(a) Income-tax---

----Capital or revenue expenditure---General principles---Test of enduring benefit is not always conclusive---Lease---Premium on lease---Finding that premium was actually advance rent---Premium allowable as revenue expenditure---Indian Income Tax Act, 1961, S. 37.

It would be misleading to suppose that, in all cases, securing a benefit for the business would be, prima facie, capital expenditure "so long as the benefit is not so transitory as to have no endurance at all". There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, nonetheless; be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to be considered is the nature of the advantage in a 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.

(b) Income-tax---

----Depreciation---Extra shift depreciation allowance---Extra shift depreciation allowance available on capitalized technical documentation fees---Indian Income Tax Act, 1961, S. 32.

The assessee had entered into a lease agreement with M.I.D.C. on November 24, 1980, granting lease of 'a plot of land. Under the terms of the agreement, the assessee was required to construct a building thereon within a period of two years. Thereafter, the assessee was entitled to use and occupy the property with the building thereon for a period of 95 years upon payment of rent of Re.1 per annum. After the expiry of the lease period, the plot together with the building thereon had to be surrendered to the M.I.D.C. Under the said agreement, the assessee had paid a sum of Rs.12,09,200 as premium for acquiring the leasehold. The assessee claimed that the said amount, although stated as premium, was nothing but rent paid in advance. Both the Inspecting Assistant Commissioner and the Commissioner (Appeals) held that this was a capital expenditure. In second appeal, the Tribunal held that the expenditure was for the sole purpose of the assessee's business and, as such, eligible for deduction. The assessee also claimed extra shift depreciation allowance in respect of capitalized technical documentation fees. On a reference:

Held, (i) that the assessee was entitled to extra shift depreciation on capitalized technical documentations fees;

CIT v. H.M.T. Ltd. (No. 2) (1993) 203 ITR 818 (Appex.) fol.

That, in the instant case, the Tribunal had found as a fact that what was paid by the assessee in a lump sum to M.I.D.C. was the future rent payable by it and which the assessee had to pay periodically. This was evident from the fact that the assessee was paying Re. 1 per annum which was obviously for the purpose of retaining the character of the transfer of property as a lease and not for any other purpose. The Tribunal was justified in law in holding that the sum of Rs.12,09,200 representing lease premium should be allowed as business expenditure.

Ramakrishna & Co. v. CIT (1973) 88 ITR 406 (Mad.) and Uttar Bharat Exchange Ltd. v. CIT (1965) 55-ITR 550 (Punj.) distinguished.

CIT v. Associated Cement Cos. Ltd. (1988) 172 ITR 257 (SC); CIT v. Madras Auto Service Ltd. (1985) 156 ITR 740 (Mad.); CIT v. Panbari Tea Co. Ltd. (1965) 57 ITR 422 (SC); CIT v. Project Automobiles (1984) 150 ITR 266 (Bom.); Commissioner of Taxes v. Nehanga Consolidated Copper Mines Ltd. (1965) 58 ITR 241 (PC) and Empire Jute Co, Ltd. v. CIT (1980) 124 ITR 1 (SC) ref.

H. Raghavendra Rao for the Commissioner

K.P. Kumar for Messrs King and Partridge for the Assessee.

JUDGMENT

S.A. HAKEEM, J.---In this reference made at the instance of the Revenue under section 256(1)of the Income Tax Act, 1961 (for short, "the Act"), the Tribunal ha& referred the following questions for the consideration of the Court:

"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in directing the Income-tax Officer to allow extra shift depreciation under section 32(1)(ii) on capitalized technical documentation fees?

(2) Whether, on the facts and in the circumstances of the case, the `Appellate Tribunal was justified in law in holding that the sum of Rs.12,09,200 representing lease premium should be' allowed as business expenditure?"

The assessee is a company in the public sector engaged in the manufacture of machine tools, watches, etc. For the assessment year 1981-82, the assessee claimed extra shift allowance under section 32(1)(ii) on capitalized technical documentation fees. This claim having been rejected by the Inspecting Assistant Commissioner and the Commissioner of Income-tax (Appeals), the assessee brought the matter in second appeal to the Tribunal. The Tribunal following its earlier order in the case of the assessee for the assessment year 1980-81, allowed the claim. The first question referred to above pertains to the said matter. In Income-tax Reference Case No. 272 of 1985 (CIT v. H.M.T. Ltd. (No. 2) (1993) 203 ITR 818 (Appex.) (supra)), (dated November 28, 1991), identical question having come up for consideration, this Court has answered the same in the affirmative and in favour of the assessee. Following the said decision, we have to answer the said question accordingly.

