Commissioner Of Income Tax,Tamil Nadu-Iii, Madras v. M/S.rane Brake Linings Ltd.,"Maithiri"

IN THE HIGH COURT OF JUDICATURE AT Dated : 07.04.2014 Coram The Honourable Mrs.Justice CHITRA VENKATARAMAN andThe Honourable Mr.Justice T.S.SIVAGNANAM Tax Case (Appeal) No.1031 of 2007--- Commissioner of Income Tax,Tamil Nadu-III, Madras. ... Appellant/Respondent. -vs- M/s.Rane Brake Linings Ltd.,"Maithiri" No.32, Cathedral Road,Chennai – 600 086.... Respondent/Appellant. Tax Case (Appeal) filed under Section 260A of the Income Tax Act,1961, against the order of the Income Tax Appellate Tribunal 'B'Bench, Chennai, dated 12.01.2007, in I.T.A.No.1953/Mds/2002 asagainst the order of the Commissioner of Income Tax [A] V, Chennaidated 21.10.2002 and passed in ITA.No.90/2002-03, for the AssessmentYear 1994-95 and against the order of the Deputy Commissioner ofIncome Tax, Company circle V[3], Chennai 34, dated 21.03.2002 andpassed in P.A.No.GIR/No.53036-R for the Assessment year 1994-95. For petitioner : Mrs.Hema Muralikrishnan For Respondent : Mr.C.V.Rajan for M/s.Subbaraya Aiyar Padmanabhan ORDER(The Order of the Court was made byT.S.SIVAGNANAM, J.) The appeal by the Revenue is directed against the order passed bytheIncomeTaxAppellateTribunal(Tribunal)inI.T.A.No.1953/Mds/2002 for the assessment year 1994-95 and the appealhas been admitted on the following substantial questions of law:- https://hcservices.ecourts.gov.in/hcservices/ Whether on the facts and circumstances of the case,the Income-Tax Appellate Tribunal was right in law inholding that a lump sum of Rs.20,00,000/- paid by theassessee being lease rentals paid to Maharashtra IndustrialDevelopment Corporation is a revenue expenditure, is validin law? 2. The assessee is a company engaged in the manufacture ofAutomotive Ancillary Products and they had taken a land measuring anextent of 11,050 sq.mts., on lease from Maharashtra IndustrialDevelopment Corporation and paid a sum of Rs.20,00,000/-, pursuant tothe agreement dated 29.10.1993. The assessee claimed the said amountas payment of rental in one lumpsum and therefore, a revenueexpenditure. The Assessing Officer rejected the stand taken by theassessee holding that the amount paid by the assessee was for thepurpose of acquiring the land for a period of 80 years, which rendersenduring advantages to the assessee. The Assessing Officer also tooknote of the fact that the assessee had paid further amount of Rs.5.04lakhs towards the enhancement cost to the land. Therefore, theAssessing Officer found that the expenditure to be a capitalexpenditure. 3. Aggrieved by the such finding, the assessee preferred anappeal to the Commissioner of Income Tax (Appeal) by contending thatM/s.Indian Filter Manufacturers Pvt., Ltd., (IFML) had taken the landon lease from the Maharashtra Industrial Development Corporation(MIDC), who is the absolute owner of the land and the lease is validupto 31.03.2077 and IFML offered the said land to the assessee forenjoyment and the assessee has paid a sum of Rs.20,00,000/-, beingthe consideration for the lease vide agreement dated 29.10.1993. Theassessee contended that the amount paid in lumpsum representeddiscounted value of future lease payments and therefore, to beallowed as deduction. The first Appellate Authority confirmed theview taken by the Assessing Officer that the transfer in favour ofthe assessee is in effect a transfer in perpetuity and therefore, theexpenditure incurred, is a capital expenditure. Accordingly, theappeal filed by the assessee was dismissed. Though there were othergrounds, which were subject matter of the appeal, we are notconcerned with those grounds in this appeal by the Revenue, which isconfined only with regard the issue relating to the payment made bythe assessee for the lease of the said land whether the same is acapital or a revenue expenditure. The assessee being aggrieved bythe order passed by the first Appellate Authority, preferred anappeal to the Tribunal. 4. The Tribunal considered the appeal along with the appealsfiled by the assessee raising various issues. The Tribunal byreferring to the decisions of this Court in the case of CIT vs. https://hcservices.ecourts.gov.in/hcservices/ Madras Auto Services, reported in 233 ITR 468 and the decision ofthis Court in the case of CIT vs. Gemini Arts Pvt., Ltd., reported in254 ITR 201 held that to decide whether the expenditure is capital orrevenue, one has to look at the expenditure from a commercial pointof view and the fact that the payment made in lump sum for the entireduration of the lease does not alter the character of revenueexpenditure. Accordingly, the appeal filed by the assessee wasallowed. Aggrieved by the same, the Revenue has preferred thisappeal. 