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TMI Blog1972 (4) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... strar of Firms on May 1, 1957, and a partnership deed also was executed on January 2, 1959. It is this firm that is the assessee in the present case. The assessee-firm returned an income of Rs. 42,138 for the assessment year 1960-61 from the business of exhibition of films at Chitra Talkies. In computing this income the assessee had claimed allowance for a sum of Rs. 9,375 representing a part of the consideration of the sum of Rs. one lakh paid by the assessee to Viswanathan under the agreement dated April 29, 1957, in addition to a monthly rent at the rate of Rs. 3,500 per month. The unexpired lease after the assignment in favour of the assessee was 10 years 8 months. The assessee wanted to average the total consideration of Rs. one lakh and spread it over the entire lease period and it is thus he has arrived at Rs. 9,375 as the proportion for the accounting year in question. The assessee claimed deduction on the ground that this was also the proportionate rent payable by him in respect of the theatre and that, therefore, he is entitled to a deduction under section 10(2)(xv) of the Income-tax Act, 1922. The Income-tax Officer disallowed the claim of the assessee on the ground th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nment of the lease and that in case of assignment both the lessee and his assignee shall be jointly and severally liable to the lessor for the discharge of the obligations under the lease deeds. The assignment dated April 29, 1957, was in favour of Ramakrishna and Company represented by its five partners. In the preamble portion of the assignment deed it is stated that the assignee has offered to purchase outright by way of assignment and transfer all the right, title, future benefit and interest of the assignor in the theatre under the lease deeds for a sum of Rs. one lakh to be paid in the manner set out in the document. Since the Tribuual was prepared to assume that at least a sum of Rs. 48,000 had already been paid out of the consideration of Rs. one lakh and the deduction claimed is only Rs. 9,375 it is not necessary for us to set out the mode of payment of the consideration. The assignment deed further stated that the assignee-firm is liable to pay rent to the owner and also to carefully and diligently perform the covenants contained in the lease deeds dated May 25, 1956, and May 26, 1956. The question for consideration, therefore, is whether the consideration of Rs. one lak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Moore it was held that the test whether the expenditure was part of the circulating as contrasted with fixed capital is a good test in most cases. And this was followed in Anglo Persian Oil Co. v. Dale. The universal application of this test also was found to be doubtful in many subsequent cases and in some cases the test applied was that the expenditure incurred in the acquisition of an asset was a capital expenditure and the expenditure incurred in the process of earning of the profit was a revenue expenditure. This is the principle which was applied in Tata Hydro Electric Agencies Ltd. v. Commissioner of Income-tax. Rowlatt J. forcefully put this test in Commissioner of Inland Revenue v. Fargus and to quote his own words : " When you consider the nature of income-tax, it is to charge incometax upon an income producing property or an annual value producing property when you have got it, although of course you have had to pay to get it first." The Supreme Court, after consideration of a number of cases on the general principles applicable in determining the question, held in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax, as follows : " If the expenditure is mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the assessee under the deed of transfer. Of course, subsequently the assessee had obtained the licence. The amount of Rs. one lakh was payable in the manner provided in the deed of transfer. The obligation to pay this amount would not cease by the termination of the lease by the owner for any default or contravention of the terms of the original lease deed. If the assessee had not agreed to pay this price of Rs. one lakh for the assignment of the lease, the assignment itself would not have been given. The deed of transfer itself says that in consideration of the sum of Rs. one lakh paid in the manner provided in the document the lessor was assigning his leasehold interest to the assignee. Without obtaining this leasehold right in the cinema theatre the assessee could not have begun or carried on his business. It is something like acquisition of a wall for the purpose of painting. It is only the acquisition of the leasehold right in the theatre that enabled or put the assessee in a position to do his business. Thus the amount paid was in the nature of premium paid for the purpose of enabling the assessee to carry on his business and it did not form part of the rent payable in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the remaining pound 63,000 was to be paid to the lessor at the rate of pound 3,000 per annum over the 21 years, the term of the lease. It was held in that case that the payments were capital expenditure. It is very useful to extract the following quotation from the judgment of Rowlatt J. at page 394 : " In the present case it is quite clear that if that premium is paid for premises--furnished or unfurnished, with or without other advantages, or for permanent rights, as Lord Clyde puts it, without which you cannot begin the business, that is a capital expenditure,and there is nothing more to be said about it. It is also clear from Adam's case, if from no other, that by dividing it out and making it payable in instalments you do, not vary its character of capital expenditure for this purpose. What is this? It is a very curious document, and the amount seems to have been reached by some consideration of what the theatre was really capable of earning, but according to the lease itself it simply comes to this. There is this premium-- I call it a premium, I do not lay any stress upon the word-- the lump sum payment, which is payable on demand; but there is no demand to be made for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, they are not deductible expenditures. The Supreme Court again considered this question in Commissioner of Income-tax v. Panbari Tea Co. Ltd. The premium payable in that case was Rs. 2,25,000 and out of this amount a sum of Rs. 45,000 was payable at the time of execution of the lease deed and the balance of Rs. 1,80,000 payable in 16 half-yearly instalments of Rs. 11,250 commencing from the end of January, 1952. The question was looked at not from the point of view of the lessee who paid the premium, but from the point of view of the lessor who received the amount. But still, the Supreme Court held that the sum of Rs. 11,250 was a capital receipt in the hands of the lessor. While so holding the Supreme Court observed that when the interest of the lessor was parted with for a price, the price paid is premium or salamibut the periodical payment made for the continuous enjoyment of the benefits under the lease are in the nature of rent. The former is a capital receipt and the latter are revenue receipts. The learned counsel for the assessee in the present case contended that the sum of Rs. one lakh paid under the document was really a rent paid in advance and that we must look at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... some of the decisions where the meaning of the term " enduring benefit " was considered. The Supreme Court has referred to three of the judgments where this was considered in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax. As observed in Sun NewsPapers Ltd. & Associated NewsPapers Ltd. v. Federal Commissioner of Taxation, " when the words ' permanent ' or ' enduring ' are used in this connection, it is not meant that the advantage which will be obtained will last for ever. The distinction which is drawn is that between more or less recurrent expenses involved in running a business and an expenditure for the benefit of the business as a whole ". In H. J. Rorke Ltd. v. Commissioners of Inland Revenue, where the question for consideration was whether the two lump sum payments made by the assessee-company to the owners for the right to enter upon the land, and compensation for diminution in the value of the land respectively in the case, were payments of a capital nature, it was argued on behalf of the assessee that the payments were not for acquisition of an asset of an enduring nature because it was a mining lease. It was held that they were of a capital nature. But it ..... X X X X Extracts X X X X X X X X Extracts X X X X
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