1. The business of the assessee-company in the relevant assessment year 1963-64, consisted of carrying on mining business and financing mining operations. The assessee also owned some land at Ghatkopar and the said land was leased by the assessee to M/s.Ishwardas Haridas Bhatia by a deed dated December 4, 1962, for a period of 98 years. Up to December 8, 1963, if rent was demanded, it was to be paid at Re. 1 per month, but from December 9, 1963, the rent was fixed at Rs. 11,250 per month payable on the 9th day of each English calendar month.
2. The claim of the assessee before the ITO was that a sum of Rs. 14,500, which was paid as stamp duty for the lease deed, as well as a sum of Rs. 45,000 paid as brokerage to one Champaklal Kothar should be allowed to be deducted from its business income as the said expenditure was wholly and exclusively incurred for the purpose of the business of the assessee. The contention of the assessee before the ITO was that the income in the form of rent should be assessed as business income.
3. The ITO took the view that the long-term lease for 98 years was in the form of an advantage of an enduring character and, therefore, the expenditure, deduction of which was claimed, had to be treated as capital expenditure. This view of the ITO was confirmed by the AAC.
4. The Income-tax Appellate Tribunal took the view that the income of the assessee under the lease deed could not be characterised as income from any business activity of the assessee and that such income could be taxed only under the head 'Income from other sources'. With regard to the expenditure of Rs. 59,500, the Tribunal took the view that the only way in which the transaction of lease can be considered was that the assessee which had a capital asset in the shape of land had incurred some expenditure to realise income from the land and that no new capital asset was brought into being. The Tribunal took the view that what the assessee did was to incur expenditure to enable the company to earn some income from the land and the fact that the income would be earned for a long period of years would not change the nature of the expenditure. The Tribunal found that the assessee was entitled to the deduction of Rs. 59,500.
5. Arising out of this order of the Tribunal, the following two questions have been referred to this court under s. 256(1), the second question being referred at the instance of the assessee and the first one at the instance of the Revenue:
'(1) Whether, on the facts and in the circumstances of the case, in computing the assessee's income for the material year, the sum of Rs. 59,500 was deductible ?
(2) Whether, on the facts and in the circumstances of the case, the income from the lease rent was assessable as business income or as income from other sources ?'
6. Mr. Joshi, the learned counsel for the Revenue, has contended before us that the only relevant provision under which the deduction, if at all, would be permissible would be under s. 57 of the I.T. Act, 1961 (hereinafter referred to as 'the Act'), and, according to the learned counsel, under cl. (iii) of s. 57, before a deduction of expenditure can be made permissible, it will have to be proved that it was not an expenditure of a capital nature. Section 57, cl. (iii), reads as follows:
'The income chargeable under the head 'Income from other sources' shall be computed after making the following deductions, namely:-......
(iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income.'
7. The learned counsel for the Revenue has contended that the expenditure of Rs. 59,500 was clearly an expenditure of a capital nature as contemplated by the bracketed portion in cl. (iii) of s. 57 because, according to the learned counsel, the amount of Rs. 59,500 was spent as cost of acquiring a source of income and this source of income, according to the learned counsel, was the contract of lease. Therefore, according to the learned counsel, the assessee was not entitled to any deduction.
8. Now, it is no doubt true that under cl. (iii) of s. 57 of the Act, only such expenditure, which is not in the nature of capital expenditure and which is laid out or expended wholly and exclusively for the purpose of making or earning income from other sources, is made deductible. It is, however, difficult for us to appreciate the contention that when the assessee entered into a contract of lease with Ishwardas H. Bhatia, he was acquiring any new source of income or that the contract of leases was any new asset for the acquisition of which the amount of Rs. 59,500 in question had been spent by the assessee. A right to lease out land is clearly an incident of ownership of land and when land is leased out to a tenant on rent, the income in the form of rent is income from land. The source of income is thus the land itself. The contract of lease cannot by any stretch of imagination be described as a source of income. The contract of please may no doubt regulate the relationship between the lessor and the lessee, but that does not serve as a source of income because rent paid is for the use of lane and, therefore, the land alone is the source of income. Thus, whenever a contract of least is entered into between a landlord and a tenant, no new source of income is brought into being.
9. If no source of income is brought into being as a result of the contract of lease, and if, as in the present case, it is not now in dispute that the expenditure was necessary to be incurred for the purposes of lease, we fail to see why such expenditure cannot be said to be laid out or expended wholly and exclusively for the purpose of earning the income in the form of rent. The lease being for a long period of time had necessarily to be by a register document and payment of stamp duty was a statutory necessity. The fact that an amount of Rs. 45,000 has been paid to a broker who has secured the lease is not now in dispute. Thus, the total expenditure of Rs. 59,500 was clearly made for the purpose of earning income which was to come in the form of monthly rent for a long period of 98 years. The Tribunal, in our view, was, therefore, justified in recording a finding that the amount of Rs. 59,500 was deductible. Question No. (1), therefore, has to be answered in the affirmative.
10. So far as the second question is concerned, it was contended on behalf of the assessee by Mr.Munim that the income from land by way of rent should be treated as business income. There is no finding recorded by the Tribunal that the land was a trading asset of the assessee. If the land was not found to be a trading asset of the assessee and the assessee's main business consisted of hiring out machinery, income from rent could not be treated as business income but had to be treated as income from other sources. The second question has, therefore, to be answers against the assessee by holding that the income from rent was assessable as income from other sources.
11. The two questions raised are answered as follows:
Question No. (1): In the affirmative and against the Revenue.
Question No. (2): Income from lease was assessable as income from other sources.
Question answered accordingly. There will be no order as to costs of this reference.