A.N. Sen, J.
1. The assessee is an engineering concern undertaking structural steel work, manufacture of railway wagons, etc. By an agreement dated April 13, 1961, described as a 'lease deed' between the assessee-company as 'lessee' and the Angus Company Ltd. as 'lessor', the assessee was permitted to take over the Angus Works for the purpose of running it as a heavy engineering workshop. The lease is for a period of 99 years. Under the terms of the agreement, the assessee was required to pay the lessor a sura of Rs. 4 lakhs per annum for 99 years. It is necessary to set out the said agreement in its entirety as the question involved in the present case turns on a true construction of the said document. The said document reads ;
'THIS LEASE is made the Thirteenth day of April One thousand nine hundred and sixty-one BETWEEN THE ANGUS COMPANY LIMITED, a company with limited liability incorporated under the Indian Companies Act, 1913, whose registered office is situate at 3, Clive Row, Calcutta (hereinafter called 'the Lessor' which expression shall where the context so admits include the person or persons for the time being entitled to the reversion immediately expectant upon the determination of the term hereby created) of the one part and BRAITHWAITE & CO. (INDIA) LIMITED, a company with limited liability incorporated under the Indian Companies Act, 1913, whose registered office is situate at 4, Clive Row, Calcutta (hereinafter called 'the Lessee') which expression shall where the context so admits include its successor in interest and assigns) of the other part WITNESSETH as follows :
1. In consideration of the rent hereby reserved and of the covenants, conditions and agreements hereinafter contained and on the part of the Lessee to be paid, observed and performed the Lessor HEREBY DEMISES unto the Lessee ALL THAT piece of land comprising 16.724 acres or thereabouts situated within Hoogly District, West Bengal, which said piece of land with the boundaries thereof is for the purpose of identification only more particularly delineated on the Plan No. 1 annexed hereto and thereon edged with red TOGETHER WITH the yard, workshops, power house, boiler house, bungalows, factories, godowns, canteen and other buildings and structures erected thereon or on some part or parts thereof more particularly described in the First Schedule hereto all as delineated and coloured blue on Plan No. 11 annexed hereto AND TOGETHER ALSO with the immovable machinery and plant and other fixtures and fittings belonging to the Lessor therein or in some part or parts thereof more particularly described in the Second Schedule hereto (all which said premises have heretofore been known as 'The Angus Engineering Works' and excluding the exemption and reservation hereinafter made are hereinafter collectively referred to as 'the demised premises') AND TOGETHER ALSO with all rights, privileges easements and appendages, advantages and appurtenances of whatever nature relating to the demised premises or usually enjoyed in connection therewith AND TOGETHER ALSO with the right in common with the Lessor and all tenants of the Lessor and other persons entitled thereto to pass and repass with or without motor cars, lorries, carriages, carts and vehicles of any description not exceeding 15 tons gross weight over and along the roadways coloured green on the said Plan No. 11 annexed hereto leading from the demised premises to the Grand Trunk Road, EXCEPTING AND RESERVING, unto the Lessor (a) the land and premises within the curtilage of the said Angus Engineering Works more particularly described in the Third Schedule hereto all as delineated and coloured Yellow on Plan No. 11 hereto annexed now held by the Lagan Jute Machinery Company Private Limited under two Leases (hereinafter referred to as 'Lagan's Leases') both dated the twenty-eighth day of March, 1957, made between the Lessor of the one part and the said Lagan Jute Machinery Company Private Limited of the other part for the term of 20 years from the 1st March, 1956, but subject to earlier determination as therein provided and (b) all rights, pertinents and privileges granted under Lagan's Leases including the rights of access as therein defined TO HOLD the same unto the Lessee for the term of 99 years from the first day of February, 1960, YIELDING AND PAYING therefor during the said term free from all deductions an yearly rent of Rs. 4,00,000 (Rupees four lakhs) payable quarterly in advance on the first day of February, May, August and November in each year.
2. The Lessee HEREBY COVENANTS with the Lessor as follows :
(1) To pay the rent hereby reserved on the day and in manner aforesaid.
(2) To pay all existing and future rates, taxes, cesses and all other outgoings and impositions including any increase or increases therein (other than land rent for which the Lessor is liable under the terms of Clause 3(2) hereof) payable in respect of the demised premises either by the owner or occupier thereof.
(3) To pay all charges including electricity duty on quantities supplied for electricity consumed in the demised premises whether supplied from the generator situate on the Lessor's adjoining land or from the Calcutta Electric Supply Corporation Limited or otherwise.
(4) In the event of the demised premises or any part thereof being damaged or destroyed by fire, explosion, tempest, earthquake, storm, flood,riot, civil commotion, war, act of God or other irresistible force forthwith at its own expense to rebuild or reinstate or replace the demised premises so that the same may be restored to the condition they were in before the destruction or damage took place.
