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IN THE HIGH COURT OF KARNATAKA DHARWAD BENCH DATED THIS THE 12TH DAY OF FEBRUARY, 2018
PRESENT
THE HON’BLE MRS. JUSTICE S. SUJATHA
AND
THE HON’BLE MR. JUSTICE JOHN MICHAEL CUNHA
I.T.A.No.100003/2018 BETWEEN: M/S SHREE RENUKA SUGARS LIMITED 105, HAVELOCK ROAD, CAMP, BELAGAVI-590001. (REPRESENTED BY ITS MANAGING DIRECTOR, SRI.NARENDRA MADHUSUDAN MURKUMBI, AGED ABOUT 47 YEARS, S/O SRI.MADHUSUDAN MURKUMBI) PAN NO: AADCS 1728 B.
… APPELLANT
(BY SRI.CHYTHANYA K.K., ADV.)
A N D :
THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 2(1), 3RD FLOOR, FK COMMERCIAL COMPLEX, OPP. CIVIL HOSPITAL, BELAGAVI-590001.
…RESPONDENT
(BY SRI.Y.V.RAVIRAJ. ADV.)
THIS APPEAL IS FILED U/SEC.260A OF THE INCOME-TAX ACT, 1961, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTION OF LAW AS STATED ABOVE AND ALLOW THE APPEAL AND SET ASIDE THE IMPUGNED ORDER OF THE INCOME-TAX APPELLATE TRIBUNAL, 'PANJI' BENCH IN ITA NO.
: 2 : 187/PANJI/2016, DATED 14.07.2017 FOR THE ASSESSMENT YEAR 2010-11 AND ETC.,
THIS APPEAL COMING ON FOR ADMISSION, THIS DAY, S.SUJATHA J., DELIVERED THE FOLLOWING:
JUDGMENT This appeal is directed against the order of the Income Tax Appellate Tribunal, Panaji Bench, Panaji, (for short ‘ITAT’), in ITA No.187/Panji/2016 dated 14.07.2017 relating to the assessment year 2010-11.
The appellant is a public limited company engaged in the business of manufacturing and trading in sugar, generation of power and distillery. It is contended that the appellant-Company has mills in Munoli, Athani, Havalga, Pathri, Gokak and raw sugar refineries in Haldia and Kandla and has taken sugar factories at Panchaganga in Ichalkaranji, Ajinkyatara in Satara and Raibag Sahakari Sakkare Karkhane on lease basis.
It transpires that the appellant entered into a lease agreement with Raibag Sahakari Sakkare Karkhane through Government of Karnataka on
: 3 : 16.10.2008 for a period of 30 years beginning from crushing season October 2008 to September 2038 for gross lease rental of Rs.126 crores. The case of the appellant was selected for scrutiny under CASS and notice under Section 143 (2) was issued on 25.08.2011 by the competent officer. On considering the objections submitted by the appellant, assessment orders were concluded. Thereafter, revisional proceedings were initiated under Section 263 of the Income Tax Act, 1961 (for short ‘the Act’). After examination of the details, the Revisional Authority opined that lease rentals paid for the initial two years as capital expenditure, the impugned assessment year being the second year of the operation of the lease, the respondent disallowed the lease rent of Rs.24,80,00,000/-. Against the order of the Revisional Authority, appeal was preferred before the Tribunal by the assessee challenging the order passed under Section 263 of the Act. The order of the Revisional Authority was set aside by the Tribunal and was remanded to the Assessing Officer. In the
: 4 : assessment proceedings, pursuant to the order under Section 263 of the Act, the Assessing Officer disallowed the sum of Rs.24,80,00,000/-. Being aggrieved by the aforesaid assessment order, the appellant filed an appeal before the Commissioner of Income Tax appeals, who accepted the contentions of the appellant that lease rentals are revenue in nature. Aggrieved by the same, the Revenue preferred appeal before the ITAT, Panaji bench. The Tribunal upholding the additions made by the respondent, passed the impugned order. Hence, this appeal under Section 260-A of the Act, by the assessee raising the following substantial questions of law: i) Whether, in the facts and circumstances of the case, is not the order of the Respondent passed under Section 143 (3) read with Section 263 invalid? ii) Whether, in the facts and circumstances of the case, the Tribunal is right in law in treating lease rentals as capital expenditure?
