1. The Tribunal has referred the following question of law under s. 256(1) of the I. T. L Act, 1961 :
'Whether, on the facts and in the circumstances of the case, the payment of Rs. 50,000 made by the assessee to M/s. Gorakhram Gokalchand was of a revenue nature and was therefore, an allowable deduction ?'
2. The assessee is a registered from and carries on business in art silk cloth as wholesalers in Mulji Jetha Market, Bombay. The assessment year is 1965-66 and the relevant accounting year is the Samvat year ending November 4, 1964. One M/s. Gorakhram Gokalchand (hereinafter referred to as 'M/s. G. G.') were the tenants of shop No. 582/638, Govind Gulli, Mulji Jetha Market, Bombay. On June 30, 1952, the assessee entered into an agreement with the said M/s. G. G. The agreement was in the form of a letter addressed by the assessee to the said M/s. G. G. Whereby the said M/s. G. G. were to act as the commission agents of the assessee to dispose of the assessee's art silk goods and the commission payable to the said M/s. G. G. was 2 annas per bale of Rs. 100 with a minimum commission payable being Rs. 500 per month. The further clauses in the said agreement, inter alia, purported to create a leave and licence in favour of the assessee in respect of the said shop. The purported lease and licence created was for a period of three years. M/s. G. G. were entitled to carry on wholesale business in cotton and woolen goods in the premises, and to keep sample pieces there, but they had no right to keep any stock of goods in the said premises. The assessee was to keep a deposit of Rs. 12,000 with M/s. G. G. and also to keep accounts of the commission payable to M/s. G. G. M/s. G. G. were to pay the rent and electricity charges of the shop premises. One of the clauses in the agreement then provided that the agreement was not to be construed as an agreement granting a sub-tenancy in favour of the assessee and that the assessee was not to claim any such sub-lease under the said agreement. The said clause also stated that likewise the assessee was not to claim that it was in exclusive possession of the shop premises or to seek the benefit of the Bombay Rent Act, 1947, in force. Another clause of the said agreement provided that the assessee was to finance the purchase of goods, and M/s. G. G. were not to be responsible for losses, if any. This agreement of 1952 was renewed by a fresh agreement also in the form of a letter dated June 23, 1955, on similar terms with regard to the rate of commission, etc., but with a change in the duration of the period of the agreement, this time the same being for four years from July 1, 1955, to June 30, 1959. The assessee claimed a deduction of Rs. 6,000 per year towards the payment of commission which was allowed up to June 30, 1959.
3. On May 13, 1959, the Govt. of Bombay issued an Ordinance being Ordinance No. III of 1959, Which recognised sub-tenancies created till that date and protected such sub-tenants from eviction to which they were otherwise liable. On the coming into operation of the said Ordinance, the assessee refused to pay the commission of Rs. 500 per month to M/s. G. G. from July 1, 1959, and started paying only the rent of the shop premises which was Rs. 95 per month, to the said M/s. G. G. It appears that thereafter M/s. G. G. filed a suit on July 11, 1959, in the City Civil Court, Bombay, for a declaration that they were in lawful possession of the said shop and that the assessee its servants and agents were not entitled to enter upon or remain in possession of the said shop after June 30, 1959, i.e., after the period for which they were permitted to stay under the second agreement between the parties and for a permanent injunction restraining them form entering the shop premises after the said date, for accounts, and for the appointment of a receiver. In the said suit on June 15, 1964, a compromise was arrived at between the parties and a consent decree of the same date was taken from the court. In terms of the said consent decree the said M/s. G. G. admitted and declared that the assessee was in lawful possession of the said shop as sub-tenant thereof since June 30, 1952. The decree further provided that the said M/s. G. G. should get issued in their names four shares or such shares of the landlords, M/s. New Piece Goods Bazar Co. Ltd., as may be necessary, and immediately thereafter sign the form or forms of the transfer of such share in favour of the assessee and should also forthwith hand over to the assessee the said from or forms of transfer of shares and upon the certificate or certificates of such shares being issue in favour of the said M/s. G. G. to handover all the said such certificate to the assessee. The assessee was to pay for the said shares. It was further provided (this provision is the subject-matter of the controversy before us) that in respect of the claims made by the said M/s. G. G. as plaintiffs in the said suit for commission, compensation and damages, the assessee will pay to the plaintiffs in full and final satisfaction of all their claims, a sum of Rs. 50,000 by five postdate cheques of Rs. 20,000 each, viz., of July 15, 1964, October 15, 1964, January 15, 1965, April 15, 1965, and July 15, 1965. The assessee thereafter paid the entire said sum of Rs. 50,000 on June 14, 1964, itself and claimed deduction in respect of the same in the assessment year in question.
4. The ITO held that the said payment of Rs. 50,000 had brought the assessee-firm a bundle of rights and, therefore, the expenses was of a capital nature. He, therefore, disallowed the claim for deduction of the said amount.