5. The learned counsel appearing for the Revenue submitted thatthe entire amount of lease paid by the assessee, at one time or ininstalments, it would be a capital expenditure and the Tribunal oughtto have followed the decision of the Hon'ble Supreme Court in thecase of A.R.Krishnamurthy vs. CIT reported in 176 ITR 470, wherein itwas held that the leasehold land is only a capital asset andrelinquishment of the sale is a transfer and the value of the leaserent paid by the assessee is for the cost of acquisition of the rightand hence, it is only a capital expenditure to acquire the capital,which is not allowable as a revenue expenditure. Further, thelearned counsel also placed reliance on the decision of the Hon'bleSupreme Court in the case of R.K.Palshikar (HUF) vs. CIT, M.P.,Nagpur & Bhandara reported in 1988 (172) ITR 311. 6. Mr.C.V.Rajan, learned counsel appearing for the assesseesought to sustain the order passed by the Tribunal by contending thatthe agreement between the assessee and the IFML was infact a leasetransaction and the payment of the lease rent in one lumpsum does notalter the nature of the transaction and the payment is essentiallytowards the lease rental, which qualifies for being treated as arevenue expenditure. Merely because, the lease rent is paid in onelumpsum does not alter the character of the expenditure and theobservation made by the Tribunal in this regard, is perfectlyjustified. Apart from referring to the decisions, which were reliedon by the Tribunal in the case of Madras Auto Services, (supra) andGemini Arts Pvt., Ltd., (supra), the learned counsel also placedreliance on the decision of this Court in the case of theCommissioner of Income-tax v. Ucal Fuel Systems Ltd. reported in(2008) 296 ITR 702. 7. We have heard the learned counsels appearing for the partiesand perused the materials placed on record. 8. The issue involved in this case lies in a narrow campus. Theassessee had entered into a transaction with IFML for the purpose ofsecuring an asset which according to the assessee is only atransaction by which the IFML assigned the leasehold rights obtainedby them from MIDC. In order to appreciate the transaction betweenthe parties, it would be necessary to examine the terms andconditions of the assignment deed dated 29.10.1993. Under the said https://hcservices.ecourts.gov.in/hcservices/ 7. We have heard the learned counsels appearing for the partiesand perused the materials placed on record. 8. The issue involved in this case lies in a narrow campus. Theassessee had entered into a transaction with IFML for the purpose ofsecuring an asset which according to the assessee is only atransaction by which the IFML assigned the leasehold rights obtainedby them from MIDC. In order to appreciate the transaction betweenthe parties, it would be necessary to examine the terms andconditions of the assignment deed dated 29.10.1993. Under the said https://hcservices.ecourts.gov.in/hcservices/ agreement, the assignor is IFML, who were granted a lease on29.04.1982, by MIDC in respect of a property at the Industrial Estatein the village Bhosari, Pune District, State of Maharashtra. Underthe assignment deed, IFML stated that they are no longer in need ofthe said property and desirous of sub-leasing the same and theassessee had approached them for absolute transfer of the right,title and interest in the said property on the terms and conditionsagreed upon and reduced into writing in the form of assignment deed.The assessee agreed to pay a lumpsum upfront to IFML being the valueof the additional lease rent which would have been charged by IFML ina sub-lease. The following Clauses of the assignment deed would berelevant for the purpose of this case:- 1.IFML hereby transfers absolutely all the right, titleand interest, it has derived under the said lease deed forall the residue now unexpired of the lease period into theDemised Premises as mentioned in the said lease deedabsolutely to RBL subject to MIDC permitting RBL to hold theDemised Premises for all the residue now unexpired of thelease period and lease to RBL the Demised Premises for afurther period of 80 years from the expiry of the leaseperiod, as mentioned in the said lease deed, i.e., from 31[st]March 1997 to 31[st] March 2077, (both the days inclusive),subject henceforth to the payment of the rent reserved byand the performance and observance of the covenants on thepart of RBL and the conditions contained in the said leasedeed dated 29[th] April, 1982. 