1. The first issue arising in this appeal relates to addition of Rs. 18,85,378/- made by the AO on account of under valuation of closing stock in respect of MODVAT credit. Both the parties are agreed that this issue is now covered by the judgment of the Hon'ble Supreme Court in the case of Indo Nippon Chemicals Co. Ltd (261 ITR 275).
Respectfully following the same, the issue is decided in favour of the assessee. The order of the CIT(A) is therefore upheld on this issue.
2. The next issue relates to disallowance of Rs. 27,37,500/- on account of lease money in respect of machinery paid by the assessee to Blue Star Ltd (BSL).
3. Briefly stated the facts are that 20th Century Finance Corporation Ltd. (CFCL) and BSL entered into an agreement of lease of machinery on 31.3.1986 under which CFCL was required to purchase the machinery as required by BSL and to give the same on lease to BSL for a period of 9 years on agreed lease rentals specified in the lease summary schedule.
After expiry of 5 years, the assessee approached both the parties with the intention to take the said machinery on lease for the remaining period of 4 years. Both the parties agreed to substitute the assessee as lessee in place of BSL and accordingly, a new tri-partite agreement was entered into. According to this agreement, the assessee was required to pay lumsum amount of Rs. 36.50 lakhs to BSL. In addition to the lease rental provided in the original lease agreement for the remaining four years. On payment of the aforesaid amount, the machinery was delivered by BSL to the assessee. The payment of Rs. 36.50 lakhs was claimed by the assessee as revenue expenditure. However, the AO was of the view that the entire expenditure could not be allowed in one year. Hence, he allowed deduction of Rs. 9,12,500/- being 1/4th of the aforesaid amount and the balance amount of claim was rejected.
(i) that the expenditure was of revenue nature, since the assessee had not acquired any capital asset, (ii) that ownership of the asset always vested with the original lessor, and 5. The CIT (A) held that the assessee had not acquired any capital asset as a result of the lumsum payment. Further, there is no concept of deferred revenue expenditure under the Income-tax Act. It was also held that the judgment of the Supreme Court in the case of Associated Cement Companies Ltd. (supra) was applicable to the facts of the case.
Accordingly, he allowed the entire claim of the assessee Aggrieved by the same, revenue is in appeal before the Tribunal.
6. The ld Sr. DR has vehemently assailed the order of the CIT (A) by contending that the expenditure was capital in nature in view of the Supreme Court judgment in the case of Aditya Minerals P Ltd (239 ITR 817) and the decision of the Tribunal in the case of South Eastern Coalfields Ltd (85 ITD 608). On the other hand, the ld counsel for the assessee has submitted that the AO never disputed the nature of the expenditure and, therefore, the ld DR cannot raise such plea before the Tribunal. Further it is submitted that the expenditure was revenue in nature in view of the Bombay High Court judgments in the case of Bhor Industries Ltd. (264 ITR 180) and Hoechst Pharmaceuticals Ltd (113 ITR 877). According to him, lease was only for 4 years which could not be considered of enduring nature.
7. Rival submissions of the parties have been considered carefully in the light of materials placed before us. The main question for our consideration is whether the payment of Rs. 36.50 lakhs by the assessee to BSL for enjoying the lease hold rights in the machinery in terms of tri-partite agreement dt 22.3.1993 can be said to be revenue expenditure for claiming deduction Under Section 37 of the Income-tax Act, 1961 (Act). In order to appreciate the controversy between the parties, it would be appropriate to refer the relevant terms of the original lease deed between CFCL and BSL as well as the terms of tri-partite agreement between the assessee, BSL and CFCL. As per the original lease deed, the machinery was to be leased out by CFCL to BSL for a period of 9 years as per rentals specified in the lease summary schedule annexed to the agreement. Delivery of the machinery was to be given by the manufacturer on or before the date of the commencement of the lease rentals. However, lease rental was deemed to commence from the date of disbursement of the purchase price by the lessor. The lease value was fixed at Rs. 250 lakhs which was to be paid as per the schedule annexed with the agreement. As per Clause 15 of the lease summary schedule, lease rentals were fixed on the basis of interest charged by commercial banks. As per the schedule, the entire tease money was to be paid within first 5 years and for the rest 4 years tease rental was of insignificant amount. One of the clauses, which is very pertinent, was that the lessee was at liberty to get the lease renewed from time to time, subject to the condition that one renewal period shall not exceed 5 years. Rest of the terms need not be mentioned as these are not relevant for the disposal of the present appeal.
