TMI Blog1980 (4) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... claim of the assessee on the ground that it was in the nature of capital expenditure. The ITO was of the opinion that the payment to M/s. Gasper Company was for acquiring a benefit of an enduring nature. The assessee preferred an appeal before the AAC. The AAC held that the payment made to M/s. Gasper Co. was in the nature of a premium for the acquisition of vacant premises and that its right to enjoy vacant possession of the property could properly be regarded as a capital asset. The AAC, therefore, held that the money paid to purchase it or acquire it must be held to be capital expenditure. There was a further appeal before the Tribunal. The Tribunal held that M/s. Gasper Co. was a tenant occupying the premises No. 240E, Acharya Jagadish Chandra Bose Road, Calcutta. The assessee took the premises on lease and paid a sum of Rs. 4,50,000 to M/s. Gasper Co. to get the vacant possession. According to the Tribunal, it was well settled that the rights of tenancy were valuable rights which the tenant possessed under s. 108, sub-s. (c), of the Transfer of Property Act. The lessee was entitled to hold the property without interruption if he pays the rent lease is not a mere co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure or revenue expenditure. Reliance was then placed on certain observations in the decision of the Supreme Court in Bombay Steam Navigation Co. (1953) P. Ltd. v. CIT [1965] 56 ITR 52, where the Supreme Court, at page 60 of the report, in the context of controversy whether a particular expenditure was revenue or capital, observed that the question should be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure was so related to the carrying on or conduct of the business, then it might be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character, the possession of which was a condition for the carrying on of the business. The expenditure in such circumstances might be regarded as a revenue expenditure. That was a case, however, dealing with the payment of interest. There, what happened was that, pursuant to a scheme of amalgamation between two shipping companies, the assessee-company was incorporated rated on August 10, 1953, to take over certain passenger and ferry services carried on by one of them. On 12th August, 1953, the assessee-company took over assets wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... called the premium and the money, share, service or other thing so rendered was called rent. The section, according to the Supreme Court, therefore, brought out the distinction between the price paid for a transfer of the right to enjoy the property and the rent to be paid periodically to the lessor. When the interest of the lessor was parted with, for a price, the price paid was premium or salami but the periodical payments made for the continuous enjoyment of the benefits under the lease are all in the nature of rent. The former, according to the Supreme Court, was a capital gain and the latter a revenue receipt. The Supreme Court, however, emphasised that there might be circumstances where the party might camouflage the real nature of the transaction by using clever phraseology, in some case, the so called premium is in fact advance rent and in others rent is deferred price. We are, however, not concerned in the instant case with that controversy, but the Supreme Court reiterated that the nomenclature used might not be decisive or conclusive in all cases. But the principle that emerges from the said decision is that the price that is paid for parting with possession of the rig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt over and above the stipulated rent and had claimed the deduction of the sum as a revenue expenditure. The claim was disallowed by the departmental authority but allowed by the Tribunal on the view that the expenditure was akin to the payment of rent for the new premises. On reference, the Division Bench of the Madras High Court held that the expenditure not having been incurred for the purpose of bringing into existence any asset or advantage of an enduring character and the payment not having been made in order to secure the lease for any term of years, but only for the purpose of a continued running of the business, though in a new premises, the sum of Rs. 1,001 was deductible in arriving at the assessee's income. Mr. justice Veeraswami, as his Lordship then was, had observed, at p. 762, that the object of the assessee was, by incurring business expenditure, to produce profits and not to create any asset of a capital nature. Reliance was also placed on certain observations of the Supreme Court in the case of V. Jaganmohan Rao v. CIT [1970] 75 ITR 373 and our attention was drawn to the observations appearing at p. 380 of the report where the Supreme Court referred to the well ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In deciding whether a particular expenditure is capital or revenue in nature what the courts have to see was whether the expenditure in question was incurred to create any new asset or was incurred for maintaining the business of the company. If it was the former it is the capital expenditure; if it is the latter, it is the revenue expenditure." Reliance was also placed on a decision of this court in the case of CIT v. De Luxe Film Distributors Ltd. [1978] 114 ITR 434, where the assesseecompany was a producer and distributor of cinematograph films. It entered into an agreement with one A for financing the production, being the distributor of a film. Disputes arose between A and the assessee-company on the question as to who was the producer of the film. An arbitration award declared A and the company to be joint producers. There were other disputes which were settled by the terms of a settlement. Under its terms A executed a deed of release whereby he gave up all his claims as producer including 40% of the share of profits and other benefits in consideration of an amount of Rs. 20,101 paid to him by the company. On the question, whether this amount represented revenue expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the tenancy. The assessee was entitled to transfer his tenancy right to the transferee in view of s. 147(1)(b) of the West Bengal Premises Tenancy Act and the transfer of the right or interest of a tenant in the tenancy was not absolutely prohibited even where tenancy right was governed by the West Bengal Premises Tenancy Act, which merely protected the tenant from eviction even where his tenancy had been lawfully determined provided it fulfilled certain conditions mentioned therein. The right of tenancy was, therefore, a transferable property or a capital asset under s. 2(14) of the I.T. Act, 1961. The court found that the assessee was a monthly tenant since 1940, and with regard to a property in Calcutta, the landlord had entered into an agreement for lease on' 17th of March, 1967, with the tenant, permitting him to construct a building on the said premises. The assessee was also a party to the agreement and received Rs. 2,25,000 out of the total consideration money of Rs. 4,50,000 on that date. The ITO sought to assess Rs. 1,83,000 as capital gains for the assessment year 1967-68. The Tribunal found that the assessee with the consent of the landlord had transferred his month ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as spent to remove antiquated restrictions which were preventing profits from being earned. It created no new asset. It did not even open new fields of trading which had previously been closed to the company.. Its true purpose was to facilitate trading by enabling the company to engage a more competent manager and to borrow money required to finance the company's traditional trading operations under modern conditions. None of the authorities cited is directly in point, and I think that the most apposite general statement in those authorities is that of Lawrence L.J. in Anglo-Persian Oil Co. Ltd. v. Dale [1932] 1 KB 124 at page 141 (CA). It 'merely effected a change in its business methods and internal organisation, leaving its fixed capital untouched '. As the Lord President put it in the present case (p. 48 of 45 TC): ' The benefit was essentially of a revenue character because the company became able more easily to finance its day-to-day transactions, and more efficiently to carry on its day-to-day manufacture'. " There, what had happened was that the money was spent to remove some recalcitrant shareholders, who were pressing an amendment to the constitution of the company an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ements which the appellants consented to cancel were not ordinary commercial contracts made in the course of carrying on their trade. They were not contracts for the disposal of their 'products, or for the engagement of agents or other employees necessary for the conduct of their business; nor were they merely agreements as to how their trading profits when earned should be distributed as between the contracting parties. On the contrary, the cancelled agreements related to the whole structure of the appellants' profit-making apparatus. They regulated the appellants' activities, defined what they might and what they might not do and affected the whole conduct of their business. ' I would think that the two most important of these considerations were that the contracts were not ordinary commercial contracts made in the course of carrying on the trade, and that, by defining what the company might do and might not do, they affected the whole conduct of the business. I think that in some later cases the metaphor of structure has been used with far less justification." In the instant case before us, the essential question is, by incurring the expenditure, what was it that the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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