TMI Blog2010 (4) TMI 726X X X X Extracts X X X X X X X X Extracts X X X X ..... PRESIDENT J. Appellant by : Mr. Porus Kaka Respondent by : Mr. Virendra Ojha, DR ORDER Per R. V. Easwar Senior Vice President: This is an appeal by the assessee relating to assessment year 2004-05 and it is directed against the order passed by the CIT under section 263of the Act on 18.09.2008. 2. The brief facts giving rise to the appeal may be noted. The assessee is a public limited company engaged in the sales and service of automobiles. It filed a return of income declaring a loss of Rs.4,33,62,100/-. It was accompanied by audited profit and loss account, balance sheet and the tax audit report. The return was first processed under section 143(1) but later selected for scrutiny. Notices were issued under section 142(1) and section 143(2), in response to which the assessee submitted elaborate details and explained the return of income. Ultimately, the assessment was completed under section 143(3) by an order dated 31.10.2006 on a loss of Rs.4,07,10,983/- under the head business and Rs.35,03,489/- under the head capital gains . There was also a long term capital loss brought forward from the assessment year 2002-03 which was also allowed to be carried fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessment was proper. The CIT however held that the deposits represented capital amounts and if they were not returned to the assessee, the loss was capital loss not allowable in computing the income. He dealt with the authorities cited by the assessee and held that in all those cases the assessee had advanced loans which were different from deposits and therefore they were not applicable. He thus held that the allowance of capital loss in the assessment was erroneous and prejudicial to the interest of the revenue. 6. As regards the prior period expenses/income, the CIT restored the same to the Assessing Officer for factual verification of the assessee s contentions that there was no underassessment. Ultimately the assessment order, in so far as it related to the claims of Rs.16,46,917/- on account of cost of improvement of leasehold assets written off and Rs.40,20,388/- on account of advances against rental properties written off was set aside and the Assessing Officer was directed to pass a fresh assessment order in the light of the directions contained in the order of the CIT. The assessee was to be given proper opportunity. 7. The assessee is in appeal against the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business. Another agreement of leave and licence entered into in February, 2002 (page 23 of the paper book) in respect of the ground floor of the building known as Sanghrajka House also described the assessee as a licensee and the owners of the property as licensors. There are several other agreements compiled in the paper book which are all described as leave and licence agreements. For instance, clause 9 of the agreement of leave and licence entered into in August, 2002 provided that nothing contained in the agreement shall be construed as creating any right, easement, interest, tenancy or sub-tenancy in favour of the licensee in or over or upon the premises or any part thereof or transferring any interest in the premises in favour of the licensee (assessee herein), other than the permissive use granted to the assessee. All the agreements of the leave and licence thus gave only a licence or a permissive use of the premises to the assessee. The interest free deposits made by the assessee was to be returned on the determination of the leave and licence agreement but those deposits which were not returned to the assessee were written off as advances against rental properties wri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the judgement. The present case seems to be stronger on facts because we are concerned only with leave and licence agreements under which the assessee obtained no interest in the properties but was merely permitted to use the same under leave and licence of the landlords. The assessee in the cited judgement obtained a lease of the premises which is actually a transfer of interest in the property; nevertheless it was held that the acquisition of the lease was for the purpose of the business and therefore the amounts advanced by the assessee for acquiring the lease of the factory was a business advance and therefore it was held that when the advance was lost on account of the insolvency of the landlord, the assessee was entitled to claim the same as business loss. In the case of the present assessee, the deposits were not to carry any interest. However, the assessee, as already noted, did not acquire any interest in the properties and all that he would entitle to was to occupy the premises under leave and licence of the landlords. In such circumstances, there is a prima-facie case that the loss of the security deposits must be considered to be a loss incidental to the business. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer. We may clarify that though the assessee described the write off as cost of improvement of leasehold assets written off , it is not actually leasehold assets as we have already seen. All the agreements are only leave and licence agreements which permitted the assessee to use the premises, without creating any interest in the premises in favour of the assessee. We have also seen earlier that a lease is a transfer of interest in the property. Since there is no transfer of interest in the property in favour of the assessee, the nomenclature given by the assessee to the write off appears to be somewhat inaccurate. But that eed not deter us from looking at the assessee s claim on the basis of legal principles. Merely because the assessee erroneously described the write off, it does not follow that the claim should be rejected. As rightly pointed out on behalf of the assessee, the nomenclature given by the assessee is not conclusive and is certainly contrary to the legal position that a leave and licence is distinct and separate from a lease and the former does not create any interest in the property in favour of the licensee. The judgement of the Supreme Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... effect to the argument of the Revenue because firstly the Explanation contains an enabling provision which provides that even where capital expenditure is incurred by an assessee on a property not belonging to him, he would be eligible for depreciation on such expenditure if it is represented by any structure etc. Secondly and more importantly, the Explanation applies only to an assessee who holds a lease or other right of occupancy and incurs such capital expenditure. It appears to us that the words other right of occupancy appearing in the Explanation should be construed ejusdem generis with the word lease and if that is so, the right of occupancy should be of such a nature that the assessee should possess an interest in the property and the occupancy must be referable to that interest. A mere right of occupancy under leave and licence agreement, without any interest in the premises itself, cannot be considered to be sufficient to attract the Explanation. We may refer to the order of the Special Bench of the Tribunal, Mumbai in the case of Voltas Ltd. Vs. ACWT., (2008) 113 ITD 19(SB) where it was observed that a licence neither passes any interest nor alters or transfers p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce basis in order to facilitate the carrying on of its business. The question is not whether what the assessee did was lawful or permitted under the agreements, but it is whether the expenditure remaining unwritten off in the assessee s books can be written off and claimed as a deduction when the agreements came to an end and the assessee vacated the premises. On this aspect, we have already expressed our view. It was thereafter argued by the revenue that the CIT can invoke section 263 even in respect of a debatable issue and reference was made to the judgement of the Madhya Pradesh High Court in CIT Vs. Kohinoor Tobacco Products P. Ltd., 234 ITR 557. A respectful perusal of the judgement shows that there the CIT had taken action under section 263 on the ground that the Assessing Officer did not carry out any enquiry to ascertain whether the income received from letting out some properties was assessable as business income or as property income. The CIT restored the assessment back to the Assessing Officer asking him to decide the issue afresh. In doing so, he had observed that the issue whether such income was assessable as business income or as property income was debatable. In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT, the Assessing Officer ought to have investigated into the facts submitted in the return before allowing the claim and failure to do so made the assessment order erroneous and prejudicial to the interest of the revenue. 17. Thus, the Madhya Pradesh, Allahabad and Delhi High Courts decisions are not relevant to the present case where there is no allegation by the CIT in the notice or in the order that the assessment was completed without any enquiry or investigation. 18. The department then referred to judgement of Supreme Court in the case of Hasimara Industries Ltd. Vs. CIT, (1998) 98 Taxman 352 in order to contend that the cost of improvements incurred by the assessee was capitalized in its books and only depreciation was claimed thereon and thus the entry made in the books of account conclusively proved that the expenditure was capital in nature as held by the CIT. A respectful perusal of the judgement shows that it does not lay down the proposition canvassed on behalf of the revenue. In that case, the assessee was engaged in the manufacture of tea and entered into a leave and licence agreement with a cotton mill which was under liquidation. The assessee paid an advance o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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