JUDGMENT
Satyanarayana Rao, J.
1. The three questions that were referred to us for decision under Section 66(1), 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. Estates was revenue expenditure which the assessee was entitled to deduct under Section 10(2) of the Act.
(2) Whether the sum of Rs. 7000 spent in connection with the new salt pans was capital expenditure and not allowable as a deduction under s. 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.
3. The facts relevant for consideration of the first two questions are as follows as appear from the statement of the case : The assesee is a manufacturer of salt in Livingipuram in Tuticorin. The salt pans originally belonged to one M.L.M. 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 orders of the District Court and with its sanction, the pans were sub-leased under a document dated 28-3-1934 to the assessee, Subbiah Nadar, for a period of seven years commencing from 1-1-1934 and ending with 31-12-1940. Under the sublease the assessee had to pay a sum of Rs. 36,969 to the Government on behalf of his lessor in three instalments.
One instalment on 12-3-1933 was paid even before the lease was executed on 2-11-1933 under an agreement. The other instalment had to be paid on 1-4-1934 and 1-10-1934. 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. 35,00 for seven years as rent. These 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. 3500, 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 31-12-1939, there was yet another form in the lease that the lessee was at liberty to spend a sum of Rs. 4000 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.
4. Before the expiry of the term of this lease, on 13-12-1937 the period of the lease was further extended under a document for a period of three years from 1-1-1941 to 31-12-1943. The assesses did not carry out the construction of the railway 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 30-12-1942. The rent payable was increased from Rs. 500 to Rs. 3000 payable in two instalments of Rs. 1500 each on 30th April and 31st August of each year. There was a second extension under a document dated 10-7-1942 of the term for a further period of two years from 1-1-1944 to 31-12-1945. 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 31-12-1942, it is stated in the document that by that time the 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 31-12-1942 the assessee should pay on or before 31-12-1942 the amount required for the construction of the siding. It is found that, in fact, by 31-12-1942, 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. 7000 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 income 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.
5. 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 purpose of the assessee’s 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.
6. 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 a 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 may even be received in advance.
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 document is that this is not amount which the assesses was under an obligation to pay to the lessor. It is an amount which is intended to bring into the business for the quick transport of the manufactured product. If the assessee does not fulfil the obligation, there is no means of enforcing that obligation by the lessor against the lessee and all that the lessor is entitled to 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 during the term of the lease and if there was failure to carry out 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 treat-led as capital expenditure and not as expenditure debitable to revenue.
The sum of Rs. 7000 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 he lease lasts. The advantage no doubt goes to the benefit of the lessor alter 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 by the latter on the premises.
7. 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’, (1938) 4 All ER 487(A). The Race Course Betting Control Board obtained a license 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 per cent. of the cost of construction of the building 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 instalments 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 Board said that but for the insertion of the declaration in the deed the Crown would not have a leg on which to stand. 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
a revenue 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 buildings 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 Race Course Co, I think that 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 buildings. However, I do not think that that is a matter which touches the issue to be determined here.”
8. The next case relied on was — ‘Commr. of Income tax v. Globe Theatres Ltd.’, (B) a decision of the Calcutta High Court. The assessee in that case carried on business as exhibitor of cinema pictures. 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 stipulation that after the construction of the buildings, the cinema house would be leased to the assessee. The building was not constructed and the company which undertook to construct the cinema house Ml 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 claimed it as an allowable deduction under Section 10(2), Income-tax Act.
The payment was treated as advance payment of rent under the lease and as 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 to the facts and does not support at all the contention urged on behalf of the assessee.
9. The decision in — ‘Henriksen v. Grafton Hotel Ltd.’, (1942) 24 Tax Cas 453 (C) 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 license was renewed in 1934 and 1937, but the assessee was obliged to pay in respect of the license monopoly value which was imposed and which was payable in instalments. 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 instance heard before Lawrence J. and in the Court of Appeal it was disposed of by Lord Greens, M.R. and 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 a 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 arid 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 it is not rent and the company and its landlord have not agreed that it shall simply pay the 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 ‘Albertoli case’ and from the fact that the monopoly value is imposed as a lump sum, though payable by instalments, and as a condition of the grant of the license, that the quality and nature of the monopoly value is capital quality in nature; and it seems to me impossible to hold that when the tenant undertakes to pay those charges they alter their quality & nature & become income charges.”
This decision was affirmed by the Court of Appeal. Lord Greene M. R. saw no difference in principle between a payment out and out for monopoly value and payment in respect of a term which is in the nature of a premium. To the contention repeated before the Court of appeal that a payment under a covenant would alter the quality of the payment it was observed at p. 460 by Lord Greene M.R.
“If a payment is of such a nature as to preclude its deduction when made spontaneously, I cannot see that its nature is affected by reason of the fact that it is made under a covenant with a third party. Capital improvements are often made under a covenant in a lease. I have never heard it suggested that the cost of making them can be deducted by the lessee in computing his profits for income-tax purposes.”
