TMI Blog1982 (3) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... e on a long-term basis for a term of 39 years at considerably low rents, as compared with prevailing rates for similar business accommodation in the vicinity. The monthly rent demanded by the landlord was Rs. 1,000 to begin with, and would go up to the maximum of Rs. 2,000 for the last four years of the lease. The prevailing rent in that area for the assessee's floor area of 8,000 square feet worked out to not less than Rs. 12,000 at the rate of Rs. 2 or Rs. 2.50 per square foot. The assessee, therefore, accepted the landlord's terms and entered into the tenancy. It then demolished the existing building on the demised land and raised a new construction in its place. This job took two years to complete. The assessee incurred expenditure of Rs. 1,62,335 in the first year and Rs. 50,937 in the next year. The question which arose in the relevant income-tax assessments of the assessee was whether this expenditure was capital or revenue. There was little or no doubt in the mind of the Income-tax Officer that the amount spent by the assessee for demolition and reconstruction of the branch office building was for business purposes. He, however, disallowed the expenditure on the ground that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two kinds of consideration for a lease must be so distinguished. Strictly, in terms of legal definition, rent is paid for use and occupation. But so is premium; it also is paid for use and occupation. If however, premium is regarded, in the language of the economists, as the price paid for the acquisition of a leasehold interest in the property, so for that matter, is rent. It is not a consideration for anything less than that. The only outward difference between the two is that whereas rent is a recurring payment, premium is an " once and for all " payment. But nobody who knows his income-tax would set any store by this supposed contrast between the two. And yet, over a period of years, courts have persisted in disallowing premium as capital expenditure and allowing rent as revenue expenditure, however short the lease be in the former case and, however long it be in the latter case. Arguments also in the past had followed the practice of treating the premium for a lease as a balance-sheet item, while regarding rent as a profit and loss account item. Recent trends in accountancy principles and practice, however, tend to blur the distinction between the two. Accountants have taken t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elder Bhagwati J., had had occasion to observe that enduring benefit is not always the acid test of capital expenditure. The learned judge referred to various other leads pursued by courts to resolve the capital versus revenue controversy. His conclusion was that wisdom lay in adopting that test which was most appropriate to the nature of the case. The Tribunal approached the problem in this case not by asking the question, how enduring was the benefit to the assessee, but by asking a different question, what saving the expenditure effected and how ? Referring to the lease agreement between the parties in this case and other surrounding circumstances, the Tribunal concluded that by incurring the expenditure on the terms laid down in the agreement, the assessee virtually got itself relieved of revenue payments monthly or annually for the duration of the lease. The Tribunal obviously had in mind the prevailing rents in the market and the tempting prospect of the assessee not having to pay rent to the landlord at those higher rates while at the same time securing to itself an assured accommodation in a good locality in a building designed and constructed according to its own standa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ules; it is also sign of bad marksmanship. As to the principle on which the Tribunal had, based its decision allowing the expenditure as a revenue item, there can be no doubt as to its validity. The principle had been fairly well established, although lacking the enchantment of a terse catch-phrase. The principle was laid down in the clearest terms, and perhaps for the first time, in the Anglo-Persian Oil Company's case [1931] 16 TC 253, on which the assessee's learned counsel, Mr. Swaminathan, principally relied in argument. We think it necessary to state briefly the facts of that case and the ground of decision which they prompted. An English Company having business the world over appointed an agent in Persia (now called Iran) for a term of years. Under the agency agreement, the agent was to be paid remuneration by way of commission calculated at certain rates. The mechanics of rate-fixing was such that as business in Persia increased, the size of the agents commission tended to become higher and higher as the years went by. The commission payments turned out to be vastly more than what the company originally envisaged. Accordingly, before the control period came to a close, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these terms. At the same time, it does not also say why the landlord was satisfied with Rs. 1,000 or Rs. 2,000 as rent for space which would any day have fetched him Rs. 12,000 ? These facts have been gathered by the Tribunal from the surrounding circumstances. The recitals cannot put everything down. In any case, this is a matter of lack of draftsmanship and not lack of connecting evidence. Mrs. Nalini Chidambaram referred to three Indian cases, the decisions in which, according to her, cannot be explained in terms of an expenditure taking its colour from what it saves or relieves the taxpayer otherwise from. They are: (1) CIT v. Menora Hosiery Works Pvt. Ltd. [1977] 109 ITR 714 (Rom), (2) Taj Mahal Hotel v. CIT [1967] 66 ITR 303 (AP) and (3) Subbiah Nadar v. CIT [1953] 23 ITR 58 (Mad). We do not, however, derive assistance from these decisions because the courts have not considered whether the deduction claimed is in respect of expenditure which is in lieu of, or in compression of, or in redemption of, future revenue payments. The reference to Anglo-Persian Oil Company's case [1931] 16 TC 253 is conspicuous by its absence in these decisions. They do not, therefore, advance our ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