The relevant facts pertaining to the second question are as follows:

The assessee had entered into a lease agreement with the Maharashtra Industrial Development Corporation (M.I.D.C) on November 24, 1980, granting lease of a plot of land at Aurangabad. Under the terms of the agreement, the assessee was required to construct a building thereon within a period of two years. Thereafter, the assessee was entitled to use and occupy the property with the building thereon for a period of 95 years upon payment of rent of Re. 1 per annum. After the expiry of the lease period, the plot together with the building thereon had to be surrendered to the M.I.D.C. Under the said agreement, the assessee had paid a sum of Rs. 12,09,200 as premium for acquiring the leasehold. The assessee claimed that the said amount, although stated as premium, is nothing but rent paid in advance instead of paying the rent periodically, and that the said payment should be considered as, a revenue or business expenditure. Both the Inspecting Assistant Commissioner and the Commissioner (Appeals) held that this was a capital expenditure. In second appeal, the Tribunal held that the expenditure; was for the sole purpose of the assessee's business and, as such, eligible for deduction. However, according to the Revenue, the said payment was a capital expenditure. As such, the question that has arisen for consideration is whether the Tribunal was justified in law in holding that the said amount of Rs. 12,09,200 should be allowed as a business expenditure.

In order to appreciate the respective contentions, we have to look into the nature of the transaction as evidenced by the agreement dated November 24, 1980, entered into between the assessee and the M.I.D.C. It is not disputed by the Revenue that the said document created a lease in favour of the assessee and no other legal rights in the land as such are granted to the assessee. The assessee was required to construct the factory building on the leased premises within a period of two years failing which the lessor, viz., the M.I.D.C., has the option to resume possession of the land. As soon as the factory building is constructed in accordance with the terms of the agreement, the M.I.D.C. is required to grant lease of the land and the factory building erected thereon for a period of 95 years from the date of the agreement on the assessee's agreement to pay a lease rent of Re.1 per annum. The agreement envisages surrender of the factory building at the expiry of the lease period subject to the condition that the assessee-company is at liberty to remove "all buildings, erections and structures and materials from the said land." The assessee has no right to assign or sublet any part of the premises without the consent in writing of the lessor.

In Empire Jute Co. Ltd. v. CIT (1980) 124 ITR 1, the Supreme Court has laid down certain guidelines to determine whether, in a given case, the expenditure incurred is in the nature of revenue or capital expenditure. It is held thus (at page 10):

"This test, as the parenthetical clause shows, must yield where there are special circumstances leading to a contrary conclusion and, as pointed out by Lord Radcliffe in Commr. of Taxes v. Nchanga Consolidated Copper Mines Ltd. (1965) 58 ITR 241 (PC), it would be ` r misleading to suppose that in all cases, securing a benefit for the business would be, prima facie, capital expenditure 'so long as the benefit is not so transitory as to have no endurance at all.' There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, nonetheless, be on revenue account and the test' of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on a application of this test. If the advantage consist merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee' 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 ...."

It is further held that what is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process. The question must be viewed in the larger context of business necessity or expediency.

In the instant case, the Tribunal has found as a fact that what was paid by the assessee in a lump sum to M.1.D.C. was the future rent payable by it and which the assessee had to pay periodically. This is evident from the fact that the assessee was paying Re. 1 per annum, which is obviously for the purpose of training the character of the transfer of property as a lessee and not for any other purpose. In CIT v. Panbari Tea Co. Ltd. (1965) 57 ITR 422 (SC), this aspect of the matter has been explained (at page 425):

"Under section 105 of the Transfer of Property Act, a lease of immovable property is a transfer of a right to enjoy the property made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically 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. The section, therefore, brings out the distinction between a price paid for a transfer of a right to enjoy the property and the rent to be paid periodically to the lessor. When the interest of the lessor is parted with for a price, the price paid is premium or salami. But the periodical payments made for the continuous enjoyment of the benefits under the lease are in the nature of rent. The former is a capital income and the latter a revenue receipt. There may be circumstances where the parties may camouflage the real nature of the transaction by using clever phraseology. In some cases, the so-called premium is in fact advance rent and in others rent is deferred price. It is not the form but the substance of the transaction that matters. The nomenclature used may not be decisive or conclusive but it helps the Court, having regard to the other circumstances, to ascertain the intention of the parties."

