AARCEE EXPORTS PVT. LTD,KOLKATA vs. DCIT, CIRCLE-11, KOLKATA, KOLKATA

Shri S.S.Viswanethra Ravi, JM:

This appeal by the Assessee is against the order dt. 22-02- 2017 of the CIT-A, 7, Kolkata for the A.Y 2005-06.

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depreciation on intangible asset and prayed to allow these grounds of appeal.

“5. Brief facts of the case are that the assessee is a Private Limited Company. The assessee has filed its return of income declaring total loss of Rs.49,40,699/-. The AO after scrutiny assessment u/s. 143(3) of the Act assessed loss of Rs.2,12,985/-. During course of the assessment proceedings the AO noted that the assessee has claimed depreciation of Rs.37,59,375/-. The AO noted that the assessee, as per Companies Act, 1956, claimed depreciation @ 5% of intangible assets which it acquired during the relevant financial year amounting to Rs.7,51,875/-. The AO noted that as per schedule of depreciation under the I. T. Act, 1961 the assessee claimed depreciation on the same assets @ 25% amounting to Rs.37,59,375/- . The AO carefully looked into the details filed in support of the alleged assets acquired during the year and he observed that the assessee acquired rights of various services related to infrastructure assets which are installed at Forum Mall owned by two companies viz., M/s. Multiplex Equipments & Services Pvt. Ltd. and M/s. Vidyut Electricals & Electronics Pvt. Ltd. (hereafter referred to as ‘Service Provider’). According to the assessee, the aforesaid right has been obtained for a consideration of Rs.1,50,37,500/-. The AO asked the assessee as to explain why the depreciation on the intangible asset as claimed by the assessee be allowed. In reply, the assessee stated that the company had acquired rights of various service related to infrastructural asset which are installed at Forum Mall situated at 10/3, Lala Lajpatrai Sarani, Kolkata on transferable basis for commercial gains and that it had acquired from M/s. Vidyut Electricals & Electronics Pvt. Ltd. and M/s. Multiplex Equipments & Services Pvt. Ltd. which has been shown in the books of account under the head intangible asset as a part of fixed asset and depreciation is charged thereon. It was brought to the notice of the AO that these assets are presently used by M/s. Inox Leisure Ltd. who are paying amenity, facility and utility charges of Rs.6,01,500/- per month which is the income of the company and shown in the Books of Account accordingly. According to the assessee, these rights have been acquired for commercial expediency and generating revenues for the company. It was also brought to the knowledge of the AO that the assessee taking into consideration the workable life of the equipments for 20 years, the depreciation @

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5% per annum has been charged and claimed in the books of account. It was also brought to the notice of the AO that the assessee company has claimed the depreciation as per Block-19 of the Act.

“This acquisition of Rights of other persons, i.e. getting of service from original service providers has been claimed by the assessee as its intangible assets. According1y, the assessee claimed depreciation on the intangible assets. On enquiry, it was confirmed that the original service providers are as usual, claiming depreciations on the assets required for providing services to the space holders. It will not be out of place to mention that the original service providers are providing usual services to the space holders as per original terms and condition. The only exception is that the service charges/facility charges are being collected by the assessee, since the assessee had gone into a one- time settlement with the original service providers about the rights of having services/facilities of the space holders.

In view of the above, few points emerges:-

a) The assessee company is not the original service provider to the space holders.

b) Whether one can purchase another's right of having service facility without involving the beneficiaries into the agreement?

c) The assessee company has no right to ultimately modify the rights of the space holders.

d) The assessee company is not the owner of plant & machinery installed at the premises for providing the services to the space holders.

e) The original service provider claiming depreciation on the plant & machinery required for providing services.”

