2012 (7) TMI 526 - HC - Income Tax

Substantial Lease Premium Is One-Time Consideration, Not Annual Rent Amortization Under Tax Rules

The HC held that the substantial lease premium paid by the lessee was a one-time consideration for securing possession and creating leasehold rights, not ... Nature of Lease Premium - Capital or Revenue Expenditure - Amortization of lease premium paid by the appellant - Rule of consistency - Whether lease premium paid Noida Authority is to be treated as advance rent? Held that:- In the present case, what is apparent is that the lessee (assesse) paid a substantial amount (Rs. 2.53 crores) in 1989 at the time of entering into the transaction. It was a precondition for securing possession; the amount was one-time consideration in terms of the lease condition. In addition, the lessee has to pay 2.5% of the said amount as annual rent, which is subject to increase periodically. No doubt, the assesse argues that the annual rent is depressed, and does not reflect the market rent. However, there is no material to support this submission. Nor is there any material to support the argument that the amount of Rs. 2.53 crore paid over 23 years ago did not constitute the true and real consideration for creating an interest in the property. We also notice that the terms of the lease agreement stipulated that the registration and stamp duty and charges were borne by the lessee (assesse). In this background, the restrictions imposed on the lessee, i.e. enjoining it not to transfer for a particular period, and granting liberty to transfer the right subject to certain conditions, and other restrictions regarding land use, are consistent with the nature of interest created, i.e. lease hold rights. The court is also conscious of the fact that the tenure of the lease is quite substantial, and virtually creates ownership rights in favour of the lessee, who is at liberty to construct upon the plot. Exclusive possession was handed over to the assessee at the time of creation of the lease. Having regard to all these factors this Court is un-persuaded by the assesses’ submission that the amount of Rs. 2.53 crores paid in 1989 had to be treated as advance rent, which could be amortized annually, in equal instalments, as is urged on its behalf. Rule of consistency - for the period of about 15 years, the income tax authorities had accepted the assesse’s submissions and permitted annual amortization of the initial lease consideration, as advance rent. - held that:- This Court notices that there cannot be a wide application of the rule of consistency. In Radhasaomi [1991 (11) TMI 2 - SUPREME COURT], the Supreme Court acknowledged that there is no res judicata, as regards assessment orders, and assessments for one year may not bind the officer for the next year. Issues Involved:1. Whether the amortization of lease premium paid by the appellant was capital expenditure or revenue expenditure.2. Applicability of the principle of consistency in tax assessments.Analysis:1. Nature of Lease Premium: Capital or Revenue ExpenditureThe primary issue was whether the lease premium paid by the appellant should be classified as capital expenditure or revenue expenditure. The appellant claimed a deduction of Rs. 2,75,045/- for the amortized lease premium paid to NOIDA, arguing that it was revenue in nature since it did not confer ownership rights but allowed the use of land for office construction.Tribunal's Findings:- The lease agreement with NOIDA was for 90 years, with a premium of Rs. 2,53,96,993/- paid upfront and annual rent at 2.5% of the premium.- The Tribunal held that the lease conferred a benefit of enduring nature and thus was capital expenditure. The premium paid was not advance rent but a one-time payment securing a long-term asset.CIT (Appeals) and ITAT Rulings:- The CIT (Appeals) and ITAT both upheld the assessment, stating that the lease premium was capital in nature. They referenced similar cases like Mukund Limited, where long-term lease premiums were treated as capital expenditure.- The ITAT distinguished the appellant's case from others like Gemini Arts (P) Ltd. and Madras Auto Service (P) Ltd., where lump sum payments were treated as advance rent due to specific lease terms and circumstances.Court's Analysis:- The Court examined the lease terms, noting the substantial payment made upfront and the nominal annual rent. It found no evidence to support the claim that the premium was advance rent.- The Court referenced the Supreme Court's decisions in Assam Bengal Cement Co. Ltd. and Panbari Tea Co. Ltd., which clarified that payments for acquiring long-term benefits or interests in property are capital expenditures.- The Court concluded that the lease premium created an enduring asset and thus was capital expenditure, not amortizable as revenue expenditure.2. Principle of ConsistencyThe appellant argued that the principle of consistency should apply since the amortization of the lease premium had been accepted for over 15 years.Tribunal's Position:- The ITAT rejected the principle of consistency, citing that it is not universally applicable, especially when previous assessments were contrary to law.Court's Analysis:- The Court acknowledged the principle of consistency as outlined in Radhasaomi Satsang but emphasized that it is not absolute and does not override legal correctness.- The Court highlighted that erroneous views in previous assessments do not bind tax authorities to repeat them, as consistency must yield to the correct application of law.ConclusionThe Court upheld the Tribunal's decision, concluding that the lease premium paid by the appellant was capital expenditure and not revenue expenditure. The principle of consistency was deemed inapplicable in this case due to the legal correctness of treating the lease premium as capital expenditure. The appeals were dismissed, affirming the revenue's stance.