SATYANARAYANA RAO, J -
(1.) THE three questions that were referred to us for decision under Section 66(1) of the Indian Income-tax Act 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.
The facts relevant for consideration of the first two questions are as follows as appear from the statement of the case : The assessee is a manufacturer of salt in Livingipuram in Tuticorin. The salt pans originally belonged to one M. L. L. Ramanathan Chettiar. He died and was succeeded by his son Mahalingam Chettiar who was then a minor In O.P. No. 30 of 1932, District Court, Ramnad, one Rao Sahib R. Krishna Aiyar was appointed interim property guardian by the District Court and he was in management of the M.L.M. Estate. Under the order of the District Court and with its sanction, the pans were sub-leased under a document dated 28th March, 1934, to the assessee, Subbiah Nadar, for a period of seven years commencing from 1st January, 1934, and ending with 31st December, 1940. Under the sub-lease the assessee had to pay a sum of Rs. 36,969 to the Government on behalf of his lessor in three installment. One installment on 12th March, 1933, was paid even before the lease was executed on 2nd November, 1933, under an agreement. The other installment had to be paid on the 1st April, 1934, and 1st October, 1934. This amount represents the amount payable by the lessor to the Government under the lease granted by the Government to the estate of M.L.M. Besides this, he had also to pay a sum of Rs. 500 per annum or Rs. 3,500 for seven years as rent. Those two amounts namely Rs. 36,969 payable to the Government on behalf of the lessor and the total rent for the seven years, namely Rs. 3,500, in all Rs. 40,469 was treated under the lease as a consolidated lease amount for seven years. There were also further obligations imposed upon the lessee under this document. The lessee undertook to spend a sum of Rs. 18,000 for constructing a railway siding, though in the sub-lease it was stated that it would include also repair of the pans then in existence but it was assumed throughout and was conceded before us that that sum really represented the estimated cost of constructing the railway siding. The railway siding had to be constructed, according to the terms of the lease, before the month of December, 1935, in default it was provided that the lessee should forfeit the lease in respect of the seventh year and shall put the lessor in possession of the pans on 31st December, 1939. There was yet another term in the lease that the lessee was at liberty to spend a sum of Rs. 4,000 in putting up new beds and for carrying out other works in connection with new beds but he was allowed to enjoy the income from such new beds until the expiry of the period of the lease without any addition to the rents stipulated.
Before the expiry of the terms of this lease, on 13th December, 1937, the period of the lease was further extended under a document for a period of three years from 1st January, 1941, to 31st December, 1943. The assessee did not carry out the construction of the railway siding as stipulated in the previous lease and, therefore, when the extension of the term was granted under this document, time for constructing the railway siding was extended till December, 1942, failing which it was provided that the assessee should deliver possession of the salt pans in good condition on 30th December, 1942. The rent payable was increased from Rs. 500 to Rs. 3,000 payable in two installments of Rs. 1,500 each on 30th April and 31st August of each year. There was a second extension under a document dated 10th July, 1942, of the term for a further period of two years from 1st January, 1944, to 31st December, 1945. This document also makes reference to the construction of a railway siding. As this came into existence before the expiry of the period fixed under the earlier document, namely 31st December, 1942, it is stated in the document that by that time assessee had already applied to the railway department for constructing the railway siding and even submitted plan. If however there should be delay on the part of the railway department in constructing the railway siding by 31st December, 1942, the assessee should pay on or before the 31st December, 1942, the amount required for the construction of the siding. It is found that, in fact, by 31st December, 1942, the assessee deposited a sum of Rs. 23,894 for the construction of the railway siding as per the revised estimate. It is also found that a sum of Rs. 7,000 was paid by the assessee in constructing new salt pans. These two amounts, it was claimed on behalf of the assessee, should be deducted from the in come during the assessment year 1944-45 either as rent under Section 10(2)(i) or as revenue expenditure under Section 10(2)(xv). This claim was rejected by the department and also by the Appellate Tribunal. Hence this reference.
It was argued on behalf of the assessee that these two amounts really formed part of the rents that were stipulated under the lease though it is not so expressly stated or in any event these amounts must be treated as expenditure wholly or exclusively incurred for the purposes of the assessees business in the manufacture of salt. The Appellate Tribunal was of opinion that the sum of Rs 23,894, the amount deposited by the assessee for the construction of the railway siding, was in the nature of a premium as it was paid in order to obtain renewal of the term under the lease.
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 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 way even be received in advanced. 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 fulfill the obligation, there is no means of enforcing that 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 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 debatable 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 to the latter on the premises.
