TaxTMI 
TaxTMI 
2021 (2) TMI 847
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.... Investment Ltd. (i.e., the assessee) at 9th Floor, Hotel Sea Rock at Band Stand, B.J. Road, Bandra (West), Mumbai and other related premises were also covered. In response to notice u/s 153A of the Act dated 09.09.2008, the assessee filed the return of income declaring loss of Rs. 5,08,73,700/- along with balance sheet, computation of income and audit report on 18.11.2008. This difference in the return of income was attributed to the changed claim of depreciation. In the original return, the depreciation was claimed to the tune of Rs. 3,08,93,616/- whereas the claim increased in the return filed pursuant to the notice u/s 153A of the Act to Rs. 7,78,27,608/-. The AO passed the order u/s 143(3) r.w. section 153A r.w.s 153B of the IT Act, 1961 on 31st December, 2008 determining the total income of the assessee at Rs. 2,85,42,450/- as against the returned loss of Rs. 5,08,73,700/- wherein he made various additions/disallowances. Against the assessment order, the assessee filed an appeal before the CIT(A). During the course of proceedings before the ld.CIT(A), the assessee was allowed to raise a ground that the amount paid by it to ITC Ltd. at the time of termination of the agreement ....
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....erefore, the payment can only be attributed to the hotel building and accordingly it is entitled to depreciation at the rate applicable to hotel building. Against the order of the ITAT, the Revenue preferred an appeal before the Hon'ble High Court wherein the following substantial question of law were framed:- "(i) Whether the Income Tax Appellate Tribunal was right in holding that the respondent-assessee is entitled to depreciation on Rs. 30.86 crores @10 % as building? (ii) Whether the Income Tax Appellate Tribunal was right in holding and setting aside the findings of the Assessing Officer that income shown by the assessee as business income should be taxed as income from house property or as income from other sources? [The contention of the respondent-assessee that the Assessing Officer had not examined and objected to depreciation as building will be also decided while examining the aforesaid question No.(i)]." 7. The Hon'ble High Court has discussed this issue and restored the issue to the file of the Tribunal by observing as under:- "6. The AO passed an assessment order on 31st December, 2008 under Section 143 (3) read with Section 153-....
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....unt of the aforementioned payment to ITC Limited "the Assessee‟s business acquired a new lease of life" it could "only be held to be an expenditure of capital in nature". 9. The ITAT then proceeded to consider the second alternative plea that the payment had led to acquisition of intangible asset. The ITAT in the impugned order came to the conclusion that "the payment cannot be said to be for acquisition of any intangible asset". It appears that the ITAT, in view of its finding that the expenditure was capital in nature, did not consider it necessary to answer the first of the three submissions of the Assessee, viz., that the expenditure was revenue expenditure and should be allowed as such. 10. Even when the above questions of law were framed before this Court by the order dated 22nd August 2013, it appears that no specific question as such was framed on this aspect. 11. However, it is pointed out by Mr S. Ganesh, learned Senior Counsel appearing for the Assessee, that if Question (i) is to be answered in favour of the Revenue i.e. by holding that the ITAT was in error in holding that the Assessee was entitled to depreciation on Rs. 30.86 crores at....
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.... Assessee should be treated as income from house property and not as income from other sources. Consequently, Question (ii) is answered in the affirmative i.e. in favour of the Assessee and against the Revenue. 16. The appeal i.e. ITA No. 918/Del/2010 is restored to the file of the ITAT for deciding the specific issue mentioned in para 14 of this order afresh in accordance with law. The appeal shall be listed for directions before the ITAT on 11th September, 2019. The ITAT will make endeavour to dispose of the appeal as expeditiously as possible and in any event within a period of six months from the date of receipt of a copy of this order." 8. Therefore, the only question to be decided by us as per the direction of the Hon'ble High Court as per para 14 of the order is as to whether the payment of Rs. 30.86 crores paid by the assessee to ITC Ltd. should be treated as revenue expenditure or as capital expenditure. 9. The ld. Counsel for the assessee submitted that M/s ELEL Hotel & Investment Ltd. i.e., the assessee is the owner of a hotel known as Hotel Sea Rock in Mumbai which was being managed by ITC Ltd. under the Hotel Operator Agreement effective from 1986 pursua....
