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Income Tax Appellate Tribunal, DELHI ‘G’ BENCH,
Before: SHRI N.K. BILLAIYA, & MS. MADHUMITA ROY
PER N.K. BILLAIYA, ACCOUNTANT MEMBER,
This appeal by the assessee is preferred against the order of the Commissioner of Income Tax [Appeals] - 30, New Delhi dated 27.11.2017 pertaining to Assessment Year 2014-15.
The substantive grievances of the assessee read as under:
“On the facts and in the circumstances of the case, the ld. CIT(A) erred in confirming the following actions of the Assessing Officer:
completing assessment u/s 143(3) of the Income tax Act, 1961 [hereinafter referred to as 'The Act' for short] at an income of Rs. 1,58,47,540/- against the returned income in a sum of Rs. 1,05,96,140/-;
2. making an addition of Rs. 52,11,176/- on account of lease rental paid treating the same as capital expenditure resulting in an enduring benefit; and
3. disallowing a sum of Rs. 23,442/- being the amount of interest paid on TDS.”
Briefly stated, the facts of the case are that the assessee is engaged in the business of manufacturing Katha & Cutch. During the course of scrutiny assessment proceedings, the assessee was asked to give detailed working of lease rent in view of the decision of the Hon'ble High Court of Delhi and also to show cause as to why the same proportionate disallowance should not be made in respect of lease rent.
Requisite details were furnished by the assessee.
5. After perusing the details, the Assessing Officer observed as under:
“3. The reply of the assessee has been carefully considered and it is seen that like preceding several years, besides fixed lease rent Rs. 1,00,000/- (Rs. One Lakh) per month the assessee has paid enhanced lease rent amounting to Rs.1,02,86,544/- to M/s Mehta Charitable Prajnalaya Trust. The disallowance of lease rent has been made ever, since A.Y. 1992-93 and onwards. This issue has been decided by the Hon’ble High Court of Delhi, vide its order dated 09.05.2012. Hon'ble High Court while deciding various- appeals for A.Y. 1992-93 to 2007-08 in 251/2007, 253/2007, 257/2007 & 223/2002, filed by the assessee and the appeal filed by the Department vide ITA Nos. 247/2002, 45/2005, 45/2005, 50/2005, 1207/2005, 361/2008, . 482/2008, 731/2008, 1191/2008, 1183/2010, 1198/2010, 842/2011 and 246/2003 respectively, directed the A.O. to allow certain relief to the assessee and also directed to work out the relief.”
The Assessing Officer accordingly computed the disallowable amount of lease rent in same line as was done in A.Ys 1992-93 to 2007- 08 and computed disallowance at Rs. 52,11,176/-.
The assessee carried the matter before the ld. CIT(A) but without any success.
Before us, the ld. counsel for the assessee drew our attention to the decision of this Tribunal in 2245, 5126 to 5141/DEL/2014 pertaining to A.Ys 1992-93 to 2010-11. The ld. counsel for the assessee stated that the quarrel has been settled by the Tribunal.
The ld. DR fairly conceded to this.
10. We have given thoughtful consideration to the orders of the authorities below and have carefully perused the decision of this Tribunal [supra]. We find force in the contention of the ld. counsel for the assessee. The impugned quarrel has been decided by the Tribunal in favour of the assessee and against the Revenue as per the order [supra].
The relevant findings of the co-ordinate bench read as under:
“9. We have heard the rival submissions made by the parties, perused the relevant findings given in the impugned orders as well as material referred to before us. The main issue before us in all the appeals is, how the enhancement of lease rent given by the assessee company to the Trust is to be allocated in terms of directions given by the Hon'ble High Court, which is, firstly, the part of the enhancement for surrendering the right to purchase khair wood would constitute revenue expenditure; secondly, part of the rent would be attributable to improvement and modernization of plant and machinery carried out by the Trust in the year 1989- 90 would be revenue expenditure; thirdly, enhancement which is attributable to normal appreciation in line with prevailing market right of lease rent would constitute revenue expenditure; and lastly, enhancement in lease rent attributable for not indulging in competition, i.e., non compete fee would construe capital expenditure. Thus our entire endeavor in all the years is to allocate the capital expenditure on account of ‘non-compete fee’, i.e., Trust agreeing not to indulge in the competition within a specific radius from the demise property.
As regards the right of purchase of khair wood, the assessee has claimed that 15% of the average purchases can be taken for the purpose of compensation which Assessing Officer has held that it should be @ 10% of the average purchases. How he has taken it 10% has not been provided by him. On the other hand, ld. counsel
for the assessee, Shri K. Sampath has filed copy of the assessment orders for the Assessment Years 1989-90 to 1992-93 in the case of Trust, i.e., M/s. Mehta Charitable Prajnalaya Trust and pointed out that in Assessment Year 1989- 90 the gross profit rate on sale of kattha by the Trust was 21%; for the Assessment Year 1990-91 it was 13.81%; for the Assessment Year 1991-92 it was 14.8%; and for the Assessment Year 1992-93 it was 20.04% which averages to 17.4%. Such an assessment order in the case of the Trust constitutes a valid basis for estimating the average purchase of the khair wood.
