2025 (7) TMI 592 - AT - Income Tax

Depreciation on lease hold improvements - Test of ownership - Assessee had procured a premise on lease and claimed depreciation on the cost of improvements made by it for utilization of the impugned property - HELD THAT - We have noted that a coordinate bench of this Tribunal in Assessee s own case 2018 (5) TMI 2191 - ITAT DELHI have decided that the Assessee is entitled for claim of depreciation qua lease hold premises. It was held that the test of ownership would be satisfied in such cases. Decided in favour of assessee. Addition on account of sale consideration on sale of its shares by the Assessee - principles of accrual of income - HELD THAT - In the present case the amounts have not been added by the revenue on account of any hypothetical supposition or any deeming provisions but purely on account of a contractual agreement where the Assessee is a seller. Thus the controversy of any accrual of income etc. is not seminal to the present facts of the case. The Assessee has also argued that the amount of Rs. 12 crores was paid after arriving at all the deductions etc. agreed between the contracting parties and which were clearly stipulated in the agreement. We are again constrained to subscribe to the argument of the appellant Assessee since the impugned amount of Rs. 4 crores was not a part of any stipulated deduction mentioned anywhere in the contract dated 30.07.2011 specifically in Clause 3 and schedule 2 of the agreement which lays down conditions precedent to the contract. To this extent the argument of ld CIT(A) has been found to be not in consonance with the true facts of the case. The value or the sale consideration was fixed at Rs. 16 crores and the impugned Rs. 4 crores do not find any mention therein as a deduction. It is not a case that the upper limit of the sale consideration was Rs. 16 crores to be suitably reduced by the said Rs. 4 crores. Accordingly we are of the considered view that the relief allowed by the ld CIT(A) of Rs. 4 crores by deleting the corresponding addition made by the ld AO is not supported by facts on record. We therefore set aside the order of the ld CIT(A) and confirm the addition of Rs. 4 crores made by the ld AO. The Grounds of appeal No. 3 4 and 5 raised by the revenue are therefore allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal are:

(a) Whether the Assessee is entitled to claim depreciation on leasehold improvements made to leased premises, and whether the disallowance of such depreciation by the Assessing Officer (AO) was justified.

(b) Whether the addition of Rs. 4 crores made by the AO on account of sale consideration relating to the sale of shares by the Assessee was correctly deleted by the Commissioner of Income Tax (Appeals) [CIT(A)], particularly in light of the terms of the share sale agreement and the principles of income accrual and receipt.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Depreciation on Leasehold Improvements

Relevant legal framework and precedents: The legal basis for claiming depreciation on leasehold improvements is grounded in the provisions of Section 32 of the Income Tax Act, 1961, particularly Explanation 1 added with effect from 1/4/1988. This Explanation clarifies that capital expenditure incurred on structural works or improvements on a building not owned by the assessee but held on lease or other occupancy rights shall be treated as if the building is owned by the assessee for depreciation purposes.

A coordinate bench of the Tribunal in the Assessee's own case (ITA No. 6431/Del/2014) had earlier ruled that the Assessee is entitled to depreciation on leasehold improvements, holding that the ownership test is satisfied under Explanation 1 and the user test is met as the asset is used for business purposes.

Court's interpretation and reasoning: The Tribunal examined the facts and found that the Assessee had incurred capital expenditure on various improvements such as plumbing, partitions, electrical fittings, and lighting in the leased premises. The depreciation claimed was at 10%, which is consistent with the rates applicable to furniture and fittings, and less than that for machinery.

The Tribunal emphasized that Explanation 1 to Section 32 treats such leasehold improvements as owned assets for depreciation purposes. The asset was used exclusively for business, satisfying the user test. The Tribunal noted that the AO's disallowance was contrary to the earlier coordinate bench decision and not supported by any distinguishing facts.

Key evidence and findings: The details of capital expenditure on leasehold improvements were documented in the record (pages 23-27 of the paper book). The Tribunal relied on the prior decision in the Assessee's own case, which had comprehensively analyzed similar facts and allowed depreciation.

Application of law to facts: Applying the statutory provisions and precedent, the Tribunal found the Assessee entitled to depreciation on leasehold improvements. The AO's disallowance was reversed, and the CIT(A)'s order deleting the addition was confirmed.

Treatment of competing arguments: The Revenue's argument was limited to reliance on the AO's order without establishing any factual or legal distinction from the precedent. The Tribunal rejected the Revenue's contention due to lack of any differentiating factor.

