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income-tax Officer Vs. Neelam theatre - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Delhi
Decided On
Judge
Reported in(1983)4ITD562(Delhi)
Appellantincome-tax Officer
RespondentNeelam theatre
Excerpt:
1. both the revenue and the assessee are in appeal against the order of aac, for the assessment year 1968-69. the revenue has raised only one issue which is about a sum of rs. 82,500 paid by the assessee during the year in question. the assessee claimed that he had made a payment of rs. 1,10,000 under the lease agreement for acquiring the property of jai hind cinema comprising of land, building, machinery and furniture.he had to make the payment of one-fourth of this sum, i.e., rs. 27,500, at the time of bidding in the auction held in july 1965. the ito did not accept the claim of the assessee for allowing a deduction of rs. 1,10,000 as the revenue payment made for carrying out the business by the assessee. . according to the assessee, the payment was made in the course of carrying out.....
Judgment:
1. Both the revenue and the assessee are in appeal against the order of AAC, for the assessment year 1968-69. The revenue has raised only one issue which is about a sum of Rs. 82,500 paid by the assessee during the year in question. The assessee claimed that he had made a payment of Rs. 1,10,000 under the lease agreement for acquiring the property of Jai Hind Cinema comprising of land, building, machinery and furniture.

He had to make the payment of one-fourth of this sum, i.e., Rs. 27,500, at the time of bidding in the auction held in July 1965. The ITO did not accept the claim of the assessee for allowing a deduction of Rs. 1,10,000 as the revenue payment made for carrying out the business by the assessee. . According to the assessee, the payment was made in the course of carrying out the business and being inextricably linked with the process of earning income should be considered as an outgoing of business. The ITO did not accept this claim. In his view, the payment was made as premium to enable the assessee to secure the aforesaid properties of Jai Hind Cinema for a period of 16 years. For this reason, the payment constituted a capital payment made for acquiring a capital asset or an advantage of enduring value. The payment was also described in the lease agreement as premium but the AAC, to whom the assesseee appealed, on a consideration of facts and circumstances brought on record, agreed with the assessee that the payment of Rs. 1,10,000 being inextricably linked with the process of earning income should be considered as a revenue payment made by the assessee in the course of carrying out his business. Since he found that payment of Rs. 27,500 was made before the accounting year, he held that this amount could not be considered for deduction during the year in issue. He allowed the claim of the assessee only in respect of Rs. 82,500 which was paid during the accounting year in issue. Therefore, both the revenue and the assessee are in cross-appeal. The revenue is in appeal against the deduction of Rs. 82,500 while the assessee is in appeal against the disallowance of Rs. 27,500.

2. In disallowing the aforesaid sum of Rs. 1,10,000 the ITO was moved by a consideration that the payment was made as a premium. Since, a payment of premium is to be considered as a capital payment, he had disallowed the claim of the assessee. As we have already indicated, the AAC had considered this payment as one which was inextricably linked with the process of earning income or as an integral part of the profit making process and, therefore, it could be considered according to him as a payment made in the course of carrying out the business. He was further moved by the plea of the assessee that payment has not brought any asset or advantage of enduring nature. On this view of his finding, he held that that portion of the payment which was made during the accounting year was allowable but the sum of Rs. 27,500 which was paid at the time of making a bid during the auction held in July 1965 was not to be considered as an expenditure made during the year in issue.

3. Both the revenue and the learned Counsel for the assessee addressed long arguments before us. Burden of arguments addressed by the revenue was that payment has enabled the assessee to enter into an agreement with the Government of Jammu and Kashmir State to acquire the building known as Jai Hind Cinema and the land appurtenant thereto together with machinery and fixtures. Lease being for a duration of 16 years, appellant cannot deny that he had secured an asset or an advantage of enduring nature. Even if it be considered that he had not acquired any asset which pertained to him, it cannot be denied by him that he had acquired an advantage of enduring nature for 16 years. Looked at from this angle, the assessee cannot justifiably claim that payment made as premium was that of the revenue nature. The departmental representative also depended on the circumstance that it was a one lump sum payment which was referred to in the lease agreement as a premium. The departmental representative supported himself by relying on a string of cases whose names we may note. The departmental representative referred to the decisions of Supreme Court in Durga Das Khanna v. CIT [1969] 72 ITR 796, that of the Calcutta High Court in Union Coal Co. Ltd. v.CIT[l968] 70 ITR 45 and that of Madras High Court in Ramkrishna & Co.

v. CIT [1973] 88 ITR 406. It was also pointed out that this Bench had already considered the claim for deduction of payment of premium in two similar cases relating to a lease granted by Jammu and Kashmir authority. These decisions are contained in the case of Paris Dry Cleaners, in IT Appeal No. 92 (Asr.) of 1977-78 and in that of Vijay Cigarette Stores [IT Appeal No. 554 (Asr.) of 1979]. The departmental representative submitted that this Bench already had considered in these cases claim for deduction of payment of premium. It reached a finding after ascertaining and considering facts that the payment could not be considered as the revenue payment made during the course of business carried on by the assessee. In both these cases, the Tribunal held that the payments of premium were capital payments which had secured the assessee, the lessee, an asset or in the alternative an advantage of enduring nature which facilitated carrying on the trade and business of the assessee. On the other hand, the learned Counsel for the assessee placed his reliance on another string of cases, namely, M.K. Bros. (P.) Ltd. v. CIT [1972] 86 ITR 38 (SC), L.H. Sugar Factory & Oil Mills (P.) Ltd. v. CIT [1980] 125 ITR 293 (SC) and CIT v.Bombay Cycle & Motor Agency Ltd. [1979] 118 TTR 42 (Bom.). The first two decisions are those by the Supreme Court and the third decision is a decision given by the Bombay High Court. Learned counsel for the assessee reiterated the pleas he had raised earlier. Referring to the lease agreement he submitted that a perusal of the various terms of the agreement does not suggest that the assessee had acquired any capital asset or any advantage of enduring nature. He referred to Clause 2(b) and submitted that he was required to undertake additional expenditure for making suitable adjustment in the building and fixtures as well as cinematographic machine before he could undertake exhibition of films.

