Income Tax Appellate Tribunal - Ahmedabad
Dhara Vegetable Oil & Food Co.Ltd.,, ... vs Assessee
-1-
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "D" AHMEDABAD
Before S/Shri T.K.Sharma, JM and D.C.Agrawal, AM
ITA No.2942/Ahd/2006
Asst. Year:2002-03
Dhara Vegetable Oil & V/s. Asstt.Commissioner of
Food Co. Ltd., Income-tax, Cir.1(1),
NDDB Campus, Baroda.
Anand-388 001.
PAN No.AABCD 3060 H
(Appellant) .. (Respondent)
Appellant by :- Shri S. N. Soparkar,
Sr.Advocate
Respondent Shri Anil Kumar,
by:- CIT, Sr.DR
ORDER
PER D.C.Agrawal, Accountant Member.
This appeal has been filed by the assessee against the order of CIT(A) dated 14.11.2006 raising following grounds :-
1. The order passed by the ld. CIT(A) is bad in law. It requires to be modified. It is submitted that it be so held now.
2. The ld. CIT(A) has confirmed addition made considering grant received of Rs.24,44,38,406/- as revenue receipt and making addition to total income. It is submitted that in the facts and circumstances of the case, the grant of Rs.24,44,38,406/-
received by the appellant company from NDDB constitutes capital receipt. It be so held now.
2.1 The ld. CIT(A) has failed to appreciate that as per the agreement, there was a specific condition to utilize interest income and on that consideration also the grant of Rs.24,44,38,406/- was not in the nature of revenue income. It be so held now.
2.2 The ld. CIT(A) has erred in not appreciating the contention that nature of grant would not defer either received in form of cash or in kind. It is submitted that grant has been accepted as a capital receipt and on that premises grant received in cash form should also be held to be capital in nature. It be so held now.
3. The ld. CIT(A) has erred in confirming the lease rent expenses of Rs.7,84,704/- paid for leasehold land situated at Narela considering same as capital expenditure. It is submitted that in the facts and circumstances of the case, lease rent paid of Rs.7,84,704/- ought to have been held to be revenue expenditure. It is submitted that it be so held now.
4. The ld. CIT(A) has erred in not directing the ld. AO to allow depreciation on actual cost of the assets transferred from National Dairy Development Board worth Rs.5,55,61,594/- as grant. It is submitted that in the facts and circumstances of the case, pursuant to explanation 2 to section 43(1) of the IT Act, depreciation ought to have been granted. It is submitted that direction be given to the ld. AO to allow the depreciation accordingly. It is submitted that the ld. AO may be directed to allow the same.
5. The ld. CIT(A) has erred in not deleting the interest charged u/s 234B of the Act for Rs.3,88,48,074/-. It is submitted that in the facts and circumstances of the case no interest u/s 234B is leviable. It is submitted that it be so held now.
6. The ld. CIT(A) has erred in confirming the interest charged u/s 234D of the Act for Rs.2,74,440/-. It is submitted that in the facts and circumstances of the case no interest u/s 234D is leviable. It is submitted that it be so held now.
2. First of all we take up ground No.4 which relates to grant of depreciation on sum of Rs.5.55 crores which was given by National Dairy 2 Development Board (hereinafter referred to as NDDB) as part of grant of Rs.30 crores for research and development.
3. We first take the issue covered in ground No.4. The Assessing Officer & the CIT(A) did not allow the depreciation on the sum of Rs.30 crores reduced from the cost of plant and machinery and other depreciable asset on the ground that cost was entirely made by NDDB and, therefore, actual cost is NIL. The ld. Authorised Representative also submitted that issue is also covered in assessee's favour by the decision of Hon'ble Gujarat High Court in the case of CIT vs. Kaira District Co- op. Milk Producers' Union Ltd. (2001) 247 ITR 314 (Guj).
4. The ld. Departmental Representative on the other hand relied on the order of CIT(A). He submitted that this issue cannot be adjudicated by the Tribunal because it is not approved by the COD. He referred to the letter No.COD/41/2008 dated 4th August, 2008 from the Deputy Secretary, Cabinet Secretariat (Mantrimandal, Sachivalaya) Rashtrapati Bhawan, New Delhi, placed on record.
5. We have beard the rival submissions and gone through the material on record. We find that approval given by the COD is in respect of capital grant and lease rent and the issues raised in ground No.4 and other grounds are not approved by the COD. Accordingly we adjudicate only ground no.2 and 3 and reject other grounds as not approved. We decline to adjudicate issue in the absence of COD approval.
