Income Tax Appellate Tribunal - Mumbai
Mumbai International Airport Pvt. ... vs Department Of Income Tax on 4 February, 2014
आयकर अपील य अ धकरण, मबुं ई यायपीठ "बी" मब
ुं ई
IN THE INCOME TAX APPELLATE TRIBUNAL "B" BENCH, MUMBAI
BEFORE S/SHRI B.R.MITTAL,(JM) AND RAJENDRA (AM)
सव ी बी.आर. म तल, या यक सद य एवं राजे , लेखा सद य के सम
आयकर अपील सं./I.T.A. No.7507/Mum/2011
( नधारण वष / Assessment Year : 2007-08)
Dy. Commissioner of बनाम/ M/s Mumbai International Airport
Income Tax, Vs. Pvt.Ltd.,
8(2) 3rd Floor, Corporate Centre,
Room No.216-A, Opp: Hotel Lotus Suits,
Aaykar Bhavan, Marol Pipeline, Andheri Kurla Road,
M.K.Road, Golden Beach Ruiya Park, Juhu,
Mumbai-400020. Mumbai-400049.
(अपीलाथ /Appellant) .. ( यथ / Respondent)
आयकर अपील सं./I.T.A. No.7111/Mum/2011
( नधारण वष / Assessment Year : 2007-08)
M/s Mumbai International बनाम/ Addl. Commissioner of
Airport Pvt.Ltd., Vs. Income Tax, Range 8(2),
3rd Floor, Corporate Centre, 771, C-10, 7th Floor,
Opp: Hotel Lotus Suits, Pratyakshakar Bhavan,
Marol Pipeline, Andheri Kurla Bandra-Kurla Complex,
Road, Bandra (E),
Golden Beach Ruiya Park, Juhu, Mumbai-400051.
Mumbai-400049.
(अपीलाथ /Appellant) .. ( यथ / Respondent)
थायी लेखा सं./जीआइआर सं./PAN/GIR No. : AAECM6285C
अपीलाथ ओर से / Revenue by : Shri Preetam Singh
यथ क ओर से/Assessee by : Shri Vijay Mehta
सन
ु वाई क तार ख / Date of Hearing : 4.2.2014
घोषणा क तार ख /Date of Pronouncement : 14.2.2014
आदे श / O R D E R
Per B.R.Mittal, JM:
These cross-appeals are filed by department and assessee against the order of ld. CIT(A) dated 10.08.2011 for assessment year 2007-08.
2I.T.A. No.7507/Mum/2011 I.T.A. No.7111/Mum/2011
2. Relevant facts are that the assessee-company was incorporated on 27.2.2006. It is a joint venture company in which the Air Port Authority of India (hereinafter to be referred to as "AAI") holds 26% stake. The main objects of the assessee company are as under :
" a) To takeover the existing Chhatrapati Shivaji International Airport (Domestic, International and Cargo Terminal)
b) To Operate, Maintain, Develop, Design, Construct, Develop, Modernize and Maintain the Airport.
c) To renovate, expand, and manage all assets and infrastructure such as runways, taxiways, aprons, terminals and provide cargo amenities ancillary buildings etc.,
d) To provide for repairing, servicing, engine overhauling, and create necessary infrastructure such as hangers, and maintenance bays, etc.,
e) To promote, operate, maintain, develope, design, construct, renovate, expand all infrastructure facilities, within and outside the Airport.
f) To determine appropriate rate of charges, fees & levies and collect the same from users of the Airport and Infrastructure facilities thereof."
2.1 On 4.4.2006, the assessee company entered into an Operations, Management and Development Agreement (hereinafter to be referred to as OMDA) with "AAI" with respect to aforesaid objectives of the assessee company which was created as a joint venture company (JVC) for the purpose of operating, managing, developing, designing, construction, up gradation, modernization, finance and management of the Mumbai Airport. The OMDA has an initial term of 30 years, which is extendable at the assessee's option for a further period of 30 years.
2.2 The assessee company has to perform certain aeronautical and non-aeronautical services. The payment of Annual Fees, Passenger Service Charges and various other payments are to be made to "AAI", in terms of various provisions of OMDA by the assessee. Thus, the assessee, provides services of an Airport Operator to the various Airlines and their passengers and the operating income of the assessee mainly comprises Landing and Parking Services to Airlines, Passenger Service Fees, Trading, Concessions for providing space to various services providers in the premises of the Airport, Rentals for providing Building Space and Hangers in the Airport and also Cargo Handling. The assessee company has taken over the operations of the Mumbai Airport with effect from 3.5.2006.
3I.T.A. No.7507/Mum/2011 I.T.A. No.7111/Mum/2011
3. For the assessment year under consideration, the assessee filed its return of income on 31.10.2007. AO made assessment u/s 143(3) of the Income Tax Act, 1961 (the Act) vide order dated 7.12.2009 by making additions/disallowances. The assessee disputed the disallowances/additions before the First Appellate Authority. The ld. CIT(A) allowed the appeal of the assessee in part. Hence, Department as well as assessee are in appeal before the Tribunal.
4. Firstly, we take the grounds of appeal taken by department in its appeal being I.T.A. No.7507/Mum/2011.
5. Ground No.1 taken by the department in its appeal is as under :
"On the facts and in the circumstance of the case and in law, the learned CIT(A) erred in deleting the addition of depreciation on upfront fees of Rs.22.50 crore without considering the facts of the case, the assessee has not acquired any absolute rights over the Airport, so as to equate it as a license, but instead, the AAI has granted the assessee the rights to perform certain functions during the contract period of 30 years".
6. AO has stated that the assessee treated Upfront Fees of Rs.150 crores paid to "AAI" in terms of provisions of "OMDA" as an Intangible Assets and claimed depreciation of Rs.37.50 crores thereon for the assessment year under consideration. AO has stated that the assessee has paid Upfront Fees of Rs.150 crores to "AAI" in terms of Chapter XI of the "OMDA", which is non-refundable, as part of consideration of the grant of Operation and Maintenance rights of Mumbai Airport. The assessee stated that the said payment of Upfront Fees is considered as a License Fee for Right to conduct Airport Operation business granted to it by the "AAI". Assessee claimed that it is a depreciable assets in the hands of assessee and the terms of license is covered under the provisions of section 32(1)(ii) of the Act. Therefore, the assessee is entitled to claim depreciation.
6.1 However, the AO stated that "AAI" , in terms of "OMDA" has parted with some of its functions and entrusted to the assessee company with those functions under "OMDA" which has a life term of 30 years and at the expiry of the term; the "AAI" has all the rights to take over all rights, title and interest in all the assets of the Airport. AO has stated that the assessee company does not have an exclusive ownership over the Airport and it has been entrusted with the work of operating, maintenance and development of Airport just as a contractor for the period of 30 years and the contract terms shall be governed by the provisions of "OMDA" signed by the assessee with "AAI". "OMDA" is liable to be terminated midway if there are violations of its provisions by the assessee. "OMDA", in effect, grants rights similar to leasehold rights 4 I.T.A. No.7507/Mum/2011 I.T.A. No.7111/Mum/2011 to the assessee for a period of 30 years. Hence, payment of upfront fee by the assessee to "AAI" is just a part of the total package of consideration to be paid and the remaining considerations are to be paid in the form of Annual Fee from year to year on the basis of revenue earned by the assessee. The Upfront Fee paid as such, does not buy any license or any absolute right for the assessee which can be considered for depreciation from year to year. Rather, it is an one time lump sum payment for exercising the right to perform certain functions of "AAI" in Mumbai Airport and collect revenues over a period of 30 years just the way lessee uses his rights over using a lease hold assets for some financial gain. Thus, benefit derived from one time payment of Upfront fee, is spread over a period of 30 years and not just 4 years as the assessee intends to do so. AO concluded that assessee is entitled for proportionate deduction from year to year for 30 years in view of the decision of the Hon'ble Apex Court in the case of Madras Industrial Investment Corporation Ltd V/s CIT reported in 225 ITR 802 (SC). In the said judgment the Hon'ble Apex Court held that "where the assessee had issued debentures at a discount, the assessee was entitled to proportionate deduction of discount spread over the period for which the debentures would remain outstanding. In view of above, the AO disallowed the claim of assessee of depreciation of Rs.37.50 crores and allowed deduction of Rs.15 crores out of the total amount of Rs.150 crores paid as Upfront Fee for the total contract period of 30 years. Thus, AO added net amount of Rs.22.50 crores in the hands of assessee. Being aggrieved, the assessee filed appeal before the First Appellate Authority.
7. On behalf of the assessee, it was contended that Upfront Fee of Rs.150 crores was paid to "AAI" and it gave to the assessee license to operate, maintain and develop Mumbai Airport. "AAI" gave exclusive right and authority to the assessee (Chapter-II of OMDA) to determine the payment, collect etc., proper charges from the user of the Airport premises. Besides, payment of upfront fee, the assessee is also required to pay to "AAI" the Annual Fees for each year during the terms of Agreement at the rate of 38.7% of the projected revenue for the said year. (Article 11.1.2 of "OMDA"). Though the assessee is required to modernize Airport as per understanding between the parties and strictly as per terms and conditions stipulated in "OMDA", the assessee by making payment of upfront fees of Rs.150 crores to "AAI" to get only license to carry on its activities and to collect tariff from the end users. The assessee has referred the decision of the Hon'ble Apex Court in the case of Sohan Lal Naraindas v. Laxmidas Raghunath Gadit (1971) 1 SCC 276, 279-280 wherein the difference between the 'lease' and 'license' was considered by their Lordships as under :
5I.T.A. No.7507/Mum/2011 I.T.A. No.7111/Mum/2011 "The crucial test in each case is whether the instrument is intended to create or not to create an instrument in the property the subject- matter of the agreement. If it is in fact intended to create an interest in the property it is a lease, if it does not, it is a license. In determining whether the agreement creates a lease or a license the test of exclusive possession, though not decisive, is of significance."
