TMI Blog1972 (4) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... to pay a sum of Rs. one lakh by way of consideration to Viswanathan and also pay to the owners of the theatre a monthly rent of Rs. 3,500 which was payable by Viswanathan. This partnership firm consisting of five partners was registered with the Registrar 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate lease deeds dated May 25, 1956, and May 26, 1956, the owners leased out the theatre in favour of one Viswanathan. The monthly rent payable was Rs. 1,750 to each owner making a total of Rs. 3,500 a month. Clause 5 of the lease deeds permitted the assignment 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 assign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ances leading to an opposite inclusion) for treating such an expenditure as properly attributable not to revenue but to capital." What is meant by the term " enduring benefit " in the above test was not to considered to be clear and, therefore, in John Smith Son 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 hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of the present case. The consideration of Rs. one lakh was paid for the acquisition of the lease-hold right in the cinema theatre in which the assessee wanted to carry on the business of exhibition of cinema films. The licence to exhibit the pictures was not transferred 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ook on lease a cinematograph theatre with its fixtures, furniture, machinery, etc., for 21 years under a lease which provided for an annual rent and payment of a premium of pound 65,000. Out of the premium of pound 65,000, a sum of pound 2,000 was paid on the date of lease 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mputing the profits of the assessee-company the sum of Rs. 5,000 and Rs. 35,000 paid to the Government could be deducted under section 10(2)(xv) of the Act. It was held by the Supreme Court that the payment of Rs., 5,000 and Rs. 35,000 were capital expenses and that, therefore, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lessor. Merely because there is a default clause in the lease deed, which itself will become operative only on default of the lessee, the right acquired by the lessee under the lease cannot be stated to be not of an enduring nature. In this connection it is also useful to refer to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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