JUDGEMENT
T.V. Rajagopala Rao, Judicial Member -
(1.)THIS is an appeal filed by the assessee firm against the order of Commissioner of Income-tax (Appeals)-I, Hyderabad dated 29-7-1986 and it relates to assessment year 1982-83 for which the previous year ended by 31-3-1982. For this assessment year continuation of registration was granted to the assessee firm. The business of the assessee was running of a lodging house and letting out of shops and to collect the monthly rentals from the tenants. It may here itself be mentioned that M/s. B.R. Associates entered into a lease agreement dated 7-4-1966 for a period of 33 years on a stipulation to pay. an yearly rent of Rs. 42,000. M/s B.R. Associates under the covenant of the above lease deed undertook to raise new constructions worth Rs. 7 lakhs on the leased premises. The assessee firm took on sub-lease from M/s B.R. Associates the premises bearing municipal Nos. 6-1-1082/B and shops bearing Nos. 6-1-1082/1 to 17 and residential flats bearing Nos. 6-1-1081/1 to 4 and an open area admeasuring about 2,500 sq. yards firstly for 11 months under the sub-lease dated 3-8-1971. Under sub-lease dated 23-9-1972 the sub-lease was renewed for a further period of 15 years on a stipulation to pay monthly rent of Rs. 3,000. Under the terms of the sub-lease agreement last cited, the assessee covenanted to put up constructions up to a minimum of Rs. 3,25,000. We had the occasion to consider the head-lease as well as the sub-leases and came to the following conclusion in our orders dated 6-2-1984 relating to the same assessee for assessment years 1974-75, 1975-76 and 1977-78 in ITA Nos. 1633, 1634 and 1635/Gtd/82. Our finding is as follows: -
So para 2 of the preamble when read coupled with condition No. 5 of the head lease would clearly disclose that as soon as any new construction would be put up on the demised premises it would partake the character of the premises already let out by the waqf to M/s B.R. Associates. That means even during the subsistence of the lease period the waqf would become the owner of the superstructures put up either by it or by its sub-lessees. In those circumstances there is no scope for the assessee to argue that it would be the owner of the superstructure raised by it during the tenure of the lease in its favour.
In discharge of its obligations the assessee had found debited an amount of Rs. 1,57,925.46 to its Profit and Loss account under the head "constructions". The assessee claimed the amount of Rs. 1,57,926.46 as a revenue deduction and it relied upon the observations made in its own case by this Tribunal for earlier years. The Income-tax Officer however, did not agree with the contentions of the assessee and held the Tribunal's decision was rendered in a different context and Hon'ble Tribunal considered whether the pagadi or salami amounts received constitute capital receipt or revenue receipt. He also duly took into consideration the fact that the assessee itself had claimed ownership in the new constructions put up by it during the course of arguments before the Tribunal for the earlier years. He further held that simply because salami amounts were held to be part of circulated capital does not give place to an argument that anything which is constructed with such circulating capital also becomes revenue expenditure even though it is under ordinary circumstances should be considered as capital expenditure. He held ultimately that the amounts spent on the new structures raised by the assessee is a capital asset in its hands. Thus he disallowed the deduction of Rs. 1,57,925. The assessee appealed. It was argued before her on behalf of the assessee that the amount spent did not result in creating the asset of an enduring nature inasmuch as the building soon after the construction would belong to the wakf. The special attention of the learned CIT(A) was drawn to Clauses 5, 6, 10 of the head-lease. The learned CIT(A) held that the lease deed mentioned rent per month and in addition made the lease conditional on construction of buildings worth Rs. 7 lakhs. Normally the sum of Rs. 7 lakhs should also be spread over the lease period and treated as part of the rent for the premises. However, neither the lessee (B.R. Associates) nor the assessee had taken this stand at any stage. She further held that the construction of buildings on the demised premises, the assessee clearly gets title for the exercise of ownership rights over such buildings after the duration of the lease period. THIS is provided in the terms of the lease deed itself for the duration of the lease and therefore the appellant is the owner of the building and as such has created an asset of an enduring advantage even though the enjoyment of which is co-terminus with the lease. Ultimately she dismissed the appeal.
