ACIT, CIRCLE - 5, KOLKATA vs. M/S. SUMAN INDUSTRIES LTD., KOLKATA

आदेश /O R D E R

PER Waseem Ahmed, Accountant Member:-

This appeal by the Revenue is arising out of order of Commissioner of Income Tax (Appeals)-V, Kolkata in appeal No.CIT(A)-V/Kol/267/Cir-5/08-09 dated 05.06.2009. Assessment was framed by ACIT, Circle-5, Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 04.12.2008 for assessment year 2006-07. Revenue has raised the following grounds:- “1. That, on the facts and circumstances of the case, the ld. CIT(A) has erred in law as well as on facts in holding that erection of Police Boots is revenue expenditure whereas the assessee, in its agreement with Kolkata police, had specified that the life of such booths is more than 15

ITA No.1522/Kol/2009 A.Y. 2006-07 ACIT Cir-5, Kol. v. M/s Suman Inds. Ltd. Page 2 years whereas the assessee has capitalized in and claimed depreciation.

Shri Miraj D Shah, Ld. Authorized Representative appearing on behalf of assessee and Shri Satyendra Mohan Das, Ld. Departmental Representative appearing on behalf of Revenue.

2.1 Facts of the case are that assessee is a Private Limited Company and engaged in business of hoarding rentals by which it earns revenue from the advertisement of space atop booths. These booths are available to the assessee as a result of contract awarded by Kolkata Police for erection and maintenance of police booths. The role of assessee is to erect the police and to maintain it for 15 years as per the agreement with Kolkata Police. After the expiry of the agreement these booths shall be handed over to Kolkata Police. These police booths are maintained and operated under the scheme of BOT (Build Operate Transfer for short) by the assessee. During the year under consideration, assessee claimed depreciation @ 100% of cost incurred on the

ITA No.1522/Kol/2009 A.Y. 2006-07 ACIT Cir-5, Kol. v. M/s Suman Inds. Ltd. Page 3 erection of police booths. On question by Assessing Officer about depreciation of 100%, assessee submitted as under:- a) The police booths erected structures are purely temporary made and being made of wooden depreciation @ 100% is allowable. The temporary structure booths are not made of building materials and it is movable from one place to other, b) No new asset is being created for the expenditure on the erection of police booths. c) The non-operational police booths are under the lock & key with the Kolkata Police (KP for short), so it clearly shows that the ownership of police booths is not with assessee. d) As per agreement in clause-c, Kolkata Police it can be terminated without warning any notice from either side. So assessee cannot take the view that allowed/obtained was enduring in nature, e) There is no provision under the Act for amortization or for deferment of expense to spread over a given period of time except for case and circumstances referred to u/s. 35D and Sec. 35D, f) The assessee also submitted a letter from Commissioner of Kolkata Police clarifying that said (erected structure) exclusively belongs to KP i.e. ownership is not with the assessee.

However, AO disregarded the claim of assessee by observing as under:- 1) Letter of KP is meaningless in the code of law as agreement written on the stamp paper shall be accepted. 2) There is ownership with the assessee of the said temporary police booths as per agreement made with KP. 3) Assessee itself is agreeing that the live span of said temporary police booths for 2 years so @ 100% depreciation cannot be allowed. 4) As per IT. Rules 1962, depreciation of such structure is allowed @ 10% only. So the depreciation claimed @ 100% by assessee is disallowed.

ITA No.1522/Kol/2009 A.Y. 2006-07 ACIT Cir-5, Kol. v. M/s Suman Inds. Ltd. Page 4 3. Aggrieved, assessee preferred an appeal before Ld. CIT(A) who has deleted the addition made by Assessing Officer by observing as under:- “5. I have considered the submission of the A/R, perused the impugned order, computation of income, audited accounts, agreement dated 7th April 2005 and the letter dated 6/12/2008. I have also gone through the judicial decisions on which reliance was placed. I find that the land on which the booths were erected belonged to Kolkata Municipal Corporation & this fact is not in dispute. The letter issued by the Addl. Commissioner of Kolkata Police dated 16/12/2008 shows that the police booths was the property of Kolkata Police which the appellant was obliged to maintain in exchange of availing exclusive right to place advertisement on the said booths. The possession of the booths always remained with Kolkata Police who had fully right to occupy; use & enjoy the police booths at all times. From the fact on record I note that the assessee was in the business of advertising & for this purpose it required public spaces to display advertisements. Erection of police booths only facilitated the assessee to carry on its business of advertising because under the agreement it had obtained right to use the sponsor’s area for displaying advertisement. The AO lost sight of the fact that the letter dated 16/12/2008 was issued by an Addl. Commissioner of Kolkata Police who is a senior officer of the Police Department. When a senior officer of the State Government issues an Office Memo the same commands evidentiary value because such communication is issued in terms of statutory powers vested in his office. I have therefore, no hesitation in holding that the contents of the letter dated 16/12/2008 issued on behalf of Kolkata Police clarified the factual position regarding ownership of the booths being vested in Kolkata Police.