And, thereafter he concludes as under:

“In this case this purchase of another person's rights for getting services against payment with original service providers, cannot be said to be a know- how, patents, copy-rights, trade marks, licenses or franchises. Most important is "any other business or commercial rights of similar nature'. By virtue of obtaining "know-how", "patents, "copyrights", ''trade-marks ", "licenses", "franchises" or "any other business or commercial rights of similar nature" a

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person carries on some exclusive nature of business activity. The intention of the legislature for providing depreciation on such intangible assets are for growth of business activity. The assessee's one time investment for periodical collection of service charges and without providing any services by it, according to terms and conditions of original service provider, cannot be said to be business or commercial rights of similar nature of know-how, patents, copy- rights, trade-marks, licenses or similar nature. In the light of above discussion no depreciation on alleged intangible assets are allowed.”

Aggrieved by the aforesaid decision of the AO, the assessee preferred an appeal before the Ld. CIT(A), who was pleased to confirm the order of the AO and dismissed the appeal of the assessee. Aggrieved by the impugned order, the assessee is before us on the following grounds: “1) For that on the facts and in the circumstances of the case, the CIT(A) erred in law and on facts in not allowing the depreciation on the "intangible" assets without appreciating the facts of the appellant's case in the proper perspective.

2) For that on the facts and in the circumstances of the case, the authorities below failed to appreciate and understand that by making lump sum payment of Rs.1,50,37,500/ - the appellant had obtained "license" or "right to receive" monthly fees and the said license being "commercial right" the same constituted intangible asset u/s 32(1)(i) of the I T Act on which depreciation was clearly allowable.

3) For that on the facts and in the circumstances of the case, the AO be directed to allow deprecation of Rs.37,59,375/- u/s 32(1)(i) of the Act.

4) For that on the facts and in the circumstances of the case, and without prejudice to the preceding grounds the appellant alternatively prays that the payment effected to Vidyut Electricals & Electronics Pvt. Ltd and Multiplex Equipments & Services Pvt. Ltd aggregating to Rs.1 ,50,37,500/ - be allowed as revenue expenditure.

5) For that on the facts and in the circumstances of the case, the appellant having made payment to the said 2 companies in connection with earning income in the form of monthly charges from INOX, the expenditure incurred or laid out wholly and necessarily for the purpose of earning such income to be allowed as revenue expenditure

6) For that on the facts and in the circumstances of the case, and without prejudice to the preceding two grounds the CIT(A) having held that the payment of Rs.l,50,37,500/- made by the assessee to the said 2 companies being "discounted present value” of the rent to be received from INOX for 25 years, the CIT(A) ought to have directed the AO to exclude from the total income the monthly rent received from INOX because the recovery of the principal amount did not have character of income.”

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The facts of the case are that the assessee is a Private Limited Company which declared loss of Rs.49,40,699/-. Thereafter, the AO completed the scrutiny assessment assessing loss of Rs.2,12,985/-. The facts as described by ld. AR is that M/s. Namrata Trading Pvt. Ltd. and Heilgers Development Construction Co. Pvt. Ltd. were the owners of the property at 10/3, Lala Lajpatrai Sarani, Kolkata. The owners along with M/s. Susnam Properties Pvt. Ltd. (hereinafter the Developer) have constructed a building on the said land which is known as Forum Mall. The said Mall has been designed to be used as retailing/entertainments. The 4th, 5th and 6th floors of the Mall were designed to be utilized as Multiplex Theatre for exhibition of films. In order to utilize the said area as multiplex theatre, it was necessary to provide supplies, infrastructure, equipments, amenities, utilities and maintenance services so that the film can be viewed by the cinegoers in the most congenial and aesthetic atmosphere. The owners and the developers had promoted M/s. Multiplex Equipments and Services Pvt. Ltd. and M/s. Vidyut Electronics & Electricals Pvt. Ltd. to provide requisite equipments, facilities, utilities and amenities at the said Forum Mall including the areas on the 4th, 5th and 6th floors of the said Mall where multiplex theatre were located. In consideration of use of facilities, equipments, utilities etc. provided by the service provider companies, the

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occupiers/sub-licencees of the said Forum Mall had obligation to pay monthly charges. The 4th, 5th and 6th floors of the Mall were leased to M/s. Inox Leisure Ltd. (hereinafter Inox). Besides paying monthly rent to the owners of the area on the 4th, 5th and 6th floors, the said Inox also entered into separate agreements with the two service providers whereunder it has to pay monthly charges to the said two service providers for use of their equipments, amenities, facilities and utilities etc. which was provided at the 4th, 5th and 6th floors. During the year under consideration, on 22.07.2003 the assessee company got into an agreement with the service providers whereunder the assessee company paid a lumpsum amount of Rs.1,50,37,500/- to two companies.