(2.)The assessee is now in second appeal before this Tribunal. We may wish to point out that the two findings of the learned CIT(A) given in para 6.4 are quite contrary to each other. In the first finding she states that the assessee gets title over the said buildings (new constructions) after the duration of the lease period. In the second finding, she states that the assessee is the owner of the building even though the enjoyment of which is co-terminus with the lease. Firstly we are unable to understand what is the definite finding of the CIT(A) with regard to the ownership of the new construction which the assessee is obliged to put up on the leased premises as per the sub-lease dated 23-9-1972. The copy of the sub-lease was furnished at pages 43 to 47 of the paper compilation filed before us. The head lease dated 7-4-1966 is furnished at pages 25 to 33. Condition No. 5 of the head lease executed between the Mumtax Yar-Ud-Dowla and B.R. Associates, reads as under : -
5. The Lessees have obtained on lease the premises consisting of buildings and shops valued approximately at Rs. 3.5 lakhs (Rupees three Lakhs and Fifty thousand Only) and the whole area of land open and constructed upon valued Rs. 2.5 Lakhs (Rupees two lakhs and fifty thousand only), inter alia for constructing thereon a building or buildings and hereby covenant that they shall spend not less than Rupees Seven Lakhs on such construction during the term of this lease.
Condition No. 4 in the sub-lease is provided at page 45 which is as follows: -
4. The second party during the period of lease shall construct or make further additions to the existing buildings up to a minimum value of Rs. 3,25,000 on the premises hereby leased.
The meaning which is to be spelt out by a conjoint reading of the head lease as well as the second sub-lease, is already considered by us in our earlier orders, and we held as extracted already by the ITO in his orders which is already extracted above. There we held that as soon as any new construction would be put up on the demised premises, it would partake the character of the premises already let out by the wakf to M/s B.R. Associates. We have also held that it means even during subsistence of lease period the wakf would become the owner of super-structure put up either by it or by the sub-lessees. In these circumstances, firstly we do not agree with the I.T.O. that we have considered the lease deeds only with reference to the salami or pagadi amounts. In our opinion the construction holds good even with regard to the ownership of the new constructions put up on the demised premises. As regards the CIT(A)'s orders we feel that there was no proper understanding of the resultant position of a conjoint reading of the head-lease as well as the second sub-lease. Therefore, we are constrained to observe that the Lower Authorities went wrong in appreciating the correct legal position which emerges from a conjoint reading of the head lease as well as second sub-lease despite the fact that we have .already decided upon the same topic in our earlier orders in the assessee's own case for earlier years referred to supra. Now as far as facts are concerned the assessee is a sub-lessee. It had taken on sub-lease dated 23-9-1972. The lease subsist only for 15 years. Under condition No. 4 of the sub-lease it had under taken to construct or make further additions to the existing buildings up to a minimum of value of Rs. 3,25,000. In the relevant accounting year it had made an addition of Rs. 1,57,925. As we have already held in our earlier orders that as soon as the new constructions were put up on the demised premises, they automatically partake the character of demised premises, the ownership of that buildings vests with the wakf, the original owner of the premises and even during the subsistence of the sub-lease the ownership does not vest with the assessee but only with the wakf. Under these circumstances the question is whether the amount of Rs. 1,57,925 should be considered as capital expenditure on which ground the revenue disallowed the same as a deduction or as a revenue expenditure as contended by the assessee. The learned counsel for the assessee Sri B. Satyanarayana Murthy, brought to our attention the Orissa High Court decision in CIT v. J.N.Bhowmick [1978] 111 ITR 747 and the Andhra Pradesh High Court Decision in CIT v. Singareni Collieries Co. Ltd. [1980] 121 ITR 466. In all fairness the learned Counsel brought to our notice the decision of the Andhra Pradesh High Court in Taj Mahal Hotel v. CIT [1967] 66 ITR 303. However, he contended that this decision does not apply and the distinguishing features were pointed out by the Orissa High Court in J.N. Bhowmick's case (supra). On the other hand the learned Departmental Representative relied upon Liberty Cinema v. CIT [1964] 52 ITR 153 (Cal.). Secondly he also drew our attention to the decision of the A.P. High Court in Sri Rama Talkies v. CIT [1966] 59 ITR 63. The learned D.R. further relied upon the Bombay High Court's decision in CIT v. Vasant Screens [1980] 124 ITR 835. He also invited our attention to the Delhi High Court's decision in Hotel Diplomat v. CIT [1980] 125 ITR 781. He also cited before us the decision of the Allahabad 'A' Bench in ITO v. Manorama Agencies [1984] 10 ITD 868.
