Richardson Hindustan Ltd. Vs. Commissioner of Income-tax - Court Judgment

Sugla, J.

1. The question of law referred to this court for the opinion at the instance of the assessee under section 256(1) of the Income-tax Act, 1961, is :

'Whether, on the facts and in the circumstances of the case, the following payments are items of capital expenditure and not allowable as revenue deductions :

(a) Rs. 10,453 spent by way of stamp duty for execution lease agreement dated April 3, 1967;

(b) Payment of Rs. 8,396 paid to M/s. Ravee A. Sood during the previous year under the agreement dated April 3, 1967; and

(c) Rs. 2,44,888 incurred in raising further share capital of Rs. 22,50,00 ?'

2. The assessee is a company and the proceedings relate to its assessment for the assessment year 1968-69. During the previous year, the assessee obtained on lease a portion of Tiecicon House, 18, Haines Road, Bombay. As per the lease agreement, which is dated April 3, 1967, the lease is for a period of ten years with effect from July 1, 1966, with provision for renewal for two consecutive periods of ten years each on the same terms. The assessee incurred an expenditure of Rs. 10,453 by way of stamp, etc., at the time of executing the lease agreement.

3. The premises were taken on lease through M/s. Ravee A. Sood, Estate Agents. In terms of the lease deed, the assessee agreed to pay a monthly sum of Rs. 691.60 (calculated at 8% of the monthly rent payable to the landlords) by way of commission during the assessee's occupation of the demised premises and paid a sum of Rs. 8,396 to M/s. Ravee A. Sood, Estate Agents, during the previous year.

4. The Income-tax Officer disallowed the assessee's claim for deduction in respect of both the above items of expenditure on the ground that the expenditure was incurred in connection with the acquisition of a capital asset, that is, the impugned premises, on lease for a period of ten years with provision for renewal for two further consecutive period of ten years each on the same terms. The disallowance has been confirmed both by the Appellate Assistant Commissioner and the Tribunal.

5. It is submitted before us by Mr. Dastur, learned counsel for the assessee, that acquiring premises on lease is not an acquisition of a capital asset nor an advantage of enduring nature. For this purpose, he placed reliance on this court's decisions in the cases of CIT v. Hoechst Pharmaceuticals Ltd. : [1978]113ITR877(Bom) , CIT v. Bombay Cycle & Motor Agency Ltd. : [1979]118ITR42(Bom) , CIT v. Burroughs Wellcome & Co. (India) (Pvt.) Ltd. : [1982]133ITR37(Bom) and CIT v. Cinceita (Private) Ltd. : [1982]137ITR652(Bom) . It was stated that the lease in the case of CIT v. Hoechst Pharmaceuticals Ltd. : [1978]113ITR877(Bom) was for a period of five years and the items of expenditure involved were stamp duty and brokerage. In the case of CIT v. Bombay Cycle and Motor Agency Ltd. : [1979]118ITR42(Bom) , there were two premises and the duration of lease was for ten and five years. The items of expenditure involved were lawyer's fees and brokerage paid. In the case of CIT v. Burroughs Wellcome & Co. (India) (Pvt.) Ltd. : [1982]133ITR37(Bom) , the period of lease was not mentioned and the expenditure involved was brokerage and commission. In the case of CIT v. Cinceita Private Ltd. [1932] 137 ITR 652 , the period of lease was 20 years with right of renewal and the expenditure involved was registration fee and stamp duty. In all these cases, he pointed out, the court took the view that taking premises on lease for different periods ranging from five to twenty years did not amount to acquisition of a capital asset not an advantage of enduring nature. He contended that the expenditure incurred on the above two items, therefore, is allowable as deduction.

6. Mr. Jetly, learned counsel for the Department, fairly admitted that so far as the expenditure by way of stamp duty is executing the lease deed is concerned, it is covered by this court's decision in CIT v. Cinceita Private Ltd. : [1982]137ITR652(Bom) . As regards the payment of Rs. 8,396 to M/s. Ravee A. Sood, however, he submitted that the decisions relied on by Mr. Dastur are not applicable. According to him, the nature of this expenditure is quite different from that of brokerage of commission paid by the assessee once for all at the time of acquiring premises on lease. Mr. Dastur, on the other hand, stated that payment of commission to an estate agent fixed at a percentage of the lease rent payable to the landlords stands on a much better footing than the brokerage and/or commission paid once for all. According to him, the commission paid to the estate agent month after month is for the use of the premises and is in the nature of rent rather than brokerage or commission.