11. On the other hand, learned Senior DR strongly relied upon the order of the Assessing Officer and ld. CIT (A) and submitted that the working given by the assessee is purely based on estimate which cannot be upheld for the reason that from Assessment Year 2004-05 onwards the amount of rent attributable to capital expenditure has gone into negative which is against the mandate and the direction of the Hon'ble High Court, therefore, the working given by the Assessing Officer needs to be upheld.
After considering the entire facts and the submissions made by the parties, we find that Assessing Officer has applied rate of 10% of the average purchases on right to purchase of khair wood surrendered in favour of the assessee by the Trust. The Assessing Officer has not given any reason as to why allowance @10% of the average purchases should be given. On the contrary, the assessee before us has demonstrated that in the case of the Trust the gross profit rate on similar product was more than 17%. The assessee has claimed rate of 15% of the average purchases as its compensation for the purpose of allocation of enhanced rent towards capital expenditure. Such a rate of 15% is inconsonance with the average GP rate in the case of the Trust, therefore, allowance of 15% is held to be quite reasonable. Accordingly, we direct the Assessing Officer to treat part of the lease rent fee for surrendering the right to purchase @15% of average purchases of khair wood.
As regards enhancement of the lease rent in line of the prevailing market rate, the assessee before the Assessing Officer as well as before the ld. CIT(A) has submitted that it has taken similar lease of a processing unit from Himachal Pradesh Marketing Corporation which is an undertaking of Government of Himachal Pradesh, to whom assessee has paid sum Rs.30 lac per annum by way of lease rental to the said government undertaking which is much smaller in size and if same is compared then it is at arm’s length transaction. Following comparability analysis of the area of land and sale of annual product was given:
MCPT HPMC (1) Investment in Fixed Assets 56,18,414 6,49,177 (2) Area of land 21800 sq. mt. 2000 sq. mt. (3) Sale of Annual Product 14.82 crore 2.98 crore in F.Y. 1993-94
Based on this comparability analysis, it was contended that lease rent cannot be held to be excessive. The assessee had requested to allow normal escalation in the fixed lease rent @11% 13 per annum of the last year, whereas the learned Assessing Officer has held that it would be reasonable to adopt lease rental @5% per year.
Before us, the learned counsel submitted that the normal appreciation in rent in the case of commercial property is more than 10%, whereas the learned DR submitted that assessee could not produce any evidence from any competent local authority which can supply input, and therefore, such an escalation of 10% or 11% is not supported by any proper evidences.
From the judgment of the Hon'ble High Court, it is seen that the Hon'ble High Court held that the portion attributable to normal appreciation in line the lease rental prevailing in the market should be allowed for which the assessee has claimed should be 10% to 11% of the lease rent charged on last year as a escalation and Assessing Officer has restricted to 5%. Since, it is lease of a commercial property; therefore, the annual escalation would normally be more than the residential property. The assessee has given a comparison of property taken on lease with HPMC to show that comparatively assessee is paying more HPMC, and therefore, keeping in that benchmark the escalation of 10% to 11% is reasonable. Though, both the parties have been unable to give annual rate prevailing in the market, however, on the facts and circumstances of the case and looking to the fact that assessee is paying percentage- wise more rent to the government undertaking on a similar lease of commercial property, therefore, we hold that 10% of annual escalation would be reasonable from Assessment Year 1992-93 onwards.
Now coming to the issue of enhancement which is attributed I.T.As. No. 2244, 2245 & 5126 To 5141/Del/2014 14 to improvement and modernization of plant and machinery carried out by Trust, we find that assessee has given detail of expenditure made by the lessor Trust for the modernization and improvement towards plant and machinery which has been tabulated in the following manner:
SI. No. Name of the Assets FY 1989-90 FY 1990- 91 FY 1991-92 FY 1992- 93 FY 1993-94 FY 1995-96 Total 1 Building 2,34,664 3,26,545 - 4,28,176 4,58,383 30, 605 14,78,373 2 Machinery 3,25,518 9,43,530 1,92,701 6,65,001 57,598 - 21,84,644 3 Shed 1,06,863 5,04,255 45,296 6,61,751 1 ,34,842 6,86.671 21,39,678 4 Land - 2.31,772 - - 42.021 1,16,000 3,89,793 5 Refrigeration Plant - - - 14,88,143 - - 14,88,143 Total 6,67,341 20.06,102 2,37,991 32.43,071 6,92,844 8,33,276 76,80,631
17.1 Assessee has claimed 18% of its investment done by the Trust for modernization and improvement of plant and machinery, building, etc. out of lease rent, whereas the Assessing Officer has restricted it to 12% on the ground that 12% of interest on investment is the proper benchmark.