2. RBL shall pay a total sum of Rs.20 lacs to IFML, asconsideration for the transfer mentioned in Clause 1 above,being the present value of the additional lease rent IFMLwould have charged during the lease period. Out of thisamount IFML hereby acknowledge and confirms the receipt ofRs.5 lacs on 6[th] April 1993. The balance will be paid by theRBL as soon as the agreement is approved by the appropriateauthority under the Income Tax Act 1961 and on or before theRegistration of the Assignment Deed or on mutually agreedupon. 5. IFML shall handover possession of the property, onor before 3[rd] November, 1993. IFML further covenants thatafter giving over possession, subject to cancellation ofthis agreement due to refusal of MIDC to approve thistransaction, IFML or anybody deriving any rights from IFML,shall have no further rights, interest or claims in anymanner whatsoever on the scheduled mentioned property oragainst RBL in respect of this transaction. 9. The nature purport and intent of the assignment deed could beculled out from the above referred clauses. It is seen that thetransfer in favour of the assessee was absolute i.e., all rights,title and interest, which were derived by IFML were absolutelytransferred in favour of the assessee. The period of lease was from 31.03.1997 to 31.03.2007 being the unexpired period of lease betweenIFML and MIDC. The conditions further stipulate that the assesseewould be entitled to a further period of eighty years on the expiryof the period mentioned in the original lease dated 29.04.1982.Thus, it is evidently clear that the lease in favour of the assesseewas a lease in perpetuity. 9. The nature purport and intent of the assignment deed could beculled out from the above referred clauses. It is seen that thetransfer in favour of the assessee was absolute i.e., all rights,title and interest, which were derived by IFML were absolutelytransferred in favour of the assessee. The period of lease was from 31.03.1997 to 31.03.2007 being the unexpired period of lease betweenIFML and MIDC. The conditions further stipulate that the assesseewould be entitled to a further period of eighty years on the expiryof the period mentioned in the original lease dated 29.04.1982.Thus, it is evidently clear that the lease in favour of the assesseewas a lease in perpetuity. 10. Coming to the consideration paid under the said agreement,it is to be noted that the asseesee paid a total sum ofRs.20,00,000/- to IFML, as a consideration for transfer ascontemplated under the clause 1 of assignment deed. Apart from that,the assessee paid a sum of Rs.5,00,000/- directly to MIDC being theadditional lease rent. 11. Conspicuously, the assignment deed does not speak oftermination nor does it contemplate a contingency by which IFML wouldbe entitled to cancel the assignment deed under certain contingenciesnor does the assignment deed speak of any contingency by virtue ofwhich the so called leasehold property would revert back to IFML. Interms of clause 5, the only covenant being that the assignmentrequires to be approved by MIDC and if that has been done, then theassignment continues and it is in perpetuity and only when MIDCrefuses to approve the said transaction, then alone the land shallrevert back to MIDC and in any event not to the so called lessor ofthe assessee namely IFML. It is not in dispute that MIDC approved thetransfer. Thus, on a cumulative reading of the conditions make itevidently clear that the nature of transaction in favour of theassessee is in perpetuity. 12. In the case of Madras Auto Services, (supra), in terms ofthe agreement between the assessee and the owner of the land, theassessee was entitled to spend certain amounts to construct a newbuilding after demolishing the old building and the new building,from the inception was agreed to belong to the lessor and not to thelessee/assessee. However the assessee was granted the benefit of theexisting lease in respect of the new building at an agreed rent for aperiod of 39 years. While considering the said facts, the Hon'bleSupreme Court observed that the assessee therein did not acquire acapital asset, but only a business advantage and the amounts spent onconstruction was deductible as revenue expenditure. The saidjudgment is clearly distinguishable on facts, as we have examined theterms and conditions of the assignment deed in the precedingparagraphs and therefore, the decision in the case of Madras AutoServices, (supra), does not render any support to the case of theassessee. 