TMI Blog1988 (3) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the assessee-company. The transaction of lease is evidenced by a registered document of lease. The period of the lease was 10 years. The assessee-company paid to the owners a sum of Rs. 5 lakhs which is expressly described in the lease deed as premium (salami). The lease deed provided for payment of royalty calculated at the rate of Rs. 12 per 100 cubic feet of clay extracted. The minimum royalty payable during the year was also stipulated at Rs. 60,000. The assessee had also agreed to defray all taxes, rates, cesses, quit rents and all other public charges including urban land tax. Clauses 6 to 9 of the lease agreement which are of some importance read as follows : " 6. The company is entitled to use the schedule lands for extracting clay up to the available depth. 7. The company is permitted to construct buildings or lay roads on the schedule lands after obtaining the written permission of the joint owners. 8. The building put up by the company, if any, as stated in clause 7 above, shall be dismantled and taken away by the lessee at the time of cessation of the lease. 9. The company is permitted to sublease the right hereby conferred after obtaining the written conse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the lease in question created an interest in immovable property. According to learned counsel, clay was the stock-in-trade of the assessee and the purpose of the lease agreement was to acquire this stock-in-trade. It was sought to be argued that the facts of the present case are squarely covered by the Full Bench decision of the Lahore High Court in Benarsidas Jagannath, In re [1947] 15 ITR 185. According to learned counsel, the transaction must be construed as a mere licence to remove the earth or the clay which was the stock-in-trade of the assessee. Learned counsel contended that while considering the question as to whether any particular outgoing was in the nature of revenue expenditure or capital expenditure, the nature of the payment must be considered from the point of view of the assessee and not from the point of view of the recipient. This argument was obviously necessitated in view of the stand which was taken by the Revenue in respect of the said payment of Rs. 5 lakhs in the hands of the owners when it was contended in the assessment proceedings relating to the owners that the owners had borrowed the capital asset by granting a lease in favour of the assesseecompany ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, notwithstanding several tests which have been set out by different courts, the question as to whether any particular outgoing is capital or revenue in nature is still debated vehemently when an occasion to decide such question arises. As observed by Lord Upjohn in Regent Oil Co. Ltd.'s case [1969] 73 ITR 301 " no part of our law of taxation presents such almost insoluble conundrums as the decision whether receipt or outgoing is capital or income for tax purposes. " The learned Law Lord then observed with reference to the income-tax law in England as follows (p. 345): " Parliament, wisely, has never given any general statutory guidance in this matter. It has been content to leave the determination of these difficult matters to the common sense of the Tribunals and judges before whom these matters are brought." The normal common sense approach to such a problem, set out by Dixon J. in Hallstroms Proprietary Ltd. v. Federal Commissioner of Taxation [1946] 72 CLR 634, was quoted with approval by Lord Wilberforce in the Regent Oil Co.'s case [1969] 73 ITR 301. The observations of Dixon J. were as follows (at p. 349): "What is an outgoing of capital and what is an outgoing o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al to consider is the nature of the advantage in commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. " In the case of what kind of a lease, a benefit can be said to be of an enduring character, was adverted to by Lord Wilberforce in the Regent Oil Co. Ltd.'s case [1969] 73 ITR 301, in the light of the dictum of Dixon J. in Sun Newspapers Ltd. v. Federal Commissioner of Taxation [1938] 61 CLR 337. At p. 352 of the report (Regent Oil Co. Ltd.'s case [1969] 73 ITR 301) Lord Wilberforce observed as follows: "As Dixon J., said in Sun Newspape ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or on specified occasions, to the transferor by the transferee, who accepts the transfer on such terms. " "The transferor is called the lessor, the transferee is called the lessee, the price is called the premium, and the money, share, service or other thing to be so rendered is called the rent." A lease, therefore, is a transfer of a right to enjoy property. In the instant case, the exclusive possession of the property which is to be exploited, by the assessee-company is handed over to the assesseecompany for the purpose of extraction of clay irrespective of the depth. The depth to which the assessee can go on digging in the process of extraction is referred to as " up to the available depth ". The assessee is entitled to construct buildings or lay roads on the lands with the