(5) Subject to Clause 3(5) hereof throughout the said term at its own cost to keep the exterior arid the interior of the buildings and other structures comprised in the demised premises in good and tenantable repair, reasonable wear and tear always excepted as also the immovable machinery, plant, fittings and fixtures in good working order, repair and condition, but only for so long as such order, repair and condition can be maintained by proper care and maintenance and by actual repair and/or minor replacements PROVIDED ALWAYS that notwithstanding anything to the contrary herein contained the Lessor shall not be entitled to exercise any remedy against the Lessee for breach of this covenant unless the Lessee shall have failed within three months to comply with a notice in writing from the Lessor specifying the want of repair for which the Lessee is liable hereunder and calling upon the Lessee to make good the same.
(6) Not to transfer, assign, charge, mortgage, hypothecate, sublet, sell, dispose of or in any way part with the possession of the demised premises or any part thereof or interest therein without the previous written consent of the Lessor (which may be given conditionally or otherwise) which consent the Lessor shall not unreasonably withhold in the case of a respectable and responsible mortgagee, hypothecatee or sub-lessee. PROVIDED ALWAYS that the Lessee notwithstanding anything to the contrary herein contained shall be entitled to mortgage and/or hypothecate the demised premises or any part thereof to its Bankers in the ordinary course of business.
(7) To permit the Lessor or its agents or surveyors with or without workman and appliances at all reasonable times in the day time on giving previous notice and making a prior appointment to enter upon the demised premises to, take inventories of the Lessor's fixtures and fittings therein and to view the condition thereof and of all defects, decays and wants of reparation there found and to give three months' notice in writing to the Lessee to repair any defects for which the Lessee shall be liable under the terms of Sub-clause (5) of this clause.
(8) Not to store any inflammable or combustible goods or explosive substances in the demised premises except such amount or quantity as may be reasonably required in connection with any business for the time being carried on by the Lessee and not to commit or cause to be committed any act or thing which may cause damage or injury to or prejudicially affect the demised premises.
(9) Not to carry on or permit to be carried on in any part of the demised premises any offensive, illegal or unlawful manufacture, trade orbusiness but to use the same for the purposes of any business for the time being carried on by the Lessee.
(10) To take all reasonable steps to prevent any encroachment on the demised premises or any part thereof by any person or persons and to give notice to the Lessor of any threatened encroachment.
(11) At the expiration or sooner determination of the term hereby created to yield and deliver up to the Lessor vacant possession of the demised premises in good and tenantable repair and all fixtures and fittings therein belonging or to belong to the Lessor reasonable wear and tear always excepted.
3. The Lessor HEREBY COVENANTS with the Lessee as follows :
(1) That the lessee paying the rent hereby reserved and observing and performing the covenants, conditions and agreements herein contained and on the Lessee's part to be observed and/performed shall and may quietly and peaceably hold and enjoy the demised premises throughout the term hereby created without any interruption by the Lessor or any person or persons lawfully claiming through under or in trust for the Lessor.
(2) To pay all land rent now or hereafter to become payable in respect of the demised premises or any part thereof to the superior landlord.
(3) At a cost to be agreed and paid by the Lessee to provide at all times a supply of water for the demised premises equivalent to the supply being given immediately prior to the execution of these presents from the existing well situate on the Lessor's adjoining land and in the event of such supply failing for any reason outside the control of the Lessor to use its best endeavours to make available an equivalent alternative supply of water for the demised premises at a cost likewise to be agreed and paid by the Lessee.
(4) For so long as the Lessee shall require the same to provide during such period as may be agreed between the parties hereto a supply of electricity to the engineering works or factory portions of the demised premises including godowns and connected buildings or structures from the generator situate on the Lessor's adjoining land and a supply of electricity from any source from which procurable to the residential premises comprised in the demised premises the Lessee paying for all the electricity so supplied and the electricity duty in respect thereof in accordance with Clause 2(3) hereof.
(5) To permit the Lessee to pull down and remove such buildings and structures comprised in the demised premises as the Lessee may reasonably require to pull down and remove and further to permit the Lessee to dismantle and remove such machinery, plant, fixtures and fittings comprised of the demised premises as the Lessee may reasonably require to dismantle and remove PROVIDED ALWAYS the Lessee restores or rebuilds such buildings or structures and/or instate other machinery, plant, fixtures and fittings all being of not lesser value and suitable for the type of business then being carried on in the demised premises in replacement thereof or in substitution therefor AND it is hereby agreed and declared that the Lessee shall be entitled to instal machinery, plant, fixtures and fittings in lieu of restoration or rebuilding of buildings or structures and to construct or build buildings and structures in lieu of installation of machinery, plant, fixtures and fittings PROVIDED ALWAYS that the privilege hereby conferred shall only be exercised by the Lessee in such manner and to such extent that the value of the demised premises shall not at any time be less than the value thereof immediately prior to any such installation, restoration or rebuilding as aforesaid and further to permit the Lessee to make such additions to the demised premises or any part or parts thereof or alterations therein so long as such additions or alterations do not adversely affect the character or value of the demised premises and, to erect such new buildings or structures and to instal such new machinery, plant, fixtures and fittings as the Lessee may reasonably require and to permit the Lessee to lay down, remove and relay from time to time pipes for sewage water, gas and electricity mains and to sink wells so long as such sinking does not adversely affect supplies of water from tube-wells already sunk on the Lessor's adjoining lands in the demised premises PROVIDED ALWAYS that the Lessee shall first provide the Lessor with plans and specifications of any such proposed works as aforesaid and the Lessee shall before commencing any such works obtain all necessary licences and sanctions as may be required by law in that behalf.