Conclusions: The Tribunal held that the Assessee's claim for depreciation on leasehold improvements was valid and the disallowance was erroneous. Grounds of appeal Nos. 1 and 2 raised by the Revenue were dismissed.

Issue 2: Addition of Rs. 4 Crores on Sale of Shares

Relevant legal framework and precedents: The issue involves interpretation of the share sale agreement and principles relating to income recognition-whether income has accrued or been received. The Revenue invoked the contractual terms to assert that the entire sale consideration of Rs. 16 crores was due and hence taxable. The Assessee relied on case law concerning the accrual and receipt of income, arguing that Rs. 4 crores was neither received nor accrued, thus not taxable.

Court's interpretation and reasoning: The Tribunal carefully analyzed the share sale agreement dated 30.07.2011. The agreement stipulated a maximum sale consideration of Rs. 16 crores for 24 lakh shares. Clause 4.2(b)(vii) and (viii) specifically provided that Rs. 4 crores of the consideration was to be paid by the purchaser, anticipated to be received from United Breweries Ltd. or United Spirits Ltd. A bank guarantee was to be furnished by the seller as security for this amount, which the purchaser could invoke if the payment was not received within one year.

The Tribunal observed that the Rs. 4 crores formed an integral part of the total sale consideration of Rs. 16 crores. The existence or invocation of the bank guarantee was immaterial to the contractual obligation to pay Rs. 16 crores. The Tribunal rejected the Assessee's contention that subsequent deductions or adjustments reduced the effective consideration to Rs. 12 crores, noting that no subsequent agreement or amendment to the contract was on record to that effect.

Key evidence and findings: The share sale agreement and its schedules were pivotal. The Tribunal highlighted that Schedule 2 and Clause D of the agreement repeatedly confirmed the Rs. 16 crores consideration. The absence of any written amendment or agreement reducing the consideration was a significant finding.

Application of law to facts: The Tribunal applied contract interpretation principles and rejected the Assessee's reliance on income accrual jurisprudence, holding that the addition was not based on hypothetical or deemed income but on a clear contractual right to receive Rs. 16 crores. The Rs. 4 crores was not a deduction or discount but a component of the agreed consideration.

Treatment of competing arguments: The Tribunal found the Assessee's reliance on accrual-based case law misplaced, as the issue was not hypothetical income but a contractual entitlement. The Tribunal also disagreed with the CIT(A)'s conclusion that the Rs. 4 crores was a deduction from the capped value of Rs. 16 crores, finding this inconsistent with the agreement's terms.

Conclusions: The Tribunal set aside the CIT(A)'s deletion of the Rs. 4 crores addition and restored the AO's addition. Grounds of appeal Nos. 3, 4, and 5 raised by the Revenue were allowed.

3. SIGNIFICANT HOLDINGS

On the issue of depreciation on leasehold improvements, the Tribunal reiterated the principle that:

"...the provisions of this clause shall apply as if the said structural work is building owned by the assessee. Therefore according to that even the expenditure incurred by the assessee on the leasehold premises will also satisfy the ownership test. Furthermore the asset is also used by the assessee for the purposes of the business satisfying the user test, the depreciation thereon cannot be disallowed."

This establishes the core principle that leasehold improvements qualify for depreciation under Explanation 1 to Section 32, provided they are used for business.

On the issue of share sale consideration, the Tribunal held that:

"The sale consideration agreed for sale of 24 lacs shares ... was agreed at Rs. 16 crores. ... The Rs. 4 crores was an integral part of the total sale consideration. ... The agreement dated 30.07.2011 is an agreement between two corporate entities which are backed by approvals of its Board of Directors and any changes ... would have to be only done through another agreement only. There is nothing on record to suggest that by way of any subsequent agreement the sale consideration was reduced from Rs. 16 crores to Rs. 12 crores."

It further observed:

"The impugned amount of Rs. 4 crores was not a part of any stipulated deduction mentioned anywhere in the contract ... The value or the sale consideration was fixed at Rs. 16 crores and the impugned Rs. 4 crores do not find any mention therein as a deduction."

These findings clarify that contractual sale consideration is to be recognized as income unless validly amended, and hypothetical or conditional payments cannot be excluded without formal modification.

The final determinations were:

• The Assessee is entitled to depreciation on leasehold improvements; the AO's disallowance is reversed.
• The addition of Rs. 4 crores on account of sale consideration is justified and must be restored; CIT(A)'s deletion is set aside.