Unless he incurred the expenditure, Jai Hind Cinema Hall could not be used as a cinema for purpose of exhibiting films. Referring to Clause 2(b), he made a submission that in case the lease agreement expired or was determined prematurely, he was not to get any compensation for having caused, repair and renovation to the building, furniture and/or cinematographic machine. It was submitted that where the appellant was saddled with a liability for further expenditure, it was hard to appreciate the finding of the ITO that he had acquired an asset or an advantage of enduring nature. Although the lease agreement was for 16 years, it was dependent upon the observance of all the conditions enumerated in the lease agreement. For the breach of any condition or a default in the payment of annual rent beyond the 30th day after the due date the lease could be determined and the lessor could enter upon the property and resume the lease. He, therefore, made a forceful submission that a perusal of the terms of the lease agreement did not justify a finding that the appellant had secured any capital asset or any advantage of enduring nature. He referred to the fact that this lease was not assignable nor was there any term under which it was renewable. After the expiry of the term the only way appellant could continue to hold the cinema building was by making a fresh bid at the auction to be held under the auspices of Jammu and Kashmir Government.

In this view of facts it was not possible to hold that the assessee had secured any asset or any advantage of enduring nature. He likened the case of the appellant to a tenant who continued to be in the enjoyment of tenancy after paying monthly rent regularly (sic). No one could reasonably claim that the tenant on a monthly basis was in possession of a capital asset or any advantage of enduring nature. What appellant had obtained was only a facility which could continue if he went on paying annual rent regularly within one month of the due date and Government had kept the terms of the agreement faithfully and the Government did not consider it necessary to acquire the property for any public purpose. Considered in this light, he submitted that the payment of Rs. 1,10,000 would not appear to be a payment of capital nature. He further submitted that Clause 1 of the lease agreement called upon the appellant-lessee to make the payment of annual rent of Rs. 65,000. It was the same clause which required the appellant to make the payment of Rs. 1,10,000 which was referred to as premium. The ITO had not considered this aspect of the matter. If the object and purpose of the annual payment of rent was to enable the assessee to carry on the business, object and purpose of payment of Rs. 1,10,000 could not be different from those intended for the payment of annual rent. If the nature of rent was that of revenue payment, it was not possible to hold that payment of Rs. 1,10,000 was that of a capital payment having the same object and purpose as was intended for payment of annual rent. It was further submitted that the Supreme Court has observed in the case of M.K. Bros., that in deciding the nature of payment made, it does not matter whether the payment was made by one instalment or by several instalments. What is important to be noted and appreciated in this connection is to ascertain the true nature and purpose for which the payment was made. In order to ascertain the purpose the nature of payment is to be ascertained. The careful perusal of Clause 2 of the agreement will suggest that it was the same purpose of making payment of Rs. 1,10,000 as obtained for the making of payment of annual rent of Rs. 65,000, purpose being the same their nature could not be different.

One could not be considered a payment of revenue nature and the other as a payment of capital nature. Looked at from this angle, it will follow that if ITO had treated the annual payment of rent to be a payment of revenue nature it was not open to consider the payment of Rs. 1,10,000 as a payment of capital nature. He also referred to a decision of the Delhi Bench of the Tribunal regarding the payment of premium made under a lease agreement, in the case of Mohd. Hussain Mohd. Yasin [IT Appeal No. 354 (Asr.)].

4. We have considered the facts of the case and also the submissions made by both the parties very carefully. It does not appear that we can possibly repeat our finding in the ex parte order and reverse the finding of the AAC in the matter. We do not find it possible to overrule the plea raised by the assessee that what he had acquired was not an asset or an advantage of enduring nature but a mere facility to carry on the business. In our view, he has correctly relied on the terms of the lease agreement to advance his contention that his position was hardly different from a person who takes a house on monthy rental basis. No doubt in this case he is to make annual payment of rent but his position cannot be considered very different from that of a tenant who enjoys his tenancy of the house on payment of monthly rent. As we cannot hold that a tenant in occupying a house on payment of monthly rent obtains an asset or an advantage of enduring nature, if he could be evicted and his tenancy determined at any time during the pleasure of the landlord, we cannot hold that the assessee in obtaining the lease had acquired any asset or advantage of enduring value, if he could be evicted from the lease for any of the reasons mentioned in the agreement. If there was default in payment of annual rent beyond 30th day from the date when the payment became due, the lessor could determine the lease agreement and resume the property. It is true that the lease agreement is to continue for a period of 16 years but it is not this factor alone which should decide whether the assessee has got an asset or an advantage of enduring nature. Our attention was drawn to Clause 2(b) under which the assessee was required to undertake additional expenditure for the repair and renovation of building, machinery and fixture before cinematographic exhibition could take place. In case of determination of lease, the assessee was not to get any compensation. In this view of facts, it is not possible for us to hold that where an assessee is saddled with a liability, we must still hold that he has acquired an asset or an advantage of enduring nature.

Our perusal of the agreement has brought to our notice Clause 2(c) which reads as under: that the lessee shall have to engage the ex-employees of the Amresh and Regal Talkies, Srinagar since defunct due to destruction thereof by fire on terms and conditions considered reasonable by the Government before he engages any new staff.

