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2015 (7) TMI 875 - DELHI HIGH COURT

2015 (7) TMI 875 - DELHI HIGH COURT - [2016] 380 ITR 552 - Entitlement to depreciation in respect of the hotel building, WTT and WTC under Section 32 - Held that:- The Court is satisfied that the during the AYs in question Assessee was indeed in full control of the three buildings, viz., the hotel building, the WTT and WTC and that in any event, notwithstanding the clarificatory amendment inserted as Explanation No. 1 in Section 32 with effect from 1st April 1988, the Assessee would be entitled .....

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ddition on account of benefit derived by the Assessee out of the deposits is separate payment of taxes. In view of the discussion hereinbefore of the clauses of the sub-licence agreements, the Court concurs with the view expressed by the ITAT.- Decided in favour of assessee.

Foreign exchange rate fluctuation - The direction of the CIT (A) to the AO to allow depreciation on the increase in liability on account of exchange rate fluctuation on notional basis was also upheld by ITAT - He .....

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2015 - Hon'ble Dr. Justice S. Muralidhar And Hon'ble Mr. Justice Vibhu Bakhru,JJ. For the Appellant : Mr. N.P.Sahni, Senior Standing counsel with Mr. Nitin Gulati, Junior standing counsel For the Respondent : Mr. Ajay Vohra, Senior Advocate with Mr Prakash Kumar and Ms Bhovita Kumar, Advocates JUDGMENT Dr. S. Muralidhar, J. 1. These appeals by the Revenue under Section 260A of the Income Tax Act, 1961 ( Act ) pertain to the Assessment Years ( AYs ) 1989-90, 1990-91, 1991-92, 1992-93, 199 .....

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the NDMC. However, no agreement as such was executed at that stage. A suit was filed by DAL against NDMC for specific performance with an alternative prayer for damages. The suit ended in a compromise and this led to an agreement dated 11th March 1981 being executed between DAL and NDMC. The key features of this agreement were as under: (i) The land was to be given to DAL on licence basis for a period of 99 years on payment of licence fee of ₹ 1,45,00,000 pa. (ii) DAL would form a public l .....

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ther with drawings had to be approved in advance from NDMC and the Director General of Tourism, Government of India. (v) Clause 12 of the said agreement stated that the licensee would not be at liberty to part with possession of the land or otherwise encumber or sublet the premises to any person directly or indirectly without the previous written consent of the licensor". However, the licensees shall have the right to sub-licence the licensed property as stipulated in Clause 30 of this lice .....

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the land and any building erected thereon during the entire period of licence except the house tax since the building was to vest in NDMC for all intents and purpose . (viii) Under Clause 16(xv) the building has to be kept insured by DAL in the joint names of itself and the NDMC against damage by fire, riots, civil commotion and earth quake etc. The premium was to be paid by DAL. The rights and the powers of the NDMC were set out in Clause 17 of the agreement. (ix) Under Clause 25, the building .....

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ment envisaged the induction of sub-licensees. The said clause reads as under: The licensees shall run the Five Star Hotel themselves. However, the licensees may allow sub- licensees within the period of licence for running car parking, cycle-scooter stand for parking and shopping arcade, banks, offices (within the shopping arcade) etc. The licensees shall be further responsible for the conduct of various sub- licensees and observance of rules and regulations etc. The licensees shall be further .....

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dated 18th June 1981. Clause 4 of this agreement permitted BHL to allow use of the shopping complex by way of a licence to one or more persons or their nominees with information to DAL. It was, inter alia, provided in Clause 4(a) that BHL would accept interest-free-deposit from the user at an agreed rate per sq. ft. of the area to be licensed to any party . The deposit would vary from party to party and from time to time. Of the deposit, the DAL was permitted to retain 25% on the agreed terms a .....

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et out in the agreement between the DAL and the NDMC would also form part of the said tripartite agreement. While this agreement incorporated all the clauses in relation to the right to the land and building vesting in the NDMC, it also provided that the NDMC would have a pre-emptive right to purchase the building at the market price. Clause 18 read thus: "18. The licensor shall have a pre-emptive right to purchase the property built on the site after deducting the market value of the land .....

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-licencees and observance of rules and regulations etc. The licencees shall be further responsible to answer that the sub-licencees shall not get any right over and above the rights and privileges of the licencees." 6. Under Clause 48, licence fee was to be enhanced after every thirty three years provided that the increase in the licence fee would not exceed 100% of that immediately before the enhancement is due. 7. One more fact that requires to be noticed is that apart from the hotel buil .....

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t, a copy of which is placed on record, incorporated the terms and conditions specified in the tripartite agreement. Relevant to the present appeals it should be noted that Clause 27 prohibits the sub-licensees from assigning their interest in the space allotted in any way without obtaining previous written consent of BHL. Clause 1 states that deposit free of interest shall remain with BHL during the subsistence of this agreement . The licence fee is to be calculated at a rate per sq. ft. of the .....

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terms of the agreement. Clause 31 clarifies that the allotted space remains under the overall control and supervision of Assessee. Clause 32 gives the Assessee right of entry to any of the allotted spaces without notice for any inspection. Clause 34clarifies that the sub-licensees do not have the right of tenancy/sub-tenancy. Clause 35(a) makes the Assessee responsible to pay all the fees, rates, taxes etc. 9. Arising out of the different orders of the Assessing Officer ( AO ) under Section 143 .....

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onsidered by the ITAT were answered by it in favour of the Assessee as follows: (i) The domain over the hotel property is of the Assessee. It was utilising the property and it was not the case of Revenue that the NDMC ever made a claim for depreciation. It is the Assessee who made the investment, utilised the property, met the expenses of wear and tear and replacement of the property which would be entitled for depreciation. (ii) The sub-licence agreements in respect of the spaces in the WTT and .....