ITA No.1522/Kol/2009 A.Y. 2006-07 ACIT Cir-5, Kol. v. M/s Suman Inds. Ltd. Page 5 held that the assessee did not acquire any capital asset by spending money on the construction of building & accordingly the expenditure was held to be revenue in nature.

‘There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, my, nonetheless, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. Even the test itself restricts the application of the test to the special cases as it uses the wording ‘in the absence of special circumstances “leading to an opposite conclusion.’

ITA No.1522/Kol/2009 A.Y. 2006-07 ACIT Cir-5, Kol. v. M/s Suman Inds. Ltd. Page 6 brining an asset or advantage of enduring nature into existence. If, for instance, the expenditure is incurred for the acquisition of property or rights of an enduring character, the possessions of which is a condition for carrying on of the trade, the outlay will be held to be an expenditure of capital nature. The main test appears to be its permanency, i.e., whether the capital of the company or its assets or its goodwill is permanently increase by reason of such expenditure and it was a tangible asset for the enduring benefit of the trade. Where the predominant and main purpose of incurring the expenditure was carrying on of the business, the incidental advantage of that expenditure, in that the property was secured more and thereby the assessee gained advantage which was of some endurance, could not affect its revenue character.

‘The true test of an expenditure laid out wholly and exclusively for the purposes of trade or business is that it is incurred by the assessee as incidental to his trade for the purposes of keeping the trade going and of making it pay and not in any capacity other than that of a trader. The question whether a particular expenditure is a revenue expenditure incurred for the purposes of the business must be determined on a consideration of all the facts and circumstances and by the application of the principle of commercial trading. The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on, or conduct of, the business that it may be regarded as an integral part of the profit- earning process and not for acquisition of an asset or a right of a permanent character the possession of which is a condition for the carrying on of the business, the expenditure should be regarded as a revenue expenditure incurred wholly and exclusively for the purposes of the business.’

ITA No.1522/Kol/2009 A.Y. 2006-07 ACIT Cir-5, Kol. v. M/s Suman Inds. Ltd. Page 7 obtained only license to display advertisements and derived revenue therefrom. From perusal of the agreement it appeared that the assessee has been described as Licensee because under the Agreement the appellant was provided only limited right or license to use designated areas of the booths for advertising purposes whereas ownership of the booths remained with Kolkata police. The erection of temporary structures in the form of Police Booths was therefore incidental to carrying on appellant’s advertising business & thus it was only a tool of trade which enabled the appellant to carry on its business more effectively. Erection of Police Booths only facilitated the assessee to carry on its existing business. The Agreement and the Letter issued by Addl. Commissioner of Kolkata Police fairly indicated that the appellant only enjoyed license to display advertisements on the designated spaces of the Police Booths but right to on, use and enjoyed these structures always vested in Kolkata police alone. The land on which the Booths were erected belonged to Kolkata Municipal Corporation at all times and structures standing thereon remained the property of Kolkata Police. The Agreement between the assessee and Kolkata Police did not envisage possession of the Booths being taken by the assessee & the Police Booths were to remain the property of Kolkata Police who alone had right to occupy and use the said booths. Save and except limited right or license to exhibit advertisements in designated areas; appellant did not acquire ownership rights in the booths itself and therefore expenditure incurred by the appellant for obtaining limited license to display advertisements; did not result in acquisition of depreciable asset by the appellant. For obtaining License to display advertisements appellant was required to pay fees or charges and if instead of paying such fees periodically; the appellant incurred expenditure on erection of police booths; such expenditure continued to retain same character in the hands of the payer. Irrespective of the period for which assessee displayed advertisements, the assessee’s contractual obligation to incur initial expenditure on erection of booths & thereafter maintain it during contract period remained unchanged & therefore merely because in the initial year assessee expended large sums on erection of Booths did not change the character of expenditure from revenue expenditure to capital. In my considered opinion therefore the entire expenditure incurred on erection of Police Booths was revenue in nature and accordingly the AO is directed to allow the deduction for Rs.1,02,19,884/- being the expenditure incurred on erection of Police Booths. Since I have allowed the deduction for the expenditure incurred on erection of police Booths as revenue deduction; the AO is directed to withdraw the depreciation of Rs.10,21,988/ which AO allowed in the assessment.”

