TMI Blog2002 (9) TMI 94X X X X Extracts X X X X X X X X Extracts X X X X ..... VADHAR. JUDGMENT The judgment of the court was delivered by S.H. KAPADIA J.-Being aggrieved by the decision of the Tribunal dated July 25, 2000, in Income-tax Appeal No. 335/MUM of 97 for assessment year 1991-92, the Department has filed this appeal under section 260A of the Income-tax Act, 1961. The assessee has preferred cross-objections under Order 41, rule 22(1). The substantial question of law which arises for determination of this court is as follows: "Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that payment of Rs. 45 lakhs for purchase of the unit was a capital expenditure and if it was a capital expenditure as held by the Tribunal then whether the Tribunal was justified in directing apportionment of the said amount as advance rent over a period of 71 years at the rate of Rs. 63,380 per annum as rent relatable to each year?" Since the above substantial question of law arises out of the appeal filed by the Department and the cross-objections filed by the assessee, they are heard together and disposed of by this common judgment. The main grievance of the Department is that the Tribunal, having held Rs. 45 lakhs to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by MIDC subject to payment by the assessee of an amount of Rs. 2,000 as and by way of transfer fee. Accordingly, on January 21, 1991, a deed of assignment came to be executed by the Official Liquidator in favour of the assignee-assessee. The assignee-assessee was the highest offerer. The assessee offered Rs. 75 lakhs for purchase of the whole unit consisting of the plot of land admeasuring 20,300 sq. meters with building thereon and including plant and machinery and other movables described in the Schedule. As stated above, the plot was a lease-hold plot. Under the deed of assignment, by way of recital, it is mentioned that the value of the land and buildings and plant and machinery stood bifurcated for the purposes of payment of stamp duty into two parts--Rs. 72 lakhs for land and building and Rs. 3 lakhs for plant and machinery. The assessee-company filed its return of income on December 31, 1991, for the assessment year 1991-92 admitting a loss of Rs. 2,95,750. The assessee filed a revised computation statement and claimed Rs. 72,18,588 as revenue expense being the cost of the land purchased from the official liquidator, High Court, Bombay. This claim was rejected by the Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d senior counsel appearing on behalf of the Department, contended that the Tribunal made a fundamental error in directing deduction to be given at the rate of Rs. 63,380 per annum. He contended that having held that Rs. 45 lakhs was a capital expenditure, it was not open to the Tribunal to direct the Department to give benefit of the expenditure as such direction proceeds on the basis that Rs. 45 lakhs were paid as advance rent. Mr. Desai submitted that the impugned order is self-contradictory. That, if Rs. 45 lakhs was paid as capital expenditure, one fails to understand how the Tribunal could have directed benefit of proportionate deduction. That, it was not permissible for the Tribunal to direct such proportionate deduction as it proceeds on the premise that Rs. 45 lakhs were paid as advance rent. He, therefore, submits that to the extent of the last paragraph of the impugned order, the Department has filed this appeal. That, if the last paragraph of the impugned order is set aside then the Department supports the rest of the order. Mr. Desai relied upon several judgments in support of his submission that payment of Rs. 45 lakhs was capital expenditure. He submitted that the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the stipulation was for renewal of the lease subject to increased premium. He further contended that the payment of Rs. 45 lakhs can never be construed as premium on the facts and circumstances of this case. He submitted that, in this case, the normal rent would be much more than Re. 1 per annum fixed under the lease. That, APV Equipments Ltd. paid premium of Rs. 1,62,400 as it got the benefit of reduced rent. He further contended that Rs. 45 lakhs paid by this assessee to the Official Liquidator of APV Equipments Ltd. was paid as this assessee got the benefit of reduced rent. That, in normal circumstances, this assessee was required to pay rent at the higher rate. That, such rent at the higher rate would have come under section 30(a)(i). That, in normal circumstances, this assessee would have incurred revenue expenditure on account of payment of rent but by paying a lumpsum amount of Rs. 45 lakhs, this assessee has paid advance rent for the remainder term of the lease of 71 years and, therefore, the said amount of Rs. 45 lakhs constituted advance rent and, therefore, the assessee was entitled to deduction as revenue expenditure. Mr. Joshi further pointed out that this assessee pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he lease and