ORDER
T.N.C, Rangarajan, Judicial Member
1. These appeals by the assessee and the revenue relate to the claims of the assessee for deductions in computing the total income for the assessment year 1981-82.
2. The assessee is a private limited company, carrying on business in film production and distribution as well as hiring of machinery.
3. The previous year of the assessee relevant to the assessment year 1980-81 ended on 28-2-1980. Therefore, the previous year for the present assessment year 1981-82 should have ended on 28-2-1981. But the company changed its accounting year to end on 31st March by resolution of the Board of Directors dated 24-9-1981 which stated that it was changed as the assessee became a subsidiary company of another company which closed its accounts on 31-3-1981. By its letter dt. 24-9-1981 the assessee informed the ITO that it has no objection for being assessed for a period of 13 months, i.e., from 1-3-1980 to 31-3-1981 for the assessment year 1981-82. Accordingly, the assessment has been made in respect of the previous year being the period from 1-3-1980 to 31-3-1981 for the present asst. year 1981-82.
4. The property known as Gemini Studios being the land measuring 89 grounds and 1042 sq. ft. with buildings thereon at 121, Mount Road, Madras was leased by T.S. Srinivasa Iyer as the Karta of his HUF to M/s. Gemini Pictures Circuit (P.) Ltd. for 2 years from 1-4-1966 to 31-3-1968 under a lease deed dated 26-3-1966. However, this property was allotted to the share of T.S. Srinivasa Iyer under a partition deed dt. 30-8-1967. Thereupon he executed a fresh lease deed dated 3-10-1967 granting the lease of the property for a period of 30 years at a rent of Rs. 8,000 per month for the first ten years, Rs. 8,500 for the next ten years and Rs. 9,000 per month for the balance of 10 years. The lease deed also granted the option to the lessee to renew the lease for a further period of 30 years by giving a notice in writing at least 12 months before the expiration of the lease. On 8-7-1968 Sri T.S. Srinivasa Iyer settled the properties in favour of Vasan Charitable Trust subject to the lease granted to M/s. Gemini Pictures Circuit (P.) Ltd. On 22-9-1975 the trust renewed the lease for a period of 30 years commencing from 1-10-1979 on the same conditions as before. This document recited that the lessee had exercised the option for renewal of the lease and also explained to the lessors their proposal about the utilisation of the demised premises. These deeds dated 4-10-1967 and 22-9-1975 also granted to the lessee, M/s. Gemini Pictures Circuit (P.) Ltd. the right to sublet the premises. On 18-2-1980 a sub-lease was granted to the assessee, M/s. Gemini Arts (P.) Ltd. by a tripartite agreement in respect of an extent of 16 grounds 311 sq. ft. for a period of 48 years from 1-10-1979 on a rent of Rs, 17,500 per annum payable directly to the trust. This deed also provided that this will be in accordance with the covenants and conditions contained in the original deed dated 4-10-1967 and the renewal dated 22-9-1975. In particular, reference was made to clause 22 of the deed dated 4-10-1967 which provided that if the rent shall be in arrears for 3 months after becoming due, or if there is any other breach of the covenants by the lessees, the lessor may determine the lease and will re-enter the demised premises. Thereafter, another tripartite agreement was entered into on 22-3-1980. That deed recited that “in order to do away with the possible default of payment of annual rent, the sub-lessee (assessee) approached the Head lessors (trust) and offered to pay a lump sum compensation on payment of which they will be relieved of the obligation to pay annual rent up to 30-9-2027” and that “the Head Lossors laid a condition that they might be willing to accept such offer if the sub-lessees are prepared to pay a down payment of Rs. 1,80,000 immediately”. The assessee agreed to this and on payment of the sum of Rs. 1,80,000 the agreement was executed on 22-3-1980 confirming that the assessee need not pay any rent for the remaining period from 1-4-1980 to 30-9-2027 and that the trust shall not determine or terminate the lease deed and the renewal done earlier or take any proceedings whatsoever to re-enter the demised premises until 30-9-2027.
5. In the accounts of the previous year ended 31-3-1981 the assessee had debited the sum of Rs. 1,80,000 and computed a net loss in the profit & loss account in the sum of Rs. 6,55,424. The ITO after getting instructions from the Inspecting Assistant Commissioner Under Section 144B disallowed this claim for deduction on the ground that the payment has been made once for all for bringing into existence of an asset of an enduring benefit. After making other disallowances he converted the loss shown into a profit of Rs. 3,83,522. But after deducting the depreciation and investment allowance the net result was a total loss of Rs. 42,585 and the assessment was declared as not assessable.
