TMI Blog1973 (9) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... ated under the Indian Companies Act, 1913, whose registered office is situate at 3, Clive Row, Calcutta (hereinafter called "the Lessor" which expression shall where the context so admits include the person or persons for the time being entitled to the reversion immediately expectant upon the determination of the term hereby created) of the one part and BRAITHWAITE CO. (INDIA) LIMITED, a company with limited liability incorporated under the Indian Companies Act, 1913, whose registered office is situate at 4, Clive Row, Calcutta (hereinafter called "the Lessee") which expression shall where the context so admits include its successor in interest and assigns) of the other part WITNESSETH as follows : 1. In consideration of the rent hereby reserved and of the covenants, conditions and agreements hereinafter contained and on the part of the Lessee to be paid, observed and performed the Lessor HEREBY DEMISES unto the Lessee ALL THAT piece of land comprising 16.724 acres or thereabouts situated within Hoogly District, West Bengal, which said piece of land with the boundaries thereof is for the purpose of identification only more particularly delineated on the Plan No. 1 annexed here ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay of February, May, August and November in each year. 2. The Lessee HEREBY COVENANTS with the Lessor as follows : (1) To pay the rent hereby reserved on the day and in manner aforesaid. (2) To pay all existing and future rates, taxes, cesses and all other outgoings and impositions including any increase or increases therein (other than land rent for which the Lessor is liable under the terms of clause 3(2) hereof) payable in respect of the demised premises either by the owner or occupier thereof. (3) To pay all charges including electricity duty on quantities supplied for electricity consumed in the demised premises whether supplied from the generator situate on the Lessor's adjoining land or from the Calcutta Electric Supply Corporation Limited or otherwise. (4) In the event of the demised premises or any part thereof being damaged or destroyed by fire, explosion, tempest, earthquake, storm, flood, riot, civil commotion, war, act of God or other irresistible force forthwith at its own expense to rebuild or reinstate or replace the demised premises so that the same may be restored to the condition they were in before the destruction or damage took place. (5) Subj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r cause to be committed any act or thing which may cause damage or injury to or prejudicially affect the demised premises. (9) Not to carry on or permit to be carried on in any part of the demised premises any offensive, illegal or unlawful manufacture, trade or business but to use the same for the purposes of any business for the time being carried on by the Lessee. (10) To take all reasonable steps to prevent any encroachment on the demised premises or any part thereof by any person or persons and to give notice to the Lessor of any threatened encroachment. (11) At the expiration or sooner determination of the term hereby created to yield and deliver up to the Lessor vacant possession of the demised premises in good and tenantable repair and all fixtures and fittings therein belonging or, to belong to the Lessor reasonable wear and tear always excepted. 3. The Lessor HEREBY COVENANTS with the Lessee as follows : (1) That the lessee paying the rent hereby reserved and observing and performing the covenants, conditions and agreements herein contained and on the Lessee's part to be observed and performed shall and may quietly and peaceably hold and enjoy the demised p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fixtures and fittings PROVIDED ALWAYS that the privilege hereby conferred shall only be exercised by the Lessee in such manner and to such extent that the value of the demised premises shall not at any time be less than the value thereof immediately prior to any such installation, restoration or rebuilding as aforesaid and further to permit the Lessee to make such additions to the demised premises or any part or parts thereof or alterations therein so long as such additions or alterations do not adversely affect the character or value of the demised premises and to erect such new buildings or structures and to instal such new machinery, plant, fixtures and fittings as the Lessee may reasonably require and to permit the Lessee to lay down, remove and relay from time to time pipes for sewage water, gas and electricity mains and to sink wells so long as such sinking does not adversely affect supplies of water from tube-wells already sunk on the Lessor's adjoining lands in the demised premises PROVIDED ALWAYS that the Lessee shall first provide the Lessor with plans and specifications of any such proposed works as aforesaid and the Lessee shall before commencing any such works obtain a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y part thereof shall remain unpaid for 60 days after becoming payable (whether demanded or not) or if there shall be a breach of any of the covenants hereinbefore contained and on the part of the Lessee to be observed and performed or in the event of the Lessee at any time during the continuance of the lease hereby granted going into liquidation whether voluntarily or compulsorily save and except for purposes of amalgamation or reconstruction the Lessor may at any time thereafter re-enter upon the demised premises or any part thereof as in name of the whole and thereupon this demise shall absolutely cease and determine and all buildings, structures, machinery, plant, fittings and fixtures erected or installed by the Lessee whether under the provisions of clause 2(4) and/or clause 3(5) hereof