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ntitled to depreciation in respect of sanitary and plumbing also for the whole of the period. (iii) The Special Bench of the ITAT was seized of the issue whether an Assessee who was running a hotel was entitled to investment allowance. Therefore the issue was remanded to the AO to abide by the decision of the Special Bench when available. (iv) As regards the question whether the deposits collected from the sub-licensees were taxable in the hands of the Assessee, the view already expressed in fav .....

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nding it to the AO was modified by directing the AO to decide the issue in accordance with law as and when the claim was made by the Assessee. (vi) The decision of the CIT (A) directing the AO to allow the arrears of licence fees on actual payment basis was upheld. (vii) The direction of the CIT (A) to the AO to allow depreciation on the increase in liability on account of exchange rate fluctuation on notional basis was also upheld. 11. In the present appeals by the Revenue, by the order dated 2 .....

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depreciation on sanitary and plumbing? (v) Whether the ITAT was right in not deciding the issue relation to claim on investment allowance? (vi) Whether the ITAT was right in holding that the amount received by the assessee from the allottees/sub-licencees is not taxable? (vii) Whether the order of the ITAT holding that the amount received by the assessee is not a taxable receipt is perverse and contrary to fact and evidence of records and ignores reality and the contradictory stand of the assess .....

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be calculated on the basis of notional exchange rate when no payment had been made and their exists possibility of change in the exchange rate and the exchange rate prevailing on the date of payment may be different? 12. At the outset it was stated by Mr. Ajay Vohra, learned Senior counsel for the Respondent Assessee that question (v) relating to investment allowance need not be decided as it has to await the outcome of the Special Bench decision of the ITAT and the consequential decision of the .....

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14. Questions (i) to (iv) concern the aspect of claim of the Assessee to depreciation in respect of hotel building, WTT and WTC under Section 32 of the Act. Mr. Vohra submitted that the whole purpose of allowing the depreciation was to replace the value of an asset to the extent it is depreciated during the period of accounting relevant to the AYs in question and such valuation as to that extent will be diminished by the corresponding allowance of depreciation. He referred to the decision of th .....

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t of the hotel building, the WTT and the WTC from the respective periods when they were begun to be utilised. With reference to various clauses of the Agreements in question Mr. Vohra contended that the Assessee had complete control over the buildings and was also given right to sub-licence them. Alternatively it was submitted that explanation (1) to Section 32 had been inserted in the Act with effect from 1st April, 1988 and it provided that if the Assessee was carrying on business in the build .....

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granted in favour of DAL, the entire cost of construction of the buildings was borne by the assessee. (ii) This is acknowledged in Clause 19 of the first Agreement dated 11th March 1981which states that the licensor shall have a pre-emptive right to purchase the property built on the site after deducting the market value of the land at the market price then prevalent." (iii) Under Clause 16 (xv) of the same Agreement, the building has to be kept insured by DAL in the joint names of itself a .....

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nauthorized Occupants), Act, 1971 for eviction of the licencee. Otherwise for all practical purposes the entire control of the buildings was with the licensee. (vi) The fact that it was for the licensee which had the control over the entire building is also acknowledged in Clause 6 where the licensee was given a right to raise loans on the security of the structures/buildings/fixtures and fittings etc. 16. According to Mr. Vohra, AY in which depreciation was first claimed for the WTC was 1987-88 .....

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ture is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work or in relation to....... the building. In such event, Section 32 (1) would apply "as if the said structure or work is a building owned by the assessee. 18. In any event even for the period earlier than 1st April 1988, in view of the decision in Supreme Court in Commissioner of Income Tax v. Podar Cement Private Limited (1997) 226 ITR 625 and Mysore Minera .....

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upra), the Supreme Court explained that the very concept of depreciation suggests that the tax benefit on account of depreciation legitimately belongs to one who has invested in the capital asset, is utilizing the capital asset and thereby loosing gradually investment caused by wear and tear, and would need to replace the same by having lost its value fully over a period of time. On the facts of the case, although the appellant-assessee had only paid part of the price of the buildings in questio .....

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inion over the building and who is entitled to use it in his own right and is using the same for the purposes of his business or profession. Assigning any different meaning would not subserve the legislative intent. To take the case at hand it is the appellant-assessee who having paid part of the price, has been placed in possession of the houses as an owner and is using the buildings for the purpose of its business in its own right. 19. The Court is satisfied that the during the AYs in question .....

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nst the Revenue. Amounts received from sub-licensees 20. The Court next turns to Questions (vi) and (vii) which concern the nature of receipt in the hands of the Assessee as far as the amounts received from the allottees is concerned. As noted both by the CIT (A) as well as ITAT, the essential fact in relation to these questions is that the Assessee accepted interest free refundable deposits from the allottees of the spaces. The sub-licence agreements which have been referred to earlier made thi .....

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ation in a transaction which resulted in the transferee acquiring the right of enjoyment of the immovable property would have to be treated as a capital receipt. The ITAT found that the AO had not examined if the amount received by the Assessee in the concerned AY pertained to a sub-licence agreement executed prior to the AY in question. If it did then it was not taxable in view of the earlier decision of the ITAT. However, if it related to an agreement executed in the year under consideration, .....

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o entitled to assign to others on payment of compensation and to transfer their occupancy rights by sale of shares. It was in those circumstances held that the whole transaction was, in reality, a sale of floor space by the Assessee company to its shareholders. It was concluded that the residuary rights of ownership which remained with the Assessee company were negligible and of dubious value. Consequently, the deposits had to be treated as trading receipt. As far as the present case is concerne .....

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