The observations in our opinion are apposite and answer effectively the contention urged on behalf of the assessee. Du Parcq L. J. referred to the Lord Chancellor’s decision in — ‘British
Insulated and Helsby Cables Ltd. v. Atherton’. (1926) A C 205 at p. 213 (D) where the nature of capital expenditure was defined; and explained that the expression ‘enduring benefit’ occurring in the passage in that case was not meant to have benefit of a permanent character and the word ‘permanent’ does not mean everlasting. The duration must always be considered with reference to the period for which the premises were leased and as long as the lease lasts and not permanent or everlasting and continuing even after the termination of the interest of the lessee.
10. The decision of Lawrence J. again in –‘Henderson v. Meade-King Robinson & Co. Ltd.’, (1939) 22 Tax Cas 97 (E) particularly his observations at page 105 are of considerable assistance in distinguishing capital expenditure from revenue expenditure.
11. For the foregoing reason we have no hesitation in answering the first two questions in the negative and against the assessee.
12. There remains the last of the questions that were referred to us. The sum of Rs. 36,680 consists of a sum of Rs. 26,326 which represented the principal paid to satisfy the compromise decree in O. S. No. 9 of 1942 to the plaintiff in that action, one, Messrs. A. R. Ramier & Co., and Rs. 10,324 the cost incurred by the assessee in connection with that suit. This amount is claimed as permissible deduction under Section 10 (2) (XV) of the Act. The assessee Subbiah Nadar had a divided brother Theri Nadar. Both of them were under pressure for money in 1939 and executed an agreement in favour of Ramier & Co. on 28-12-1939. Under this document it was recited that the two brothers took separately leases of salt pans at Tuticorin and other places and that financial help was needed, and that Rainier & Co. were ready and willing to give the necessary help.
It was, therefore, provided that Ramier should advance if necessary funds to the two brothers on their joint responsibility and there were certain stipulations for the benefit of Ramier for the financial help rendered by him. Besides the interest payable on the sum by way of commission on the sales provision was made also to secure repayment to Ramier & Co., by practically putting the management of the business under his supervision and control. The entire amounts borrowed were not, however, repaid and Ramier & Co., were obliged to institute a suit, O. S. No. 9 of 1942. We do not know what exactly the defence in that suit was but, finally on 26-7-1943, the matter was compromised between the brothers and Ramier; and the compromise of that date recites that Subbiah Nadar the assessee paid on behalf of Theri Nadar his brother a sum of Rs. 25,000 in full quit of all the obligations in favour of Ramier and the suit was dismissed on condition that each party should bear his own costs of the suit.
The assessee had no definite basis on which this amount was claimed as permissible deduction under Section 10(2) (XV) of the Act. When called upon to state the legal position in the first instance he said that he was a surety for his brother, and that the losses which had incurred should be lawfully deducted. Perhaps realising that this position was somewhat untenable and shaky he filed an affidavit in which he shifted his ground and claimed there was a joint venture of himself and his brother and that this amount represented the amount which he became liable to pay to Ramier. In the argument before us, yet a third case was put forward by the learned counsel for the assesses and it was claimed that really it was money borrowed by both of them jointly for their respective businesses and that each was surety for the other and, therefore, this is a legitimate deduction which should have been permitted by the department.
The claim that it is a joint venture was negatived finally by the Appellate Tribunal though the Appellate Assistant Commissioner took a different view because the partition deed entered into between the brothers negatived such a case, Even if he was surety for his brother as there is no connection between their business and the business which is the subject-matter of the assessment, the expenditure could not be deducted. Assuming that the position taken up by the assessee now before us that each was surety for the other there is no justification for treating this as a loss in respect of this business. The counsel for the assessee relied upon the decision in — ‘Commr. of Income-tax, Madras v. Ramaswami Chettiar‘, AIR 1946 Mad 508 (F) in support of his contention but that case proceeded upon the peculiar custom or usage which obtained among the Nattukottai Nagarathars and is not a justification for extending that principle to other cases.
This point was considered in — ‘Commr. of Income-tax, Madras v. Subramanya Pillai’, (G) by this Court and the case in — ‘Commr. of Income-tax, Madras v. Ramaswami Chettiar’, (F) was distinguished. The loss in such a case is totally outside the scope and purpose of the business of the assessee and the claim cannot be sustained. This decision was followed by the Calcutta High Court in — ‘Commr. of Income-tax v. Madan Gopal Bagla‘, (1952) 21 ITR 142 (H).
13. We think, therefore, that the view taken
by the Appellate Tribunal even as regards this
question was correct. This question also must
be answered in the negative and against the
assessee. As the assessee has failed on all the
questions he must pay the costs of the respondent which we fix at Rs. 250.