(6) Upon expiration by efflux of time of the term hereby granted to permit the Lessee to dismantle and to remove any new buildings or structures, machinery, plant, fixtures and fittings constructed or installed in or about the demised premises during the currency of this lease PROVIDED ALWAYS that the Lessee shall make good any damage caused to the demised premises or any part or parts thereof occasioned by such dismantling and/or removal so as to leave the demised premises in the same state and condition as the same were in prior to construction and/or installation of the said new buildings or structures, machinery, plant, fixtures and fittings as aforesaid.
(7) If the Lessee shall be desirous of continuing the tenancy hereby created for a further term from the expiration of the term hereby granted and of such its desire shall give to the Lessor notice in writing not less than two years before the expiration of the term hereby granted and if there shall not at such time be any existing breach or non-observance of any of the covenants on the part of the Lessee hereinbefore contained then the Lessor will at the expense of the Lessee execute in favour of the Lessee a lease of the demised premises for such further term from the expiration of the term hereby granted as the Lessee shall specify in such notice as aforesaid at a rent which shall be equivalent to five per cent, of the depreciated value of the demised premises but subject always to a minimum rent equivalent to the land rent and other outgoings legally payable by the Lessor as the owner of the demised premises and containing the like or lesser covenants, conditions and agreements as are herein contained. For the purpose of this Sub-clause the expressson 'depreciated value' shall mean the value of the demised premises obtained by reference to the going concern valuation thereof made by Messrs. Edwards Son and Bigwood, Surveyors and Valuers, Birmingham, England, and specified in the Fourth Schedule hereto annexed reduced by depreciation annually at the respective rates laid down in the Indian Income-tax Act, 1922, and Rules made thereunder as in force at the date of execution of these presents.
4. IT IS HEREBY AGREED and DECLARED by and between the parties hereto as follows :
(1) If the rent hereby reserved or any part thereof shall remain unpaid for 60 days after becoming payable (whether demanded or not) or if there shall be a breach of any of the covenants hereinbefore contained and on the part of the Lessee to be observed and performed or in the event of the Lessee at any time during the continuance of the lease hereby granted going into liquidation whether voluntarily or compulsorily save and except for purposes of amalgamation or reconstruction the Lessor may at any time thereafter re-enter upon the demised premises or any part thereof as in name of the whole and thereupon this demise shall absolutely cease and determine and all buildings, structures, machinery, plant, fittings and fixtures erected or installed by the Lessee whether under the provisions of Clause 2(4) and/or Clause 3{5) hereof or otherwise shall become and remain the property of the Lessor so that the Angus Engineering Works shall revert to the Lessor as a going concern PROVIDED ALWAYS that in respect of new machinery, plant, fittings and fixtures installed under the provisions of Clause 3(5) hereof the Lessor shall compensate the Lessee therefor and the compensation payable by the Lessor to the Lessee here-under shall be the amount by which the value as a going concern of the Angus Engineering Works or the market value thereof whichever is the less exceeds the capitalised value of the rent which would have accrued and become payable for the then unexpired residue of the term hereby created.
For the purposes of this sub-clause the capitalised value of the rent which would have accrued and become payable for the unexpired residueof the said term shall be such sum as when used for the purchase of an annuity at a rate of interest of 8 per cent. per annum would yield a return of Rs. 4 lakhs per annum payable quarterly in advance for the then un-expired residue of the said term.
(2) On the expiration or sooner determination of Lagan's Leases the Lessor shall offer to demise to the Lessee the land and premises comprised therein save and except the two godowns and workers' latrines therein specified at such rent as shall be agreed upon between the parties hereto for a term equivalent to the then unexpired residue of the term hereby created and subject to the same covenants, conditions and agreements as are herein contained such option to be exercised by the Lessee communicating to the Lessor its acceptance in writing of such offer within four weeks from the date of receipt of the same from the Lessor.
(3) In the event of the demised premises at any time during the term hereby created being acquired by any Government or any local authority under any Act or law for the time being in force then immediately upon possession of the demised premises being taken by such acquiring authority this lease shall cease and determine and the Lessor shall be entitled to receive the whole of the compensation monies payable in respect of such acquisition as may be awarded PROVIDED ALWAYS that in the event that the whole of the compensation monies payable as aforesaid exceeds the capitalised value of the rent which would have accrued and become payable for the then unexpired residue of the term hereby created, the Lessee shall be entitled to receive from the Lessor the said compensation monies to the extent of any such excess.
For the purpose of this sub-clause the expression 'the capitalised value of the rent which would have accrued and become payable for the then unexpired residue of the term hereby created' shall have the same meaning as has been assigned to the expression in Sub-clause (i) of this clause.
(4) The Lessee shall pay the stamp duty and registration fee payable in respect of this Lease all legal and other charges being payable by the party incurring the same.
IN WITNESS WHEREOF the parties hereto have executed these presents the day and year first before written.'
