Leasehold rights and section 14A disallowance: depreciation denied, revenue deduction rejected, and exempt-income disallowance remanded.

Leasehold rights in land were treated as an interest in immovable property and not as intangible assets or similar business or commercial rights eligible for depreciation under section 32(1)(ii), so the depreciation claim failed. The alternative claim that development cost of commercial space given to STPI was revenue expenditure was also rejected because the outlay related to acquisition of a capital interest in land. The section 14A read with rule 8D(2)(iii) disallowance was set aside because the record lacked a proper factual basis on expenditure incurred for exempt income, and the matter was remitted for fresh examination.

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Issues: (i) Whether leasehold rights in land constituted an intangible asset or business or commercial rights eligible for depreciation under section 32(1)(ii); (ii) whether the cost of development of commercial space given to STPI was allowable as revenue expenditure; (iii) whether disallowance under section 14A read with rule 8D(2)(iii) was sustainable.

Issue (i): Whether leasehold rights in land constituted an intangible asset or business or commercial rights eligible for depreciation under section 32(1)(ii).

Analysis: The definition of intangible assets in section 32(1)(ii) covers know-how, patents, copyrights, trademarks, licences, franchises, and other business or commercial rights of a similar nature. Leasehold rights in land were held to create only an interest in immovable property and did not fall within the enumerated category or the residuary limb applying the principle of ejusdem generis. A lease confers an interest in land, which is capital in nature and not an eligible intangible asset for depreciation.

Conclusion: Depreciation on leasehold rights was not allowable and the issue was decided against the assessee.

Issue (ii): Whether the cost of development of commercial space given to STPI was allowable as revenue expenditure.

Analysis: The expenditure was incurred for acquiring an interest in land and not for a revenue purpose. Since the underlying asset was capital in nature, the alternative plea for allowance of the same outlay as revenue expenditure could not succeed.

Conclusion: The alternative claim for revenue deduction was rejected and the issue was decided against the assessee.

Issue (iii): Whether disallowance under section 14A read with rule 8D(2)(iii) was sustainable.

Analysis: The record did not show a clear finding that the assessee's claim of no expenditure for earning exempt income was incorrect. Where investments are made from a common pool of funds, investments may be inferred to be out of own funds, and without a proper factual finding the disallowance could not stand. The matter therefore required fresh examination by the Assessing Officer.

Conclusion: The section 14A disallowance was set aside and remitted for fresh adjudication.

Final Conclusion: The depreciation claim and the alternative revenue-expenditure claim failed, while the disallowance under section 14A was remanded for reconsideration, resulting in a partly allowed appeal.

Ratio Decidendi: Leasehold rights in land are an interest in immovable property and do not constitute intangible assets or similar business or commercial rights under section 32(1)(ii); a section 14A disallowance requires a proper factual basis before it can be sustained.

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