5. Against the said decision, the assess appealed and the AAC held that there was no foundation for the ITO's finding that the payment of Rs. 50,000 create a bundle of rights in favour of the assessee, and accepting the case of the assessee, delete the addition of the said amount made by the ITO.
6. The department appealed to the Tribunal against the decision of the AAC. It was contended before the Tribunal on behalf of the department that the said sum of Rs. 50,000 was paid by the assessee to regularise the sub-tenancy and thus to get a title, as a sub-tenant to the said premises, which was of an enduring benefit to the business. It was also submitted that the said payment in any case was an expenditure for curing a defect in the title and on that ground also the expenditure was in the nature of a capital expenditure. The department further submitted that the consent decree provided for the acquisition of a direct tenancy by the assessee from the landlords, M/s. New Piece Goods Bazar Co. Ltd., in consideration of Rs. 50,000 paid to M/s. G. G., and on that ground also the expenditure was of a capital nature. As against this, it was the contention of the assessee that the assessee-firm was in exclusive possession of the suit premises as the sub-tenant thereof right from June 30, 1952. Further, by virtue of the said Ordinance No. II of 1959, the sub-tenancy was validated and protected under the Bombay Rent Act, 1947, and that there was no acquisition of a sub-tenancy under the consent decree dated June 15, 1964. The payment of Rs. 50,000 to M/s. G. G. was firstly on account of their claim for commission and compensation and in the alternative it was a payment made merely to preserve and maintain the asset, viz., the subtenancy in the said premises which asset they had already acquire since June 30, 1952. It was also contended on behalf of the assessee that the said payment was also a payment made to avoid a commercial inconvenience and a disturbing element in its day-to-day business and for avoiding litigation with M/s. G. G. in respect of the said premises in which the assessee-firm undoubtedly carried on its business.
7. The Tribunal in the first instance came to the conclusion that the construction of the said consent decree showed that the payment was mainly or the commission due to M/s. G. G. and that the said commission was an allowable deduction. According to the Tribunal, since it was not open to go behind the consent decree, the depreciation of the said payment as payment for the commission due, was sufficient to dispose of the appeal. However, the Tribunal felt that in view of the controversy raised before it at some length, it should record a finding on the other question also, viz., whether the agreements dated June 30, 1952, and June 23, 1955, entered into between the parties were those of commission agency or of sub-lease, and the nature of the payment of Rs. 50,000 in the context of the said finding. After construing the said agreements of 1952 and 1955, the Tribunal came to the conclusion that the said agreements thought purporting to create a selling agency had in fact create sub-tenancy in favour of the assessee in respect of the shop premises and that they were not agreements of commission agency. On this finding, the Tribunal held that there was already a sub-tenancy created in favour of the assessee as far back as June 30, 1952, and, therefore it could not be said that the payment of Rs. 50,000 which was made under the decree of 1964 was a payment for the acquisition of a sub-tenancy under the said consent decree. In this view of the matter the Tribunal held that the expenditure of Rs. 50,000 was not of a capital nature. The Tribunal taking the view as it did, therefore, held that the AAC was justified in holding that payment of Rs. 50,000 was an allowable deduction. The Tribunal, therefore, dismissed the revenue's appeal. The revenue having thereafter made an application for reference under s. 256 (1) of the I. T. Act, 1961, the Tribunal has referred the question as reproduce at the outset under the said section.
8. Shri Kotwal, the learned counsel appearing for the revenue, raised the same contentions which were raise before the Tribunal. In support of his contentions, he relied upon the terms of the consent decree dated June 15, 1964, and pointed out two features of the said decree which according to him were salient and showed that the expense of Rs. 50,00 was in the nature of a capital expense. The first such feature according to him is that M/s. G. G. had in the plaint claimed that they were in lawful possession of the suit premises and that the assessee-firm was not entitled to remain in the premises after June 30, 1959, which was the period up to which it was allowed to stay on the premises under the second of the two agreements. This according to Shri Kotwal showed that the assessee was not a legal sub-tenant and was not inducted as such sub-tenant in the premises. It was only under the consent decree that it was for the first time recognised as such lawful sub-tenant. The payment of Rs. 50,000, therefore, was directly for the acquisition of such sub-tenancy from M/s. G. G. under the said consent decree. This being so the expense was rightly held to be of a capital nature by the ITO. The second feature of the consent decree according to him was that it was agreed between the parties that M/s. G. G. would first acquire the necessary shares from the landlords, M/s. New Piece Goods Bazar Co. Ltd., and that these shares would thereafter be transferred in the name of the assessee to enable it to get a direct tenancy from the said landlords. M/s. G. G. had further undertaken to give all co-operation and to sign all papers for the purpose of getting such direct tenancy in favour of the assessee. The payment of Rs. 50,000 was also in consideration of this arrangement made between the parties to get the direct tenancy in favour of the assessee. On that count also, the finding recorded by the ITO that the said expense was in the nature of a capital expense was a valid and a proper one and the two appellate authorities had erred in holding to the contrary. His third submission was that properly construed the two agreements of 1952 and 1955, under which the assessee was in the premises, were, at best, agreements of leave and licence and no sub-tenancy was created under the said agreements as contended on behalf of the assessee and held by the Tribunal. This being so, it could not be said that the sub-tenancy was created as far back as on June 30, 1952. The sub-tenancy could be said to have been created for the first time under the consent decree of June 15, 1964, and the payment of Rs. 50,000 could properly be related to the creation of the said sub-tenancy and, hence, the expense was of a capital nature.
