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Mac Charles India Ltd Versus Deputy Commissioner of Income-tax, Circle -12 (1) , Bangalore

2015 (9) TMI 554 - ITAT BANGALORE

Disallowance of depreciation on land on which assessee had leasehold rights - alternate claim of assessee that the payment had to be allowed as revenueHeld that:- As decided in assessee's own case for AY 2006-07 to 2008-09 the lease rent paid for acquiring leasehold rights over the land can never be treated as cost of the plant (windmill). The functional test cannot be extended to a case of lease rent for acquiring leasehold rights over the land, whatever be the technical requirement of erecting .....

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g on which depreciation is to be allowed? In our view, by applying the functional test, it is possible to contend in all the cases that the land is a tool of trade and has to be regarded as plant or building. We therefore decline to accept the proposition canvassed on behalf of the assessee.

Hon’ble High Court of Karnataka in the case of HMT Ltd. (1992 (11) TMI 37 - KARNATAKA High Court), has considered the premium for acquiring leasehold rights as nothing but rent paid in advance. T .....

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ccept the alternative prayer of the assessee. - Decided partly in favour of assessee.

Disallowance u/s.14 of the Act read with Rule 8D - Held that:- It is crystal clear that assessee had a number of transactions in mutual fund units and equity shares during the relevant previous year. It would be naive to presume that assessee would not have incurred any expenditure, but for the brokerage. Claim of the assessee that no indirect expenditure was incurred and there was no necessity of an .....

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ssee to prove its claim that no expenditure was indeed incurred by it for earning the exempt income. We set aside the orders of authorities below and remit the issue regarding disallowance under Section 14A back to the file of AO for denovo consideration after obtaining the explanation of the assessee. - Decided in favour of assessee for statistical purposes.

Interest u/s.234B - assessee contested as paid advance-tax of more than 90% of the assessed tax - Held that:- It is clear that .....

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. - Decided in favour of assessee for statistical purposes. - I.T.A No.1616/Bang/2014 - Dated:- 26-8-2015 - SHRI. N. V. VASUDEVAN AND SHRI. ABRAHAM P. GEORGE, JJ. For The Assessee : Shri. Bharadwaj Sheshadri, CA For The Revenue : Shri. Sunil Kumar Agarwala, JCIT ORDER PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : In this appeal filed by assessee, it has taken six grounds of which grounds 1, 5 and 6 are general needing no specific adjudication. 02. In its ground 2 grievance raised by assessee is tha .....

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the wind mill was located. According to him, it was held by this Tribunal in the said decision that upfront payment of lease charges was allowable as a revenue expenditure, though claim of depreciation could not be accepted. 03. Per contra, Ld. DR supported the orders of authorities below. 04. We have perused the orders and heard the rival contentions. Treatment of upfront charges paid for acquiring lease of land on which wind mill was located, and whether depreciation was allowable on such paym .....

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of allowing depreciation and that the depreciation is allowable only on building cost. 15. The assessee claimed depreciation on Wind mills acquired during the previous year. Cost of wind mills as shown in the depreciation working was ₹ 9,05,15,305/-. While verifying the bills, it was found by the AO that the above cost includes an amount of ₹ 18 lakhs being consideration charged by M/s.Suzlon Energy (the person who sold and installed the wind mill) for transfer of lease hold rights i .....

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transferred by Suzlon to the Assessee. A debit note raised by M/s.Suzlon was filed before the AO by the Assessee. The AO was of the view that the lease rent paid for the land by the Assessee to Suzlon which is included as part of cost of windmill will not qualify for allowing depredation. The Assessee submitted before the AO that land is an integral part of wind mill without which it cannot be installed. The AO did not agree with the stand taken by the Assessee. As per I. T.Rules, depreciation .....

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ferent category of asset. According to the AO, if the assessee s logic is extended, then in case of block of any buildings, the land cost should be included for depreciation claim since without land, the building cannot exist. In the opinion of the AO that was not the intention of law. The leasehold right on land is not a depreciable asset. Hence, the AO disallowed depreciation claim of ₹ 7,20,000/- being 40% of cost of leasehold right on land. 16. On appeal by the assessee, the CIT(A) all .....