In the circumstances, it seems to us that the use of the term "premium' in the agreement in respect of the advance rent paid does not render the payment anything more than rent paid in advance instead of paying the same in future periodically. There is absolutely no indication in the agreement that the amount paid by the assessee can be considered as a consideration paid by it for being let into possession of the premises while reserving a separate or economic rate of rent to be paid periodically thereafter.

In CIT v. Madras Auto Service Ltd. (1985) 156 ITR 740 (Mad.), the assessee-company therein had taken op lease land and building in Bangalore for housing its branch in that city. The building was in a good business locality, but rather old. Under an agreement between the assessee and the landlord, the building was demolished and a new building constructed in its place and, as a consideration for this, the landlord agreed to take a very low rent of Rs.1,000 per mensem initially and Rs.2,000 for the last four years of the lease which was extended to 39 years. The prevailing rent in the area would have worked out to Rs.12,000 per month. The amount spent by the assessee of the construction of the new building was claimed as deductible business expenditure. It was held that no tangible or intangible asset came into existence as a result of the expenditure incurred by the assessee in demolishing the old building and constructing a new one and it would be more appropriate to regard the amounts spent as losses. The terms of the agreement and the circumstances of the case clearly showed that the assessee had entered into the agreement only because of the obvious savings in rent charges, and, therefore, the amount of expenditure was deductible as losses incidental to business. In the instant case, the rent of Re.1 payable for the premises is only nominal which would lead to the irresistible inference that the lump sum amount paid at the inception of the lessee under the agreement is nothing but rent paid in advance and to obviate the need for making periodical payments.

In CIT v. Associated Cement Cos. Ltd. (1988) 172 ITR 257 (SC), the question was whether the expenditure incurred by the assessee towards installing water pipelines and accessories outside the factory premises which were to belong to and maintained by the municipality in return for the assessee being exempted from paying municipal rates and taxes for a period of 15 years, was revenue expenditure. It was held that, since the installations and accessories were the assets of the municipality and not of the assessee, the expenditure did not result in bringing into existence any capital asset for the company. Further, that the advantage secured by the assessee by incurring the expenditure was absolution or immunity from liability to pay municipal rates or taxes for a period of 15 years; if these liabilities had to be paid, the payments would have been on revenue account, and, therefore, the advantage secured was in the field of revenue and not capital.

Sri Raghavendra Rao, learned counsel for the Revenue, contended that having regard to the terms of the lease including the long tenure thereof and the payment of a nominal rent, the assessee can be said to have secured an enduring benefit which is traceable to the payment of the lump sum amount as premium. As such, this expenditure incurred by the assessee can be said to be in the field of capital investment. In support of this contention, reliance is placed upon CIT v. Project Automobiles (1984) 150 ITR 266 (Bom.). In that case, the assessee entered into an agreement of lease with the owners for thirty years. Premium was to be paid at the rate of Re. 1 per square foot. In addition, the assessee was also to pay economic rent calculated at the rate of five per cent. of the total ground rent per annum which was to be revised at the end of fifteen years. The premium which amounted to Rs.62,500 was payable in instalments. In the facts and circumstances of that case and construing the terms and conditions of the lease in its entirety and in the absence of material to prove that the premium was payment of advance rent (since separate economic rent was also payable), the amount of Rs.62,500 was capital expenditure and hence not deductible. The facts and circumstances of this case, as stated earlier, are entirely different and, as such, the decision is of no assistance to the Revenue.

Sri Raghavendra Rao further sought to rely upon the rulings in Uttar Bharat Exchange Ltd. v. CIT (1965) 55 ITR 550 (Punj.) and Ramakrishna and Co. v. CIT (1973) 88 ITR 406 (Mad), which are clearly distinguishable from the instant case on facts.

In view of the above discussion, we answer both the questions referred in the affirmative and in favour of the assessee.

The Income-tax Reference case is disposed of accordingly.

M.B.A./212/T.F.Reference disposed of.