7.1. It is not in dispute that as a result of lump sum payment made to said company, the asessee had started receiving monthly payments from M/s Inox towards use of utilities , amenities etc. Hence it could be safely concluded that the assessee had acquired ‘licence to receive monthly payments’ for use and exploitation of various equipments, facilities and utilities. In our considered opinion, the same would clearly fall under the definition of ‘intangible assets’ under the ambit of ‘business or commercial rights’ within the meaning of section 32 of the Act. For the sake of convenience, the definition of intangible assets is reproduced below:-

Explanation 3 – For the purposes of this sub-section , the expression “assets” shall mean – (a) tangible assets, -------------- (b) intangible assets, being know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature.

7.2. From the facts and pursuant to the agreements entered into between the parties, it could be seen that the assessee had acquired the right to receive monthly charges in place and stead of the two companies, by paying a lump sum consideration to them. We find that the two companies were under an obligation to provide equipments, amenities, facilities and utilities to 4th, 5th & 6th floors used as Multiplex and correspondingly have the right to receive the monthly charges from INOX. The assessee by making lump sum payments to these two companies, stood replaced in place of two companies and thereby becoming entitled to receive the monthly charges from INOX. The assessee by making payment of lump sum consideration had become the owner of the license to collect monthly charges from INOX on on-going basis for a period of 25 years which clearly shows that the aforesaid license gave enduring commercial rights to the assessee. We find that the ld AO had also assessed the monthly charges under the head ‘income from business’ of the assessee, which goes to prove that the said license had been used by the assessee in the course of business of the assessee. In our considered opinion, the said license to collect monthly charges, so acquired, by paying lump sum consideration , becomes an intangible asset in the hands of the assessee company and thereby eligible for depreciation u/s 32 of the Act.

7.3. We find that the ld CITA had in page 20 of his order in the finding portion of his order in para vi) had stated that the payment of Rs 1,50,37,500/- made by the assessee is nothing but discounted present value of the rent to be received by M/s Vidyut Electricals & Electronics Pvt Ltd and Multiplex Entertainments & Services Pvt Ltd from INOX for 25 years. Having held so, then the entire payment of Rs 1,50,37,500/- takes the character of payment of rentals which would be allowable as a revenue expenditure in the year of incurrence in one go. The ld CITA did not allow the claim of revenue expenditure of the assessee by placing reliance on the decision of the Hon’ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd vs CIT reported in 225 ITR 802 (SC). In the facts before the Hon’ble Supreme Court, the assessee issued the debentures for a longer period and the actual cost of issue of debentures was equally spread over the life of debentures by the assessee, which was accepted by the Hon’ble Supreme Court. Whereas in the facts before us in the impugned case, the future rentals for 25 years have been worked out at discounted present value and the lump sum amount of Rs 1,50,37,500/- was arrived at and was paid by the assessee to the aforesaid two companies. It is not the actual rentals that are payable year on year , with or without any increase thereon, which was paid in one shot by the assessee in the facts before us. Hence we hold that the decision of Hon’ble Apex Court supra is not applicable to the facts of the instant case. However, the ld AR fairly stated that this claim though made in the grounds raised before this tribunal, would create administrative inconvenience of revising the orders of several assessment years and accordingly pleaded that the claim of depreciation be allowed u/s 32 on the said payment treating it as intangible asset, would meet the ends of justice. In our considered opinion, the payment made by the assessee for acquiring the license to receive the monthly charges from INOX clearly falls under the ambit of ‘business or commercial rights’ within the meaning of ‘intangible assets’ and thereby the assessee is indeed entitled to claim depreciation u/s 32 of the Act.

