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Income Tax Appellate Tribunal, DELHI BENCH “B” NEW DELHI
Before: SHRI AMIT SHUKLA & SHRI O.P. KANT
PER BENCH:
The aforesaid appeals have been filed by the assessee against separate impugned orders passed by Ld. CIT (Appeals)-XI, New Delhi for the quantum of assessment passed u/s.143(3) for the Assessment Years 1992-93 to 2010-11. Since common issues are involved in all the appeals arising out of identical set of facts, therefore, same were heard together and are being disposed of by way of this consolidated order.
The brief facts and background of the case are that the assessee is a company engaged in the business of manufacturing and sale of Kattha and Cutch. It has taken a factory on lease from Mehta Charitable Prajnalaya Trust (hereinafter referred to as
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‘Trust’) w.e.f. 01.06.1978. The Trust was also engaged in business of manufacturing of the same products. From time to time vide separate lease deed executed between the assessee company and the Trust, a lease rental were regularly increased. Earlier it was Rs.25,000/- per month and prior to year 1989, it was enhanced to Rs.50,000/-. Later on vide lease deed dated 01.04.1989, the monthly lease rent was increased to Rs.1 lac and after 18.01.1992 again, the lease rent were enhanced to Rs.6,75,000/- per month and finally w.e.f. 01.04.1997 lease rent was further enhanced to Rs.7,50,000/- within annual increment. The lease rental paid by the assessee company was claimed as expenditure in the P&L account. The Assessing Officer was of the opinion that, firstly, the assessee company had claimed benefit of an enduring nature and accordingly, disallowed the increase amount of rent on the ground that it is in the nature of capital expenses; secondly, he also invoked provision of Section 40A(2). Similar disallowances were made in the all the years.
Ld. CIT (A) has confirmed the said action of the Assessing Officer on the ground that unusual increase in the rent was primarily for the purpose of reducing the tax incident on the profits earned by the assessee company and not for business purpose. The Tribunal held that enhanced lease rent was in the nature of capital expenditure, and therefore, not allowable. Even the invoking of provision of Section 40A (2) was confirmed.
Right from the Assessment Year 1992-93 to Assessment Year 2007-08, the matter had travelled up to the Hon'ble Delhi High Court, wherein Their Lordships had summarized the following question of law for adjudication:-
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“i) whether the lease rent of Rs 6,75,000/- per month paid by the assessee to the Trust was a capital expenditure or revenue expenditure or partly capital and partly revenue expenditure; (ii) whether the payment made by the assessee to the Trust or ITAs 53/2000, 251/2007, 253/2007, 257/2007, 223/2002 247/2002, 45/2005, 50/2005, 1207/2005, part of it comes within the purview of Section 40A(2) of the Act; (iii) if issue No. 2 is decided in favour of the revenue, whether the payment made by the assessee to the Trust was excessive or unreasonable, having regard to the fair market value of the goods, services or facilities for which the payment was made or legitimate needs of the business of the assessee or the benefit derived by or accruing to it from those goods, services or facilities.”
4.1 On perusal of the lease rental agreement whereby rent were enhanced from time to time, the Hon'ble High Court noted that same was due to following reasons:
“(a) The Trust relinquishing its rights to purchase Khairwood in Himachal Pradesh;
(b) The Trust agreeing not to indulge in competition with the assessee in a radius of less than 1000 kms.
(c) The Trust having incurred expenditure in the year 1989-90 on modernization and improvement of the plant and machinery which it had leased to the assessee. ITAs 53/2000, 251/2007, 253/2007, 257/2007, 223/2002 247/2002, 45/2005, 50/2005, 1207/2005, Yet another factor contributing to revision of lease money could be the normal appreciation in the lease rental, in line with the lease rent prevailing in the market.
4.2. The Hon'ble High Court further observed that there can be
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no dispute on enhancement of lease rental to the extent, it is attributable to the expenditure incurred by the Trust in the year 1998-90 on the modernization or improvement of plant and machinery which the lessee had taken on lease would be a revenue expenditure, since it would have the effect of enhancing the lease rent of the plant and machinery in the open market. However, how much of the enhancement in the lease rent is attributable to the modernization and improvement in the plant and machinery is a matter which the Assessing Officer has to decide after giving the opportunity to that of the assessee to the lease agreement in this regard.
4.3. After examining the nature of agreement amongst the parties and discussing various judgments on the issue of capital expenditure vs. revenue expenditure and applying the test laid down therein, the Hon'ble High Court held that:- “1. That part of the enhancement of lease rent, which is attributable to Mehta Charitable Trust surrendering its right to purchase khair wood in favour of the assessee company constitutes revenue expenditure, 2. 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.
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.
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Since, the trust is not an "association of persons", the provisions of Section 40A(2) of the Income Tax Act are not attracted to the transaction between the trust and the assessee company.”