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.... u/s 139(1) of the IT Act, 1961 had capitalized the amount under the head 'building' stating that the said payment was towards the vacation of the building and accordingly claimed depreciation @ 10% on Rs. 30.86 crores which can be verified from page 33 of the paper book. Consequent to search on 28.02.2007 and in response to notice u/s 153A, the payment was re-categorised as intangible asset depreciable @ 25% being in the nature of business and commercial rights. He submitted that during the course of assessment proceedings, the assessee made an alternate claim that the payment to ITC having been made to terminate an onerous agreement was wholly and exclusively for the purpose of business and was deductible u/s 37 of the IT Act. He submitted that the AO rejected all claims without giving any specific findings on this claim by simply stating that there was no business during the year and no asset had been used for the purpose of business actually or constructively. He failed to record a finding as to whether payment to ITC Ltd. resulted into a depreciable asset, building or intangible and even if there was no business during the year depreciation should be allowed or not in subse....
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.... book, he submitted that the Hotel Operator Agreement dated 3rd May, 1986 clearly states that the assessee has granted a licence to ITC Ltd. to operate the hotel. Therefore, this is not a lease and no property right has been transferred to ITC Ltd. Referring to Article IV of the Hotel Operator Agreement copy of which is placed at page 45 of the paper book, he submitted that the duration of the agreement has been defined which is 25 years commencing from 01.07.1986 subject to ITC Ltd. not committing any breach of terms and conditions of the agreement. The agreement was renewable at the option of ITC for a further period of 25 years. Referring to clause 18.1 of Article XVIII of the Hotel Operator Agreement, copy of which is placed at page 56 of the paper book, he submitted that it is stated in the said agreement that the possession of the property is not delivered to ITC Ltd. and no interest or any tenancy or any other interest in the assessee's property or asset is created or intended to be created in favour of ITC Ltd. The assessee remains in possession of the property at all points of time and no tenancy or leasehold rights are created in favour of ITC Ltd. Referring to the dec....
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....oney from the hotel and, therefore, the compensation paid had arisen out of business necessity. He submitted that the expenditure incurred for termination of the agreement was to avoid commercial inconveniences occurring in future and to facilitate the smooth functioning of the business i.e., in relation to the carrying on of the business in a profitable manner. He submitted that the assessee has acquired nothing new of enduring nature as it always had the asset of enduring nature. It was not a case where the assessee was acquiring for the first time something which it did not otherwise own or possess. It was, thus, a change in method of earning profits from the hotel and not a transfer of any asset. He submitted that the agreement was terminated on business considerations and as a matter of commercial expediency and, therefore, such expenditure would be deductible u/s 37 of the Act. 13. The ld. Counsel submitted that after the cessation of the agreement with ITC Ltd., the business continued by means of Hotel Operator Agreement dated 11th May, 2005 between the assessee and Claridges Hotel Pvt. Ltd. (CHPL) The agreement continued to be operative till 31st July 2006 and after its ....
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.... xxiv) CIT vs. Todi Tea Co. Ltd. (1999) 239 ITR 28 (Cal). 14. The ld. DR, on the other hand, submitted that the Tribunal has already dealt with all the three issues and has already held the payment to ITC Ltd. as capital in nature. He submitted that a perusal of Article 3 of the Agreement dated 3rd May, 1986 between ITC and the assessee shows that all workmen, employees, members of the staff including managerial staff as may be decided by ITC shall be on the pay roll of ELEL and their salaries, wages and other emoluments and perquisites shall be granted and disbursed by ITC. Thus, ITC is paying salary to all the staff and managerial personnel. Referring to Article IX of the said agreement, the ld. DR submitted that all the renovations, alterations, refurbishings, equipment replacements and capital expenditure shall be undertaken by ITC on its own cost. The said movable assets will belong to ITC Ltd. and depreciation on the same will be claimed by ITC. He submitted that even insurance is also paid by ITC. Thus, ITC is using the property and carrying on business and, therefore the assessee cannot claim the payment made to ITC as revenue in nature. He accordingly submitted t....
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....h Court in the said decision has held that where the assessment has not concluded, the assessee may while filing the return in pursuance of notice u/s 153A or even during assessment proceedings u/s 153A, raise any claim which was not raised during the filing of return u/s 139 of the Act. Hence, a fresh claim can be made. He submitted that even in the case of Kabul Chawla, the Hon'ble Delhi High Court very clearly held that the restricted scope of assessment is only in respect of assessment years that concluded on the date of search and all of the assessment years had to be treated as normal assessments subject to scrutiny. Referring to the following decisions, he submitted that a return filed u/s 153A(1) is to be treated as return furnished u/s 139 and once the AO accepts the revised return filed u/s 153A, the original return u/s 139 abates and becomes nonest . It has been held that section 153A is in the nature of a second chance given to the assessee which incidentally gives him an opportunity to make good omission, if any, in the original return and, therefore, an assessee can raise a fresh claim u/s 153A proceedings:- a) PCIT vs. Neeraj Jindal (2017) 393 ITR 1 (Del); ....
