JUDGMENT
Desai, J.
1. This reference is at the instance of the Commissioner and the following question of law has been refereed to us under s. 256(1) of the I.T. Act, 1961 :
“Whether, on the facts and in the circumstances of the case, the stipulated payment of Rs. 62,500 or any part thereof is of a revenue nature ?”
2. The assessee is a registered firm which was at the relevant time engaged in the business of motor and automobile parts. It also carried on the business of running or petrol pump and service station. This business was carried on even prior to July 9, 1959, on land which belonged to Messrs. Hindustan Steel Limited, Bhilai Steel Plant Project (hereinafter referred to as the “plot owner”). The assessee received a letter from the plot owner dated December 14, 1960, mentioning that the licence given to the assessee dated July 9, 1959, allotting the plot on temporary lease basis for petrol pump and service station was being thereby terminated. The letter further stated that in case the assessee was interested in taking the plot on a permanent lease basis, it should apply to the plot owner in the prescribed form. The plot owner thereafter wrote a letter dated January 21, 1961, wherein the main terms and conditions of the proposed permanent lease were indicated. The period lease was to be 30 years. Clause 2 provided for payment of premium (ground rent) in lump sum at Re. 1 per sq. ft. and cl. 3 provided that in addition to the above, the permanent lessee was to pay economic rent calculated at the rate of 5% of the total ground rent per annum. Under term 4, the economic rent could be revised at the end of every 15 years and could be increase by 25%. It would appear that the assessee had submitted its plan of construction for approval. However, it was pointed out to it by the plot owner by its letter dated February 6, 1961, that as the assessee had not communicated its acceptance of the terms and applied for permanent lease, its licence dated July 9, 1959, stood terminated and the assessee, therefore, should vacate the plot. The assessee thereafter carried on. correspondence and queried the propriety of charging any permium for it. The plot owner by it letter dated June 1, 1961, pointed out that for allotment of land on a permanent basis of commercial purposed, the lessee was required to pay premium at the rate of Re. 1 per sq. ft. plus 5% of that as annual ground rent. The assessee thereafter made a further representation repeating its contention that the provision for payment of premium of Re. 1 per sq. ft. may not be insisted upon but the said representation was not accepted and the assessee was so informed by the plot owner’s letter of June 22, 1961. It would appear that thereafter the assessee sought facility of paying the premium in instalments. Initially this was rejected by the plot owner and the assessee was so informed by the plot owner’s letter dated September 4, 1961. It would appear that thereafter there were further representations and ultimately by its letter dated December 28, 1961, the assess confirmed its acceptance of the rate of premium payable subject to the facility for payment of the same by twelve equal annual instalments which appears to have been agreed to at some meeting. The assessee also agreed to pay annual rent of 5% on the amount of the premium. It also accepted the other terms and conditions conveyed to it in the plot owner’s letter dated January 21, 1961. The endorsement at the foot of the said letter indicated that the assessee was applying for permanent allotment of the plot on the above terms and conditions. The plot owner by its letter dated May 18, 1962, referred to the correspondence between the parties resting with the assessee’s letter dated December 28, 1961, and indicated that the plot admeasuring 250′ x 250′ on Great Eastern Road, Bhilai Nagar, was proposed to be allotted to the assessee on the terms and conditions mentioned therein, 11 terms and conditions were indicated. Term No. 2 related to payment of premium by the assessee at Re. 1 per sq. ft. and the amount of premium, viz. Rs. 62,500 was to be paid in 12 equal instalments. The first of the instalments was to be paid on May 20, 1962. The assessee was also required to pay ground rent of Rs. 3,125 per annum which was calculated at 5% of the premium. The ground rent was sought from July 9, 1959. The period of lease was mentioned in term No. 1 at 30 years with effect from July 9, 1959. Clauses or terms Nos. 9 and 11 are somewhat material and will be set out fully a little later on. In reply, the assessee contended that the period the lease should be 30 years from the date of the contract, that is, from May 30, 1962 and not with retrospective effect. It also urged that higher rent at the rate of Rs. 3,125 per annum (as against Rs. 50 per month which it was paying earlier) should also be charged with effect from May 20, 1962. Accordingly, the assessee in its letter dated June 6, 1962, mentioned that it was depositing the first instalment of premium, viz. at Rs. 5,209 and rent for one year, viz. Rs. 3,125 for the period from May 20, 1962 to May 9, 1963.
3. In its assessment for the assessment year 1964-65, the assessee claimed inter alia this payment of premium amount of Rs. 5,209 under the heading “Rent, rates and taxes.” The ITO sought details which were furnished and are written submission was handed over. The ITO came to the conclusion that the payment was made for the acquisition of the lease. In the opinion of the ITO the assessee had acquired a capital asset and the premium paid by the assessee for the grant of lease was capital expenditure. It was accordingly disallowed. The same position continued in the subsequent assessment years regarding the amount of premium paid during the said year. It would appear from the subsequent assessment order that the assessee secured facility to pay the premium amount by 30 equal instalments instead of 12 instalments referred to in the correspondence. Accordingly, in one of the assessment orders, the amount claimed which was disallowed by the ITO came to Rs. 2,083 being 1/30th of the aggregate premium of Rs. 62,500.