or otherwise shall become and remain the property of the Lessor so that the Angus Engineering Works shall revert to the Lessor as a going concern PROVIDED ALWAYS that in respect of new machinery, plant, fittings and fixtures installed under the provisions of clause 3(5) hereof the Lessor shall compensate the Lessee therefor and the compensation payable by the Lessor to the Lessee hereunder shal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -clause (i) of this clause. (4) The Lessee shall pay the stamp duty and registration fee payable in respect of this Lease all legal and other charges being payable by the party incurring the same. IN WITNESS WHEREOF the parties hereto have executed these presents the day and year first before written. " The relevant assessment year is 1963-64 for which the previous year is the calendar year 1962. In the relevant assessment year, the assessee claimed the sum of Rs. 4 lakhs paid as rent under the lease as a revenue expenditure before the Income-tax Officer in its assessment and claimed a deduction as such in respect of the said sum. After discussing the provisions of the aforesaid deed the Income-tax Officer held that by the arrangement contained in the said deed there was in effect a sale of the Angus Works to the assessee and the annual payment of Rs. 4 lakhs was a payment towards purchase consideration of the Angus Works and so constituted capital expenditure. The Income-tax Officer, accordingly, declined to allow the sum of Rs. 4 lakhs as deduction. The Income-tax Officer also declined to allow depreciation on the buildings, plant and machinery comprising the Angus Works ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... items : Rs. Rs. (1) Land 1,95,000 (2) Buildings : Works including Durwans quarters 26,72,800 Lady Doctor's Bungalow 40,000 Staff Bungalow No. 5 1,95,500 ----------------- 29,08,300 (3) Plant Machinery 28,78,775 (4) Furnishings, etc., Works 98,800 Bungalow No. 5 29,250 ---------------- 1,28,050 (5) Motor Vehicles 18,200 ---------------- 61,28,325 ---------------- The Tribunal referred to clauses 2, 3 and 4 of the agreement and the Tribunal held : " Though possessing some of the ordinary incidents of a lease, the agreement also contains which may more or less correspond to the case of a purchase in instalments or of a hire purchase agreement. Clauses 4(1) and 4(3) quite clearly provide that in the event of sale as a going concern or acquisition by Government, the lessor would be entitled only to the capitalised value of the annuity of Rs. 4 lakhs for the balance of the unexpired term within the 99 years period capitalised @ 8%. The lessee will get the remaining surplus. In other words, the lessee is in the position of being entitled to the beneficial ownership of the monies realised on sale or compulsory acquisition subject t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lakhs, the terms of the agreement would not be much different from the present ones. If during the term of the lease the premises is sold away or acquired, the lessor's interest would be confined to the capitalised value of the remaining annual payments. The annual payment of Rs. 4 lakhs would be in the nature of equated annuity payments consisting partly of price of the asset and partly of either the hire charges or interest in respect of the unpaid purchase price. For a period of 99 years the total amount payable would be about Rs. 3,96,00,000 as against the agreed value of the property which was only Rs. 61 lakhs. If the assessee had made a cash down payment of Rs. 61 lakhs for outright purchase of the premises, the whole expenditure would have been regarded as capital expenditure. Since this amount is allowed to be paid for a fixed term of 99 years @ Rs. 4 lakhs per annum, from a practical and business point of view the payment consists of discharge of the capital liability plus the interest on the unpaid balance. The sum of Rs. 61,00,000 gets multiplied more than six times only because the rate of compound interest is 8%. We are, therefore, of opinion that, subject to veri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the various clauses in the said document which we have earlier set out and he has contended that, on a true construction of all the clauses, the document is essentially a document of lease and under the said document the properties mentioned in the said document which really constitute the entire undertaking of Angus Co. Ltd. are being leased out to the assessee. It is his contention that under the various clauses of the document the ownership of the demised properties remains with the lessor who continues to remain the owner of the said properties and the reversionary interest is retained by the lessor. He has argued that if there be any default on the part of the lessee in the matter of payment of rent the lessor retains the right to re-enter and to take possession of all the demised properties. It is the argument of Mr. Gupta that the provisions contained in clause 4(1) and clause 4(3) on which the Tribunal has relied have been incorporated in the interest of both the parties bearing in mind the nature of the transaction which was being entered into by the parties concerned. Mr. Gupta argues that the lease in question was not a lease simpliciter of only land and building but is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or a long term. The learned standing counsel has drawn our attention to section 105 of the Transfer of Property Act and also to sections 108 and 111 of the said Act. He has contended that the document in question is clearly a document of lease as provided in the Transfer of Property Act and the document satisfies all the requirements of a lease. Mr. Gupta has also drawn our attention to section 54 of the Transfer of Property Act which defines a sale