Per R. V. Easwar
Senior Vice President: This is an appeal by the assessee relating to assessment year 2004- 05 and it is directed against the order passed by the CIT under section 263 of the Act on 18.09.2008.
2. The brief facts giving rise to the appeal may be noted. The assessee is a public limited company engaged in the sales and service of automobiles. It filed a return of income declaring a loss of Rs. 4,33,62,100/-. It was accompanied by audited profit and loss account, balance sheet and the tax audit report. The return was first processed under section 143(1) but later selected for scrutiny. Notices were issued under section 142(1) and section 143(2), in response to which the assessee submitted elaborate details and explained the return of income. Ultimately, the assessment was completed under section 143(3) by an order dated 31.10.2006 on a loss of Rs. 4,07,10,983/- under the head “business” and Rs. 35,03,489/- under the head “capital gains”. There was also a long term capital loss brought forward from the assessment year 2002- 03 which was also allowed to be carried forward to the subsequent years.
3. On 31.07.2008 the CIT issued notice under section 263 of the Act proposing to revise the assessment on the ground that the assessment order passed by the Assessing Officer was erroneous and prejudicial to the interest of the revenue. In particular, he stated in the notice that the allowance of Rs. 16,46,917/- on account of “cost of improvement of leasehold assets written off” and Rs. 40,20,388/- debited on account of “advances against rental properties written off” was erroneous since these expenses were not revenue in nature. He relied on Schedule `N’, para-6 of the notice forming part of the assessee’s accounts in which it was stated that the company had surrendered the leasehold properties and therefore the cost of improvement of the leasehold assets have been written off and debited to the profit and loss account. According to the CIT, omission to disallow the aforesaid two amounts aggregating to Rs. 56,67,305/- had resulted in excess computation of the loss in the assessment. The CIT also considered that the allowance of prior period expenses of Rs. 7,42,653/- was also erroneous and that after setting off the prior period income of Rs. 1,81,990/-, the net amount of Rs. 5,60,663/- represented under-assessment of income. According to the CIT, such under-assessment was also to be revised under section 263.
4. The assessee submitted detailed replies to the CIT on 18.08.08, 08.09.08 & 16.09.08. As regards the write off of the cost of improvement of leasehold assets, the assessee’s submission was that the amount of Rs. 16,46,917/- represented the expenditure which was capitalised over the years less the depreciation actually allowed and the write off was necessary because the leasehold assets had been surrendered. The CIT did not accept the submission. According to him, the write off represented the written down value of the capital assets and therefore the loss resulting on account of the surrender was a capital loss and not allowable in the assessment. In so far as the Assessing Officer had allowed the same, the assessment was erroneous and prejudicial to the interest of the revenue.
5. As regards the write off all the advances against rental properties of Rs. 40,20,388/-, the assessee submitted the relevant details before the CIT and claimed that the expenditure represented revenue expenditure and the allowances thereof in the assessment was proper. The CIT however held that the deposits represented capital amounts and if they were not returned to the assessee, the loss was capital loss not allowable in computing the income. He dealt with the authorities cited by the assessee and held that in all those cases the assessee had advanced loans which were different from deposits and therefore they were not applicable. He thus held that the allowance of capital loss in the assessment was erroneous and prejudicial to the interest of the revenue.
6. As regards the prior period expenses/income, the CIT restored the same to the Assessing Officer for factual verification of the assessee’s contentions that there was no under assessment. Ultimately the assessment order, in so far as it related to the claims of Rs. 16,46,917/- on account of “cost of improvement of leasehold assets written off” and Rs. 40,20,388/- on account of “advances against rental properties written off” was set aside and the Assessing Officer was directed to pass a fresh assessment order in the light of the directions contained in the order of the CIT. The assessee was to be given proper opportunity.
7. The assessee is in appeal against the aforesaid order of the CIT contending that the assessment order was neither prejudicial to the interest of the revenue nor erroneous. It was claimed that even on merits the assessee was entitled to deduct the aforesaid amounts for computing its income.