4. The assessee agitated the question of disallowance for all the six assessment years before the AAC. The AAC agreed with the approach of the ITO and held that the officer was justified in treating the payment of lease premium as capital expenditure and there was no arrant for interference with the disallowance.
5. The same conclusion followed for all the assessment years and ultimately the assessee was constrained to file six appeals. The said appeals came up for hearing before a Bench of the Income-tax Appellate Tribunal but occasioned divergence of opinion between the judicial member and the accountant member. The judicial member by his consolidated order dated July 3, 1971, came to the conclusion that the premium of Rs. 62,500 did not represent the price for parting with the land but was mainly in the nature of advance rent. He was of the view that the six appeals, therefore, were required to be allowed on this point. On the other hand, the accountant member, after analysing the correspondence exchanged between the parties, was unable to agree with the judicial member. According to him as against the original monthly rent of Rs. 50 paid from July 9, 1959, the assessee accepted the liability to pay the enhanced rent at the rate of Rs. 3,125 per annum, that is, at about Rs. 260 per month. it also accepted the liability to pay the amount of Rs. 62,500 as premium. According to the accountant member, the liability to pay this premium was relatable to the acquisition of the lease rights and the premium was measured on the basis of the area of land at the rate of Re. 1 per sq. ft. According to the accountant member, the annual rent payable and accepted by the assessee was revenue expenditure and the payment of the instalment of premium was capital expenditure, According to the accountant member, it made no difference whether the premium was paid in one lump sum of in 12 yearly instalments or more. The accountant member accordingly proposed that the appeal ought to be dismissed on this point.
6. As the two members of the Bench differed in their opinion on this plea, the point of difference was referred to the president under s. 255(4) of the I.T. Act, 1961. The President agreed with the judicial member’s opinion that the so-called premium was nothing but advance rent. The President referred to the plot owner’s earlier letter in which it had bracketed the premium with ground rent. Further, according to the President, as the so-called premium was linked with the area of the plot and the annual rent again linked with the premium, all these would seem to suggest that both the payments were to be considered as part and parcel of rent although different nomenclature had been applied by the parties to the two payments. In the result, the assessee succeeded in its appeals and got relief against the disallowance in respect of the payments made towards the premium amount of Rs. 62,500.
7. Aggrieved by this decision of the Tribunal, the Revenue has claimed the reference in which the above question has been referred to us.
8. Mr. Joshi on behalf of the revenue referred us to a decision of the Supreme Court in CIT v. Panbari Tea Company Ltd. [1965] 57 ITR 422 and submitted that whether the amount of premium was paid in a single lump sum or by instalments would not be conclusive. In Panbari’s case, the Supreme Court cited with approval the decision of the Privy Council in Raja Bahadur Kamakshiya Narain Singh of Ramgarh v. CIT [1943] 11 ITR 513 at 519, as also the observations in an earlier decision of the Supreme Court. The question would seem to be whether the premium represented a payment agreed to be made by the assessee or lessee to enjoy the benefit granted to it but the lease. If this was the case, then the right acquired may be regarded properly as a capital asset and the money paid to purchase it may properly be held to be payment on capital account.
9. We were also referred to Durga Das Khanna v. CIT . In the said case the appellant before the Supreme Court had taken on lease certain premises for a term of 99 years with a right to assign the lease and alter the structure of the premises so as to convert it into a cinema house. After spending a substantial amount, he ran short of funds and on February 23, 1946, he entered into a lease by which the building was demised to his lessees for 30 years. The lessees agreed to pay to the appellant Rs. 55,200 as also the rent which was to be applied towards the cost of erecting the cinema house. The lessees also agreed to pay rent of Rs. 2,100 per month. The lease did not contain any condition or stipulation from which it could be inferred that the sum of Rs. 55,200 had been paid by way of advance rent. There was no provision for adjustment of the said amount towards rent or for its repayment by the appellant. Both the Tribunal and the High Court, however, held that the receipt of the same was in the nature of advance payment of rent but the appellant succeeded in having this view reversed in his appeal to the Supreme Court. The relevant observations are to be found at pages 799 and 800.
10. It was submitted on behalf of the assessee before us that the assessee was in occupation of the plot even earlier to May 20, 1962. Our attention was invited to the assessee’s letter dated June 12, 1961, and it was suggested that the earlier allotment also conferred certain degree of permanency on the assessee’s right to occupy the plot which was not substantially enhanced by the new agreement. it was urged that as a matter of fact, no formal lease was executed and all that had been done was that the lessor extracted more moneys from the assessee which the assessee was constrained to agree to pay in order to protect its business. Finally, considerable reliance was placed on term No. 9 and it was submitted that having regard to the term, it was impossible to conclude that the assessee had acquired an asset of enduring nature. In other words, the argument was that if the plot owner could seek back possession of the plot of, land from the assessee at any time, then the so-called acquisition of the leasehold rights of 30 years was just chimerical since the assessee’s occupancy could be ended at any time, even within a short spell of one or two years or whenever the plot owner deemed fir to do so. Term No. 9 was also relied on since it provided for refund of a proportion of the premium amount. Our attention was also drawn to the fact the ultimately the plot owner agreed to take the amount in annual instalments and it was suggested that this confirmed that the payment was by way of additional rent and no more.