permission of the joint owners. The assessee has undertaken to defray all the taxes, rates, cesses, etc., including urban land tax. What is of considerable importance is that the assessee is entitled to sub-lease the right conferred by the lease. In other words, the right of extraction of earth and it is to be noticed that it is not a right of removal of clay simpliciter can be transferred by way of a su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efits under the lease are in the nature of rent ; the former is a capital receipt and the latter is a revenue receipt. Parties may camouflage the real nature of the transaction by using clever phraseology and, therefore, it is not the form but the circumstances of the transaction that matters. The nomenclature used may not be decisive or conclusive but it helps the courts, having regard to the other circumstances, to ascertain the intention of the parties." The same principle is reiterated in the decision earlier referred to of this court in which the transaction of lease in question has been held to result in the transfer of a capital asset. If the document is properly read according to its plain tenor, it will appear that even on the, recitals, the sum of Rs. 5,00,000 is consideration for the transfer of the right to extract clay. Clause I of the agreement reads as follows : " The joint owners hereby grant a lease-cum-licence to the company to extract clay from the schedule lands in consideration of the payment of Rs. 5 lakhs (Rupees five lakhs only) as and by way of premium or salami for a period of 10 years, the receipt of which sum the joint owners do hereby acknowledge." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ufacturer of bricks. He had obtained certain land on lease for the purpose of digging out earth for the manufacture of bricks. Under the deed, he had the right to dig earth up to a depth of three to three and half feet. As soon as the earth was dug out and removed, the lessee had no interest left in the land. The period of the lease varied from six months to three years. The income-tax authority and the Tribunal held that the consideration paid by the assessee to the owners of land was capital expenditure and was, therefore, not liable for deduction under section 10(2)(xii) of the Indian Income-tax Act, 1922. On a consideration of the agreements, however, the Full Bench of the Lahore High Court held that the main object of the agreements was the procuring of earth for manufacturing bricks and not the acquisition of an advantage of permanent nature or of an enduring character and the payments made were the price of raw material and that the assessee was, therefore, entitled to claim them as business expenditure under section 10(2)(xii) of the Indian Income-tax Act, 1922. It is this decision which, according to learned counsel, concludes the controversy in the present case. Firstly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case. Firstly, in the same decision, the learned judges have made it clear that if the transaction would have been of a different nature so as to confer an advantage of an enduring nature, then the expenditure would have been of the character of capital expenditure. At page 198 of the report, the learned judges have observed as follows : "It may be presumed in a transaction of such a transitory nature that there was no intention of investing the money as capital of the concern. Had the transaction been of such a nature as would have conferred an advantage of an enduring nature on the trade and the payment was made once and for all to avoid recurring expenditure, it may have been possible to infer that the expenditure incurred was of a capital nature but when the expenditure incurred neither swells the capital nor improves it, but it only increases or decreases the profit or loss, it must be held to be a part of the profit and loss account of the business. The observations would, therefore, indicate that, even according to the learned judges, the decision must be restricted to the facts of that case. The other distinguishing feature which appears on the agreement in question is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red was " Whether the lease money paid by the assessee-company to Nawab Mehdi Jung Bahadur and to the Government is capital expenditure or revenue expenditure ? " The High Court held that the payments amounted to capital expenditure. When the matter was taken to the Supreme Court, the contention on behalf of the assessee was that the quolnama was a licence and not a lease, that it created no interest in the land and no premium was payable for the right but what was paid was periodic compensation corresponding to rent, and that the payments could only be regarded as periodic compensation or periodic royalty or licence fees and thus revenue in character. The further argument was that even if it was held to be a lump sum payment broken up into instalments, it was still allowable as expenditure because it represented the price for the acquisition of raw materials, viewed from the business angle. The decision of the Lahore High Court (Benarsidas Jagannath's case [1947] 15 