2022 (5) TMI 230 - AT - Income Tax

Claim of depreciation on units leased to assessee - assessee company has taken the units on lease for a period of 95 years from SEEPZ Authority - HELD THAT - Being a perpetual lease i.e. 95 years 95 years, the assessee is nothing less than an owner of the units allotted to it. Therefore, the consideration paid by the assessee can reasonably include not only the cost of construction of the building but also the cost of proportionate land. This conclusion is also supported by the clause of sub lease referred herein above, which specifically provides that the said 4 units were allotted to the assessee together with the proportionate land under the Tower No.II in Seepz . Nominal yearly ground rental of Re.1/- charged to the assessee is at concessional rate in order to promote export industries in India. Otherwise, property having such an area i.e. 26168 sq.ft. at SEZ location fetch a very high rent. The reliance placed by the learned A.R. on judicial precedents to support its submission that the agreement should be read as a whole rather supports the fact that the consideration paid by the assessee was not only for the cost of construction of the 4 units but the same also included cost of proportionate land. To this extent, we do not find any infirmity in the impugned order passed by the learned CIT(A). Further, for bifurcating the consideration amongst the aforesaid two components, the learned CIT(A) has placed reliance on the stamp duty rate of proportionate land during the relevant period of acquisition of the said 4 units, which also we find to be quite reasonable, as only about 35% of the consideration was treated as cost of proportionate land. In view of the above, we find no infirmity in the order passed by the learned CIT(A) granting partial depreciation to an extent of Rs. 48,17,491 as against Rs. 65,61,664 claimed by the assessee. As a result, grounds raised by the assessee in appeal for assessment year 2010 11 are dismissed.

Summary

Issues Involved:
1. Claim of depreciation on units leased to the assessee.
2. Ownership status of the units leased to the assessee.
3. Bifurcation of total consideration into land cost and cost of construction.
4. Computation of total assessable income.

Detailed Analysis:

1. Claim of Depreciation on Units Leased to the Assessee:
The primary issue in both assessment years 2010-11 and 2011-12 revolves around the claim of depreciation on units leased to the assessee. The assessee argued that it should be entitled to claim depreciation on the units leased for 95 years, as it effectively owns the units. The Commissioner of Income Tax (Appeals) [CIT(A)] allowed partial depreciation, recognizing the cost of construction but not the land component. The Tribunal upheld this partial depreciation, agreeing with the CIT(A) that the lease of 95 years, renewable for another 95 years, essentially made the assessee the owner of the units.

2. Ownership Status of the Units Leased to the Assessee:
The assessee contended that it should be considered the owner of the units because it paid all relevant taxes and had exclusive possession for 95 years. The CIT(A) and the Tribunal agreed, noting that the lease term effectively made the assessee the owner. The Tribunal highlighted that the consideration paid by the assessee included not only the cost of construction but also the cost of proportionate land, given the perpetual nature of the lease.

3. Bifurcation of Total Consideration into Land Cost and Cost of Construction:
The CIT(A) bifurcated the total consideration paid by the assessee into land cost and cost of construction, using the stamp duty rate of proportionate land during the acquisition period. The Tribunal found this approach reasonable, noting that about 35% of the consideration was treated as the cost of proportionate land. This bifurcation was crucial in determining the allowable depreciation, as depreciation was only granted on the construction cost.

4. Computation of Total Assessable Income:
For assessment year 2011-12, the assessee raised an additional issue regarding the computation of total assessable income. The Tribunal directed the Assessing Officer to compute the total income correctly, taking into consideration the correct figure as per the assessee's computation filed with the return of income.

Conclusion:
In the appeals for assessment years 2010-11 and 2011-12, the Tribunal upheld the partial allowance of depreciation on the cost of construction of the leased units, recognizing the perpetual lease as effectively granting ownership to the assessee. The bifurcation of the total consideration into land cost and construction cost was deemed reasonable. The Tribunal also directed the correct computation of total assessable income for the year 2011-12. As a result, the appeal for 2010-11 was dismissed, and the appeal for 2011-12 was partially allowed.