SHANKAR TRADING COMPANY P. LTD.,NEW DELHI vs. DCIT, NEW DELHI

That part of the enhancement of lease rent, which is attributable to improvement and modernization of plant and machinery carried out by the Trust in the year 1989-90, constitutes revenue expenditure. 3. The enhancement in lease rent, if any, which is attributable to normal appreciation, if any, in line with the lease rentals prevailing in the market constitutes revenue expenditure. 4. The enhancement in lease rent, which is attributable to Mehta Charitable Trust agreeing not to indulge in competition with the assessee within a radius less than 1000 kms from the demises property, constitutes capital expenditure. 3.1 The assessee in compliance to the order of the Hon’ble High Court attributed different percentage of enhanced lease rentals towards revenue expenditure and worked out nil expenditure towards capital expenditure. Computation of the enhanced rent attributable to revenue nature and capital nature made by the assessee for the different years is reproduced as under: Computation of rent attributable to revenue nature and capital in nature AY Lease Part of Lease Fixed Normal Rend Normal Sum of rent Balance Charges rend fee for Amount of escalation in attributable escalation attributable to amount of Paid (A) surrendering Lease fixed lease to on (D1) revenue nature rent the right to Rent rent @11% improvement @9.5% (E) attributable purchase plus basic and plus basic {(E)=(B)=(C)=(D) to capital @15% on lease modernization rent nature average charges © of plant and amount [(F)=(A)-(E)] purchase of machinery (D) Khair Wood during (B) assessment years 1990- 91 to 1995-96 @ 18% (D1) 1. 2. 3. 4. 5. 6. 7. 8. 9. 1992-93 29,25,000 6,74,813 12,00,000 16,41,157 5,24,059 5,24,059 28,40,029 84,971 1993-94 81,00,000 26,99,251 12,00,000 18,21,684 11,07,812 11,57,598 56,78,533 24,21,467 1994-95 81,00,000 26,99,251 12,00,000 20,22,070 12,32,524 13,92,281 61,13,602 19,86,398 1995-96 81,00,000 26,99,251 12,00,000 22,44,497 13,82,514 16,74,538 66,18,286 14,81,714 1996-97 81,00,000 26,99,251 12,00,000 24,01,332 13,82,514 18,33,619 70,24,262 10,75,756 1997-98 81,00,000 26,99,251 12,00,000 27,65,445 13,82,514 20,07,813 74,72,509 6,22,491 1998-99 81,00,000 26,99,251 12,00,000 30,09,644 13,82,514 21,98,555 79,67,450 1,32,550 1999-00 94,50,000 26,99,251 12,00,000 34,07,305 13,82,514 24,07,418 85,13,974 9,36,026 2000-01 99,22,500 26,99,251 12,00,000 37,82,108 13,82,514 26,36,123 91,17,482 8,05,018 2001-02 1,04,18,628 26,99,251 12,00,000 41,98,140 13,82,514 28,86,554 97,83,945 6,34,683 2002-03 1,09,39,560 26,99,251 12,00,000 46,59,936 13,82,514 31,60,777 1,05,19,964 4,19,506 2003-04 1,14,86,544 26,99,251 12,00,000 51,72,529 13,82,514 34,61,051 1,13,32,831 1,53,713 2004-05 1,14,86,544 26,99,251 12,00,000 57,41,507 13,82,514 37,89,851 1,22,30,609 (7,44,065) 2005-06 1,14,86,544 26,99,251 12,00,000 63,73,072 13,82,514 41,49,887 1,32,22,210 (17,35,666) 2006-07 1,14,86,544 26,99,251 12,00,000 70,74,110 13,82,514 45,44,126 1,43,17,487 (28,30,943) 2007-08 1,14,86,544 26,99,251 12,00,000 78,52,263 13,82,514 49,75,818 1,55,27,332 (40,40,788) 2008-09 1,14,86,544 26,99,251 12,00,000 87,16,011 13,82,514 54,48,521 1,68,63,783 (53,77,239) 2009-10 1,14,86,544 26,99,251 12,00,000 96,74,773 13,82,514 59,66,130 1,83,40,154 (68,53,610) 2010-11 1,14,86,544 26,99,251 12,00,000 1,07,38,998 13,82,514 65,32,913 1,99,71,162 (84,84,618)

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

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% 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 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:

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 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

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 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. 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.