard to that lease, the learned judge observed at page 204 of the report as follows: The other agreement, exhibit TD, however, is of a different character. It ..... X X X X Extracts X X X X X X X X Extracts X X X X
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