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2019 (7) TMI 177 - AT - Income TaxNature of expenditure - amortization of lease premium over lease period - payment of advance rent to the lessors in respect of different lands taken on lease for the purpose of business - capital or revenue expenditure - HELD THAT - In principle the AO did not dispute the assessee s contention that the amount paid by the assessee at the time of obtaining lease was in the nature of lease rent paid in advance and by making such payment the assessee had obtained right to use such land for carrying on its business. In the circumstances once the nature of payment is found to be for the purpose of carrying on business and not to acquire capital asset then such expenditure has to be considered to be in the revenue field and therefore allowable as per the method of accounting followed by the assessee. Claim for amortization of lease premium - Principle of matching concept - It is evident that in the opinion of the Hon ble Supreme Court in MADRAS INDUSTRIAL INVESTMENT CORPORATION LIMITED VERSUS CIT 1997 (4) TMI 5 - SUPREME COURT and TAPARIA TOOLS LIMITED VERSUS JCIT 2015 (3) TMI 853 - SUPREME COURT certain cases where the assessees themselves opt to spread the expenditure over a period of ensuing years then such a claim of the assessee can be allowed only if the principle of matching concept is satisfied. In the present admittedly the assessee has obtained leases from Governmental autonomous bodies such as CIDCO, KPT etc. for the purpose of carrying on assessee s business and used these lease hold lands for setting up industrial undertakings/infrastructure facilities thereon. As such the benefit of the lease is being enjoyed by the assessee over the lease period. The assessee therefore is assured of deriving revenue from the business carried from these leased premises over the tenure of lease and therefore the corresponding cost in the form of pro-rata lease premium is required to be netted off against revenues generated from the business, applying the principle of matching of cost with revenue so as to disclose true fair amount of operating profits of each year. We therefore find that since in the present case the assessee has satisfied the matching concept test assessee s claim for amortization of lease premium is allowable. Even CBDT issued the Circular on 23.04.2014 wherein expenditure of such nature was permitted to be spread over the lease period after the commencement of business - by applying the CBDT Circular No. 9/2014 dated 23.04.2014 granted the assessee s claim for amortization of lease premium over the effective life of lease. For the reasons discussed in the foregoing therefore we do not find any infirmity in the order of the Ld. CIT(A) granting amortization of lease premium in computing business income of the assessee Deduction u/s. 80IA being the profit derived from CFS undertaking - notional interest income charge on intra-unit fund transfers - HELD THAT - Assessee had both credited and debited notional interest in respect of intra-unit fund transfers and in reality no interest was either paid or received by any of parties. In any case we find that ultimately in the P L A/c of CFS undertaking there was net debit of ₹ 2,90,26,398/- on account of interest on intra-unit fund transfers. In other words the net profit of the CFS undertaking was arrived at after the net charge of interest of ₹ 2,90,26,398/-. On these facts therefore we find merit as basis adopted by the AO for making the impugned disallowance being factually incorrect, the disallowance made by the AO was unwarranted. We also note that during the relevant year the gross interest cost of the assessee was ₹ 4.18 crores whereas interest income credited in the P L A/c was ₹ 35.44 crores. We therefore find that during the relevant year the assessee company made net interest earning of ₹ 31.26 crores. Viewed from any angle therefore we find that the assessee company did not incur any interest expenditure in relation to its CFS undertaking requiring any adjustment to the profits eligible for deduction u/s 80IA. The disallowance made by the AO in granting deduction u/s 80IA is therefore deleted. - Decided in favour of assessee.
Issues Involved:
1. Whether the payment of advance rent to the lessors amounting to ?79,68,169/- should be treated as capital expenditure. 2. Whether the deduction of ?2,90,26,398/- under Section 80IA of the Income Tax Act was justified. Issue 1: Treatment of Advance Rent as Capital Expenditure The solitary issue in the Revenue's appeal was whether the Ld. CIT(A) was justified in not treating the payment of advance rent to the lessors amounting to ?79,68,169/- as capital expenditure. The assessee claimed this amount as revenue expenditure, amortized over the lease period, arguing it was an upfront payment of lease rent. The AO held it as capital expenditure, relying on the Delhi High Court's decision in GAIL India Ltd Vs Jt.CIT, and disallowed the deduction. The Ld. CIT(A) deleted the disallowance, following a previous decision of the Tribunal in the assessee's favor for AY 2003-04. During the hearing, the Ld. DR pointed out that a Special Bench in Mumbai had ruled against such amortization in Jt.CIT Vs Mukund Ltd. The Ld. AR for the assessee argued that the payment was upfront lease rent, not capital expenditure, and cited decisions from the Gujarat High Court in DCIT Vs Sun Pharmaceuticals Industries Ltd and the Tribunal in ACIT Vs Delhi International Airport Pvt Ltd, which supported their claim. The Tribunal noted that the assessee had been consistently claiming amortization of lease premium since earlier years, and no dispute arose until AY 2003-04. The Tribunal's earlier decision in favor of the assessee was influenced by the Supreme Court's observations in CIT Vs Panbari Tea Co. Ltd and CIT Vs Associated Cement Co Ltd, which treated such payments as advance rent. The Tribunal also considered the Supreme Court's judgment in Madras Industrial Investment Corporation Ltd Vs CIT, which allowed spreading expenditure over ensuing years if it provided a continuing benefit. The Tribunal found that the Special Bench's decision in Mukund Ltd was influenced by the Bombay High Court's ruling in Khimline Pumps Pvt Ltd Vs CIT, which was jurisdictionally binding. However, the Gujarat High Court's later decision in Sun Pharmaceuticals Industries Ltd held the expenditure as revenue, not capital. The Tribunal also noted similar decisions by the Karnataka High Court in CIT Vs HMT Ltd. Given these precedents and the CBDT Circular No. 9/2014, the Tribunal upheld the Ld. CIT(A)'s order, allowing the amortization of lease premium over the lease period. Issue 2: Deduction under Section 80IA The assessee's appeal concerned the disallowance of ?2,90,26,398/- from its claim for deduction under Section 80IA. The AO excluded this amount, treating it as interest income not derived from the industrial undertaking, relying on Supreme Court judgments in Sterling Foods Ltd, Pandian Chemicals Ltd, and Liberty India Ltd. The Ld. CIT(A) upheld the AO's decision. The Ld. AR argued that the amount represented net interest debited to the P&L Account of the eligible undertaking, not actual interest income. The interest entries were notional, related to intra-unit fund transfers between the CFS undertaking and the Head Office, and did not involve actual payments. The Ld. AR emphasized that the methodology was consistently followed in earlier years and accepted in assessments. The Tribunal found that the AO's disallowance was based on incorrect facts, as the net interest of ?2,90,26,398/- was a notional charge, not actual income. The Tribunal noted that similar claims were allowed in earlier assessments, and the assessee's net funds were sufficient to cover the investments without incurring actual interest expenses. The Tribunal concluded that the disallowance was unwarranted and deleted it. Conclusion The Tribunal dismissed the Revenue's appeal, upholding the Ld. CIT(A)'s order on the treatment of advance rent as revenue expenditure. The Tribunal allowed the assessee's appeal, deleting the disallowance of ?2,90,26,398/- under Section 80IA. The order was pronounced in the open court on 01.07.2019.
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