Income Tax Appellate Tribunal - Pune
Dy. Commn. Of Income Tax vs Sudarshan Chemicals Ltd. on 22 July, 2004
Equivalent citations: (2005)95TTJ(PUNE)710
ORDER
K.C. Singhal, Judicial Member
1. The following grounds have been raised by the revenue in this appeal :-
"1. The ld CIT(A) erred in deleting the addition of Rs. 14,40,000/- which the AO had disallowed being advance rent ton MIDC Mahad and hence not allowable and the ld CIT(A) also erred in relying on the decision of Karnataka High Court reported in 203 ITR 820 since the special leave petition has been granted by the Supreme Court (1993) 203 ITR(St) 44(SC).
2 The ld CIT(A) erred in deleting the addition of Rs. 71,76,040/- which the AO had made to cover the understatement of stock reflected by unused extent of MODVAT.
3 The ld CIT(A) erred in directing to exclude the amount of excise duty and sales tax from the total turnover for working out 80HHC deduction under the IT Act, 1961.
4 The order of the Id CIT(A) may be vacated on the above issues and that of the AO be restored.
5 The appellant craves leave to add, amend, or alter any of the above grounds of appeal.
2 As far as ground No. 1 is concerned, the issue is whether the lump-sum payment made by the assessee to Maharastra Industrial Development Corpn (MIDC) as per the lease agreement is to be considered as capital expenditure being the payment for acquisition of lease- hold rights in the land for a period of 99 years or to be considered as advance rent in the nature of revenue expenditure Briefly stated the facts are these:- In the year under consideration, the assessee had obtained MIDC land at Mahad on 99 years lease after payment of Rs. 14,40,000/-. This amount was shown in the Balance Sheet under the head "fixed assets" as leasehold land. In the original return, no claim was made by the assessee for any deduction on this amount, but in the revised return filed by the assessee on 28.3.95 claimed the deduction of Rs. 14,40,000/- as revenue expenses considering the same as advance rent relying on the judgment of Karnataka High Court in the case of HMT Ltd 203 ITR 820. The AO rejected the claim of the assessee by observing that the Income Tax Department had not accepted the decision of the Karnataka High Court on this point. On appeal, the CIT(A) held that this amount represented as advance rent and was allowable as deduction in view of the Karnataka High Court Judgment. Aggrieved by the same, the revenue is in appeal before the Tribunal.
4 The ld DR has assailed the order of the CIT(A) by contending that the payment made by the assessee was for acquiring the leasehold rights which is an asset and therefore, the payment is in the nature of capital expenditure. It was also pointed out by him that the CIT(A) in AY 1992-93 has taken a different view by referring to the judgment of Madhya Pradesh High Court in the case of Project Automobiles 167 ITR 781 wherein it was held that premium payable by the assessee to secure a permanent lease cannot be considered as advance rent and the same as to be held as capital expenditure. Further reliance was placed on the judgment of AP High Court in the case of Aditya Minerals Pvt Ltd 167 ITR 774 which was relied upon by the ld CIT(A) in AY 92-93. The reliance was also placed on the Supreme Court judgment in the case of Panbari Tea Co Ltd. 57 ITR 422.
5 On the other hand the ld counsel for the assessee has vehemently supported the order of the CIT(A) by placing heavy reliance on the judgment of Karnataka High Court in the case of HMT Ltd 203 ITR 820 wherein on similar facts, it was held that the payment to MIDC was nothing but advance rent which was allowable as revenue expenditure. He also took us through the relevant clauses of the lease deed to emphasize that payment of one rupee per annum could not be considered as rent and therefore, what was paid by the assessee was nothing but the discounted rent paid in advance to MIDC for the lease period. He further argued that no adverse inference could be drawn merely because the payment was made in lump-sum. He also relied on the judgment of J & K High Court in the case Mohd Husain wherein a clear distinction was made between rent paid for use of the land and amount paid for acquiring capital asset. He also placed reliance on the Supreme Court judgment in the case of Madras Auto Service Pvt Ltd 233 ITR 468 wherein it was held that even the cost of construction in respect of leased property was held to be revenue expenditure. Further, reliance was placed by him on the Madras High Court judgment in the case of Gemini Arts Pvt Ltd 254 ITR 201 wherein lump-sum payment made for taking premises on lease for 48 years was held to be revenue expenditure. In the course of hearing a quarry was also raised from the Bench to the effect that if it is assumed that lump-sum payment was advance rent then why proportionate amount relate-able to the year under consideration only should not be allowed as deduction. In response to the same, the ld counsel for the assessee submitted that there is no concept of deferred revenue expenditure under I.T Ac t in view of the Allahabad High Court Judgment in the case of Hindustan Commercial Bank 21 ITR 353. Lastly it was contended that even assuming that two views are possible then the view in favour of the assesse should be accepted in view of the Supreme Court judgment in the case of Vegetable Products 88 ITR 192.
