Business lease deed expense ruled as revenue, not capital by High Court, benefiting assessee

The High Court of BOMBAY determined that the expenditure of Rs. 10,700 for drawing up a deed of lease related to business premises was a revenue expenditure and not capital in nature. Despite the 20-year lease period, the court found that the expense was necessary for conducting business and did not create an enduring asset. The court ruled in favor of the assessee, directing the Commissioner to cover the costs of the reference.

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Issues involved: Determination of whether the expenditure incurred for drawing up a deed of lease is a capital or revenue expenditure.

Summary:
The High Court of BOMBAY delivered a judgment on a reference under section 256(1) of the Income Tax Act, 1961. The case involved an assessee who took a lease of business premises for 20 years with an option for renewal. The assessee claimed an expenditure of Rs. 10,700 for registration fee, stamp duty, and solicitors' fees related to the lease deed. The Income Tax Officer (ITO) disallowed the expenditure as capital in nature, but the Tribunal allowed it as a revenue deduction. The main question referred to the court was whether the sum of Rs. 10,700 was a capital or revenue expenditure under section 37 of the Income Tax Act.

In analyzing the case, the court referred to previous decisions where expenses for acquiring office premises on lease were allowed as deductions if the lease period did not create an enduring advantage. The court noted that the expenditure in question was solely for drawing up a valid deed of lease without any premium element. Despite the 20-year lease period, the court held that the expenditure was revenue in nature as it was necessary for conducting the business and did not create an enduring asset.

Therefore, the court concluded that the sum of Rs. 10,700 was a revenue expenditure and decided the reference in favor of the assessee. The Commissioner was directed to pay the costs of the reference.

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