6. So far as ground no.2 is concerned, this relates to confirmation of addition considering grant of Rs.24,44,38,406/- received as revenue receipt.
37. The facts of the case are that the assessee company is engaged in manufacturing and trading in various edible oils and food products under the brand name "Dhara". One of the objects incidental or ancillary to the main objects of the assessee company was to acquire, take-over and manage the on-going and other agricultural products in operation in NDDB with all assets or liabilities held in connection with the production of vegetable oil by NDDB. The NDDB is a body corporate established under an Act of Parliament i.e. National Dairy Development Board Act, 1987. NDDB has been authorised to form one or more subsidiary companies for implementation of its objects after obtaining necessary approval of the Central Government under section 43(1) of the NDDB Act. Accordingly NDDB obtained prior approval of the central Govt. under section 43(1) of its Act and transferred all its oil related activities carried out by a separate division of NDDB to assessee company under section 43(2) of the NDDB Act. Accordingly vide agreement dated 23rd March, 2001 NDDB transferred its separate division carrying out its oil related activities to the assessee company. It is undisputed fact that assessee is wholly owned subsidiary of NDDB. During the year under consideration assessee company filed its return of income on 30.10.2002 declaring total income of Rs.7,87,09,889/-. The return was accepted originally under section 143(1) but subsequently scrutiny assessment order under section 143(3) was passed on 17.3.2005.
8. During the course of assessment proceedings Assessing Officer found that NDDB has given a grant of Rs.30 crores for research & development to the assessee company. Out of above sum Rs. 5,55,61,594/- was given in the form of fixed assets. Accordingly cost of these fixed assets was taken as NIL for the purpose of depreciation under section 32 r.w.s. 43(1) Explanation 10. Balance sum of Rs.24,44,38,406/-
4was given in cash by the NDDB which was credited by the assessee to reserve and surplus as capital receipt. The Assessing Officer sought to treat the sum of Rs.24,44,38,406/- as revenue receipt. It was explained to the Assessing Officer that assessee company is under obligation to keep this sum in long term financial instruments as may be decided by a committee constitute by the Board of Directors of the assessee company which has been actually constituted for this purpose. Further as per agreement with NDDB the assessee is entitled only to utilize the interest received from such investment only for the purposes of research and development in the field of oil and oil seeds. The grant so received has been accounted in conformity with the accounting standard -12. The Assessing Officer, however, did not accept the contention of assessee that above grant is a capital receipt and held it to be a revenue receipt for the following reasons:-
"3.6 I have gone through the submission of the assessee, but the same is not found tenable. Here, it is significant to note that NDDB has given Rs.24,44,38,406/- in cash. This amount is given for the research work which is the integral part of carrying out of the business of the assessee. As mentioned above, the unit was already existing and functioning as a part of NDDB and therefore, this amount is certainly not paid for setting of new unit.
3.7 The assessee company has to improve the products with lower cost in order to gain more profits which is essential for surviving in the market. Therefore, this research activity is being carried out for the betterment of products and hence the same is very much a part of assessee's business.
3.8 Moreover, there is no prohibitory clause whereby it is intended that if assessee company does not apply the amount to research and development work and utilizes this fund in any other manner, all securities and grant will be recovered back. No prohibitory or restrictive conditions have been provided in the clause 10 of the agreement. The total control over the investments and the right for changing the nature of investment is of assessee company and for 5 all legal purposes, the ownership on the fund of Rs.24,44,38,406/- is of DOFCO, therefore, considering all the facts, the same constitutes revenue receipts in the hands of assessee company.
3.9 Any grant may whatever be the nature, granted to a company after it has started production, is a revenue receipt. The payment of subsidy to assist an assessee in carrying on trade or business as distinct from the subsidy to help the assessee to set up an industry or complete a project is production incentive or operational subsidy is not a capital subsidy. Hence, it is chargeable to tax as revenue receipt. The same view was held in the decision of Sahaney Steel & Press Works India Ltd. Vs. CIT 228 ITR 253 (SC).