6 In the rejoinder, ld DR stated that for all purposes, it was a case of acquisition of leasehold rights and all responsibilities of the owner were conferred on the lessee since the assesse was required to pay all the taxes relating to such property.
7 Rival submissions of the parties have been considered carefully in the light of the material produced before us as well as the case law referred to. In our opinion, it is the settled legal proposition that where lump-sum money is paid before acquiring leasehold rights then such payment has to be considered as capital expenditure. In the common parlance, the premium is called as "salami". The Hon'ble Privy council, had to consider such question in the case of Raja Bahadur Kamakshya Narain Singh of Ramgarh v. CIT 11 ITR 513. Their Lordships at page 519 held as under:-
"It (salami) is a single payment made for the acquisition of the right of the lessees to enjoy the benefits granted to them by the lease. That general right may properly be regarded as a capital asset, and the money paid to purchase it may properly be held to be a payment on capital account. But the royalties are on a different footing."
8 The Hon'ble Supreme Court has also considered this issue in the case of Member for Board of Agricultural Income Tax, Assam v. Sindurani Chaudhurani, 32 ITR 169 wherein it was held as under: -
"The indicia of salami are (1) its single non-recurring character and (2) payment prior to the creation of the tenancy. It is the consideration paid by the tenant for being let into possession and can be neither rent nor revenue but is a capital receipt in the hands of the landlord"
9 The Apex court in the case of Chintamani Saran Nath Sah Deo v. CIT 41 ITR 506 held as under:
"The definition of salami was a general one, in that it was a consideration paid by a tenant for being let into possession for the purpose of creating a new tenancy."
10 All the above three decisions were again considered by the Supreme Court in the case of Panbari Tea Co Ltd 57 ITR 422. Their lordships also considered provisions of Section 105 Transfer of Property Act which deals with the lease of immovable property. Their lordships at page 425 of the report held as under:
"Under Section 105 of the Transfer of Property Act, a lease of immovable property is a transfer of a right to enjoy the property made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms. The transferor is called the lessor, the transferee is called the lessee, the price is called the premium, and the money, share, service or other thing to be so rendered is called the rent. The section, therefore, brings out the distinction between a price paid for a transfer of a right to enjoy the property and the rent to be paid periodically to the lessor. When the interest of the lessor is parted with for a price, the price paid is premium or salami But the periodical payments made for the continuous enjoyment of the benefits under the lease are in the nature of rent. The former is a capital income and the later a revenue receipt. There may be circumstances where the parties may camouflage the real nature of the transaction by using clever phraseology In some cases, the so-called premium is in fat advance rent and in other rent is deferred price. It is not the form but the substance of the transaction that matters. The nomenclature used may not be decisive or conclusive but it helps the court, having regard to the other circumstances, to ascertain the intention of the parties."
11 Again the Hon'ble Supreme Court in the case of Govind Sugar Mills 232 ITR 319 held that the expenditure related to acquisition of a lease hold right for setting up a sugar factory was clearly of capital in nature.
12 In view of the above judgments, it is clear beyond doubt that if any consideration is paid for acquiring leasehold rights then such payment would be in the nature of capital expenditure. So, if the interest of the lessor is parted with for a price then the price paid as to be considered as premium/salami which is neither assessable as income in the hands of the recipient nor allowable as deduction in the hands of the payer. Hence, the question to be considered is whether in the present case the payment made by the assessee is the price of leasehold rights or the advance rent ?.
