BY TIOL News Service

KOLKATA, JULY 23, 2018: THE issue before the bench was whether payments made to evict sub-tenants so as to acquire full use of sub-let property is capital in nature, where it results in the assessee acquiring enduring right of possession over such property. YES is the answer. Besides, the bench also observed that the dominant purpose behind incurring some expenditure is key to determining whether it is capital or revenue in nature.

Facts of the case

The assessee company is engaged in manufacturing alcoholic beverages. During the relevant AY, the assessee was the sub-lessee of the third & fourth floors of a building. The main lessee was an individual, who subsequently passed away, on account of which all rights of the sub-lessee were ended. The assessee claimed to be monthly tenant and later sub-let the fourth floor to another entity. This entity in turn sub-let the property to a third entity, which also sub-let the property to a fourth one. The assessee claimed that such further sub-letting had been done without its permission. Thereafter, the assessee itself was subject to proceedings seeking to evict it from the premises. Such proceedings were initiated by a waqf and the assessee was later directed to pay Rs 32000 /- per month as occupation charges. Subsequently, the assessee filed suits against the first party to whom it had sub-let the floor as well as against the second party to whom the floor had been further sub-let. The assessee claimed that it needed the floor for its business purposes & so paid Rs 62 lakhs to both the entities. Similarly, it paid about Rs 21 lakhs to another firm to vacate the third floor. On assessment, the CIT(A) treated such expenses as capital in nature. Such findings were upheld by the Tribunal. Hence the assessee's appeals seeking to know whether such expenses classify as capital in nature or revenue in nature.

On appeal, the High Court held that,

++ to put it simply, any expenditure that results in formation of capital is capital expenditure. Capital is something permanent. Any property of enduring value may be called capital. Any property providing permanent benefit may also be called capital;

++ if an expenditure is an integral part of the profit earning process of a business then it is revenue expenditure but if made for possession of an asset or right of a permanent character then the expenditure is capital in nature;

++ the principles are plain that when one is examining an expenditure in connection with property, one has to see what is the dominant purpose of making this expenditure. If it results in acquisition of any right to property, whether free hold, lease hold or a mere right to possession, having some kind of permanence and of enduring nature the expenditure is capital. But if the expenditure is pre-dominantly for expansion of business although it results in acquisition of some capital, then the business purpose of the expenditure is paramount. The expenditure has to be taken as revenue;

++ in the present case, it is just not established how the business of the assessee was perceived to grow out of the property acquired by them by negotiating the eviction of the said occupants. In fact, through the negotiation the assessee acquired some kind of an enduring right of possession over the occupied area of the said premises surrendered to them by those occupants. It had the incidents of permanence. Hence the Revenue correctly adjudged such expenses as being capital in nature.

(See 2018-TIOL-1429-HC-KOL-IT)