8. In support of the submission that the assessment order was not erroneous, our attention was drawn to the judgement of the Supreme Court in CIT Vs. Max India Ltd., (2007) 295 ITR 282. On the basis of this judgement, it was contended before us that at least two views were possible on the question of tax ability of the two amounts claimed by the assessee and if that is so, there can be no resort to action under section 263. The Supreme Court in the case cited above has held that when the Assessing Officer adopts one of the two courses permissible in the law which has resulted in loss of revenue or has adopted one of the two possible views with which the Commissioner does not agree, the assessment order cannot be treated as an erroneous order prejudicial to the interest of the revenue, unless the view taken by the Assessing Officer is sustainable in law. Keeping this judgement in view, we have to look at the facts relating to the allowance of Rs. 40,20,388/- representing the forfeiture of the security deposits placed by the assessee on account of the properties taken on rent. The assessee has entered into several agreements with the landlords and copies of these agreements are contained in the paper book. These agreements are titled “leave and licence agreement”. For example in the leave and licence agreement between the assessee and Shapoorji Pallonji & Co. Ltd., the assessee has been described as licensee. The preamble states that the assessee was in need of accommodation for automobile workshop, repair & service station and on being approached, the licencor gave the licence and consent to the assessee to occupy and use the land and the structure. Clause 2(ii) provided that the assessee would pay interest free deposit of Rs. 2.5 lakhs to the licencor for the due performance of the contract to be refunded on the determination of the licence and upon handing over the clear and peaceful vacant possession of the premises in a satisfactory manner. Under sub-clause (v), the assessee was bound to use the licensed premises only as automobile workshop, repair & service station for the purpose of carrying on its existing business. Another agreement of leave and licence entered into in February, 2002 (page 23 of the paper book) in respect of the ground floor of the building known as “Sanghrajka House” also described the assessee as a licensee and the owners of the property as licencors. There are several other agreements compiled in the paper book which are all described as leave and licence agreements. For instance, clause 9 of the agreement of leave and licence entered into in August, 2002 provided that nothing contained in the agreement shall be construed as creating any right, easement, interest, tenancy or sub-tenancy in favour of the licensee in or over or upon the premises or any part thereof or transferring any interest in the premises in favour of the licensee (assessee herein), other than the permissive use granted to the assessee. All the agreements of the leave and licence thus gave only a licence or a permissive use of the premises to the assessee. The interest free deposits made by the assessee was to be returned on the determination of the leave and licence agreement but those deposits which were not returned to the assessee were written off as “advances against rental properties written off”.
9. It appears to us on the aforesaid facts that by making the interest free deposits for the purpose of obtaining the permissive use or licence to use the premises, the assessee did not obtain any enduring advantage or capital asset. There are two judgements which lend support to the assessee’s claim. The first judgement is that of the Bombay High Court in the case of IBM World Trade Corporation Vs. CIT, (1990) 186 ITR 412. In that case, the assessee was engaged in the manufacture of accounting and computing machines. It entered into one agreement with another company under which that company undertook to construct a factory and give the same on lease to the assessee. That company however required funds to build the factory and in order to facilitate the speedy construction of the factory, the assessee advanced nearly Rs. 1 lakh to the company. Eventually, the landlord company became insolvent and the amount advanced, including interest, which came to Rs. 1,08,088/- was written off in the assessee’s books and claimed as business loss. The Tribunal upheld the dis allowance of the same in the assessment. However when the matter was referred to the Honourable High Court, it was held that the amounts advanced by the assessee for the purpose of acquiring the factory on lease was an advance for the purpose of assessee’s business, that the length of the period of the lease was not very material for the purpose of determining the nature of the expenditure incurred on them and that since the acquisition of the premises on lease would not ordinarily be in the capital field, the amounts advanced by the assessee pursuant to the lease agreements to the landlord for the purpose of and in connection with the acquisition of the premises on lease should be held to be for the purpose of the assessee’s business. In this view of the matter, the loss was allowed as a business loss. The case of the present assessee seems prima-facie covered by the judgement. The difference between that case and the present case, as pointed out by the CIT as well as by the department before us is that in that case the amounts were advanced as loans whereas in the present case the amounts were placed by the assessee with the landlords as deposits which did not carry any interest. It seems to us that the distinction is superfluous and not substantial and would make no difference to the ratio of the judgement. The present case seems to be stronger on facts because we are concerned only with leave and licence agreements under which the assessee obtained no interest in the properties but was merely permitted to use the same under leave and licence of the landlords. The assessee in the cited judgement obtained a lease of the premises which is actually a transfer of interest in the property; nevertheless it was held that the acquisition of the lease was for the purpose of the business and therefore the amounts advanced by the assessee for acquiring the lease of the factory was a business advance and therefore it was held that when the advance was lost on account of the insolvency of the landlord, the assessee was entitled to claim the same as business loss. In the case of the present assessee, the deposits were not to carry any interest. However, the assessee, as already noted, did not acquire any interest in the properties and all that he would entitle to was to occupy the premises under leave and licence of the landlords. In such circumstances, there is a prima-facie case that the loss of the security deposits must be considered to be a loss incidental to the business.
