2016 (7) TMI 1001 - AT - Income Tax

Depreciation claim on leasehold property disallowed - Held that - Right of enjoyment to immovable property under a lease is immovable property within the meaning given in sec.103 of the Transfer of Property Act. Under sec.105 of the Transfer of Property Act, a lease creates a right or an interest in the enjoyment of the land property.Having referred to the above legal position, we hold that by virtue of lease only an interest in land is created which does not qualify for allowance e of depreciation. Considering the alternative claim of the assessee-company that the cost incurred on development of commercial space given to STPI should be allowed as a revenue expenditure, as mentioned above, the expenditure is incurred for acquiring interest in the land which is capital in nature. Therefore, the question of allowing it as revenue expenditure does not arise at all. Hence, this ground of appeal filed by the assesseecompany is dismissed. Disallowance made under the provisions of sec.14A - Held that - AO, taking note of the negative balance in the bank, after making investment in mutual funds, inferred that borrowed funds were utilized. However, it is settled proposition of law that where common pool of funds were utilized for making investment should be inferred that investments are out of own funds. The AO has not rendered any finding whether the claim of the assessee is incorrect. When the assessee-company had not incurred any expenditure, the question of disallowance u/s 14A does not arise as per law laid down by the Hon ble Karnataka High Court in the case of Canara Bank vs. Asst.CIT (2014 (6) TMI 929 - KARNATAKA HIGH COURT ). Therefore, this ground of appeal is remitted back to the file of the AO for fresh adjudication in accordance with law.

Summary

Issues:
1. Disallowance of depreciation on leasehold property
2. Disallowance under section 14A

Issue 1: Disallowance of Depreciation on Leasehold Property:
The appellant contested the disallowance of depreciation amounting to ?28,06,462 claimed under section 32(1)(ii) for business or commercial rights held. The appellant argued that the leasehold rights constituted intangible assets eligible for depreciation. The AO disallowed the claim, stating the rights acquired were akin to immovable property and not eligible for depreciation. The Tribunal held that leasehold rights on land do not qualify as intangible assets under section 32(1)(ii) as they are not akin to know-how, patents, copyrights, trademarks, licenses, or franchises. The Tribunal referred to legal definitions and precedents to establish that leasehold rights represent an interest in land and do not qualify for depreciation.

Issue 2: Disallowance under Section 14A:
The appellant challenged the disallowance under section 14A related to expenses incurred for earning exempt income. The AO inferred that borrowed funds were utilized for investments based on a negative bank balance post-investment. The appellant argued that no borrowed funds were used and relied on legal principles stating that investments from a common pool should be deemed as from own funds. The Tribunal noted that if no expenditure was incurred, disallowance under section 14A does not apply, citing the decision in Canara Bank vs. Asst. CIT. The Tribunal remitted this issue back to the AO for fresh adjudication in accordance with the law.

In conclusion, the Tribunal partly allowed the appeal for statistical purposes, dismissing the claim for depreciation on leasehold property and remitting the issue of disallowance under section 14A back to the AO for reconsideration. The judgment clarified the legal definitions and principles governing depreciation claims on leasehold rights and disallowances under section 14A, providing detailed reasoning and references to relevant legal precedents throughout the analysis.