Leasehold stamp duty treated as revenue expenditure where it enables business use without transferring ownership or creating an independent capital asset

Stamp duty and registration expenditure incurred for executing a lease deed may be treated as revenue expenditure where the taxpayer obtains only a right to occupy, use and commercially exploit leasehold premises, without acquiring ownership or an independent capital asset. Applying Section 32(1)(ii) and the alternative claim under Section 37 of the Income-tax Act, 1961, the expenditure was characterised as connected with carrying on the business rather than acquiring an enduring ownership right. Because the liability crystallised in the financial year relevant to A.Y. 2011-12, the amount was allowable in full in that year. Amortisation over the lease term and subsequent depreciation claims on the same amount therefore did not apply.

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Issues: Whether stamp duty and registration expenditure incurred for execution of a lease deed in relation to leasehold rights was allowable as depreciation as an intangible asset, required to be amortised over the lease term, or allowable in full as revenue expenditure in the initial assessment year.

Analysis: The dispute was examined with reference to Section 32(1)(ii) of the Income-tax Act, 1961 and the assessee's alternative claim under Section 37 of the Income-tax Act, 1961. The expenditure arose from stamp duty paid for execution and registration of a lease deed forming part of a business arrangement for operating the textile undertaking. The assessee had not acquired ownership in the land, but only a right to occupy, use and commercially exploit the leasehold property during the lease tenure. The expenditure was found to be connected with enabling the assessee to carry on its business and not with acquisition of any independent capital asset or enduring ownership right. On that basis, the character of the outlay was held to be revenue in nature. Since the rights and obligations had crystallised in the financial year relevant to A.Y. 2011-12, the expenditure was held allowable in that year itself, making the directions for amortisation unsustainable and rendering later-year depreciation claims on the same amount infructuous.

Conclusion: The stamp duty expenditure on the lease deed was allowable in full as revenue expenditure in A.Y. 2011-12, in favour of the assessee. The direction to amortise the expenditure over the lease period was set aside, and the depreciation claims for the subsequent assessment years on the same amount did not survive and were infructuous.

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