and also to section 58 which defines a mortgage. Mr. Gupta has argued that the essence of the transaction of a sale is the transfer of ownership. It is the argument of Mr. Gupta that in the instant case there cannot be any question of any transfer of ownership of properties by the lessor to the lessee. Mr. Gupta has referred to the decision of the Supreme Court in the case of Damodar Valley Corporation v. State of Bihar [1961] 12 STC 102 and also to the decision of the Supreme Court in the case of K. L. Johar Co. v. Deputy Commercial Tax Officer [1965] 16 STC 213, and has pointed out that in these two decisions the Supreme Court had occasion to consider the nature of a transaction of sale and also the nature of transaction of hire. Mr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he source of the receipt in question can be ignored and substituted by what the taxing authority considers the substance of the matter. The assessing authority is undoubted1y entitled and is, indeed, bound to determine the true legal relationship resulting from a transaction. If the parties have chosen to conceal, by a device, the true legal relations it is open to it to unravel such device and to ascertain the true nature of the relationship. If the transaction is embodied in a document, the liability to tax depends upon the meaning and content of the language used in it in accordance with the ordinary rules of construction. " Mr. Gupta has contended that in the instant case the true nature of the transaction was that the assessee was taking on lease the entire undertaking of Angus Co. Ltd., the particulars whereof have been set out and mentioned in the document. Mr. Gupta submits that the true nature of the transaction is not that the assessee was either purchasing the said properties or any of them and the assessee was also not entering into any kind of hire purchase agreement. The lessor owned the undertaking with all the properties comprised in the said undertaking and the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Mr. Gupta that the document in question makes it abundantly clear that Angus Co. Ltd. is the lessor and the owner of the property subject to the rights of the assessee as lessee to enjoy the same in terms of and in accordance with the provisions contained in the said deed of lease. Mr. Gupta contends that the payment that is being made under the lease to the lessor is a business payment made as rent for the use and occupation of the demised property on the basis of the said lease and is not for securing any enduring or permanent advantage. Mr. Gupta in this connection has referrred to the decision of the Supreme Court in the case of Gotan Lime Syndicate v. Commissioner of Income-tax [1966] 59 ITR 718 and he has relied on the following observations at page 727 : " We are of the opinion that in the present case the royalty payment is not a direct payment for securing an enduring advantage ; it has relation to the raw material to be obtained. Ordinarily, a mining lease provides for a capital sum payment ; but the fact that there is no lump sum payment here cannot by itself lead to the conclusion that yearly payments to be made under the mining lease have relation to the acquisit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d machinery and the assessee will be paying to the lessor a sum of about Rs. 3,96,00,000. Mr. Pal argues that the payment of this huge sum against the value of the assets comprised in the lease, coupled with the further fact that the assessee has the right to remain in possession for another indeterminate period by exercising its option under the lease clearly go to indicate that the transaction is not one of lease but is really one of sale. Mr. Pal has referred to article 187 at page 113 in Halsbury's Laws of England, 3rd Edition, volume 10. Mr. Pal has also referred to the decision of the Supreme Court in the case of Commissioner of Income-tax v. Panbari Tea Co. Ltd. [1965] 57 ITR 422 and relying on the said decision Mr. Pal has contended that the substance of a transaction and not the form is what really matters and the nomenclature used may not be decisive or conclusive, although it may help the court, having regard to the other circumstances to ascertain the intention of the parties. Mr. Pal has also referred to the decision in the case of Ainley (H. M. Inspector of Taxes) v. Edens [1935] 19 TC 303 (KB). Mr. Pal has argued that clauses 3(7), 4(1) and 4(3) clearly indicate that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the nature of the transaction was a lease of the entire undertaking of Angus Co. Ltd. The entire undertaking was being leased out for a period of 99 years and in the undertaking there were plant and machinery and other items of considerable value which were likely to deteriorate in course of time ; and the lease was going to be for a period of 99 years with a further option to the lessee. In view of the nature of the transaction between the parties, the parties who are all businessmen, incorporated in the said document of lease various provisions for safeguarding their own interests. The provisions contained in clause 3(7) and clauses 4(1) and 4(3) are clauses which have been incorporated by the parties because of the particular nature of the transaction which was a transaction of lease for a long term of an entire undertaking consisting not only of land and buildings, but also of plant, machinery, fixtures, furnishings and vehicles which are likely to deteriorate in course of time. Bearing in mind this particular nature of the transaction under which an entire undertaking was going to be leased out by its owner for a very long period, the parties who are business people and were e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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