3.10 As regards accounting standard, Hon'ble Supreme Court held in several cases that the true nature and quality of the receipt and not the head under which it is entered in the account books as would be decisive in determining its taxability. Therefore, the existence or absence of entries in books of account of assessee cannot be decisive or conclusion in the matter. Reliance is placed on the decision of Kedarnath Jute Manufacturing Co. Ltd. Vs. CIT 82 ITR 363 (SC) and Chowringhee Sales Bureau (P) Ltd. Vs. CIT 87 ITR 542 (SC)."
9. Before ld. CIT(A) assessee raised several arguments and relied on various authorities. Assessee's arguments were summarized by ld. CIT(A) under para 6 of his order as under :-
"(i) that the transaction is governed by a written agreement which should determine the character of the receipt in the hands of the appellant.
(ii) that the funds were lying as capital funds in the books of NDDB and the grant has been given of the said capital funds.
(iii) that the appellant agreed to identify this amount as an ear marked corpus and also it agreed to keep the amount invested in the long term financial instruments.
(iv) That it flows from (iii) above that there was a prohibition on the use of the grant funds and the grant had been earmarked as a 6 corpus contribution which could not be considered income under section 2(24)(ia) r.w.s. 11,12,12A & 13 of the Act.
(v) That the grant was given as an aid to set up the oil and food division of the NDDB as a new company.
(vi) That it was not the case that to carry on R & D was the main business of the appellant.
(vii) That the grant was given to purchase long term financial instruments and not for the purpose of assisting the appellant in its business and, the amount given for purchase of securities was for creation of capital assets.
(viii) That no business operations took place between the dateof incorporation of the company and the date of separation of the division from NDDB and that the regular business activity of the appellant company started only on transfer of business from NDDB and, therefore, the grant was not received after it had started production.
(ix) That the use of Accounting Standard it was mandatory and under it the grant was treated as capital receipt.
(x) That therefore, for all these reasons the grant was a capital receipt in the hands of the appellant.
10. The CIT(A) rejected these arguments. He has held as under :-
(1) Nomenclature given by the transacting party is not conclusive to understand the true and real character of a particular receipt. Therefore, above arguments of assessee as covered in para 6(i), 6(ii) and 6(iii) are not acceptable. (2) The nature of funds in the hands of payer is non-
determinative of character of the receipt in the hands of recipient. A capital receipt in the hands of one may become income in the hands of receiver. He referred to the decision in the case of CIT vs. Presidency Co-op. Housing Society Ltd. (1995) 216 ITR 321,325 (Bom); CIT vs. Kamal Behari Lal Singha (1971) 82 ITR 460 (SC).
7(3) An obligation to use the income in a particular manner does not remove it from the category of income. Even when the obligation to use it in a particular manner forms a part of an original contract/agreement giving rise to such income and will not alter its character. He referred to the decision of Apex Court in E.D.Sassoon & Co. vs. CIT (1954) 26 ITR 27 (SC) to this effect. From this ld. CIT(A) inferred that even if assessee was obliged to use the grant in a particular manner i.e. to keep it invested in the form of long term instrument as per agreement it did not affect the true character of the receipt.
(4) The assessee is not clear as to the purpose for which the grant was given. At one point it is stated that the grant was given for the purpose of setting up of the oil and food division of NDDB as a new Company but at another point it stated that grant was given for purchase of long term financial instrument/securities. In fact grant is not given either of the two but is given for research and development in oil-seeds, oil and food related activities. Since research and development and expenditure thereon constitute revenue activities, therefore, grant given for that purpose establish revenue nature. Research and development is a regular business activity, therefore, grant so given is revenue nature.
(5) Business activity was always going on in the division concerning production of oil. Earlier it was under the control of NDDB and now it is with the assessee company. The production and the business of the unity continue. Therefore, grant was received for the start of production.
(6) It is incorrect to say that grant was not given for corpus of the assessee company but towards the normal business activity. Further the concept of corpus is in the context of contribution made to charitable trust for charitable purposes. It has no application to a commercial enterprise carrying on activity in the nature of business.
11. Thus holding that grant was given for normal business activity, ld. CIT(A) held it as revenue receipt and affirmed the order of A.O. 8
12. Before us the ld. Authorised Representative for the assessee submitted that NDDB vide agreement dated 23rd March, 2001 transferred its existing oil related activities to the assessee company w.e.f. 1.4.2001. By virtue of the said agreement NDDB has -
(i) contributed initial capital of Rs.5 crore;
(ii) transferred all existing assets and liabilities relating to oil
related activities to DOFCO;
(iii) provided working capital loan with a cap of Rs120 crores. The
loan would bear interest at the rate of SBIPLR plus 1.5%.;
(iv) interest free loan of Rs.135 crores as support funds; and
(v) Research and Development Grants of Rs.30 crores specifically for research and development in oilseeds, oil and food related activities. Rs.5,55,61,594/- in the form of fixed assets and balance in the form of Fixed Deposit as corpus fund.
