Tribunal allows assessee's appeal, dismisses Revenue's appeal, directs deduction, confirms investment allowance.

The appeal of the assessee was allowed, and the appeal of the Revenue was dismissed. The Tribunal directed the ITO to allow the deduction of Rs. 1,80,000 as a revenue expenditure in computing the total income and confirmed the CIT (Appeals)'s decision to grant investment allowance on the new machinery.

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Issues Involved:
1. Change of accounting year and its implications.
2. Deductibility of lump sum payment as revenue expenditure.
3. Investment allowance on new machinery.

Detailed Analysis:

1. Change of Accounting Year and its Implications:

The assessee, a private limited company engaged in film production, distribution, and machinery hiring, changed its accounting year to end on 31st March by a resolution of the Board of Directors dated 24-9-1981. This change was prompted by the assessee becoming a subsidiary of another company that closed its accounts on 31-3-1981. The assessee informed the Income Tax Officer (ITO) of its willingness to be assessed for a 13-month period from 1-3-1980 to 31-3-1981 for the assessment year 1981-82. Consequently, the assessment was made for this period.

2. Deductibility of Lump Sum Payment as Revenue Expenditure:

The primary issue in this case was whether a lump sum payment of Rs. 1,80,000 made by the assessee to the lessor to avoid future rent payments should be treated as a capital expenditure or a revenue expenditure. The ITO and the Commissioner of Income Tax (Appeals) [CIT (Appeals)] had disallowed the deduction, treating it as a capital expenditure that brought an enduring benefit.

Upon appeal, it was argued that the original lease rent was a revenue expenditure, and the commuted lump sum payment should also be considered a revenue expenditure. The Tribunal found that the assessee had already acquired a leasehold interest for 48 years under previous agreements and that the lump sum payment did not confer any additional rights or advantages that would classify it as a capital expenditure. The Tribunal distinguished this case from others, such as Mac Taggart v. Strump (B. & E.) and CIT v. Panbari Tea Co. Ltd., where payments made for being let into possession were treated as capital expenditures.

The Tribunal concluded that the lump sum payment was a substitution for the annual rent, which was undisputedly a revenue expenditure. Citing the Supreme Court's observations in Gotan Line Syndicate v. CIT and the Madras High Court's decision in CIT v. Madras Auto Service Ltd., the Tribunal held that the expenditure was on revenue account. The Tribunal also rejected the Revenue's alternative submission that the expenditure should be spread over multiple years, referencing the High Court's decision in Hindustan Commercial Bank Ltd., In re., which found no legal justification for spreading revenue expenditure over several years.

3. Investment Allowance on New Machinery:

The Revenue appealed against the CIT (Appeals)'s decision to grant investment allowance on new machinery, specifically a new color film analyzer and a new color film printing machine. The CIT (Appeals) had followed the Tribunal's decision in ITO v. First Leasing Co. of India Ltd., which allowed investment allowance for leasing companies on machinery leased out, even if the company was not engaged in manufacturing operations. Additionally, the CIT (Appeals) overruled the Revenue's objection regarding the exclusion of cinematograph films in the Eleventh Schedule to the Income-tax Act, referencing the Tribunal's decision in Prasad Productions (P.) Ltd., where it was held that "cinematograph films" in the Eleventh Schedule referred only to the manufacture of raw films and not to subsequent processing.

The Tribunal confirmed the CIT (Appeals)'s order, finding no reason to take a different view.

Conclusion:

The appeal of the assessee was allowed, and the appeal of the Revenue was dismissed. The Tribunal directed the ITO to allow the deduction of Rs. 1,80,000 as a revenue expenditure in computing the total income and confirmed the CIT (Appeals)'s decision to grant investment allowance on the new machinery.

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