13 This question, on identical fact's, has been considered by the Tribunal, Pune Bench in the case of Devi Constructions Company (ITA No. 1769/PN/90) to which one of us (JM) was party. This order is dated 17.7.1997. The copy of the said decision is placed on the file. The terms of the lease agreement are identical in the present case as well as in the case of Devi Construction Co. In both the cases, owner of the land was MIDC. The Tribunal in the case of Devi Construction Co (supra) considered the terms of the lease agreement in para 5 of its order which, for the benefit of this order, reproduced as under:-
"We have considered the terms and conditions of the agreement between the assessee and MIDC dated 1.8.1985. In our opinion, this agreement by itself does not create any lease between the parties. It is a mere agreement of license under the terms of which, if the assessee is able to perform the conditions prescribed in the agreement within a stipulated time, the MIDC is under obligation to grant lease of the land in favour of the assessee. The perusal of the recital of the agreement shows that the assessee has, first to apply to MIDC for lease of the land alongwith the payment of a sum which is called premium. After the receipt of application and the premium, the MIDC enters into an agreement with the assessee which, in the present case was entered on 1.8.85. The MIDC has been described as grantor while the assessee is licensee. The fact that the payment is received in advance prior to the agreement is apparent from the recital itself. This agreement creates only a license in favour of the assessee to enter upon the piece of land for the purpose of building and executing works thereon within a period of two years. This is provided in Clause (1) of the agreement. Jhe building is to be constructed on such land must be in accordance with the building rules. According to Clause 5(II) if the assessee fails to complete the construction of the building within a period of two years or fails to observe the stipulation provided in the agreement, the MIDC has right to terminate the agreement without making any refund or repayment of the premium paid by the assessee. However, if the assessee fulfills the conditions of the agreement, the parties are under obligation ton enter into an agreement of lease, the specimen of which is provided in the Fourth schedule to the agreement against the payment of yearly rent of Rs. 1/- for a period of 95 years. Clause (2) of the agreement specifically provides that unless lease agreement is executed, nothing contained in this agreement shall be construed as demise of the land and the assessee shall only have a license to enter upon the land for the purpose of the agreement."
13.1 In that case also the assessee raised the similar arguments as taken before us. After considering the same the Tribunal observed in paras 6 to 8 as under:-
"6. After considering the agreement as a whole, we are of the view that the payment of Rs. 1,25,000/- is a consideration for letting the assessee into possession of the land and therefore, is a capital expenditure. The payment is a condition precedent for grant of the license to enter upon the land for construction of building in accordance with its stipulation which further gives right to the assessee for grant of lease for a period of 95 years against the yearly consideration of Rs. 1/-. In our considered opinion, the payment of Rs. 1,25,000/- is the price for the transfer of possession of the land by MIDC in favour of the assessee for a period of 95 years in terms of Section 105 of the Transfer of Property Act. Thus, the assessee gets enduring benefit against the lump-sum payment of Rs. 1,25,000/-. According to Section 105 the parties may agree for the transfer of possession of the property for a certain period or in perpetuity against the lumpsum price which is called premium. Alternatively, they may agree for a periodic payment for the use of the property which is called the rent. The Hon'ble Supreme Court in the case of Pandbari Tea Co Ltd (supra) has considered such a provision and held that when the transfer is for a price then, it is of capital nature. But their Lordships has provided a caution at page 425 that there maybe circumstances where the parties may camouflage the real nature of the transaction by using clever phraseology. In the present case, the agreement is with the MIDC which is a Government undertaking and there is no reason to think about any camouflage between the parties. Therefore, we are unable to agree with the contention of Mr. Khandelwal that payment by the assessee is nothing but future rent of the land. In our view, there is nothing in the agreement or lease deed to suggest that it is a future rent of the land. In view of the above discussion, we hold that he payment by the assessee to MIDC was capital expenditure and the same could not be allowed.
7. The decision of the Karnataka High Court relied upon by the assessee is, in our opinion, distinguishable, in the sense that the High Court has proceeded on the finding of fact recorded by the Tribunal that the payment to MIDC was the future rent of the land. The High Court also took into consideration the confession by the revenue that the agreement created a lease in favour of the assessee, but in the present case, we have found that the agreement itself does not create any lease in favour of the assessee. It is merely agreement of license for a specified purpose. In fact, the lease Agreement is executed later on, on the format provided in the fourth schedule of the agreement if conditions provided in the agreement of license are fulfilled. The High Court has also referred to the decision of the Supreme Court in the case of Empire Jute Co Ltd (124 ITR 1). Their lordships in that case have held at page 10 that sometimes test of enduring benefit may break down, if such payment facilities, the trading operation or the management of the business. It has also been held that if the advantage is in the capital field, then it cannot be allowed as revenue expenditure. If this test is applied, then the assessee cannot succeed because the payment of premium does not help the assessee either in the trading operation or in the management of the assessee's business. On the contrary, the enduring benefit is in the capital field.
8. The learned counsel for the assesee has distinguished the Supreme Court decision in the case of Panbari Tea Co Ltd (supra) and the decision of the Bombay High Court in the case of Project Automobiles (supra) on the ground that there was an economic rent in addition to the premium. In our opinion, this contention is without any force. Section 105 of the Transfer of Property Act provides that if the transfer of possession is for a price then it has to be treated as premium. There is nothing in the provisions which says that there must be an economic rent in addition to the premium. We therefore, reject this contention of the assessee's counsel also."
