Deductibility of expenditure on stamp duty and registration charges

    1.1 The deductibility or otherwise of payments connected with a property under a lease has always been a source of protracted litigation. Some of such issues are :

•  Whether payment of premium for acquiring a leasehold asset is a revenue or capital expenditure.

• Whether payment of lease rent in lump sum is a revenue or capital expenditure.

•   Whether expenditure incurred for repairs and renovation of leasehold property is allowable as a deduction or not.

•    Whether expenses on construction of building on a leasehold property is a capital or revenue expenditure.

    1.2 One more issue, which regularly comes for consideration of Courts, is about the deductibility of an expenditure incurred on stamp duty and registration charges, in executing a lease deed, paid by a lessee.

    1.3 The issue remained controversial, in spite of several Courts holding the expenditure to be deductible, because of the decisions of the Karnataka and some other High Courts holding the expenditure in question to be not allowable. Recently, the Himachal Pradesh High Court had an occasion to examine the true purpose of the dissenting decision of the Karnataka High Court in adjudicating the issue under consideration, namely, deductibility of expenditure on stamp duty and registration charges.

2. Hotel Rajmahal’s case :

    2.1 The issue earlier came for consideration of the Karnataka High Court in the case of Hotel Rajmahal v. CIT, 152 ITR 218.

    2.2 The facts behind the legal formulation were that the assessee, a firm consisting of five partners, came into force with effect from March 2, 1974. The firm took over a running business with boarding and lodging facilities in the name and style ‘Hotel Rajmahal’ at Bangalore by executing a lease deed dated April 24, 1974, for which it incurred an expenditure of Rs.11,270 by way of stamp duty, registration fee and legal expenses. The lease was for a period of ten years with option for renewal for another period of ten years.

    2.3 The assessee filed a return disclosing an income of Rs.67,220 for the A.Y. 1975-76, the relevant previous year ending December 31, 1974 after deducting the aforesaid sum of Rs.11,270. The AO completed the assessment accepting the return allowing the said deduction, but the Commissioner revised the order u/s.263 of the Act by disallowing the expenditure of Rs.11,270 on the ground that it was of capital nature having been incurred for acquisition of a capital asset. The appeal preferred by the assessee, against the order of the Commissioner, was dismissed by the Tribunal by holding that the assessee had started the business only during the relevant year for the first time and that the lease was for a considerably long period and therefore, the benefit arising from the transaction be considered as of an enduring nature.

    2.4 At the instance of the assessee, the following question of law was referred for the opinion of the Court :

    “Whether, on the facts and in the circumstances of the case, Rs.11,270 being the expenditure incurred by the assessee by way of stamp duty, registration fee and legal expenses for the execution of registration of the lease deed dated April 24, 1974, is to be allowed in computing its income for the A.Y. 1975-76 ?”

    2.5 The assessee, urged before the Court that the period of lease was not relevant for deciding whether the sum claimed for deduction was in the nature of revenue expenditure or capital in nature; what was important to consider was whether the said amount spent was a necessary outgoing for the use of a thing from which the assessee was to earn profit.

    2.6 In support of the contention, the assessee relied upon the decision of the Supreme Court in India Cements Ltd. v. CIT, 60 ITR 52 as also on the two decisions of the Bombay High Court in the cases of CIT v. Hoechst Pharmaceuticals Ltd., 113 ITR 877 and CIT v. Bombay Cycle & Motor Agency Ltd., 118 ITR 42.

    2.7 The Court observed that the contention of the assessee could have been relevant, provided the assessee was engaged in a business prior to the execution of the lease deed and the expenditure incurred was incidental to such business, but the assessee in the given case, for the first time, entered into the business in respect of which he spent the amount for executing and registering the lease deed and but for the execution of the lease deed, he would not have got the apparatus of the business and the leasehold rights. The Court held that the expenditure had really brought into existence an asset of enduring nature and the expenditure in connection with the acquisition of such rights should be distinguished from the expenditure incidental to the existing business and that the former could not be allowed u/s.37 of the Act, though the latter may in certain circumstances be allowed.

    2.8 The Court further observed that the assessee could not draw support from those decisions of the Supreme Court and the Bombay High Court since they concerned themselves with cases where a certain sum of money was spent towards stamp duty, registration fees, lawyer’s fees, etc., for the purpose of the existing business of the assessee.

    2.9 In the instant case, as already stated by the Court, it was for the first time that the assessee entered into the business by executing the lease whereunder the assessee secured the leasehold rights for an initial period of ten years with an option to renew for another period of ten years and as such the expenditure incurred for securing this kind of asset, by way of stamp duty, registration charges and legal fees was an expenditure of capital nature.