The lease agreement saddled the assessee with a responsibility of employing the ex-employees of Amresh and Regal Talkies on terms and conditions which the Government considers to be reasonable. In fact in a consideration of this condition, it is not possible for us to entertain the belief that the assessee had been provided with any advantage of enduring nature which could be considered as a capital advantage in the matter. We have to weigh both advantages and disadvantages proceeding from the terms of the lease agreement. It is only then, we can strike a balance and hold that any capital advantage of enduring value was obtained by the assessee so that the payment made therefor may be considered to be a payment of capital nature. A careful perusal of these terms shows that what the assessee had acquired was not merely a cinema building with its fixtures and machinery which he may choose to exploit or not in his sweet will. He had acquired the aforesaid property with the obligation to run the cinema where he was to make further investment and then could employ the erstwhile employees of Amresh and Regal Talkies on terms and the conditions the lessor considered satisfactory. The lease of the property if we consider it as a lease in the technical sense was coupled with obligations upon obligation involving investment not only over repair and renovation of building and fixtures but also over in running the cinema employing the erstwhile staff of the aforesaid Amresh and Regal cinemas. It was not at all that grant of lease was saddled with several monetary obligations to be undertaken by the assessee. The assessee had to take care that if he defaulted in the payment of annual rent beyond the 30th day from the date when the rent became due or committed any breach of any of the conditions including those provided in Clauses 2(a), 2(b), 2(c) and 2(d), the lessor was entitled to determine the lease agreement and resume the properties. The appellant was not to get any compensation for all the investment having been made by him over repair and renovation, employment of ex-employees of aforesaid talkies and the running of the cinema. He could not keep the leased property idle say for want of funds or use it for any purpose other than that of running a talkie. Considered from this angle it cannot lead to a finding that the assessee had acquired any asset or advantage of enduring value. We have noted further that a lease is generally transferable and assignable but in this case the terms of the lease deed provided that it was not assignable or transferable by the assessee at his instance. There was no provision whatsoever for the renewal of the lease agreement. A leasehold agreement which runs for several years generally provides a clause by which the leasehold agreement is renewable. But there was no provision for renewal of lease agreement in this case. There could not be any possibility either. If the assessee desired to continue to hold the property, he had to make the highest bid in the auction to be held for the purpose after the expiry of the lease. Only then he could continue to occupy the property under a fresh lease agreement as distinct from a renewed agreement. In this view of our finding based on a perusal of the terms of the agreement, we cannot hold that the assessee had obtained any capital asset or even a capital advantage of enduring nature which was different from the interest of a tenant in respect of his tenancy agreement. Therefore, we find force in the contention of the learned Counsel for the assessee that the assessee had not acquired any capital asset or any advantage of enduring nature for which premium had been paid. What he had obtained and which could at best be described as a facility for carrying on the cinema business for sixteen years during the pleasure of the lessor, who could determine the lease agreement for any of the reasons mentioned in the agreement or chose to acquire the property for public purpose at any time during the continuance of the lease. This finding is further supported by a careful peru sal of Clause 1 of the agreement which provides for the payment of Rs. 1,10,000 as premium and of Rs. 65,000 as annual rent to be paid every year. The learned Counsel has argued that both these payments have been provided for in Clause 1 only on the same conditions and basis. The ITO had considered the annual payment at Rs. 65,000 to be a payment of the revenue nature. It must be on the ground that it facilitated the assessee from carrying on this business. The terms and language of Clause 1 providing for the payment of Rs. 1,10,000 as premium, cannot be understood to have any other object or aim different from the aim and object of annual payment of rent. We find force in his submission that if the annual payment of rent can be considered to be a payment of the revenue nature on the ground that it enabled the assessee to carry on his business without securing for him any capital asset or capital advantage of enduring nature, we must also hold that the payment of Rs. 1,10,000 as premium was also made for the same purpose and object of enabling the assessee to carry on the business. If the object of the two payments was same, we shall not be justified in treating the one payment as a payment of the revenue nature and another as a payment of capital nature. In our view, it was not accidental but carefully planned that two payments have been provided for by the common language of Clause 2. When all the clauses are read together we are not left in doubt that the lessor who had settled the form of the agreement had no doubt in his mind about what he was transferring to the lessee, was not any asset or any capital advantage of enduring nature but a mere facility or an opportunity to earn income from carrying on his business. Nothing prevented him from providing for payment of premium separately in words which could show that intention of payment of premium was to enable the assessee to enter an agreement to acquire an asset or any advantage of capital value. Therefore, in this view of our finding, the finding of the AAC that payment of Rs. 1,10,000 was a payment of the revenue nature is to be upheld. We refrain from discussing the different authorities cited by both sides for the obvious reason because those decisions were on the facts of those cases. Still we cannot resist the temptation of referring to two decisions of the Supreme Court. In the case of M.K. Bros. (P.) Lid.

(supra), their Lordships observed, "the answer to the question as to whether an amount paid is a revenue expenditure or capital expenditure depends not so much upon the fact as to whether the amount paid is large or small or whether it has been paid in lump sum or by instalments, as it does upon the purpose for which the payrrent has been made and expenditure incurred. It is the real nature and quality of the payment and not the question or the manner of the payment which would prove decisive. If the subject of making the payment is to acquire a capital asset, the payment would partake of the character of a capita] payment even though it is made not in lump sum but by instalments over a period of time. On the contrary, payment made in course of and for the purpose of carrying on business or trading activity would be revenue expenditure even though the payment is of a large amount and has not to be made periodically". Our finding that the assessce has made the payment for carrying on his business and not for acquiring any capital asset or advantage of enduring nature is in accordance with the pro-n ouncement of the Supreme Court. Another decision which he would refer in this connnection is in the case of L.H. Sugar and Oil Mills (supra), their lordships observed, "the construction of these reads facilitatfd the business operations of the assessee and enabled the management to conduct the assessee's business to be carried on more efficiently and profitably. It was true that the advantage secured for the business of the assessee was of long duration in as much as it would last so long as the roads continued to be in motorable condition but it was not an advantage in the capital field because no tangible or intangible asset was acquired by the assessee nor was there any addition to or expansion of the profit iraking apparatus of the assessee. The amount of Rs. 50,000 was contributed by the assessee for the purpose of facilitating the conduct of the business of the assessee and making it more efficient and profitable without the assessee getting any advantage of enduring nature to itself and was an expenditure on revenue account". Incidentally, it may be noted that this is exactly our view regarding the payment of Rs. 1,10,000 which has not brought to the assessee any asset or advantage of enduring value. It has obtained the assessee only a facility to carry on its business. Too much reliance was placed by departmental representative on the two cases decided by Amritsar Bench of the Tribunal. Although, these decisions are decisions on the facts of the case, we deal with them so that the revenue may not feel that we have moved away from the stand taken in these two decisions. Both these decisions relate to leasehold agreement for leasing out shops, by Srinagar Municipal Council. In Paris Dry Cleaners' case (supra), a 'Nazrana' of Rs. 65,000 was paid besides the payment of monthly rent.

