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Income Tax Appellate Tribunal, HYDERABAD BENCHES “A” : HYDERABAD
Before: SHRI S.S.GODARA & SHRI LAXMI PRASAD SAHU
O R D E R PER S.S.GODARA, J.M. :
This assessee’s appeal for AY.2014-15 arises from the CIT(A)-5, Hyderabad’s order dated 30-10-2017 passed in case No.0494/2016-17/CIT(A)-5, in proceedings u/s.143(3) of the Income Tax Act, 1961 [in short, ‘the Act’]. Heard both the parties. Case file perused.
The assessee has pleaded the following substantive grounds in the instant appeal: “1)The order of the Learned Commissioner (Appeals) is contrary to the facts and law on the points in dispute. 2)The learned Commissioner (Appeals) erred in denying weighted deduction U/s 35(2AB) amounting to Rs.1,45,67,871 towards Expenditure incurred for Research and Development on the ground of Non furnishing of Certificate in Form 3CL from Department of Scientific and Industrial Research (DSIR). 3)The learned Commissioner (Appeals) having noted that the assessee has furnished the relevant application to Department of Scientific and Industrial Research (DSIR) before completion of assessment, should have allowed the deduction as the relevant expenditure was actually incurred during the relevant previous year. 4)The learned Commissioner (Appeals) erred in treating the amount of premium paid towards Leasehold rights of land as Non-Depreciable asset. 5)The learned Commissioner (Appeals) erred in not treating the premium paid for leasehold rights as Intangible asset and thereby denying the depreciation on leasehold rights @25% amounting to Rs. 86,06,701. 6)The learned Commissioner (Appeals) erred in not considering the case laws relied upon by the assessee”.
Coming to the former issue of Section 35(2AB) weighted deduction of Rs.1,45,67,871/-, we notice at the outset that both the lower authorities have rejected the same for the sole reason that the then taxpayer had failed to file corresponding Form-3CL issued by the prescribed authority i.e., Department of Scientific and Industrial Research ‘DSIR’. Case file indicates that the assessee has filed its additional evidence petition dt.08-10-2020 placing on record the DSIR’s approval in Form- 3CI, dt.28-11-2017 whereas the CIT(A)’s order under challenge is dt.30-10-2017. We therefore deem it appropriate to restore the instant former issue back to the Assessing Officer to be examined afresh in light of the DSIR approval dt.28-11-2017 issued in assessee’s case in AYs.2014-15 to 2016-17; as the case may be. Ordered accordingly.
Next comes the latter issue of disallowance of depreciation of Rs.86,06,701/-. The CIT(A)’s detailed discussion to this effect reads as under:
“5. Disallowance of Rs.86,06,701/- of depreciation claimed on Lease Hold Rights. 5.1 The Facts: During the FY 2010-11 the appellant has entered into a Lease Deed with APIIC (Andhra Pradesh Industrial Infrastructure Corporation Ltd) for acquiring leasehold rights on land to setup a unit in SEZ. As per the Lease Deed, the appellant is given 16.47 (11.97+4.50) acres of Land on lease for which an amount of Rs.5,85,30,062/- (Rs.4,18,95,000 - 11.97 acres Rs.57,50,000 – 4.50 acres + Rs.8,85,062 - Stamp and Registration Charges) shall be paid as a one-time premium to acquire the leasehold rights of the land. In addition to the above lease premium, an amount equal to 2% of the Lease Premium i.e. Rs.11,52,900/ -shall be paid as Annual Lease Rentals as per Para 1(d) of the Lease Deed subject to annual enhancement of 5%. The lease period is for a term of 33 years. On expiry of said period of 33 years, the land along with construction thereon shall be returned to the Lessor i.e. APIIC. 5.2 Submission of the Appellant: Following are the submissions of the appellant in respect of the above mentioned ground: "The annual lease rentals are treated as revenue expenditure and are charged to Profit and Loss account. The one time premium paid for leasehold rights is capitalized in the Books of Accounts and the same is being treated as an intangible asset as per section 32(1)(ii) of Income tax Act, 1961 as the payment allows the appellant to exercise a right over the property over a specific period for conducting its business activities. There is a conferment of right on the lessee (appellant) by acquiring leasehold land and premium has been paid in lieu thereof. As the right acquired by the appellant to utilize the land is in the nature of a license or commercial right to carry on its business activities which is evident from. the lease agreements, the appellant treated the right is an intangible asset u/s.32(1)(ii) and accordingly claimed depreciation @ 25% amounting