    2.10 At this juncture, we need to take note of the decisions in the cases of United Commercial Corporation, 78 ITR 800 (All) and Govind Sugar, 152 ITR 218 (Kar.), wherein the expenses in question were held to be not allowable, irrespective of the fact that they were incurred after the business was set up.

3. Gopal Associates’ case :

3.1 Recently, the Himachal Pradesh High Court in the case of CIT v. Gopal Associates, 222 CTR 307 was required to consider the issue of allowability of the expenditure on stamp duty and registration charges in executing a lease deed. In that case, during the A.Y. 1994-95, the assessee took on lease, a fruit processing plant from the HPMC. The lease deed was executed on 27th December, 1993 for a period of 7 years but was later terminated. The assessee had spent a sum of Rs.3,44,251 as stamp duty and registration charges on execution of the lease deed. The AO treated this expenditure as capital expenditure by relying upon the judgment of the Karnataka High Court in the case Hotel Rajmahal (supra). On the other hand, the assessee relying upon the judgments of the Madras, Kerala and Gujarat High Courts in Sri Krishna Tiles & Potteries Madras (P) Ltd. v. CIT, 173 ITR 311 (Mad.), Plantation Corporation of Kerala Ltd. v. Commissioner of Agri. IT, 205 ITR 364 (Ker.) and Gujarat Machinery Manufacturing Ltd. v. ClT, 211 ITR 1010 (Guj.) contended that the amount spent as stamp duty and registration charges should be treated as revenue expenditure. The CIT(A) and Tribunal accepted the plea of the assessee.

3.2 The Revenue filed an appeal challenging the order of the Tribunal by raising the following substantial question of law:

“Whether on the facts and in the circumstances of the case the Tribunal was right in law in holding that the expenditure incurred on stamp duty and registration charges at the time of execution of lease agreement for taking on lease the fruit processing plant for seven years was allowable as revenue expenditure.”

3.3 The Himachal Pradesh High Court noted that the Karnataka High Court in Hotel Rajmahal’s case (supra) did not really discuss the matter in detail but held that when for the first time the assessee entered a lease deed securing leasehold rights for a long period, the expenditure incurred on stamp duty registration and legal fees, etc. should be treated as expenditure of capital nature. The Court however chose to follow the decision of the Madras High Court  in Sri Krishna  Tiles & Potteries  Madras  (P) Ltd. case (supra) which in turn followed the law laid down by the Bombay High Court in ClT v. Cinceita Ltd., 137 ITR 652 (Born.) and accordingly dis-agreed with the decision of the Karnataka High Court to hold that irrespective of whether the incidental expenditure was incurred in connection with or related to capital expenditure, the same had to be treated as revenue expenditure.

3.4 The Court also  noted that the Kerala High Court also took the same view in Plantation Corporation’s case (supra) and the Gujarat High Court in Gujarat Machinery’s case (supra) dealt with the same question and held that the amount spent on registration and stamp charges was a revenue expenditure.

3.5 The Court chose to follow the reasoning given by the Bombay, Madras, Kerala and Gujarat High Courts and respectfully disagreed with the judgment of the Karnataka High Court.

3.6 In view of the findings, the Court decided the substantial question against the Revenue by holding that the expenditure in question was a revenue expenditure allowable as a deduction.

Observations:

4.1 The short but interesting  issue is whether  the expenditure  in question  for drawing  up a proper and effective deed of lease, namely, the expenditure in respect  of stamp  duty,  registration  charges  and professional fees paid to the. solicitors who prepared and got registered  the deed  of lease is an expenditure resulting in an enduring  benefit simply because it is in some manner  incurred  at the same time and is connected  that way to a property  acquired  under a lease. Further,  the fact that the lease is of a longer period will have any bearing in deciding the issue or not.

4.2 We need to note that there is no element of premium in the said amounts claimed as expenditure and the expenditure would have been the same even if the lease had been of a shorter duration. The expenditure in question is not for acquiring the lease-hold right which is normally acquired on payment of premium, but is incurred to meet certain expenses which have necessarily to be incurred in order to conform to the legal requirements laid down in this behalf for getting a legal deed of lease. It is incurred for drawing up and registering a valid deed of lease not suffering from legal infirmities to facilitate the carrying on of the business of the as-sessee.

4.3 The contention that the assessee obtains an en-during benefit by obtaining the lease deeds and any expenses incurred in connection therewith should be treated as capital expenditure, more so when the lease is for a longer a period should be examined in light of the decisions of the Supreme Court in the cases of Empire Jute Co. Ltd. CIT, 124 ITR I, CfT v. Associated Cement Companies Ltd., 172 ITR 257 and Alembic Chemicals Works Co. Ltd. v. CIT, 177 ITR 377, which have laid down pragmatic and practical tests to find out whether an expenditure is revenue or capital in nature. The Supreme Court held that even in a case where expenditure is incurred for obtaining an advantage of enduring benefit, emphasis should be placed on the nature of the advantage in a commercial sense and if the advantage consists merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried on more efficiently or profitably, while leaving the fixed capital untouched, the expenditure should be held to be on revenue account, even though the advantage may endure for an indefinite future.

