Payments for common infrastructure not depreciable under s.32; treated as land, but 5% lease-crystallised amortisation allowed

HC held that the taxpayer cannot claim depreciation under s.32 for payments made toward common infrastructural facilities because a long-term leasehold/right to use does not make the taxpayer an "owner" of an intangible asset; the claim was therefore disallowed and the Tribunal's view affirmed. The HC treated the payment as part of the land (not building). However, the HC allowed interference with the Tribunal on the alternate claim: the contribution should be amortised and 5% of the amount, becoming non-refundable each year under the lease terms, is allowable as revenue expenditure in the year it crystallises.

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1. ISSUES PRESENTED AND CONSIDERED

Whether sums paid to a development authority for common infrastructural facilities are eligible for depreciation as intangible "commercial rights" under Section 32(1)(ii) of the Income Tax Act when the payer holds a long-term lease/right of enjoyment but not ownership.

Whether such sums, if not eligible for depreciation, are allowable as revenue expenditure under Section 37 of the Income Tax Act.

Whether, if allowable as revenue expenditure, the full amount is deductible in the year of payment or must be amortised in view of refund/forfeiture terms in the lease (5% forfeiture per year / crystallisation over time).

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Eligibility for depreciation under Section 32(1)(ii) where only long-term lease/right of enjoyment (99 years) exists and ownership of infrastructure is retained by the lessor

Legal framework: Section 32(1)(ii) allows depreciation for "know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature" that are "owned, wholly or partly, by the assessee and used for the purposes of the business or profession."

Precedent treatment: Authorities and the Tribunal treated ownership as a prerequisite for depreciation and rejected claims where infrastructure/amenities were owned and retained by the lessor; the assessee relied on decisions accepting depreciation for certain commercially enforceable rights or leasehold/licence-like rights in other fact patterns.

Interpretation and reasoning: The Court reads the statutory phrase "owned, wholly or partly" literally and concludes ownership (full or partial) is required. A long-term lease/right of enjoyment confers a right to use but does not convert the user into an owner of the asset. The Court rejects the contention that a 99-year lease equates to ownership for the purposes of Section 32(1)(ii). Because the infrastrucutral facilities remain owned by the lessor and are provided for common use by multiple occupants, the assessee neither acquires ownership nor an exclusive commercial right akin to the statutory examples.

Ratio vs. Obiter: Ratio - ownership (whole or part) is a statutory prerequisite for depreciation under Section 32(1)(ii); mere leasehold/right of enjoyment does not satisfy "owned, wholly or partly". Obiter - whether the phrase "commercial rights of similar nature" is limited to conventional items (patents, trademarks, licences, franchises) or broader was not decided as unnecessary to the conclusion.

Conclusion: Claim for depreciation under Section 32(1)(ii) on sums paid for common infrastructure was correctly disallowed; appeals on this ground are answered against the assessee.

Issue 2 - Allowability as revenue expenditure under Section 37 where depreciation is disallowed

Legal framework: Section 37 permits deduction of expenditure (not capital in nature) laid out wholly and exclusively for the purposes of the business; capital or enduring benefit expenditures are ordinarily non-deductible.

Precedent treatment: The Court relies on precedents recognizing that contributions to construction of public roads/bridges or basic infrastructure which remain owned by government/third parties, and do not create enduring proprietary assets for the payer, may qualify as revenue expenditure where they facilitate business operations (as distinguished from betterment charges or expenditures giving enduring capital benefit).

Interpretation and reasoning: The Court distinguishes amenities (recreational/beneficial enjoyment) from basic infrastructural works (roads, drainage, water, street lighting). It finds these infrastructural works are essential preconditions for establishing and operating the factory; the contributor does not receive an addition to its assets or an enduring proprietary benefit. Therefore the payments are not betterment/capital in nature but facilitative and allowable under Section 37. The Tribunal's refusal to entertain the alternative revenue-expenditure plea solely because the assessee had not previously debited these sums in its books or claimed them in the return was rejected: where a capital claim is made and disallowed, an alternate relief must be considered on its merits and cannot be dismissed for absence of a prior book charge; authorities and the Tribunal have a duty to consider alternative grounds raised by the assessee.

Ratio vs. Obiter: Ratio - contributions for basic infrastructure, not resulting in ownership or enduring proprietary advantage to the payer and facilitating business operations, may be revenue expenditure deductible under Section 37; the Tribunal must consider alternative claims when a primary claim is disallowed. Obiter - the Court's characterisation of specific amenities versus infrastructural items is applied to facts here and may inform analogous categorizations.

Conclusion: The sums paid qualify as revenue expenditure under Section 37 rather than capital outlay; the Tribunal's denial of the alternate claim was unsustainable insofar as it refused to consider the relief on the ground that the assessee had not debited the amount in accounts or claimed it in returns.

Issue 3 - Timing and quantum of deduction when revenue expenditure claim is accepted but lease contains refund/forfeiture terms (5% per year crystallisation)

Legal framework: Revenue expenditure is generally deductible in the year it is incurred; however contractual terms affecting crystallisation/refund rights and the existence of a refundable component require consideration of when the expense becomes non-refundable and hence finally expended.

Precedent treatment: The Court reviews authorities allowing immediate deduction where no element of future refund exists, and those requiring amortisation where an amount remains refundable or confers enduring benefit; previous decisions permitted amortisation where crystallisation occurs over time.

Interpretation and reasoning: The lease provides that development charges are refundable subject to forfeiture of 5% per year (minimum 15%), so the payment does not fully crystallise as an irrevocable outlay immediately. Therefore, it would be inappropriate to allow the entire sum as a revenue deduction in the year of payment. Instead, the Court directs amortisation by recognising 5% of the contribution as deductible in each year when that 5% becomes non-refundable (i.e., the portion forfeited/crystallised at year-end), reflecting the contractual diminution of refund rights over time.

Ratio vs. Obiter: Ratio - where a payment has a refundable component subject to scheduled forfeiture/crystallisation, deduction is to be permitted progressively (amortised) to the extent the amount becomes non-refundable in the relevant assessment year. Obiter - the precise commercial treatment in different contractual configurations may vary but the principle of matching deduction to crystallisation holds.

Conclusion: Deduction is allowable as revenue expenditure but must be limited to the portion that crystallises (5% per year) in each assessment year; full immediate deduction is not permitted given the lease's refund/forfeiture mechanism.

Overall Disposition

The Court affirms disallowance of depreciation claims under Section 32(1)(ii) because ownership (wholly or partly) is required and long-term use/lease does not confer ownership. The Court allows the alternate claim under Section 37, treating the contribution to basic infrastructural works as revenue expenditure, but directs amortisation of the deduction in line with the lease's 5% per annum forfeiture/crystallisation mechanism rather than permitting full deduction in the year of payment. The Tribunal's orders are confirmed on depreciation and set aside in part on the revenue-expenditure issue, with remand directions to give effect to amortised deductions as indicated.

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