Hon'ble High Court has thus held that, firstly, provision of Section 40A(2) is not attracted to the transaction involved; and secondly, the lease rental has to be bifurcated under four categories, the three of which were held to be constituting revenue expenditure, i.e., i) part of enhancement of lease rent which is attributable to the Trust surrendering its right to purchase khair wood; ii) part of enhancement of lease rent which is attributable to the improvement and modernization of plant and machinery carried out by the Trust in the year 1989-90 will construe revenue expenditure; and iii) enhancement of the lease rent which is attributable to normal appreciation in line with prevailing market rate would also construe revenue expenditure. However, in so far as the enhancement of lease rent attributable to the Trust agreeing not indulge in competition with the assessee within a radius of less than 1000 km from the demise property would constitute capital expenditure, i.e., some kind of ‘non compete fee’. With this direction, Assessing Officer was directed to apportion the lease rent in various categories and to pass a fresh assessment order in terms of apportionment made by him.
Before the Assessing Officer, assessee after explaining the entire facts and background of the case, gave bifurcation and basis of computation for disallowance on part of lease charges in accordance with the Hon'ble High Court order which has been incorporated and dealt by the Assessing Officer and Ld. CIT (A) in their order which for the sake of ready reference is also reproduced herein below:-
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Asst. Lease Part of lease Fixed Normal Normal Sum of rent Balance year charges rent fee for amount of escalation n escalation on attributable amount of Rent lease rent (A) @ 9.5% paid surrendering fixed tease to revenue rent attributable for 17 years (A) the right to rent % 11% nature (E) attributable to plus basic [(EMB) +(C) purchase @ for 20 years to capita! improvement rent amount 15% on plus basic -(D)] nature (F) and (D) average lease 1(F) = (A)- modernization purchase of charges (E)] of plant and (C) Khair wood machinery (B) during the AY 1990-91 to 1995-96 a, 18% 1992-93 2,925.000 6.74.813 1.200,000 1.641,157 524.059 524.059 2,840.029 84.971 1993-94 8,100,000 2,699,251 1.200.000 1.821.684 1.107,812 1.157,598 5,678,533 2,421,467 1994-95 8,100.000 2,699,251 1.200,000 2.022.070 1,232,524 1,392.281 6.113.602 1,986,398 1995-96 8,100,000 2.699,251 1.200.000 2,244,497 1,382,514 1.674.538 6,618,286 1,481,714 1996-97 8.100.000 2,699,251 1,200,000 2,491,392 1,382.514 1,833,619 7,024.262 1,075,738 1997-98 8,100.000 2,699,251 1,200,000 2,765,445 1.382,514 2.007.813 7,472,509 627,491 1998-99 8.100.000 2,699,251 1,200,000 3,069.644 1,382,514 2,198.555 7,967,450 132,550 1999-00 9,450,000 2,699.251 1,200,000 3,407,305 1,382,514 2,407,418 8,513,974 936,026 2000-01 9,922,500 2,699,251 1,200,000 3.782.109 1.382,514 2,636,122 9,117,482 805,018 2001-02 10,418,628 2,699,251 1,200,000 4,198,141 1,382,514 1.886.554 9. 783,946 634,682 2002-03 10.939,560 2,699,251 1,200,000 4.659,936 1,382,514 3.160.776 10,519,954 419,596 2003-04 11,486,544 2,699,251 1,200,000 5,172,529 1.382,514 3,461,050 11.332.830 153,714 2004-05 11,486,544 2,699,251 1,200,000 5,741,507 1,382,514 3,789,850 12.230,608 (744,164) 2005-06 11,486,544 2,699.251 1,200,000 6.373.073 1,382.514 4,149,886 13,222,210 (1,735,666) 2006-07 11.486.544 2.699.251 1,200,000 7,074,111 1.382.514 4,544,125 14.317.487 (2,830.943) 2007-08 11.486.544 2.699.251 1.200.000 7,852.263 1.382.514 4,975.8 1 7 15,527,331 (4.040.787) 2008-09 11.486.544 2,699.251 1.200.000 8.716.012 1.382.514 5,448.519 18.863.783 (5,377,239) 2009-10 11.486.544 2,699,251 1.200.000 9.674,774 1.382.514 5,996.129 18.340,153 (6.853,609) 11.486,544 2,699,251 10,738,999 1,382,514 6,532,911 19,971,161 (8,484,617) 2010-11 1,200,000
However, the learned Assessing Officer disagreed with the computation given by the assessee and has proceeded to make his own competition after discussing as under: “I. Right of purchase Khairwood:
Right to purchase of Khairwood has been surrendered in favour of the assessee by the Trust and has been held revenue expenditure by the Hon'ble High Court vide para 21 of the order. In compliance to the order of the Hon'ble High Court, part of the
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enhanced rent is to be attributed against the surrender of purchasing rights. In this connection there is no scientific formula or yardstick to work out the reasonable amount as allowance under this head. However for this purpose, the basis for this working is being taken as the average purchases of Khair Wood by the Trust M/s. Mehta Charitable Trust during the financial years 1989-90, 1990-91 & 1991-92. The details of its purchases and amount of average purchase for these years as per the submission of the assessee is as under; Financial Year Amount 1989-90 1,50,11,600.00 1990-91 2,12,01,081.00 1991-92 1,77,72,354.00 Total Amount 5,39,85,035.00 Average 1,79,95,012.00
7.1 The assessee vide its reply dated 10.12.2013 has made a
claim of 15% of the average purchases as its compensation. This
amount comes out to be 1.79,95,012 x 15% = 26,99,251/-. The
claim of the assessee seems to be on, higher side. However it
seems be reasonable and acceptable to allow a fixed percentage
of the lease rent After considering the request of the assessee
company in this regard an allowance d 10% of the average
purchases of M/s Mehta Charitable Trust for the three immediate
preceding financial years ' is considered to be reasonable. 10% of
1,79,95,012/- comes out to Rs 17.99,501/- or Rs. 17,99,500/-.
