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2012 (7) TMI 282 - HC - Income TaxDis allowance of lease rental paid to the Trust - enhanced lease rent for the period from January to March, 1992 was a capital expenditure and therefore not allowable as a deductible expenditure - AO invoked the provisions of Section 40A(2) - Held that:- The limited right which the assessee acquired under the lease was the right to purchase khair wood trees from the Government in the State of Himachal Pradesh. Assessee company would have got a right only to purchase the raw material and not the source of raw material. Therefore, that part of the lease rent, which is attributable to the right to purchase Khair wood would be a revenue expenditure and not a capital expenditure - the normal lease rental in this case would be a revenue expenditure and not a capital expenditure, as the ownership of the property as well as the plant and machinery continued to vest in the trust and in any case the lease granted to the assessee company was neither a perpetual lease nor a lease for such a long term as would bring it at par with a perpetual lease. Enhancement of lease rent attributable to improvement and modernization of plant and machinery carried out by the Trust - enhancement of lease rental from Rs.1 lac p.m. to Rs.6,70,000/- p.m., to the extent it is attributable to the expenditure incurred by the trust in the year 1989-90 on modernization and improvement of the plant and machinery which the lessee had taken on lease, would be a revenue expenditure, since it would have the effect of enhancing the lease rent of the plant and machinery in the open market Enhancement in lease rent attributable to normal appreciation in line with the lease rentals prevailing in the market - if there was any appreciation in the market in the lease rentals of such properties, the enhancement in the lease rent of the property to the extent it is attributable to such normal appreciation in the lease rentals prevailing in the market, would be a revenue expenditure. Thus it would be for the AO to determine whether there was any such appreciation in lease rentals, and if so, to what extent. Payment of non-compete fees - Increase in lease rent relatable to elimination of competition from the Trust constitutes capital expenditure as the Trust had leased whole of its production unit which was a profit generating unit to the assessee and not only the building, but the plant and machinery was also leased to the assessee along with all benefits, etc - The Trust had also relinquished its rights to purchase khairwood from the Government in favour of the assessee. Therefore, the business being carried by Trust was practically taken over by the assessee-company for an indefinite period . Therefore, this was a case of takeover of the business, coupled with elimination of competition from the rival - constitutes capital expenditure,applicability of Section 40A(2). the trust is not an “association of persons”, the provisions of Section 40A(2) are not attracted to the transaction between the trust and the assessee company.
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