13. The ld. Authorised Representative drew our attention to clause 10 of the agreement according to which assessee had agreed to amount received in cash as a earmarked corpus and keep the amount invested in the long term financial instrument. The assessee also agreed to utilize the amount of interest earned thereon for the research and development activities. Thus the grant of Rs.24.44 crores was out of capital funds of NDDB and transferred to the assessee company for carrying out research and development activities out of interest earned from the investment of such cash. There is specific stipulation in the agreement to use the interest for the said purpose. Interest earned thereon has been treated as income and taxed accordingly while expenditure incurred for research and development has been shown as expenditure, claimed as deduction and allowed accordingly by the Department. NDDB has given other capital grant as a loan to the assessee. Every item so given cannot be treated as revenue receipt. Once there is a control of NDDB and direction to the assessee company to use only interest from the investment of the cash 9 funds for the purpose of research and development then there is no discretion left with the assessee company to use it the way it would have liked otherwise. Corpus has to be kept intact, invested in the long term investments and only interest from such investment have to be used for the purpose of research and development. He submitted that reliance of the Assessing Officer and CIT(A) on the decision of Supreme Court in Sahaney Steel & Press Works India Ltd. Vs. CIT 228 ITR 253 (SC) is misplaced. Payments received in that case were in the nature of supplementary trade receipts. The assessee in that case was free to use the money in its business entirely as claimed. Subsidy was given after commencement of production for carrying out their business activities. But in the present case grant was given with specific agreement that it would be invested in longterm investments, only interest would be utilized in research and development. Further no production was started till the receipt of the grant by the assessee company. Further funds as such did not become the property of the assessee company as it is only 100% subsidiary of NDDB. The ld. Authorised Representative relied on the following authorities :-
1. Kalapana Palace vs. CIT (All) 275 ITR 365 Held, that even though the grant-in-aid was given after the business has been set up, it would still be relatable to the construction of cinema halls. Thus, it would be a capital receipt.
2. CIT vs. Kanpur Sahkari Milk Board Ltd. 144 Taxmaan 779 (All High Court) In this case, grant was given from government for reorganization of society and same was to be utilized specifically for working capital and for no other purpose. Even then the Hon'ble High Court, after considering Sahney Steel & Paper Works Ltd. Held that the grant was capital receipt and not a revenue receipt.10
3. DCIT vs. Reliance Industries Ltd. (2004) 88 ITD 273 (Mum)(SB) The Tribunal's observations made on the basis of the observations of the Supreme Court in Sahney Steel & Press Works Ltd.'s case (supra) also showed that the Tribunal was alive to the distinction between the character of the subsidy given with the object of promoting industrial growth in a particular area and the subsidy given conditional upon the commencement of production and after actual commencement of production. It is not correct to understand the judgement as laying down the broad proposition that wherever the subsidy is given after the commencement of production and conditional upon the same, it should be treated as a revenue receipt in the hands of the assessee, irrespective of the object for which the subsidy is granted. The object for which the subsidy is granted takes primacy over the fact that it is given after the commencement of production and conditional upon the same. That the Supreme Court itself recognized that position had been amply made clear in its observation. Thus the purpose and object of the Scheme under which the subsidy is given is of more fundamental importance than the fact that the subsidy is received after the commencement of production or conditional upon it. Hence, the Tribunal in the case of the assessee for the assessment year 1985-
86 had correctly interpreted and understood the ratio of the judgement of the Supreme Court in Sahney Steel & Press Works Ltd.'s case (supra).
4. Addl.CIT vs. Chodavaram Co-op. Sugars Ltd. (2003) 86 ITD 139 (Visakha) The Supreme Court laid down a principle by stating that the character of subsidy is to be determined having regard to the purpose for subsidy is given. If the purpose is to help the assessee, to set up its business or complete a project, the subsidy is to be treated as capital receipt. The source of the fund is immaterial. In the assessee's case, the subsidy was given for the purpose of expansion of project and the assessee had also discharged its obligation in utilizing the receipt for specific purpose, which had been accepted by the Govt.
