Deduction of depreciation was allowable as expenditure on Leasehold Premises classified as capital expenditure

DCIT Vs Add Lounge Service Pvt. Ltd (ITAT Delhi)

Conclusion: Capital expenditure on leasehold premises, such as plumbing, partitions, flooring, and electrical fittings, qualified as improvements to a building used for business purposes. Therefore, depreciation deduction for improvements made to leasehold premises was allowable.

Held: Assessee had claimed depreciation on the cost of improvements made to a leased property used for its business operations. AO disallowed the depreciation and treated the expenditure as non-qualifying for depreciation under Section 32 and made an addition of Rs. 53,42,103/-. CIT(A) deleted the addition, relying on a prior ITAT decision in the assessee’s own case. CIT(A) held that assessee was entitled to claim depreciation on leasehold improvements, as such expenditure satisfied the ownership test under Explanation 1 to Section 32. Revenue appealed to the ITAT. It was held that the earlier ruling held that capital expenditure on leasehold premises, such as plumbing, partitions, flooring, and electrical fittings, qualified as improvements to a building used for business purposes. Further, it was highlighted that Explanation 1 to Section 32 of the Income Tax Act, effective from 01/04/1988, explicitly allows depreciation on such expenditure as if the assessee owned the building. Tribunal noted that Revenue failed to distinguish the facts of the present case from the prior ruling. It confirmed the CIT(A)’s order and directed AO to delete the addition of Rs. 53,42,103/-.

FULL TEXT OF THE ORDER OF ITAT DELHI

1. This appeal by Revenue is directed against the order of Commissioner of Income Tax (Appeals)-29, New Delhi [for short hereinafter referred to as the “(Ld. CIT(A)”] dated 30.06.2023 for Assessment Year 2012-13. The word Act hereinafter in this order shall mean the Income Tax Act, 1961.

2. The first issue raised by the appellant revenue through its grounds of appeal Nos. 1 and 2 is regarding the decision of the ld CIT(A) in deleting the addition of Rs. 53,42,103/- made by the ld AO by disallowing the Assessee’s claim of depreciation on lease hold improvements. As per brief factual matrix of the case the Assessee had procured a premise on lease and claimed depreciation on the cost of improvements made by it for utilization of the impugned property.

3. Per contra the ld DR placed reliance upon the order of ld AO.

4. The ld counsel for the Assessee submitted that the ld CIT(A) has given it relief by relying upon the order of this Tribunal in its own case vide ITA No. 6431/Del/2014 of Skylark Hospitality India (P) Ltd Vs. DY CIT. it was argued that consequently there is no error in the order ld first appellate authority.

5. We have heard rival submissions in the light of the materials available on the record. We have noted that a coordinate bench of this Tribunal in Assessee’s own case vide ITA No. 6431/Del/2014 (supra) have decided that the Assessee is entitled for claim of depreciation qua lease hold premises. It was held that the test of ownership would be satisfied in such cases. The relevant part comprising para 4 of the order is reproduced as under:-