Now before distinguishing the case of Taj Mahal Hotel (supra) we have to see what are the facts of the case and what is the ratio held on those facts. The assessee in that case firstly took up a hotel building on lease for 10 years in 1956 on a rent of Rs. 1300 per month with an option to renew the same for another 10 years on a rent of Rs. 1400. Under the terms of the lease deed, the assessee was given liberty by the lessor to make alterations or new constructions with the permission of the lessor and it was stipulated that the lessor could not demand any enhanced rent. On termination of the lease, the assessee was to take away fittings and fixtures like fans, wash basins, wooden screens etc. while the structures would remain the property of the lessor. In the accounting year relevant to assessment year 1966-67 the assessee put up new rooms for the comfort and convenience of guests and claimed the expenditure incurred viz., Rs. 60,000 as allowable deduction. The department disallowed the same on the ground that it is capital expenditure. The High Court held on the above facts that the improvements effected by the assessee were of an enduring advantage, though not everlasting, for the assessee's business during the period of the lease; the expenditure was neither "rent" nor "premium" and the department was right in treating it as capital expenditure. In J.N. Bhowmick's case (supra) the facts are as follows: -
The assessee is an individual. The assessment year is 1969-70. The previous year ended with 31-3-1969. During the year the assessee ran a hotel known as Sagarika Hotel located on the sea beach at Puri. The hotel premises were taken on lease by the assessee. Under the covenant of lease dated 13-7-1967 the assessee undertook to erect within 18 months from the date of the lease, masonry structures on the two sides of the vacant plot of land in- front of existing building known as Ashu Bhavan as per plan to be approved by the lessors and the building was to be of very good type and the expenditure was estimated at Rs. 60,000 in the minimum. This masonry structure undertaken to be built by the assessee was to vest in the lessor on the expiry of the term of the lease (i.e. 12 years 11 months) and it was further expressly stipulated that failure to raise the construction within the time indicated would entail forfeiture of the lease. During the year, assessee claimed deduction of a sum of Rs. 38,397 said to have been spent on the aforesaid head and the same was pressed to be accepted as revenue expenditure. The I.T.O. treated it as capital expenditure and rejected the claim for deduction. The A.A.C. confirmed the order of the I.T.O. He also declined to accept the deduction. The Tribunal while confirming the finding of the Lower Authorities treated capital expenditure however allowed depreciation calculated at 1/11th of the expenditure reckoned with the year of construction as deferred revenue expenditure. The question referred to the High Court was whether the Tribunal was justified in allowing depreciation at 1/11th of the expenditure reckoned with the year of construction as deferred revenue expenditure.
The Orissa High Court had reviewed the whole of the case law during the course of which they have also considered the A.P. High Court Decision in Taj Mahal Hotel's case (supra). They have extracted the discussion portion from pages 313, 314 and 315. They found out that in the case of Taj Mahal Hotel (supra) the assessee was given an option either to raise new building or not. However, that is not the case on hand. The lease deed itself cast an obligation on the assessee-lessee to raise the structures. We have already quoted para 4 of the sub-lease in the above paras which obliges the assessee to spend a minimum of Rs. 3.5 lakhs over the new construction in order to continue as a tenant for a period of 15 years. This makes all the difference. In so many words the Orissa High Court held it so at p. 754: -
It is thus clear that the construction undertaken by the assessee was an obligation which the lessee had undertaken to perform in order to keep up the lease hold where the hotel business was being run. This, in our view, brings about a substantial distinction and, therefore, the Andhra Pradesh decision referred to above would not assist in resolving the dispute arising on the facts of this case.