115. R.B.Narain Singh Sugar Mills Ltd. Vs. DCIT -(2003) 85 ITD 552 (Delhi) The legal position as enunciated by various courts emerging from catena of cases manifestly draws a line of distinction between a capital subsidy and revenue subsidy. Whereas the former is directed towards the expansion of capital base and, accordingly, falls beyond the ambit of taxation, the latter helps the recipient in recouping the revenue expenses and cannot escape the taxation. Applying the said distinction to the instant case, it became palpable that the case of the assessee fell in the former category and hence the amount of subsidy could not attract tax.
The ld. Authorised Representative also relied on the case laws in the case of CIT vs. Ponni Sugars & Chemicals Ltd. 306 ITR 392 (Supreme Court).
14, On the other hand ld. Departmental Representative relied on the orders of CIT(A) and Assessing Officer. He submitted that research and development is revenue activity. Grant is given by NDDB but there is as such no condition imposed by NDDB that it would be only as corpus. It is a self imposed condition by the assessee that it will keep the funds in long term investment and utilize the interest thereon for research and development activities. In fact entire funds were given for research and development activities, therefore, they are revenue receipts in nature. Further corpus is for trust only created by the assessee for its own benefit and not as a condition imposed for the purpose of conferring the grant. NDDB has in fact given entire money for research and development. Further the nature of receipt is to be decided at the point of transfer and it is immaterial how it is subsequently preserved, safeguarded, utilized entirely whether the principal or the interest thereon. Conduct of the assessee company cannot become the condition for giving grant by NDDB which has given the grant as a part of entire scheme of creating a subsidiary and then for encouraging research and development in such 12 subsidiary. It is one thing to give grant as a condition and it is another thing to accept a grant with a condition. In the former ld. Departmental Representative submitted that condition will decide the nature of the grant but in the latter its imposed conditions are inconsequential in determining the nature of grant.
15. We have heard the rival submissions and perused the material on record. In our considered view assessee deserves to succeed. The undisputed facts are already narrated above. The NDDB has given various grants and loans to assessee company after it being created as 100% subsidiary. Rs.5.55 crores being the value of assets involved in research and development are transferred to the assessee company and balance of Rs.24.44 crores is transferred in cash which was in the form of fixed deposit. Clause -10 of the agreement dated 23rd March, 2001 between NDDB and DOFCO (i.e. assessee company) reads as under :-
"10. NDDB further agrees to give a grant of Rs.30 crore to DOFCO for research and development in oilseeds, oil and food related activities. An amount of Rs.6.06 crore, being the value of assets belonging to Dal Analogue project and R & D activities of the NDDB as per Schedule -III will be adjusted against the grant and balance of Rs.23.94 crore will be given in cash. DOFCO agrees to identify the amount received in cash as an earmarked corpus and keep the amount invested in the long term financial instruments as may be decided from time to time by the Committee constituted by the Board of DOFCO. The DOFCO shall utilize the amount of interest earned thereon for the research and development activities."
16. In addition clause -9, NDDB further provides that NDDB agrees to give a loan of Rs.135 crore as support funds to be kept under long term deposits. No doubt the first sentence of clause -10 provides that grant of Rs.30 crore to DOFCO is for research and development in oil seeds, oil and food related activities. However, clause 10 cannot be read in part or 13 for that matter entire agreement has to be read as a whole so as to find out intent and purpose for which this grant or other grants are given by NDDB. Clause -10 further provides that out of Rs.30 crores Rs.6.06 crores goes for fixed assets which is undisputedly capital assets. The balance sum though mentioned as Rs.23.94 crore but finally it comes to Rs.24.44 crores was given in cash. Assessee company has agreed to ear mark this sum as corpus and kept the amount invested in long term financial instrument to be decided by a committee constituted by Board of Directors of assessee company and utilize only the interest earned thereon for the research and development activities. Intent and purpose of the grant of Rs.30 crores can be gauzed from the first limb of this clause which provides for grant in form of fixed deposits of the value of Rs.5.55 crores (mentioned as 6.06 crores in the clause). If the first part of the receipt is capital then there is no reason to hold that NDDB intended to give other part as revenue and it is only the assessee which is treating it as capital in nature and agreeing to utilize the interest thereon for revenue purposes (for research and development activities). Investments in long term financial instruments are shown in the balance sheet from year to year and interest there from has been taxed as income by the revenue. There is no protective assessment of such interest income. They are taxed substantively by the Department. It is not disputed that research and development activities constitute activities on which expenditure incurred would be revenue in nature but that does not automatically lead to the inference that funds earmarked for such activities would also be revenue in nature. Further it is incorrect to say that funds of Rs.30 crores including fixed assets of Rs.5.55 crorres were given to the assessee during the course of production. They were given at the time of creation of assessee company when assessee company had not taken over the ongoing operation of the oil unit of NDDB. The transfer of asset took 14 place on 1.4.2001 as per clause 1 of the agreement whereas agreement to transfer the funds took place on 22nd March, 2001.
