2012 (11) TMI 325 - HC - Income Tax

Amortization of lease premium - Revenue v/s capital - Held that - In the present case the lease arrangements are for a substantially long period i.e. 60-95 years. That the arrangements do not confer outright ownership rights to the lessee is besides the point as the enjoyment of the land as a lessee in such cases is substantially that of the owner itself. In other words, barring the right to alienate or outright sale of the property in unqualified manner, all rights of enjoyment in respect of leased properties are with the assessee. Furthermore, even though the stipulation in the deed one of which (dated 25.07.1995 with MHIDC) was produced during the hearing by the assessee, clause 3(m) enjoins the lessee not to transfer either directly or indirectly, sell or encumber the lease benefits to any other party, the same stipulation enables transfer with previous consent in writing of the Chief Executive Officer . Also that the conditions embodied in such lease deed are part of the general policies consciously adopted by the municipal and statutory authorities who manage and lease out such assets - no infirmity with the reasoning of the Tribunal no infirmity with the reasoning of the Tribunal - against assessee.

Summary

Issues:
1. Correctness of disallowance directed by the Income Tax authorities on account of the assessee's amortization cost of land.
2. Deductibility of premium/lumpsum amount paid in lieu of payment of annual rent for taking land on a long lease under Section 30 of the Income Tax Act, 1961.
3. Deductibility of premium/lumpsum advance lease rentals paid in consideration for the grant of lease of land as revenue expenditure under Section 37 of the Income Tax Act, 1961.

Analysis:
1. The primary issue in this case revolved around the correctness of the disallowance directed by the Income Tax authorities regarding the assessee's amortization cost of land. The assessee contended that the amortized value of lease rentals should be allowed as a deduction, arguing that the heavy premium paid constituted advance rental eligible for amortization. However, the Assessing Officer and CIT (Appeals) considered the lumpsum premium as capital expenditure, leading to the disallowance. The ITAT affirmed this decision, stating that the cost incurred for land is capital in nature unless the assessee is dealing specifically in land, thus rejecting the claim for amortization.

2. The second issue raised was regarding the deductibility of the premium/lumpsum amount paid in lieu of annual rent for taking land on a long lease under Section 30 of the Income Tax Act, 1961. The appellant argued that the nominal rent payable each year during the lease period indicated that the heavy premium paid constituted advance rental, qualifying for deduction for amortization. The appellant relied on various judgments to support this argument, emphasizing the commercial sense and nature of the advantage gained. However, the Court emphasized the need to consider the nature of the expenditure from a commercial viewpoint and whether it substitutes for revenue expenditure to determine its deductibility.

3. The final issue centered on the deductibility of premium/lumpsum advance lease rentals paid for the grant of lease of land as revenue expenditure under Section 37 of the Income Tax Act, 1961. The CIT (Appeals) rejected the assessee's claim for amortization based on the nature of the lease agreements and the heavy premium paid upfront. The Court considered various judgments, including those related to similar lease hold arrangements, to determine whether the expenditure qualified as revenue or capital in nature. The Court highlighted the duration of the lease agreements, the rights conferred upon the lessee, and the stipulations in the lease deeds to conclude that the expenditure constituted capital expenditure and not revenue expenditure, thereby upholding the decision of the ITAT and ruling against the assessee.

In conclusion, the Court dismissed the appeals, answering the questions of law against the assessee and in favor of the Revenue, based on the analysis of the nature of the expenditure, the duration of the lease agreements, and the rights conferred upon the lessee in the context of revenue and capital expenditure.