7.1 On behalf of assessee, it was contended that as per Article 11.1.1 in Chapter -
XI, the amount of Rs.150 crores paid by assessee is one time payment and non- refundable. Once amount is non-refundable, it implies that the same is for acquisition of rights of license to perform certain functions and not in the nature of advance lease payment as perceived by the AO. In case of advance lease payment, in the event of pre-mature termination of lease, normally the lease premium pertaining to the unexpired period of lease is to be refunded. However, in the case of the assessee, there is no such provision for refunding the lease rent for the unexpired period. It was also contended that the AO also in his own perception considered the said expenditure as capital. Therefore, AO once considered the expenditure as capital in nature, there is no escapement from the conclusion that depreciation thereon is to be granted. The assessee also referred the following cases to point out the distinction between "lease" and "license" :
(a) Ashoka Hotels of India v. R. N. Kapur (AIR 1959 SC 1262, 1269) wherein it was held as under :
"There is a marked distinction between a lease and a license. Section 105 of the Transfer of Property Act defines a lease of immovable property as a transfer of a right to enjoy such property made for a certain time in consideration for a price paid or promised. Under section 108 of the said Act, the lessee is entitled to be put in possession of the property. A lease is therefore a transfer of an interest in the land. The interest transferred is called the leasehold interest. The lessor parts with his right to enjoy the property during the term of the lease and it follows from it that the lessee gets that right to the exclusion of the lessor."
(b) B. M. Lal v. Dunlop Rubber Co. (AIR 1968 SC 175, 177) wherein it was held :
"A lease.... is the transfer of a right to enjoy the premises; whereas a license is privilege to do something on the premises which otherwise would be unlawful ....The transaction is a lease, is it grants an interest in the land; it is a license if it gives a personal privilege with no interest in the land......"
(c) Khalil Ahmed Bashir Ahmed v. Tufelhussein Samasbhai Saranqpuiwala (AIR 1988 SC 184, 190) wherein it was held :
"To put precisely if an interest in immovable property entitling the transferee to enjoyment was created, it was a lease; if permission to use land without 6 I.T.A. No.7507/Mum/2011 I.T.A. No.7111/Mum/2011 exclusive possession was alone granted, a license was the legal result. We are of the opinion that this was a license and not a lease as we discover the intent."
(d) Qudrat Ullah v. Municipla Board, Bareilly (AIR 1974 SC 396):
wherein it was held:
".... If an interest in immovable property, entitling the transferors to enjoyment is created, it is a lease; if permission to use land without right to exclusive possession is alone granted licence..."
(e) Board of Revenue V/s A.M.Ansari (AIR 1976 SC 1813, 1816) where in it was held:
"....it is the creation of an interest in immovable property or right to possess it that distinguishes a lease from license. A license does not create an interest in the property to which it relates while a lease does. There is in other words transfer of a right to enjoy the property in case a lease ..."
7.2 On behalf of assessee it was further stated that the grant of right for a period of 30 years cannot act against the eligibility for depreciation and ld. CIT(A) has stated at page 19 of the impugned order that it was submitted before him as under :
"......Attention was drawn to other specified intangible assets provided in clause
(ii), of section 32 which are patent, trademark and copyrights. As per section 22 of the Copyright Act, 1957, copyright is registered for 60 years. Section 53 of the Patents Act, 1970, the life of patents is 20 years and as per section 25 of Trademark Act, 1999, the trademark is available for a period 10 years. Inspite of all these limitations of period, the depreciation is admittedly admissible on these intangible assets. Therefore, there is no reason to hold that the depreciation is available as the intangible assets in the form of license are owned by the appellant only for a period of 30 Years."
7.3 It was contended that the expenditure on account of payment of upfront fee is a capital expenditure giving rise to intangible assets in the form of license.
8. Ld. CIT(A) considered the submissions of the assessee and the cases referred to (supra). Ld. CIT(A) has stated that the Hon'ble Apex Court has held in the case of Technoshares and Stocks Ltd and others V/s CIT, 327 ITR 323 (SC) that membership right of Stock Exchange is a "business or a commercial right" conferred by the rules of BSE on the non defaulting continuing members and by virtue of explanation 3 to section 32(1)(ii) the "commercial or business right" which is similar to a license or franchise is declared to be an intangible asset. That the right to participate in the market is an economic and money value. It is an expenditure incurred by the assessee which satisfies the test of being a license or "any other business or commercial right" of similar nature in terms of section 32(1)(ii) of the Act". The ld. CIT(A) has also considered the decision of the Hon'ble Delhi High Court in the case of CIT V/s 7 I.T.A. No.7507/Mum/2011 I.T.A. No.7111/Mum/2011 Hindustan Coca Cola Beverages Pvt Ltd -331 ITR 192 (Del) and stated that Their Lordships have held that the assets which are included in the definition of "intangible assets" include, along with other things, any other business or commercial rights of similar nature. The "similar" has been dealt with by the Hon'ble Apex Court in the case of Nat Steel Equipment (P) Ltd V/s CCE (AIR 1988 SC 631) wherein the Hon'ble Apex Court has opined that the term "similar" means corresponding to or resembling to in many aspects. The ld. CIT(A) also considered the decision of Delhi High Court in the case of ONGC Videsh Ltd V/s DCIT, 37 SOP 97(Del) wherein it is held that the assessee was engaged in exploration, development and production of hydro carbons. The assessee was assigned rights to participate in oil exploration in Russia through a consortium. The said right was for a period of 25 years. The total consideration paid by the assessee for obtaining 20% membership in the consortium, amounting to Rs. 155.9 crores, was treated by the assessee as a license, being intangible assets, and entitled to depreciation @ 25%, u/s. 32. The AO disallowed the depreciation on the grounds that the right acquired was not of the similar nature as those specified in section 32(1)(ii). The Tribunal, after considering the facts, held that the right acquired by the assessee was similar in nature to a 'license', and was therefore eligible for depreciation u/s. 32(1)(ii).
8.1. Ld. CIT(A) has stated that the definition of "intangible asset" has to be given wider meaning to include "business and commercial rights of similar nature". He has stated that the agreement between "AAI" and JVC (OMDA) opens with the preamble that AAI is desirous of granting some of its functions to the JVC. "AAI" has granted exclusive right and authority for operating , maintenance, development, design, construction, up gradation etc of Mumbai Air Port for a period of 30 years extendable by another 30 years and JVC has complete and uninterrupted control of the Airport site and the existing assets. JVC has right to sub-contract with third parties sub-lease or license the demise premises in accordance with Article 8.5.7. Upfront fee of Rs.150 crores is non-refundable. Ld. CIT(A) has further stated that the assessee has the right to create mortgage on the "Transfer Assets" for the purposes of arranging finance. The ld. CIT(A) has stated that in fact rights are transferrable to "AAI" on the expiry of the period of 30 years, on payment of compensation. That it cannot be said that the assessee is not having ownership rights by virtue of agreement, and the same is akin to a lease. On the other hand, ld. CIT(A) has stated that the grant is more in the nature of a "license" than a "lease" .
8I.T.A. No.7507/Mum/2011 I.T.A. No.7111/Mum/2011 8.2 That the ld. CIT(A) after summarizing his findings in para 4.14 of the impugned order has held that the expenditure on account of upfront fee has created a capital asset in the form of license and the claim of depreciation on this "intangible assets", is required to be upheld. Until, this upfront fee is paid as per terms and conditions of the agreement, the assessee could not have acquired the right to develop the Airport. The ld. CIT(A) has also considered the decision of the Pune Bench of the Tribunal in the case of Ashoka Info (P) Ltd V/s ACIT (123 TTJ 77)(Pune) wherein it has been held that the expenditure incurred on construction of the highway is eligible for depreciation @25% as this expenditure has given rise to an intangible asset in the hands of the assessee. Since the assessee has paid payment of upfront fee to acquire right to develop, modernize the Airport which is a capital expenditure, creating "intangible assets" in the nature of "license". Hence, the assessee is eligible for deprecations under the provisions of section 32 (1)(ii) of the Act. Therefore, the ld. CIT(A) has deleted the disallowance of Rs.22.50 crores and directed the AO to allow depreciation at the rate of 25% on the payment of upfront fee of Rs.150 crores. Being aggrieved, department is in appeal before the Tribunal.
9. That Ld. DR submitted that the said upfront fee of Rs.150 crores was paid to acquire leasehold right for 30 years. He referred para 7 of the assessment order and submitted that the assessing officer has rightly said that the assessee is entitled to proportionate deduction from year to year in 30 years. The ld. DR referred the decision in the case of Madras Industrial Investment Corporation Ltd.(supra) and submitted that the total expenditure is to be spread proportionately over a period of 30 years in an equitable manner. Ld. DR also referred the decision of the Mumbai Tribunal in the case of ITO V/s M/s Navi Mumbai SEZ Pvt.Ltd. in I.T.A. Nos.738 to 741/Mum/2012 (2006-07 to 2009-10) , order dated 16.8.2013 and submitted that the payment of Rs.150 crores as upfront fee to "AAI" could not be said to acquire a license by the assessee. Therefore, AO has rightly disallowed the claim of depreciation of Rs.37.50 crores and allowed the proportionate deduction considering the total contract period of 30 years because the assessee has got right under "OMDA" to collect revenue on account of lease hold rights given to the assessee.
