PADMAVATI PROPERTIES & TRUST PVT. LTD.,KOLKATA vs. ITO, WD-11(3), KOLKATA, KOLKATA

आदेश/ORDER Per Shri A.T.Varkey, JM

This is an appeal filed by the assessee against the order of Ld. CIT(A)-XII, Kolkata dated 17.01.2014 for AY 2004-05. 2. None appeared on behalf of revenue nor any adjournment application has been filed, so, we are going to decide the appeal after hearing the Ld. AR.

2 ITA No.612/Kol/2014 Padmavati Properties & Trust Pvt. Ltd.,AY 2004-05 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 @ 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.

3 ITA No.612/Kol/2014 Padmavati Properties & Trust Pvt. Ltd.,AY 2004-05 the service providers will charge their service charges separately on each and every space holders. The AO noticed that the service provider who are the absolute owner of all plant and machineries required for providing such services to the space owners. The AO noticed that the assessee company had entered into an agreement with those service providers on 26.09.2003. By virtue of this agreement the service providers will not collect any service charges from the tenants/space holders of 4th, 5th and 6th floors of Forum Mall. According to AO, the entire service value has been settled with the assessee company through a one-time settlement at a consideration Rs.1,50,37,500/-. The AO noted that in view of that one-time payment, the assessee company would be eligible to collect only the service charges from the tenants/space holders. It has been noted by the AO that the assessee company would not acquire any rights from the assets owned by the service providers which were installed by them for the purpose of providing service to the tenants/space holders. With the aforesaid facts the AO held as under: “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 person carries on some exclusive nature of

4 ITA No.612/Kol/2014 Padmavati Properties & Trust Pvt. Ltd.,AY 2004-05 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

7 ITA No.612/Kol/2014 Padmavati Properties & Trust Pvt. Ltd.,AY 2004-05 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 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

8 ITA No.612/Kol/2014 Padmavati Properties & Trust Pvt. Ltd.,AY 2004-05 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:-

9 ITA No.612/Kol/2014 Padmavati Properties & Trust Pvt. Ltd.,AY 2004-05 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 38. Further, as regards 'maintenance portfolio' purchased by the assessee/ appellant by way of 'slump-sale' arrangement, it is pertinent to note that the same constitutes the basic income earning apparatus of the Assessee and cannot be vitiated or watered down by certain residual conditionalities inasmuch as continuance of certain govt. contracts with the ECE Division etc. in the slump-sale arrangement since, the same would lapse once the contract term under respective maintenance contracts are concluded. Secondly, it would be prudent to state that these AMC's in terms of value only comes next to the value of fixed assets. 39. Thus, on the basis of above discussions, we are of the view that AMC's would not fall under any of the specified intangible assets such as know-how, patents, copyrights, trademarks, licenses and franchises listed under Section 32(1)(ii) of the Act. In this regard, the Ld. AR had argued before us that, such AMC's form the very essence of the transaction of slump-sale i.e. 'purchase of the Maintenance portfolio business' in the instant case and any transfer of such AMC's could only be effected in the form of intangible commercial rights alone and no other form. Moreover, It is unambiguously clear from various clauses under the said Agreement as well as documents available on record, the present Agreement represent a bundle of rights in the form of 'commercial rights' which eventually constitute the basic income earning apparatus of the Assessee. 40. In the said circumstances, we find force in the argument of the ld AR that since said AMC's are commercial rights and the same should rightly be categorized as 'business or commercial rights' for the purposes of Section 32(1)(ii) of the Act. Thus, by applying the principle of ejusdem generis we hold that in the facts and circumstances of this case, such AMC's should get covered within the expression "business or commercial rights of similar nature" specified under Section 32(1)(ii) of the Act and accordingly eligible for depreciation. In the result, this issue is answered in the affirmative and decided in favour of the assessee. b) Pune Tribunal in the case of Ashoka Info (P) Ltd vs ACIT reported in (2010) 35 SOT 50 (Pune)(URO) dated 31.12.2008 wherein the head notes are as under:- 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