10. There is one more judgement which is that of the Supreme Court in CIT Vs. Madras Auto Service (P.) Ltd., 233 ITR 468. In this case also the assessee had a lease for 39 years of the property. He demolished the building and constructed new buildings at his own expenses. The new building was to belong to the lessor and not the assessee. The assessee was entitled to merely use the new building at a very low rent. In these circumstances, the Supreme Court held that the amount spent by the assessee on construction of the new building was deductible as business expenditure, the only advantage derived by him by spending the money being that he got the lease of the new building at low rent which was an advantage from the business point of view and not a capital advantage. On this basis, the amounts spent by the assessee on constructing the property for the lessor was allowed as a deduction in computing the assessee’s business profits. The facts of the present case are stronger. The ratio of this judgement of the Supreme Court also prima-facie supports the assessee’s case. Thus we find that the view taken by the Assessing Officer that the loss of Rs. 40,20,388/- arising on account of the write off of the advances against rental properties was a loss incidental to the business cannot be said to be unsustainable in law. It is certainly one of the possible views which has the backing of the judgement of the Supreme Court in the case of Madras Auto Service (P.) Ltd. (supra) and that of the Honourable Bombay High Court in the case of I.B.M. World Trade Corporation (supra). In this view of the matter, we hold that the Assessing Officer was right in allowing the aforesaid amount as a deduction and his action cannot be called erroneous or prejudicial to the interest of the revenue.
11. So far as the cost of improvement of leasehold assets written off (Rs. 16,46,917/-) is concerned, the assessee had incurred various expenditure by way of improvement in respect of the leasehold assets to suit the specific needs of its business. This expenditure amounted to Rs. 40,57,635/- which was capitalised in the books of account and depreciation amounting to Rs. 24,10,718/- had been claimed and allowed in the assessments. The balance stood at Rs. 16,46,917/- which was written off on surrender of the leasehold premises. This amount was claimed as a deduction in the return and it was allowed by the Assessing Officer. We may clarify that though the assessee described the write off as “cost of improvement of leasehold assets written off”, it is not actually leasehold assets as we have already seen. All the agreements are only leave and licence agreements which permitted the assessee to use the premises, without creating any interest in the premises in favour of the assessee. We have also seen earlier that a lease is a transfer of interest in the property. Since there is no transfer of interest in the property in favour of the assessee, the nomenclature given by the assessee to the write off appears to be somewhat inaccurate. But that eed not deter us from looking at the assessee’s claim on the basis of legal principles. Merely because the assessee erroneously described the write off, it does not follow that the claim should be rejected. As rightly pointed out on behalf of the assessee, the nomenclature given by the assessee is not conclusive and is certainly contrary to the legal position that a leave and licence is distinct and separate from a lease and the former does not create any interest in the property in favour of the licensee. The judgement of the Supreme Court in the case of Madras Auto Service (P.) Ltd. (supra) supports the assessee on this point also. The improvements made by the assessee upon the properties taken on leave and licence basis were no doubt capitalised in the assessee’s books and depreciation had also been allowed. But in the year under consideration, we are concerned only with the balance of the cost of the expenditure minus the depreciation actually allowed. In the judgement of the Supreme Court cited above, it was held that where the building was owned by the lessor and the lessee spends money on improving the same or even constructing a new building the lessee did not acquire any capital asset and that the only advantage which the lessee derived was that it got lease of a new building at a reduced rent which was only a business advantage and not an advantage in the capital field. Applying the ratio of this judgement to the present case, it seems to us that the present case is a fortiori in the sense the assessee herein is not even the lessee of the property but only as licensee who was allowed the permissive use of the premises for its business. If the assessee had put up certain improvements in the premises in order to facilitate the carrying on of its business, we should have thought that the expenditure itself should have been allowed as revenue expenditure but for some reason, the assessee did not make such a claim but capitalised the same in its books of account and was claiming only depreciation. The assessee’s erroneous impression of the legal position should not be held against it when the correct legal position is brought out and the claim is made on that basis. In any case, the claim of the assessee is prima-facie supported by the judgement of the Supreme Court in Madras Auto Service (P.) Ltd. and by allowing the same, the Assessing Officer could not be said to have adopted an unsustainable or untenable view.