2. The relevant assessment year is 1963-64 for which the previous year is the calendar year 1962. In the relevant assessment year, the assessee claimed the sum of Rs. 4 lakhs paid as rent under the lease as a revenue expenditure before the Income-tax Officer in its assessment and claimed a deduction as such in respect of the said sum. After discussing the provisions of the aforesaid deed the Income-tax Officer held that by the arrangement contained in the said deed there was in effect a sale of the Angus Works to the assessee and the annual payment of Rs. 4 lakhs was a payment towards purchase consideration of the Angus Works and so constituted capital expenditure. The Income-tax Officer, accordingly, declined to allow the sum of Rs. 4 lakhs as deduction. The Income-tax Officer also declined to allow depreciation on the buildings, plant and machinery com-prising the Angus Works on the ground that 'on paper at least the legal ownership thereof rests with the lessor and not the assessee'.
3. Against the order of the Income-tax Officer, the assessee appealed to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner was of opinion that by means of the aforesaid agreement the lessor became practically divested of its ownership of the valuable property in course of 99 years and that the exact status of the lessee during this period and even afterwards was not at all clear. The Appellate Assistant Commissioner agreed with the Income-tax Officer and held that the sum of Rs- 4 lakhs represented payment of a capital nature. The Appellate Assistant Commissioner, however, held that the additions made by the assessee to the Angus Works during the previous year belonged to the assessee who was the legal owner of the said assets and depreciation in respect thereof was allowable to the assessee. He, however, held that no depreciation was allowable in respect of the value of buildings, plant and machinery comprising the Angus Works taken over by the assessee under the terms of the lease. In view of his aforesaid findings, the Appellate Assistant Commissioner substantially upheld the order of the Income-tax Officer and partly allowed the appeal of the assessee only to the extent of allowing the depreciation as earlier indicated. Against the order of the Appellate Assistant Commissioner the assessee preferred a further appeal to the Appellate Tribunal. The department had also preferred an appeal to the Tribunal against the decision of the Appellate Assistant Commissioner allowing depreciation and development rebate in respect of new assets installed or created by the assessee. The Tribunal dismissed the appeal preferred by the department. In the assessee's appeal before the Tribunal it was contended on behalf of the assessee that the transaction in question was not a sale and that the agreement was a lease both in form and in substance, and that the sum of Rs. 4 lakhs paid by it per annum for a period of 99 years was allowable as rent or revenue expenditure. The Tribunal in its order considered the terms of the agreement between the assessee and Angus Co. Ltd., and on a consideration of the said agreement the Tribunal noticed that the subject-matter of the agreement described as an agreement of lease consisted of the following items :
Rs.Rs.
(1)Land 1,95,000(2)Buildings : Works including Durwans quarters26,72,800 Lady Doctor's Bungalow 40,000 Staff Bungalow No. 5 1,95,500
29,08,300(3)Plant & Machinery 28,78,775(4)Furnishings, etc., Works 98,800 Bungalow No. 5 29,250
1,28,050(5)Motor Vehicles 18,200
61,28,325
4. The Tribunal referred to Clauses 2, 3 and 4 of the agreement and the Tribunal held :
'Though possessing some of the ordinary incidents of a lease, the agreement also contains which may more or less correspond to the case of a purchase in instalments or of a hire purchase agreement. Clauses 4(1) and 4(3) quite clearly provide that in the event of sale as a going concern or acquisition by Government, the lessor would be entitled only to the capitalised value of the annuity of Rs. 4 lakhs for the balance of the un-expired term within the 99 years period capitalised @ 8%. The lessee will get the remaining surplus. In other words, the lessee is in the position of being entitled to the beneficial ownership of the monies realised on sale or compulsory acquisition subject to a charge in respect of the capitalised value of the annuity instalments still due. Taking the extreme case of a sale or compulsory acquisition at the end of 98 years, the whole of the proceeds or compensation monies would be received by the lessee and it would have to pay only Rs. 4 lakhs to the lessor. If the sale or acquisition took place in the 99th year after the month of November, no instalment could be outstanding and the entire sale price would be receivable by the lessee. Thus, the effect of Clause 4 is what obtains in a hire purchase agreement where the vendor is entitled only to the balance of the unpaid purchase price. This view is also consistent with the right given to the assessee to instal new plant and machinery and its being entitled to their beneficial ownership to the exclusion of the lessor. It is significant to note that while the depreciated value of the 'demised premises' has to be considered (or the capitalised value of the annual payment for the unexpired term) the assessee is entitled to the full benefit of the increase in market value as a going concern (subject to the charge in respect of the annual payments stili due). Under Clause 3(7) providing for renewal after 99 years at the option of the lessee, the rent reserved is about Rs. 9,750 (5% of the value of land being Rs. 1,95,000 mentioned in the Fourth Schedule to the agreement at page 51). The land itself is not liable to depreciation and the rent payable is either Rs. 9,750 (on the footing that the other assets would have negligible written down value) or the taxes, land rent, etc., payable by the lessor in respect of the premises (whichever is more).'