9.2 It is relevant to state that the AO allowed the deduction of Rs.15 crores by considering that the assessee is entitled to use the lease right for a period of 30 years on account of payment of upfront fee of Rs.150 crores and therefore the assessee is entitled to proportionate deduction. It may be stated that the said deduction as per AO should come to Rs.5 crores but the AO has mentioned in the assessment order the 9 I.T.A. No.7507/Mum/2011 I.T.A. No.7111/Mum/2011 deduction of Rs.15 crores and made the net addition of Rs.22.50 crores out of the claim of the assessee of depreciation of Rs.37.50 corers. As per above findings of AO, the total addition should have been Rs.32.50 crores after allowing deduction of Rs.5 crores (Rs.150 crores/ 30 years). The assessee also disputed the said addition of Rs.22.50 crores before the First Appellate Authority, and the ld. CIT(A) also deleted the same which is disputed by department in the appeal before the Tribunal. During the course of going through the order of ld. CIT(A), it is observed that the ld. CIT(A) passed order u/s 154 of the Act dated 1.6.2010 to make the disallowance/addition of Rs.32.50 crores. Be that as it may, we proceed to consider the amount disputed in the grounds of appeal before us for our consideration.
9.3 Ld.AR in his submissions supported the order of ld. CIT(A). He submitted that it was not simply a leasing of space but the assessee has acquired a license to carry on its business and to collect charges, fees and levies from end users of the Airport premises pursuant to agreement entered into, and under which the assessee has paid an upfront fee of Rs.150 crores. The ld. AR submitted that the assessee has not acquired any right to enjoy the space at the Airport but has got only privilege to do requisite activities for modernization, operation, maintenance, development, construction, up gradation etc under "OMDA". Ld AR submitted that if the agreement is terminated prematurely, the assessee is not entitled to get refund of the said upfront fee unlike in the case of lease payment. He submitted that the payment of upfront fee to "AAI" has resulted in granting a license to the assessee and therefore is eligible for depreciation by treating it as "intangible assets". Ld. AR submitted that the decision of Mumbai Bench of Tribunal in the case of Reliance Ports Terminals Ltd V/s DCIT in ITA Nos.1743, 1744 and 1745 / Mum/2007 (AYs-2000-01, 2001-2002 and 2002-03) order dated 26.11.2007, relied upon by ld. DR, supports the case of assessee as in that case, it was held that the expenditure incurred towards cost of construction of jetty under an agreement with Gujarat Maritime Board , it was to remain in force for a period of 25 years or till such time the aggregate of rebate (under wharfage charge) availed off by the assessee equals to the amount of cost of construction of jetty whichever is earlier; was held capital in nature and was incurred wholly and exclusively for the purpose of business under the terms of agreement. It was held that assessee had acquired some business or commercial rights by incurring expenditure. That the expenditure had not resulted in the acquisition of any tangible assets like building, machinery, plant or furniture. The Tribunal held that the assessee company acquired the right to claim rebate on the wharfage charges payable or to guard against the possible increase in the wharfage charges that might be necessitated by efflux of time 10 I.T.A. No.7507/Mum/2011 I.T.A. No.7111/Mum/2011 or economic inflation considering all points together. It was held that the said expenditure gave rise to acquisition of license or other business or commercial rights which are really in the nature of "intangible assets" and are fully covered within the meaning of section 32(1)(ii) of the Act. Therefore, assessee is entitled for appropriate depreciation by treating the said expenditure as part of the block of "intangible assets". Ld AR submitted that the case of assessee is fully covered in its favour by the decision of Tribunal (supra) and accordingly the order of ld. CIT(A) may be confirmed.
10. We have carefully considers the orders of authorities below and submissions of ld. Representatives of the parties. We have also considered the relevant Articles of "OMDA" and the cases relied upon by the parties before the authorities below (supra) as well as the cases referred before us.
10.1 The assessee is a Joint Venture Company. It has entered into an agreement with "AAI" and under the agreement i.e. "OMDA", the assessee has been granted exclusive right and authority to undertake some of the functions of "AAI" being functions of operation, maintenance, development, design, construction, up gradation, modernization, finance and management of Airport for an initial term of 30 years, which is extendable for a further period of 30 years on the same terms and conditions as applicable for the initial period, as per Article 18.1 of "OMDA". Under the terms and conditions of "OMDA", the assessee paid a sum of Rs.150 crores to "AAI" as upfront fee as described under Article 11.1.1 of Chapter-XI of "OMDA" which is reproduced as under :
"11.1.1 Upfront Fee The JVC shall pay to the AAI an upfront fee (the "Upfront fee") of Rs.150 crores (Rupees one hundred and fifty crores only) on or before the Effective date. It is mutually agreed that this Upfront fee is non-refundable (except on account of termination of this agreement in accordance with Article 3.3 hereof and payable only once during the term of this Agreement"
Besides, above payment, the assessee is also to pay Annual Fees as per Article 11.1.2.1 for each year during the terms of the agreement. By virtue of above one time payment of upfront fee of Rs.150 crores, the assessee has been given exclusive right and authority to collect payment of various nature from the users of Airport premises as per Article 2.1.2(iii) of Chapter-II, subject to the Regulations prescribed under Chapter -XII. The question arises as to whether the assessee has got the lease right or a license by making this one time payment of Rs.150 crores to "AAI" as upfront fee.11
I.T.A. No.7507/Mum/2011 I.T.A. No.7111/Mum/2011 10.2 That the AO has stated that the assessee has got lease hold rights for a period of 30 years and whereas the assessee has contended that the assessee has got a license for a period of 30 years and as such it is an "intangible assets". Thus, the assessee is entitled for depreciation as per section 32(1)(ii) of the Act. We observe that the said amount of Rs.150 crores paid by assessee is non-refundable. The assessee has got the privilege under "OMDA" to collect charges of the nature as mentioned in the agreement entered into i.e. "OMDA" from the users of Airport premises. We observe that it is not a case where the assessee has got the transfer of a right to enjoy the Airport premises. The assessee only got a license or right to do something at the Airport premises. The Hon'ble Apex Court has held in the case of B. M. Lal (supra) that the transaction is a lease, if it grants the interest in the land and whereas it is a license if it gives a personal privilege with no interest in the land. We are of the considered view that the assessee has got the economic /commercial right under the said agreement to collect charges from the users of the Airport premises which is similar to grant of a license to the assessee. This case is similar to the case of Technoshares and Stocks Ltd and others (supra), wherein the Hon'ble Apex Court has held that a right given to member of Stock-Exchange to carry on the business at the premises of the Stock-Exchange is a business or commercial right which is akin to license in terms of section 32(1)(ii) of the Act, therefore, eligible for depreciation. Their Lordships have held that right to participate in the market is an economic and money value, itself satisfies the test of being a license. There is no dispute to the fact that the said payment of Rs.150 crores paid to "AAI" has not resulted to the assessee in the acquisition of any "tangible assets" like building, machinery, plants or furniture. Therefore the said payment of Rs.150 crores has not resulted into acquisition of "tangible assets". Thus, the assessee has only acquired right to collect charges from the users of the Airport preemies, which is a business or commercial right in the form of license and therefore it is an "intangible assets" as per section 32(1)(ii) of the Act. The Hon'ble Delhi High Court in the case of Hindustan Coca Cola Beverages Pvt Ltd (supra) has also held that the assets which are included in the definition of "intangible assets" include, along with other things, any other business or commercial rights of similar nature. In this regard, it is relevant to state that the decision of Delhi High Court in the case of ONGC Videsh Ltd (supra) has held that the assessee who was assigned the rights to participate in oil exploration in Russia through a consortium for a period of 25 years and paid the total consideration for obtaining 20% membership in the consortium, amounting to Rs. 155.9 crores, was treated to acquire a license, being intangible assets, and thus assessee was entitled to claim depreciation u/s. 32(1)(ii) of 12 I.T.A. No.7507/Mum/2011 I.T.A. No.7111/Mum/2011 the Act. Pune Bench of the Tribunal in the case of Ashoka Info (P) Ltd (supra) has also held that the expenditure incurred on construction of highway is eligible for depreciation @25%, as this expenditure has given rise to an 'intangible assets' in the hands of the assessee. In view of above decisions and the facts of the case, we hold that the ld. CIT(A) has rightly held that the payment of upfront fee of Rs.150 crores paid by assessee to "AAI" has created capital assets in the form of license to develop and modernize the Airport and collect charges as per terms and conditions as prescribed under the agreement entered into which is an "intangible assets" to the assessee. Thus assessee is entitled for depreciation.
10.3 Hence, the disallowance of Rs.22.50 crores made by AO has rightly been deleted by ld. CIT(A) by directing the AO to allow depreciation at the rate of 25% on the said payment of upfront fee of Rs.150 crores. Thus, Ground No.1 taken by department is rejected.
11. Ground No.2 taken by the department is as under :
"On the facts and in the circumstance of the case and in law, the learned CIT(A) erred in deleting the addition of Operating and Administrative expenses of Rs.64,77,39,527/- made by the AO by treating it as a capital expenditure and allowing depreciation at the rate of 10%, without considering the fact that this being the first year of operation, a major portion of the expenditure would be for modernization and expansion of the Airport, constituting capital expenditure."