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.... requiring extensive repair and renovation. Subsequently, disputes and differences arose between the assessee and the ITC with respect to responsibility to restore the damaged portion and other consequential issues. Since then, the assessee had been in litigation with ITC Ltd. who declined to make any payment to the assessee and was appropriating the entire revenue to its account. After prolonged legal litigation, the disputes eventually settled after a period of 12 years and after the settlement agreement dated 11th May, 2005, copy of which is placed at pages 61-73 of the paper book and consent terms dated 11th May, 2005, copy of which is placed at pages 74 to 99 of the paper book. The assessee company, out of commercial expediency, terminated the operator-cum-management agreement and paid a sum of Rs. 43.10 crore during A.Y. 2006-07 to ITC Ltd. As per the terms of the settlement, ITC could hand over the vacant and peaceful possession of hotel property after receipt of the amount the details of which are as under:- a) Repayment of security deposit ITC - Rs. 7.75 Cr. b) Reimbursement towards cost of stores acquired from ITC - 0.64 Cr. c) Reimbursement ....
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....lained by the assessee in the notes to the accounts which included the line of litigations at the lower and higher judiciary on innumerable matters. On reading of the same, it will be clear that the entire dispute arose in respect of damages, retrieval of loss of profit, shareholdings and transfer of shares, capturing or retaining controlling interests etc. There is no mention anywhere to show that the assessee in fact has been doing any business of hotel after 1993,The reply of the assessee has been considered and the same is not acceptable as the company has not carried out any business activities itself during the year under consideration. The assessee was not doing any business of Hotel, itself. Further, the assets have also not been used for the purpose of business actually or constructively. Therefore, assessee is not entitled to claim the depreciation on assets to the tune of Rs. 7,78,27,608/- and same is disallowed. Disallowance on account of depreciation includes the depreciation claimed by the assessee in respect of payment made to M/s ITC Ltd. and capitalized by the assessee company under the head billing. The same is also disallowable but not discussed in detai....
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....e any payment and was appropriating the entire revenue to its own account. Further, the hotel property due to lack of proper repair and renovation was also getting detonated. Thus, it will be seen that but for this payment the appellant was not in a position to get the hotel back in its possession for running and management in the manner in which it wanted. Therefore it can he said that this agreement with the ITC was in nature of defect in the title of the hotel property. In other words it can be said that the payment is basically made to ITC to clear the defect in title of the hotel and therefore this payment is in the nature of Money paid in consideration of re-acquisition of a source of profit of income. Therefore, the same is not revenue in nature. Thus, the facts of the present case are exactly identical as in the case of V Jagmohan Rao (supra). Thus, on merit also, the claim of appellant is not held to be correct." 22. He also held that the payment made could not be said for acquiring 'right to run the hotel' and even if it was treated as 'right to manage and conduct business' still this asset could not be tangible asset as defined u/s 32(1)(ii) of the Act. We fi....
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....e 18.1 of the Article XVIII reads as under:- "ARTICLE XVIII : NO TENANCY RIGHTS CREATED 18.1 It is clearly agreed and understood between the parties that possession of the property is not delivered to ITC: under this Agreement and no interest or no tenancy or lease or other Interest in EHIL's properties or assets is created or intended to be created in favour of ITC, the intention of the parties being that ITC will be authorised to conduct; operate and run the said hotel on the terms, conditions and stipulations herein contained. It being clearly and distinctly understood that the property and assets as defined in the schedule are and will continue to be the exclusive property and asset of EHIL and the legal ownership thereof Shall be of EHIL, who are and shall be the exclusive owners and in legal possession of the entire Hotel with Operating Licence to ITC to operate Hotel SeaRock." 25.3. Similarly, the analysis of the settlement agreement dated 11th May, 2005 shows that the licence will be terminated w.e.f. the date of settlement agreement with no claim of any nature remaining outstanding between the assessee and ITC. The said clause reads as under:- ....