8. On the basis of the above terms, BSL enjoyed the use of the leased machinery for a period of 6 year. By this time, the entire lease money of Rs. 250 lakhs had been paid by the lessee, i.e. BSL. At this juncture, the assessee approached BSL and the lessor for transposing it as lessee in place of the BSL. The lessor and BSL agreed to the assessee's proposal and a tripartite agreement was executed on 22.3.1993. As per this agreement, the assessee was required to pay a lumsum amount of Rs. 36,50,000/- within 60 days of the date of agreement. On consideration of the same, machinery was to be delivered at the cost and risk of the assessee and in turn the assessee was entitled to use the same for a period of 4 years. In addition, it is further provided in Clause 2(c) that the assessee shall be entitled to exercise all rights, to which BSL was entitled to under the original lease agreement, provided the assessee complies with the conditions and discharge all the obligations of BSL as per the terms of the original deed. Clause 3 provides that in addition to the lumsum payment mentioned above, the assessee is further required to pay lease rental fixed for balance 4 years in the original deed to CFCL. In terms of the said deed, the assessee paid the lumsum amount of Rs. 36,50,000/- which has been claimed as revenue expenditure. 9. We have given our due consideration to the terms of both lease deeds and the submissions of both the parties. In our opinion, the lumsum payment of Rs. 36.50 lakhs is nothing but the price for acquiring lease hold lights in the machinery, not only for a period of 4 years, but also for the extended period for which the assessee is entitled to, by way of renewal from time to time, subject to the condition that one renewal would not exceed 5 years, since the assessee had stepped into the shoes of the original lessee and consequently could exercise all the rights of BSL.
The lessor also had no right to refuse such renewal so long as the lessee was complying with and discharging the obligation under the agreement. Further there is no limit to such renewals and, therefore, the assessee can exercise its right to renewal of lease as many times as it wants so long as it complies with the terms of the deed. The lease rental is very insignificant, i.e. Rs. 6810/- per annum as per assessee's own claim. So, it is wrong to contend on behalf of the assessee that lease hold rights were acquired for a smaller period of 4 years. In view of the renewal clause, the assessee in fact got enduring right to use the machinery subject to payment of negligible amount of lease rentals.
10. We are also unable to agree with the finding of the CIT (A) that the assessee had not acquired any capital asset. The Hon'ble Supreme Court in the case of A.R. Krishnamurthy v. CIT (176 ITR 417) has approved the following observations of the Patna High Court in the case of Traders & Minerals Ltd v. CIT (27 ITR 341) at 345: "We think that the expression 'transfer' in the section includes not only a permanent transfer but also a temporary transfer of title to the property in question and lease of mines for any period would fall within the ambit of Section 12B of the Act. It was also contended by Mr. Dutt that a transaction of lease did not tantamount to a transfer of title but that a mere contractual right was created. We do not think that this argument is correct. A lease of land is transfer of interest in the and creates a right in rem: and there is a transfer of title in favour of the lessee though the lessor has right of reversion after the period of the lease terminates." In view of the above observations, the Apex Court held that lease hold right in a property is a capital asset Under Section 2(14) of the Act and, therefore, capital gains arising on the sale of such right was exigible to tax Under Section 45 of the Act. This view was also taken by the Supreme Court in the case of R K Palshikar (HUF) (172 ITR 311).
At this stage, it is clarified that in the case before the Patna High Court as well as in the case of A.R. Krishnamurthy, it was a case of mining lease. However, such principle has been applied even to simple lease of plot also by the Hon'ble Supreme Court in the case of R K Palshikar (supra), wherein their Lordships observed as under: "It is true that the decision of the Patna High Court in Traders & Miners Ltd v. CIT (1955) 27 ITR 341 relates to the case of a mining lease, but, to our mind, the principle laid down in that case can well be applied to the case before us." Therefore, the above principle would also apply to the lease of machinery. Accordingly, it is held that the lease hold right in a property is capital asset and, therefore, payment made for acquisition of such right would certainly amount to capital expenditure. The judgment of the Bombay High Court relied upon by the ld counsel for the assessee is distinguishable on the ground that in those cases the expenditure did not relate to acquisition of capital asset. On the contrary, our view is fortified by the judgment of Supreme Court relied upon by the ld DR.11. In view of the above discussion, we hold that the lumsum payment of Rs. 36,50,000/- was made for acquiring lease hold rights in the machinery, particularly considering the fact that acquisition of such right was for a considerable long period in view of the renewal clause and the fact that the assessee was required to pay only token money of Rs. 6810/-per annum by way of lease rental. The entire lease money of Rs. 250 lakhs as per the original deed had already been paid by BSL In the first 5 years and BSL was required to pay token amount by way of lease rental. BSL could enjoy the use of the machinery by paying lease amount for a longer period in view of its right to renewal. Such right was a valuable right which had been transferred for a price Therefore, in our humble opinion, it was a sale of lease hold right against lumsum consideration. Since such right was a capital asset, the payment for the transfer of such asset amounted to capital expenditure. Hence, the assessee was not entitled to claim the same as revenue expenditure.
12. However, It may be mentioned that the AC had allowed 1/4th of the amount in the year under consideration. Such order to that extent has become final in the absence of any order Under Section 263 of the Act.
The ld counsel for the assessee has contended before us that the AO had not disallowed the claim on the ground that it was capital expenditure and, therefore, the ld DR could not contend that it was capital expenditure. We are unable to accept such contention. The assessee had itself argued before the CIT (A) that by making such payment the assessee had not acquired any capital asset and, therefore, the entire expenditure being revenue expenditure should be allowed. It is this contention of the assessee which was accepted by the CIT (A) by holding that there was no acquisition of capital asset. In such premises, the ld DR could challenge the finding of the CIT (A) by contending that such expenditure was not in the nature of revenue. Hence he can very well argue that it was a case of capital expenditure. No doubt, the ld DR by taking such contention cannot plead for total disallowance since the relief allowed by the AO has become final.
In view of the above discussion, the order of the CIT (A) is set aside on this issue and the order of the AO to that extent is restored.