“16. We have carefully considered the rival contention and perused the orders of the lower authorities. In fact after the order u/s 154 of the act passed by the Ld. assessing officer the exact amount of depreciation disallowed by the Ld. AO does not remain Rs. 7959039 but only Rs. 2625414. The above depreciation has been claimed by the assessee on account of various capitalisation made by the assessee being in the nature of improvement made to the leasehold assets. The respective details of those expenditure are available at page No. 23 – 27 of the paper book. For assessment year 2009 – 10 the total amount of expenditure incurred by the assessee is Rs. 193,31,630 and for assessment year 2010 – 11 the total expenditure incurred by the assessee is Rs. 14347583/- . On the above amount of expenditure the assessee has claimed depreciation at the rate of 10%. On looking at the details of the expenditure, it is apparent that the above addition has been made by the assessee to the building and the claim of depreciation is at the rate of 10% of the expenditure. The expenditure are in the nature of plumbing work, and grail, building words such as partition, flowing entice, main panel and distribution board, fancy lighting etc. From the above details furnished by the assessee before the lower authorities, it is apparent that the assessee has made improvement in the leased property which is used by the assessee for the purposes of the business. Naturally, the addition has been made to the building and also part of the furniture and electrical fittings. Even otherwise the assessee has claimed depreciation for the income tax purposes only at the rate of 10% which is less than the depreciation for machinery and plant and equivalent to the depreciation rate for the furniture and fittings. Further the explanation 1 added to section 32 with effect from 1/4/1988 which provides that whether the business or profession of the assessee is carried on in the building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business on the construction of any structure or doing any work in on in relation to and by way of renovation or extension of improvement to the building , then the provisions of this clause shall apply as if the said structural work is building owned by the assessee. Therefore according to that even the expenditure incurred by the assessee on the leasehold premises will also satisfy the ownership test. Furthermore the asset is also used by the assessee for the purposes of the business satisfying the user test, the depreciation thereon cannot be disallowed. In view of the above facts we direct the Ld. assessing officer to delete disallowance of depreciation on various expenditure incurred for of the business which are capital expenditure in nature and qualifies as building and furniture and fixture amounting to Rs. 2625414/-. Accordingly, we reverse the finding of the Ld. CIT (A) and allow ground No. 2 of the appeal of the assessee.”

6. We have also noted that the facts of the present case are identical to those adjudicated by the Hon’ble coordinate bench in ITA No. 6431/Del/2014 (supra). The ld DR could not establish any distinguishment of facts of the present case. Accordingly, in respectful compliance to the said decision as well as for the principles of consistency we hold that the Assessee is entitled for its claim of depreciation on improvements on lease hold premises. Accordingly, we confirm the order of the ld CIT(A) and direct the ld AO to delete the impugned addition. Grounds of appeal Nos. 1 and 2 raised by the revenue are dismissed.

7. The next issue raised by the revenue vide grounds of appeal Nos. 3, 4 and 5 are regarding the deletion of addition of Rs. 4 crores made by the ld AO on account of sale consideration on sale of its shares by the Assessee. The ld DR drew our attention to the brief factual matrix of the issue. During the year under consideration the appellant Assessee has entered into a sale agreement for sale of its shares to one M/s. Devyani International Ltd for sale of its share holding in M/s. Delhi Select Services Hospitality Pvt. Ltd (DSSH). The appellant Assessee was in joint venture with M/s. Delhi International Airport Ltd (DIAL) and had its operations located in the domestic Terminal T-3 of IGI Airport, New Delhi. The appellant Assessee had 60% of share holding aggregating to 24 lac shares of DSSH. In terms of para D of the impugned shares sale agreement dated 30.07.2011 a sale consideration of Rs. 16 crores was to be received by the appellant Assessee for transfer of its 24 lacs shares. Clause 4.2 of the said agreement postulated that Rs. 4 crores would be paid to the Assessee by the buyer and which will be remitted to the buyer from United Beverage Ltd or some other alcoholic beverage company. There was stipulation of a bank guarantee to be provided by seller to the buyer which was to be invoked in case of non receipt from the buyer. The ld DR argued that ld AO made the addition of Rs. 16 crores because the agreement unequivocally mandated sale consideration of Rs 16 crores and that the provisions of Clause 4.2 would not alter the sale consideration. It is the case of the revenue that the deletion by ld CIT(A) is excessive and erroneous. It has been argued that the ld First Appellate Authority has failed to consider clear stipulations of the agreement and have been swayed by the principles of accrual of income and accompanying case laws relied upon by the appellant Assessee.

8. The ld counsel for the Assessee before us reiterated the same set of arguments which were taken before the ld First Appellate Authority. The ld counsel relying upon a catena of judgments pronounced by Hon’ble Bombay High Court, Gujarat High Court as well as Apex Court argued that the ld AO had made hypothetical assumption of income and that the alleged amount of Rs. 4 crores was neither received by the Assessee nor had accrued. It was stated that accordingly there cannot be any case for taxation of the impugned income in the hands of the Assessee. The ld counsel submitted that after adjustment of all deduction etc provided for in the agreement dated 30.07.2011 (supra), the Assessee had received Rs. 12 crores and which was offered for taxation.

