TMI Blog1966 (11) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... derabad with its head office at Secunderabad. . In respect of a building at Secunderabad, the assessee entered into a lease agreement with one Sheik Ahmed on 1st February, 1949, for a period of five years. Even after the expiry of the said lease, a fresh agreement was entered into between the parties on 4th August, 1956, by virtue of which the assessee was to continue as tenant for a term of ten years with an option to him to extend the lease by a period of another ten years, on payment of a monthly rent of Rs. 1,300 during the first five years and Rs. 1,400 thereafter. The lease, inter alia, gave liberty to the assessee to make alterations and new constructions which they may deem necessary for their business with the express permission of the lessor. In the accounting year the assessee made certain extensions to the demised building by putting up new rooms on the terrace and providing additional accommodation for the guests. During that year the assessee earned a net income of Rs. 1,22,604 and claimed deduction under two heads : Rs. 57,492 as renovation and repairs, and Rs. 21,590 on account of painting and repairs, making a total of Rs. 79,082. The Income-tax Officer disallowe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement where there is one, or other proved facts. The expression " capital expenditure " is not defined in the Act and the words " in the nature of capital expenditure " occurring in section 10(2)(xv) make the meaning of the expression more elastic in its application to the facts of each case. The expression must be construed in a business sense save in so far as there may be rules of construction applicable to it. For determining whether an expenditure is of a capital or revenue nature it is immaterial whether the expenditure is made out of moneys withdrawn from the capital or out of its profits. One should consider the nature of the concern, the ordinary course of business usually adopted in that concern, and the object with which an expense is incurred. As observed by the House of Lords in Duke of Westminster v. Commissioners of Inland Revenue cited in Bank of Chettinad v. Commissioner of Income-tax, the court cannot ignore the legal position represented by the form of the transaction and regard " the substance of the matter " in tax cases. If the transaction takes the form of a contract or other deed, it depends upon the construction of the terms of the deed whether paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time give a reasonable return on the money that it has invested, is, I think, immaterial. The question is : can you under this document spell out any obligation on the part of the Board to make a capital payment to the Racecourse Company ? I think it is clear, as I have said, not only from the declaration, but also from the method in which the annual payment is calculated, viz., 12 1/2 per cent. on cost, that the payment is of such an amount as to recoup to the Racecourse Company its expenditure on the building. But I do not think that that is a matter which touches the issue to be determined here. In my view, the annual sum paid by the Board must be treated for the purpose of ascertaining its liability to income-tax as a revenue payment. It is not necessary for me to review all the cases which have been cited, but with regard to Boyce v. Whitwick Colliery Co. Ltd. I may point out that all the members of the Court of Appeal considered that the question whether the payments prescribed by the agreement which was under consideration in that case were to be attributed to capital or to revenue depended on the true construction of the agreement, and, in my view, that case, as well as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be allowed as interest. On the other hand, it may very well be that the total payment over the ten years is only a fair rent for the machinery during that period, and that further, the value of the machinery at the end of ten years may be quite a substantial amount. On the facts of that case, however, it was held that there was no material upon which the Income-tax Officer could find that the payment of Rs. 52,806 or part of it was in the nature of capital expenditure. In Tata Hydro-Electric Agencies Ltd. v. Commissioner of Income-tax the Privy Council held that : " If the purchaser of a business undertakes to the vendor as one of the terms of the purchase that he will pay a sum annually to a third party, irrespective of whether the business yields any profits or not, it would be difficult to say that the annual payments were made solely for the purpose of earning the profits of the business; and it would make no difference that the annual sum should be made payable out of a particular receipt of the business, irrespective of the earning of any profit from the business as a whole. Lord Macmillan speaking on behalf of the Judicial Committee adopted the test suggested by Lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rent payable to the Government by the lessee agreed to construct a railway siding within a certain period, failing which he had to deliver possession of the pans before the expiry of the term fixed in the deed, i.e., cutting down the period by one year. The assessee was given liberty to spend money in putting up new beds and for carrying out other works in connection with new beds, and was allowed to enjoy the income from such new beds until the expiry of the period of the lease without any addition to the rents stipulated. The assessee claimed that the sum of Rs. 23,894 deposited by him for the construction of the railway siding and the sum of Rs. 7,000 paid by him for constructing new salt pans should be deducted from his assessable income either as rent under section 10(2)(i) or as revenue expenditure under section 10(2)(xv). Satyanarayana Rao and Rajagopalan JJ., following the decision in Atherton v. British Insulated and Helsby Cables Ltd., Henriksen (H. M. Inspector of Taxes) v. Grafton Hotel Ltd. and other decisions, held : " ........ that the payment of the sums of Rs. 23,894 and Rs. 7,000 could not be treated as rent or revenue expenditure and they could not there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. " In Jackson (Inspector of Taxes) v. Laskers Home Furnishers Ltd. the facts are somewhat similar to the present case and are as follows : A lease of business premises for 14 years contained a covenant under which the tenant was obliged to put the premises in repair, and thereafter to keep them in repair. The premises had been unoccupied for a number of years and were unfit for occupation. The tenant in compliance with the covenant spent pounds 2,295 in putting the premises into repair. The rent payable was a peppercorn rent for the first year, pounds 700 a year for the next six years, and pounds 1,000 a year for the last seven years. The tenant claimed the sum of pounds 2,295 as a deductible expenditure under Schedule D of the Income Tax Act, 1952 of England. Danckwerts J., in the Chancery Division, after referring, inter alia, to Henriksen v. Grafton Hotel Ltd. and other cases, held that this was an expenditure of a capital nature, being an expenditure in respect of the accumulation of re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Commissioner of Income-tax. The assessee, in that case who had constructed and was running a cinema theatre on a land taken on lease, claimed an allowance of Rs. 15,275 spent on extensive renovations to the theatre. It was held that the amount was not allowable as expenditure for current repairs or as revenue expenditure under section 10(2)(v) or 10(2)(xv) of the Act. The expenditure could not be allowed under section 10(2)(v) as the amount was not spent in current repairs to the theatre but on improvements of great magnitude carried out for giving an enduring advantage to the assessee to keep pace with or outstrip in the competition with a new theatre which had recently sprung up, and the expenditure did not fall within the scope of section 10(2)(v) of the Act. It was not allowable under section 10(2)(xv) as substantial improvements were made to the building and the land appurtenant thereto with the sole object of getting an enduring benefit for the business and the expenditure must be deemed to be in the nature of a capital expenditure. Kumarayya J., who spoke on behalf of the Bench, observed that when the expenditure was not on necessary repairs which were required for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Insulated and Helsby Cables Ltd. v. Atherton, an expenditure made for bringing into existence an asset or an advantage for the enduring benefit of a trade (in the absence of special circumstances leading to an opposite conclusion) is a very good reason for treating such an expenditure as properly attributable not to revenue but to capital. Bearing in mind the principles enunciated in the above cases we shall examine the facts in the instant case. The assessee, which had been carrying on hotel business at Secunderabad in the premises from 1949, entered into a fresh lease in 1956, for a period of ten years certain, and for a further period of ten years at its option. So during the accounting year which ended on September 30, 1957, the firm Taj Mahal Hotel at Secunderabad was a going concern in that building and it spent Rs. 60,000 for making extensions to the existing building by constructing additional rooms for providing lodging to the guests, and contends that it should be deducted as a revenue expenditure. The answer to this question mainly depends upon the form of the contract entered into by the assessee, and its construction. A close examination of the relevant clauses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e did not make these additions, the lessor could not complain of it, much less compel its performance. The result of the additional construction is, undoubtedly, in the nature of more or less of a permanent advantage. There is no covenant on the part of the assessee to pay Rs. 60,000 and the additions are only for the augmentation of the assessee's business during the lease period. An expenditure of that description cannot be called " rent " as understood in law. Nor has it the element of premium. It is only an expenditure incurred by the lessee to effect an improvement to secure an advantage and an asset to it, and to enjoy during the the time of the lease, though it may be that, at the expiry of the lease, the additions for what they are worth would vest in the lessor. But there can be no doubt that during the subsistence of the lease, the lessee alone was entitled to have the advantage and the lessor could not claim any additional rent on the improvements made. Even in a case where an expenditure is incurred pursuant to a contract, it is more or less something in the nature of a permanent advantage, as there is no means of enforcing such payments. It was held by the Madras High ..... X X X X Extracts X X X X X X X X Extracts X X X X
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