4.4 The test of ‘enduring benefit’ has been held to be not a decisive or conclusive test: it cannot be applied blindly and mechanically. The question must be viewed in the larger context of business necessity or expediency. If the expenditure is so related to the carrying on or the conduct of the business, it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character. If the expenditure helps in the profit-earning process, it should not be treated as resulting in acquisition of a profit-earning machinery or apparatus.

4.5 The Bombay High Court in the case of CIT v. Cinceita Pvt. Ltd., 137 ITR 652, held that though the period of the lease was for 20 years with an option for renewal at a higher rent, yet the expenditure claimed by the assessee was the only expenditure required for drawing up a proper and effective lease deed, namely, the expenditure in respect of the stamp duty, registration charges and professional fees paid to the solicitors, who prepared and registered the lease deed. It noted that there was no element of premium in the amount claimed as expenditure for acquiring the leasehold premises and moreover, the expenditure would have been the same even if the lease was for a shorter duration of any period exceeding one year. Importantly, the Court held that merely because the period of the lease was longer it could not be held that the expenditure resulted in acquiring an asset or advantage of an enduring nature. Therefore, the sum spent was held to be allowable as revenue expenditure.

4.6 The Kerala High Court in the case of Plantation Corporation, 205 ITR 364, held that the Appellate Tribunal had overemphasised the fact that the assessee had acquired an enduring benefit on planting rubber trees by obtaining long-term lease arrangement. The expenditure incurred relating to stamp duty, adjudication fee, registration fee, etc. in respect of lease deeds covering the lands leased to the assessee by the Government was revenue expenditure according to the Court.

4.7 The Madras High Court in the case of Sri Krishna Tiles & Potteries Madras (P) Ltd., 173 ITR 317, held that there was a transfer of interest in the property which was the subject matter of the agreement and the Tribunal was justified in holding that the amount paid as salami was a capital expenditure; however, the sum paid towards stamp duty, registration charges and professional fees to the lawyers was allowable as revenue expenditure.

4.8 The Gujarat High Court in the case of Gujarat Machinery Mfg. Ltd. 211 ITR 1010, in a case dealing with the claim by the lessor, held that the assessee had let an immovable property in consideration of obtaining rent from the lessee and that the assessee (lessor) had not spent any money for acquisition of an asset or rights of a permanent character. On the contrary, the assessee, as a lessor, had parted with some of its rights as owner of the immovable property in favour of the lessee. The assessee was the owner of the property and by executing the lease deed in favour of the lessee, it was not acquiring any new source of income or new asset. Therefore, the expenditure for the stamp duty and the registration of the lease deed could not be said to have been laid out for acquisition of any asset or a right of a permanent nature. The expenditure was laid out for earning rent or was spent as part of the process of profit earning. The expenditure was related to the carrying on or conduct of the business or of earning income by letting out the immovable property which was already owned by the assessee. Merely because the expenditure was related to a capital asset, it did not become a capital expenditure. Therefore, the expenditure incurred by the assessee for letting out the property was revenue expenditure. The Court in arriving at the decision relied on CIT v. Khandelwal Mining and Ores Pvt. Ltd., 140 ITR 701 (Born.) and CIT v. Katihar Jute Mills (P) Ltd., 116 ITR 781 (Cal.).

4.9 In CIT v. Hoechst Pharmaceuticals Ltd., 113 ITR 877, it was held by the Bombay High Court that expenses incurred by way of brokerage and stamp duty for acquiring office premises on lease for a short period of five years were allowable as a deduction in computing the total income of the assessee, since the assessee could not be said to have acquired or brought into existence an advantage of an enduring character.

4.10 The Bombay High Court again in CIT v. Bombay Cycle & Motor Agency Ltd., 118 ITR 42, allowed the claim of the assesses for deduction of the expenses in question. In that case, one of the leases in question was for a period of ten years and the other for a period of five years. The Tribunal had taken the view that the fact that the amounts had been spent in connection with the opening of new branches was by itself no justification for disallowance, that no asset of an enduring nature had been brought into existence, and that the period of the lease by itself was not indicative of securing an asset of an enduring nature and that the expenditure could not be disallowed as of a capital nature.

4.11 It appears that the decisions in the cases of United Commercial Corporation, 78 ITR 800 (All.) and Govind Sugar, 152 ITR 218 (Kar.), wherein the expenses in question were held to be not allowable irrespective of the fact that they were incurred after the business was set up require reconsideration. The view that the expenditure on stamp duty, registration charges and professional fees for drafting the lease deed be allowed as a revenue expenditure is a better view.