17. The arguments of ld. Authorised Representative cannot be brushed aside that grant given to the assessee company is a liability and is refundable to the NDDB. The liability cannot be treated as income except in accordance with the provisions of law i.e. only after invoking section
68.
18. Arguments of ld. Departmental Representative that it is unilaterally assured by assessee company to the NDDB and hence such assurance cannot alter the character of receipt, is not acceptable because last sentence of clause -10, 'DOFCO will utilize the amount of interest earned thereon for the research and development' clearly gives mandate by the NDDB to assessee company only to utilize interest. Thus strings are attached to the fund meaning thereby that NDDB intended to retain control over the corpus and permits discretion to the assessee company in respect of interest earned from such long term investments. Hon'ble Supreme Court in CIT vs. Ponni Sugars & Chemicals Ltd. (supra) has clearly laid down the purposive test to determine the nature of subsidy given by the Government to its subsidiary. The character of receipt of a subsidy in the hands of assessee under a scheme should be determined with respect to the purpose for which subsidy is granted. The point of time when the subsidy is paid is not relevant. Thus the Hon'ble Supreme Court has taken a different line of the argument that what was given in Sahney Steel & Press Works Ltd. Vs. CIT (supra) when it was held that point of time of giving subsidy is relevant. Thus source and the point of time is not material. If the object of the subsidy is to enable the assessee more profitable then the receipt is of revenue account. If the object of the 15 subsidy is to enable the assessee to set up a new unit or to extent its existing unit then the receipt of the subsidy would be on capital account. In the Ponni Sugars & Chemicals Ltd. (supra) case subsidy was given only for repaying the loan which was taken by the assessee to set up a new unit or substantial expansion of the existing unit. The subsidy received by the assessee was not in the course of trade but was of a capital nature. In the present case purpose for which grant is given by NDDB is research and development but the right of the assessee company is restricted to utilize only interest on the principal in such activities. Therefore, in fact it is an interest on such long term investment which is the subsidy of revenue in nature and not the principal sum over which NDDB has kept a direct control by not permitting the assessee company to utilize it at its free will.
19. In view of above discussion, we hole that receipt of Rs.24.44 crores is capital in nature and therefore is not taxable. As a result, this ground of assessee is allowed.
20. Ground No.3 relates to lease rent expenses of Rs.7,84,707/-. It was disallowed treating it as capital in nature. Assessee company had taken on lease at Kandla (for 30 years), at Narela ( perpetual lease) & Kolkata ( for 30 years ). Initial amount paid for lease hold land rights was capitalized. Subsequently lease rent was paid. The Assessing Officer disallowed the claim on the ground that assessee has acquired rights which provide enduring benefits. It was claimed before ld. CIT(A) that amount was paid for use of the assets and not for acquiring the assets. Ld. CIT(A) held that lease rent in respect of Kandla and Kolkata is revenue in nature as no ownership rights are granted to the assessee. However, lease rent paid in respect of Narela is for acquiring perpetual leasehold rights for 99 years.
16For all practical purposes it is a permanent asset in possession of assessee and, therefore, expenditure incurred thereon has been correctly capitalized. The ld. Authorised Representative on the other hand submitted that ownership of the land vested in the Government and by paying annual leasehold rentals assessee is not getting any permanent asset which is already given by paying one time. Ld. Authorised Representative submitted that the issue is covered in its favour by the decision of the Hon'ble Gujarat High Court in CIT vs. Sun Pharmaceuticals Ltd. in Tax Appeal No.274 of 1999 decided vide order dated 23rd March, 2009.