13. In the case of Gemini Arts Pvt., Ltd., (supra), which wasfollowed by this Court in the case of Commissioner of Income-tax vs.Ucal Fuel Systems Ltd reported in 296 ITR 702, which was relied uponby the learned counsel appearing for the assessee, the nature of 13. In the case of Gemini Arts Pvt., Ltd., (supra), which wasfollowed by this Court in the case of Commissioner of Income-tax vs.Ucal Fuel Systems Ltd reported in 296 ITR 702, which was relied uponby the learned counsel appearing for the assessee, the nature of transaction was that the assessee therein had taken a land on leasefor twenty years for setting up a new unit at an Industrial Estate atPondicherry. The Assessing Officer in the said case treated theamount paid by the assessee as an advance in the nature of discountedvalue of lease amount otherwise payable over a period of twenty yearsand the assessee had treated the said payment as capital in its booksof account in order to project a boosted profit to impress theshareholders. Consequently, the said payment was treated as a capitalexpenditure. Aggrieved by such order of the Assessing Officer, theassessee preferred appeal to the Commissioner of Income Tax(Appeals), who held that the entire expenditure could not be treatedas revenue in nature for the purpose of deduction under the Income-Tax Act, when the assessee has treated the same as a capital in thebooks of account. On further appeal by the assessee to the Tribunal,the Tribunal allowed the appeal by relying upon the decision in thecase of Gemini Arts Pvt., Ltd., (supra), that this is how the appealarose before this Court in the case of Ucal Fuel Systems Ltd (supra).Infact in the said case, the Revenue fairly conceded that the issuecovered by the decision in the case of Gemini Arts Pvt., Ltd.,(supra) which was a case relating to a leasehold agreement for 47years and the rent was paid in lumpsum and the entire amount wasclaimed as deduction. After referring to the decision in the caseof Madras Auto Services, (supra), it was held that to decide whetherexpenditure is revenue or capital one has to look at the expenditurefrom a commercial point of view and whatever substitutes for revenueexpenditure should normally be considered as revenue expenditure.Further, it was held that merely because that the payment was made ina lumpsum for the entire duration of the lease does not alter thecharacter of it being a revenue expenditure. Firstly, it has to bepointed out that the nature of transaction in the case of Ucal FuelSystems Ltd (supra), was entirely different from that of thetransaction in the case on hand. 14. Admittedly, it was a case of lease of a land for a period of20 years and the assessee therein having paid the lease rent for afirst year, paid the remaining amount in one lumpsum, whereas thecase on hand is entirely different and we have seen that the transferin favour of the assessee was by IFML, who themselves were stated tobe lessees under MIDC and the transfer in favour of the assessee wasin perpetuity i.e., to be continued to be a period of 80 years beyondthe unexpired lease period, which itself was in force till 2077.Therefore, these decisions relied on by the learned counsel for theassessee are clearly distinguishable on facts. 15. As far as the reliance was placed on the decision in thecase of Madras Auto Services, (supra), is concerned, we do not findthis judgment would be of any assistance to the assessee herein.While considering the lumpsum payment, whether lumpsum payment wouldbe taken as a revenue expenditure or capital expenditure, the ApexCourt referred to the decision in the case of Assam Bengal Cement Co. https://hcservices.ecourts.gov.in/hcservices/ Ltd. v. CIT, reported in [1955] 27 ITR 34, being the testdistinguishable between the capital expenditure and revenueexpenditure, the Apex Court summarized the test laid down in the saiddecision reported in Assam Bengal Cement Co. Ltd. (supra), whichmeans being extracted hereunder:- 15. As far as the reliance was placed on the decision in thecase of