Onetime payment of annual rent for business advantages allowable

Multitude Infrastructure Pvt. Ltd. Vs DCIT (ITAT Delhi)

It is seen that the assessee purchased a hotel constructed on leased land obtained from Jaipur Development Authority (JDA) from Vishnu Apartments Pvt. Ltd. vide agreement dated 05.11.2008 and as per clause 28 of the sale agreement, the assessee was under an obligation to pay to the seller Government rate taxes and cess etc. from the date of agreement. Vide letter dated 22.06.2011, JDA required Vishnu Apartment Pvt. Ltd. to pay a cumulative sum of Rs.1,35,34,794/- (Rs.62,15,978 on account of Annual Lease Rent up to Year 2011-12 and lumpsum payment of Annual Lease Rent of Rs.73,18,816/- ).

Proportionately the share of the assessee out of that payment was computed at Rs.42,11,495/-. These facts were not at all disputed by the Revenue at any point of time.

In the present case, Annual Lease Rent payable per annum is approximately that of 1% to 1.25% and such payment, if paid annually is to be treated as revenue expenditure. The assessee paid the said annual lease rent at one time, but that does not lose the character of the annual rent. Thus, the expenditure incurred was for the business purpose only and therefore, it cannot be held as capital in nature.

The Ld. AR relied upon the decision of the Hon’ble Apex Court in case of Commissioner of Income-tax vs. Madras Auto Service (P.) Ltd. 233 ITR 468, wherein it is held that expenditure which bring about some kind of an enduring benefit to the company as a revenue expenditure when the expenditure did not bring into existence any capital asset for the company are expenditure of the said company.

The asset which was created belonged to somebody else and the company derived an enduring business advantage by expending the amount. The expenses have been looked upon as having been made for the purpose of conducting the business of the assessee more profitably or more successfully. Since the asset created by spending the amounts did not belong to the assessee but the assessee got the business advantage of using modern premises at a low rent, thus saving considerable revenue expenditure for several years, such expenditure should be looked upon as revenue expenditure. In the present assessee’s case as well, the expenses have been looked upon as having been made for the purpose of conducting the business of the assessee.

The onetime payment of the annual rent as per the lease deed is rightly claimed by the assessee as revenue expenditure. The Assessing Officer was not right in holding that the payment during the year relates to land which is capital in nature.

In fact, the assessee is running the mall and hotel constructed on the lease land of Jaipur Development Authority which was given to Vishnu Apartments Private Ltd. In fact, the mall and hotel was constructed by the Vishnu Apartments Private Ltd. The CIT(A) also ignored this fact. Therefore, the order of the CIT(A) is set aside. The Appeal of the assessee is allowed.

FULL TEXT OF THE ITAT JUDGEMENT

This appeal is filed by the assessee against the order of the Commissioner of Income Tax [Appeals]-6, Delhi dated 02.03.2017 for Assessment Year 2012-13.

2. The Grounds of appeal are as under:-

“Ground No. 1:

The Ld. Commissioner of income Tax (Appeals) – 6, New Delhi (hereinafter referred to as ‘CIT(A)’) has erred on facts and in law in passing the order dated 02.03.2017 under section 250 of the income Tax Act,, 1961 (hereinafter referred to as ‘The Act’).

Ground No. 2:

The Ld CIT(A) erred in law and on facts in confirming the disallowance of Rs.42,11,415/- on account of Lease hold rent paid by Appellant treating the same as capital expenditure.

The appellant contends that the amount was paid by the appellant as per the terms of the agreements between the Appellant and Vishnu Apartments Pvt. Ltd. and not as leasehold rent, therefore no disallowance in this regard should be made.

Ground No. 3:

The appellant prays that he may be allowed to add, amend, alter or forego any of the above grounds of appeal as the circumstances may warrant.”

3. The assessee company is primarily engaged in the business of operating hotels. Return declaring total loss of Rs.6,81,14,200/- was e-filed by the assessee company on 28.09.2012. The return was processed u/s 143(1) of the Act. As the case was selected for scrutiny under CASS, notice u/s 143(2) dated 07.08.2013 and 142(1) dated 13.07.2014 along with detailed questionnaire were issued and served upon the assessee to complete necessary details. In response thereto, CA & AR of the assessee company attended the proceedings from time to time and furnished a requisite details/information. The necessary details which were called for and obtained during the course of assessment proceedings were examined by the Assessing Officer. The Assessing taxguru.in Officer made the following disallowances while passing Assessment Order dated 18.03.2015 u/s 143(3) of the Act:

4. Being aggrieved by the assessment order the assessee filed appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee.