Since the lease deed was executed in the month of January 1992,
this allowance will be l/4th of 17,99,500/- for AY. 1992-93 which
comes out to Rs. 4,49,875/-. For subsequent assessment years
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this allowance would be uniformly at Rs. 17,99,500/- @l 10%.
II.Enhancement of lease rent in ....... line ...... prevailing in the market.” 8. Hon'ble high court has directed to allow normal appreciation in the lease rent keeping in view the rentals prevailing in the market. For this purpose the assessee was asked to provide details of exiting rentals for various assessment years of the lease rental prevailing in the market. The assessee has shown its inability in furnishing such details. In this regard, request letters were also issued to the SDM, Una (HP) and Executive Engineer, HPPWD, requesting them to provide the details so that the undersigned may get an idea about the prevailing lease rentals for different assessment years. Till this date of order nothing has been heard from the Executive Engineer, HPPWD. The assessee has made a request to allow an appreciation at the rate of 11 per cent which seems to be very unreasonable and high. Therefore, the request of the assessee is not acceptable. Normally the appreciation in the lease rent is based on local area market trend and market demand. It may vary from place to place. Normally an appreciation in rent in the case of residential properties across the country is seen (a 10 % yearly. But this is not true for the 'Commercial' properties In the Commercial properties this variation may be from Zero to Ten percent or even more depending upon location, area and prevailing market price factors and demand of the vacant plots/plants Neither the assessee has produced any evidence in this regard nor the Competent Local Authorities of the area of Himachal Pradesh where it is situated would have supplied
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and input in this regard The industrial plot in question is located in a remote area at Amb, located in district Una, Himachal Pradesh. The plot is located in a an industrially under developed area. 1 don't find any reason in such an area for any shortage of any industrial plot to the probable customers or the tenants. Rather in such places there happens to be surplus number of industrial plots and less number of takers of such plots on rent. For these reasons. I don't find any merit in the rate proposed by the assessee for annual increase. However, keeping in mind the interest of the owner i.e. M/s Mehta Charitable Trust, it would be reasonable to adopt an increase in lease rental @ 5% per year, on Rs. 12,00,0001- from assessment year 1992-93 onwards. Since in A. V. 1992- 93, the enhancement deed was in operation for only three months, it is being allowed for 3 months only. III. Enhancement in Plant & Machinery for the purpose modernization done by leaser. 9.Hon'ble High Court has directed vide para 17 of its order (page No. 13 of the order). In particulars, the Assessing Officer will have to ascertain ... what lease rent modernized and improved plant and machinery would had fetched in the market, as on 1.4.1992 when the revised lease commenced and the rent which such plant and machinery would have fetched in the open market prior to its modernization and improvement in the year 1989-90. The details of expenditure made by the lessor M/s Mehta Charitable Trust on the request of Lessee M/s Shanker Trading Company for the modernization and improvement towards plant and machinery are tabulated on the basis of Balance sheets of M/s Mehta Charitable Trust supplied by the
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assessee.”
Ld. CIT (A) has confirmed the action of the Assessing Officer holding that Assessing Officer has applied his mind properly in allocating the lease rent under the different heads and the working given by the assessee is not correct because the total revenue expenditure from Assessment Year 2004-05 onwards is more than the actual payment of lease charges which cannot held to be correct.
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
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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.
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,
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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 in F.Y. 1993-94 14.82 crore 2.98 crore
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%
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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
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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. Name of the FY FY 1990- FY FY 1992- FY FY Total No. Assets 1989-90 91 1991-92 93 1993-94 1995-96 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 - - - 14,88,143 - 14,88,143 Refrigeration - Plant 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
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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 ‘non- compete 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
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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. 22. 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. 23. 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. 24. In view of the finding given above, our direction to the Assessing Officer is summarized hereunder:-
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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. 26. In the result, all the appeals of the assessee are partly allowed for statistical purposes. Order pronounced in the open Court on 24th October, 2018. Sd/- Sd/- [O. P. KANT] [AMIT SHUKLA] ACCOUNTANT MEMBER JUDICIAL MEMBER
DATED: 24th October, 2018 PKK: