2012 (4) TMI 761 - AT - Income Tax

Lease premium as capital expenditure: Tribunal overturns CIT(A) decision under Income Tax Act

Deputy Commissioner of Income-tax, Circle-5, Kolkata Versus M/s. Balmer Lawrie & Co. Ltd.

The Tribunal held that the lease premium paid by the assessee should be treated as capital expenditure, aligning with the principles in the Mukund Ltd. ... Expenditure on Lease premium - Capital or Revenue Expenditure - Assessee entered in agreements with different authorities for obtaining land on long term lease thereon and lease period varies from 10 years to 95 years - Claimed proportionate amount of lease premium paid as advance payable and claimed the expenditure as revenue expenditure u/s. 37 - Allowed by CIT(A) as revenue expenditure following assessee's own case - Thus, Revenue Appeal HELD THAT:- In the issue before Special Bench in the case of JOINT COMMISSIONER OF INCOME-TAX, SPECIAL RANGE 25, MUMBAI VERSUS MUKUND LTD. [2007 (2) TMI 358 - ITAT MUMBAI], the assessee company entered into exactly similar agreement with MIDC as in the present case before us. It was held that 'Assessee terminated the lease agreement prior to the expiry of lease period of 99 years. There was also no material on record to show that the assessee had made the advance payment of rent for future years to secure any reduction in the rent payable for the future years or for any other business consideration. Hence, the consideration of amount paid by the assessee for obtaining the leasehold rights from the MIDC in its favour for a period of 99 years was capital in nature and, therefore, not allowable as deduction to the assesse' In assessee’s own case for AY 2003-04, the decision of Special Bench in the case of Mukund Ltd was never cited even though it was available at that time. In such circumstances, we are of the view that now we have alternative except to follow the ratio laid down by Special Bench of this Tribunal in the case of Mukund Ltd. Respectfully following Special Bench in the case of Mukund Ltd we reverse the order of CIT(A) and restore that of the A.O - Decision against Assessee Issues Involved:1. Whether the expenditure claimed by the assessee on lease premium can be treated as business expenses and allowed as a deduction under Section 37 of the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Nature of Lease Premium Expenditure:The core issue in this appeal is whether the lease premium expenditure claimed by the assessee should be treated as a business expense and allowed as a deduction under Section 37 of the Income Tax Act, 1961. The assessee, engaged in various businesses, claimed a proportionate amount of lease premium paid for land acquired on long-term leases from different authorities like Maharashtra Industrial Development Corporation (MIDC) and Calcutta Port Trust, as business expenditure. The Assessing Officer disallowed this claim, treating the lease premium as capital in nature.2. CIT(A)'s Decision:The CIT(A) allowed the assessee's claim by relying on the Tribunal's decision in the assessee's own case for the Assessment Year 2003-04, where a similar expenditure was allowed as revenue expenditure. The CIT(A) considered this a covered issue based on the precedent set by the Tribunal.3. Tribunal's Analysis and Precedents:The Tribunal examined the facts and circumstances of the case, noting that the assessee had entered into several agreements with authorities like MIDC and Calcutta Port Trust for acquiring land on long-term leases. The assessee paid lease premiums and claimed these as business expenses under Section 37 of the Act. The Tribunal referred to its earlier decision in the assessee's case for the Assessment Year 2003-04, where similar lease premium payments were allowed as revenue expenditure. The Tribunal also considered the Special Bench decision in the case of JCIT Vs. Mukund Ltd., which dealt with a similar issue where the lease premium paid for a 99-year lease was treated as capital expenditure.4. Special Bench Decision in Mukund Ltd.:The Special Bench in Mukund Ltd. held that the lease premium paid for acquiring leasehold rights for a period of 99 years was capital in nature. The Tribunal noted that the facts in the present case were similar to those in Mukund Ltd., where the lease premium was considered a non-refundable payment for acquiring leasehold rights, thus capital in nature. The Special Bench emphasized that the lease premium paid was not an advance rent but a consideration for acquiring leasehold rights, which conferred an enduring benefit to the assessee.5. Distinguishing Factors and Judicial Precedents:The Tribunal also considered other judicial precedents, including the Karnataka High Court's decision in CIT Vs. HMT Ltd., where a similar lease premium payment was treated as revenue expenditure. However, the Tribunal found that the facts in the present case were more aligned with those in Mukund Ltd., where the lease premium was treated as capital expenditure due to the enduring nature of the benefit conferred.6. Conclusion and Final Judgment:Given the similarity of facts with the Mukund Ltd. case and the principles laid down by the Special Bench, the Tribunal concluded that the lease premium paid by the assessee should be treated as capital expenditure. Consequently, the Tribunal reversed the order of the CIT(A) and restored the disallowance made by the Assessing Officer. The appeal of the revenue was allowed, and the lease premium expenditure claimed by the assessee was not allowed as a deduction under Section 37 of the Act.Final Order:The appeal of the revenue is allowed. The order was pronounced in open court on 30.04.2012.