5. After detailing the various items of the leased property and the value thereof as earlier indicated the Tribunal proceeds to hold :
'The so-called lease certainly includes some special features as discussed earlier. Since there is not a capital payment downright, and the lessee is allowed to make use of the premises and the lessor is to be paid an annual payment of Rs. 4 lakhs for 99 years, prima facie each payment of Rs. 4 lakhs would include a part payment for capital and a part either by way of interest or hire for user of the premises. If the assessee had entered into a hire-purchase agreement with the lessor on condition that the premises would belong to the assessee after 99 years against annual payment of Rs. 4 lakhs, the terms of the agreement would not be much different from the present ones. If during the term of the lease the premises is sold away or acquired, the lessor's interest would be confined to the capitalised value of the remaining annual payments. The annual payment of Rs. 4 lakhs would be in the nature of equated annuity payments consisting partly of price of the asset and partly of either the hire charges or interest in respect of the unpaid purchase price.
For a period of 99 years the total amount payable would be about Rs. 3,96,00,000 as against the agreed value of the property which was only Rs. 61 lakhs. If the assessee had made a cash down payment of Rs. 61 lakhs for outright purchase of the premises, the whole expenditure would have been regarded as capital expenditure. Since this amount is allowed to be paid for a fixed term of 99 years @ Rs. 4 lakhs per annum, from a practical and business point of view the payment consists of discharge of the capital liability plus the interest on the unpaid balance. The sum of Rs. 61,00,000 gets multiplied more than six times only because the rate of compound interest is 8%. We are, therefore, of opinion that, subject to verification, the sum of Rs. 61,28,325 or Rs. 61 lakhs in round figures or any such figure agreed to between the assessee and the department may be regarded as the capitalised value of the annuity of Rs. 4 lakhs for a term of 99 years. We direct the Income-tax Officer to work out the interest embedded in each annual payment and to allow the same as revenue deduction and the balance of the annuity, which is attributable to the capital value of the assets, be treated as capital expenditure. We may note that initially the interest element in the annual payment will be very large and will get reduced year after year so that the capital element in annual value will be small to start with and will go on increasing subsequently. We direct the Income-tax Officer accordingly.'
6. In the above view of the matter and on the aforesaid findings, the Tribunal allowed the appeal of the assessee in part.
7. The assessee required the Tribunal to state a case to this court under Section 66(1) and in its application the assessee had suggested four questions. On the said application of the assessee and on the aforesaid facts the Tribunal under Section 66(1) of the Indian Income-tax Act, 1922, has referred the following questions of law to this court:
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the indenture was not a lease, and that the assessee was entitled to deduction only in respect of the interest element included in the annuity of Rs. 4 lakhs for a term of 99 years, treating the value of the leasehold assets as representing capitalised value of the annuity ?
2. Whether the Tribunal was right in not allowing depreciation on the part of the annual payment which has been held by the Tribunal to be attributable to the capital value of the assets, and as such treated as capital expenditure ?'
8. Mr. D. Gupta, learned standing counsel appearing on behalf of the assessee, has submitted that the finding of the Tribunal that the document in question is not a document of lease but is a document which is in the nature of a document of a hire-purchase agreement or a document of purchase of the properties in instalments is clearly wrong. He has contended that, on a true construction of the document, the document is a document of lease of the undertaking of Angus Co. Ltd. and is nothing else. He has taken us through the various clauses in the document which we have earlier set out and he has contended that, on a true construction of all the clauses, the document is essentially a document of lease and under the said document the properties mentioned in the said document which really constitute the entire undertaking of Angus Co. Ltd. are being leased out to the assessee. It is his contention that under the various clauses of the document the ownership of the demised properties remains with the lessor who continues to remain the owner of the said properties and the reversionary interest is retained by the lessor. He has argued that if there be any default on the part of the lessee in the matter of payment of rent the lessor retains the right to re-enter and to take possession of all the demised properties. It is the argument of Mr. Gupta that the provisions contained in Clause 4(1) and Clause 4(3) on which the Tribunal has relied have been incorporated in the interest of both the parties bearing in mind the nature of the transaction which was being entered into by the parties concerned. Mr. Gupta argues that the lease in question was not a lease simpliciter of only land and building but is also a lease of the plant and machinery of the lessor and it is the argument of Mr. Gupta that the plant and machinery are likely to deteriorate due to wear and tear in course of time. Mr. Gupta contends that the whole object of the lease was to enable the lessee to run the said undertaking and to carry on the business of the lessee by utilising and exploiting the properties which were demised to the lessee ; and to enable the lessee to carry on the business, provision has also been made in the said document with regard to the lessee's right to instal its own plant and machinery and provision has also been made in the said document as to what is to happen to such plant and machinery which may be installed by the lessee in accordance with the terms of the lease in the demised premises. Mr. Gupta contends that each and every clause in the document is consistent with a document of lease bearing in mind the nature of transaction which the parties were entering into. It is the contention of Mr. Gupta that the arrangement was a business arrangement and the parties were both business people and in the business interests of the parties the parties have entered into the said agreement of lease. Mr. Gupta has argued that not because of the description contained in the lease, describing Angus Co. Ltd. as the lessor and the assessee as the lessee and the amount that is being paid as rent, but taking into consideration the real nature of the transaction, the transaction is essentially a transaction of lease of the undertaking of Angus Co. Ltd., to the assessee for the consideration of the annual payment of rent. Mr. Gupta has submitted that in the matter of the transaction the parties knew what they were really doing and if the parties intended to