11. We may now set out fully the said term No. 9 on which great reliance has been placed by the assessee. The said term provides as under :
“9. If during the period of the lease, the premises are required by the company for its own use or for a public purpose, the company shall be at liberty to take possession of the land together with all buildings structures and appurtenances by giving three month’s notice. You will be entitled to compensation in respect of the buildings and the structures on the demised land, but shall not be entitled to any compensation for your interest in the said land except the refund of the proportion of the premium. The compensation payable under this clause shall in case of dispute be referred to the arbitration of a sole Arbitration agreed upon by both the parties or in the absence of such agreement by two arbitrators, one to be appointed by such party. The provisions of the Arbitration Act, 1940, and any statutory modification thereof shall apply to any such arbitration.”
12. In our opinion, this term should be considered apart from the facility given to the assessee to pay the amount of premium in instalments. As a matter of fact, the plot owner had suggested having this term together with an insistence on the assessee paying the amount in lump sum prior to the execution of the lease. Suppose the assessee had paid the amount, that is the full premium of Rs. 62,500, then merely because there is provision permitting the plot owner to re-enter the premises on these two contingencies, can it be said that lessee’s tenure is uncertain and non-permanent or can it be said that merely because there is provision for refund in these contingencies that the premium ceased to be a premium and becomes some payment on revenue account or revenue expenditure ?
13. In the first place, it is important to note that the term does not give an unrestricted or unfettered right to the lessor to re-enter the demised premises. The re-entry is permitted if the plot owner requires the premises for its own use or for a public purpose and the lessee can if called upon to vacate insist that the owner must give reasons why it requires the premises and dispute the owner’s claim for re-entry if the reasons do not fall squarely within the two limited contingencies contemplated by the term; by way of example, the lessor may not be permitted to re-enter upon the premises and take possession of the structures (even on payment of compensation for them) to give them to some one else. Thus, we are unable to accept the contention that merely because there is an additional provision for re-entry contained in this term that the assessee did not secure any tenure or certainty of tenure under the lease. The terms and conditions of such agreement have to be construed in their entirety. The lease itself or the terms, since no formal document was executed, provided that the parties contemplated that the lessee was to be undisturbed for 30 years the stipulated rent was also to be undisturbed for 15 years and even at the end of the said period it could not be enhanced by more than 25%. There was a separate term providing for payment of premium and it would appear to us that the method of calculation of the same with reference to the area or the fact that the rent was to be determined at a percentage of the premium can have no relevance to the question. There is no material to suggest that the assessee did not acquire further certainty of tenure of rent by reason of these terms which were accepted by it in the correspondence. In our opinion, further, the fact that instead of a lump-sum payment as originally contemplated, the plot owner allowed the assessee to make payments in 12 installments initially and 30 instalments subsequently would seem to make no difference.
14. There is nothing in the correspondence to suggest that this amount of Rs. 62,500 partook the character of rent or was payment of advance rent. In Khanna’s case , one of the tests indicated was to see whether the rent fixed was absurdly low. If that be so, then the amount designated as premium would conceivably be considered to be rent paid to advance since the actual rent designated would be nominal. In the instant case, we have enhancement of rent from Rs. 50 fixed provisionally earlier to Rs. 260 per month and there is no material even to suggest that this latter amount was not proper for the plot of land.
15. To recapitulate, we are unable to accept the submissions advanced on behalf of the assessee that the assessee did not obtain an enduring advantage under the fresh terms. It is impossible to hold that the tenure of the assessee was secured or unsecured under the allotment of 1979. It is also not possible to accept the assessee’s contention that impermanence is inherent by reason of term No. 9. It would appear to us that the provision of refund contained in that very term or facility for the payment of premium amount in instalments would make no difference to the question. Similarly, the fact that the premium was calculated on the area of the plot or that the ground rent was determined at a percentage of the premium would not at all be material to the question. It would appear to us that the learned judicial member and the learned president have misdirected themselves and wrongly applied the correct test postulated. The tests which they have set out in their orders are not warranted by the legal position.
16. The learned advocate for the assessee referred us to CIT v. Assam Oil Co. Ltd. . The Calcutta High Court in the said decision was considering the question whether certain royalty paid was capital or revenue expenditure. An amount payable by way of royalty has always been differently treated and an observation to this effect is also found in Raja Bahadur Kamakshya Narain Singh v. CIT [1943] 11 ITR 513 (PC). This observation has been reproduced by the Supreme Court in Panbari’s case . The said Calcutta decision, therefore, would seem to be of little assistance in the above case.
17. In our opinion, the view taken by the accountant member was the correct view and there is nothing on the record to suggest that the sum of Rs. 62,500 was advance rent or the instalments of the said amount paid by the assessee partook the character of rent or were revenue expenditure. In this view, we answer the question referred to us in the negative and in favour of the Revenue. The assessee will pay the costs of the reference to the Commissioner.
