2018 (4) TMI 267 - HC - Income Tax

Expenditure towards the rental expenses - Revision u/s 263 - Tribunal treating lease rentals as capital expenditure - appellant has entered into a lease deed on Lease, Rehabilitate, Operate and Transfer basis (LROT) for a period of 30 years - Held that - 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. 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.

Summary

Issues:
1. Validity of the order passed under Section 143 (3) read with Section 263.
2. Treatment of lease rentals as capital expenditure.

Analysis:
1. The case involved an appeal against the order of the Income Tax Appellate Tribunal regarding the disallowance of lease rent paid by a public limited company engaged in sugar manufacturing and trading. The Revisional Authority disallowed a portion of the lease rent as capital expenditure, which was challenged by the appellant. The Commissioner of Income Tax appeals accepted that the lease rentals were revenue in nature, but the ITAT upheld the addition made by the Revisional Authority, leading to the current appeal under Section 260-A of the Income Tax Act.

2. The appellant argued that the Tribunal failed to consider crucial aspects of the case, such as the nature of the lease agreement and the requirement to expand the sugar factory's crushing capacity. The appellant contended that the lease rental expenditure was revenue in nature as the assets created under the lease agreement would be handed over to the lessee in working condition. The Tribunal's misunderstanding of the lease terms and the misconception regarding the useful life of the sugar mill were highlighted as grounds for re-consideration.

3. The Revenue initially defended the capital nature of the lease rental expenditure but later acknowledged the need for the Tribunal to review the case based on the factual material presented by the appellant. The High Court observed that the Tribunal failed to grasp the factual matrix of the case, emphasizing the terms and conditions of the lease deed and the requirement for the lessee to invest in modernizing and expanding the factory.

4. Consequently, the High Court set aside the impugned order and remanded the matter to the Tribunal for fresh consideration. The Tribunal was directed to reevaluate the lease deed's terms and conditions and make a decision in accordance with the law. The Court refrained from expressing an opinion on the substantial questions of law raised by the appellant, leaving all rights and contentions of the parties open for further proceedings. The appeal was disposed of accordingly.