Madras Auto Services, (supra), is concerned, we do not findthis judgment would be of any assistance to the assessee herein.While considering the lumpsum payment, whether lumpsum payment wouldbe taken as a revenue expenditure or capital expenditure, the ApexCourt referred to the decision in the case of Assam Bengal Cement Co. https://hcservices.ecourts.gov.in/hcservices/ Ltd. v. CIT, reported in [1955] 27 ITR 34, being the testdistinguishable between the capital expenditure and revenueexpenditure, the Apex Court summarized the test laid down in the saiddecision reported in Assam Bengal Cement Co. Ltd. (supra), whichmeans being extracted hereunder:- Whether by spending the money any advantage of anenduring nature has been obtained or not will depend uponthe facts of each case. Moreover, as the above passageitself provides, this test would not apply if there arespecial circumstances pointing to the contrary. This courtin the above case summarised the tests as follows : “1. Outlay is deemed to be capital when it is made for theinitiation of a business, for extension of a business, orfor a substantial replacement of equipment. 2. Expenditure may be treated as properly attributable tocapital when it is made not only once and for all, but witha view to bringing into existence an asset or an advantagefor the enduring benefit of a trade. . . If what is got ridof by a lump sum payment is an annual business expensechargeable against revenue, the lump sum payment shouldequally be regarded as a business expense, but if the lumpsum payment brings in a capital asset, then that puts thebusiness on another footing altogether. 3. Whether for the purpose of the expenditure, anycapital was withdrawn, or, in other words, whether theobject of incurring the expenditure was to employ what wastaken in as capital of the business. Again, it is to beseen whether the expenditure incurred was part of the fixedcapital of the business or part of its circulating capital.”(underlining ours) 16. Referring to the test given in paragraph 2 on facts, theApex Court held that the asset created by spending the said amountsdid not belong to the assessee that the assessee got the businessadvantage of using modern premises at a low rent, thus savingconsiderable revenue expenditure for the next 39 years. Therefore,the observation of the Apex Court as to whether the expenditure orrevenue expenditure or capital expenditure has to be looked at as acommercial point of view is a test, which has to be seen herein to onthe facts has already been given in the preceding paragraphs as tothe terms of the assignment deed, we have no hesitation in holdingthat even though that the expenditure in question is pure in acapital expenditure, the assessee does not deny the fact that theassignment of the lease in its favour had to be approved by the MIDCand there is no denial of the fact that once the assignment deed doesnot speak anything about the state of affairs which continued on theexpiry of the so called lease, it is clear from the reading of the assignment deed that once the assignment is approved by the MIDC, thevendor had no interest at all in the so called lease property. 17. The Assessing Officer pointed out that MIDC had directed theassessee to pay a further sum of Rs.5.40,000/- being enhancement ofthe cost of land. The fact remains that on the approval of theassignment in favour of the assessee practically the assessee issubstituted in the place of its vendor which means on the adjustmentof the amount, the assessee had to pay to the owner of the land-MIDCby reason of parting money to the assignor namely, IFML. We do notfind any justification in bifurcating the amount paid to IFML, as arevenue expenditure and the payment of Rs.5,40,000/- to MIDC as acapital expenditure. assignment deed that once the assignment is approved by the MIDC, thevendor had no interest at all in the so called lease property. 17. The Assessing Officer pointed out that MIDC had directed theassessee to pay a further sum of Rs.5.40,000/- being enhancement ofthe cost of land. The fact remains that on the approval of theassignment in favour of the assessee practically the assessee issubstituted in the place of its vendor which means on the adjustmentof the amount, the assessee had to pay to the owner of the land-MIDCby reason of parting money to the assignor namely, IFML. We do notfind any justification in bifurcating the amount paid to IFML, as arevenue expenditure and the payment of Rs.5,40,000/- to MIDC as acapital expenditure. 