12. AO has stated that the assessee incurred indirect expenses to the tune of Rs.225.22 crores. Out of the said expenditures, the assessee capitalized expenditures of Rs.21.43 crores to the project account and remaining amount of Rs.203.71 crores claimed as revenue expenditures. During the course of assessment proceedings, the AO sought details and the working of this expenditures and the basis of its apportionment between the project and operation. AO has stated that the assessee filed the details of item-wise expenditure. That the assessee also filed a copy of chart showing allocation of indirect expenses between the projects and operations. AO, taking into account the details filed by the assessee, held that the basis of apportionment of indirect expenses between revenue and capital is neither transparent nor substantiated by verifiable evidence. AO, therefore, apportioned the expenditure in the ratio of 75:25, between the projects and revenue operations, the details of which are given at pages 13 of the assessment order. Accordingly, the AO capitalized the expenditure of Rs.64,77,39,527/- after allowing depreciation at the rate of 10% on the said capitalized expenditure, made addition of Rs.58,29,65,575/-. Being aggrieved, assessee filed appeal before the First Appellate Authority.
13I.T.A. No.7507/Mum/2011 I.T.A. No.7111/Mum/2011
13. The ld. CIT(A) has stated that the assessee vide letter dated 12.5.2010 filed an application for admission of additional evidence under Rule 46A of the Income Tax Rules, 1962 (the Rules). In this regard, the assessee revised the chart, the details of which are given by him at pages 27-28 of the impugned order. The assessee stated during the assessment proceedings, inadvertently, certain errors were made in the original chart, showing allocations of indirect expenses between project and operations. Therefore, correct chart showing allocation of indirect expenditure between the project and operations was filed vide letter dated 12.5.2010 along with application under Rule 46A(1). The ld.CIT(A) sought remand report from AO. AO objected to the admission of additional evidence. However, he submitted his remand report, the details of which are stated by ld. CIT(A) at pages 30 to 37 of the impugned order. AO in the remand report admitted that there was certain errors in the original chart indicating the apportionment of indirect expenses between project and operations. However, AO stated that corresponding ledger account and invoices/vouchers have not been produced during the course of assessment, nor during remand proceedings. Therefore, it was not possible to verify the authenticity of the expenditure incurred under 26 heads of indirect expenditures. AO stated that allocation chart of the assessee is nothing but the exercise in estimation with a view to claim excessive deduction in the profit and loss account. Therefore, the analysis and allocation made by AO be accepted.
13.1 Ld. CIT(A) forwarded the copy of the remand report to the assessee and the assessee vide letter dated 8.7.2011 furnished its rejoinder on the remand report . The ld. CIT(A) has sated extract of remand report and reply of assessee at pages 30 to 42 of the impugned order. It is relevant to state that in the rejoinder the assessee has stated that though there was some errors in the chart filed by assessee before AO in relation to apportionment of expenditure between project and operations but could not give some details due to paucity of time, during the assessment proceedings. That the additional evidence now furnished is required to be taken into consideration so that no prejudice is caused. The assessee also submitted that the ratio of decisions relied upon by the AO in the remand report are not applicable and they are distinguishable, which were stated by assessee in the rejoinder.
13.2 Ld. CIT(A) after considering the submissions of the assessee stated that the assessee has rectified the mistakes by filing revised chart of the apportionment of the expenditures. Besides this, no other fault has been noticed. He has further stated that non production of evidence in the nature of invoices /vouchers, the AO never asked for 14 I.T.A. No.7507/Mum/2011 I.T.A. No.7111/Mum/2011 invoices/vouchers during the assessment proceedings. He has further stated that the assessee submitted various details of expenditures during the assessment proceedings, vide letters dated 16.6.2009, 4.9.2009, 14.9.2009, 22.9.2009, 4.11.2009, 16.11.2009, 20.11.2009, 25.11.2009 and 30.11.2009. It is further stated that had the AO specifically asked the assessee to produce invoices/ vouchers, they could have been produced before him. He has stated that in order to meet ends of justice and equity, it is essential to admit additional evidences and accordingly accepted the said evidences after rejecting the contention of AO.
13.3 Ld. CIT(A) after summarizing the submissions of the assessee has held vide para 5.12 at pages 45 to 52 of his order as under :
"5.12 I have examined the various submissions and details filed by the appellant. I have also examined the AO's order and remand report. During the course of appellate proceedings, the appellant has filed a revised chart for allocation of expenses by way of additional evidence, which I have already admitted for reasons cited supra. I notice that there were certain mistakes in the original chart showing the apportionment of expenses between the projects and operations. The mistakes have now been rectified by filing a revised chart of the said apportionment of expenses. With regard to the non-production of evidences in- the nature of invoices/ vouchers, I find that the A.O. never asked for invoices and vouchers. The appellant has submitted various details of expenditure during assessment proceedings vide letters dated 16.06.2009, 04.09.2009, 14.9.2009, 22.09.2009, 4.11.2009,16.11.2009,20.11.2009,25.11.2009 and 30.11.2009. Had the A.O. specifically asked the appellant to produce invoices/vouchers, they could have been produced before him. I have examined the chart and the details by the assessee before the AO, and after doing so, the following conclusions are reached. For the sake of clarity this chart is reproduced again, along with my concluding remarks:
Actual as per ledger Particulars Gross amount Transferred to project Operation Concluding remarks (Rs.) (Rs.) Salaries and 13,78,24,011 6,17,34,020 7,60,89,991 This is the same as the bonus original chart. The AO had allocated a sum of Rs.10,33,68,008/-
towards projects @
75%. In annexure 3, of
its letter,
dtd.25.11.2009, the
assessee has given list
of employees and
percentage allocation of
salaries to CWIP. In the
absence of any mistake
in the said allocation no
adhoc disallowance is
called for The allocation
has been made on the
basis of actual
manpower allotted.
Hence, no disallowance
is called for.
15
I.T.A. No.7507/Mum/2011
I.T.A. No.7111/Mum/2011
Contribution to 8,73,986 - 8,73,986 The assessee has not
PF and other made any allocation
funds towards projects. It is
difficult to understand
why PF and other funds
are not allocated
towards projects when
salary is being allocated.
Hence, the AO is
directed to allocate this
expenditure in the ratio
in which salary and
bonus has been
allocated by the
assessee supra.
Operation 77,91,02,786 - 77,91,02,786 This is the same as the
support cost original chart. These are
direct cost with regard
to operations
and hence,
nothing is allocable
towards projects. Even
the AO has not made
any disallowance in this
regard.
Staff welfare 12,58,729 - 12,58,729 This is the same as the
expenses original chart. These are
direct cost with regard
to operations
and hence
nothing is allocable
towards projects. Even
the AO has not made
any disallowance in this
regard.
Rent 1,05,87,961 45,18,000 60,69,961 This is the same as the
original chart. These are
direct cost with regard
to operations
and hence
nothing is allocable
towards projects. Even
the AO has not made
any disallowance in this
regard.
Rates and 10,33,33,544 - 10,33,33,544 This is the same as the
taxes original chart. These are
direct cost with regard
to operations
and hence
nothing is allocable
towards projects. Even
the AO has not made
any disallowance in this
regard.
Airport 4,89,65,895 - 4,89,65,895 The AO has allocated
operator 75% of this expenditure
charges to projects. The
assessee has given
details of this
expenditure at annexure
4 of its letter, dtd
14.9.2009. These
charges have been paid
to ACSA for handling
16
I.T.A. No.7507/Mum/2011
I.T.A. No.7111/Mum/2011
operations at the
airport, as per OMDA.
Hence, no amount is
allocable to projects.
The addition made on
this account is,
therefore, deleted.
Insurance 3,11,26,572 - 3,11,26,572 This is the same as the
original chart. These are
direct cost with regard
to operations
and hence
nothing is allocable
towards projects. Even
the AO has not made
any disallowance in this
regard.
Travelling and 5,06,28,382 2,66,98,851 2,39,29,531 In the original chart Rs.
conveyance 7.42 crores had been
shown against this
head, and an amount of
Rs. 3.76 crores was
capitalized by the
assessee. The appellant
has now reallocated this
amount & stated that
only Rs. 2.66 crores has
been capitalized under
this head on actuals. I
see no reason to
interfere as the AO has
not pointed out any
discrepancy in the
assessee's workings.
Adhoc disallowance is
not called for. The
addition made of
Rs.1.76 crores is
therefore deleted.
Communication 78,29,699 69,352 77,60,347 This is the same as the
expenses original chart. These are
direct cost with regard
to operations
and hence
nothing is allocable
towards projects. Even
the AO has not made
any disallowance in this
regard.
Power and fuel 33,85,94,386 3,78,070 33,82,16,316 In the original chart the
amount allocated had
been shown at Rs.
33.82 crores. The AO
has allocated Rs. 25.36
crores towards projects.
In the revised chart the
appellant has allocated
only Rs. 3,78,070/-
towards projects. It has
been submitted that
power and fuel
expenses for project are
to be met by the
contractors as per the
terms of the contract. In
the circumstances,
17
I.T.A. No.7507/Mum/2011
I.T.A. No.7111/Mum/2011
nothing is allocable
towards projects out of
the expenses. The AO
is, therefore, directed to
delete the addition of
Rs. 25.36 crores in view
of the explanation.