purchase the said properties in instalments or to enter into any hire-purchase agreement in respect of the said properties or to pay any premium for the purpose of the said lease the parties could have easily made necessary and suitable provisions. It is the contention of Mr. Gupta that the provi-tions contained in some of the clauses, particularly in Clauses 3(7), 4(1) and 4(3), which are considered to be peculiar clauses, are not at all inconsistent with any document of lease and these particular provisions have been incorporated because of the very nature of the transaction which was really a lease of an entire undertaking for a long term. The learned standing counsel has drawn our attention to Section 105 of the Transfer of Property Act and also to Sections 108 and 111 of the said Act. He has contended that the document in question is clearly a document of lease as provided in the Transfer of Property Act and the document satisfies all the requirements of a lease. Mr. Gupta has also drawn our attention to Section 54 of the Transfer of Property Act which demies a sale and also to Section 58 which defines a mortgage. Mr. Gupta has argued that the essence of the transaction of a sale is the transfer of ownership. It is the argument of Mr. Gupta that in the instant case there cannot be any question of any transfer of ownership of properties by the lessor to the lessee. Mr. Gupta has referred to the decision of the Supreme Court in the case of Damodar Valley Corporation v. State of Bihar : [1961]2SCR522 and also to the decision of the Supreme Court in the case of K. L. Johar & Co. v. Deputy Commercial Tax Officer : AIR1965SC1082 , and has pointed out that in these two decisions the Supreme Court had occasion to consider the nature of a transaction of sale and also the nature of transaction of hire. Mr. Gupta has relied on the decision of the Supreme Court in the case of Commissioner of Income-tax v. B. M, Kharwar : [1969]72ITR603(SC) . la this case, the Supreme Court has held that it is now well settled that the taxing authorities are not entitled in determining whether a receipt is liable to be taxed, to ignore the legal character of the transaction which is the source of the receipt and to proceed on what they regard as 'the substance of the matter'; and the taxing authority is entitled, and is indeed bound, to determine the true legal relation resulting from a transaction ; and if the parties have chosen to conceal by device the legal relation, it is open to the taxing authorities to unravel the device and to determine the true character of the relationship, but the legal effect of a transaction cannot be displaced by probing into the 'substance of the transaction' ; and this principle applies alike to cases in which the legal relation is recorded in a formal document, and to cases where it has to be gathered from evidence--oral and documentary--and conduct of the parties to the transaction.
9. Mr. Gupta has submitted that in the instant case there cannot be any question of any of the parties to the transaction choosing to conceal by a device the legal relationship between the parties. The relationship has been embodied in a formal document which clearly indicated the true nature of the relationship of the parties. The legal effect of the transaction which is essentially a transaction of lease must, therefore, be given effect to. Mr. Gupta has also referred to the decision of the Supreme Court in the case of Devidas Vithaldas & Co. v. Commissioner of Income-tax : [1972]84ITR277(SC) , and he has relied on the following observations at page 284 :
'As has been observed in a number of decisions, it is not always easy to distinguish whether an agreement is for the payment of price in stipulated instalments or for making annual payments in the nature of income, that there is no single test of universal application for a solution of the question, and, that, therefore, the court has to look not only into the document relating to the transaction, but also the surrounding circumstances to decide its true nature, the name which the parties give to it being of little consequence. This, of course, does not mean that the legal character of the transaction which is the source of the receipt in question can be ignored and substituted by what the taxing authority considers the substance of the matter. The assessing authority is undoubtedly entitled and is, indeed, bound to determine the true legal relationship resulting from a transaction. If the parties have chosen to conceal, by a device, the true legal relation, it is open to it to unravel such device and to ascertain the true nature of the relationship. If the transaction is embodied in a document, the liability to tax depends upon the meaning and content of the language used in it in accordance with the ordinary rules of construction.'
10. Mr. Gupta has contended that in the instant case the true nature of the transaction was that the assessee was taking on lease the entire undertaking of Angus Co. Ltd., the particulars whereof have been set out and mentioned in the document. Mr. Gupta submits that the true nature of the transaction is not that the assessee was either purchasing the said properties or any of them and the assessee was also not entering into any kind of hire purchase agreement. The lessor owned the undertaking with all the properties comprised in the said undertaking and the lessee wanted to take the said undertaking inclusive of all the properties on lease for a period of 99 years with a further option to the lessee to have the said lease renewed. The true nature of the transaction, according to Mr. Gupta, was that the assessee, namely, the lessee, was taking on lease the entire demised premises and the lessor was granting a lease of the said premises and the said transaction is clearly embodied in a formal document and the said document has been entered into for the purpose of giving effect to the said arrangement entered into by and between the parties. Mr. Gupta contends that the lessor did not want to sell the said entire undertaking and it is not a case of a sale of the undertaking by the lessor and it is Mr. Gupta's contention that had it been a case of sale by the lessor to the lessee whether the payment was made in instalments or otherwise, the nature of the document would have been entirely different and the document would have contained entirely different clauses. Whatever clauses, argues Mr. Gupta, have been incorporated in the document have been incorporated for the purpose of giving effect to the true transaction which is one of lease of the undertaking by its owner to the assessee and bearing in mind that the lease was going to be a lease of an entire undertaking including plant and machinery and was to be for a period of 99 years with an option of renewal, various clauses in the said document have been incorporated in the interest of both the parties, and all the clauses which have been incorporated in the said document of lease are consistent with the real nature of the transaction which is a demise of the undertaking by its owner on lease to the assessee on the terms and conditions mentioned in the document of lease.
