2020 (1) TMI 80 - AT - Income Tax

Disallowance on account of Lease hold rent paid - Nature of expenditure - revenue or capital expenditure - HELD THAT - The asset which was created belonged to somebody else and the company derived an enduring business advantage by expending the amount. The expenses have been looked upon as having been made for the purpose of conducting the business of the assessee more profitably or more successfully. Since the asset created by spending the amounts did not belong to the assessee but the assessee got the business advantage of using modern premises at a low rent, thus saving considerable revenue expenditure for several years, such expenditure should be looked upon as revenue expenditure. In the present assessee s case as well, the expenses have been looked upon as having been made for the purpose of conducting the business of the assessee. The onetime payment of the annual rent as per the lease deed is rightly claimed by the assessee as revenue expenditure. AO was not right in holding that the payment during the year relates to land which is capital in nature. In fact, the assessee is running the mall and hotel constructed on the lease land of Jaipur Development Authority which was given to Vishnu Apartments Private Ltd. In fact, the mall and hotel was constructed by the Vishnu Apartments Private Ltd. The CIT(A) also ignored this fact. Therefore, the order of the CIT(A) is set aside. The Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Disallowance of leasehold rent as capital expenditure.

Analysis:
The appellant, engaged in hotel operations, filed an appeal against the Commissioner of Income Tax [Appeals]'s order for Assessment Year 2012-13. The primary issue revolved around the disallowance of ?42,11,415/- as leasehold rent paid by the appellant, treated as capital expenditure. The appellant argued that the amount was paid as per agreements with Vishnu Apartments Pvt. Ltd., not as leasehold rent, thus contesting the disallowance. The Assessing Officer disallowed the amount as capital expenditure related to land, a decision upheld by the Commissioner but allowing depreciation on the capitalized value. The appellant contended that the annual lease rent payment, proportionate to the total consideration, should be deductible as revenue expenditure, citing legal precedents supporting this argument. The Departmental Representative supported the Assessing Officer's decision, emphasizing the capital nature of the payment, considering the appellant's ownership of the land and future liabilities towards the property.

The Tribunal noted that the appellant purchased a hotel on leased land from Vishnu Apartments Pvt. Ltd., with obligations to pay government taxes and cess as per the sale agreement. The Jaipur Development Authority required a cumulative payment, including annual lease rent, of which the appellant's share was ?42,11,495/-. The Tribunal found that the annual lease rent, constituting 1% to 1.25% of the total consideration payable annually, should be treated as revenue expenditure even if paid at once. Relying on legal precedents, the Tribunal determined that the expenditure brought business benefits without creating a capital asset for the appellant, thus qualifying as revenue expenditure. It emphasized that the asset created belonged to another entity, providing the appellant with a business advantage by using modern premises at a low rent. Therefore, the one-time payment of annual rent under the lease deed was correctly claimed as revenue expenditure. The Tribunal overturned the Commissioner's decision, highlighting the business purpose of the expense and the enduring business advantage derived by the appellant, ultimately allowing the appeal and setting aside the Commissioner's order.