1992 (11) TMI 37 - HC - Income Tax

Lump-sum 'premium' treated as advance rent, not capital consideration; payments held revenue in nature favoring assessee

HC held for the assessee that the lump-sum payment described as a premium was in substance advance rent, not consideration creating a capital asset, given ... Depreciation On Capitalised Documentation Fees - Extra Shift Depreciation Allowance - Premium On Lease - HELD THAT:- This is evident from the fact that the assessee was paying Re. 1 per annum which is obviously for the purpose of retaining the character of the transfer of property as a lessee and not for any other purpose. It seems to us that the use of the term 'premium' in the agreement in respect of the advance rent paid does not render the payment anything more than rent paid in advance instead of paying the same in future periodically. There is absolutely no indication in the agreement that the amount paid by the assessee can be considered as a consideration paid by it for being let into possession of the premises while reserving a separate or economic rate of rent to be paid periodically thereafter. In the instant case, the rent of Re. 1 payable for the premises is only nominal which would lead to the irresistible inference that the lump sum amount paid at the inception of the lessee under the agreement is nothing but rent paid in advance and to obviate the need for making periodical payments. In CIT v. Associated Cement Cos. Ltd.[1988 (5) TMI 2 - SUPREME COURT], the question was whether the expenditure incurred by the assessee towards installing water pipelines and accessories outside the factory premises which were to belong to and maintained by the municipality in return for the assessee being exempted from paying municipal rates and taxes for a period of 15 years, was revenue expenditure. It was held that, since the installations and accessories were the assets of the municipality and not of the assessee, the expenditure did not result in bringing into existence any capital asset for the company. Further, that the advantage secured by the assessee by incurring the expenditure was absolution or immunity from liability to pay municipal rates or taxes for a period of 15 years if these liabilities had to be paid, the payments would have been on revenue account, and, therefore, the advantage secured was in the field of revenue and not capital. Thus, we answer both the questions referred in the affirmative and in favour of the assessee. Issues:1. Extra shift depreciation on capitalised technical documentation fees under section 32(1)(ii).2. Allowance of lease premium as business expenditure.Analysis:1. The first issue revolves around the allowance of extra shift depreciation on capitalised technical documentation fees under section 32(1)(ii) for the assessment year 1981-82. The assessee, a public sector company engaged in manufacturing, claimed this allowance, which was initially rejected by the Inspecting Assistant Commissioner and the Commissioner of Income-tax (Appeals). However, the Tribunal allowed the claim based on a previous order for the assessment year 1980-81. The court referred to a similar case where the question was answered in favor of the assessee, leading to a positive response to this issue as well.2. The second issue concerns the treatment of a sum of Rs. 12,09,200 paid as lease premium for acquiring a plot of land. The Revenue contended that this payment constituted capital expenditure, while the Tribunal held it eligible for deduction as business expenditure. The court analyzed the nature of the transaction based on the lease agreement between the assessee and the Maharashtra Industrial Development Corporation. The court referred to legal precedents to distinguish between capital and revenue expenditure, emphasizing the practical and business impact of the expenditure. It was concluded that the lump sum payment made by the assessee was akin to advance rent, not a capital investment, and hence deductible as business expenditure.3. The court cited precedents such as Empire Jute Co. Ltd. v. CIT and CIT v. Panbari Tea Co. Ltd. to support the view that the nature of the transaction, not just the terminology used, determines the treatment of expenditure. Additionally, cases like CIT v. Madras Auto Service Ltd. and CIT v. Associated Cement Cos. Ltd. were referenced to highlight the distinction between capital and revenue expenditure based on the enduring benefit and asset creation. The court rejected the Revenue's argument based on CIT v. Project Automobiles, emphasizing the unique facts of the present case.4. Ultimately, the court answered both questions in the affirmative and in favor of the assessee, concluding that the extra shift depreciation and the lease premium should be allowed as per the Tribunal's decision. The income-tax reference case was disposed of accordingly, providing clarity on the treatment of the disputed expenditures in favor of the assessee.