11. Mr. Gupta has drawn our attention to the finding of the Tribunal recorded at page 36 of the paper book in the department's appeal to the Tribunal where the Tribunal has held that the assessee is in the position of a person who has purchased the demised premises under the terms corresponding to a hire-purchase agreement and that it is the beneficial owner of all improvements effected by it. Mr. Gupta argues that the view expressed by the Tribunal that the assessee has really purchased the entire undertaking is clearly erroneous and cannot be borne out by the document in question. It is the argument of Mr. Gupta that the document in question makes it abundantly clear that Angus Co. Ltd. is the lessor and the owner of the property subject to the rights of the assessee as lessee to enjoy the same in terms of and in accordance with the provisions contained in the said deed of lease. Mr. Gupta contends that the payment that is being made under the lease to the lessor is a business payment made as rent for the use and occupation of the demised property on the basis of the said lease and is not for securing any enduring or permanent advantage. Mr. Gupta in this connection has referrred to the decision of the Supreme Court in the case of Gotan Lime Syndicate v. Commissioner of Income-tax : [1966]59ITR718(SC) and he has relied on the following observations at page 727 :
'We are of the opinion that in the present case the royalty payment is not a direct payment for securing an enduring advantage ; it has relation to the raw material to be obtained. Ordinarily, a mining lease provides for a capital sum payment; but the fact that there is no lump sum payment here cannot by itself lead to the conclusion that yearly payments to be made under the mining lease have relation to the acquisition of the advantage. No material has been placed on the record to show that any part of the royalty must, in view of the circumstances of the case, be treated as premium and be referable to the acquisition of the mining lease.'
12. Mr. Gupta contends that in the facts of the instant case if the parties had so intended, some premium might have been paid for the acquisition of the lease but payment of premium is not a condition precedent to the acquisition of any lease and is not an absolute requirement for obtaining a lease. Here the parties have not provided for the payment of any premium but parties have fixed an amount payable yearly as rent. Mr. Gupta contends that it was entirely for the parties to decide and agree to the terms on which lease was to be granted. According to Mr. Gupta the fact that there is no lump sum payment here cannot by itself lead to the conclusion that the yearly payment which is made under the lease to the lessor has any relation to the acquisition of the advantage and there is no material on the record to show that any part of the rent must, in the facts and circumstances of the case, be treated as premium and be referable to the acquisition of the lease, Mr. Gupta has submitted that on a true construction of the document, the document is undoubtedly one of lease and there is no question of any device being used.
13. Mr. B. L. Pal, learned counsel appearing on behalf of the department, has contended that the view expressed by the Tribunal in the instant case is right. It is his contention that the document in question is not a document of lease pure and simple and under the document the lessee, i.e., the assessee in the instant case, gets advantages and rights which he should not otherwise normally get under a document of lease pure and simple. Mr, Pal has also pointed out that in a document of lease, it is not necessary to mention the value of the property demised. Mr. Pal contends that on a true construction of the document and particularly on a construction of Clauses 4(1), 4(3) and 3(7) the Tribunal has rightly come to the conclusion that the document in question is really not a document of lease but is a document in the nature of hire purchase agreement or of sale in which the price is to be paid over a number of years. Mr. Pal points out that the value of the properties demised is Rs. 61,28,325 including the value of plant and machinery and the assessee will be paying to the lessor a sum of about Rs. 3,96,00,000. Mr. Pal argues that the payment of this huge sum against the value of the assets comprised in the lease, coupled with the further fact that the assessee has the right to remain in possession for another indeterminate period by exercising its option under the lease clearly go to indicate that the transaction is not one of lease but is really one of sale. Mr. Pal has referred to Article 187 at page 113 in Halsbury's Laws of England, 3rd edition, volume 10. Mr. Pal has also referred to the decision of the Supreme Court in the case of Commissioner of Income-tax v. Panbari Tea Co. Ltd. : [1965]57ITR422(SC) and relying on the said decision Mr. Pal has contended that the substance of a transaction and not the form is what really matters and the nomenclature used may not be decisive or conclusive, although it may help the court, having regard to the other circumstances to ascertain the intention of the parties. Mr. Pal has also referred to the decision in the case of Ainley (H. M. Inspector of Taxes) v. Edens [1935] 19 TC 303 (KB). Mr. Pal has argued that Clauses 3(7), 4(1) and 4(3) clearly indicate that the document in question was not intended to be a lease simpliciter and under the said clauses additional rights not normally conferred upon a lessee are being conferred on the lessee in the instant case. Mr. Pal argues that in the instant case the lessor was really transferring his entire undertaking valued at over Rs. 61 lakhs to the assessee for a period of 99 years with a further option to have it renewed for a further indefinite period. It is the argument of Mr. Pal that the substance of the transaction clearly indicates that the assessee was really acquiring the entire undertaking and was becoming virtually the owner thereof. It is Mr. Pal's argument that in any event in securing an advantage of this particular type the payment that is being made by the assessee must be considered to include a payment for the value of the plant and machinery, furnishings and the motor vehicles which would, in all probabilities, cease to exist on the expiry of the period of 99 years. Mr. Pal argues that the value of the said properties must necessarily be considered to have been included in considering the amount of money to be paid by the assessee to the lessor and must be considered to be included in the annual payment of the sum of Rs. 4 lakhs described as payment of rent to the lessor. Mr. Pal concludes that in the said sum of Rs. 4 lakhs a certain amount must be considered to be included which would go to acquire the value or to pay the value of the plant and machinery and furnishings which were being given away to the assessee under the said document of lease. Mr. Pal, therefore, submits that the Tribunal was in the instant case right in its order that there would be an apportionment of the said sum of Rs. 4 lakhs, a part of which should be taken to be capital payment and part of which should be considered to be a revenue payment.