: 5 : 4. Learned counsel Shri Chythanya K.K., appearing for the appellant would submit that the factual aspects of the case was not properly appreciated by the Tribunal. In para 8 of the order of the Tribunal, it has been held that the appellant has entered into sale deed on 16.10.2008 with Raibag Sahakari Sakkare Karkhane for Rs.126 crores whereas the appellant has entered into a lease deed on Lease, Rehabilitate, Operate and Transfer basis (LROT) for a period of 30 years. The terms and conditions of the lease deed stipulates that the sugar factory presently having an installed capacity of 2500 TCD has to be expanded with the crushing capacity from 2500 TCD to 5000 TCD within a period of 5 years from the date of the agreement. All the equipments, industrial machinery and other assets created/acquired or added under LROT Scheme shall be handed over to the lessee in the working condition which demonstrates that the expenditure incurred on the lease rental is revenue in nature. However, these aspects were not considered by the Tribunal while
: 6 : arriving at a decision as to whether these expenditures are revenue or capital in nature. The Tribunal misconceived the submissions made by the learned counsel for the assessee while recording that life of a sugar mill is only to the extent of the lease i.e., 30 years meaning thereby that at the end of the lease hold, the useful life of the sugar factory would be over and it may not be usable for the purpose for which it is erected for. This being contrary to the factual material available on record, the issue involves re-consideration by the Tribunal.
Learned counsel appearing for the Revenue though at the outset justifying the impugned order contended that the expenditure towards the rental expenses incurred by the assessee is capital wherein, appellant is enduring benefit for long 30 years but on the factual aspects now pointed out by the learned counsel for the assessee submitted that there is no impediment for the Tribunal to consider the matter
: 7 : afresh in the light of the factual material placed on record by the assessee.
In view of the aforesaid submissions made by the learned counsel for the respective parties and perusing the material on record, we are of the considered opinion that the Tribunal failed to appreciate the factual matrix of the case in a right perspective. Indeed, it is not in dispute that the appellant has entered into a lease deed with Raibag Sahakari Sakkare Karkhane on LROT basis for a period of 30 years. It is also pointed out by the learned counsel for the assessee that the lessor has no power to alienate the property during the lease period. The machinery and other equipments installed during the modernization or expansion of the sugar factory has to be handed over to the lessee in the working conditions. The Tribunal while arriving at a decision has failed to appreciate the terms and conditions of the lease deed. On the other hand, proceeded to consider the same as a sale deed which prima facie appears to be a wrong approach. In addition to this, learned counsel
: 8 : has also relied upon the judgment of this Court in the case of Sri Ramu Solanke and others Vs. State of Karnataka reported in ILR 2008 KAR 606 where the lessee was required to invest in the factory and increase the crushing capacity as well as establish co-generation as well as the distillery and ethanol unit. After the lease period is over, the entire assets including those that have been set up at the cost of the lessee would revert back to the society.
Considering these aspects, this Court finds it appropriate to set aside the impugned order and remand the matter to the Tribunal for fresh consideration. Hence, without expressing any opinion on the substantial questions of law raised by the assessee, impugned order is set aside. The matter is remanded to the Tribunal for fresh consideration. The Tribunal shall consider the terms and conditions of the lease deed dated 16.10.2008 executed between the appellant with Raibag Sahakari Sakkare Karkhane and pass appropriate orders in accordance with law in an
: 9 : expedite manner. All rights and contentions of the parties are left open. Appeal stands disposed of in terms of the above.
(Sd/-) JUDGE (Sd/-) JUDGE
Jm/-