The main legal point established in the judgment is the differentiation between capital and revenue expenditure based on the acquisition of enduring rights of possession and the predominant purpose of the expenditure.

I.P. MUKERJI, J.

1. By an order of a Division Bench of this Court dated 12th June, 2006, this appeal under Section 260A of the Income Tax Act, 1961, was admitted on the following substantial questions of law :

“Whether the Tribunal was justified in law in upholding the disallowance as capital expenditure of the payment of Rs. 62 lakhs made by the appellant to the sub-tenant inducted by it in an earlier year for resuming the sub-tenanted portion of Wallace House for its own business use and its purported findings in that behalf are arbitrary, unreasonable and perverse?

Whether the Tribunal was justified in upholding the disallowance as capital expenditure of the payment of Rs.21.20 lakhs made by the appellant to its distributor for resuming for its own business use the portion of Wallace House which the appellant had allowed the distributor to use in the past and for setting the distributor’s claim and its purported findings in that behalf are arbitrary, unreasonable and perverse?”

2. The reference to the appellant will include their predecessor-in-interest.

3. Briefly the facts are these:-

The appellant was the sub-lessee of, inter alia, the third and fourth floors of Wallace House standing on 4 and 5 Bankshal Street, Kolkata-01. The lessee was one Joseph Issac Hyam. The head lease, according to the appellant expired on 30th June, 1984. With it all rights of the sub lessee came to end. The appellant claiming themselves as a monthly tenant, on 4th April, 1985, sub let the fourth floor to M/s Satya Sai Properties Limited. There was further sub-letting to M/s. Anam Corporation which in turn let in Allahabad Bank. The appellant says that this was done without their permission. Thereafter, legal proceedings were commenced, inter alia, by a trustee to the wakf for eviction of the appellant. In the suit filed by him, on 18th September, 1996, An order was made by this Court directing the appellant to pay a sum of Rs.32,000/- per month as occupation charges to the wakf estate as an interim measure.

4. The appellant contends before us that they did not have any permanent interest in the property. Even their right, title and interest as a tenant, was disputed. They filed a suit against M/s. Satya Sai Properties Limited and M/s. Anam Corporation praying for their eviction on the ground that the appellant needed the portion occupied by them, namely, the fourth floor, for their business. In those circumstances it paid Rs.62 lakhs to M/s. Satya Sai Properties Limited and M/s. Anam Corporation. Similarly, it paid Rs.21.20 lakhs to Mr. B. K. Roy (P) Ltd. to vacate the third floor of the premises.

5. The question which falls for consideration is whether this expenditure incurred by the company was capital or revenue in nature?

6. The learned Income Tax Appellate Tribunal ‘B’ Bench, Calcutta expressed the opinion in its order dated 31st August, 2005, that the payment of Rs. 83.20 lakhs made by the appellant to M/s. Satya Sai Properties Limited, M/s. Anam Corporation and M/s. B.K. Roy (P) Ltd. was to be treated as capital expenditure and not revenue expenditure. It affirmed the order of the Commissioner of Income Tax (Appeals).

7. Both Mr. Khaitan, learned senior advocate appearing for the appellant and Mr. Agarwal, learned Advocate for the Income Tax department cited various authorities in which property related expenditure was made by the assessee. In the cases cited by Mr. Khaitan those expenditures were treated as revenue expenditure whereas in those cited by Mr. Agarwal, they were held to be capital expenditure.

8. The principles of law and accountancy on which the differentiation has been made by the Courts between capital expenditure and revenue expenditure, must be appreciated in order to come to a conclusion in this appeal.

9. Under Section 37(1) of the Income Tax Act, 1961 expenses not being those described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses, laid out or expended wholly and exclusi