2022 (12) TMI 403 - HC - Income Tax

Upfront premium amortization - land has been given on long lease/license for 30 years - Entitlement to amortize and offer 1/30th of the amount received as income every year - Whether consideration amount received in respect of an immovable property, either while conveying property or granting long license/lease shall be a capital receipt? - whether tribunal is justified in holding that the entire upfront premium constituted the income for the current year? - HELD THAT - The issue involved in Sindhurani Chaudharani 1957 (4) TMI 3 - SUPREME COURT is payment of 'Salami' and in this case it is upfront premium which non refundable. Therefore the matter requires reconsideration in the hands of the Assessing Officer referring to relevant facts and law. According to Shri.A.Shankar, if the accounting is as per AS-19 and even as per general principles of accounting, the upfront premium can be amortized on the principles of matching concept because the assessee has to provide various services. We have also noticed that Comptroller And Auditor General in his report has held that premium can be amortized. In our considered opinion, the matter requires reconsideration in the hands of the Assessing Officer. Hence, matter is remitted to the file of the Assessing Officer for fresh consideration in accordance with law after providing an opportunity of hearing to the assessee.

Summary

Issues:
1. Recognition of upfront premium as income over the period of the agreement.
2. Amortization of upfront premium received on license agreements.
3. Justification of treating entire upfront premium as income for the current year.
4. Assessment of upfront premium received for a 30-year period.

Issue 1:
The main issue is whether the assessee can recognize the upfront premium as income on a proportionate basis over the period of the agreement. The Tribunal held that the entire upfront premium received should be recognized as income in the current year, contrary to the assessee's contention of amortizing it over the agreement period. The Comptroller & Auditor General's observations on the matter were also considered.

Issue 2:
The question arises on the treatment of the upfront premium received on license agreements. The assessing officer rejected the assessee's method of recognizing 1/30th of the premium as income each year, citing that the sum was not dependent on the number of years. The CIT(A) and ITAT upheld this decision, emphasizing that the assessee had no further obligations under the agreements after receiving the premium.

Issue 3:
The issue is whether the Tribunal was justified in treating the entire upfront premium received as income for the current year. The assessee argued that the premium was a capital receipt and not taxable, as they were obligated to provide various services for 30 years. The Revenue contended that there were no clauses mandating the provision of services, making the premium income for the relevant financial year.

Issue 4:
The final issue involves the assessment of the upfront premium received for a 30-year period. The ITAT concluded that the assessee had no further obligations after receiving the premium and, therefore, the entire amount constituted income for the current year. The matter was remitted to the Assessing Officer for reconsideration, keeping all contentions open and setting aside previous orders.

In conclusion, the judgment highlighted the complexities surrounding the recognition of upfront premiums as income, emphasizing the need for a thorough reconsideration by the Assessing Officer in accordance with the law. The decision to set aside previous orders and provide both parties with an opportunity for further arguments reflects the intricacies involved in determining the taxability of such premiums and the obligations associated with them.