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TMI Blog2018 (10) TMI 1862X X X X Extracts X X X X X X X X Extracts X X X X ..... ial property, therefore, we hold that 10% of annual escalation would be reasonable from Assessment Year 1992-93 onwards. Enhancement which is attributed to improvement and modernization of plant and machinery carried out by Trust - 12% rate as taken by the Assessing Officer seems to be on a very lower side even though this could not be proper base. Since substantial investment was done by the Trust in various years, therefore, looking to quantum of investment made and escalation over the period of time the rate of 18% claimed by the assessee seems to be quite reasonable and accordingly, we direct the Assessing Officer to take rent attributable to improvement and modernization of plant and machinery, building, etc during the Assessment Yea₹ 1989-90 to 1995-96 @18%. Depreciation should be allowed on such a capital expenditure, because it is in the nature of intangible asset - We find substance in such a contention because part of the lease rent has been held to be on account of payment made to the Trust for not indulging in competition, i.e., it is in the form of non-compete fees and such a non-compete fee ostensibly falls in the category of commercial rights as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Adv. Respondent by: Ms. Ashona Neb, Sr.D.R.. ORDER PER BENCH: The aforesaid appeals have been filed by the assessee against separate impugned orders passed by Ld. CIT (Appeals)-XI, New Delhi for the quantum of assessment passed u/s.143(3) for the Assessment Years 1992-93 to 2010-11. Since common issues are involved in all the appeals arising out of identical set of facts, therefore, same were heard together and are being disposed of by way of this consolidated order. 2. The brief facts and background of the case are that the assessee is a company engaged in the business of manufacturing and sale of Kattha and Cutch. It has taken a factory on lease from Mehta Charitable Prajnalaya Trust (hereinafter referred to as Trust ) w.e.f. 01.06.1978. The Trust was also engaged in business of manufacturing of the same products. From time to time vide separate lease deed executed between the assessee company and the Trust, a lease rental were regularly increased. Earlier it was ₹ 25,000/- per month and prior to year 1989, it was enhanced to ₹ 50,000/-. Later on vide lease deed dated 01.04.1989, the monthly lease rent was increased to ₹ 1 lac and aft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpetition with the assessee in a radius of less than 1000 kms. (c) The Trust having incurred expenditure in the year 1989-90 on modernization and improvement of the plant and machinery which it had leased to the assessee. ITAs 53/2000, 251/2007, 253/2007, 257/2007, 223/2002 247/2002, 45/2005, 50/2005, 1207/2005, Yet another factor contributing to revision of lease money could be the normal appreciation in the lease rental, in line with the lease rent prevailing in the market. 4.2 The Hon'ble High Court further observed that there can be no dispute on enhancement of lease rental to the extent, it is attributable to the expenditure incurred by the Trust in the year 1998-90 on the modernization or improvement of plant and machinery which the lessee had taken on lease would be a revenue expenditure, since it would have the effect of enhancing the lease rent of the plant and machinery in the open market. However, how much of the enhancement in the lease rent is attributable to the modernization and improvement in the plant and machinery is a matter which the Assessing Officer has to decide after giving the opportunity to that of the assessee to the lease agreement in this rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arious categories and to pass a fresh assessment order in terms of apportionment made by him. 6. Before the Assessing Officer, assessee after explaining the entire facts and background of the case, gave bifurcation and basis of computation for disallowance on part of lease charges in accordance with the Hon'ble High Court order which has been incorporated and dealt by the Assessing Officer and Ld. CIT (A) in their order which for the sake of ready reference is also reproduced herein below:- Asst. year Lease charges paid (A) Part of lease rent fee for surrendering the right to purchase @ 15% on average purchase of Khair wood (B) Fixed amount of lease rent Normal escalation n fixed tease rent % 11% for 20 years plus basic lease charges (C) Rent attributable to improvement and modernization of plant and machinery during the AY 1990-91 to 1995-96 a, 18% Normal escalation on (A) @ 9.5% for 17 years plus basic rent amount (D) Sum of rent attributable to revenue nature (E) [(EMB) +(C) -(D)] Balance amount of rent attributable to capita! nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,200,000 4.659,936 1,382,514 3.160.776 10,519,954 419,596 2003-04 11,486,544 2,699,251 1,200,000 5,172,529 1.382,514 3,461,050 11.332.830 153,714 2004-05 11,486,544 2,699,251 1,200,000 5,741,507 1,382,514 3,789,850 12.230,608 (744,164) 2005-06 11,486,544 2,699.251 1,200,000 6.373.073 1,382.514 4,149,886 13,222,210 (1,735,666) 2006-07 11.486.544 2.699.251 1,200,000 7,074,111 1.382.514 4,544,125 14.317.487 (2,830.943) 2007-08 11.486.544 2.699.251 1.200.000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,251/-. The claim of the assessee seems to be on, higher side. However it seems be reasonable and acceptable to allow a fixed percentage of the lease rent After considering the request of the assessee company in this regard an allowance d 10% of the average purchases of M/s Mehta Charitable Trust for the three immediate preceding financial years ' is considered to be reasonable. 