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Commissioner of Income-tax, Bombay City-i Vs. Menora Hosiery Works Pvt. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 86 of 1966
Judge
Reported in[1977]109ITR714(Bom)
ActsIncome Tax Act, 1961 - Sections 37(1)
AppellantCommissioner of Income-tax, Bombay City-i
RespondentMenora Hosiery Works Pvt. Ltd.
Appellant AdvocateR.J. Joshi, Adv.
Respondent AdvocateV.H. Patil, Adv.
Excerpt:
.....the first place, it is clear that at about the time when the permission was granted, the original licence period of five years had already been renewed for a further period of five years, that is to say, the licensee at about the time when permission was granted was entitled to enjoy the benefit of the licensed premises well as the additional floor which it was to construct for a period of at least seven years more. 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. commissioner of income-tax [1967]66itr303(ap) on which..........character, for, according to him, after the said expenditure had been incurred, the leave and licence period that was available to the assessee was only up to 15th february, 1967. in other words, the benefit was to last only for a period of five or seven years at the highest. he urged that it was not a case where the assessee had attempted to extend or expand its business by incurring this expenditure on the construction of the second floor, but since the assessee was in need of additional accommodation to house his original business such expenditure had been incurred and, since no benefit of any enduring nature had been acquired by the assessee, the expenditure could not be regarded as capital expenditure but should be regarded as a revenue expenditure. he also contended that.....
Judgment:

Tulzapurkar, J.

1. This reference involves the usual ticklish question as to whether a particular expenditure incurred by the assessee is of capital nature or revenue nature and the exact question referred to us for our opinion by the Tribunal under section 256(1) of the Income-tax Act, 1961, at the instance of the Commissioner of Income-tax, Bombay City-I, runs thus :

'Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 27,284 or 1/5th of it incurred by the assessee in constructing second floor, was allowable as a deduction in the computation of its business profits ?'

2. The short facts giving rise to this question may be stated. The question relates to the assessment year 1962-63, the corresponding year of account being the year ended 31st March, 1963. The assessee, Messrs. Menora Hosiery Works Pvt. Ltd., which 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 would not charge anything to the assessee for the use and occupation of the additional structure till the expiry of the period of the licence. Pursuant to this agreement the assessee constructed the second floor at a cost of Rs. 27,284 and claimed the whole amount as a revenue expenditure or at least 1/5th of it as pertaining to the year of account in the assessment proceedings for assessment year 1962-63. The claim was disallowed by the Income-tax Officer on the ground that the expenditure was of a capital nature inasmuch as the assessee had acquired an enduring benefit by the construction of the second floor and that the amount spent by it over the construction did not amount to payment of advance rent. On appeal, the Appellate Assistant Commissioner upheld the disallowance of the claim as he confirmed the Income-tax Officer's view that the expenditure in question was clearly in the nature of capital expenditure. The assessee carried the matter in second appeal to the Appellate Tribunal. Before the Tribunal it was contended that the construction cost was in effect a payment of advance rent for the period of five years (for an extended period of the licence) and that the taxing authorities had erred in disallowing the same. In the alternative, it was contended that if it was considered a capital expenditure, then depreciation should be allowed on the said amount. On behalf of the revenue the disallowance was sought to be supported on the basis of a decision of the Madras High Court in M. Subbiah Nadar v. Commissioner of Income-tax : [1953]23ITR58(Mad) . The Tribunal distinguished the Madras decision as, in its view, it rested on its peculiar facts and that in the instant case the renewal of licence for a period of five years had nothing to do with the construction of the second floor undertaken by the assessee under the agreement dated 12th December, 1959. The Tribunal further took the view that there was no obligation cast on the assessee under the leave and licence agreement to improve the property and that instead of paying the said amount as rent for the second floor to the licensor the assessee had spent it over its construction on behalf of the licensor. It also observed that, at the expiry of the licence, the additional structure was to belong to the licensor and that the assessee had to hand it over to the licensor without paying any compensation for the 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 out decision.