The Tribunal after a consideration of facts held that the amount of 'Nazrana' was a capital payment. We have found from an examination of the finding that the lease agreement did not provide for any expenditure to be undertaken by the lessee for the development or renovation of the shop. Failure to pay the rent in time was not to be immediately visited with the determination of the lease agreement but the lessee was obliged to pay interest for the period of delay caused in making payment of the rent. No doubt failure to pay rent for three consecutive months only could entitle the lessor to resume the lease, but it was not to be likened with the default in making the payment of the rent beyond a period of 30 days from the due date which could entitle the lessor to determine the lease in the present case. It was only when, default period continued for 3 consecutive months the question of determining the lease was to arise. There was a further provision for extending the terms of the lease and there was also a provision for the renewal of the lease. These provisions for extension or renewal of lease were lacking in the present agreement. In the present case as we have already said there was an obligation to incur further expenditure over the repair and renovation of the building.

There was an additional obligation cast on the lessee to run the cinema so that the ex-employees of Amresh and Regal Talkies could be employed.

The assessee in the present case could not keep the building idle without using it to exhibit films. In the case of the Paris Dry Cleaners (supra), the assessee was at liberty to keep the shop locked and not use it for business at a time when it was not profitable to do business. No such liberty was available to the lessee of Jai Hind Cinema. As we have analysed above the agreement of Jai Hind Cinema saddled the assessee with heavy obligations instead of obtaining an advantage of enduring value to them in the real sense. Therefore, the principles approved in the case of Paris Dry Cleaners (supra) could not be applied to the case of the present appellant, 5. Similarly we have examined the facts in the case of Vijay Cigarette Stores (supra). There again the lease as already indicated, related to a letting out shop and the assessee was required to make a payment of Rs. 9,100 as premium. In this case, lease was for 40 years. It does not appear that there were any of the obligations which were casted on the lessee of Jai Hind Cinema, were casted on the lessee of the shop in the case of Vijay Cigarette Stores (supra) for the determination of lease deed for the default in making payment of monthly rent. In fact the finding in this case was reached without any examination of the terms of the lease deed agreement. It was observed, "Shri Vasudeva refers to Clause 1(a) which is also misplaced. He had not furnished a copy of the lease deed agreement entered into with Jammu Development Authority but filed a copy of the lease deed entered into with Jammu Development Authority but had filed a copy of terms and conditions for the lease as given in the auction notice". Finding was reached in this case without a perusal of the terms and conditions of the lease agreement. We are, therefore, unable to follow the finding arrived at in this case in determining whether the payment of Rs. 1,10,000 was a payment of the revenue nature or of capital nature. We again reiterate that mere reliance on names or nomenclature instead of a critical appreciation of terms and conditions of the lease agreement is misleading. In both these decisions, the Tribunal found that payment was made to enable the assessee to enter into the agreement of lease. Looked at from this standpoint also the payments were undoubtedly payments of capital nature. In the present case, as has been reiterated by the learned Counsel, payment was made under the agreement being provided in Clause 2 which also provided for the payment of annual rent. As we have indicated there is no material on record which may enable us to distinguish but the two payments made under Clause 2. Therefore, we uphold the finding of the AAC that payment being linked with the process of earning income was a payment for carrying out the business.

As far deduction is concerned, acting on the same principle, we uphold his finding that the assessee is entitled to claim deduction of Rs. 82,500 only made during the accounting year and is not entitled to claim the deduction of Rs. 27,500 made before the commencement of the accounting year. This disposes of the appeal of the revenue and also the appeal of the assessee partly in respect of claim of deduction of Rs. 82,500 and Rs. 27,500 respectively.

6. The assessee has also made a claim for deduction of Rs. 8,596 which were admittedly preliminary expenses incurred before the commencement of the accounting year. We have examined the findings of the two authorities and we do not find that the assessee has made out any case that would justify our interference. We uphold the finding of the A AC regarding the disallowance of Rs. 8,596.

7. Similar is our finding for disallowance of Rs. 5,212 representing a part of the conveyance expenses. We consider the finding of the AAC as reasonable and correct and decline to interfere.

8. There remains the appeal of the assessee in respect of disallowance of Rs. 6,060 from donation account. In our view, the assessee has not been able to make out a case which may entitle him for deduction. We uphold the finding of the AAC and maintain the disallowance of Rs. 6,060.

10. I have perused the order recorded by my brother, the learned Judicial Member. I am not inclined to agree with the conclusion arrived at by him on the main point involved in these appeals. The reasons for the same are discussed below.

11. The basic facts are that the Divisional Commissioner, Kashmir, notified the intention of the Government to lease out by public auction for the purpose of cinematographic exhibition the building known as JAI HIND CINEMA HALL and land appurtenant thereto. The auction was held on 15-7-1965. The notification stated 'The bid offer shall specify a lump sum to be paid for the lease and an annual lease rent to be paid in addition. The acceptance of any bid will be subject to the approval of the Government'. One-fourth of the premium offered was to be deposited on the spot and the balance was to be paid within 15 days of the date on which the sanction of the acceptance of the bid was accorded by the Government by a duly registered Quabbuliat Nama. The annual lease rent was payable within one month of the expiry of each year of the lease and the lease was to be terminable for non-payment of the same. The notification further cl arified that the lessees will have to incur necessary expenditure on the repair, improvement and reinforcement, etc., of the building and also for making necessary additions thereto in order to make it suitable for cinematogaphic exhibition in terms of the prescribed rules. The lease was to be for a period of sixteen years and on the expiry of the lease possession of the cinema hall was to be surrendered. If the conditions laid down by the Government were not satisfied, the Government could re-auction the lease.