The above observations, squarely cover the issue before us. In view of the same, it has to be held that expenditure by way of premium is capital expenditure.
14. Before concluding the matter, we would like to mention one more judgment of the Supreme Court in the case of R K Palshikar (HUF) v. CIT 172 ITR 311. In that case also the assessee leased certain developed plots for 99 years and received certain premium in addition to rent of Rs. 75/- per annum. The question arose whether the premium received by the assessee was capital receipt for the purpose of capital gain Under Section 12B of Indian I.T Act 1922. Their lordships held that transfer of leasehold rights for 99 years amounted to transfer of capital asset and therefore, the consideration was capital receipt liable to capital gains tax. The relevant observations of their lordships appear at page 317 of the report which are quoted as below:-
"The next question which we have to consider is whether the provisions of Section 12B of the said Act can be brought into play, although what was transferred was only leasehold interest in the lands in question. In this connection, it is significant that the leases are for a long period of 99 years and in all the transactions of lease, premium has been charged by the assessee for the grant of the lease concerned. In Traders and Miners Ltd v. CIT(1955) 27 ITR 314, a case decided by a Division Bench of the Patna High Court, the assessee let on lease for 99 years a portion of a zamindari (land) acquired by it. The lease related to the surface right together with nine mica mines located in that area. The consideration for the lease was the payment of a "salami" and a reserve rent per year. The Income Tax Officer determined the cost to the assessee of the mineral rights and after deducting this amount from the salami, he assessed the balance to lax as capital gains under Section 12B of the said Act. It was held by the Patna High Court that the gains arising from the said transaction were rightly taxed This decision has been cited without comment by Kanga and Palkhivala in their Commentary on the Law and Practice of Income tax (7th Edition) at Page 550, and no case to the contrary has been cited in the said text book or has been brought to our attention. It is true that the decision of the Patna High Court in Traders and Miners Ltd v. CIT (1955) 27 ITR 341n relates to the cased of mining lease, but, to our mind, the principle laid down in that case can well be applied to the case before us. In the first place, the lease is for a long period, namely, 99 years, and hence it would appear that under the leases in question, the assessee has parted with an asset of an enduring nature, namely, the rights to possession and enjoyment of the properties leased for a period of 99 years subject to certain conditions on which the respective leases could be terminated. A premium has been charged by the assessee in all the leases. In these circumstances, we fail to see how it could be said that the provisions of Section 12B of the said Act cannot be brought into play. The grant of the leases in question, in our view, amounts to a transfer of capital asset as contemplated under Section 12B of the said Act."
The above judgment also clearly shows that the payment towards transfer of leasehold rights is capital in nature.
15 In view of the above discussion, we are of the view that the premium paid by the assessee was capital in nature considering the terms of lease agreement, particularly, the Clause 5(b) of the Agreement which provides that in case of termination of lease, the premium is non-refundable. Hence, such consideration, by no stretch of imagination, can be considered as advance rent. Further, it was also important to note that agreement by itself does not create any right in the land except the right to enter upon the land for the purpose of construction as noted by the Pune Bench in the case of Devi Construction (supra). It is only when the terms of agreement are satisfied that lease deed is required to be executed which ultimately would confer the leasehold rights upon the assessee. Further, it is pertinent to note the entire consideration is required to be paid even before entering into agreement which itself shows that the payment of the consideration was condition precedent for acquiring the leasehold rights. The lease agreement itself shows that the entire premium was paid by the assessee before entering into the agreement itself Therefore, considering the entire agreement as a whole, we are inclined to hold that such consideration was nothing but a price for obtaining the leasehold rights by MIDC in favour of the assessee. Hence, the judgment of the Supreme Court in the Panbari Tea Co Ltd and Govind Sugar Mills (supra) would squarely apply. In view of the same, we hold that the consideration in question was capital in nature and therefore, not allowable as deduction. The order of the CIT(A) is, therefore, reversed and the order of the AO is restored on this issue.
16 After hearing bbth the parties, we find that ground No. 2 is covered in favour of the assessee by the judgment of Supreme Court in the case of Indo Nippon Chemicals Ltd. 261 ITR 275. Respectfully following the same, the order of the CIT(A) is upheld on this issue.
17 The ground No. 3 is also covered by the decision of the Bombay High Court in assessee's own case reported in 245 ITR 769 wherein it has been held that Excise duty and sales tax have to be excluded from the total turnover for computing the deduction Under Section 80HHC. Respectfully following the same, the order of the CIT(A) is upheld on this issue 18 In the result, the revenue's appeal is partly allowed.