6. On appeal, the C.I.T. (Appeals) also agreed with the ITO that the assessee had brought an advantage which would last for 47 years and hence the assessee derived enduring advantage and the assessee escaped the inflation of future rent liability. He, therefore, confirmed the disallowance treating the expenditure as capital expenditure.
7. In the further appeal before us it was contended on behalf of the assessee that the rent payable under the original lease was a revenue expenditure and therefore the commuted amount paid under the subsequent agreement continued to be a revenue expenditure and had to be allowed as a deduction. On the other hand, it was contended on behalf of the revenue that the assessee had derived an enduring benefit over a long period of years and hence the expenditure should be treated as a capital expenditure and was rightly disallowed.
8. On a consideration of the rival submissions, we are of the opinion that the assessee is entitled to succeed on this point. The undisputed position is that the assessee had already acquired the leasehold interest under the deed dated 18-2-1980 which enured for a period of 48 years. Therefore, under the deed dated 22-3-1980 the assessee did not acquire any additional right to be in possession for the period of 48 years. The assessee also did not protect itself from any enhancement of the rent because the rent also had already been fixed in the original lease deed and the lessor had no right to enhance it. If the assessee had paid a lump sum for the renewal of the lease in addition to the rent, it may be said that it is a premium in the sense of an amount paid for being let into possession so as to be treated as a capital expenditure. But in the present case the assessee having been already let into possession the amount of Rs. 1,80,000 under the deed dated 23-2-1980 did not represent a premium at all. The distinction will be clear when we refer to the decision in Mac Taggart v. Strump (B. & E.) [1925] 10 TC 17 (C. SS.) referred to in the decision of Ramakrishna & Co. v. CIT [1973] 88 ITR 406 (Mad.) relied on by the Revenue. In that case where the assessee did not have an option for renewal the lessor insisted on the payment of a lump sum at the time of renewal in addition to the rent payable for the lease. It was held that the payment was a capital expenditure obviously because it was a payment made for being let into possession such as the cases falling within the ratio laid down by the Supreme Court in the case of CIT v. Panbari Tea Co. Ltd. [1965] 57 ITR 422. Since in the present case the amount was not paid for being let into possession it cannot be treated as a premium and thus a capital expenditure.
9. The Supreme Court has observed in the case of Gotan Lime Syndicate v. CIT [1966] 59 ITR 718 that none of the tests laid down in various authorities to distinguish between revenue expenditure and capital expenditure is exhaustive or universal and each case must depend on its own facts. The Supreme Court also referred to the test laid down in British Insulated & Helsby Cables Ltd. v. Atherton [1925]10 TC 155 (HL) :
But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.
The Supreme Court then pointed out that,
Viscount Cave acknowledged that in certain cases an expenditure for obtaining an enduring advantage need not be capital expenditure for he inserted the words ‘in the absence of special circumstances leading to an opposite conclusion’ within brackets.
Therefore, the mere fact that the assessee was entitled to remain in possession for a long number of years under the lease deed does not make the expenditure a capital expenditure especially when that right was not acquired by the payment of this particular expenditure and had already been acquired under the earlier lease deed.
10. This takes us to the consideration of the actual nature of the expenditure under the deed dated 18-2-1980. The assessee was already obliged to pay the rent of Rs. 17,500 per year for a period of 48 years which would come to Rs. 8,40,000. But under the deed with which we are concerned, vis., the deed dated 22-3-1980, the assessee was obliged to pay only a sum of Rs. 1,80,000 which will come to about 10 years’ rent as against 48 years’ rent. Perhaps it represented the lump sum with which the lessor could get an annual return of Rs. 17,500 at the current bank rates. Therefore, it only represented a substitution of a lump sum payment in the place of the original contract to pay annual rent which was undisputedly a revenue expenditure. It has been held by the Madras High Court in the case of CIT v. Madras Auto Service Ltd. [1983] 13 Taxman 378 that whatever substitutes or surrogates a revenue expenditure is also revenue expenditure. The surrogate expenditure may be a lump sum payment. It may be laid out at any stage. But if it saves the taxpayer from incurring in the very year or the other years other revenue payments, either in whole or in part, then the expenditure has to qualify as revenue expenditure. The Supreme Court has also held in the case of Empire Jute Co. Ltd. v. ClT [1980] 124 ITR 1 that what is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. Since we have found that the assessee had no specific advantage arising out of the agreement dt. 22-3-1980 the expenditure has to be on the revenue account even though the assessee was having the advantage of remaining in possession for a long period of years.
