COMMISSIONER OF INCOME TAX vs. APEX ELECTRICALS PVT LTD

ITR/239/1995HC GujaratGJHC24022562199525 September 2006Author: HONOURABLE MR. JUSTICE D.H.WAGHELA,HONOURABLE MR. JUSTICE R.S.GARG12 pages
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What were the facts?

The assessee, Apex Electricals Pvt Ltd, is a company engaged in manufacturing and selling transformers. For Assessment Years 1977-78 to 1980-81, it claimed a deduction of Rs. 50,000 paid annually as lease rent to its associate company, Jay's Inns Pvt. Ltd. Jay's Inns Pvt. Ltd. had leased a plot of land in Juhu, Greater Bombay, for 98 years, with rights for the lessee to construct and deal with the super-structure but not the land. The Assessing Officer and the Commissioner of Income Tax (Appeals) held that the lease was sham and a part payment towards acquisition of the plot, disallowing the deduction. The Income Tax Appellate Tribunal, however, allowed the deduction, holding the transaction to be a genuine lease. The Revenue has referred a question to the High Court regarding this decision.

What did the High Court hold?

The High Court held that the Tribunal was justified in allowing the deduction of Rs. 50,000/- as lease rent and revenue expenditure. The Court analyzed Section 105 of the Transfer of Property Act, 1882, defining a lease as a transfer of a right to enjoy property for a certain time in consideration of rent. The Court observed that the lease deed did not confer ownership on the lessee, the lessor retained the power of disposition subject to the lessee's rights, the lessor was entitled to receive the annual sum, and could terminate the lease on breach of terms. The lessee could deal with the super-structure but not the land. The Court distinguished the A.R. Krishnamurthy case, stating it dealt with capital gains on transfer of leasehold rights, not the deductibility of lease rent. The Court found no evidence that the parties intended the lease to amount to a conferral of ownership rights. The argument that the leased property in the hands of the lessee is a capital asset was rejected as it would nullify Section 30 of the Income-tax Act. The question referred by the Revenue was answered against the Revenue and in favour of the assessee.

What were the issues?

1. Whether the Appellate Tribunal was right in allowing the amount of Rs. 50,000/- claimed as lease rent as revenue expenditure, when the Commissioner of Income Tax (Appeals) and the ITO found it to be capital expenditure and part payment towards acquisition of land? (Question of law) Assessee's Contention: The assessee claimed the Rs. 50,000/- as lease rent, which should be deductible. The Tribunal ultimately agreed with this. (Implicit from the facts and the Tribunal's decision). Revenue's Contention: The Revenue argued that the lease deed, with its 98-year term, the parties being associate companies, and the extensive rights conferred on the lessee, constituted a sham transaction or a transfer of capital asset. They relied on the Supreme Court judgment in A.R. Krishnamurthy and another Vs. Commissioner of Income-tax, [1989 176 ITR 417], to argue that such a bundle of rights amounts to acquiring a capital asset, making the payment for acquisition rather than rent.

Which sections of the Income-tax Act were involved?

Section 256,Section 147,Section 29,Section 105,Section 30

AI-generated summary — verify with the full judgment below

ITR/239/1995 1/12 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE No. 239 of 1995 For Approval and Signature: HONOURABLE MR.JUSTICE R.S.GARG HONOURABLE MR.JUSTICE D.H.WAGHELA ========================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ========================================================= COMMISSIONER OF INCOME TAX - Applicant(s) Versus APEX ELECTRICALS PVT LTD - Respondent(s) ========================================================= Appearance : MR MANISH R BHATT for Applicant None for Opponent ========================================================= CORAM : HONOURABLE MR.JUSTICE R.S.GARG and HONOURABLE MR.JUSTICE D.H.WAGHELA Date : 25/09/2006 ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE R.S.GARG)

ITR/239/1995 2/12 JUDGMENT

1.

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