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tegral part of the structure itself. In the case of a building, the undivided share of the land upon which it stands is valued and added to the cost of the structure. In the same way, the land is no longer free once the windmill is installed, and for the lease period of 30 years, it is integrated with the structure of the mill. Hence I find myself unable to agree with the AO that the land is separate from the structure and should be denied depreciation. With regard to depreciation on leased land .....

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depreciation on the leasehold land is permissible in law, and also that the land in question is an integral part of the windmill structure. The addition made by the AO is herby deleted. 17. Aggrieved by the order of CIT(A), the Revenue has raised ground No.3 before the Tribunal. The assessee has filed CO No.5/Bang/2015 in which the assessee has sought to raise the following grounds:- 1. The order of the CIT (Appeals) is correct and the same does not require any interference. 2. In the alternati .....

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hat recently assessee came to know that Bangalore Bench of the Tribunal in the case of M/s. V.S. Lad & Sons v. ACIT, in ITA Nos. 18 to 20/Bang/2013, for A.Ys. 2006-07 & 2007-08, by order dated 13.6.2014, while dealing with an identical issue raised in the CO, whether depreciation can be claimed on land taken on lease on which windmill is erected, held that depreciation on land cannot be allowed, but nevertheless allowed alternative plea of considering the expenditure in the form of upfro .....

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ew that the grounds sought to be raised in the CO are legal grounds which can be decided on facts already available on record and therefore the grounds raised in the CO should be admitted for adjudication. We are of the view that proceedings before the Tribunal are proceedings for proper determination of tax liability of an assessee in accordance with law and therefore there should not be any impediment in deciding the questions on determination of tax liability. The delay is condoned. 20. As fa .....

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e case of V.S. Lad & Sons (supra), wherein the issue has been dealt with by this Tribunal as follows:- ITA Nos.18 to 20/Bang/2013 (Assessee s appeals) (AY 2006-07 to 2008-09) 27. A common issue arises for consideration in all these appeals by the assessee As we have already seen, the assessee had installed windmills and generated power in all the three assessment years and claimed deduction u/s. 80IA(4)(iv)(a) of the Act. We have also seen that the assessee has been claiming depreciation on .....

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mountains and hillocks over which the windmills and turbines were installed were owned by the Karnataka Forest Department. Suzlon entered into a lease agreement with the Karnataka Forest Department and had a right to sub-lease the same to the third parties. Suzlon charges lease rent for the land sub-leased to the assessee so that the windmills can be installed on hillock. In other words, the lease rent charged for the entire period of 30 years of lease was also included as part of the machinery .....

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tion paid for acquiring the leasehold rights over the land should also be considered as a payment made for acquisition of a plant. Alternatively, the assessee claimed that the expenditure in question is revenue expenditure and should be allowed as a deduction u/s. 37(1) of the Act. 28. According to the revenue, acquiring a right over the land and cost paid for such acquisition cannot be equated with the consideration paid for acquiring a plant. According to the revenue, acquiring leasehold right .....

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ation; or whether alternative claim of the assessee to allow the said expenditure as revenue expenditure can be sustained. 29. Both the AO and the CIT(Appeals) decided the issue against the assessee giving rise to these appeals by the assessee for the three assessment years under consideration. 30. The reasons given by the CIT(Appeals) for rejecting the claim of the assessee for depreciation on the value of lease rent paid by including it as part of the plant (windmill) are as follows:- I have c .....

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evenue expenditure. In the case of HMT Ltd. 203 ITR 820, it was a factory building that was to be returned after the expiry of lease period. Hence, the lease rent is in the nature of rent for plant and machinery. In the case of the appellant, the appellant has obtained the right on land for 30 years on lease which is an enduring benefit and land is not a depreciable asset and hence I am in agreement with the AO that the expenditure is capital in nature. Accordingly the addition on this count is .....

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orms part of the tool with which the assessee carries on its business. 32. The ld. counsel for the assessee placed reliance on the decision of the Hon ble Supreme Court in the case of CIT v. B. Venkata Rao, 243 ITR 81. In the aforesaid decision, the question for consideration was as to whether a building which was specifically designed and equipped to function as nursing home would constitute plant to entitle depreciation at a higher rate of 10%, instead of being considered as a building on whic .....