14. On a construction of the document in question, we are clearly of the opinion that the document is a document of lease and under the said document the properties mentioned in the said document were being demised to the assessee on the basis of the terms and conditions contained in the said lease. It is to be borne in mind that the transaction in question was a transaction of a lease of an undertaking consisting not only of land and buildings but also of the plant and machinery, furniture and fixtures and the vehicles. In other words, the nature of the transaction was a lease of the entire undertaking of Angus Co. Ltd. The entire undertaking was being leased out for a period of 99 years and in the undertaking there were plant and machinery and other items of considerable value which were likely to deteriorate in course of time ; and the lease was going to be for a period of 99 years with a further option to the lessee. In view of the nature of the transaction between the parties, the parties who are all businessmen, incorporated in the said document of lease various provisions for safeguarding their own interests. The provisions contained in Clause 3(7) and Clauses 4(1) and 4(3) are clauses which have been incorporated by the parties because of the particular nature of the transaction which was a transaction of lease for a long term of an entire undertaking consisting not only of land and buildings', but also of plant, machinery, fixtures, furnishings and vehicles which are likely to deteriorate in course of time. Bearing in mind this particular nature of the transaction under which an entire undertaking was going to be leased out by its owner for a very long period, the parties who are business people and were entering into a business transaction with full knowledge as to what they were doing and what would serve their interests best, incorporated the said provisions contained in Clauses 3(7), 4(1) and 4(3) for safeguarding their own interests. The said provisions are not in any way contrary to any provisions to be contained in a lease and they do not lend any support to a case of sale on the basis of a hire-purchase agreement or on the basis of payment of the purchase price in instalments. On a true construction of the document, there is no manner of doubt that the document in question is one of lease. It has to be borne in mind that though it is a lease for 99 years, it is always open to the lessor to re-enter on the said premises in the event of any of the contingencies which give rise to the right of re-entry happening. It has also to be remembered that the transaction was essentially a business transaction by which the lessor was leasing out its entire undertaking which the assessee, the lessee, was seeking to exploit for its own business. This was a transaction entered into by businessmen who were quite clear in their own minds as to what they intended to do. There cannot be any question in the instant case of any device being adopted for any particular purpose. If the assessee intended to purchase the entire undertaking for a consideration, the document clearly would have been one of sale and not one of lease. An appropriate provision in such a document might have been made as to how the payment was to be made. None of the clauses, in our opinion, in the document indicate that the document in question is anything but a lease. It might have been open to the lessor to claim a lump sum payment by way of premium for the grant of the lease and it would have been perfectly legal for the lessee to make such payment, if the parties had agreed to claim and pay any such lump sum money by way of premium. That was, however, entirely a matter for the parties to agree. It cannot be said that as there is no lump sum payment by way of premium the document is not a document of lease but is something else. It cannot also, in our opinion, be said that a particular amount must be considered to be included as premium in the said sum of Rs. 4 lakhs which is being paid as rent to the lessor. There is no material in the document or on record to suggest this, and this court will indeed be speculating if this court has to come to a conclusion that the said sum of Rs. 4 lakhs paid as rent under the lea'se includes within itself an amount which is really being paid as premium for the said lease. Apart from this aspect, in our opinion, the question raised in the present reference does not permit this court to go into this aspect.
15. We are, therefore, of the opinion that in the instant case the Tribunal was not right in its conclusion that the document in question is not a document of lease and the annual payment of Rs. 4 lakhs paid by the assessee to the lessor is not a payment of rent on the basis of the said document of lease. We, therefore, answer question No. 1 in the negative, against the department and in favour of the assessee. In view of our answer to question No. 1, the second question really does not fall for determination and does not call for any answer and we may also note that the second question has also not been pressed. There will be order as to costs.
Hazra, J.
16. I agree.