Upfront lease "deposit" treated as advance rent for 15-year term, disallowed as revenue deduction for business profits

Whether an upfront "deposit" paid under a lease was deductible as revenue expenditure in computing business profits. The SC held that, on the lease terms, the amount represented rent for the leased land for the entire 15-year term, paid in advance as a non-interest-bearing deposit securing performance, adjustable against monthly rent. Applying the principle in prior SC authority treating advance rent/premium for enduring lease rights as capital in nature, the payment was not allowable as a deduction. The appeals were dismissed.

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Issues:
1. Conflict between judgments of two Benches of the Supreme Court.
2. Whether a sum paid by the assessee was allowable as a deduction in computing business profit.

Analysis:
1. The judgment involved a conflict between two previous judgments of the Supreme Court in Pingle Industries Ltd. v. CIT [1960] 40 ITR 67 (SC) and Gotan Lime Syndicate v. CIT [1966] 59 ITR 718 (SC). The matter was referred to a Constitution Bench to resolve this conflict, as the common question to be considered was whether a sum paid by the assessee was allowable as a deduction in computing business profit.

2. The appellant-assessee in this case obtained a lease from Aditya Minerals Private Limited, where the lease required payment of rent at a specified rate per acre per month for a period of fifteen years. The lease also mandated a deposit by the lessee equal to the rent for the full period, which was adjustable against monthly rent and did not carry any interest. The assessee claimed the rent amounts as revenue expenditure, which was disputed by the authorities.

3. The court noted a material difference between the facts of the two referenced cases. In Gotan Lime Syndicate's case, the payment was a yearly payment of dead rent and royalty, while in Pingle Industries Ltd.'s case, it was a lump sum payment in installments for acquiring a capital asset of enduring benefit. The court emphasized that the payment in the present case was for land rent payable monthly, and the deposit was towards guaranteeing performance of the lease for fifteen years, making it akin to the situation in Pingle Industries Ltd.'s case.

4. Ultimately, the court found that the case at hand aligned more closely with Pingle Industries Ltd.'s case, where the payment was considered a capital expenditure for acquiring a capital asset of enduring benefit. As the payment in the present case was for land rent over a specified period and was part of a lease agreement, the court dismissed the appeals, concluding that the expenditure claimed by the assessee was not allowable as a deduction in computing business profit.

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