9. We have heard rival submissions in the light of the materials available on the record. We have noted that the conditions prescribed in the shares sale agreement dated 30.07.2011 are seminal to the controversy and hence, we deem it appropriate to reproduce relevant conditions herein below:-

Clause B, C and D of the agreement

‘…..(B) The issued and paid up share capital of the Company presently comprises 40,00,000 (Four Million Only) fully paid up equity shares (the “Equity Shares”) having a face value of Rs. 10/- (Rupees Ten only) each, aggregating to a total of Rs. 4,00,00,000/- (Rupees Forty Million Only) as set out in Appendix A.

(C) The Seller holds 24,00,000 (Two Million Four Lakhs) Equity Shares of the Company representing 60% of entire equity shareholding of the Company, the details whereof are more particularly described in Appendix-A hereto:

(D) The Purchaser is desirous of purchasing the entire shareholding in the Company held by the Seller. The Seller has agreed to sell its entire 24,00,000 (Two Million Four Lakhs) Equity Shares in the Company (“Sale Shares”) to the Purchaser for an aggregate maximum sale consideration of Rs. 16,00,00,000/- (Rupees Sixteen Crores only) (“Purchase Consideration”) and upon the terms set out in this Agreement….. ”

Para 2.2 and 2.3 of the agreement

“…..2.2 The parties also agree to the allocation of the Purchase Consideration as set forth in Schedule 2 attached hereto and by this reference incorporated herein.

2.3  Purchaser has agreed to pay an amount of Rs. 2.00.00.000/-(Rupees Two Crores only) simultaneously on signing of this SPA, as a commitment amount, which shall be adjusted against the final payment of the Purchase Consideration, In case deal is not consummated due to any reason before the Long Stop Date, then SSP shall repay the Commitment Amount to the Purchaser without any demur or protest along with interest (2) 12% p.a. and to secure the repayment of Commitment Amount as per this clause, SSP has agreed to give a Post dated cheque of Rs. 2,00,00,000/- (Rupees Two Crores only) to Purchaser, simultaneously with present to its Banker and have the same encashed …..”

Clause 4.2 (d)(vii) and (viii) of the agreement

“…..vii. Execution by Seller and Purchaser of such deeds and documents as may be required by the lenders of the Company and for DIAL to their respective satisfaction,

viii. Parties have mutually agreed that as a part of the Purchase Consideration, Purchaser shall transfer Rs. 4,00,00,000/- (Rupees Forty Million only); anticipated to be received from United Breweries Limited and United Spirits Limited (the “UBL/USL/”) or any other alcoholic beverages Company (“One time payment”), to Seller alongwith with balance consideration amount.

Further, the Parties have agreed that Seller shall provide a Bank Guarantee (in a format manner acceptable to the Purchaser) of aforesaid amount of Rs. 4,00,00,000/- (Rupees Forty Million only) in favour of purchaser with an understanding that if aforesaid amount of Rs. 40.000.000) (Rupees Forty Million), is not received within a period of one year from the Long Stop Date, in such an eventuailty Purchaser shall be entitled to invoke the Bank Guarantee given by Seller to the Purchaser However, if the aforesaid amount is received by the Company at any time after the invocation and realization of bank guarantee, in such an event Purchaser shall remit the same to the Seller….. ”

“SCHEDULE 2 of the agreement or ALLOCATION OF PURCHASE CONSIDERATION

* Net Current Liabilities shall mean all current liabilites and provisions less all current assets.

10. A perusal of the above extracts of the agreement dated 30.07.2011 shows that the sale consideration agreed for sale of 24 lacs shares of M/s DSSH was agreed at Rs. 16 crores. The same has been clearly written in item ‘D’ extracted hereinabove. The same amount has further been reproduced and reiterated in Schedule 2 of the agreement again extracted herein above. Thus, it is clear that the agreed sales consideration was Rs. 16 crores. The Assessee has argued that by way of subsequent deductions and understandings it received Rs. 12 crores. In support of its contentions it has relied upon its financials. The argument of the Assessee are however far from convincing. The agreement dated 30.07.2011 is an agreement between two corporate entities which are backed by approvals of its Board of Directors and any changes in any conditions therein would have to be only done through another agreement only. There is nothing on record to suggest that by way of any subsequent agreement the sale consideration was reduced from Rs. 16 crores to Rs. 12 crores.