10% of 1,79,95,012/- comes out to ₹ 17.99,501/- or ₹ 17,99,500/-. Since the lease deed was executed in the month of January 1992, this allowance will be l/4th of 17,99,500/- for AY. 1992-93 which comes out to ₹ 4,49,875/-. For subsequent assessment years this allowance would be uniformly at ₹ 17,99,500/- @l 10%. II.Enhancement of lease rent in ....... line ...... prevailing in the market. 8. Hon'ble high court has directed to allow normal appreciation in the lease rent keeping in view the rentals prevailing in the market. For this purpose the assessee was asked to provide details of exiting rentals for various assessment years of the lease rental prevailing in the market. The assessee has shown its inability in furnishing such details. In this regard, request letters w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 1.4.1992 when the revised lease commenced and the rent which such plant and machinery would have fetched in the open market prior to its modernization and improvement in the year 1989-90. The details of expenditure made by the lessor M/s Mehta Charitable Trust on the request of Lessee M/s Shanker Trading Company for the modernization and improvement towards plant and machinery are tabulated on the basis of Balance sheets of M/s Mehta Charitable Trust supplied by the assessee. 8. Ld. CIT (A) has confirmed the action of the Assessing Officer holding that Assessing Officer has applied his mind properly in allocating the lease rent under the different heads and the working given by the assessee is not correct because the total revenue expenditure from Assessment Year 2004-05 onwards is more than the actual payment of lease charges which cannot held to be correct. 9. We have heard the rival submissions made by the parties, perused the relevant findings given in the impugned orders as well as material referred to before us. The main issue before us in all the appeals is, how the enhancement of lease rent given by the assessee company to the Trust is to be allocated in terms o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that Assessing Officer has applied rate of 10% of the average purchases on right to purchase of khair wood surrendered in favour of the assessee by the Trust. The Assessing Officer has not given any reason as to why allowance @10% of the average purchases should be given. On the contrary, the assessee before us has demonstrated that in the case of the Trust the gross profit rate on similar product was more than 17%. The assessee has claimed rate of 15% of the average purchases as its compensation for the purpose of allocation of enhanced rent towards capital expenditure. Such a rate of 15% is inconsonance with the average GP rate in the case of the Trust, therefore, allowance of 15% is held to be quite reasonable. Accordingly, we direct the Assessing Officer to treat part of the lease rent fee for surrendering the right to purchase @15% of average purchases of khair wood. 13. As regards enhancement of the lease rent in line of the prevailing market rate, the assessee before the Assessing Officer as well as before the ld. CIT(A) has submitted that it has taken similar lease of a processing unit from Himachal Pradesh Marketing Corporation which is an undertaking of Government of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wise more rent to the government undertaking on a similar lease of commercial property, therefore, we hold that 10% of annual escalation would be reasonable from Assessment Year 1992-93 onwards. 17. Now coming to the issue of enhancement which is attributed to improvement and modernization of plant and machinery carried out by Trust, we find that assessee has given detail of expenditure made by the lessor Trust for the modernization and improvement towards plant and machinery which has been tabulated in the following manner: SI. No. Name of the Assets FY 1989-90 FY 1990- 91 FY 1991-92 FY 1992- 93 FY 1993-94 FY 1995-96 Total 1 Building 2,34,664 3,26,545 - 4,28,176 4,58,383 30,605 14,78,373 2 Machinery 3,25,518 9,43,530 1,92,701 6,65,001 57,598 - 21,84,644 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate as taken by the Assessing Officer seems to be on a very lower side even though this could not be proper base. Since substantial investment was done by the Trust in various years, therefore, looking to quantum of investment made and escalation over the period of time the rate of 18% claimed by the assessee seems to be quite reasonable and accordingly, we direct the Assessing Officer to take rent attributable to improvement and modernization of plant and machinery, building, etc during the Assessment Years 1989-90 to 1995-96 @18%. 21. Another very important submission made by Mr. K. Sampath before was that the capital expenditure attributable to noncompete fee or amount received for not carrying out any activity in relation to business or profession comes within the ambit of certain kms. Amounts to commercial rights being intangible assets, and therefore, depreciation u/s. 32(1)(ii) which is applicable w.e.f. 01.14.1998 should be allowed @25% per annum. Apart from that, after 01.04.2003 the non compete fee or money received for not carrying out any activity in relation to any business is treated as revenue received in the hands of the person receiving the same which inter ..... X X X X Extracts X X X X X X X X Extracts X X X X
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