12. Reference was made on behalf of the department to Explanation 1 below section 32(1) which provides for a case where the business of the assessee is carried on in a building not owned by him and on which capital expenditure is incurred by him for the purposes of the business. It provides that such capital expenditure represented by the construction of any structure or renovation or extension or improvement to the building would be eligible for depreciation. We are unable to give effect to the argument of the Revenue because firstly the Explanation contains an enabling provision which provides that even where capital expenditure is incurred by an assessee on a property not belonging to him, he would be eligible for depreciation on such expenditure if it is represented by any structure etc. Secondly and more importantly, the Explanation applies only to an assessee who holds a lease or “other right of occupancy” and incurs such capital expenditure. It appears to us that the words “other right of occupancy” appearing in the Explanation should be construed ejusdem generis with the word “lease” and if that is so, the right of occupancy should be of such a nature that the assessee should possess an interest in the property and the occupancy must be referable to that interest. A mere right of occupancy under leave and licence agreement, without any interest in the premises itself, cannot be considered to be sufficient to attract the Explanation. We may refer to the order of the Special Bench of the Tribunal, Mumbai in the case of Voltas Ltd. Vs. ACWT., (2008) 113 ITD 19(SB) where it was observed that a licence neither passes any interest nor alters or transfers property in anything but only makes an action lawful which without the licence would have been unlawful. Licence to use the property, it was observed by the Special Bench, is traditionally distinguishable from a lease inasmuch as that the licensee does not have possession or any interest in the property. Leave and licence is thus materially different from a lease. In making these observations, the Special Bench relied on section 52 of the Indian Easements Act, which defines a licence. The assessee in the present case is having a mere licence to use the property which cannot be equated to a lease or a right of occupancy involving an interest in the property.
13. It was then argued on behalf of the revenue that there is nothing in the assessment order to show that the Assessing Officer took an informed decision after weighing the various possibilities or views that can be validly taken in respect of the assessee’s claims. It was argued that the Assessing Officer ought to have carried out an investigation into the claims and erred in not doing so which has itself made the order erroneous and prejudicial to the interest of the revenue. The notice dated 31.07.2008 does not in terms refer to such a deficiency in the assessment order. Action under section 263 seems to have been taken on the premise that the Assessing Officer ought not to have allowed the claims of the assessee on merits. There is no observation in the notice to the effect that the assessment order was completed in haste or without any enquiry. If no such deficiency in the assessment proceedings has been pointed out in the notice and the action under section 263 has not been founded on the same, it is not open to us to substitute our reasons in the place of the reasons given by the CIT and authority for this proposition can be found in the decision of the Punjab & Haryana High Court in CIT Vs. Jagadhri Electric Supply & Industrial Co., 140 ITR 490 and that of the Kerala High Court in CIT Vs. Chandrika Educational Trust, 207 ITR 108.
14. It was then submitted by the revenue that there was no clause in the leave and licence agreement permitting the assessee to make improvements. This contention is neither here nor there because it is a fact, whether there was a provision in the agreements or not, that the assessee did incur expenditure in making improvements to the premises taken on leave and licence basis in order to facilitate the carrying on of its business. The question is not whether what the assessee did was lawful or permitted under the agreements, but it is whether the expenditure remaining unwritten off in the assessee’s books can be written off and claimed as a deduction when the agreements came to an end and the assessee vacated the premises. On this aspect, we have already expressed our view. It was thereafter argued by the revenue that the CIT can invoke section 263 even in respect of a debatable issue and reference was made to the judgement of the Madhya Pradesh High Court in CIT Vs. Kohinoor Tobacco Products P. Ltd., 234 ITR 557. A respectful perusal of the judgement shows that there the CIT had taken action under section 263 on the ground that the Assessing Officer did not carry out any enquiry to ascertain whether the income received from letting out some properties was asses sable as business income or as property income. The CIT restored the assessment back to the Assessing Officer asking him to decide the issue afresh. In doing so, he had observed that the issue whether such income was asses sable as business income or as property income was debatable. In this background, it was held by the High Court that merely because the CIT had made an observation that the issue was debatable, his power to invoke section 263 cannot be struck down if the action under that section was actually based on the fact that the Assessing Officer had not carried out a proper enquiry into the assessee’s claim. This judgement, with respect, does not seem to support the revenue in the present case because as pointed out by us earlier, the CIT in the present case has not taken action on the ground of lack of enquiry by the Assessing Officer. He has merely stated that the Assessing Officer ought not to have allowed the claims of the assessee and it has been demonstrated before us on behalf of the assessee that its claims were prima-facie allowable, having regard to the judgement of the Supreme Court in CIT Vs. Madras Auto Service (P.) Ltd., (supra) and that of the Bombay High Court in IBM World Trade Corporation Vs. CIT (supra). The present case is covered, on this aspect, by the judgement of Supreme Court in CIT Vs. Max India Ltd. (supra) where it has been held that no action can be taken under section 263, if the Assessing Officer had adopted one of the two or more possible views on the issue and in such a case the assessment cannot be termed as erroneous or prejudicial to the interest of the revenue.