Contract 15,41,71,450 - 15,41,71,450 This is the same as the
services original chart. These are
direct cost with regard
to operations
and hence
nothing is allocable
towards projects. Even
the AO has not made
any disallowance in this
regard.
Consumable 3,21,00,065 - 3,21,00,065 This is the same as the
stores original chart. These are
direct cost with regard
to operations
and hence
nothing is allocable
towards projects. Even
the AO has not made
any disallowance in this
regard.
Hotel boarding 1,61,21,955 38,34,190 1,22,87,765 The AO is directed to
& lodging allocate these expenses
charges in the same ratio as
traveling expenses,
supra.
Hospitality 50,09,651 12,57,768 37,51,883 The AO is directed to
expenses allocate these expenses
in the same ratio as
traveling expenses,
supra.
Printing and 74,72,284 12,24,562 62,47,722 This is the same as the
stationary original chart. These are
direct cost with regard
to operations
and hence
nothing is allocable
towards projects. Even
the AO has not made
any disallowance in this
regard.
Repairs and The Appellant has
maintenance submitted that these are
-Buildings 13,34,74,575 - 13,34,74,575 repairs to the existing
-Machinery 5,09,25,307 - 5,09,25,307 buildings and Plant &
-Others 79,00,855 - 79,00,855 machinery. Details of
these expenses were
provided vide letter
dated 16.6.2009. The
AO has not pointed out
any discrepancies to
these details. Hence, no
disallowance is called
for. The addition of
Rs.7,45,20,688/- is,
therefore, deleted.
Legal and 28,53,24,940 11,46,43,143 17,06,81,798 This is the same as the
professional original chart. These are
charges direct cost with regard
18
I.T.A. No.7507/Mum/2011
I.T.A. No.7111/Mum/2011
to operations
and hence
nothing is allocable
towards projects. Even
the AO has not made
any disallowance in this
regard.
Remuneration - This is the same as the
to auditors original chart. These are
-Audit fees 10,00,000 10,00,000 direct cost with regard
to operations
and hence
nothing is allocable
towards projects. Even
the AO has not made
any disallowance in this
regard.
Director's 3,60,000 - 3,60,000 This is the same as the
sitting fee original chart. These are
direct cost with regard
to operations
and hence
nothing is allocable
towards projects. Even
the AO has not made
any disallowance in this
regard.
Preliminary 1,77,62,220 - 1,77,62,220 This is the same as the
expenses original chart. These are
written off direct cost with regard
to operations
and hence
nothing is allocable
towards projects. Even
the AO has not made
any disallowance in this
regard.
Miscellaneous 3,05,39,645 4,495 3,05,35,150 The AO has allocated
expenses Rs. 3.04 crores towards
project. Details of
miscellaneous expenses
have been provided in
annexure A to letter
dated 14.9.2009. As
no discrepancy
has been pointed
out by the AO with
regard to the same,
no addition is called for.
The same is, therefore,
deleted.
2,25,22,88,897 21,43,62,450 2,03,79,26,447
13.4 Thus, the ld. CIT(A) allowed the said ground in part as indicated above. Hence,
department is in appeal before the Tribunal.
14. At the outset, it may be stated that the ld. CIT(A) has not deleted the entire addition made by AO in respect of the above ground, as may be evident from the order of ld. CIT(A), which has been stated hereinabove . Be that as it may, the ld. DR relied on the order of AO and submitted that there was no actual bifurcation of the expenses 19 I.T.A. No.7507/Mum/2011 I.T.A. No.7111/Mum/2011 as there was no scientific basis adopted by assessee. Ld. CIT(A) has allowed what was submitted by assessee.
15. On the other hand, ld. AR submitted that ld. CIT(A) considered the details of the expenses at length in the light of letters submitted by assessee before AO at the time of assessment proceedings. He submitted that the ld. DR has not controverted the letters, details of which are mentioned by ld CIT(A) in his order and referred paras 5.10 and 5.12.
16. We have carefully considered the orders of authorities below and the submissions of ld. Representatives of the parties. We observe that the AO did not accept bifurcation/apportionment of the expenses between the revenue and capital on the ground that the assessee could not file requisite details and the same were made on adhoc basis. On the other hand, we also observe that AO has also not disputed the fact that some of the items of expenses were in the nature of capital and allocated also on adhoc basis in the ratio of 75:25 between the projects and revenue operations.
We observe that the assessee filed revised chart before the First Appellate Authority for allocation of expenses. Ld CIT(A) sought remand report from the AO and also obtained reply from assessee thereon. Ld CIT(A) has mentioned specifically that assessee furnished various details of expenses during the course of assessment proceedings vide letters dated 16.6.2009, 4.9.2009, 14.9.2009, 22.9.2009, 4.11.2009, 16.11.2009, 20.11.2009, 25.11.2009 and 30.11.2009. He has further stated that AO did not ask the assessee to produce invoices/vouchers and if the same had been asked for, they could have been produced before him. We observe that the ld. CIT(A) examined the chart and the details of the expenses item-wise and after considering the same he has held that no disallowance is called for in respect of : (i) - Salaries and bonus; (ii)- Contribution to PF and other funds; (iii)-Airport operator's charges; (iv)-Travelling and conveyances; (v)-Power and fuel; (vi)-Hotel boarding and lodging charges; (vii)- Hospitality expenses, to be allocated in the same ratio as travelling expenses; (viii)- Repairs and maintenance, building, machinery and others ; (ix)-Miscellaneous expenses.
16.1 The ld. CIT(A) has further considered other items viz (a) operation support cost,
(b) staff welfare expenses, (c) rent, (d) rates and taxes, (e) insurance, (f) communication expenses, (g) contract services (h) consumable stores, (i) printing and stationary, (j) legal and professional charges , (k) remuneration to auditors-Audit fees,
(l) Director's sitting fees and (m) preliminary expenses written off and has stated that even the AO has not made any disallowance in this regard.
20I.T.A. No.7507/Mum/2011 I.T.A. No.7111/Mum/2011 16.2 Since DR has not been able to point out any infirmity in the findings of ld CIT(A), we uphold his order and reject ground No.2 of the appeal taken by department.
17. Grounds of appeal Nos.3 and 4 taken by department are as under :
"3. On the facts and in the circumstance of the case and in law, the learned CIT(A) erred in deleting the disallowance of payment of Rs.7,18,12,178/- to group concerns claimed by the assessee as revenue expenditure, without appreciating that the assessee had failed to justify and substantiate such payments/ reimbursement to the sister concerns.
4. On the facts and in the circumstance of the case and in law, the learned CIT(A) erred in directing the AO to treat the payments of Rs.6,25,47,024/- to assessee's sister concerns as capital work-in-progress as per assessee's claim, without appreciating that the assessee had failed to justify and substantiate these payments".
18. In respect of expenditure of Rs. 7,18,12,178/- , AO has stated that the assessee paid large sum of monies to different group concerns of GVK group including GVK Airport Holdings Pvt Ltd, which is a majority shareholding company of the assessee. The assessee submitted details of payment to GVK Airport Holding Private Limited vide letter dated 20.11.2009 aggregating to Rs.26,43,59,202/-, details of which have been summarized by AO at page 17 of the assessment order. He has stated that out of above expenditures of Rs.26,43,59,202/-, Rs.13 crores were paid to GVK Industries Ltd, towards Bank Guarantee Commission. It has been considered for capitalization as the same was incurred in connection with obtaining term loan for financing the capital projects of the assessee. However, in respect of rest of the expenditures, AO has stated that there is no justification. He has stated that the provisions of section 40A(2)(b) applies. Large sum of money paid towards professional fees, legal fees to GVK Airport Holding Private Limited, GVK Industries Ltd, and Novapan Inds. Ltd. have not been substantiated by assessee. He has stated that nature of professional services rendered by these parties to the assessee are not known. That the assessee has not discharged its onus to prove that it has really received any service and whether the said companies had capabilities or technical expertise to render such legal/professional assistance to the assessee during the year. AO stated that the assessee has capitalized only a sum of Rs.19,25,47,024/ under the head "Capital Work -in-Progress"
(CWIP)- indirect expenses from the reimbursement made to GVK group of companies.
AO has stated that except bank guarantee commission of Rs.13 crores, the assessee has not been able to justify the remaining capital expenses of Rs.6,25,47,024/- (Rs.19,25,47,024 - Rs.13,00,00,000). Therefore, the AO disallowed the claim of assessee of revenue expenditure of Rs.7,18,12,178/- paid to GVK group and also 21 I.T.A. No.7507/Mum/2011 I.T.A. No.7111/Mum/2011 disallowed a sum of Rs.6,25,47,024/- from the CWIP and reduced CWIP to that extent. AO has also stated that the assessee is not entitled to depreciation on the disallowed portion of CWIP in subsequent years. Being aggrieved, assessee filed appeal before the First Appellate Authority.
