TMI Blog2008 (9) TMI 869X X X X Extracts X X X X X X X X Extracts X X X X ..... . As per the agreement, the assessee was to provide premises for running CCD and also uninterrupted supply of electricity and water etc. In return, M/s. ABC agreed to pay the assessee minimum guaranteed amount of Rs. 1,50,000 per month or 5 per cent. of the monthly turnover, whichever was higher. The business of the CCD commenced in October 2002. The assessee showed income of Rs. 8,08,000 as minimum guarantee amount received from ABC as per the agreement. However, the return was filed with loss of Rs. 4,66,273, inter alia, claiming deduction mainly on account of compensation paid at Rs. 10 lakhs. On being required to give the details of compensation, the assessee furnished reply dated October 27, 2005 and December 31, 2005. The gist of information furnished before the Assessing Officer, reproduced verbatim, is as under : "(a) Shri Kulwant Singh Kohli owns Shop Nos. 20, 21 and 21A on the ground floor of Dharamputra Building at Dadar T. T. On the same floor in that building M/s. Pritam Hotel Pvt. Ltd. is running a restaurant and eating house. Shri Kulwant Kohli is also one of the directors of Pritam Hotel Pvt. Ltd. (b) Shop No. 20 on the ground floor mentioned above, was given on r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arried out by M/s. Pritam Hotel Pvt. Ltd. was of no use to the assessee-firm, since its business is of supplying drinks and eatables, has been, as per the business style of franchiser M/s. Amalgamation Bean Trading Co. Ltd. (i) By paying amount of Rs. 10,00,000 to M/s. Pritam Hotel Pvt. Ltd., the assessee has incurred expenses for getting peacefully the premises vacated." The Assessing Officer, in order to evaluate the nature of expenditure noted the relationship of the landlord, tenants and sub-tenants with each other. The original landlord Shri Kulwant Singh Kohli had let out the premises, viz., Shop No. 20 to Shri Gurbaxish Singh Kohli and Shop Nos. 21 and 21A to Mrs. Gunjan Kaur Kohli. Shri Kulwant Singh Kohli is the father of Shri Gurbaxish Singh Kholi and Smt. Gunjan Kaur Kohli is wife of Shri Gurbaxish Singh. M/s Pritam Hotel Pvt. Ltd. (hereinafter referred as "PHPL") had taken the shops on sub-tenancy from Shri Kulwant Singh Kohli and Smt. Gunjan Kaur Kohli. Shri Gurbaxish Singh Kohli, is the director of M/s. Pritam Hotel Pvt. Ltd. and Shri Kulwant Singh Kohli, the owner of the premises is also one of the directors of PHPL. The assesseefirm acquired the premises from PH ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be levied by the Central Government and/or by the State Government and/or by the Bombay Municipal Corporation and/or by any other local authority for the time being will be borne and paid by the tenant and the incoming sub-tenant will not be asked to pay anything over and above the compensation recorded hereinabove. (3) The incoming sub-tenant shall bear and pay the electricity charges for the use of electricity in the said shops as per the electricity meter. (4) The incoming sub-tenant has agreed and paid compensation amounting to Rs. 6,00,000 (rupees six lakhs) to the outgoing subtenant." From these clauses, the Assessing Officer noted that a sum of Rs. 4 lakhs was paid by the assessee-firm to the sub-tenant, i.e., PHPL in lieu of the "vacant and peaceful possession" of the shop originally let out to Gurbaxish Singh. Similarly, a sum of Rs. 6 lakhs was paid by the assessee to PHPL towards vacant and peaceful possession of the shops originally let out to Mrs. Gunjan Kaur. The Assessing Officer opined that it was capital expenditure paid to the outgoing tenants for acquiring the tenancy rights over the shop premises. Since the payment was directly related to the acquiring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same family. The compensation of Rs. 10 lakhs was stated in the agreements to be on account of peaceful acquisition of the premises, which was nothing but a capital expenditure. Before us, learned counsel for the assessee elaborated the facts in detail by contending that the sum of Rs. 10 lakhs was paid for acquiring the premises and also towards renovation cost incurred by PHPL. He took us through the copies of profit and loss accounts of PHPL for the years ending March 31, 1999, March 31, 2000 and March 31, 2003 to show that the said PHPL had incurred capital expenditure of more than Rs. 20 lakhs on account of the substantial renovation of the premises taken on rent which was capitalised in its books of account and the compensation received from the assessee-firm was offered for taxation as revenue receipt. Then he relied on the decision of the hon'ble Bombay High Court in the case of CIT v. Hede Consultancy Pvt. Ltd. [2002] 258 ITR 380 for the proposition that the capital expenditure incurred on the rented premises is to be allowed as deduction. It was, therefore, contended that there was no infirmity in the order of the learned Commissioner of Income-tax (Appeals) and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll of them joining each other in one form or the other with other relatives. We, therefore, approve the findings of the learned Commissioner of Income-tax (Appeals) by which he has accepted the Assessing Officer's stand in not concurring with the payment being made towards obtaining peaceful possession of the premises. Now, turning to the main submissions on which the learned Commissioner of Income-tax (Appeals) has deleted the addition and learned counsel for the assessee has focussed his submission being the payment of a sum of Rs. 10 lakhs towards renovation to the rented premises carried out by PHPL, we note from the final accounts of PHPL that they had incurred capital expenditure of around Rs. 20 lakhs. A case has been made out that any capital expenditure incurred by the assessee in respect of premises for which it does not have any ownership right be construed as revenue expenditure. In support of this submission, learned counsel for the assessee has relied on the judgment of the hon'ble Supreme Court in the case of CIT v. Madras Auto Service P. Ltd. [1998] 233 ITR 468 which has been followed by the hon'ble Bombay High Court in the case of Hede Consultancy Pvt. Ltd. [2002 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... premises acquired otherwise than on ownership basis, has to be treated as a building owned by such person and depreciation is allowable on it under section 32 as if it is a building owned by him. There is no dispute on the fact and the learned authorised representative has forcefully contended that the expenditure incurred by PHPL was capital in nature and had also been capitalised in the accounts. Even if we accept the contention of the learned authorised representative for a moment, that the terms of the tripartite agreements are to be regarded as not happily drafted and the intention was to make payment in lieu of the renovation work carried out by PHPL to the premises, again position remains the same in so far as the deductibility of the expenditure of Rs. 10 lakhs in the hands of the assessee is concerned. If the payment was not towards the acquisition of the premises, in which case, it is not deductible but was towards the partial reimbursement of the capital expenditure incurred by PHPL on the complete renovation of the premises as stated on behalf of the assessee, the amounts continues to assume character of capital expenditure, which is not deductible in terms of Explanati ..... X X X X Extracts X X X X X X X X Extracts X X X X
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