5. The Ld. AR submitted that the assessee purchased a hotel constructed on leased land obtained from Jaipur Development Authority (JDA) from Vishnu Apartments Pvt. Ltd. vide agreement dated 05.11.2008 and as per clause 28 of the sale agreement, the assessee was under an obligation to pay to the seller Government rate taxes and cess etc. from the date of agreement. Vide letter dated 22.06.2011, JDA required Vishnu Apartment Pvt. Ltd. to pay a cumulative sum of Rs.1,35,34,794/- (Rs.62,15,978 on account of Annual Lease Rent up to Year 2011-12 and lumpsum payment of Annual Lease Rent of Rs.73,18,816/- ). Proportionately the share of the assessee out of that payment was computed at Rs.42,11,495/-. The assessee claimed the said payment of Rs.42,11,495/- as rent paid by the assessee. The Assessing Officer disallowed the same on the ground that it is a capital expenditure relating to land. The CIT(A) confirmed the action of the Assessing Officer, however, held that the depreciation on capitalized value is allowable. The Ld. AR submitted that the hotel is constructed on Plot -1, 2 & 3 and the lease premium and annual lease rent were described in the purchase deeds in respect of these 3 plots. The Ld. AR further submitted that Annual Lease Rent payable per annum is in the vicinity of 1% to 1.25% and such payment, if paid annually is to be deductible as revenue expenditure. However, up to 2011, since it was unpaid, it was paid as annual rate being in arrear which is a sum of Rs.12,29,977/- for the period from 05.11.2008 to 31.03.2012 and to discharge the assessee from regular annual rate payments for the entire period of lease lumpsum payment of Rs.29,81,518/- was made. The aggregate of both the above amounts comes to Rs.42,11,495/-. The Ld. AR submitted that in case of Rajesh Projects India Pvt. Ltd. vs. CIT 392 ITR 483, it has been held that the rent generally 1% of the total consideration payable annually are clearly rent and not capital. This decision of the Hon’ble Delhi High Court was upheld by the Hon’ble Supreme Court in case of New Okhla Industrial Development Authority vs. CIT 406 ITR 209 (SC). Thus, it is clear that the payment made on account of Annual lease rent is on revenue account and cannot be considered as capital expenditure. The Ld. AR relied upon the following decisions:

a) Empire Jute Co. Ltd. vs. Commissioner of Income Tax 124 ITR 1(SC)

b) Commissioner of Income-tax vs. Associated Cement Companies Ltd. 172 ITR 257(SC)

c) Commissioner of Income-tax vs. Gemini Arts (P.) Ltd. 254 ITR 201 (Madras)

d) Deputy Commissioner of Income-tax vs. Sun Pharmaceutical India Ltd. 329 ITR 479

e) Commissioner of Income-tax vs. Madras Auto Service (P.) Ltd. [233 ITR 468 (SC)]

f) Commissioner of Income-tax vs. H.M.T. Ltd. 203 ITR 820

6. The Ld. DR submitted that the Assessing Officer has rightly held that the payment during the year relates to land which is capital in nature and which should have been capitalized by the assessee. The assessee is an owner of the said land as per the terms of the lease deed and, therefore, the assessee’s claim in its P&L Account of lease rent is not allowable. The Ld. DR further submitted that the amount has been paid to the party from which the property was acquired and based on the nature of expenses it can be seen that the assessee has acquired the property from the said party and had assumed the future liability towards the same property. Thus, the Ld. DR relied upon the assessment order as well as of the order of CIT(A).

7. We have heard both the parties and perused all the relevant materials available on record. It is seen that the assessee purchased a hotel constructed on leased land obtained from Jaipur Development Authority (JDA) from Vishnu Apartments Pvt. Ltd. vide agreement dated 05.11.2008 and as per clause 28 of the sale agreement, the assessee was under an obligation to pay to the seller Government rate taxes and cess etc. from the date of agreement. Vide letter dated 22.06.2011, JDA required Vishnu Apartment Pvt. Ltd. to pay a cumulative sum of Rs.1,35,34,794/- (Rs.62,15,978 on account of Annual Lease Rent up to Year 2011-12 and lumpsum payment of Annual Lease Rent of Rs.73,18,816/- ). Proportionately the share of the assessee out of that payment was computed at Rs.42,11,495/-. These facts were not at all disputed by the Revenue at any point of time. In the present case, Annual Lease Rent payable per annum is approximately that of 1% to 1.25% and such payment, if paid annually is to be treated as revenue expenditure. The assessee paid the said annual lease rent at one time, but that does not lose the character of the annual rent. Thus, the expenditure incurred was for the business purpose only and therefore, it cannot be held as capital in nature. The Ld. AR relied upon the decision of the Hon’ble Apex Court in case of Commissioner of Income-tax vs. Madras Auto Service (P.) Ltd. 233 ITR 468, wherein it is held that expenditure which bring about some kind of an enduring benefit to the company as a revenue expenditure when the expenditure did not bring into existence any capital asset for the company are expenditure of the said company. The asset which was created belonged to somebody else and the company derived an enduring business advantage by expending the amount. The expenses have been looked upon as having been made for the purpose of conducting the business of the assessee more profitably or more successfully. Since the asset created by spending the amounts did not belong to the assessee but the assessee got the business advantage of using modern premises at a low rent, thus saving considerable revenue expenditure for several years, such expenditure should be looked upon as revenue expenditure. In the present assessee’s case as well, the expenses have been looked upon as having been made for the purpose of conducting the business of the assessee. The onetime payment of the annual rent as per the lease deed is rightly claimed by the assessee as revenue expenditure. The Assessing Officer was not right in holding that the payment during the year relates to land which is capital in nature. In fact, the assessee is running the mall and hotel constructed on the lease land of Jaipur Development Authority which was given to Vishnu Apartments Private Ltd. In fact, the mall and hotel was constructed by the Vishnu Apartments Private Ltd. The CIT(A) also ignored this fact. Therefore, the order of the CIT(A) is set aside. The Appeal of the assessee is allowed.

8. In result, appeal of the assessee is allowed.

Order pronounced in the Open Court on 13t^h day of December, 2019.