Rs.1,03,80,339/- (25% of Rs. 4,15,21,357/-) being assets in the form of intangible assets. Provisions of the Income Tax Law: As per section 32(1)(ii) of Income tax act 1961 "In respect of depreciation of knowhow, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed:- a. In the case of any block of assets, such percentage on the written down value thereof as may be prescribed b. In the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed As per Rule 5(1) of Income tax rules 1962 "Subject to the provisions of sub-rule (2), the allowance under clause (ii) of sub-section (1) of section 32 in respect of depreciation of any block of assets shall be calculated at the percentages specified in the second column of the Table in Appendix I to these rules on the written down value of such block of assets as are used for the purposes of the business or profession of the assessee at any time during the previous year. " Assessment Proceedings: The assessing officer after verifying the facts, stated in the assessment order that the lease premium paid is a capital expenditure and that' the appellant is eligible for depreciation. However, the learned assessing officer concluded that the lease premium paid is nothing but a rent for the premises and it is neither a right nor an intangible asset and same shall be amortized for a period of 33 years starting from the AY 2011-12. The assessing officer is not correct in treating the premium as rent without considering the fact that the appellant pays lease rent annually in addition to the premium. Nowhere in the Income Tax Act, is it specified that lease premium is required to be amortized over the period of Lease. The assessing officer without accepting the contentions of your appellant, treated the lease premium as deferred revenue expenditure and disallowed an amount of Rs.86,06,701/- i.e. (Rs.1,03,80,339 - Rs.17,73,638 [Annual Amortized amount]) Having accepted that the lease premium is a capital expenditure, the learned assessing officer contrarily concluded that the lease premium is normal rent i.e, it is in the nature of revenue expenditure which is to be amortized over a period of lease. Considering the terms of the lease deed, the entire lease premium is paid before entering into the agreement which itself showed that the payment of lease premium was a condition precedent for acquiring the leasehold rights. It cannot be treated as a rent as it is a onetime premium and additional annual rentals are also being discharged by the appellant. Considering the entire deed as a whole, such premium paid is nothing but a price for obtaining the leasehold rights and in view of the same, the premium in question is capital in nature and not revenue expenditure. The lump sum premium paid is a commercial right acquired by the appellant to carry on its business activities. Commercial rights confer certain rights upon the appellant to carry on its business in order to earn more profit. The appellant got commercial benefits for a period of 33 years on payment of lease premium and therefore any amount incurred in acquiring such commercial right is eligible for depreciation u/s.32 of Income Tax: Act, 1961. 5.3 The Decision: 5.3.1 The appellant relies on the following case laws: i. Gobind Sugar Mills Ltd. 1998J 232 ITR 319 (SC) ii. Tirumal Music Centre (P.) Ltd. [2013] 39 taxmann.com 196 But in these cases it was not held that expenditure incurred for acquisition of leasehold rights is capital in nature and the same are eligible for depreciation u/s 32. In Gobind Sugar Mills Ltd (supra) case the Hon'ble Supreme Court only held that "expenditure incurred by assessee for acquisition of leasehold right for setting up of leasehold right for setting up of sugar factory was capital expenditure". But all capital expenditure is not entitled for depreciation. In Tirumal Music Centre the facts are entirely different. 5.3.2 The Land is a non-depreciable Asset. So Depreciation will not be allowed on any leased right on land as per the provisions of the Act. Further, in Income Tax Act, in case of Lease, since ownership has not transferred, depreciation on Depreciable asset will be available to the lessor. Since Land is not a depreciable asset depreciation will not be available. 