18. As pointed out by the Apex Court, the outlay by theassessee is for acquiring the benefit of the land for nearly 80 yearswith the further clause on the renewal to. 19. The Hon'ble Supreme Court in the case of Palshikar (HUF) vs.CIT (S.C)., reported in 172 ITR 311, considered the questionregarding a lease of plot for 99 years on payment of a premium and asto whether capital gain tax levyable in respect of the saidtransaction. After analyzing the scope of the transaction inquestion, the Hon'ble Supreme Court pointed out that the lease is fora long period namely 99 years and hence, it would appear that underthe lease in question, the assessee has parted with an asset of anenduring nature, namely, the rights to possession and enjoyment ofthe properties leased for a period of 99 years subject to certainconditions on which the respective lease could be terminated.Further, a premium has been charged by the assessee in all theleases. In such circumstances, the Hon'ble Supreme Court held thatthe grant of leases in question amounts to a transfer of capitalassets as contemplated under section 12B of the Income Tax Act, 1922.The said decision would squarely apply to the facts of the case onhand and we have no hesitation to hold that the nature of transactionamounts to a transfer of a capital assets. 20. The learned counsel appearing for the assessee submittedthat the assignment deed is more in the nature of sub-lease, as such,the same is covered by the decision of the Hon'ble Supreme Courtreported in Madras Auto Services, (supra), we do not find anyjustification to construe the assignment deed as a sub-lease.Considering the fact that the assignment deed is of much leaseholdinterest, such assignment must be approved by MIDC and on approval,the assessee had admittedly paid a further sum to the Corporation.In the background of the above said facts, it is difficult for us todraw inference of the agreement in question only be treated as a sub-lease and not an assignment. Furthermore, the assignment deed itselfdoes not say anything about the reversion of the property back to thehands of the assigner namely, IFML. On the other hand, the rights of the assignor on approval of the assignment comes to an end in toto. the assignor on approval of the assignment comes to an end in toto. 21. Incidentally, we may also point out that as early as 1928 inthe decision in the case of Archaka Sundara Raju Dikshatulu vs.Archaka Seshadri Dikshatulu reported in (1928) 54 MLJ 76, this Courtheld that the lease for 99 years or for a long term in considerationof a premium paid down is as much an alienation as a sale ormortgage. This Court pointed out that the mere use of the word'lease' or the fact that a long term is fixed would not by itselfmake the document in lease. In this connection, this Court followedthe decision in the case of Rama Varma Tambaran vs. Raman Nayarreported in (1882) ILR 5 M 89, holding that there was no realdistinction between mischief of such a transfer in perpetuity and atransfer for the long period of 96 years. Thus, this Court took aview that a permanent lease is as much an alienation as a sale. Inthe background of what we have narrated about and the clauses in theassignment deed, we hold that the lumpsum amount paid does not make apermanent lease any the less an alienation than a sale. 22. As far as the decision in the case of A.R.Krishnamurthy &Anr., vs. CIT., reported in [1989] 176 ITR 417, is concerned, theAssessing Officer rightly construed the law declared inA.R.Krishnamurthy (supra), to hold that the expenditure is of capitalin nature and not the revenue expenditure. 23. In the circumstances, we have no hesitation in setting asidethe order of the Tribunal and allow the appeal filed by the Revenueby answering the question in its favour. No costs. Sd/-Asst. Registrar[cs.ii]Dt/-27/04/2014 /true copy/ pbn Sub Asst. Registrar. To 1.The Assistant Registrar, Income Tax Appellate Tribunal Chennai Bench 'B', ChennaiIncome Tax Appellate Tribunal Chennai Bench 'B', Chennai 2.The Commissioner of Income Tax (Appeals) – V, Chennai-34. 3.The Deputy Commissioner of Income Tax, Company Circle V(3),Chennai -34.Chennai -34. 4. The Commissioner of Income Tax, Tamil Nadu III, Madras. 1 CC To Mr.T.Ravikumar, Advocate SR NO.16592 1 CC To Mr.C.V.Rajan, Advocate SR NO.16709 ctk[co]gp/21.4 Tax Case (Appeal) No.1031 of 2007