19. The assessee furnished break up of the amount of Rs.26,43,59,202/- paid to GVK group and the details of which are given by ld. CIT(A) at page 71 of the impugned order as under :
S.No. Name of Party Amount Capitalized in Revenue by Further Balance Reason (Rs.) books MIAL capitalized by revenue by AO @ 75% AO 1 GVK Airport Holding 1,57,20,141 - 1,57,20,141 1,17,90,106 39,30,035 Reimbursement Pvt Ltd. of expenses 2 GVK Industries Ltd 23,35,27,111 18,46,65,611 4,88,61,500 4,60,21,125 28,40,375 As per ledger account of party 3 GVK Jaipur- 22,78,924 22,78,924 - - Sweeper
- machine for Kishangharh projects Expressway Ltd 4 GVK Power and 10,728 - 10,728 8,046 2,682 Air tickets of Infrastructure Ltd operations personnel 5 Novopan Industries 1,28,22,298 - 1,28,22,298 96,16,724 32,05,575 Professional GVK Airport Holding fees for Pvt Ltd operations and management Total 26,43,59,202 18,69,44,535 7,74,14,667 5,80,61,000 99,78,667 19.1 It was contended that amount of Rs.1,57,20,141/ represents reimbursement of the expenses incurred by GVK on behalf of the assessee and claimed by raising debit notes with supporting vouchers. Since the amount was purely in the nature of reimbursement of expenses already incurred, there was no reason for making deduction of tax at source. It was contented that complete details of the expenditures backed by supporting vouchers were furnished with the AO vide letter dated 14.9.2009. The assessee also furnished copy of the said letter to the ld. CIT(A) along with the details filed before AO. The assessee further contended that for the amount of Rs.23,35,27,111/-, relevant details were furnished vide letter dated 20.11.2009 and there was no further query. Hence, relevant bills were not provided.
Further, it was submitted that out of the aforesaid aggregate amount, amount of Rs.9,03,79,600/- and Rs.1,10,62,463/- were expenditure for obtaining professional services for which supporting bills etc were submitted before the AO on 25.11.2009 22 I.T.A. No.7507/Mum/2011 I.T.A. No.7111/Mum/2011 and the assessee furnished copy of the said letter together with its enclosures before ld.CIT(A). It was further contended that other amount of Rs.22,78,924/- relates to payment made to GVK Jaipur Kishangarh Expressway Ltd being cost of road sweeper machine i.e plant and machinery. The expenditure was duly reflected in the annexure submitted to the AO along with the assessee's letter dated 20.11.2009. There was no further requisition from the AO for any additional information and /or details. It was also contended that the claim of amount of Rs.10,728/- was the amount of reimbursement of expenses incurred by GVK Power and Infrastructure Ltd for and on behalf of the assessee and the information was also given in the chart annexed to the assessee's letter dated 20.11.2009 . During the course of assessment proceedings, AO had not called for any details. Therefore, there was no occasion for the assessee to meet any such demand. Further, in respect of Rs.1,28,22,298/-, it was submitted that this amount represent professional fee paid to Novapan Industries Ltd and the complete details of the expenditure by way of a chart, bills and service tax return of assessee showing set off of service tax were duly filed before AO vide letter dated 25.11.2009. A copy of which was also furnished before ld. CIT(A). It was submitted that no additional details were called for by AO. Therefore, assessee had no occasion to furnish any additional details.
19.2 It was also contended that the AO was not justified in reducing CWIP by Rs.6,25,47,024/-. In case, AO was not satisfied with the submissions made before him and/or the details filed before him, AO ought to have at-least again exposed his mind to enable the assessee to meet with additional requirement, if any. That the assessee recorded additions to CWIP during the assessment year under consideration to the extent of Rs.164.22 crores and the details were furnished giving party-wise details of expenditures incurred, bills, vouchers and bills of payment made to identified parties. It was submitted that disallowance made by AO was not justified.
20. Ld. CIT(A) after considering the submissions of assessee has deleted the aforesaid disallowance vide para 8.4. and 8.5 of the impugned order which reads as under :
"8.4 I find that the appellant has filed letters dated 14.09.2009, 20.11.2009 and 25.11.2009, during assessment proceedings, with it is explanation and evidences. Copies of the same have now been filed before me. I notice that the appellant has, vide letter dated 14.09.2009, furnished the details of payment of Rs.1.57 crores to GVK Airport Holding towards expenses incurred on the appellant's behalf, duly supported by proper debit notes and proper invoices. This expenditure was purely reimbursement of expenses and therefore, no tax was deducted at source. Besides this, the appellant vide letter dated 20.11.2009 submitted the details of transactions with the sister concerns along with 23 I.T.A. No.7507/Mum/2011 I.T.A. No.7111/Mum/2011 necessary evidences to substantiate the expenditure. The appellant further filed a letter dated 25.11.2009, wherein the invoice for payment of professional fees, details of service charges etc. have been filed. These evidences prove beyond doubt that the services have been rendered by the sister concerns to the appellant. Looking to these details, I find that the appellant has adduced sufficient evidences before the A.O. to justify the incurring of the expenditure in the nature of payment to its sister concerns during the conduct of its business. The contention of the A.O. that the amount of Rs.13,43,59,202/- remained unverified and unsubstantiated is incorrect and without any basis."
8.5 Thus, the facts in its entirety clearly reveal that there is no reason to say that the expenditure in question remained unverified and unjustified. Rather, I feel that the evidences filed before the A.O. were sufficient and the A.O. could have verified the claim of the said expenditure with reference to the details filed before him vide letters dated 14.09.2009, 20.11.2009, 25.11.2009. The A.O.'s other contention is that provisions of section 40A(2)(b) are attracted on the payments made to its sister concerns. This contention of the A.O. is again devoid of merit as the A.O. has not brought out any material on record to prove that the payments to sister concerns are not reasonable and excessive. This remark of the A.O. has thus no merit. I, therefore, feel that the A.O.'s action in disallowing a sum of Rs.6,25,47,024/-, from capital work in progress, and also disallowing Rs.7,18,12,178/-, claimed as revenue, can not be upheld. Accordingly, the A.O. is directed to enhance work in progress by Rs.6,25,47,024/-. The disallowance of Rs.7,18,12,178/- is also deleted. "
Hence, the department is in appeal before us.
21. During the course of hearing, ld. DR submitted that he relies on the order of AO as the ld. CIT(A) deleted the aforesaid disallowance by accepting the assessee's contention. However, ld. AR supported the orders of authorities below and submitted that assessee filed relevant details before AO and same were also furnished before the ld. CIT(A). He submitted that AO did not ask for further details, hence, the same were filed before the ld. CIT(A) which he considered after seeking remand report from AO. He submitted that the order of ld. CIT(A) is a reasoned order as per paras 8.4 and 8.5 thereof and the same be confirmed.
22. We have carefully considered the orders of authorities below and the submissions' of the ld. Representatives of the parties. The ld. DR has not controverted the facts that the assessee filed the letters dated 14.9.2009, 20.11.2009 and 25.11.2009 during the course of assessment proceedings with requisite explanation and evidence. Copies of the same were also filed by assessee before ld. CIT(A). Ld CIT(A) after considering the said details has stated that over all expenditures were reimbursed to GVK and/or the assessee filed the copies of invoices and the details of the transactions with sister concern of the payment made by assessee to substantiate the expenditure. Ld. DR has not controverted the said facts. We agree with ld. AR 24 I.T.A. No.7507/Mum/2011 I.T.A. No.7111/Mum/2011 that the said disallowance have been made by AO merely on assumptions and without controverting the facts furnished by assessee before the authorities below. In the absence of any fact contrary to the findings mentioned in the orders of ld. CIT(A), we do not find any reason to interfere with the order of ld. CIT(A). Therefore, the ground Nos.3 and 4 of the appeal taken by department are rejected.
23. Now, we take up the appeal of the assessee being ITA No.7111/Mum/2011.
24. Ground No.1 of the appeal taken by assessee reads as under :
"1. On the facts and in the circumstances of the case, the ld. CIT(A) has erred in disallowing the expenditure on resurfacing of runway, replacement of floors tiles and regularizing storm water drains incurred by the appellant, and instead treating the same as capital expenditure eligible for depreciation at the rate of 10%.
25. The assessing officer observed that the assessee claimed expenditure of Rs.10,38,17,645/- as revenue expenditure towards the purpose for which the assessee has been created as JVC and entered into an agreement (OMDA) on 4.4.2006 with "AAI"; for the purpose of operating, maintaining, developing, designing, constructing and modernizing the Mumbai Airport. AO has stated that the notes to return of income, assessee qualified its claim by stating that these expenditures has been incurred to preserve and maintain existing assets and there is no new asset /advantage created. The assessee relied on the decisions of Hon'ble Apex Court in the case of Sarvana Spinning Mills reported in 293 ITR 201(SC), Allahabad High Court in the case of Himalaya Drugs Company reported in 149 CTR 260 (All), and Delhi High Court in the case of Volga Restaurant 170 CTR 206 (2006) (Del) to claim aforesaid expenditure as revenue expenditure. AO stated that in the audit report, the auditors have clearly mentioned that the above amount of Rs.10.38 have been incurred towards resurfacing and replacement of certain projects assets, which are capitalized in the books of account, but in the return filed the assessee has claimed as revenue expenditure for tax purpose. AO did not accept the contention of the assessee on the ground that the said expenditure has been incurred as integral part of overall capital expenditure for renovation, expansion and modernization of the Airport. That the assessee has already recognized these expenditures to be capital in nature and capitalized in the books of account prepared under the provisions of Companies Act. Hence, the AO did not accept the claim of the assessee that it was a revenue expenditure. AO after allowing depreciation at the rate of 10% as applicable to 25 I.T.A. No.7507/Mum/2011 I.T.A. No.7111/Mum/2011 building, made the net addition of Rs.9,34,35,881/-. Being aggrieved, assessee filed appeal before the First Appellate Authority.
