BRIJLAL GUPTA, J. - (1.) THESE three references under S. 66(1) of the IT Act relate to the same assessee for different assessment years and arise more or less a common question and can be conveniently disposed of by a common judgment. The first reference relates to the asst. yrs. 1948 -49, 1949 -50, 1950 -51, 1951 -52 and 1952 -53. The second reference relates to the asst. year 1953 -54 and the third reference to two assessment years, namely, 1954 -55 and 1955 -56. The question which has been referred in the first reference is : "Whether, on the facts and in the circumstances of this case, the lease money and rent paid by the assessee to the lessor is a permissible deduction within the meaning of cl. (xv) to sub -s. (2) of s. 10 of the Indian IT Act ?"
(2.) IT will be clear from the form of the question that relates to two classes of money paid : (1) the "lease" money; and (2) the rent. It may be stated that in the fifteen leases which are under consideration in these cases a certain sum of money was paid by the assessee in a lump sum at the time of the execution of the lease, and this has been described in the question as "lease" money. Another sum of money was payable by the assessee year after year and this has been described in the question as "rent". In the second and the third references the questions referred are stated respectively as follows : "Whether, on the facts and in the circumstances of the case, part of the initial lease amount paid by the applicant to its lessors and adjusted during the year in question, is a permissible deduction within the meaning of cl. (xv) of sub -s. (2) of S. 10 of the IT Act ? and Whether, on the facts and circumstance of the case, the sum of Rs. 1,215 and Rs. 1,630 representing the lease amounts paid in the asst. ysr. 1954 -55 and 1955 -56 by the applicant to its lessors are permissible deductions within the meaning of cl. (xv) of sub -s. (2) of S. 10 of the IT Act ? Whether the lessors conferred on the lessee an asset of an enduring nature ?" It will be seen that these two questions concern themselves only with one class of payment, namely, the payment made by the lessee initially in a lump sum at the time of execution of the lease and do not concern themselves with the second class of payment, namely the rent which was to be paid year after year. This was so far the reason that in the years involved in the last two references the amount paid annually as rent was allowed by the Tribunal as a permissible deduction and, therefore, in those years no question arose of the allowability or otherwise of this latter class of payment. The facts giving rise to the references may be shortly stated : The assessee is a private limited company and carried on the business of manufacture and sale of bricks. It takes plots of land on lease, erects kilns, extracts clay from the land, manufactures bricks and sells them, and thus earns its income. It had plots of land on the lease and had executed 15 leases for varying periods and it is the payments made in respect of these 15 leases with which we are concerned in these references. The serial number, the name of the lessor, the date of the lease, the period of the lease, the rights of the assessee under the lease and the initial and annual amounts paid by the assessee under the leases are stated below in a tabular form : S. No. Name of lessor Date of lease Period of lease Right of the assessee under the lease Amount paid by the assessee . 1 2 3 4 5 6 . . . . . . Initial Annual rate . . . . . Rs.As.Ps. Rs.As.Ps. 1. Surju Pd. 7 -6 -46 10 yrs. Dig earth up to a specific depth of 7ft., construct katcha and pucca wells, construct buildings without foundation for residence of employees, construct kilns roads construct manufacture tiles, bricks and set up an engine for manufacture of lime, surkhi, build a workshop, use the land in any manner they wish and transfer their rights under the lease. 3,760 150 -6 -0 2. Mst. Raj Dulari 24 -4 - 46 10 yrs. do. 12,760 508 -6 -0 3. Sarswati Pd. 10 -10 - 46 " Dig earth up to a specified depth of 10ft., construst 6,400 40 -6 -0 wells pucca and katcha, construct buildings without foundation for the residence of employees, construct roads, construct kilns, manufacture tiles, and set up an engine for manufacture of lime, build a workshop, use the land in any manner they wish and transfer their rights under the lease. 