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Income Tax Appellate Tribunal, MUMBAI BENCH “E” MUMBAI
Before: SHRI MAHAVIR SINGH & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
This is an appeal filed by the assessee. The relevant assessment year is 2008-09. The appeal is directed against the order of the Commissioner of Income Tax (Appeals)-24 [in short ‘CIT(A)’], Mumbai and arises out of the assessment completed u/s 143(3) of the Income Tax Act 1961, (the ‘Act’).
The 2nd and 3rd ground of appeal are not pressed by the assessee. Hence we proceed to deal with the 1st and 3rd ground of appeal.
M/s Shell India Markets The 1st ground of appeal
1.1 On the facts and in the circumstances of the case, the Ld. CIT(A) erred in confirming the action of the Assessing Officer of treating rent paid on leasehold land amounting to Rs.11,72,60,333 as capital expenditure on the ground that the Appellant acquired ownership of the land; 1.2 On the facts and in the circumstances of the case, the Ld. CIT(A) failed to appreciate that the agreement was only for use of land for determined period of time wherein the lease rent was to be paid on monthly basis and hence it did not constitute capital expenditure. 1.3 The Appellant, therefore, prays that the abovementioned amount paid on monthly basis be allowed as revenue expenditure.
3. Briefly stated the facts are that the appellant has claimed expenditure on rent paid for land. Such payment of lease rent on land has been claimed as revenue expenditure. The Assessing Officer (AO) observed that the appellant had taken the land for a lease of 21-99 years and the period of lease is extendable for further period. In response to a query raised by the AO, it is submitted by the appellant that they are not the owners of the assets and the lease rent is the monthly payment being made and the assessee does not have ownership right over the property and the lease is cancellable. Thus it was stated by the appellant that the expenditure is revenue in nature. However, the AO was not convinced with the above explanation of the assessee for the reason that the lease is for a minimum period of 20 years; some leases are for a period of even 99 years. Therefore, as the period of lease exceeds 12 years, the appellant is the deemed owner of the land. The AO was of the view that the appellant’s payment of rent is M/s Shell India Markets basically the payment for acquiring land and such payments are in the nature of payment of cost of land. The appellant has constructed building on such land and set up retail outlets. On such assets, the appellant is claiming depreciation. Thus the AO was of the view that the assessee is the owner of the land and the payments are in the nature of payment of cost of land in monthly instalments. With the above facts, the AO made an addition of Rs.11,72,60,333/- to the business loss shown by the appellant.
4. Aggrieved by the order of the AO the assessee filed an appeal before the Ld. CIT(A). During the course of appellate proceedings, the Ld. CIT(A) observed from the lease rentals totalling Rs.11,72,60,333/- that most of the land lease agreements are for 20 to 30 years and some of these for 70 or 99 years also. These land lease rental agreements are in respect of land located from Pune to Chennai all over South West India and monthly lease rentals range from Rs.5,00,000/- to Rs.90,00,000/-. Moreover, the stamp duty charges and brokerage charges in respect of these land lease agreements have been paid by the assessee. The Ld. CIT(A) further observed from the perusal of these agreements that the right of renewal is with the assessee indicating long term plans for continuing in business and renewal of these agreements after the expiry of the lease. As per him, even though the agreement is that of lease, in spirit and substance, the agreements are for acquisition of land to circumvent state laws in respect of acquisition of land. The Ld. CIT(A) followed the order of his predecessor in assessee’s own case for AY 2006-07 and dismissed the claim of the assessee for deduction of lease rentals totalling to Rs. 11,72,60,333/- as revenue expenses.
M/s Shell India Markets
Before us, the Ld. counsel of the assessee submits that the above issue has been decided in favour of the assessee by the Tribunal in assessee’s own case for AY 2006-07. On the other hand, the Ld. DR relies on the order passed by the Ld. CIT(A).
