2019 (8) TMI 569 - HC - Income Tax

Proportionate allowability of lease premium u/s 37 - five years lease deeds - advance payment of rent OR capital expenditure - depressed rent - HELD THAT - Special Bench of the Tribunal in JCIT VERSUS MUKUND LTD. 2007 (2) TMI 358 - ITAT MUMBAI gave its view regarding advance payment of rent to be capital expenditure on findings, inter alia, that there was termination clause, by which premature termination did not provide for refund of premium, claimed to be advanced rent, there was no clause in the agreement to show that the amount paid by the assessee as advance rent for all future years and the lump sum payment of future years rent had been paid to avail some concession for advance payment of rent or for some other business consideration. It is clear from our perusal of terms of leases between assessee and its lessors, such terms are not there between them. We are unable to appreciate that fact of rent being depressed rent can only be appreciated as such if there is recital about it in the lease rent. That substantial amount of money was paid as premium, claimed and shown by assessee to be advance rents and where rents reserved are as above, it follows there was no contention raised before the Tribunal regarding the rents reserved corresponding to market rate of rent. We have no hesitation to infer that rents reserved are depressed rents. Finding by the Tribunal that assessee s agreements are exactly similar with the agreements before Special Bench, considered and dealt with in Mukund Ltd . (supra) is perverse as based on no material or contrary to material before it. - for reasons aforesaid we answer the question in the affirmative and in favour of assessee.

Summary

Issues:
Appeal against Income Tax Appellate Tribunal order for assessment year 2008-09 - Interpretation of lease deeds - Advance rent as capital expenditure or business deduction under Section 37(1) of the Income Tax Act, 1961.

Analysis:
The petitioner appealed against the Income Tax Appellate Tribunal's order regarding the treatment of advance rent paid under lease deeds. The substantial question of law framed was whether the Tribunal erred in not following its earlier order while interpreting the lease deeds to determine if the advance payment of rent should be considered a capital expenditure or a business deduction under Section 37(1) of the Income Tax Act, 1961. The petitioner argued that the Tribunal's decision disallowing the amortization of advance rent was based on a Special Bench judgment. The Special Bench found that the premium paid for leasehold rights was non-refundable, indicating it was not advance rent. The petitioner relied on the Supreme Court judgment in CIT v. Madras Auto Service, emphasizing that expenditure leading to an enduring benefit without creating a capital asset should be treated as revenue expenditure. Additionally, a Division Bench judgment of the High Court of Karnataka was cited to support the petitioner's case.

The respondent, representing the revenue, relied on a Division Bench judgment of the Delhi High Court, distinguishing the petitioner's case from the Madras Auto Service case. The respondent highlighted that the substantial amount paid upfront for securing possession was considered a one-time consideration, and the subsequent annual rent was subject to increase. The respondent argued that the terms of the lease agreement indicated a leasehold interest was created, not advance rent. The Tribunal's finding regarding the payment as advance rent was based on the absence of specific clauses in the agreement indicating such an arrangement.

The Tribunal's decision was based on the similarity of the petitioner's agreements with those considered by the Special Bench in a previous case. The Tribunal concluded that the substantial premium paid by the petitioner was not advanced rent, especially considering the low annual rents reserved in the agreements. However, the Court found this conclusion to be unsupported by material and contrary to the evidence presented. Therefore, the Court answered the question in favor of the assessee, ruling that the advance rent should be treated as a business deduction under Section 37(1) of the Income Tax Act, 1961.