7.4. We also draw support in respect of the aforesaid findings on the following decisions:-

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a) Delhi Tribunal in the case of ThyssenKrupp Elevator (India) (P) Ltd vs ACIT reported in (2014) 50 taxmann.com 279 (Delhi-Trib.) dated 29.8.2014 The brief facts of this case is that the assessee had acquired the ‘Elevator Division’ business of ECE Industries Ltd, which comprised of marketing, selling, erection, installation, commissioning service, repair, maintenance and modernization including major repairs of products on slump basis. The assessee’s claim for depreciation in respect of Annual Maintenance Contract (AMC) for ‘Elevator division’ within the meaning of business or commercial rights of similar nature under section 32(1)(ii) was rejected by revenue authorities. HELD

Section 32 of the Income-tax Act, 1961 - Depreciation - Allowance/rate of - Assessee-company was engaged in business of development, operation and maintenance of infrastructure facilities - It entered into project of construction and development of a road which was awarded by State Government on Build, Operate and Transfer [BOT] basis with toll collection rights for a prescribed period - Assessee claimed depreciation on an asset termed as 'license to collect toll' - Revenue authorities disallowed assessee's claim - Whether right to collect toll was a commercial right in nature of intangible asset within meaning of section 32(1)(ii) and, therefore, assessee's claim for depreciation was to be allowed - Held, yes

c) Mumbai Tribunal in the case of ACIT vs West Gujarat Expressway Ltd reported in (2015) 57 taxmann.com 384 (Mumbai-Trib.) dated 15.4.2015 wherein the head notes are as under:-

II. Section 32 of the Income-tax Act, 1961 - Depreciation - Allowance/Rate of (Right to collect toll) - Assessment year 2009-10 - Whether an assessee is entitled to claim depreciation on right to collect toll in respect of a particular road being an intangible asset falling within purview of section 32(1)(ii) - Held, yes [Para 29] [In favour of assessee] 7.5. In view of the aforesaid facts and findings and respectfully following the judicial precedents relied upon hereinabove, we hold that the assessee is entitled for claiming depreciation on intangible assets for payment of lump sum consideration of Rs 1,50,37,500/- and accordingly the claim of depreciation thereon amounting to Rs

ITA No. 882/Kol/2017 9 M/s. Aarcee Exports Pvt. Ltd (merged with Padmavati Properties & Trust P.Ltd) 37,59,375/- is hereby directed to be allowed. Accordingly, the Grounds raised by the assessee in this regard are allowed.

In view of above and following the order dt. 27-07-2017 supra of the Co-ordinate Bench, ITAT, Kolkata, we set aside the impugned order of the CIT-A and accordingly, direct the AO to delete the impugned addition made on claim of depreciation on intangible asset u/s. 32(1)(ii) of the Act. Ground nos.4 & 5 of assessee’s appeal are allowed.

Order pronounced in the open court on 29-11-2017

Sd/- Sd/- P.M. Jagtap S.S. Viswanethra Ravi Accountant Member Judicial Member

Dated : 29-11-2017 PP(Sr.P.S.)

Copy of the order forwarded to: 1. Appellant/Assessee: M/s. Aarcee Exports Pvt. Ltd (merged with M/s. Padmavati Properties & Trust Pvt. Ltd) 60A, Bentinck Street, Kolkata-700 069. 2 Respondent/Revenue : The DCIT, Cir-11, Kolkata, Aaykar Bhavan, P-7 Chowringhee Square, Kolkata-700 069. 3. The CIT(A), Kolkata 4. CIT , Kolkata 5. DR, Kolkata Benches, Kolkata

/True Copy, By order

Sr.P.S, Head of Office ITAT Kolkata