2004 (7) TMI 334 - AT - Income Tax

Tribunal's Decision: Revenue's Appeal Partially Allowed, CIT(A)'s Rulings Upheld

Deputy Commissioner Of Income-tax, Special Range - 3. Versus Sudarshan Chemicals Ltd.

Deputy Commissioner Of Income-tax, Special Range - 3. Versus Sudarshan Chemicals Ltd. - ITD 095, 131, TTJ 095, 710, Issues Involved:1. Deletion of addition of Rs. 14,40,000 as advance rent to MIDC Mahad.2. Deletion of addition of Rs. 71,76,040 related to understatement of stock due to unused MODVAT.3. Exclusion of excise duty and sales tax from total turnover for 80HHC deduction computation.Issue-wise Detailed Analysis:1. Deletion of Addition of Rs. 14,40,000 as Advance Rent to MIDC Mahad:The primary issue was whether the lump sum payment of Rs. 14,40,000 made by the assessee to Maharashtra Industrial Development Corporation (MIDC) for a 99-year lease should be considered capital expenditure or advance rent, thus deductible as revenue expenditure. The assessee initially showed this amount under 'fixed assets' as leasehold land and later claimed it as revenue expense in a revised return, relying on the Karnataka High Court judgment in CIT v. HMT Ltd. The Assessing Officer (AO) rejected this claim, stating that the Income-tax Department had not accepted the Karnataka High Court's decision. The CIT(A) allowed the deduction, treating the amount as advance rent.The Tribunal analyzed the nature of the payment, considering various judicial precedents. The Tribunal emphasized that lump sum payments for acquiring leasehold rights are generally considered capital expenditure, citing decisions from the Privy Council, Supreme Court, and other High Courts. It was noted that the payment in question was a condition precedent for acquiring leasehold rights and not merely advance rent. The Tribunal referred to its own earlier decision in the case of Devi Construction Co., which had similar facts and concluded that such payments are capital in nature. Consequently, the Tribunal reversed the CIT(A)'s order and restored the AO's decision, holding the Rs. 14,40,000 as capital expenditure.2. Deletion of Addition of Rs. 71,76,040 Related to Understatement of Stock Due to Unused MODVAT:The second issue was whether the addition of Rs. 71,76,040 made by the AO to cover the understatement of stock due to unused MODVAT should be deleted. The CIT(A) had deleted this addition, and the Tribunal found that this issue was covered in favor of the assessee by the Supreme Court judgment in CIT v. Indo Nippon Chemicals Ltd. The Tribunal upheld the CIT(A)'s order, following the Supreme Court's decision.3. Exclusion of Excise Duty and Sales Tax from Total Turnover for 80HHC Deduction Computation:The third issue concerned whether excise duty and sales tax should be excluded from the total turnover when computing the deduction under section 80HHC of the Income-tax Act, 1961. The CIT(A) directed the exclusion of these amounts, and the Tribunal noted that this issue was covered by the Bombay High Court's decision in the assessee's own case, CIT v. Sudershan Chemicals Industries Ltd. The Tribunal upheld the CIT(A)'s order, following the High Court's ruling.Conclusion:The Tribunal's decision resulted in a partial allowance of the revenue's appeal. The Tribunal reversed the CIT(A)'s order regarding the Rs. 14,40,000 payment to MIDC, treating it as capital expenditure, while upholding the CIT(A)'s decisions on the deletion of the Rs. 71,76,040 addition and the exclusion of excise duty and sales tax from total turnover for 80HHC deduction computation.