5.3.3 One of the arguments of the appellant is that the leasehold rights fall within the term and scope of expression 'intangible asset' as defined under the provisions of sec. 32(1)(ii) of the Act. I have to adjudicate whether leasehold rights partake character of land or intangible asset. Intangible asset has 'been defined in the section 32(1)(ii) of the Act. The term 'intangible assets' has been defined being know-how, patents, copy rights, trade marks, license, franchises or any other business or commercial rights of similar nature. Obviously, leasehold rights on land do not fall in the category of above categories. It does not fall even in residuary category of any other business or commercial rights of similar nature. Because the term 'rights of similar nature' qualifies that even to fall under residuary clause, it should be in the nature of above know-how, patents, copy- rights, trade marks license or franchise. Applying the rule of ejusdem generis even to fall within the residuary category it should be in the nature of rights enumerated above. Further, definition of the term 'immovable property' is given in sec. 3(26) of the General Clauses Act and it is defined as follows: "Immovable property shall include land, benefits to arise out of land and things attached to the earth or permanently fastened to anything attached to earth" Right of enjoyment to immovable property under a lease is immovable property within the meaning given in sec. 103 of the Transfer of Property Act. Under sec. 105 of the Transfer of Property Act, a lease creates a right or an interest in the enjoyment of the land property [Jaswantsingh Mathurasinh v. Ahmedabad Municipal Corporation [1992] 5 SCC 12]. In the impugned case, by virtue of lease only an interest in land is created. Hence, it does not qualify for allowance of depreciation. [Cyber Park Development & Construction Ltd. [2016] 71 taxmann.com 210 (Bangalore - Trib.)/[2016] 159 ITD 648 (Bangalore - Trib.)/[2016] 181 TTJ 556 (Bangalore - Trib.] followed]. It was held as under: "7.2 Having referred to the above legal position, we hold that by virtue of lease only an interest in land is created which does not qualify for allowance of depreciation" 5.3.4 The Apex Court (SC), in Mother Hospital (P.) Ltd [2017] 79 taxmann.com 375 (SC)/[2017] 247 Taxman 12 (SC)/[2017] 392 ITR 628 (SC) /[2017] 294 CTR 25 (SC) held that since the assessee (lessee) had not become the owner of the immovable property in question, depreciation could not be allowed to the taxpayer as per section 32 of the Income-tax Act, 1961. The title in the immovable property could not be passed from lessor when its value was more than INR 100, unless it was executed on a proper stamp paper and was duly registered with. the sub-registrar. In the absence thereof,_the taxpayer could not be said to be the owner, of the immovable property and depreciation could not be allowed in such circumstances. On the alternative argument of claiming depreciation under Explanation 1 to section 32, the SC held that the lessee was entitled to depreciation on the capital expenditure incurred by him by way of renovation, extension or improvement to the building and not on the construction carried out by the owner, the cost of which was subsequently reimbursed by the lessee”.
The Revenue’s vehement contention in support of the impugned disallowance is that the assessee ought to have amortized the same u/s.35 of the Act. We find no merit in the instant contention per se in view of the fact that neither there is any specific provision in the Act nor is any CBDT circular to this effect. Hon'ble apex court’s recent decision in Taparia Tools Ltd. Vs. JCIT (2015) [372 ITR 605] (SC) rather holds that the claim of revenue expenditure is not to be denied merely because the same could also be split over a period of years.
Coupled with this, this tribunal’s Special Bench in ACIT Vs. Progressive Constructions Ltd., (2018) 92 taxmann.com 104 (Hyd) decides the issue in assessee’s favour that a right to operate any asset forms an intangible asset u/s.32(1)(ii) of the Act entitled for depreciation.
Learned departmental representative at this stage sought to highlight the fact that the assessee in the instant case has taken land on lease to set up an SEZ and therefore, the same ought not to be taken as eligible for depreciation. We find no substance in the instant last plea as well as the assessee has claimed the impugned relief qua lease premium of Rs.5,85,30,062/- than regarding acquisition of the land along with its title. We therefore distinguish the Revenue’s arguments based on case law M/s.Mahanadi Coalfields Ltd dt.03-01-2018 and M/s.Cyber Park Development & Construction Ltd. Vs. DCIT, ITA No.1549/Bang/2012, dt.30-06-2016 in light of the foregoing Special Bench decision (supra). The assessee’s instant second substantive ground is accepted in principle. The Assessing Officer shall frame his consequential computation as per law.
This assessee’s appeal is partly allowed in above terms.
Order pronounced in the open court on 17th August, 2021