21. On the other hand ld. Departmental Representative relied on the decision reported in Enterprising Enterprises vs. DCIT (2007) 293 ITR 437 (Supreme Court). The Departmental Representative further submitted that in the judgment referred to by the ld. Authorised Representative in Sun Pharmaceuticals Ltd.'s case decision of Hon'ble Supreme Court in Enterprising Enterprises vs. DCIT (supra) was neither cited nor considered and, therefore, the decision of Hon'ble Gujarat High Court in above case cannot be relied on.
22. We have considered the rival submissions and perused the material on record. In our considered view the decision in the case of Enterprising Enterprises vs. DCIT (supra) referred by the ld. Departmental Representative, in that case one fixed amount was paid for entire lease and rentals were paid by the lessee to extract minerals. The Assessing Officer disallowed proportionate part of rent. It was held by Hon'ble Supreme Court that lease rent paid was capital in nature. However, this lease rent was paid for extracting minerals and not for acquiring the source. In the present case lease rent was paid for using the land which is 17 a source. Hon'ble Gujarat High Court in Sun Pharmaceuticals has referred to the decision of Hon'ble Apex Court in CIT vs. Madras Auto Servie Ltd. (1998) 233 ITR 468 (Supreme Court) which was followed by the Tribunal in that case while deciding the appeal in favour of the assessee. In this regard we refer para 5 to para 8 of Hon'ble Gujarat High Court as under :-
"(5) On behalf of the respondent-assessee ld. Senior Advocate invited attention to decision of Karnataka High Court in the case of CIT vs. HMT Ltd.(No.3) (1993) 203 ITR 820(Kar) to submit that the said decision had considered judgment of Madras High Court in the case of CIT vs. Madras Auto Service Ltd. (1985) 166 ITR 740 (Mad), which had since been confirmed by the Apex Court in the case of CIT vs. Madras Auto Service Ltd. (1998) 233 ITR 468 (Supreme Court). That the Apex Court decision in case of CIT vs. Madras Auto Services (P) Ltd. (supra) as well as earlier decision of the Apex Court in the case of Empire Jute Co. Ltd. Vs. CIT (1980) 124 ITR 1 (Supreme Court) has been applied and followed by the Tribunal. Thus, the Tribunal having applied the ratio of Apex Court decisions had made and order in accordance with law which was not required to be interfered with.
(6) The facts are not in dispute. The lease agreement entered into between the assessee and GIDC has been analysed and relevant terms summarized by the Tribunal. It is not necessary to refer to the said terms in detail in the present proceedings. Suffice it to state that the Tribunal on appreciation of the Deed in question, has recorded following findings of fact :
'It is not disputed that the land which has been leased out to the assessee did not cease to be belonging to GIDC, the lessor. The lease deed was registered because as per the Registration Act it is compulsorily registrable, but it has not changed the ownership. It is not also disputed that the lease rent is very nominal and by obtaining this land by lease the capital structure of the company has not been changed....
...Thus by this payment the assets of the assessee company had not been increased because the land continued to be the land of GIDC. The benefit the assessee got is only of an advantage of carrying on the business more profitably by paying nominal rent on the land.18
The issue can be considered in another angle. It cannot be disputed that if the land is not obtained by the assessee it would not be possible for it to carry on the business.
(7) The Tribunal has thus, after referring to two decisions of Supreme Court held that the land in question was not acquired by the assessee. That merely because the deed was registered the transaction in question would not assume a different character.
The lease rent was very nominal. By obtaining the land on lease the capital structure of the assessee did not undergo any change. The assessee only acquired a facility to carry on business profitably by paying nominal lease rent.
(8) In light of the aforesaid findings of fact and the ratio of the Apex Court decisions, the court does not find this to be a case which warrants interference. Even the Assessing Officer has recorded that the payment was for use of land. There is no legal infirmity committed by the Tribunal."
23. Respectfully following the above decision of Jurisdictional High Court, we hold in favour of the assessee that lease rental paid are revenue in nature and are allowable. This ground of assessee is allowed.
24. In the result, the appeal is partly allowed as stated above.
Order pronounced in Open Court on 31/12 /2009
Sd/- Sd/-
(T.K.Sharma) (D.C.Agrawal)
Judicial Member Accountant Member
Ahmedabad,
Dated : 31/12/2009
Mahata/-
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Copy of the Order forwarded to:-
1. The Appellant.
2. The Respondent.
3. The CIT(Appeals)-
4. The CIT concerns.
5. The DR, ITAT, Ahmedabad
6. Guard File.
BY ORDER,
Deputy/Asstt.Registrar
ITAT, Ahmedabad
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