(3.) MR. 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 installments 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 :-
"Except for that declaration (referring to the declaration in the deed) it seems clear that the annual sum must, for the purpose of income-tax assessment, be regarded as a revenue payment. MR. Latter arguing for the aboard, said that but for the insertion of the declaration in the deed, the Crown would not have a leg to stand on. The Solicitor-General would not go quite so far as that, but he did say that it would be a crutch rather than a leg upon which he would have to support himself."
And lower down in the same page it was pointed out that one has to look at the legal obligations between the parties created under the document. That is, in other words, one must look at the substance of the document and should not be influenced by the form of it. The learned Judge went on to observe :-
"It is said, and truly said, that whether a payment is a revenue payment or a capital payment may depend upon the angle from which you look at it - the payment may be a revenue payment from the point of view of the payer and a capital payment from the point of view of the receiver, and vice versa, it may be a revenue payment from the point of view of the receiver and a capital payment from the point of view of the payer. The fact that the sum payable by the board is a sum which, over a period of years, will recoup to the Race Course Co. nearly the whole of the cost of the erection of the building, and at the same time give a reasonable return on the money that they have invested, is, I think, immaterial. The question is : whether or not under this document you can spell out any obligation on the part of the board to make a capital payment to the Race Course Co. ? I think it is clear, as I have said, not only from the declaration, but also from the method in which the annual payment is calculated, namely 12 1/2 per cent. on cost, that the payment is of such an amount as to recoup to the Race Course Co., their expenditure on the building. However, I do not think that that is a matter which touches the issue to be determined here."
The next case relied on was Commissioner of Income-tax v. Globe Theatres Ltd., High Court. The assessee in that case carried on business as exhibitor of cinema picture. He owned some cinema houses and also took others on lease. A sum of Rs. 10,000 was advanced by the assessee to a company, which was at that time proposing to build a cinema house, with a stipulation that after the construction of the building the cinema house would be leased to the assessee. The building was not constructed and the company which undertook to construct the cinema house fell into financial difficulties with the result that the assessee was obliged to write off a sum of Rs. 10,000 which was bad debt; and he claimed it as an allowable deduction under Section 10(2) of the Indian Income-tax Act. The payment was treated as advance payment of rent under the lease and an allowable deduction under section 10(2)(xv) of the Act. It was pointed out that the sum was not paid either as premium or as salami for the lease, that is, as purchase money for getting a lease. On the contrary it was an advance payment of rent. The facts of that case do not present any difficulty and bear no analogy to the case now before us. The decision in our opinion, if we may say so with respect, was perfectly justified on the facts and does not support at all the contention urged on behalf of the assessee.
The decision in Henriksen (H. M. Inspector of Taxes) v. Grafton Hotel Ltd. to which our attention was drawn by Mr. Rama Rao Sahib, the learned Counsel for the Commissioner, in our opinion, is a case on the other line, where the sum paid was treated as capital expenditure. The assessee in that case was a company which was running a licensed hotel in a building which was obtained on lease. The lease provided that the tenant should pay all the charges that will be imposed under the Licensing Consolidation Act, 1910. His licence was renewed in 1934 and 1937, but the assessee was obliged to pay in respect of the licence monopoly value which was imposed and which was payable in installments. It was claimed on behalf of the assessee that it was a debitable expenditure and not capital expenditure. This contention was rejected by the Court of Appeal. The matter was in the first in stance heard before Lawrence, J., and in the Court of Appeal it was disposed of by Lord Greene, M.R., du Parcq, L.J., and Singleton, J. The extreme contention urged on behalf of the assessee in that case was that as the assessee was under contractual liability to pay all the charges which could be imposed under the Licensing Act, the monopoly value which he paid was in the nature of revenue expenditure. In other words, every liability which accrues and arises out of a contract must be treated as debitable expenditure and not as capital expenditure. This contention was not accepted as Lawrence, J., pointed out in the court of first instance at page 456 :-
"It is perfectly clear upon all the authorities that no sum which is paid by a trader of a capital nature is deductible for income-tax purposes, and, therefore it is necessary to see whether the sum which the respondent paid is of a capital nature or not. If it were rent, no doubt it would not be a payment of a capital nature, but is not rent, and the company and its landlord have not agreed that it shall simply pay a rent for these premises, but what they have agreed is that it shall bear the charges imposed in respect of the Licensing Act. It is clear, I think, from the authorities to which I alluded in the Abbertolli case and from the fact that monopoly value is imposed as a lump sum, though payable by installments, and as a condition of the grant of the licence, that the quality and nature of the monopoly value is a capital quality in nature; and it seems to me impossible to hold that when the tenant in nature; and it seems to me impossible to hold that when the tenant undertakes to pay those charges they alter their quality and nature and become income charges."