2021 (8) TMI 1328 - AT - Income Tax

Weighted deduction u/s 35(2AB) - Claim Denied on expenditure incurred for Research and Development on the ground of Non furnishing of Certificate in Form 3CL from Department of Scientific and Industrial Research (DSIR) - HELD THAT - Both the lower authorities have rejected the same for the sole reason that the then taxpayer had failed to file corresponding Form-3CL issued by the prescribed authority i.e., Department of Scientific and Industrial Research DSIR . Case file indicates that the assessee has filed its additional evidence petition dt.08-10-2020 placing on record the DSIR s approval in Form- 3CI, dt.28-11-2017 whereas the CIT(A) s order under challenge is dt.30-10-2017. We therefore deem it appropriate to restore the instant former issue back to the Assessing Officer to be examined afresh in light of the DSIR approval dt.28-11-2017 issued in assessee s case in AYs.2014-15 to 2016-17; as the case may be. Disallowance of depreciation - appellant acquired leasehold rights on land to setup a unit in SEZ - revenue contention in support of the impugned disallowance is that the assessee ought to have amortized the same u/s.35 - HELD THAT - We find no merit in the instant contention per se in view of the fact that neither there is any specific provision in the Act nor is any CBDT circular to this effect. Hon'ble apex court s recent decision in Taparia Tools Ltd. 2015 (3) TMI 853 - SUPREME COURT rather holds that the claim of revenue expenditure is not to be denied merely because the same could also be split over a period of years. Coupled with this, this tribunal s Special Bench in ACIT Vs. Progressive Constructions Ltd. 2017 (3) TMI 1167 - ITAT HYDERABAD decides the issue in assessee s favour that a right to operate any asset forms an intangible asset u/s.32(1)(ii) of the Act entitled for depreciation. Assessee in the instant case has taken land on lease to set up an SEZ and therefore, the same ought not to be taken as eligible for depreciation - We find no substance in the instant last plea as well as the assessee has claimed the impugned relief qua lease premium of Rs.5,85,30,062/- than regarding acquisition of the land along with its title. We therefore distinguish the Revenue s arguments based on case law M/s. Mahanadi Coalfields Ltd 2018 (1) TMI 326 - ITAT CUTTACK and M/s. Cyber Park Development Construction Ltd. 2018 (1) TMI 326 - ITAT CUTTACK in light of the foregoing Special Bench decision (supra). The assessee s instant second substantive ground is accepted in principle. AO shall frame his consequential computation as per law.

Summary

Issues Involved:
1. Denial of weighted deduction under Section 35(2AB) for Research and Development expenditure.
2. Treatment of premium paid towards leasehold rights of land as a non-depreciable asset.
3. Denial of depreciation on leasehold rights as an intangible asset.
4. Consideration of case laws relied upon by the assessee.

Detailed Analysis:

1. Denial of Weighted Deduction under Section 35(2AB):
The assessee claimed a weighted deduction of Rs. 1,45,67,871 under Section 35(2AB) for expenditure incurred on Research and Development. The lower authorities rejected the claim due to the non-furnishing of the Certificate in Form 3CL from the Department of Scientific and Industrial Research (DSIR). The assessee later submitted additional evidence, including DSIR’s approval in Form 3CI dated 28-11-2017, which was after the CIT(A)’s order dated 30-10-2017. The tribunal deemed it appropriate to restore this issue to the Assessing Officer for re-examination in light of the DSIR approval.

2. Treatment of Premium Paid Towards Leasehold Rights:
The CIT(A) treated the premium paid for leasehold rights as a non-depreciable asset. The assessee argued that the one-time premium paid to acquire leasehold rights should be treated as an intangible asset under Section 32(1)(ii) of the Income Tax Act, allowing for depreciation. The premium was capitalized in the books and treated as an intangible asset, as it conferred a right over the property for business activities. The CIT(A) held that the leasehold rights did not qualify as an intangible asset and were not eligible for depreciation, citing that land is a non-depreciable asset and that depreciation is available to the lessor in case of lease.

3. Denial of Depreciation on Leasehold Rights:
The CIT(A) concluded that the leasehold rights did not fall within the definition of intangible assets under Section 32(1)(ii). The tribunal, however, found merit in the assessee’s contention, referencing the Special Bench decision in ACIT Vs. Progressive Constructions Ltd., which held that a right to operate any asset forms an intangible asset entitled to depreciation under Section 32(1)(ii). The tribunal also cited the apex court’s decision in Taparia Tools Ltd. Vs. JCIT, which supported the claim of revenue expenditure without the necessity of amortization over several years.

4. Consideration of Case Laws Relied Upon by the Assessee:
The assessee relied on case laws such as Gobind Sugar Mills Ltd. and Tirumal Music Centre (P.) Ltd. to support their claim. The CIT(A) noted that these cases did not conclusively establish that expenditure on leasehold rights was capital in nature and eligible for depreciation. The tribunal distinguished the Revenue’s arguments and other case laws cited, such as M/s. Mahanadi Coalfields Ltd and M/s. Cyber Park Development & Construction Ltd., in light of the Special Bench decision favoring the assessee.

Conclusion:
The tribunal restored the issue of weighted deduction under Section 35(2AB) to the Assessing Officer for re-examination with the DSIR approval. It accepted the assessee’s claim for depreciation on leasehold rights in principle, directing the Assessing Officer to frame the consequential computation as per law. The appeal was partly allowed.