We have heard the rival submissions and perused the relevant material on record. The same issue arose before the ITAT ‘E’ Bench Mumbai in assessee’s own case for AY 2006-07 (ITA No. 1743/Mum/2012). The Tribunal vide order dated 13.04.2018 held: “6. Having heard both the sides, we do not find any merits in the findings of the AO, for the reason that on perusal of details filed by the assessee we find that the assessee has entered into a lease agreement with various land owners and such lease agreements are entered into for a period of 30 years to 99 years. On further verification of copies of lease agreement filed by the assessee, we find that the assessee agreed for payment of monthly lease rent. It is also evident from various clauses of the lease agreement that the assessee has only acquired lease rights in respect of land for limited period. The assessee has not made any lump sum payment, except refundable security deposit for acquiring such lease rights. The assessee is required to surrender the possession of land on expiry or termination of lease agreement. The lease agreements also provide for termination of lease by either party by giving notice in writing before expiry of term of lease agreement. It is also amply clear from the clauses of agreement that the assessee is not owner of the land but mere user of the land for certain period. Therefore, we are of the considered view that the lower authorities erred in considering monthly lease rental payment as capital expenditure paid for acquiring land. We further notice that the AO’s reliance on the decision of M/s Shell India Markets Hon’ble Madras High Court in the case of Krishna & Co (supra) is highly misplaced as the Hon’ble Madras High Court has considered the issue of lease rent payment in the light of facts of that case whereas the assessee has paid lump sum consideration for acquiring lease rights of land. In this case, the assessee has paid periodical payment on monthly basis. Therefore, we are of the considered view that the case law relied upon by the department is not applicable to the facts of the present case.
On the other hand, the Ld. AR for the assessee relied upon the decision of Hon’ble Gujarat High Court in the case of DCIT vs Sun Pharmaceuticals Industries Ltd (2010) 329 ITR 479 (Guj) wherein the Hon’ble Gujarat High Court under similar circumstances held that when assessee acquired land on lease by paying monthly lease rent, even if such lease rent has been paid in advance, the same can be allowable as revenue expenditure and could not be treated as capital expenditure. The Hon’ble Supreme Court has approved the ratio laid down by the Hon’ble Gujarat High Court by dismissing SLP filed by the revenue in SLP No.19002 of 2009 dated 04-12-2009.
In this view of the matter and also respectfully following the decision of Hon’ble Supreme Court, in the case of CIT vs Sun Pharmaceuticals Industries Ltd (supra), we are of the considered view that the lease rentals paid on leasehold land cannot be regarded as capital in nature merely for the reason that the period of lease agreement is more than 12 years. Therefore, we direct the AO to delete additions made towards lease rent paid on leasehold land.” 6.1 Facts being identical, we follow the above order of the Co-ordinate Bench and allow the 1st ground of appeal. The assessee has filed an additional ground which is without prejudice to the above 1st ground of appeal. As we have allowed the 1st M/s Shell India Markets ground of appeal
, the said additional ground of appeal becomes infructuous.
7. The 3rd ground of appeal “3.1 On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not adjudicating the ground of disallowance of salary expense amounting to Rs.2,59,57,941 paid to estate team made by the Appellant. 3.2 AO failed to appreciate that the expenses have been incurred in the running course of the business and hence even though capitalized in the book of accounts requires to be allowed while computing the income for the year. 3.3. The appellant prays that the disallowance of salary expenses amounting to Rs.2,59,57,941/- be deleted.
8. During the course of assessment proceedings, the AO noticed that an amount of Rs.26,94,373/- was claimed by the assessee being salary cost of employees engaged in supervision and project management of construction activities of retail. Similarly, salary/wages/bonus etc. incurred for set up of freehold land of Rs.2,32,63,568/- have been claimed as deduction. In response to query raised by the AO, the assessee submitted that the salary cost of employees related to normal course of business and its expansion. However, the AO was not convinced with the said explanation and held the expenditure of Rs.2,59,57,941/- as capital in nature.
9. We find that in appeal the Ld. CIT(A) forgot to adjudicate the ground of appeal relating to disallowance of salary expenses amounting to Rs.2,59,57,941/-.
10. Before us, the Ld. counsel of the assessee relies on the decision of the Hon’ble Bombay High Court in CIT v. M/s Reliance Supply Chain M/s Shell India Markets Solutions Ltd. (ITA No. 892 of 2014) and submits that the ratio laid down in the above case squarely applies to the instant case. On the other hand, the Ld. DR supports the order passed by the AO.
11. We have heard the rival submissions and perused the relevant materials on record. It is found that in the instant case the salary expenses are directly identifiable with the operations of the assessee. We further find that the assessee had incurred the salary expenses on account of expansion of business. In the case of M/s Reliance Supply Chain Solutions Ltd. (supra), the Hon’ble Bombay High Court allowed the claim of the assessee of project development expenses as revenue expenditure on the ground that it had incurred the expenditure on account of expansion of business. Facts being identical, we follow the ratio laid down in the above decision and allow the 3rd ground of appeal.