12. On the date of auction, the assessee agreed to pay a premium of Rs 1,10,000 and an annual rent of Rs. 65,000. The assessee being the highest bidder, a lease deed was executed in favour of the assessee and under the said deed the assessee could hold the cinema building on lease for sixteen years. It was provided that at the expiry of each lease year the annual rent of Rs. 65,000 was to be paid within 30 days.

The lessee had to incur necessary expenses for repair, maintenance, etc., as well as for improvement. It was further stipulated that the lessee shall have to engage the ex-employees of Amresh and the Regal Talkies, Srinagar, which had been destroyed by fire. The lease was not transferable without the sanction of the lessor and the security of Rs. 10,000 was paid for continuing cinema theatre by the lessee.

13. When this matter came before the Tribunal, the Tribunal passed an order in this case on 19-11-1981. The learned Judicial Member speaking for the Bench observed as under: 5. We have perused the order passed by the AAC very carefully and considered the submission made on behalf of the revenue. We are not in a position to subscribe to the view of the AAC that the payment of premium being linked up with the income earning apparatus, was of the nature of revenue expenditure. We are also not able to convince ourselves that the assessee had not acquired any asset or advantage of enduring value. In our view, the assessee had acquired the lease on account of the payment of premium of Rs. 1,10,000. The assessee being the highest bidder, would not have still acquired the lease if it had not agreed to the payment of Rs. 1,10,000. There is no misgiving that the payment of the premium of Rs. 1,10,000 was not on account of the payment of advance rent. We have perused the agreement brought on record very carefully. It does not directly or indirectly support a claim of the assessee that premium could be considered as an advance payment of rent or any part of it. The lease agreement to obtain the building of Jai Hind Cinema and land appurtenant thereto was not to be mistaken for a lease to obtain raw material or stock-in-trade for example brick earth, limestone, tendu leaves, etc., Which may justify a finding that the payment was linked up with the income earning activity and was an integrated part of the business set up. The lease had enabled the assessee to possess and use the premises of Jai Hind Cinema building and land appurtenant thereto for a period of 16 years. From this consideration, we do not find any support for the contention of the assessee which had been relied on by the AAC to hold that no asset or advantage of enduring value had been obtained under the lease. In our view the assessee had obtained the possession of the building and land appurtenant thereto for a period of 16 years. Even if he had not acquired the ownership of an asset, he cannot deny that he has not acquired an advantage of enduring value in the possession of the Jai Hind Cinema building for a period of 16 years. A premium paid by the lessee for the grant or renewal of a lease is normal capital expenditure whether it is payable in lump sum or in instalments over the whole period of the lease along with rent. If the sum paid by the lessee represents premium or 'salami' for the lease and not the advance payment of rent such a payment cannot partake of the nature of revenue payment. There is no doubt that such payment is of the nature of capital expenditure. In our view, the premium of Rs. 1,10,000 for acquiring the lease represented capital expenditure and was not deductible from the profit of the assessee for the year in issue. We have already held that the lease agreement has not put in the possession of the assessee a source of raw material where the lump sum payment as premium might be considered as payment for the purpose of acquiring the raw material.

Therefore, the finding of AAC is liable to be vacated and we vacate it. We may here deal also with the issue raised by the assessee in respect of his claim for further deduction of Rs. 27,500. As we have held that the payment of the premium was capital expenditure and was not liable to be deducted, the claim of the assessee for deduction of Rs. 27,500 cannot succeed and we, therefore, uphold the finding of the AAC disallowing the claim.

The assessee's appeal against the disallowance of the balance of Rs. 26,500 by the AAC was also dismissed. This order of the Tribunal was restored for fresh hearing on the plea of the assessee that he could not be represented on the date of hearing due to certain unavoidable reasons.

14. The material which was already before the Tribunal in the shape of the notification, the copy of the agreement, etc., continued to be the same on the basis of which the earlier order was passed. The learned Counsel for the assessee has now made his submissions and it has to be seen whether on the basis of the facts already considered and in the light of the arguments advanced by the learned Counsel for the assessee, a different view has to be taken on the facts and in the circumstances of the case.

15. It would appear from the notification for auction that the lump sum was to be paid for the lease and an annual lease rent was also to be paid. This rent was payable at the end of each lease year. The lump sum payment is described as premium in the auction notification as well as in the agreement. A perusal of the notification read with the agreement shows that the lump sum payment by way of premium was for obtaining the rights under the lease whereas for the continued enjoyment of those rights the annual payment of rent had to be made at Rs. 65,000.

16. As observed by the learned author, Palkhivala, on page 494 of his commentary, a premium paid by the lessee for the grant or renewal of a lease is normally capital expenditure, whether it is payable in a lump sum or in instalments over the whole period of the lease along with the rent. However, if a part of the total rent for the term of lease is taken in advance in one year, it would not mean that it is payment by way of premium. If the same bid represents not premium but advance payment of rent, it has to be allowed as a revenue expenditure.

17. Now on the facts of the present case, we have to ascertain whether the amount of Rs. 1,10,000 has been stipulated and paid by way of advance rent or it is in the nature of premium enabling the assessee to enter into the lease agreement and to obtain the rights under the lease. It is an admitted position that the assessee was not carrying on cinematographic exhibition business in the Jai Hind Cinema hall prior to the grant of this lease by the Government. The premium was paid in order to enable the assessee to enter into the lease agreement and to start a new bnsiness of cinema exhibition in Jai Hind Cinema hall.

Neither from the notification nor from the agreement the premium appears to be merely advance payment of rent for the whole of the lease period. Under the lease agreement the lessee obtained the cinema building for a period of 16 years and got the right to carry on business in those premises in accordance with the terms and conditions of the agreement. The right to get the possession of the building for carrying on business for the period of lease and having the right to carry out improvements and adjustments in the premises was certainly an advantage of enduring nature and formed the nucleus and the hard core of the business which was to be carried on by the assessee. The fact that certain conditions were laid down on the assessee for employing the ex-employees of certain cinema houses which had been destroyed and other conditions of following the rules and conditions could not have the effect of changing the nature of the enduring advantages given by the assessee as a result of the payment of premium.

18. In the case of H. Dear & Co. (P.) Ltd. v. CIT. [1966] 60 ITR 546, it was held by the Supreme Court that the amount paid in addition to the stipulated royalty with a view to pursuade the authority to grant a leaise was in the nature of capital expenditure and was not deductible.

The Supreme Court had held that while royalty was deductible the payment made by way of additional payment could not be allowed as a revenue deduction. These principles were laid down in Green v.Favourite Cinemas Ltd. 15 TC 390 and Watney & Co. v. Musgrave 1 TC 272.

A similar matter like the one which is before us was considered by the Madras High Court in the case of Ramakrishna & Co. (supra) in which a cinema theatre building was taken on lease on a monthly rent of Rs. 3,500, the lease being for a period of four years with a right to renew the same for further terms of four years each. The right title and interest under this lease deed was assigned to another firm which paid the amount of Rs. 1,00,000 to the initial lessee. In addition a rent of Rs. 3,500 was payable to the initial one. The assessee had claimed a part of the consideration of Rs. 1,00,000 as a deduction. The question for consideration was whether the amount of Rs. 1,00,000 which was paid was a revenue expenditure or not. The High Court found that the amount of Rs. 1,00,000 was paid for execution of lease deed the right of cinema theatre in which the assessee wanted to carry on business of exhibition of cinema films. If the assessee had not agreed to pay this amount of Rs. 1,00,000 for the assignment of the lease the assignment itself would not have been given. The High Court held that the amount paid in the interest of premium paid for the purpose of enabling the assessee to carry on his business and it did not form part of the rent payable in respect of the theatre. The High Court held that the amount was paid for the acquisition of capital asset which enabled the assessee to carry on his business and it was a capital expenditure and not a revenue expenditure. While doing so, their Lordships took note of several English decisions including the decisions referred to above, and also the decision of the Supreme Court in the case of Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34. Their Lordships further observed that merely because there was a penalty clause in the lease deed the right acquired by the lessee under the lease cannot be stated to be not of enduring nature.

19. In view of the legal position discussed above, the premium paid by the assessee was not in the nature of an advance rent but in the nature of salami or a lump sum payment so as to give him the rights under the lease. As the payment was made as a preliminary condition of the start of the business which enabled the assessee to carry on business for the period of lease the payment was certainly of a capital nature.

20. In the course of hearing, the departmental representative relied upon an order of the Amritsar Bench in the case of Paris Dry Cleaners (supra). The learned Judicial Member has referred to this order in para 4 of his order. According to the discussion, it appears that in his view the facts of that case were materially different from the present case. With respect, however, I do not find any such difference in the essentials. The differences which have been mention ed regarding the various clauses in the agreement could not change the nature of the payment of premium or Nazrana. The fact that the assessee had the right to make improvement in the building for the purpose of carrying on of his business which right was not there in Paris Dry Cleaners' case (supra) would not in my opinion have any bearing on the capital or revenue nature of the payment of Rs. 1,10,000. The fact that in the case of Paris Dry Cleaners (supra) the lease could be resumed on failure of three months' rent whereas in the present case it could be resumed on the default is also of no avail. It may be noted that in the present case the annual rent was payable within one month after the close of these years. This is an advantage over monthly payment of rent. However, in my opinion, these procedural terms would not determine the nature of the payment. The fact that the assessee had to employ ex-employees would also not change the nature of the payment. In my opinion, therefore, the so-called distinguishing features drawn are differences in non-essentials and the basic facts and principles to be decided were the same in that case as in the present case. It may further be mentioned that this Bench has made a reference to the High Court in the case of Paris Dry Cleaners [RA No. 23 (Asr.) of 1980] and the matter is pending before the High Court. In that case also, the Tribunal had held: 5. . .In this case copies of the relevant documents have been placed before us and the conditions of the advertisement proposing to auction for fixing the amount of Nazrana payable in addition to monthly rent, the lease agreement and other papers have been brought to our notice. Looking into them and considering the case law we are unable to share the view of Delhi Bench and the case has to be decided on the basis of the evidence led before us which is definitely more complete in this case.

6. It is clear from the advertisement of the Municipal Council, Srinagar that that body held an auction for fixing up through bids the amount of Nazrana (premium) in respect of shops and rooms under construction which were situated in Had Singh High Street, Srinagar.

It was clearly provided that rent will be payable in addition to the Nazrana or premium and condition 3 may be referred to in that regard. The payment of Nazrana therefore was stipulated merely for the purpose of entering into a tenancy agreement. It is further clear from the sanction order, dated 7-3-1974 that the monthly rent of Rs. 300 was to be paid by the allottee. The lease agreement, dated 7-3-1974 laid down that the lease was to be granted for a period of 17 years. These facts are quite eloquent to indicate the true nature of the payment of Rs. 65,000 which, in our opinion, is capital in nature. We may refer to a commentary of Kanga and Palkhivala, Vol. I, Seventh Edition wherein at page 149 observations occur in support of our view along with the relevant case law. At page 149 it is stated that premium (Salami) is a single payment made for the acquisition by the lessee of the right to enjoy the benefits granted to them by the lease and that general right may properly be regarded as a capital asset and the money paid to purchase it may properly be held to be payment on capital account. These authorities one of Privy Council and the two of the Supreme Court namely 11 ITR 513, 32 ITR 169 and 82 ITR 464 have been relied upon by the learned author. At page 494 while dealing with Section 37 the learned author has again stated that a premium paid by the lessee for the grant of renewal of lease is clearly capital expenditure, whether it is payable in a lump sum or in instalments over the whole period of the lease along with rent.

7. We may also deal with the question of forfeiture of lease on non-fulfilment of lease conditions as contained in the agreement. To our mind this issue is not at all relevant to determine the nature of expenditure incurred on payment of Nazrana or premium to the Municipal Council. The Nazrana was paid only for the grant of tenancy rights and once these are granted the purpose of payment of Nazrana is over. A lease is granted on certain conditions and if these conditions are violated cancellation of lease on that score will have nothing to do with the question of acquisition of lease.

The breach of conditions of lease agreement stands on a different footing and if the lessee violates those conditions, the acquired lease will be forfeited for non-fulfilment of lease conditions. It is, therefore, unnecessary to go into the question of non-registration of the lease agreement. According to the sanction order, dated 7-3-1974 it was the duty of the allottee to get the agreement already executed registered in the court of law within one month of date of issue of allotment order and if the assessee fails to do that no claim can arise for the refunding of Nazrana money. In fact despite the nonregistration of the lease agreement the assessee's tenancy was continuing and had run for a period of more than five years when the appeal was taken up and in practice the Municipal Council was honouring the lea se agreement which appears to have been executed by the assessee as is seen from the photostat copy filed before us but had not been registered as p er the assessee's counsel.

In my opinion, therefore, the essential and the relevant facts in the case of Paris Dry Cleaners (supra) and the present case are the same.

It has been held by the Madras High Court in the case of CIT v. L.G.Ramamurthi [1977] 110 ITR 453 that where the set of facts are the same a Bench of the Tribunal should not take entirely contrary view to the one reached by the another Bench of the same Tribunal on similar facts.

If a member of Division Bench is of the view that the earlier view is not correct the proper course should be to ask the matter to be decided by a larger Bench. In my opinion, there was no justification for taking a different view on the facts of the present case. For this reason as well, I hold that the essential facts being identical to the facts in the case of Paris Dry Cleaners (supra) a different view should not be taken by the same Bench.

21. There is a mention in the order of the learned Judicial Member that there was no difference in the nature of the payment of premium and the annual rent. In other words, he has held that the premium was also in the nature of advance rent. In this "connection, it may be pointed out that in the order recorded earlier it had been observed that there was no direct or indirect evidence to support the claim of the assessee that the premium could be considered as an advance payment of rent or any part of it. It was further observed in that order that the assessee had acquired an asset of advantage of enduring value. It has further been observed as a finding that there was no doubt that such payment was of the nature of capital expenditure. I see no reason in the arguments of the learned Counsel for the assessee which may persuade me to depart from the categorical finding and observations made in the earlier order of the Bench. I, therefore, hold that the A AC erred in allowing the deduction of Rs. 82,500 in the computation of the assessee's income.

22. The nature of the payment of Rs. 27,500 being the same and the payment having not been made in this year and the liability also having not arisen in this year has rightly not been allowed by the AAC as a deduction. On this point, therefore, I agree with the conclusion of the AAC.23. On the other points dealt with in paras 6, 7 and 8 of his order, I respectfully agree with the learned Judicial Member. In the result, the departmental appeal is allowed whereas the assessee's appeal is dismissed.

We having differed in opinion in the above case, we refer the following points of difference to the President for getting the matter decided by another member or members under Section 255(4) of the Income tax-Act, 1961 ('the Act'): 1. Whether on the facts of the case, the claim of Rs. 82,500 was to be allowed as revenue expenditure or was to be treated as capital expenditure 2. Whether on facts and in the circumstances of the case it is possible to reach a finding about the true nature of payment of Rs. 82,500 made by the assessee without making a proper appraisal of the terms and stipulations of the agreement under which the aforesaid payment was purported to have been made 1. The assessee is a partnership firm constituted for the purpose of carrying on exhibition of films. In order to carry on that business, it bid at an auction notified by the Government of Jammu and Kashmir for taking on lease a cinema hall known as Jaihind Cinema Hall. The Divisional Commissioner of Kashmir notified for information of general public that Jaihind Cinema Hall would be put to public auction for lease for a period of 16 years, renewable at the discretion of the State Government and on such terms as they might deem fit. Clause 2 of the notification states: 2. The bid offer shall specify a lump sum to be paid for the lease and an annual lease rent to be paid in addition. The acceptance of any bid will be subject to the approval of the Government who reserve their rights to accept or reject any bid without assigning reason.

We are not concerned with other terms of the lease as much for the purpose of deciding this appeal. The assessee took part in the auction and he was the highest bidder. The highest premium he quoted was Rs. 1,10,000. He also quoted annual rent of Rs. 65,000. The assessee's bid was, therefore, accepted by the Government. Accordingly, the lease was given to him. It is necessary at this stage to mention that there is no written document of lease brought on record even though at the time of hearing of the appeal I specifically asked for it and both parties stated that there is no written document except the notification on the basis of which the assessee bid and it being the highest bidder, it obtained the lease of the cinema hall for a period of 16 years renewable at the discretion of the State Government.

2. At the time of the assessment proceedings, the assessee claimed Rs. 1,10,000 which is the premium paid by it as a revenue expenditure apart from the annual rent of Rs. 65,000. The ITO disallowed the claim of deduction of the premium. The AAC, however, accepted the assessee's claim. Thereupon, the revenue came up in appeal and the main point in the appeal filed by the revenue was about the allowability of the premium of Rs. 1,10,000.

3. The learned members, who heard the appeal differed in their views, the learned Accountant Member holding that it is not allowable while the learned Judicial Member holding it to be allowable and that is why the following difference of opinion arose: Whether, on the facts of the case, the claim of Rs. 82,500 was to be allowed as revenue expenditure or was to be treated as capital expenditure? The matter has been placed before me by the President under Section 255(4).

4. The matter was heard at considerable length. The learned departmental representative obviously relied on the order of the learned Accountant Member and he also cited number of authorities and relied on the decisions which are referred to by the learned Accountant Member, He particularly brought to my notice the decision of the Madras High Court in the case of Ramakrishna & Co. (supra).

5. On the other hand, Shri G.C. Sharma for the assessee not only relied on the order of the learned Judicial Member but also contended that in all these cases the object of the expenditure is necessary to be considered and it should be from the point of view of a businessman. In this connection, he referred to the following decisions: Indian Aluminium Co. Ltd. v. CIT [1972] 84 ITR 735 (SC), Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC), and L.H. Sugar Factory & Oil Mills (supra).

