COMMISSIONER OF INCOME TAX Vs. PROJECT AUTOMOBILES

JUDGEMENT

(1.) THIS reference is at the instance of the CIT and the following question of law has been referred to us under S. 256(1) of the IT Act, 1961:

(2.) THE assessee is a registered firm which was at the relevant time engaged in the business of motor and automobile parts. It also carried on the business of running of petrol pump and service station. This business was carried on even prior to July 9, 1959, on land which belonged to M/s Hindustan Steel Limited, Bhilai Steel Plant Project (hereinafter referred to as the "plot owner"). The assessee received a letter from the plot owner dated December 14, 1960, mentioning that the licence given to the assessee dated July 9, 1959, allotting the plot on temporary lease basis for petrol pump and service station was being thereby terminated. The letter further stated that in case the assessee was interested in taking the plot on a permanent lease basis, it should apply to the plot owner in the prescribed form. The plot owner thereafter wrote a letter dated January 21, 1961, wherein the main terms and conditions of the proposed permanent lease were indicated. The period of lease was to be 30 years. Clause 2 provided for payment of premium (ground rent) in lump sum at Re. 1 per sq. ft. and cl. 3 provided that in addition to the above, the permanent lessee was to pay economic rent calculated at the rate of 5per cent of the total ground rent per annum. Under term 4, the economic rent could be revised at the end of every 15 years and could be increased by 25per cent. It would appear that the assessee had submitted its plan of construction for approval. However, it was pointed out to it by the plot owner by its letter dated February 6, 1961, that as the assessee had not communicated its acceptance of the terms and applied for permanent lease, its licence dated July 9, 1959, stood terminated and the assessee, therefore, should vacate the plot. The assessee thereafter carried on correspondence and queried the propriety of charging any premium for it. The plot owner by its letter dated June 1, 1961, pointed out that for allotment of land on a permanent basis for commercial purposes, the lessee was required to pay premium at the rate of Re. 1 per sq. ft. plus 5per cent of that as annual ground rent. The assessee thereafter made a further representation repeating its contention that the provision for payment of premium of Re. 1 per sq. ft. may not be insisted upon but the said representation was not accepted and the assessee was so informed by the plot owner's letter of June 22, 1961. It would appear that thereafter the assessee sought facility of paying the premium in instalments. Initially this was rejected by the plot owner and the assessee was so informed by the plot owner's letter dated September 4, 1961. It would appear that thereafter there were further representations and ultimately by its letter dated December 28, 1961, the assessee confirmed its acceptance of the rate of premium payable subject to the facility for payment of the same by twelve equal annual instalments which appears to have been agreed to at some meeting. The assessee also agreed to pay annual rent of 5per cent on the amount of the premium. It also accepted the other terms and conditions conveyed to it in the plot owner's letter dated January 21, 1961. The endorsement at the foot of the said letter indicated that the assessee was applying for permanent allotment of the plot on the above terms and conditions. The plot owner by its letter dated May 18, 1962, referred to the correspondence between the parties resting with the assessee's letter dated December 28, 1961, and indicated that the plot admeasuring 250' X 250' on Great Eastern Road, Bhilai Nagar, was proposed to be allotted to the assessee on the terms and conditions mentioned therein. II terms and conditions were indicated. Term No. 2 related to payment of premium by the assessee at Re. 1 per sq. ft. and the amount of premium, viz., Rs. 62,500, was to be paid in 12 equal annual instalments. The first of the instalments was to be paid on May 20, 1962. The assessee was also required to pay ground rent of Rs. 3,125 per annum which was calculated at 5per cent of the premium. The ground rent was sought from July 9, 1959. The period of lease was mentioned in term No. 1 at 30 years w.e.f. July 9, 1959. Clauses or terms Nos. 9 and 11 are somewhat material and will be set out fully a little later on. In reply, the assessee contended that the period of the lease should be 30 years from the date of the contract, that is, from May 30, 1962, and not with retrospective effect. It also urged that higher rent at the rate of Rs. 3,125 per annum (as against Rs. 50 per month which it was paying earlier) should also be charged w.e.f. May 20, 1962. Accordingly, the assessee in its letter dated June 6, 1962, mentioned that it was depositing the first instalment of premium, viz., at Rs. 5,209, and rent for one year, viz., Rs. 3,125, for the period from May 20, 1962, to May 9,1963.

(3.) THE assessee agitated the question of disallowance for all the six assessment years before the AAC. The AAC agreed with the approach of the ITO and held that the officer was justified in treating the payment of lease premium as capital expenditure and there was no warrant for interference with the disallowance.