2016 (6) TMI 254 - AT - Income Tax

Cancellation of the lease and the payments of the consideration - revenue v/s capital expenditure - Held that - A perusal of the resolution passed by the Board of Directors of the assessee company in respect of authorization for cancellation of the lease, also talks as compensation and for loss of business. A perusal of the agreement entered into by the assessee shows the relinquishment of the lessees lease rights and interest in the leased premises. It is clearly a capital asset has come into existence in the hands of the assessee, which is of enduring benefit for the business of the assessee and consequently, the expenditure is liable to be treated as capital expenditure. A perusal of the assessment order shows that the Assessing Officer not only treated the same as capital expenditure also, but an expenditure out of the capital, but in the grounds of appeal, the issue of capital expenditure has been raised by the Assessing Officer. As we have held that the said expenditure is a capital expenditure, the Assessing Officer is directed to grant the assessee depreciation, on the same, as applicable. - Decided in favour of revenue

Summary

Issues: Revenue's appeal against the treatment of payment towards Compensatory Lease Cancellation as revenue expenditure instead of capital expenditure.

Analysis:
1. The Revenue contested the treatment of payment towards Compensatory Lease Cancellation as revenue expenditure by the Commissioner of Income Tax (Appeals). The issue revolved around whether the payment should be considered capital expenditure, as assessed by the Assessing Officer, or revenue expenditure, as claimed by the assessee.
2. The Revenue argued that the assessee, being the owner of the property, had no business reason to make the payment for surrendering the lease, especially when legal eviction could have been pursued. The Revenue contended that the expenditure did not result in any additional rights for the assessee, making it a payment out of capital rather than revenue.
3. The Assessing Officer highlighted the necessity for the assessee to cancel the lease due to business expansion, compelling them to take back the property for operational purposes. The assessee's business growth and the need for the property for its own use were emphasized to support the claim that the expenditure was incurred solely for business purposes.
4. The Tribunal analyzed various legal precedents cited by both parties, including decisions from the Bombay High Court, Calcutta High Court, and Kerala High Court. The Tribunal differentiated the facts of these cases from the present case and emphasized the relevance of the principles laid down by the Supreme Court regarding distinguishing between capital and revenue expenditure.
5. Applying the principles established by the Supreme Court, the Tribunal concluded that the expenditure on Compensatory Lease Cancellation should be treated as capital expenditure. The Tribunal noted that the cancellation of the lease and the associated payments resulted in the assessee gaining enduring benefits and acquiring a capital asset, justifying the classification as capital expenditure.
6. Consequently, the Tribunal allowed the appeal of the Revenue, directing the Assessing Officer to grant depreciation to the assessee on the treated capital expenditure. The judgment was delivered on May 12, 2016, at the Appellate Tribunal ITAT Panaji.

This detailed analysis encapsulates the key arguments, legal interpretations, and the final decision rendered in the case regarding the treatment of Compensatory Lease Cancellation payment as capital expenditure.