TMI Blog2005 (5) TMI 555X X X X Extracts X X X X X X X X Extracts X X X X ..... rned Commissioner of Income-tax (Appeals) erred in not directing Assessing Officer to allow the depreciation on legal and professional expenses of Rs. 65,000. Appellant submits that the direction may please be given to allow the depreciation as claimed. 3. The learned Commissioner of Income-tax (Appeals) erred in not upholding the action of the Assessing Officer by not directing to set-off the income of Rs. 4,32,000 by way of interest against the Pre-Operative Expenses and not of such expenses and income ought to have been capitalised. 4. The learned Commissioner of Income-tax (Appeals) erred in not allowing donation of Rs. 2,301 capitalised in the development account and also erred in not directing to allow depreciation on the said amount. Your appellant submits that donation of Rs. 2,301 is wrongly been disallowed as the said amount is not debited to Profit Loss Account but to the Development Account. Appellant, therefore, submits that the addition of Rs. 2,301 ought to be deleted." 2. Out of the above, Learned counsel for the assessee did not press for ground Nos. 3, 4 and 5. Hence, they are treated as rejected. 3. In respect of the ground No. 2, the Ld. coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apitalised the above amount in the block "plant and machinery" and claimed depreciation. While disallowing the claim of the assessee and treating the expenditure as capital, as incurred for acquiring right in the land, the Assessing Officer observed as under : "It is admitted fact that the assessee-company has not purchased the land and, therefore, it is not the owner. Moreover, no depreciation is allowable on the cost or expenditure on land even if it is owned or used by assessee-company. Therefore, the assessee-company was required to explain why expenditure on right of user of land should not be excluded from the value of the asset, i.e., plant and machinery for depreciation purpose. It was submitted vide letter dated 30th December, 1994 that the expenditure pertaining to the period prior to the laying of and commissioning of pipeline is capital in nature and without such land it is not possible for the company to lay, operate and maintain the pipeline. Further, it was submitted vide letter dated 24-1-1995 that the expenses incurred has been made in order to use the property land from which pipeline had gone through a distance of approximately 52 Kms. The reason for capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... condition for its intended use. According to the appellant, the Accounting Standard also requires that the development cost of the pipeline ought to be capitalised to the pipeline account and that is what has been done by the appellant. It would be significant to note that in the instant case only use the land for laying down pipeline acquired. This is in the nature of licence to use the land. This transfer of right is in respect of land. Thus, no depreciation is allowable either on the land purchased by the assessee for business purpose of purchase of any right in respect of that land. In respect of plant and machinery, depreciation is allowable on the cost incurred by the appellant to set up of machinery. It is seen that expenditure on acquisition or right of user of land is not at all related with the installation of plant and machinery to be included as cost of plant and machinery installed. In other words, the cost of plant and machinery installed by an assessee has no nexus with the right of user obtained by the assessee. Accordingly, expenditure on right of user of land has no relationship or nexus with the cost of plant and machinery installed. Thus, depreciation was righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the cost of theatre was disallowed by the ITO. The High Court has held that under the I.T. Act, there is a distinction between the land and building. Depreciation is allowable on the building. However, any item of expenditure incurred by an assessee referable to land and not referable to building is not allowable expenditure. It was held in this case that the rent paid for the pre-construction period cannot be taken to be the part of cost of construction of cinema theatre. I find that decision in this case is directly applicable to the appellant s case. The assessee has placed reliance on the cases reported in 216 ITR 742 , 233 ITR 391, 209 ITR 174 and 127 ITR 37. I find that the facts of the cases reported in these judgments were totally different. In all these cases expenses referred were in respect of borrowings, establishment charges, expenditure on horticulture, periodicals. In Herdillia Chem. Expenditure was on development of land. It was not on the issue of acquisition of land. Therefore, none of these cases are applicable to assessee. On the other hand, decision of Hon ble Supreme Court in the case of CIT v. Alps Theatre 65 ITR 377 is directly applicable. It was held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after the pipelines are removed from the land. The Ld. Authorised Representative took us to various clauses of one of the agreement which was produced as an example. He, in particular, emphasized on clause-4, clause-8, clause-13 of the agreement which highlight that what the assessee, after payment of compensation, is acquiring is not capital asset but only a right to use the land. The Ld. Counsel for the assessee also referred to some of the provisions of Petroleum and Minerals Pipelines (Acquisition of Right of User in the Land) Act, 1962. In particular, he referred to section 6, section 7(1)( ia ), section 7(1)( ii ) and section 9 which provide that the licensee ( i.e., the assessee in the present case) will only have a right to use in the land. Thus, the Ld. Counsel for the assessee emphasized that expenditure of Rs. 50,60,433 is of "revenue" nature and it is only one time payment for use of land. His Plant, i.e., pipeline is resting inside the land of the licensor and the assessee has to pay licence fee for use of such land as observed by the CIT(A) while dismissing the appeal of the assessee. 