11. Coming to the analysis and reliance placed by the ld AO upon provisions of Clause 4.2(b)(vii), we have noted that the same is not unfounded. Clause 4.2(a) of the agreement clearly postulates that the purchaser shall remit to the seller consideration amount as set forth in schedule 2. It is pertinent to note that Schedule 2 (supra) clearly provided that the consideration for the sale of 24 lacs shares is Rs. 16 crores. Further, Clause 4.2(b)(vii) stipulates that the purchaser shall transfer Rs. 4,00,00,000/- to the seller. It has been clarified that the said amount is anticipated to be received by the purchaser from M/s. United Breweries Ltd. and M/s. United Spirits Ltd. or any other alcoholic beverages company. The said clause further stated that the seller shall provide a bank guarantee of Rs. 4 crores to the purchaser as a security for the said payment of Rs. 4 crores. It was provided that in case the purchaser does not receives the amount of Rs. 4 crores from M/s. United Breweries Ltd. and M/s. United Spirits Ltd. (UBS/ USL) or any other alcoholic beverages company, the purchaser would have the right to invoke the bank guarantee. The said clause further stated that in the event bank guarantee was invoked by the purchaser and he receives the said Rs. 4 crores from UBS/ USL later then Rs. 4 crores would be returned back to the seller. Thus, it is clear that the understanding that was agreed between the contracting party was that total consideration would be Rs. 16 crores out of which the said Rs. 4 crores was an integral part. It is the case of the ld counsel for the Assessee that no bank guarantee was given. It is immaterial whether bank guarantee was given or not because the same was primarily as an assurance to the prospective buyer only and was conditional upon non payment of amounts from UBS/ USL. There could have been a situation that amounts were received by the buyer from UBS/ USL and hence necessity for bank guarantee did not arise.

12. The ld counsel for the Assessee has placed heavy reliance upon case laws concerning taxation of income on accrual or receipt basis. We do not find sufficient force in the argument as the judicial precedents relied upon by the Assessee have been found to be un-contextual. In the present case the amounts have not been added by the revenue on account of any hypothetical supposition or any deeming provisions but purely on account of a contractual agreement where the Assessee is a seller. Thus, the controversy of any accrual of income etc. is not seminal to the present facts of the case. The Assessee has also argued that the amount of Rs. 12 crores was paid after arriving at all the deductions etc. agreed between the contracting parties and which were clearly stipulated in the agreement. It was vehemently stated that the amount of Rs. 12 crores was arrived at after such deductions and hence, cannot be doubted. We are again constrained to subscribe to the argument of the appellant Assessee since the impugned amount of Rs. 4 crores was not a part of any stipulated deduction mentioned anywhere in the contract dated 30.07.2011 specifically in Clause 3 and schedule 2 of the agreement which lays down conditions precedent to the contract. To this extent the argument of ld CIT(A) in para 4.5 of his order that “…the agreement stated the gross value to be capped at Rs. 16 crores there were clauses for deductions and restrictions from the capped value …” has been found to be not in consonance with the true facts of the case. The value or the sale consideration was fixed at Rs. 16 crores and the impugned Rs. 4 crores do not find any mention therein as a deduction. It is not a case that the upper limit of the sale consideration was Rs. 16 crores to be suitably reduced by the said Rs. 4 crores.

13. Accordingly, we are of the considered view that the relief allowed by the ld CIT(A) of Rs. 4 crores by deleting the corresponding addition made by the ld AO is not supported by facts on record. We, therefore, set aside the order of the ld CIT(A) and confirm the addition of Rs. 4 crores made by the ld AO. The Grounds of appeal No. 3, 4 and 5 raised by the revenue are therefore allowed.

14. In the result the appeal of the revenue is partly allowed.

Order pronounced in the open court on 27/06/2025.