15. The judgement of the Allahabad High Court in Mannulal Matadeen Vs. CIT., (2005) 277 ITR 346, cited by the revenue, is similar to the judgement of the Madhya Pradesh High Court(supra). There also the Assessing Officer had not made the necessary enquiries before allowing deduction of the interest. The Assessing Officer had not made enquiries into the journal entries passed by the assessee in that case and without examining them had allowed the interest as a deduction. The CIT’s action under section 263 was upheld under these circumstances.
16. The judgement of the Delhi High Court in Duggal And Co. Vs. CIT, (1996) 220 ITR 456 also falls in the same category, where the action under section 263 was upheld because it was taken on the ground that the Assessing Officer did not make any enquiry into the return even though such an enquiry was called for. In this case also the Assessing Officer had allowed interest at a higher percentage even though the assessee had charged interest from others at a much lower percentage. According to the CIT, the Assessing Officer ought to have investigated into the facts submitted in the return before allowing the claim and failure to do so made the assessment order erroneous and prejudicial to the interest of the revenue.
17. Thus, the Madhya Pradesh, Allahabad and Delhi High Courts decisions are not relevant to the present case where there is no allegation by the CIT in the notice or in the order that the assessment was completed without any enquiry or investigation.
18. The department then referred to judgement of Supreme Court in the case of Hasimara Industries Ltd. Vs. CIT, (1998) 98 Taxman 352 in order to contend that the cost of improvements incurred by the assessee was capitalised in its books and only depreciation was claimed thereon and thus the entry made in the books of account conclusively proved that the expenditure was capital in nature as held by the CIT. A respectful perusal of the judgement shows that it does not lay down the proposition canvassed on behalf of the revenue. In that case, the assessee was engaged in the manufacture of tea and entered into a leave and licence agreement with a cotton mill which was under liquidation. The assessee paid an advance of Rs. 20 lakhs to the cotton mill for modernisation of its machinery. The cotton mill was unable to repay the advance on the expiry of the leave and licence agreement and so the same was written off in the books of the assessee and claimed as a business loss. The Supreme Court noticed that the assessee’s business was in the manufacture of tea and not in cotton manufacturing. It had obtained only the operating rights from the cotton mill under leave and licence agreement for the purpose of acquiring the profit making apparatus for a period of three years and that the business of running the cotton mill was not its own. Since it was only operating the mill under leave and licence basis, the amount of the advance of Rs. 20 lakhs given by the assessee to the cotton mills was not for its own purpose by way of business expenditure for modernising the mill but represented capital to the cotton mill which in turn undertook to modernise the mill.
The assessee had passed resolutions showing that the amounts were not in the nature of loans or money lending transactions. The advances not being in the nature of loans in the course of money lending business and not having been made for the purpose of assessee’s own business, the Supreme Court held that the amount cannot be claimed as a business loss. We fail to see how this judgement can be of any help to the revenue. No case has been made out by the CIT or by the learned D.R. before us to the effect that the expenditure incurred by the assessee in the premises taken on leave and licence basis were not connected to its business operations. Unless it is successfully shown that the expenditure had nothing to do with the carrying on of the assessee’s business, the contention of the revenue that the loss cannot be allowed as a business loss must fail.
19. For the aforesaid reasons, we set aside the order passed by the CIT under section 263 of the Act and allow the appeal of the assessee with no order as to costs.