4. Ashrafali 25 -2 - 41 5 yrs. Construct katcha nad pucca wells, roads, kilns, houses for employees and labourers, stock bricks and tiles, dig earth up to a depth of 12ft., cultivate the land and sublet it. 1,170 47 -12 -0 5. Ramraj and Others 1 -2 -46 10 yrs. Dig earth up to a depth of 10 ft., build a kiln, manufacture bricks, tiles, and on the land, instal an engine, cultivate the land, sublet the land or do whatever he might chosse to do on the land. 145 -4 -0 8 -4 -6 6. Chhedi and Others " " do. 344 -8 -0 19 -11 -0 7. Ramshanker " " do. 91 -8 -0 5 -4 -0 8. Mahadeo and Others " " do 657 -14 -0 37 -8 -6 9. Sheo Shanker and Others 4 -2 -46 10 yrs. do. 2,600 -0 - 0 57 -0 -0 10. Th Bhanu Pratap 14 -10 - 41 5 yrs. 8 1/2 months Dig earth. No Specification, construct thatched sheds. construct wells, manufacture bricks, construct kilns and to use the land he may choose for the use of workshop. 630 -0 -0 . 11. Th Bhanu Pratap 2 -12 - 47 3 yrs. Dig earth No specification about depth, construct thatched sheds, construct katcha and pucca wells, construct kilns, manufacture bricks and to use the land for any purpose he may choose for the use of work shop. 825 . 12. Sheosaran and Others 1 -2 -46 15 yrs. Construct roads and use it in any manner. 36 3 -6 -0 13. Ramraj and Others " " do. 72 7 -8 -0 14. Dwarka " 15 yrs. Construct roads and use it in any manner. 64 6 -6 -0 15. Bhaggal " " do. 16 3 -0 -0 It will appear from the aforesaid table that leases at Nos. 12, 13, 14 and 15 do not refer to the extraction of any clay from the land. It appears from those lease deeds that what was given to the assessee was a right to construct roads, possible approach to the other neighboring plots taken on lease by the assessee. In leases at Nos. 10 and 11, there was no construct between the lessor and the assessee about the annual payments by way of lease money nor was there any contract about the depth up to which clay could be extracted from the land. Those documents also show that there was a contract between the assessee and the lessors whereby the assessee could construct thatched sheds, dig wells, or construct kilns and use the land for any purpose it might choose. Lease deeds at Nos. 1 to 9 show that the assessee could dig earth up to a particular depth. Those documents further show that the assessee could construct wells, buildings, for the residence of employees, and also construct roads and kilns. Under those contracts, the assessee could also set up an engine for the manufacture of lime and use the land in any manner which the assessee liked. The assessee could also transfer its rights under the leases. Lease deeds at Nos. 5 to 9 speak of the right of the assessee to cultivate the land in addition of the other uses to which the land could be subjected. Copies of the leases are are made parts of the case and are annexures "A" to "A -14".
(3.) IT appeared from the assessment record that the assessee itself had added back Rs. 9,277 and Rs. 3,431 paid to the lessors as lease money in the asst. yrs. 1948 -49 and 1949 -50 respectively though during the assessment proceedings an allowance in respect of those amounts was claimed. In the subsequent years, however, it claimed the allowance of the amounts paid as lease money etc. The details of the payments claimed are as under : In the years involved in the first reference the ITO disallowed both classes of payments, namely, the lump sum payments and the annual payments and also the expense connected with the execution of the leases holding that the expenditure was of a capital nature and not a revenue nature so as to be allowable under S. 10(2)(xv). In appeal by the assessee the AAC allowed 80 per cent of both classes of payments relying on the Full Bench decision of the Lahore High Court in Benarsidas Jagannath vs. CIT (1947) 15 ITR 185 (FB) but holding that as in some of the leases the right of cultivation had also been given to the assessee, and even though no cultivation may actually have been done still as the right was there the entire amount could not be allowed. The Department went up in appeal to the Tribunal against the orders of the AAC and the Tribunal allowed the appeals and reversed the orders of the AAC holding that under the leases the assessee had acquired an interest in the land and the payments made by it to the lessors were not the purchase price of raw material as claimed by the assessee but was an item of expenditure of a capital nature. It will be noticed that neither the assessee nor any of the authorities below made any distinction between the two classes of payments, the lump sum payments initially made by the lessee at the time of the execution of the lease and the annual payments made or to be made by it for the duration of the lease. . Rs. . 1948 -49 9,277 . 1949 -50 3,431 . 1950 -51 4,121 (the other items claimed have been allowed by the ITO). 1951 -52 2,044 . 1952 -53 3,625 . 1953 -54 1,393 (2320 -18 -909) 1954 -55 1,215 . 1955 -56 1,630 ;