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....olved, but only an alteration in the mode of earning the money from the cinema. Instead of getting Rs. 5.000 as a fixed yield from the KF who were running the cinemas, the assessee preferred to run the cinemas itself and took the chance of either making more or less from the box office. The expenditure of Rs. 68,000 was, therefore, properly in the revenue field and not in the capital field. The Tribunal was, therefore, justified." 27.1 We find, the Hon'ble High Court in the case Gopal Das Estates & Housing (P) Ltd. vs. CIT, (2019) 412 ITR 489 (Del) has held as under:- "There is merit in the contention of the assessee that it had not 'repurchased the flats from the buyers.' The stage of parting with title/ownership in relation to commercial space allotted to the buyers had not been reached. The Assessing Officer himself noted that 'since the assessee has not sold the space which has been surrendered by the buyers/allottees, therefore, the compensation paid in lieu of surrender of rights in flats/space shown in work and progress in balancesheet will enhance the value of work and progress.' [Para 24] It was contended by the revenue that even if th....
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....ees of the flats for surrendering the rights therein should be allowed as business expenditure of the assessee. [Para 38] Accordingly, the question of law framed is answered in affirmative i.e. in favour of the assessee and against the revenue by holding that the conclusion recorded by the Tribunal that the compensation was paid by the assessee for 'extraneous consideration' is perverse and contrary to the record. [Para 39]" 27.2. We find, the Hon'ble Calcutta High Court in the case of Shyam Buriap Company Ltd. vs. CIT (2016) 380 ITR 151 (Calcutta) has held as under:- "Though before the Tribunal the Memorandum was relied on to put forward the case that the income was part of the business and payment of compensation was to earn higher income, it was not at all considered.... Again, the Assessing Officer and the Tribunal had rejected the claim of the assessee as there was no change in the facts of the case during the relevant assessment year. Though the assessee had claimed that the rental income earned by it was assessable under the head 'business' and the compensation way paid by it for obtaining possession from lessee/tenant, so as to ....
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.... under the lease acquired full right to carry on mining operations in the entire area including the Railway Area. Under clause 3 he could carry on mining operations only after obtaining the permission of the authorities which had been granted by the Railway authorities. The payment of Rs. 3 lakhs was not made by the assessee for the grant of permission to carry on mining operations within the Railway Area, instead the payment was made towards the cost of removing the construction which obstructed the mining operations. The presence of the railway station and railway track was operating as an obstacle to the assessee's business of mining, the assessee made the payment to remove that obstruction to facilitate the mining operations. On the payment made to the Railway authorities the assessee did not acquire any fresh right to any mineral nor he acquired any capital asset instead the payment, was made by it for shifting the railway station and track which operated as hindrance and obstruction to the business of mining in a profitable manner. The assessee had already paid tender money, licence fee and other charges for securing the right of mining in respect of the entire area of 4.....
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....ce, the advantage secured was in the Field o f revenue and not capital. Further, as a result of the expenditure incurred, there was no addition to the capital assets o f the assessee and no change in its capital structure. The pipelines, etc., which might have been regarded as capital assets and which came into existence as a result of the expenditure incurred did not belong to the assessee but to the Municipality. In these circumstances, applying the principles laid down in Empire Jute Co. Ltd.'s case (supra), the impugned expenditure was clearly liable to be allowed as deduction from the profits under section 70(2)(xv)." 27.5 We find, the Hon'ble Supreme Court in the case of CIT vs. Ashok Leyland Ltd. (1972) 86 ITR 549 (SC) has held as under:- "It has been laid down in a number of decision that when an expenditure is made with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, there is good reason (in the absence of special circumstances leading to the opposite conclusion] for treating such an expenditure as property attributable not to revenue but to capital. From the facts found in the instant case it was cle....
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....ture and was capable of fair ascertainment Taking note of Bikaner Gypsums Ltd. (supra ], the Tribunal held that such an expenditure, if incurred in the year, would be revenue in nature. [Para 15] However, the Tribunal stated that no such liability had been incurred or crystallized, it. held that though various meetings had taken place between the assessee and the Government, apart from making certain recommendations and estimating the likely expenditure, no agreement came into existence between the assessee and the hutment dwellers with or without the involvement of any third party and as no agreement between the assessee and hutment dwellers has been f led, no legally enforceable liability was fastened on the assessee in relevant year and, therefore, even under mercantile system of accounting, the assessee is not entitled to deduct the impugned amount simply because a provision was made. The Tribunal also took note of the submission of the assessee that it had, in fact, released a payment of Rs. 16.01 crore, but rejected this plea on the ground that the date of release of the money and the person to whom the money had been paid had not been stated. [Para 16] No d....