3. 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 licensor has allowed the assessee to construct the second floor and the terms and conditions on which such construction was allowed to the assessee and has contended that having regard to the terms and conditions as are to be found in the said agreement dated 12th December, 1959, it will have to be held that the expenditure that was incurred by the assessee for the construction of the second floor was a capital expenditure inasmuch as by incurring such expenditure the assessee had acquired an enduring benefit of a permanent nature and the said expenditure could not be said to have been incurred as and by way of payment of advance rent. In support of his contention he strongly relied upon a decision of the Andhra Pradesh High Court in the case of Taj Mahal Hotel v. Commissioner of Income-tax : [1967]66ITR303(AP) . On the other hand, Mr. Patil appearing for the assessee has sought to support the view of the Tribunal by contending that the assessee could not be said to have acquired a benefit of any enduring nature of a permanent character, for, according to him, after the said expenditure had been incurred, the leave and licence period that was available to the assessee was only up to 15th February, 1967. In other words, the benefit was to last only for a period of five or seven years at the highest. He urged that it was not a case where the assessee had attempted to extend or expand its business by incurring this expenditure on the construction of the second floor, but since the assessee was in need of additional accommodation to house his original business such expenditure had been incurred and, since no benefit of any enduring nature had been acquired by the assessee, the expenditure could not be regarded as capital expenditure but should be regarded as a revenue expenditure. He also contended that having regard to the two aspects which become clear on a fair reading of the agreement dated 12th December, 1959, (1) that at the end of the licensor period the structure, namely, the second floor, was to belong to the licensor and the same was required to be handed over by the assessee to the licensor without claiming any compensation; and (2) that the licensor had agreed not to charge any rent to the assessee during its occupation of the second floor till the renewed period was over, the expenditure incurred should be regarded as payment of advance rent made by the assessee to the licensor and hence it should be allowed as business expenditure in computing the business income of the assessee.

4. 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]27ITR34(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 and then summarised the law as follows - See : [1955]27ITR34(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 whatever be its source whether it is drawn from the capital or the income of the concern is certainly in the nature of capital expenditure. The question however arises for consideration where expenditure is incurred while the business is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment. Such expenditure can be looked at either from the point of view of what is acquired or from the point of view of what is the source from which the expenditure is incurred. If the expenditure is made for acquiring or bringing into existence on asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If, on the other hand, it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital.'

5. It will thus appear clear from the aforesaid observations which we have quoted that it is really the aim and object of the expenditure that would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure and, if the aim and object of the expenditure is to acquire or bring into existence an asset or advantage for the enduring benefit of the business, the expenditure will be in the nature of capital expenditure but if, on the other hand, the aim and object of the expenditure is not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it would 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.

6. 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 licence had been extended for a period of five years. In other words, at about the time when permission was granted to the assessee to construct the second floor at its own cost on terms and conditions contained in the agreement dated 12th December, 1959, the total period of the licence which was enjoyable by the assessee was ten years ending on 15th February, 1967. By the letter dated 12th December, 1959, the licensor granted permission to the assessee to build one more floor on his property at Vile Parle, which was going to be an extension to the existing the premises that were occupied by the assessee under the leave and licence of the licensor. The terms and conditions on which such permission was granted were set out in the second paragraph of this letter which runs as follows :

'You shall carry out the construction at your own cost and when the original leave and licence expires on the 15th February, 1967, the additional structure that you shall be building shall belong to us, and you will not be entitled to any compensation after the expiry of the said period. We shall not charge you anything for the use and occupation of the said additional structure that you will be constructing up to the 15th February 1967. Whatever extra rates, taxes, water charges, etc., that we may be required or called upon to pay as a result of your putting up the said additional structure, shall have to be borne and paid by you.'

7. Two or three aspects emerge very clearly from the aforesaid terms and conditions on which permission to construct the second floor was granted by the licensor to the assessee. In the first place, it is clear that at about the time when the permission was granted, the original licence period of five years had already been renewed for a further period of five years, that is to say, the licensee at about the time when permission was granted was entitled to enjoy the benefit of the licensed premises well as the additional floor which it was to construct for a period of at least seven years more. Secondly, the additional floor was to belong to the licensor only on the expiry of the licence period on 15th February, 1967. In other words, till the licence period expired on 15th February, 1967, the licensor was not to have any interest whatsoever in the said additional floor that was not to be constructed by the assessee at its own cost and its interest in the additional 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 benefit which was to enure to the assessee for a period of seven years could not be regarded as an enduring benefit of a permanent nature or a permanent character. The question whether a particular benefit is of enduring nature or of a permanent nature would always depend upon the facts and circumstances of each case, the concept of permanency being relative. Along with this aspect of the matter there are two other aspects which will have to be borne in mind, that during the period of the licence which was to expire on 15th February, 1967, the licensor had no interest whatsoever in the said additional structure and the said structure was to continue to belong to the assessee as the same had been constructed by the assessee at its own cost. It was for this reason that the consequential terms were indicated in the letter dated 12th December, 1959, that on the expiry of the licence period the said additional structure would be handed over by the assessee to the licensor without claiming any compensation and that the licensor would not charge the assessee any additional compensation for the said additional structure during the period of the licence. In the light of these aspects it will be difficult to accept the contention of Mr. Patil that the expenditure of Rs. 27,284 which was incurred for the construction of the second floor should be regarded as an expenditure incurred by way of payment of advance rent by the assessee to the licensor. Actually, the amount had been expended for the construction of the second floor in terms of the letter dated 12th December, 1959. It cannot, therefore, be regarded as any payment of advance rent by the assessee to the licensor. Moreover, as has been indicated above, the licensor had no interest whatsoever in the second floor that was to be constructed by the assessee till the expiry of the licence period on 15th February, 1967, and it is difficult to accept the proposition that incurring of the expenditure of Rs. 27,284 would be by way of payment of advance rent by the assessee to himself. That the licensor was not going to have any interest whatsoever in the second floor that was to be constructed by the assessee during the subsistence of the licence period has been made amply clear by the term which is to be found in the letter dated 12th December, 1959, that whatever extra rates, taxes, water charges, etc., that the licensor 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.