Before us, the ld. counsel for the assessee had given SBI BPLR to point out that 1992-93 when lending rate was 12% and in Assessment Year 2010-11 it was 13%. He pointed out that if the wholesale price index is taken into consideration then annual variation of 18% is very reasonable.
The learned Department Representative on the other hand submitted that PLR takes into account inflation and devaluation of rupees taken on account and WPI cannot be made applicable here in this case. Thus, rent attributed by the Assessing Officer @12% is reasonable.
After considering the rival submissions and on perusal of I.T.As. No. 2244, 2245 & 5126 To 5141/Del/2014 15 the material facts on record, we find that the Hon'ble High Court has directed that enhancement of lease rent which is attributable to improvement and modernization of plant and machinery, building, etc. by the Trust has to be worked out. The basis given by the Assessing Officer that 12% on interest on investment should be given into account. If one goes by SBI Prime Lending Rate right from the Assessment Years 1992-93 to 2010-11, it is seen that it ranges between 10.25 to 17%. The average of which worked out to more than 15%, because up till Assessment Year 1998-99 the PLR rate was more than 13% and after 2006-07 also it is ranging between 12 to 14%. Thus, 12% rate as taken by the Assessing Officer seems to be on a very lower side even though this could not be proper base. Since substantial investment was done by the Trust in various years, therefore, looking to quantum of investment made and escalation over the period of time the rate of 18% claimed by the assessee seems to be quite reasonable and accordingly, we direct the Assessing Officer to take rent attributable to improvement and modernization of plant and machinery, building, etc during the Assessment Years 1989-90 to 1995-96 @18%.
Another very important submission made by Mr. K. Sampath before was that the capital expenditure attributable to ‘noncompete fee’ or amount received for not carrying out any activity in relation to business or profession comes within the ambit of certain kms. Amounts to commercial rights being intangible assets, and therefore, depreciation u/s. 32(1)(ii) which is applicable w.e.f. 01.14.1998 should be allowed @25% per annum. Apart from that, after 01.04.2003 the ‘non compete fee’ or money received for not carrying out any activity in relation to any I.T.As. No. 2244, 2245 & 5126 To 5141/Del/2014 16 business is treated as revenue received in the hands of the person receiving the same which inter alia means that it has to be treated as revenue expenditure in the hands of the assessee-company, therefore, he submitted that direction may be given to the Assessing Officer to allow such statutory claim on the capital expenditure and/or allow such non- compete fee to be revenue expenditure.
Learned Department Representative strongly objected to such a proposition and submitted that once the Hon'ble High Court has held that certain portion of lease rent is to be treated as capital expenditure, now the same cannot be held to be allowable as revenue expenditure.
After considering the aforesaid submissions, we find that in so far as the claim of the learned counsel that depreciation should be allowed on such a capital expenditure, because it is in the nature of intangible asset, we find substance in such a contention because part of the lease rent has been held to be on account of payment made to the Trust for not indulging in competition, i.e., it is in the form of ‘non-compete fees’ and such a ‘non-compete fee’ ostensibly falls in the category of commercial rights as defined in Section 32(1)(i), therefore, assessee is liable for depreciation from 1st April, 1998. In so far as the claim for entire non compete fee should be treated as revenue expenditure because of amendment brought w.e.f. 01.04.2003 in Section 28(va), we direct the Assessing Officer to examine this aspect and what is allowable as per the statute in respect of certain payment then the same needs to be allowed.
In view of the finding given above, our direction to the Assessing Officer is summarized hereunder:- I.T.As. No. 2244, 2245 & 5126 To 5141/Del/2014 17 i. Part of the enhanced lease rent paid for surrendering the rise to purchase the khair wood should be taken @15% of the average purchases price. ii. The normal escalation on fixed rent should be taken @10% of the lease charges per year. iii. The rent attributable to modernization and improvement plant and machinery should be taken @18%. iv. The Assessing Officer should allow depreciation w.e.f. 01.04.1998 on the portion of the rent which is held to be capital in nature in accordance with law and also examine the assessee’s contention
that whether the non compete fee can be allowed as an expenditure in terms of amendment in the statute w.e.f. 01.04.2003.
Based on the aforesaid direction, the Assessing Officer should work out the net disallowable expenditure for the various Assessment Years. Accordingly, all the appeals of the assessee are treated as partly allowed for statistical purposes.”
12. Respectfully following the decision of the Tribunal [supra], Ground No. 2 is allowed.
13. Ground No. 3 relates to the disallowance of Rs. 23,442/- being the amount of interest paid on TDS.
14. The ld. counsel for the assessee did not seriously contest this ground and moreover, the interest paid on late payment of Income tax is not an allowable expenditure. Hence the finding of the ld. CIT(A) is upheld. This ground stands dismissed.
In the result, the appeal filed by the assessee in is partly allowed.
The order is pronounced in the open court on 11.08.2021 in the presence of both the rival representatives.