6. The facts are not at all in dispute and the controversy arising in this appeal is the usual and vexed question as to whether a particular expenditure is revenue or capital. There are no fixed norms or standards for deciding as to under which head the particular expenditure would fall. All the same, there arc number of judicial pronouncements which serve as guidelines for deciding an issue of the present nature. The Transfer of Property Act defines lease under Section 105. It contemplates two types of payment that is made by a lessee. One is called premium which is always expressed in lump sum while the recurring amount payable either annually or monthly is termed as rent. Premium is the amount paid by a lessee for getting property on lease, while rent is for the user of the property. Therefore, normally speaking premium is of a capital nature since it is paid once and for all in order to get property to be exploited or to be put to use. It is well known that the nomenclature given to a particular item of payment is not decisive. It all depends upon the nature of the payment and the purpose for which it is paid. But once it is stated that a particular payment is in the nature of premium, certainly it should be treated as capital in nature. It may be that parties try to camouflage a particular payment by giving different names. Therefore, it is necessary to find out the real nature of payment in a given case.

Whether it is premium or rent is a matter to be looked into by taking into account all the facts and circumstances of the case. But once it is found that a particular lump sum payment is in the nature of premium, perhaps there should be no difficulty in holding that such payment is capital in nature and, therefore, not deductible as revenue item.

7. In this case there is no other document nor any material to find out the nature of the payment except t he notification issued by the Divisional Commissioner on behalf of the State Government. That notification obviously spells out the payment towards premium and payment towards rent annually. In other words, the auction contemplated payment of both premium and rent. If we apply the concept premium and rent as given under the Transfer of Property Act which undoubtedly has to be looked into, there should be no manner of doubt that the premium paid in this case is for the purpose of getting property on lease and the rent for the use thereof. Therefore, the premium paid by the assessee in this case cannot be treated as revenue expenditure. There is no material placed on record by the assessee that the premium is in the nature of rent. The parties may try to camouflage the transaction but the real purpose and the nature of payment have to be seen. In the absence of any material placed on record that the amount paid towards premium is also in the nature of rent, a distinction has to be kept between the premium and the rent. In this case, the sum of Rs. 1,10,000 paid by assessee must be treated as a premium in its real sense and in no event it can be treated as rent. Mr. Sharma's argument that if a matter can be decided by description of the nature of the payment and the document by the parties, it may be that the person who receives the premium can escape by calling it a capital receipt. True it is that a situation may arise like that but I have pointed out that the facts of the case will have to be seen and on the basis of materials placed on record one can find out the real nature of the payment. Once the real nature of payment is found out it should pose no difficulty in deciding whether a particular item is revenue item or capital item. The State Government clearly mentioned the lump sum payment as premium and the annual payment as rent. The assessee has not been able to show by any material that though the lump sum amount is called premium, it is in the nature of rent paid in lum sum. It must be held that the premium, is nothing but a lump sum payment for the purpose of getting the lease and, therefore, it is capital in nature.

8. So far as the authorities are concerned, I have already mentioned that the matter has to be decided on the facts of each case but at the same time, the guidelines given by judicial pronouncements will have to be kept in mind. It is, therefore, necessary to look into some of the decisions cited by the parties. The decision relied on by the learned departmental representative in the case of Ramakrishna & Co. (supra) appears to be on the point but I must say that the principle laid down by their Lordships cannot be of such universal application. Their Lordships held that in deciding a question of this nature formal transaction which the parties have chosen will be very material. But I think their Lordships unfortunately have not referred to the decision of the Supreme Court in the case of CIT v. Panbari Tea Co. Ltd. [1965] 57 ITR 422. In my opinion this decision clearly clinches the issue though I must say that it is a reverse case. There the question is whether a particular amount is capital receipt or not. In dealing with this issue, their Lordships laid down: The real test of a salami or premium is whether the amount paid, in a lump sum or in instalments, is the consideration paid by the tenant for being let into possession. 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 receipt and the latter are revenue receipts.

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 my view the above passage fully supports what is stated by me and if we apply the test laid down by their Lordships my conclusion is fortified that the amount in question cannot be treated as a revenue expenditure.

9. Coming to the decisions cited by Mr. Sharma, let me take one by one.

In Indian Aluminium Co. (supra), their Lordships were dealing an altogether a different issue but as already pointed out by me the general principles are of importance. This decision recognises the principle that there must be a direct and intimate connection between the expenditure and the business and that if the expenditure is laid out by the assessee as owner-cum-trader and it is incidental to the carrying on of its business, it must be treated to have been laid out by him as trader and as incidental to his business. There can be no quarrel about this proposition. Even applying the aforesaid proposition to the facts of this case, one cannot say that the premium paid by the assessee is revenue in character. Empire Jute Co.'s case (supra) deals again with a different type of case but the general principles laid down therein are very relevant and, therefore, they should be reproduced here: (i) It is not a universally true proposition that what may be a capital receipt in the hands of the payee must necessarily be capital expenditure in relation to the payer. The fact that a certain payment constitutes income or capital receipt in the hands of the recipient is not material in determining whether the payment is revenue or capital disbursement qua the payer.

(ii) There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, 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 an application of this test. If the advantage consists merely in facilitating the assessees 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.

(iii) 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." (pp. 2-3) I have already mentioned that the object and the nature of the expenditure are very relevant. Even bearing in mind these aspects in a case where it is found that a lessee paid premium within the meaning of the Transfer of Property Act, the same must be held to be capital in nature as it is a payment for the purpose of acquiring the capital asset. Similarly the decision of the Supreme Court reported in L.H.Sugar Factory and Oil Mills (supra) is of no help in deciding a matter like the present one.

10. For the foregoing reasons I am of the opinion that the premium paid in this case is capital in nature and, therefore, cannot be deducted as the revenue expenditure. I accordingly endorse the view taken by the learned Accountant Member. The matter will have to be placed before the Bench for passing the order in conformity with the majority view.


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