11. This led the Revenue to put forward an alternative submission that even if the expenditure is considered to be a revenue expenditure, since it related to the right of the assessee to remain in possession for a long number of years, the entire expenditure could not be taken into account in computing the income of a particular assessment years since we are concerned with the computation of the true profits of one particular assessment year. This is the argument which found acceptance with the Tribunal in the case of Hindustan Commercial Bank Ltd., In re. [1952] 21 ITR 353 (All.) where while finding that a sum of Us. 89,870 was revenue expenditure, the Tribunal classified it as “deferred revenue expenditure” and. spread it over a period of twenty years on the ground that the expenditure was of a heavy character, the benefits of which were likely to extend beyond the year in question up to that anticipated period. This led to the reference of the following question :
Whether in view of the finding that the expenditure of Rs. 89,870 is of a revenue nature and was incurred not to start any new business but to facilitate the carrying on of an existing business there was any legal justification for treating the amount as a deferred expenditure and for spreading it over a period of 20 years and allowing only l/20th of that amount during the year in question ?
The High Court answered this question thus,
Coming now to the three questions mentioned above, we may take up the first question that arose in the assessee’s application for reference, that is, whether the sum of Rs. 89,870 could be spread over a period of twenty years and allowance made at the rate of l/20th each year. The learned counsel for the Commissioner has frankly admitted that he can find no provision in the Act for spreading out the expenditure over a period of twenty years. If the amount was laid out and expended wholly and exclusively for the purpose of the business and was not in the nature of a capital expenditure, the whole of it was allowable under Section 10(2)(xv) of the Act.
12. There is also a justification for this in the provisions of the Act itself. The expenditure in question is allowable as an expenditure laid out or expended wholly and exclusively for the purpose of the business Under Section 37, such expenditure not being in the nature of capital expenditure. That section does not limit the expenditure to that incurred for the purpose of earning the income of the year. As long as it is laid out for the purpose of the business the fact that the assessee may derive some benefit from that expenditure for a period of more than a year does not detract from the eligibility of deduction under that section. Under the original lease deed the rent was payable annually and, therefore, only the rent which accrued and was payable for that year could be allowed as a deduction. When that contract to pay an annual rent was substituted by the contract to pay a lump sum, the original contract to pay the annual rent was discharged in terms of Section 62 of the Indian Contract Act. What survives and is in force is only the substituted contract under which the lump sum becomes payable and accrues as the expenditure in the previous year relevant to this assessment year itself. While the nature of the payment remains the same because it was the substitution or a surrogate of an earlier revenue expenditure, the point of accrual of the expenditure has undergone a change due to the novation and hence the entire amount becomes deductible Under Section 37 of the Income-tax Act, 1961. Therefore, we are unable to accept the alternative submission of the Revenue. In the circumstances, we find that the expenditure of Rs. 1,80,000 was an admissible deduction Under Section 37 and we direct the ITO to allow the same in computing the total income.
13. The appeal of the Revenue is directed against the decision of the C.I.T. (Appeals) to grant investment allowance on the new colour film analyser and new colour film printing machine, as claimed by the assessee. The CIT (Appeals) followed the decision of the Appellate Tribunal in the case of ITO v. First Leasing Co. of India Ltd. [1985] 13 ITD 234 (Mad.) (SB) where it was held that a leasing company can claim investment on machinery leased out even though the company is itself not engaged in manufacturing operations. The CIT (Appeals) also over ruled the objection of the Revenue with regard to the exclusion of cinematograph films in the Eleventh Schedule to the Income-tax Act by referring to the decision of the Tribunal in the case of Prasad Productions (P.) Ltd. [I.T. Appeal Nos. 1831 and 1832 (Mad.) of 1983-84, dated 29-5-1985] where it was held that in item No. 9 of the Eleventh Schedule to the Income-tax Act “cinematograph films” refers only to the manufacture of raw films and not for the processing of the film subsequently. The Revenue is unable to persuade us to take a different view in this matter. Hence, the order of the CIT (Appeals) on this point is confirmed.
14. In the result, the appeal of the assessee is allowed and the appeal of the Revenue is dismissed.