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.... is with respect to the certain expenditure to the tune of Rs. 6 lacs approximately. The Tribunal observed as under: "47. We have heard the rival contentions and perused the material on record. The factual matrix or the case is that the assessee had contracted with landlord to take a premise on lease for opening its branch though no formal agreement with the landlord was entered into. Based on the understanding, the landlord had started the construction of the premises as per the requirement of the assessee. Before the construction was completed the assessee came to know of the proposed construction of overbridge over the said property. The assessee was of the view that overbridge will cause hindrance to conduct the business and services. Accordingly it decided to terminate the understanding with the landlord. Based on the negotiation and understanding, the assessee agreed to compensate the landlord for the work done it by paving the compensation and the landlord agreed to withdraw all the claims against the assessee. Accordingly the assessee compensated the landlord by making a payment of Rs. 6 lacs in full and final settlement of all its claims. The aforesaid fa....
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....fact that the language employed in clause 13 did not admit of any exception in favour of any agreement, whether in the form of a protocol or otherwise, there was nothing to indicate that the protocol which too was broadly speaking, an agreement between the parties, was saved from overriding provisions of the agreement. The fact that similar provisions existed in the agreement earlier executed between the parties in the year 1967 too was no ground for ignoring the said provision or treating it as redundant. It is also pertinent to mention that except for the agreement of the year 1967 and the protocol dated 28-1-1972 there was no other agreement between the parties, whether oral or written, which could be superseded or was meant to be nullified by incorporating a provision like clause 13. It followed, therefore, that the protocol dated 28-1-1972 did not survive the rigours of clause 13 of the 1972 agreement and was, therefore, non est, as on the date the payment in question was made by the assessee. For an expenditure to be an an allowable deduction under section 37, it is necessary that the same is laid out, or expended wholly and exclusively for the purpose of the busines....
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....nship even though non¬existent on a true and strictly legatistic view of the matter was nevertheless, believed by the parties to be subsisting in a greater or lesser measure. From the point of view of the assessee the payment was considered expedient to remove a restriction in its right to operate in northern territory without any let or hindrance from the erstwhile sole distributor. In view of the above, the Tribunal was right in holding that the payment of Rs, 99 lakhs by the assessee to GEC was an allowable deduction under section 37." 27.9 We find, the Hon'ble Bombay High Court in the case of CIT vs. Sales Magnesite (P) Ltd. (1995) 214 ITR 1 (Bombay) has held as under:- "To hold it to he an expenditure allowable as a deduction under section 37, it is not essential that it should be necessary, legally or otherwise, to incur the same or that it should directly and immediately benefit the business of the assessee. Even expenditures incurred voluntarily on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business would be deductible under this section. The question whether it is necessary for commerci....
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....he very same space to a bank at a much higher rent and also received substantial deposits from the new tenant. These facts clearly supported the case of the assessee that the expenditure in question was a revenue expenditure and was laid out wholly and exclusively for the purpose of business of letting of properties. The assessee did not acquire any new asset right or advantage of an enduring nature bv making the said payment. Therefore, the Tribunal was justified in holding that the payment of Rs. 6.96 lakhs was an allowable business expenditure." 27.11 We find, the Hon'ble Calcutta High Court in the case of CIT vs. Peico Electronics & Electricals (1992) 107 CTR Cal 240, has held as under:- "2. The reason was that the assessee company could not carry on business with M/s. Vulcan industries and that such agreement was creating onerous burden on the assessee company. Therefore, by making a lump sum payment the assessee company wanted to get rid of this onerous burden. 4. The Tribunal, on the contrary, found that the assessee by paying the amount did not get any benefit of enduring nature. The payment was made as a result of this business expediency and ....
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....held that the expenditure incurred for the termination of a trading relationship in order to avoid losses occurring in the future through that relationship, whether pecuniary losses or commercial inconveniences, is just as much for the purposes of the trade as the making or the carrying into effect, of a trading agreement." Accordingly, the question referred by the Department is answered in the affirmative and in favour of the assessee." 27.14 The Hon'ble Delhi High Court in the case of CIT vs. B.L. Dhingra & Sons (1985) 153 ITR 167 (Del), has held as under:- "The true nature of the impugned payment was repeated in the said clause of the agreement which said that it was made in order to compensate the vendors during the intervening period, namely, from the date of the handing over of the cinema property to the assessee to the registration of the sale deed. This compensation was in respect of the non-payment of the balance of the sale consideration. The impugned payment was made to procure, extension of time for performance of the complete agreement of and payment, of the balance consideration. If the requisite amount of consideration had been borrowed by the as....