10 ITA No.612/Kol/2014 Padmavati Properties & Trust Pvt. Ltd.,AY 2004-05 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 37,59,375/- is hereby directed to be allowed. Accordingly, the Grounds raised by the assessee in this regard are allowed. 8. The next issue to be decided in this appeal is as to whether the ld CITA was justified in upholding the disallowance of Rs 97,500/- towards professional charges in the facts and circumstances of the case. 8.1. The brief facts of this issue is that the ld AO observed that the assessee had debited Rs 6,76,196/- a professional, consultancy and service charges under the head ‘administrative, selling and other expenses’ in the profit and loss account. From the details filed before him, it was noticed by the ld AO that a sum of Rs 3,90,000/- was paid to three different lawyers and consultants. From the information gathered u/s 133(6) of the Act , the purpose of payment of these charges were not mentioned thereon. The assessee verbally replied that payments were made for consultancy on retainer basis and for observing different aspects of acquiring new assets, drafting of agreements and legal aspects of the service facility rights acquired during the year. He observed that the assessee could not segregate which amount has been paid towards retainership and which amount has been paid for observing legal aspects of service facility etc and accordingly concluded that they are incurred wholly and exclusively for the purpose of business of the assessee. He therefore held that in the absence of details, 25% of the said expenditure of Rs 3,90,000/- (i.e Rs 97,500/-) to be incurred for the purpose of acquiring fixed assets and making investments which are capital in nature and disallowed the same in the assessment. 8.2. Before the ld CITA, the assessee argued that the notices issued u/s 133(6) of the Act on the three persons were duly served and none of them had been returned unserved. Hence the identity of the payees stood clearly established. The payments to these three persons were made by account payee cheques after due deduction of tax at source. Mere fact that these three professionals did not respond to queries raised by the ld AO u/s 133(6) of the Act would not make the expenditure as incurred for non-business purposes. However, these arguments were not appreciated by the ld CITA and the disallowance made by the ld AO thereon was confirmed by the ld CITA. Aggrieved, the assessee is in appeal before us on the following ground:-

11 ITA No.612/Kol/2014 Padmavati Properties & Trust Pvt. Ltd.,AY 2004-05 “7. For that on the facts and in the circumstances of the case, the CIT(A) was unjustified in law and on facts in upholding the disallowance of Rs.97,500/- out of professional charges paid.”

8.3. We have heard the ld AR. We find that the assessee had duly given the entire details of professional and consultancy charges before the ld AO together with the names and addresses of the payees. We find that the three professionals to whom notices u/s 133(6) of the Act were issued by the ld AO stood duly served on them. The assessee cannot be made responsible in case those professionals do not respond to the notices issued u/s 133(6) of the Act and no adverse inference could be drawn against the assessee for the same. Moreover, the ld AO had not doubted the genuineness of incurrence of these expenditure. We find that the ld AO had not brought any material on record to prove that the portion of total expenditure of these three professionals i.e Rs 97,500/- constituted capital expenditure. We find that this addition had been made on an estimated basis and on mere surmises and conjectures. It is well settled that no addition could be made on surmises and conjectures. Hence we do not have any hesitation in directing the ld AO to delete this disallowance in the sum of Rs 97,500/- towards professional and consultancy charges. Accordingly, the Ground No. 7 raised by the assessee is allowed. 9. In the result, the appeal of the assessee is partly allowed. Order is pronounced in the open court on 27.07.2017 Sd/- Sd/- (M. Balaganesh) (Aby. T. Varkey) Accountant Member Judicial Member

Dated :27th July, 2017

Jd.(Sr.P.S.) Copy of the order forwarded to: Appellant – Padmavati Properties & Trust Pvt. Ltd., 234/3A, A.J.C. Bose 1. Road, FMC Fortuna, Room 4A, 3rd floor, Kolkata-700 020. Respondent – ITO, Ward-11(3), Kolkata. 2 The CIT(A), Kolkata 3. 4. CIT , Kolkata 5. DR, Kolkata Benches, Kolkata /True Copy, By order,

Sr. Pvt. Secy