M SUBBIAH NADAR Vs. COMMISSIONER OF INCOME-TAX

JUDGEMENT

(1.) THE three questions that were referred to us for decision under Section 66(1) of the Income Tax Act, 1922 by the Income-tax Appellate Tribunal are (1) Whether the payment of Rs. 23,894, cost of railway siding, paid by the assessee to the M.L.M. Estate was revenue expenditure which the assessee was entitled to deduct under Section 10(2) of the Act (2) Whether the sum of Rs. 7,000 spent in connection with the new salt pans was capital expenditure and not allowable as a deduction under Section 10(2) of the Act (3) Whether the sum of Rs. 36,680 paid to Messrs. A. R. Ramier & Co., under the compromise decree was an admissible expenditure under Section 10(2)(xv) of the Act

(2.) THE three questions may be considered under two groups as questions Nos. (1) and (2) are closely connected and raise the same questions of law. THE third question will be dealt with separately

(3.) UNDER the provisions of the Transfer of Property Act, Section 105, the consideration for a lease may be a price paid or promised, or of money, a share of crops, service, or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms. Normally the amount paid for the purchase of the term is a premium. The periodical payment paid, if it is in money, for the use and occupation of the premises demised is called rent. This definition of course is not exhaustive for the rent may be something other than money and need not necessarily always be a periodical payment as it may even be received in advance. What distinguishes rent from premium is the latter represents money paid as price for the purchase of the term secured by the lease and is not part of the rent. If, on the other hand, the consideration paid is a return for the use and occupation of the land or premises demised it generally is known as rent. Taking all the three documents into consideration can it be said that the amount deposited for the construction of the railway siding is rent or even premium " The most important feature that emerges from a reading of the documents is that this is not an amount which the assessee was under an obligation to pay to the lessor. It is an amount which is intended to bring an enduring advantage which could be profitably employed for the quick transport of the manufactured product. If the assessee does not fulfil the obligation, there is no means of enforcing that obligation by the lessor against the lessee and all that the lessor is entitled to insist is that the lessee should deliver possession of the land before the lapse of the full period of the term that was fixed in the document it is cut down by one year. Further, the result of constructing a railway siding is to add to the premises demised something in the nature of more or less of a permanent advantage. There is no covenant to pay, there is no means of enforcing such payment, the only obligation cast being to effect an improvement to the property leased. To describe an expenditure of that description as " rent " as understood in the Property Law seems to us would be a misnomer. It has none of the elements of " rent " nor even of " Premium ". It is an obligation cast upon the assessee to effect an improvement, of course to the advantage of both himself and his lessor, and to enjoy that improvement during the term of the lease and if there was failure to carry out that improvement the only effect is to cut down the term of the lease. As the improvement is in the nature of an enduring advantage to the business, it can only be treated as capital expenditure and not as expenditure debitable to revenue. The sum of Rs. 7,000 expended in bringing into existence new pans for getting more income in the light of the foregoing can never be treated either as rent or as revenue expenditure. So long as the period of the lease continues, the lessee alone is entitled to the advantage of the new pans and their yield with no further obligation to pay any additional rent to his lessor. It is, in other words, an income producing asset which at the expense of the lessee was brought into being the profits of which he is entitled to enjoy so long as the lease lasts. The advantage no doubt goes to the benefit of the lessor after the termination of the lease as an accretion to the property. There is of course no obligation cast upon the lessor to pay any compensation to the lessee for the improvement effected by the latter on the premisesMr. P. Somasundaram, the learned advocate for the assessee, relied on two decisions in support of his contention. The first is the decision in Race Course Betting Control Board v. Wild. The Race Course Betting Control Board obtained a licence from the owner of certain buildings erected on the Manchester Race Course under a deed whereby the Board bound itself to pay 12 1/2% of the cost of construction of the buildings annually and the deed also contained a declaration that this annual sum was payable not only in respect of the enjoyment and exercise of the right of user but also by way of repayment by yearly instalments of the capital value of the cost of construction. The question that came up for consideration was whether such an annual payment was a revenue payment either in whole or in part or was capital payment. Notwithstanding the express declaration contained in the deed, it was held by Macnaghten, J., that it was a revenue payment and not capital payment and therefore deductible from the income. But for the complication introduced by the declaration in the deed, one would have thought that the question would not present any difficulty in the matter. As the payment of 12 1/2 per cent. of the cost price was really rent, though rent was fixed at a certain proportion of the cost price, it was fixing it in a different manner. Macnaghten, J., considered that the form in the deed should not be given any preference to substance and that looked at from that point of view there can be no doubt that the payment was a revenue payment. At page 490 the learned Judge observed :---