The fundamental point of distinction brought about by the Orissa High Court in order to distinguish Taj Mahal Hotel's case (supra) equally applies to the facts on hand before us. Ultimately on the facts before them the Orissa High Court held as follows: -
Held, that the construction raised by the assessee was an obligation which he had undertaken to perform in order to keep up the leasehold where the hotel business was being run. If the expenditure had not been incurred the lease itself would have stood forfeited thereby depriving the assessee of the source of income. Though in a way the benefit obtained by the new construction was an enduring asset to last as long as the lease subsisted, that cannot be the sole guideline for all types of cases. When an overall picture is taken on the facts of the case it would be appropriate to hold that the expenditure was incurred for keeping up the business and, therefore, was revenue expenditure.
In Singareni Collieries Co. Ltd.'s case (supra) the facts before the A.P. High Court were the following : -
Under the provisions of Coal Mines Labour Fund Act, 1967, the Coal Mines Labour Housing Board was constituted for construction of low cost houses for persons employed in coal mines. In pursuance of a scheme prepared by the said Board, the assessee-collieries entered into an agreement with the said Board for construction of quarters for its labourers. As per the specifications laid down by the Board, the Board was to pay a maximum amount of Rs. 3,100 per house to the assessee-company. According to the Scheme, the buildings shall be durable for an estimated life of 15 years and buildings and site shall belong to the Board. The agreement with the Board shall be with 15 years during which period a nominal amount of Re. 1 per month per tenement shall be paid by the company to the Board. In pursuance of the said scheme, the assessee-company constructed quarters in the assessment years 1964-65 and 1965-66 by incurring an expenditure of Rs. 45,20,723 and Rs. 42,25,420. However, the Board had paid the assessee an amount of Rs. 44,14,400 and Rs. 39,70,317 calculated at the rate of Rs. 3,100 per quarter. The balance sum of Rs. 1,06,323 for assessment year 1964-65 and Rs. 2,55,103 for assessment year 1965-66 was claimed as revenue expenditure by the assessee-company. The I.T.O. negatived the claim of the assessee and it was confirmed by the AAC. However, the Tribunal upheld the claim of the assessee. The Andhra Pradesh High Court on these facts while confirming the Tribunal's view held the following: -
Held, in deciding whether an expenditure is of a capital or revenue nature, each case has to be decided on its own merits mainly with reference to the aim, object and result of the expenditure. Though the expenditure was incurred by the assessee-company for the construction of the houses once for all, that circumstance by itself cannot be a ground to hold that the expenditure was capital in nature. A capital expenditure must be incurred with a view to bring into existence an asset or advantage for the enduring benefit of the trade. "Enduring benefit" is a relative term of contextual interpretation. In the light of possible and probable long span of the company's life, the indirect benefit which the company may derive through contented workman for a limited period of just 15 years, cannot constitute a lasting benefit so as to classify the expenditure as capital in nature. The expenditure was incurred primarily for the welfare of the employees of the assessee-company. The consideration whether the assessee was acting voluntarily or whether the expenditure was incurred in pursuance of its statutory obligation would not make any difference. The extra-expenditure had to be incurred by the assessee because it could not construct the quarters according to the specifications of the Board with the amount allotted by the Board. Therefore, the expenditure incurred by assessee was not for the purpose of bringing into existence an enduring benefit for its business but for carrying on its business profitably. Hence, the expenditure incurred is revenue in nature.
