True legal character of a long-term commercial lease depends on its substance, not protective clauses or label.

A commercial instrument described as a lease deed must be construed by its true legal effect, not by labels or isolated clauses. On the terms described, a 99-year demise of an entire industrial undertaking, with ownership and reversion remaining in the lessor, a right of re-entry on default, and clauses on renewal, deterioration and acquisition during the term, was consistent with a long-term lease and not with a hire-purchase or instalment sale. The absence of a lump sum premium did not justify treating part of the annual payment as capital consideration. The annual payment was therefore rent under the lease, and there was no basis for splitting it into capital and revenue components.

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Issues: Whether the instrument described as a lease deed was in substance a lease or, as found by the Tribunal, a hire-purchase or instalment sale arrangement, and whether the annual payment of Rs. 4 lakhs was deductible as rent/revenue expenditure.

Analysis: The decisive question was the legal character of the transaction on a true construction of the document. The agreement demised the entire undertaking for 99 years, retained ownership and reversion in the lessor, preserved a right of re-entry on default, and incorporated special clauses dealing with renewal, deterioration, and acquisition during the term. Those clauses were held to be consistent with a long-term lease of an entire industrial undertaking and not indicative of a transfer of ownership or an instalment sale. The absence of a lump sum premium did not justify treating part of the yearly rent as capital consideration, and there was no material to split the annual payment into capital and revenue components.

Conclusion: The document was a lease and the annual payment of Rs. 4 lakhs was rent under that lease. The Tribunal was wrong in treating the arrangement as other than a lease and in restricting deduction to an assumed interest element.

Ratio Decidendi: A formal commercial instrument must be construed according to its legal effect, and a long-term lease of an entire undertaking does not become a sale or hire-purchase arrangement merely because it contains protective clauses and an annual rent fixed by reference to the value of the assets, unless ownership is in fact transferred.

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