26. On behalf of the assessee it was contended that the said expenditure was incurred by assessee on resurfacing of runway, replacement of floor tiles and regularizing storm water drains. That the above expenditure was incurred to preserve and maintain the existing Airport assets. That the assessee neither created any new assets nor had derived any benefit of enduring nature . The assessee also furnished the details of expenditure vide letter dated 12.5.2010, the details of which are mentioned by ld. CIT(A) at pages 3 and 4 of the impugned order as under :
S.No. Nature of expenditure Amount Grand total
(Rs.) (Rs.)
1 Reimbursement to AAI for expenses
incurred on resurfacing the runway
M/s PBA Infrastructure Ltd. 8,81,48,895
M/s Delite Engineers 25,69,888
M/s Moulis Advertising Services Pvt Ltd. 74,000
M/s Jaya Advertising Pvt.Ltd 2,53,000
M/s Goldmine Advertising 51,000
M/s Roles Electrolux Pvt Ltd. 81,000 9,11,78,223
2 Replacement of floor tiles
M/s Jaya Constructions 33,57,000
M/s Bhamra Constructions 76,92,000 1,10,49,000
3 Expenditure incurred on strengthening of
storm water drains and paid to M/s J P
Brothers 15,89,645
Grand total 10,38,17,645
It was contended that the expenditure was incurred only to rectify the defects and deficiencies in the existing runways to ensure the same in usable condition continuously, without compromising safety of Aircrafts and passengers and also of the airport premises. Since runway/premises did not belong to the assessee, the question of incurring any expenditure of enduring benefit does not arises. It was also contended that approximate expenditure on construction of runway is in between Rs.1100 crores to Rs.1300 crores and the expenditure of Rs.9.11 crores on part resurfacing of runway No.14/32 does not bring into existence any new asset. That the said expenditure was incurred by way of reimbursement of "AAI". It was also contended that no new asset had been brought into existence and the work was akin to resurfacing of a road. It was also contended that the treatment given in the books of account does not effect the nature of the expenditure incurred and the taxability or otherwise has to be decided as per statute. The assessee also distinguished the cases relied upon by AO, details of which are given by ld. CIT(A) at pages 6 and 7 of the impugned order.26
I.T.A. No.7507/Mum/2011 I.T.A. No.7111/Mum/2011 26.1 The ld. CIT(A) has stated that he has considered the submissions of the assessee and the assessment order and has also the cases cited by assessee. The ld.CIT(A) has stated that the expenditure incurred by assessee of Rs.10,38,17,646/- on resurfacing of runways and replacement of floor tiles and storm water drainage etc has been capitalized by the assessee in its books of account. The ld. CIT(A) considering the terms and conditions of "OMDA" viz. Article 5, Article 8 and Article 19 has held that the assessee is responsible for completion of all ongoing "Capital- Work- in- Progress "(CWIP) at the Airport. Thus, assessee has made the payment in respect of such CWIP to the parties. He has stated that the said expenditure has been incurred towards CWIP and thus, cannot be claimed as revenue expenditure. It is in the nature of capital expenditure. Accordingly, the ld. CIT(A) has confirmed the action of AO.
Hence, assessee is in further appeal before the Tribunal.
27. On behalf of assessee it was contended that the assessee capitalized the expenditure of Rs.10,38,17,646/- in its books of accounts to claim it as revenue expenditure. He submitted that details of the said expenditures are stated by ld. CIT(A) in para 3.2 (also mentioned herein above in para 26) and it could be revealed from the said details that the said expenditure was incurred not on construction of runway but to maintain already existing runway. He submitted that the said expenditure also included a part of the expenditure incurred for replacement of tiles of terminal building which was already in existence. He submitted that the ld. CIT(A) has considered it as a capital expenditure on the ground that the assessee is going to get benefit for 30 years and the assessee has also capitalized the said expenditure in its books of account. Ld. AR submitted that the assessee is not the owner of the said runway/premises and the expenditure was incurred in respect of maintaining of existing assets. He submitted that one should not go on the treatment of expenditure given in the books of account but should consider the nature of expenditure to decide whether it is revenue or capital in nature. Ld AR submitted that the cases which have been considered by authorities below have been considered by the Hon'ble Delhi High Court in the case of CIT V/s Hi Line Pens Private Limited (2008) 306 ITR 182 (Del) and the Honb'le High Court has held that when the expenditure is incurred by a tenant, he will not undertake expenditures as would endure beyond his likely period of tenancy or create a new asset, unlike in the case of owner who undertake expenditure so as to bring a new asset of capital nature. He submitted that in the said case, the Hon'ble High Court has held the cost of repairs that have been incurred by a tenant in 27 I.T.A. No.7507/Mum/2011 I.T.A. No.7111/Mum/2011 respect of such premises would have to be allowed under section 30(a)( i) of the Act. He submitted that assessee is not an owner of the runway/premises. It has been resurfaced/repaired to maintain and workable. Hence, expenditure incurred is revenue expenditure.
28. On the other hand, ld. DR supported the orders of authorities below. He submitted that the bills produced could not determine the nature of work. Ld. DR submitted that the order of ld. CIT(A) be confirmed.
29. We have carefully considered the orders of authorities below and the submission of ld. Representatives of the parties. We observe that the authorities below have considered the said expenditure as capital mainly for the reasons that the assessee itself has categorized that expenditure in its books of account as capital in nature. In determining whether the expenditure is a capital expenditure or revenue expenditure, one has to take into consideration the facts and nature of expenditure to decide whether it is made for the initiation of business or extension of business or substantially replacement of existing equipment and treatment given in books of accounts could not decide the nature of expenditure. The expenditure would be capital if the expenditure has been incurred to create new assets. However, it will be revenue in nature, if incurred merely in facilitating assessee's operation or enable assessee's business to be carried on effectively, while leaving capital untouched. The similar view is taken by the Hon'ble Apex Court in the case of CIT V/s Associated Cement Companies Ltd. (1988) 172 ITR 257 (SC). If the expenditure incurred does not bring into existence any new assets but only facilitate operation to ensure that the existing runway is maintained properly ensuring safety of the Aircraft or passenger and also Airport premises and no new asset has come into existence the expenditure is revenue in nature. We are of the considered view that it cannot be said that by incurring the expenditure details given hereinabove, a new asset has come into existence giving rise to the assessee of enduring benefits. There is no dispute to the fact that the said runway /Airport premises does not belong to assessee but belong to "AAI" and the assessee is required to maintain the same under "OMDA". We are of the considered view that the said expenditure has been incurred by assessee only for the purpose of carrying out its one of the object to renovate and/or repair existing runway. The Hon'ble Bombay High Court in the case of New Shorrock Spg. & Mfg. Co. Ltd. V/s CIT (1956) 30 ITR 338 (BOM.) has held that the "the expression "current repairs' means expenditure on building, machinery, plant or furniture which is not for the purpose of renewal or restoration but which is only for the purpose of preserving and maintaining 28 I.T.A. No.7507/Mum/2011 I.T.A. No.7111/Mum/2011 an already existing asset which does not bring new asset into existence or does not give the assessee new or different advantage. We observe that the said expenditure has been incurred only for resurfacing the layer of the runway and to put new tiles to replace floors. Therefore, it cannot be said that expenditure is in the nature of capital as it does not bring into existence any new asset, leaving aside the fact that the said runway /premises is not owned by assessee. No doubt, the assessee is to redesign, upgrade, modernize and also to operate and maintain Airport but the expenditure under consideration has been incurred only to ensure that the existing assets continued to be used for use safely and as per norms to enable assessee to run its activity. Hence, we are of the considered view that the said expenditure is incurred to facilitate of carrying on by the assessee its main business for which the assessee has been engaged and pending the expansion of the Airport etc. Hence, we hold that the said expenditure is a revenue in nature and cannot be said to be capital in nature irrespective of the fact that the assessee in its books of account has given treatment of it as capital in nature. We may state that the assessee will not be entitled for depreciation thereon as it is held to be revenue in nature. Hence, Ground No.1 of the appeal taken by assessee is allowed.
30. Ground No.2 of the appeal taken by assessee reads as under :
"2. On the facts and in the circumstances of the case, the ld. CIT(A) has erred in restricting the depreciation allowance to 10% applicable to building instead of 15% applicable to plant and machinery, on the expenditure incurred by the appellant on taxiways and aprons, parking bays and bridges."
31. We observe that the assessee in the return filed has treated the asset as of part of building and claimed depreciation at the rate of 10%. AO has accepted the claim of assessee. However, while filing the appeal before the First Appellate Authority, the assessee contended that the said asset is in the form of plant and machinery and therefore, the assessee is entitle for depreciation at the rate of 15%, the rate as applicable to plant and machinery and not at the rate of 10%. The ld. CIT(A) did not accept the contention of the assessee and has stated that assessee, in its computation of income has itself considered the said asset to be a building and it has only by way of note an alternative claim has been made stating that taxiways, aprons, hangar, parking bays and bridges are part of plant on which assessee is entitle for depreciation at the rate of 15%.
29I.T.A. No.7507/Mum/2011 I.T.A. No.7111/Mum/2011
32. The ld. CIT(A) has held that the impugned assets which are basically structures and are in the nature of places which are used by Aircrafts for taxing, parking. Accordingly that they are not in the nature of plant. Hence, assessee is in appeal before the Tribunal.