9. The Ld. Counsel for the assessee submitted that it is not material whethe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st all buildings will become part of the plant, as without such building, a business cannot be carried out. Relying on the decision of Hon ble Bombay High Court in CIT v. Mazagaon Dock Ltd. [1994] 206 ITR 260, the Ld. Departmental Representative submitted that an approach channel made by dredging the sea was not held as plant for the purpose of depreciation. Similarly a channel created for allowing pipeline in the land can also not become a plant. Distinguishing the decision in Madras Auto Services (P.) Ltd. s case ( supra ), the Ld. Departmental Representative submitted that it pertained to a running company where business has already commenced and new office was sought to be opened at Bangalore. An amount was spent on the construction of the building after demolishing the old building and a very low rent for the new building was agreed. The amount so spent was held to be revenue in that case. The Ld. Departmental Representative also relied on the decision of Hon ble Bombay High Court in the case of CIT v. Khimline Pumps Ltd. [2002] 258 ITR 459 wherein payment made for land and building was held to be capital. The Ld. Departmental Representative also referred to variou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on right is conditional. So long as the assessee obeys the terms of the agreement, the licensor cannot compel the assessee to get out of the land for its use. This is provided in clause-14 of the agreement. This is a right of permanent character which has been acquired by the assessee. Thirdly, what is paid is of the nature of premium or salami for acquiring right. Interest of the owner of the land is parted away for a price. It is not a lump sum payment for continuous enjoyment of the land but it is for a compromise on the absolute ownership of the land for which compensation is paid. Such a compromise on the ownership of land can be seen from section 7(1)( ia ), section 7(1)( ii ), section 8 and section 9 of the Petroleum and Minerals Pipelines (Acquisition of Right of User in the Land) Act, 1962. These sections are quoted for reference as under : "Section 7. Central Government or State Government or Corporation to lay pipelines .-(1) Where the right of user in any land has vested in the Central Government or in any State Government or Corporation under section 6 ( i )****** ( ia )for laying pipelines for the transport of petroleum, it shall be lawful for any person au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o which a declaration has been made under section 6(1) ( a )constructs any building or any other structure, or ( b )constructs or excavates any well, tank, reservoir or dam, or ( c )plants any tree, on that land, the Court of the District Judge within the local limits of whose jurisdiction such land is situated may on an application made to it by the competent authority and after holding such inquiry as it may deem fit, cause the building, structure, reservoir, dam or tree to be removed or the well or tank to be filled up, and the costs of such removal or filing up shall be recoverable from such owner or occupier in the same manner as if the order for the recovery of such costs were a decree made by the Court." There is a statutory compulsion on the owner of the land to allow use of the land for the said purpose. Section 7(2) defines the right of the licensee that it can lay pipeline maintain, examine, repair, alter or remove, section 8 provides right to enter the land for inspection. Section 9 curtails the right of the land owner and imposes the condition that it cannot construct any building or any other structure, construct or excavate any land, well reservoir or pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and permitted assigns) of the One part and Chembur Patalganga Pipelines Limited, a Company incorporated under the Companies Act, 1956 and having its Registered Office at N.K.M. International House, 5th Floor, Babubhai Chinai Road, Bombay-400 020 (hereinafter called the licensee which expression shall, unless the context does not so admit, include its successors and permitted assigns) of the other Part." 13. The assessee has acquired a right to protect pipelines and land as is evident from clauses 3 and 6 of the agreement. It has right to enter into the land for examination, maintenance, surveillance, repairs (clause 8 of the agreement). It has a liability to pay enhanced land revenue. Clause 13 of the agreement reads as under : "In case the Government or the Local Authority enhance the land revenue tax and impose new levy on account of the laying of the pipeline by the Licensee as hereinbefore mentioned the Licensee shall pay on demand to the Licensor such additional tax or levy as may be imposed by the said Authorities." Originally land revenue will be paid by the lessor while enhanced land revenue will be paid by the licensee, i.e., assessee-company. No tax on the lan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by the assessee for the purpose of acquiring tenancy rights in the shop in question, and as to whether the same is an expenditure of a capital nature. Even this aspect is covered by a number of decisions. The Madhya Pradesh High Court in the case of CIT v. Lucky Bharat Garage [1988] 174 ITR 526, has held that, when the assessee in question made payment which represented the acquiring of tenancy rights, the assessee in fact acquired a right to possession which was of an enduring nature and, therefore, such expenditure incurred for the acquisition of such a right was capital in nature. A similar view has been taken by the Calcutta High Court in the case of Chloride India Ltd. v. CIT [1981] 130 ITR 61 . In this decision, it has been held that, on the facts of the case, the amount was paid for acquiring a right to possession which right was a capital of enduring nature and as such the amount of payment made was to be treated as capital expenditure. This Court in the case of Rajabali Nazarali and Sons v. CIT [1987] 163 ITR 7 has considered in detail and reiterated the above principle. This decision holds that a lease creates an interest in immovable property and transfer o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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