Being aggrieved by this order of Ld. CIT(A) Revenue is in appeal before us.

ITA No.1522/Kol/2009 A.Y. 2006-07 ACIT Cir-5, Kol. v. M/s Suman Inds. Ltd. Page 8 4. We have heard rival parties and perused the materials available on record. Before us Ld. DR submitted various case laws and relied on the order of Assessing Officer, whereas Ld. AR supported the order of Ld. CIT(A) and submitted paper books which is running pages 1 to 64.

4.1 Before us Ld. DR submitted that in terms of agreement of 15 years between the KP and assessee booths are the property of assessee. Therefore, only depreciation should be allowed instead of cost incurred on erection of police booths. On the contrary, Ld. AR submitted that assessee is not the owner of police booths and there is no creation of new assets and requested the Bench that entire amount of expenditure should be allowed as revenue expenditure.

4.2 From the aforesaid discussion, we understand that assessee has incurred expenditure on erection of police booths which is made of wood and treated as revenue expenditure but at the assessment proceeding AO treated it as capital expenditure and allowed depreciation @ 10% only. Though in appellate proceedings Ld. CIT(A) treated it same as revenue expenditure on the ground that no fixed assets was created and assessee was not the owner of the police booths as per lease between assessee and KP. The ld. AR also cited various case laws as given below:

i) CIT v. Associated Cement Companies Ltd. (1998) 38 taxman 110A (SC), where Section 10(2)(xv) of the Indian Income-tax Act, 1922 [corresponding to section 37(1) of the Income-tax Act, 1961] – capital or revenue expenditure – Under an agreement, assessee-company incurred expenditure on laying of water pipelines in a particular town and handed over possession and ownership of those pipelines to Municipality – In consideration, Government had exempted assessee from municipal taxes for 15 years – Whether impugned expenditure

ITA No.1522/Kol/2009 A.Y. 2006-07 ACIT Cir-5, Kol. v. M/s Suman Inds. Ltd. Page 9 was revenue in nature and, was thus, allowable as deduction Held, yes ii) CIT v. Madras Auto Service (P) Ltd. (1998) 99 taxman 575 (SC), where the head note – Section 37(1) of the Income-tax Act, 1961 – Business expenditure – Allowability of –[ Assessment year 1968-69 – Assessee obtained premises on lease for 39 years – In terms of lease agreement, assessee demolished existing construction and constructed new building to suit its business at its own expenses – In any circumstances assessee would not be entitled for any compensation on account of putting up new construction and it should be treated as tenant subject to payment of rent lower than rent prevailing – Assessee claimed said construction expenditure as revenue expenditure – Assessing Officer rejected its claim and treated said expenditure as capital expenditure – Whether since asset created by assessee by spending amounts did not belong to assessee but assessee got only business advantage of using modern premises at a low rent, thus, saving considerable revenue expenditure for next 39 years, said expenditure should be treated as revenue expenditure – Held, yes iii) CIT v. Birla Jute Mfg. Co. Ltd. (1990) 51 taxmann 402 (CAL), where Section 37(1) of the Income-tax Act 1961 –Business expenditure – allowability of – Assessment year 1972-73 – For facilitating supply of electricity to it – Under an agreement assessee made payment to West Bengal State Electricity Board for laying service lines agreement provided that service lines may be used by other persons also and that lines would, never become property of assessee – Whether payment made by assessee was allowable as a revenue expenditure – Held, yes

From the above discussion and various case laws cited by Ld. AR, we find that neither any new asset has come into existence nor the assessee has the

ITA No.1522/Kol/2009 A.Y. 2006-07 ACIT Cir-5, Kol. v. M/s Suman Inds. Ltd. Page 10 ownership of the police booths so it should be treated as revenue expenditure. We are also putting our reliance on the decision of Hon'ble Supreme Court in the case of Madras Auto Services (P) Ltd. (supra). Therefore we have no hesitation to uphold the order of the Ld. CIT(A) and this ground of Revenue’s appeal is dismissed.