9. We are afraid that the contentions raised by Shri Kotwal on behalf of the revenue suffer from primary errors. In the first instance, the Tribunal having been invited to construe the two agreements, viz., of June 30, 1952, and June 23, 1955 has recorded a finding of fact with regard to the nature of the said agreements and it has come to the conclusion that the said agreements had in fact recorded a sub-tenancy in favour of the assessee. In view of this finding of fact recorded with regard to the nature of the said two agreements, it is not open to the revenue to a assist the said finding before us. As a matter of fact, there is not such question referred to us with regard to the validity of the finding recorded on the said two agreements by the Tribunal and the only question is as stated earlier with regard to the nature of the said payment, viz., whether the said payment was of a revenue or of a capital nature. Secondly as the documents on record show, admittedly, the assessee-firm has been in exclusive possession of the shop premises right from June 30, 1952. It was the contention of the assessee in its written statement filed in the suit in which the decree has been obtained, that the said two agreements of 1952 and 1955 were sham and bogus. The said agreements were in fact agreements of sub-tenancy in favour of the assessee and the agreements were words in a particular fashion only to circumvent the law and to avoid eviction of M/s. G. G., the tenants, from the shop premises for breach of the provisions of the Bombay Rent Act, 1947. The payment of Rs. 500 per month to M/s. G. G. though worded as commission was in fact rent in respect of the suit premises and that M/s. G. G. were never in possession of the suit premises not were they carrying on any of their business in the said premises. It was the assessee alone who was in possession of the suit premises and the entire business carried on there was the business of the assessee. Further, by virtue of the said Ordinance No. III of 1959 which came into force with effect from May 13, 1959, i.e., before the expiry of the period of the second agreement between the parties the assessee was protected from eviction as sub-tenant of the suit premises and whatever defects there were in its title prior to May 13, 1969, were cured and its sub-tenancy was regularised. There was no reason for the assessee, in the circumstances, to enter into any agreement with M/s. G. G. to regularise its sub-tenancy in view of the statutory validation of its status, was the said shop premises. Thirdly, the consent decree itself shows that M/s. G. G. in terms accepted the position that the assessee was in possession of the suit premises as lawful sub-tenant right from June 30, 1952, and that they were prepared to co-operate with the assessee for getting a direct tenancy if necessary from the landlords themselves. In the wording o the consent decree, therefore, it is clear that even according to M/s. G. G. who were the plaintiffs in the said suit, the defendants were the lawful sub-tenants of the suit premises from June 30, 1952. It cannot, therefore, be said that the subtenancy in favour of the assessee was being created for the first time on June 15, 1964, i.e., the date of the consent decree. The said agreement record in the consent decree is not binding on the landlords of the shop premises. Therefore, even if it was agreed between the parties that M/s. G. G. would co-operate with the assessee in securing a direct tenancy, the landlords were not bound to recognise any such agreement. Hence, it is difficult to understand the argument that it was agreed that such an asset would come into existence by virtue of the consent decree. Lastly, as the facts in the present case show, the assessee had become the lawful sub-tenant of the suit premises by virtue of the statutory intervention in the form of the said Ordinance under the Bombay Rent Act, 1947, which applied to the suit premises, the creation of a sub-tenancy was prohibited prior to the said Ordinance. The tenants, viz., M/s. G. G. were not, therefore, authorised to create such a sub-tenancy in favour of the assessee prior to May 13, 1959, nor could they create such a sub-tenancy after May 13, 1959. Therefore, on June 15, 1964, M/s. G. G. could not have created the sub-tenancy in favour of the assessee even under the said consent decree. The only construction, therefore, that can be placed on the said consent decree is that M/s. G. G. recognised the legal effect of the said Ordinance, which was that by virtue of the assessee being in the suit premises prior to May 13, 1959, it had become the lawful sub-tenant of the suit premises. Recognition of a sub-tenancy is not a creation thereof. It is not, therefore, correct to say, as is sought to be urged by shri Kotwal, that it was the consent decree dated June 15, 1964, which for the first time created an asset in the form of sub-tenancy in favour of the assessee. For all these reasons, we are of the view that the finding recorded by the Tribunal that no such asset as a sub-tenancy was create on June 15, 1964, under the said consent decree is a correct finding. Hence, the amount of Rs. 50,000 which was paid by the assessee to M/s. G. G. under the terms of the said consent decree could not be said to be an expense in the nature of a capital expenditure.
10. Hence, the answer to the question referred to us would be in the affirmative and in favour of the assessee. The revenue to pay the costs of this reference.