7. The expenditure of Rs. 10,453 incurred by the assessee by way of stamp duty, etc., in executing the lease deed dated April 3, 1967, is covered by this court's decision in CIT v. Cinceita (Private) Ltd. : [1982]137ITR652(Bom) . The payment of Rs. 8,396 to the estate agents, M/s. Ravee A. Sood, is in terms of the lease agreement entered into between the assessee and the lessor. Clause 4(vii) of the agreement reads as under :

'4. (vii) The lessees shall, during their occupation of the demised premises, pay to M/s. Ravee A. Sood, Estate Agents, monthly a sum of Rs. 691.60 (calculated at 8% on the monthly rent hereby reserved) by way of commission on or before the tenth of each succeeding English calendar month. Provided that the lessee shall not be liable to pay the said commission for the period during which the rent shall remain completely suspended under sub-clause (ii) hereof and in case rent is proportionately reduced under the said sub-clause, the lessees shall be liable to pay the said commission only on such reduced rent.'

8. It is evident that so far as the assessee is concerned, it has taken the premises on lease. In terms of the lease deed, it is required to pay a certain amount per month as rent to the lessor and a certain other amount as commission to the estate agent during the period of the lease for use of premises. In the circumstances, we find force in Mr. Dastur's submission that though described as commission, the exact nature of payment is more like rent. Assuming that the payment is in the nature of commission or brokerage, even then it would have to be allowed as deduction as held by this court in the decisions relied on by Mr. Dastur.

9. The assessee had raised fresh share capital of Rs. 22,50,000 during the previous year and incurred an expenditure of Rs. 2,44,888 in connection therewith. The income-tax authorities as well as the Tribunal disallowed the expenditure on the ground that the expenditure was of a capital nature. Placing reliance on this court's decision in the case of Bombay Burmah Training Corporation Ltd. v. CIT : [1984]145ITR793(Bom) , Mr. Dastur submitted that the disallowance of the entire expenditure is not at all justified and that expenditure on items like postage, printing and legal expenses require to be allowed as deduction. In particular, he referred to the observations of this court at page 801 in the above decision to show that expenditure in the nature of postage, printing and legal expenses in connection with the issue of bonus shares is entirely different from raising of fresh share capital. In the case of issue of bonus shares, the company's capital base does not get augmented. The company only retains the available profits in the form of bonus shares, whereas in the case of raising further fresh share capital, the capital base is augmented.

10. In our opinion, this court's decision in Bombay Burmah Trading Corporation Ltd. v. CIT : [1984]145ITR793(Bom) , does not help the assessee's case at all. In fact, while dealing with the Madras High Court decision in the case of Addl. CIT v. Brakes India Ltd. : [1979]118ITR820(Mad) , this court has taken due notice of the manner in which the Supreme Court appreciated the difference between raising of capital by issue of shares and obtaining of loan by issuing debentures. It is pertinent to mention that in the case of Bombay Burmah Trading Corporation Ltd. v. CIT : [1984]145ITR793(Bom) , the capital raised included both by issue of bonus shares and by issue of altogether fresh shares and certain types of expenditure incurred on the issue of bonus shares such as postage and printing alone was held to be allowable. As regards the cost of raising the additional or fresh capital, a reference was made to the Supreme Court decision in India Cements Ltd. v. CIT : [1966]60ITR52(SC) , wherein the Supreme Court had referred to the earlier decision of this court in In re Tata Iron and Steel Co. [1921] 1 ITC 125, and stated at page 61 of the report that 'we do not say that the Tata Iron and Steel Co.'s case [1921] 1 ITC 125 (Bom) was wrongly decided' as obtaining capital by issue of bonus shares is different from obtaining loan by debentures. In the case of Tata Iron and Steel Co., the court has, it may be stated, held that if the cost of raising the original capital cannot be deducted from profit after the first year, it is difficult to see how the cost of raising additional capital can be treated in a different way. As already stated, in the case of Bombay Burmah Trading Corporation Ltd. v. CIT : [1984]145ITR793(Bom) , the capital of the company was enhanced from Rs. 3 crores to Rs. 10 crores, which was inclusive of the issuance of bonus shares, the value of which was Rs. 70 lakhs. The items of expenditure mentioned earlier which were held allowable pertained to the enhancement of share capital by issue of bonus shares only. In the circumstances, we have no difficulty in holding that the expenditure incurred by the assessee in raising additional capital by issue of equity shares as distinct from bonus shares cannot be allowed as deduction.

11. In the above view of the matter, our answer to the question is that items (a) and (b) of the expenditure are to be allowed as deduction, whereas item (c) is not to be allowed.

12. No order as to costs.