While applying the above ratio to the facts of our case it can as well be argued that the new constructions at the cost of Rs. 1,57,925 was incurred by the assessee for carrying on of its business profitably besides the fact that it was obligatory on the part of the assessee to spend the amount according to the terms of the lease. If it tails to keep up the terms of the lease there is every likelihood of forfeiture of the lease. In such a case the whole income earning apparatus would not be available. The only benefit which the assessee would contemplate, is, that it is entitled to let out the additional accommodation created by the new constructions can also be let out and thus the main object of its carrying on of its business more profitably can be achieved. This argument of Sri. B. Satyanarayana Murthy, learned counsel for the assessee is to be accepted. In our opinion the case law cited by the D.R. is clearly distinguishable and therefore the ratios of those of the case laws cited by the learned D.R. in our opinion, do not apply to the facts on hand. Firstly let us take up in Liberty Cinema's case (supra). The Calcutta High Court in that case laid down that in a case where the deduction from business profits are to be claimed under Sub-section (2) of Section 10 of the I.T. Act, the onus of proving that such allowances are permissible is upon the .assessee and the High Court in such cases must base its answer on the facts as found by the Tribunal. We respectfully follow the above proposition as correct. Having laid the above they went into the facts of the case which are as follows: -
The assessee purchased the leasehold right for five years in a cinema theatre in Court auction with the machinery, furniture and other fixtures and had to spend in the year of account Rs. 24,408 for repairs and renovation and a sum of Rs. 9,890 as legal expenses in connection with an application to set aside the auction sale and claimed these amounts as a deduction. The Tribunal found that these expenses were of a capital nature and disallowed the claim. The High Court held, (i) with regard to the claim of Rs. 24,498, since the Tribunal had found that the expenses incurred on this account were all of capital nature, and the onus was on the assessee to prove the facts necessary to bring him within the allowance under Section 10(2) (xv) of the Act and the assessee had failed completely to discharge that onus by producing any fact showing the nature and character of these expenses, the sum of Rs. 24,498 cannot be claimed Under Section 10(2)(xv) or Under Section 10(2)(v) of the Act.
As can be seen from the above the High Court very much relied upon the finding of fact given by the Tribunal that the expenditure of Rs. 24,498 was capital in nature. It also took into consideration the failure of the assessee to prove necessary facts which would bring him within the allowance under Section 10(2)(xv). However, this is not the case here. The Tribunal already found that the assessee would not be the owner as soon as the constructions were completed and it would form part of the demised premises whose owner would be the lessor under head lease. Therefore, the Calcutta decision does not help the revenue.
(3.)NOW let us deal with the Sri Rama Talkies' case (supra). In that case the assessee was a tenant of the land and he had taken the cinema hall on lease. The Landlord filed a suit for eviction. A conditional stay of execution of the decree pending the appeal, was passed according to which the assessee has to pay a sum of Rs. 6,991 as mesne profits for 7 years from the date of termination of the term of lease up to the date of the stay order. The assessee claimed Rs. 6,991 as rent paid in the assessment year and also claimed a further allowance of Rs. 15,275 spent on extensive renovations to the theatre. The reason for disallowing Rs. 15,275 by the High Court is stated pithily in the head note of the decision at p. 63 as follows : -
Held further, that the amount of Rs. 15,275 was not allowable as expenditure for current repairs or as revenue expenditure under Section 10(2) (v) or 10(2) (xv) of the Act. The expenditure could not be allowed Under Section 10(2)(v) as the amount was not spent in current repairs to the theatre but on improvements of great magnitude carried out for giving an enduring advantage to the assessee to keep pace with or outstrip in the competition with a new theatre which had recently sprung up, and the expenditure did not fall within the scope of Section 10(2) (v) of the Act. It was not allowable Under Section 10(2)(xv) as substantial improvements were made to the building and the land appurtenant thereto, with the sole object of getting an enduring benefit for the business and the expenditure must be deemed to be in the nature of a capital expenditure.
As can be seen from the above that the finding of fact given on which the High Court confirmed the finding that it was capital expenditure, was, that the amount was not spent in current repairs to the theatre but on improvement of great magnitude carried out for giving an enduring advantage to the assessee to keep pace with or outstrip in the competition with a new theatre which had recently sprung up and the expenditure did not fall within the scope of Section 10(2) (v) of the Act. However, no such facts are present in the case before us. In Sri Rama Talkies' case (supra) there was no obligation on the part of the assessee-lessee to construct by investing any amount whatsoever. In fact the assessee is not even the lessee but a tenant holding over. Thus the facts of Sri Rama Talkies' case (supra) and the facts of the present case are at great variance and the ratio given in Sri Rama Talkies case (supra) is confined only to the facts of that case and it cannot have universal application.