the right to remove the plant and machinery. He contended that, in this case, the assessee has allocated an amount of Rs. 2,81,412 for purchase of plant and machinery and Rs.27,18,588 for building for which the Department has treated the payment as investment in capital assets. Therefore, payment of Rs. 45 lakhs was only for this assessee obtaining the benefit of lower rent for the next 71 years so that this assessee could effect saving of revenue expenditure by way of reduced rent and, therefore, Rs. 45 lakhs should be treated as revenue expenditure. He further contended that the payment of Rs. 45 lakhs can never be construed as premium. He contended that the official liquidator cannot be equated with the private landlord. That the private landlord could insist on payment of premium, but the official liquidator was not in the dominant position and, therefore, the payment of Rs. 45 lakhs can never be a premium. That, this assessee had bought the unit from the Official Liquidator and not from MIDC. That, only MIDC could have insisted on payment of premium. He, therefore, contended that Rs. 45 lakhs did not constitute premium. Findings: As stated hereinabove, the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the other hand valued at Rs. 3 lakhs was only for the purposes of stamp duty. It is well settled that in order to ascertain the true character and purport of payment, the court has to go by the substance of the transaction and not by the manner in which the assessee allocates the items for accounting purposes. On the facts and circumstances of the case, if one reads the terms of the lease, as discussed above, the deed of assignment and the order passed by MIDC permitting assignment, it is dear that the assessee bought the whole unit for Rs. 75 lakhs. It is also clear that Rs. 45 lakhs were paid as a part of Rs. 75 lakhs. In the circumstances, the Tribunal was right in coming to the conclusion that Rs. 45 lakhs was a capital expenditure. Moreover, in this case, this assessee is an assignee. This assessee is not the original lessee. The original lessee was APV Equipments Ltd. This assessee came on the scene when there was already in existence, the land as well as the building, including plant and machinery. That was not so when APV Equipments Ltd. entered into lease for open land with MIDC as far back as June 30, 1970. The original lessee, APV Equipments Ltd., paid the premium am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tructure. Under the lease, permission was granted to the assessee to construct a new building to suit the purpose of their business. Under clause 2, the assessee was required to pay Rs. 1,000 per month for the first 15 years, Rs. 1,500 per month for the next ten years, Rs. 1,650 per month for the next ten years and Rs. 2,000 per month for the remaining years. Under the lease, the new construction was to remain the property of the lessor and on completion of the work, the lessee had the right to be a tenant for 39 years. Under the lease, the lessee had no right, title and interest in the new construction. That, the lessee was not entitled to compensation from the lessor for putting up the new construction in place of the old construction. Acting under the lease, the assessee invested Rs. 1,62,835 in the previous year relevant to the assessment year 1968-69 and Rs. 50,937 in the succeeding year for constructing a new building on the land. The assessee claimed the expenditure as capital loss. In the alternative, the assessee claimed deduction for the payments as business expenditure or as extra rent for the lease. The Tribunal held that the expenditure of the aforestated amounts was f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MIDC, the whole unit. Therefore, on the facts, the judgment of the Supreme Court has no application to the present case. Moreover, in the case before the Supreme Court in Madras Auto Service (P.) Ltd. [1998] 233 ITR 468, the old construction was dilapidated. The assessee could not have carried on business in the old structure. Under the lease, in that case, the old structure was permitted to be demolished. That demolition was at the expense incurred by the assessee-lessee. That the assessee-lessee put up the new construction at his own cost. Therefore, under section 30(a)(i), the assessee in the case before the Supreme Court was entitled to claim deduction as revenue expense as it had undertaken to bear the cost of repairs to the premises. Under section 30 in respect of rent, rates, taxes, repairs and insurance for premises, used for business purposes, deductions are allowed. One such deduction is in cases where the premises are occupied by the assessee as a tenant and such assessee is required to pay rent. Such rent would be revenue expense. Similarly, if such assessee undertakes to incur cost of repairs to the premises, then such assessee would be entitled to deduction because t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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