TMI Blog1976 (7) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... is a private limited company, had obtained for its business purposes on leave and licence basis a certain property formerly known as Vishnu Cinetone at Vile Parle from M/s. Vasant Investment Corporation Ltd. for a period of five years with effect from 15th February, 1957. Initially, the property consisted of a piece of land admeasuring 5,025 sq. yds. with a bungalow consisting of ground and first floor and a pucca shed standing thereon. The monthly compensation agreed to be paid by the assessee in respect of the said property was Rs. 600. On 12th December, 1959, the licensor entered into an agreement with the assessee whereunder the assessee could at its own cost construct the second floor on the said building; that at the expiry of the licence, which was to happen on 15th February, 1967 (there being in the meanwhile a renewal of the initial period of five years for a further period of five years), the additional structure put up by the assessee was to belong to the licensor and the assessee at the end of the period of the licence was bound to hand over the additional structure to the licensor without claiming any compensation for the construction. The licensor agreed that it woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he construction. Accordingly, the Tribunal came to the conclusion that for the period of occupation of the second floor after construction the assessee had paid the cost of construction, i.e., Rs. 27,284 as its rent. Since the licensor had agreed not to charge any sum by way of rent in respect of the said additional construction, the Tribunal held that the cost of construction that was incurred should be regarded as payment of advance rent made by the assessee for the period of the licence till 15th February, 1967. After coming to the conclusion that it was a revenue expenditure, which was allowable as business expenditure in the computation of business income, the Tribunal directed that since 1/5th of it pertained to the relevant accounting year, a reduction of 1/5th of the cost of construction should be permitted as an allowable expenditure in the computation of its business income. At the instance of the Commissioner of Income-tax the question set out at the commencement of this judgment has been referred to us for our decision. Mr. Joshi appearing for the revenue has invited our attention to the agreement in the form of a letter dated 12th December, 1959, under which the lice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee to the licensor and hence it should be allowed as business expenditure in computing the business income of the assessee. The question as to whether a particular expenditure incurred by an assessee while carrying on its business is a capital expenditure or a revenue expenditure has always been a ticklish one and several aspects and tests have been indicated in various decisions of the Supreme Court and of various High Courts. In Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax [1955] 27 ITR 34 (SC), the Supreme Court reviewed the case law on the question as to what is capital expenditure deductible under section 10(2)(xv) of the Act and what is revenue expenditure. Justice Bhagwati approved the principles laid down by Justice Mahajan in Benarsidas Jagannath, In re [1947] 15 ITR 185 (Lah) [FB] and then summarised the law as follows--See [1955] 27 ITR 34, 45 (SC): "In cases where the expenditure is made for the initial outlay or for extension of a business or a substantial replacement of the equipment, there is no doubt that it is capital expenditure. A capital asset of the business is either acquired or extended or substantially replaced and that outlay whateve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be a revenue expenditure. The question in the instant case would be as to whether the expenditure of Rs. 27,284 that has been incurred by the assessee for putting up the second floor to the building which had been taken on leave and licence by it from the licensor was incurred with the object of bringing into existence any advantage of an enduring nature for the benefit of the business or whether the same was incurred for running the business or working it with a view to produce the profits. In order to consider this question it will be necessary to refer to the facts and circumstances which obtain in the case. As stated earlier, initially, the assessee had obtained for its business on leave and licence basis the property in question for a period of five years with effect from 15th February, 1957, at a monthly compensation of Rs. 600. This property consisted of ground and first floor and a pucca structure standing thereon. It appears clear from the agreement which is in the form of a letter dated 12th December, 1959, that even before this agreement was entered into by the licensor with the assessee, permitting the latter to construct the second floor, the period of the licenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional floor was to commence only at the end of the licence period whereafter the assessee was bound to hand over possession of the said additional structure to the licensor without claiming any compensation. Thirdly, during the time the assessee was to occupy the said additional structure till the expiry of the licence period, namely, up to 15th February, 1967, the licensor was not going to charge anything by way of any compensation for the use and occupation of the said additional structure by the assessee. On a consideration of all these factors which emerge very clearly on record, it seems to us clear that the assessee must be taken to have acquired the right to occupy the additional structure for its business purposes and for acquiring such right to occupy such additional structure, it had incurred an expenditure of Rs. 27,284. In other words, by incurring the expenditure to the tune of Rs. 27,284 the assessee could be said to have brought into existence an asset or advantage in the form of a right to occupy the additional floor for the purpose of its business which was going to enure to the assessee for a period of at least seven years. It was urged by Mr. Patil that the benef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... might be required or called upon to pay as a result of the assessee putting up the said additional structure, the same shall have to be borne and paid by the assessee. Having regard to the above discussion it seems to us clear that the expenditure that was incurred by the assessee for constructing the second floor on the property in question will have to be regarded as capital expenditure inasmuch as its aim and object was to bring into existence an enduring advantage of a permanent character. The benefit would last so long as the leave and licence of the assessee lasts in regard to the premises. The decision of the Andhra Pradesh High Court in the case of Taj Mahal Hotel v. Commissioner of Income-tax [1967] 66 ITR 303 (AP) on which strong reliance was placed by Mr. Joshi clearly supports him in his contention. The facts of that case were almost similar to those which are obtaining in the instant case before us. In that case the assessee, carrying on hotel business, took a fresh lease of a hotel building in 1956 for 10 years on a rent of Rs. 1,300 per month with an option to renew the lease for another 10 years on a rent of Rs. 1,400. Under the lease deed the assessee was give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dvantage and the lessor could not claim any additional rent on the improvements made. Even in a case where an expenditure is incurred pursuant to a contract, it is more or less something in the nature of a permanent advantage, as there is no means of enforcing such payments. It was held by the Madras High Court in M. Subbiah Nadar v. Commissioner of Income-tax [1953] 23 ITR 58 (Mad), already cited, in which the facts are similar, that such an expenditure could not be described as rent or premium." The argument that the-expenditure of Rs. 60,000 could not be considered to be for securing an enduring benefit was also rejected as being devoid of force and in that behalf this is what the court has observed [1967] 66 ITR 303, 315 (AP): "As already noticed, in Henriksen (Inspector of Taxes) v. Grafton Hotel Ltd. [1943] 11 ITR (Suppl) 10 (CA), the advantage acquired was only for a period of three years and du Parcq Lord Justice held that it could be treated as an enduring benefit, and that those words were introduced only for the purpose of making it clear that the 'asset' or 'right' acquired must have enough durability to justify its being treated as a capital asset, and that in Adam ..... X X X X Extracts X X X X X X X X Extracts X X X X
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