8. 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.

9. The decision of the Andhra Pradesh High Court in the case of Taj Mahal Hotel v. Commissioner of Income-tax : [1967]66ITR303(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 given liberty by the lessor to make any alterations or new constructions with the permission of the lessor and it was stipulated that the lessor could not demand enhanced rent. On termination of the lease, the assessee was to take away fittings and fixtures like fans, wash basins, wooden screens, etc., while the structures would remain the property of the lessor. During the accounting year 1956-57, the assessee put up new rooms for the comfort and convenience of guests and claimed the expenditure incurred, viz., Rs. 60,000, as allowable deduction either under section 10(2)(i) as rent spread over a number of years or under section 10(2)(xv). The department disallowed the claim on the ground that it was capital expenditure. On a reference to the High Court, the High Court held that, on the facts, the improvements effected by the assessee were of enduring advantage, though not everlasting, for the assessee's business during the period of the lease and that the expenditure was neither 'rent' nor 'premium' and the department was right in treating it as capital expenditure. On the question as to the nature of the expenditure of Rs. 60,000 that was incurred by the assessee for construction this is what the High Court has observed at page 314 :

'The sum of Rs. 60,000 spent for construction is not the amount which the assessee was under an obligation to pay to the lessor. It was intended to bring an enduring advantage for their hotel business by providing an additional number of rooms. If the assessee did not make these additions, the lessor could not complain of it, much less compel its performance. The result of the additional construction is, undoubtedly, in the nature of more or less of a permanent advantage. There is no covenant on the part of the assessee to pay Rs. 60,000 and the additions are only for the augmentation of the assessee's business during the lease period. An expenditure of that description cannot be called 'rent' as understood in law. Nor has it the element of premium. It is only an expenditure incurred by the lessee to effect an improvement to secure an advantage and an asset to it, and to enjoy during the time of the lease, though it may be that, at the expiry of the lease, the additions for what they are worth would vest in the lessor. But there can be no doubt that during the subsistence of the lease, the lessee alone was entitled to have the advantage 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 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 59, already cited, in which the facts are similar, that such an expenditure could not be described as rent or premium.'

10. 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 benefit this is what the court has observed : [1967]66ITR303(AP) , 315 (AP) :

'As already noticed, in Henriksen (Inspector of Taxes) v. Grafton Hotel Ltd. : [1943]11ITR10(Cal) , 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's case [1928] 14 TC 34 the duration of the right acquired was eight years and yet it was held to be of 'relatively permanent character'. The learned judge observed that 'permanent' is indeed a relative term, and is not synonymous with 'everlasting'.

In this view, we have no doubt that the right to occupy the additional rooms for a period of ten years, or after exercising the option for a further period of ten years, is a right of enduring benefit, though not everlasting.' In the instant case also it could be said that by incurring the expenditure of Rs. 27,284 the assessee acquired the right to occupy the additional floor for a period of seven years which could be regarded as a right of enduring benefit, though not everlasting. Having regard to the above conclusion to which we have arrived it is not necessary to refer to the other two decisions to which our attention was invited, viz., the decision of the Punjab High Court in Uttar Bharat Exchange Ltd. v. Commissioner of Income-tax and the decision of the Madras High Court in M. Subbiah Nadar v. Commissioner of Income-tax : [1953]23ITR58(Mad) .

11. In the result, the question that is referred to us is answered in the negative and against the assessee. The assessee will pay the costs of the reference.


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