2014 (4) TMI 486 - HC - Income Tax

Nature of expenses Revenue or capital Lease rents paid - Whether the Tribunal was right in holding that a lump sum paid by the assessee being lease rentals paid to Maharashtra Industrial Development Corporation is a revenue expenditure Held that - The transfer in favour of the assessee was absolute i.e., all rights, title and interest, which were derived by IFML were absolutely transferred in favour of the assessee the decision in Palshikar (HUF) vs. CIT (S.C) 1988 (5) TMI 3 - SUPREME Court followed - the lease for a long period namely 99 years, and the assessee has parted with an asset of an enduring nature, namely, the rights to possession and enjoyment of the properties leased for a period of 99 years subject to certain conditions on which the respective lease could be terminated - the grant of leases amounts to a transfer of capital assets as contemplated u/s 12B of the Income Tax Act, 1922 - thus, the nature of transaction amounts to a transfer of a capital assets. The assignment deed is of much leasehold interest, such assignment must be approved by MIDC and on approval, assessee had admittedly paid a further sum to the Corporation - it is difficult to draw inference of the agreement only to be treated as a sub-lease and not an assignment - the assignment deed itself does not say anything about the reversion of the property back to the hands of the assigner namely, IFML - On the other hand, the rights of the assignor on approval of the assignment comes to an end in toto - mere use of the word lease or the fact that a long term is fixed would not by itself make the document in lease - there was no real distinction between mischief of such a transfer in perpetuity and a transfer for the long period of 96 years - a permanent lease is as much an alienation as a sale - the lump sum amount paid does not make a permanent lease any the less an alienation than a sale thus, the order of the Tribunal is set aside Decided in favour of Revenue.

Issues Involved:

1. Whether the lump sum payment of Rs.20,00,000/- by the assessee for lease rentals to Maharashtra Industrial Development Corporation constitutes a revenue expenditure or a capital expenditure.

Issue-Wise Detailed Analysis:

1. Nature of Lump Sum Payment:
The primary issue is whether the lump sum payment of Rs.20,00,000/- made by the assessee to Maharashtra Industrial Development Corporation (MIDC) for lease rentals should be classified as a revenue expenditure or a capital expenditure. The assessee, a company manufacturing automotive ancillary products, took a land on lease from MIDC and paid Rs.20,00,000/- as lease rental in a lump sum. The assessee claimed this amount as a revenue expenditure. However, the Assessing Officer (AO) rejected this claim, holding that the payment was for acquiring the land for 80 years, thus providing an enduring advantage, and classified it as a capital expenditure. The AO also noted an additional payment of Rs.5.04 lakhs towards the enhancement cost of the land.

2. Appeal to Commissioner of Income Tax (Appeal):
The assessee appealed to the Commissioner of Income Tax (Appeal), arguing that the payment was a discounted value of future lease payments and should be allowed as a deduction. The Commissioner upheld the AO's decision, stating that the transfer was effectively in perpetuity, making the expenditure capital in nature. The assessee then appealed to the Income Tax Appellate Tribunal (Tribunal).

3. Tribunal's Decision:
The Tribunal, referencing CIT vs. Madras Auto Services (233 ITR 468) and CIT vs. Gemini Arts Pvt. Ltd. (254 ITR 201), held that the expenditure should be viewed from a commercial perspective. It concluded that a lump sum payment for the entire lease duration does not change its character as a revenue expenditure and allowed the assessee's appeal. The Revenue then appealed this decision.

4. Revenue's Argument:
The Revenue argued that the lump sum payment, whether made at once or in installments, is a capital expenditure. They cited A.R. Krishnamurthy vs. CIT (176 ITR 470) and R.K. Palshikar (HUF) vs. CIT (1988, 172 ITR 311), stating that the leasehold land is a capital asset, and the payment for acquiring such rights is capital expenditure.

5. Assessee's Argument:
The assessee contended that the payment was for lease rental and should be treated as revenue expenditure. They supported their argument with the Tribunal's references and additional reliance on CIT vs. Ucal Fuel Systems Ltd. (2008, 296 ITR 702).

6. Court's Analysis:
The court examined the assignment deed dated 29.10.1993, noting that IFML (Indian Filter Manufacturers Pvt. Ltd.) transferred all rights, title, and interest in the leased property to the assessee. The lease period was from 31.03.1997 to 31.03.2077, indicating a lease in perpetuity. The court observed that the payment of Rs.20,00,000/- was for the absolute transfer of rights, making the transaction a capital expenditure. Additionally, the court noted that the assignment deed did not include termination clauses or contingencies for reversion of the property to IFML.

7. Distinguishing Previous Cases:
The court distinguished the current case from Madras Auto Services and Gemini Arts Pvt. Ltd., noting that those cases involved different facts. In Madras Auto Services, the expenditure was for constructing a building that belonged to the lessor, not the lessee, and was considered a business advantage. In Gemini Arts Pvt. Ltd., the lease was for 20 years with a lump sum payment, whereas the current case involved a transfer in perpetuity.

8. Supreme Court Precedents:
The court referenced the Supreme Court's decision in Assam Bengal Cement Co. Ltd. vs. CIT (27 ITR 34) to outline the tests for distinguishing between capital and revenue expenditure. It also cited Palshikar (HUF) vs. CIT, where a 99-year lease was considered a transfer of a capital asset, and A.R. Krishnamurthy vs. CIT, which supported the AO's classification of the expenditure as capital.

Conclusion:
The court concluded that the lump sum payment of Rs.20,00,000/- for the lease was a capital expenditure, not a revenue expenditure. The appeal filed by the Revenue was allowed, and the Tribunal's order was set aside. The court emphasized that the nature of the transaction, being a transfer of rights in perpetuity, justified the classification as a capital expenditure.

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