33. During the course of hearing, ld. AR reiterated the submissions as made before the First Appellate Authority and stated that aprons, taxiways and runway are not only the structures but they are structures for specific purposes which can be considered as tools for the purpose of business of the assessee. Ld AR referred the decision of the Mumbai Bench of Tribunal in the case of National Airports Authority of India V/s CIT [2011] 134 ITD 34 (Delhi), wherein it was held that the terminal place used for regulation of air traffic and communicational and navigational control are part of tool of business of the assessee and therefore they constitute part of the plant. That the assessee is accordingly entitle for depreciation as applicable on plant and machinery. The ld. AR referred the decision of the Hon'ble Apex Court in the case of CIT V/s Dr. B. Venkata Rao (2000) 243 ITR 81(SC) and submitted that in the case of an operation theater in the hospital, it has been held to be a part of plant and not a part of building. Ld. AR referred the decision of the Hon'ble Apex Court in the case of CIT V/s Karnataka Power Corpn. (2000) 247 ITR 268 (SC) and submitted that the power generating station building is held to be a plant. He submitted that such structures are specific for the purpose of business of the assessee and the assessee is entitled for depreciation at rate as applicable to plant and machinery.
34. On the other hand, ld. DR supported the orders of authorities below. He submitted that assessee itself has claimed depreciation at the rate of 10% in the return as applicable to building.
35. We have carefully considered the orders of authorities below and submissions of ld. Representatives of the parties. There is no dispute to the facts that runway, taxiway are necessary part of Airport operation and are specific part of infrastructure for use of aircrafts. These are not merely concrete structures. The Hon'ble Bombay High Court in the case of CIT V/s Mazagaon Dock Ltd (1991) 191 ITR 460(Bom) has held that dry dock and wet dock created for ships are to be treated as plant and not building. The Hon'ble Apex Court has held in the case of Karnataka Power Corpn.(supra) that power generating station building is not a simply concrete structure but a specially designed building and is to be treated as part of plant. Similarly, the Hon'ble Apex Court has held in the case of Dr. B. Venkata Rao (supra) that the operation theater in an hospital building is not simply a concrete structure but 30 I.T.A. No.7507/Mum/2011 I.T.A. No.7111/Mum/2011 necessarily a part for running of the hospital and the assessee is entitled to claim depreciation as applicable to plant and machinery. If we apply the above, decisions to the facts of the case before us, we are of the considered view that taxiways and aprons, parking bays cannot be said to be merely concrete structures but are necessary tools for operating/using the Airport. Hence, the same are to be considered as part of plant and machinery. Therefore, we hold that assessee is entitled for depreciation at the rate as applicable on plant and machinery in respect of taxiways, aprons, parking bays etc. Hence, Ground No.2 of the appeal taken by assessee is allowed.
36. Ground No.3 of the appeal taken by assessee is as under :
"3. On the facts and in the circumstances of the case, the ld. CIT(A) has erred in reducing the amount debited to capital work in progress by 3,195,765 based on the argument that the appellant is unable to furnish confirmation from the vendor".
37. AO stated that the assessee made an addition of CWIP in the account of Rs.164.22 crores. The assessee has furnished party-wise details of such expenditure under different heads. AO has stated that assessee was asked to furnish confirmation in respect of some of the major contracting parties interalia in respect of L and T to verify the bonafide of the expenses booked in its name. The assessee expressed his inability to furnish the same during the hearing on 26.11.2009. AO stated that the expenditure incurred by way of payment to L&T remained unverifiable. Hence, AO did not allow the expenditure paid to L&T as part of CWIP of Rs.31,98,450/- and reduced the same from the total value of CWIP for the purpose of assessee's claim of depreciation. Being aggrieved, assessee filed appeal before the First Appellate Authority.
38. Assessee stated before the ld. CIT(A) that following documents were obtained after the date of assessment order and the same may be admitted as additional evidence under Rule 46A of the Income Tax Rules, 1962:
i) Letter dated 1.8.2006 addressed to the appellant along with Running bill No.1 for Rs.51,80,548/-;
ii) Forwarding Note of Running bill no.1 for reduced amount of Rs.31,96,765/-;
iii) Letter dated 1.1.2007 addressed to the appellant along with Running Bill No.04 for Rs.32,58,637/-
iv) Forwarding note of Running Bill No. 4 for reduced amount of Rs.29,94,040/-
v) Confirmation of accounts for the period 1.4.2006 to 31.3.2007
39. Since these were additional documents filed by assessee before ld. CIT(A), he called for remand from the AO which was submitted by him vide letter dated 10.5.2011.
31I.T.A. No.7507/Mum/2011 I.T.A. No.7111/Mum/2011 The ld. CIT(A) forwarded the copy of the said remand report to the assessee to seek his reply. The assessee filed rejoinder dated 8.7.2011. The relevant comments of the AO and reply of the assessee in respect of remand report are stated by ld CIT(A) in paras 7.4 and 7.5 (pages 67 to 69) of the impugned order.
40. Ld. CIT(A) has stated that AO named seven parties and during the course of assessment proceedings, the assessee vide letter date 30.11.2009 filed various details in respect of those parties including payment details in respect of viz M/s Leighton India Contractors Pvt. Ltd, M/s Roman Tarmat Ltd, M/s Kirby Building Systems India Ltd, M/s NACO Netherlands and M/s L&T. He has further stated that details were also filed interalia in respect of L&T. The said informations were in the nature of letters of awarding the work, running bills etc from M/s L&T. Ld. CIT(A) has stated that during the appellate proceedings, the assessee also filed confirmation letter from L&T. However, he has stated that in the remand report, the AO noted that notice was issued u/s 133(6) of the Act to six parties and replies were received from five parties, except M/s L&T. In view of above, ld. CIT(A) has stated that no confirmation has been obtained in spite of notice u/s 133(6) of the Act and the assessee has also failed to file any confirmation with regard to L&T. Accordingly, the ld. CIT(A) has confirmed the addition made by AO. Hence, the assessee is in further appeal before the Tribunal.
41 It is relevant to state that in the assessment order, the AO has mentioned the amount in respect of L&T of Rs.31,98,450/- but in the grounds of appeal, the amount mentioned is Rs.31,95,765/-.
42. At the time of hearing, ld.AR submitted that the finding of the ld. CIT(A) is contradictory as the ld. CIT(A) itself has mentioned at pages 64-65 of the impugned order that the assessee filed additional documents before him including the confirmation of accounts for the period 1.4.2006 to 31.3.2007 relating to M/s L&T. The ld. CIT(A) has also again stated that the assessee filed confirmation of account in respect of M/s L&T for the period 1.4.2006 to 31.3.2007 at page 67 (para 7.3) of the order. He submitted that M/s L&T being Multinational Company would not meet any compromises to the benefit of the assessee. He submitted that ld. CIT(A) has confirmed the action of the AO to reduce the CWIP relating L&T merely because no reply was given to the AO in respect of notice u/s 133(6) of the Act. Ld AR submitted that the order of ld. CIT(A) is contradictory in itself and the assessee furnished requisite evidence of the amount paid to M/s L&T for the CWIP in the assessment year under consideration of Rs.31,98,450/- along with confirmation of accounts for relevant period. On the other hand, ld. DR relied on the order of ld. CIT(A).
32I.T.A. No.7507/Mum/2011 I.T.A. No.7111/Mum/2011
43. We have carefully considered the orders of authorities below and the submissions of ld. Representatives of the parties. We agree with the ld. AR that the ld. CIT(A) itself has mentioned that the assessee filed during the course of appellate proceedings before him forwarding note of running bill for reduced amount of Rs.31,96,765/- and also interalia submitted account for the period 1.4.2006 to 31.3.2007. We agree with the ld. AR that the execution of the said work by L&T has not been accepted merely because M/s L&T had not sent its reply to the notice issued u/s 133(6) of the Act by AO. However, the ld. CIT(A) has not disputed details of documents filed by assessee, details of which have been mentioned hereinabove in para 38 of this order including the confirmation of account for the relevant period from M/s L&T. Considering the facts of the case, we are of the considered view that the execution of work by L&T for an amount of Rs.31,95,765/- cannot be considered as not genuine merely because there was no reply from M/s L&T in response to notice issued u/s 133(6) of the Act. Therefore, in the absence of any other evidence on record, we direct to enhance the CWIP by the amount of Rs.31,95,765/- in respect of the work executed by M/s L&T. Hence Ground No.3 of the appeal taken by assessee is allowed.
44. In the result, the appeal of the assessee is allowed, whereas the appeal of the department is dismissed.
The above order is pronounced in the open court on 14th February, 2014.
घोषणा खुले यायालय म दनांकः 14th February, 2014 को क गई ।
Sd sd
(राजे /RAJENDRA) (बी.आर. म तल/B.R.MITTAL)
लेखा सद य / ACCOUNTANT MEMBER या यक सद य / JUDICIAL MEMBER
मब
ुं ई Mumbai: on this 14th day of February, 2014
व. न.स./ SRL , Sr. PS
33
I.T.A. No.7507/Mum/2011
I.T.A. No.7111/Mum/2011
आदे श क त ल प अ े षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent.
3. आयकर आयु त(अपील) / The CIT(A)- concerned
4. आयकर आयु त / CIT concerned
5. वभागीय त न ध, आयकर अपील य अ धकरण, मब
ुं ई /
DR, ITAT, Mumbai concerned
6. गाड फाईल / Guard file.
आदे शानस
ु ार/ BY ORDER,
True copy
सहायक पंजीकार (Asstt. Registrar)
आयकर अपील य अ धकरण, मब
ुं ई /ITAT, Mumbai