ITR 185) was relied upon and the argument on behalf on the assessee was that as the decision was approved by the Supreme Court in Assam Bengal Cement Co. Ltd.'s case [1955] 27 ITR 34, the expenditure could not be held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision in M. A. Jabbar v. CIT [1968] 68 ITR 493 (SC) was a case in which the question related to a lease for a term of 11 months whereby the lessee had obtained exclusive lease and liberty to enter, occupy and use for quarrying purposes and to raise, to render marketable, carry away, sell and dispose of sand within or under or upon land constituting the beds of a river and certain nallahs specified in the lease. It was found as a fact that the contract was for removal of sand lying on the surface of the river beds, that all the sand that could be removed was lying on the surface and that no excavation or skilful extraction was to be performed on the land before obtaining it. On those facts, it Was held that the right to remove the sand lying loose on the land within the short period of I 1 months to the extent to which the lessee could do so did not amount to acquisition of any fixed or capital asset of an enduring nature by obtaining the lease. It was held that the sums paid were expenditure of a revenue nature. It will be clear from the decision that the lease was merely a lease for removal of sand and specific mention is made of the fact that no excavation was necessary. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court have taken the view that the facts of the case before them had resemblance to the facts in Benarsidas jagannath's case [1947] 15 ITR 185 (Lah). The agreement of lease entered into by a building contractor who was also running a brick kiln, enabled the assessee to excavate earth up to a total depth of 6 feet over a period of seven years. The assessee was entitled to make use of the land for erection of bhatta and temporary huts. All that he did was to dig earth up to six feet for the manufacture of bricks. He was allowed to put a tube well for his brick-kiln but to leave the same on the expiry of the lease. The assessee had no right or interest in the trees standing on the land. The assessee had paid a total sum of Rs. 44,822 and claimed deduction of one-seventh thereof for each of the assessment years 1967-68 and 1968-69 as revenue expenditure. The Tribunal allowed the deduction holding that it was lease money, but paid in advance in lump sum for obtaining the raw material. This decision of the Tribunal was affirmed taking the view that the payment of Rs. 44,822 was made in advance by the assessee to ensure regular supply of earth over period of seven years and as the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted clay from the land and manufactured bricks and sold them. An amount described as lease money was paid by the assessee in lump sum at the time of the execution of the leases and another sum of money called " rent " was payable by the assessee year after year. The rights granted under the lease 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 and wells and to put up temporary structures for the residence of employees and workmen. There was a general right to use the land in any manner it liked including the right to cultivate the land or to sublet it. The lump sum payments were held to be of a capital nature. The annual payments also were held to be of a capital nature. On a reference, the Allahabad High Court held that as the main purpose of the lease was not merely to provide the lessee with earth which was the raw material for his manufacturing business but of providing him with an interest in land for setting up brick-kilns, engines, workshops and residences for carrying on his manufacturing business, the leases provided him with an asset of an enduring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision in Gobind Sugar Mills Ltd. v. CIT [1979] 117 ITR 747 (Cal) and Hotel Rajmahal v. CIT [1985] 152 ITR 218 (Kar). In CIT v. Cinceita Private Ltd. [1982] 137 ITR 652, the Bombay High Court has taken the view that the expenditure incurred in connection with a lease in the form of payment of stamp duty, registration charges and professional fees paid to the solicitors would be allowable expenditure. For the reasons given therein, we hold in the present case also that the amount of Rs. 30,274 was liable to be treated as deductible expenditure. It is true that the Calcutta High Court in Gobind Sugar Mills Ltd. v. CIT [1979] 117 ITR 747, has taken the view that the legal charges incurred by the assessee in connection with the execution of a temporary lease for a period of 5 years was capital and not revenue expenditure. We, however, prefer to adopt the reasoning of the Bombay High Court and hold that irrespective of whether the incidental expenditure is incurred in connection with or is related to capital expenditure having regard to the nature of the expenditure, which is in connection with the document of lease, it must be treated as revenue expenditure. Accordingly, the que ..... X X X X Extracts X X X X X X X X Extracts X X X X
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