2004 (12) TMI 307 - AT - Income Tax

Summary

Issues Involved:
1. Classification of payment to Maharashtra Industrial Development Corporation (MIDC) as capital or revenue expenditure.
2. Classification of interest paid to Bank of Baroda as capital or revenue expenditure.

Detailed Analysis:

1. Classification of Payment to MIDC as Capital or Revenue Expenditure:

The primary issue was whether the payment of Rs. 27,00,000 made to MIDC should be treated as capital or revenue expenditure. The assessee argued that this payment was an advance rent and should be considered as revenue expenditure. The payment was made for a lease of 95 years, with an annual nominal rent of Re. 1. The Assessing Officer (AO) and the Commissioner of Income-tax (Appeals) [CIT(A)] both concluded that this payment was capital in nature. The AO relied on the precedent set by CIT v. Panbari Tea Co. Ltd [1965] 57 ITR 422 (SC), which established that substantial premiums paid for long-term lease rights are capital expenditures. The CIT(A) supported this view, citing cases like CIT v. Project Automobiles [1984] 150 ITR 266 (Bom) and Sri Krishna Tiles and Potteries Madras (P.) Ltd. v. CIT [1988] 173 ITR 311 (Mad).

The Tribunal examined the lease agreement and found no indication that the Rs. 27,00,000 was advance rent. Instead, it was a lump sum payment for acquiring a long-term lease right, which conferred an enduring benefit to the assessee. The Tribunal distinguished this case from CIT v. HMT Ltd. (No. 3) [1993] 203 ITR 820 (Kar.), where the payment was considered advance rent. The Tribunal concluded that the payment was capital expenditure, as it brought into existence an asset or an advantage for the enduring benefit of the trade.

2. Classification of Interest Paid to Bank of Baroda as Capital or Revenue Expenditure:

The second issue was whether the interest of Rs. 43,263 paid to Bank of Baroda on the borrowed amount used to pay MIDC should be treated as capital or revenue expenditure. The AO and CIT(A) both held that this interest should be capitalized, as it was incurred before the land was exploited for business purposes. The Tribunal agreed with this view, stating that the interest paid during the period when the land was not yet used for business should be capitalized.

Conclusion:

The Tribunal dismissed the appeal, upholding the decisions of the AO and CIT(A). The payment to MIDC was classified as capital expenditure, and the interest paid to Bank of Baroda was also capitalized. The Tribunal emphasized that the expenditure brought into existence an asset or an advantage for the enduring benefit of the trade, which is a key factor in distinguishing between capital and revenue expenditure.