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ess activities were carried on, it amounted to a plant ; but where the structure played no part in the carrying on of those activities but merely constituted a place wherein they were carried on, the building could not regarded as a plant. The Tribunal and the High Court in the instant case proceeded upon assumptions of what a nursing home should contain. This may not be altogether appropriate. What is to be determined is whether the particular nursing home building was equipped so as to enable .....

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ng home is also equipped with an operation theatre. In the circumstance, we think that the finding of the High Court should be accepted. We would, however, add that in a case such as this, the Tribunal should proceed upon material placed by the assessee which establishes that the building is specially equipped as a plant for the assessee s business. The appeal is dismissed. No order as to costs. (emphasis supplied) 33. With regard to the alternative contention that the expenditure should be trea .....

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the assessee s trading operation or enables the management and conduct of the assessee s business more efficiently and more profitably leaving the fixed capital untouched, the expenditure would be on revenue account. Strongly reliance was also placed by the ld. counsel for the assessee on the decision of the Hon ble High Court of Karnataka in the case of CIT v. HMT Ltd., 203 ITR 820 (Kar), wherein it was held that lease premium paid has to be allowed as revenue expenditure in the year of payment .....

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ng leasehold rights. The question before the Hon ble High Court was as to whether the aforesaid premium paid was a revenue expenditure or capital expenditure. The Hon ble Court held that while paying a lump sum premium to MIDC, the assessee was in effect paying future rents payable by it periodically. The Hon ble High Court held that the expenditure was revenue in nature, as it merely facilitates the assessee s trading operations and the test of enduring benefit should not be applied. 35. The ld .....

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over the land as part of the cost of plant for the purpose of allowing depreciation. The argument of the ld. counsel for the assessee has been that requirement of erecting the windmill at mountain terrains at a high altitude is a technical requirement for generation of power. Though this contention has not bee disputed by the revenue, there is no evidence on record to show that there is a technical requirement of erecting the windmills at high altitudes. We will, however, proceed on the assumpti .....

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epreciation on land indirectly. If such a claim were to be allowed, then it could be extended to a case of a land over which a shopping mall is constructed. A shopping mall requires a good area/location, main road for good business. Can it be said that the rent paid for the land over which the shopping mall is constructed is part of the building on which depreciation is to be allowed? In our view, by applying the functional test, it is possible to contend in all the cases that the land is a tool .....

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ered the premium for acquiring leasehold rights as nothing but rent paid in advance. The rent paid in advance was for acquiring leasehold rights over the land. Such payment had been considered by the Hon ble Court as revenue expenditure. In view of the aforesaid decision of the Hon ble High Court which is in pari materia with the facts of the present case, we are of the view that the lump sum rent paid for the entire period of 30 years has to be considered as revenue expenditure. The CIT(A) wron .....

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5 years. It paid heavy premium and nominal rent for lease. Assessee was entitled to transfer benefit of lease to another party with the previous consent of municipality. The assessee claimed premium paid by amortising it over the period of lease as revenue expenditure. The Hon ble Delhi High Court concurred with the view of Tribunal that the said expenditure was capital expenditure. It was also submitted by the ld. DR that the Hon ble Delhi High Court in the aforesaid decision has also taken not .....

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rnataka in the case of HMT Ltd. (supra) and came to the conclusion that what was paid in the said case was advance rent and therefore it could be amortised. They distinguished the case where premium is paid for acquiring leasehold rights. In the present case, as we have already seen, the payment is in the nature of advance rent and therefore the decision of Hon ble High Court of Karnataka in the case of HMT Ltd. (supra) will squarely apply to the assessee s case. 23. Following the judgment of Ho .....

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ciation cannot be allowed. Ordered accordingly. Ground 2 is therefore partly allowed. 05. Vide its ground 3, assessee assails disallowance u/s.14 of the Act read with Rule 8D. 06. Facts apropos are that assessee had made investments in equity shares dividend from which was claimed as exempt. Before the AO contention of the assessee was that no expenditure was incurred for earning exempt income. However, AO was not impressed by the above explanation. According to him it was necessary to compute t .....

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n in value of investments 9449033 215098877 0.5% of 215098877 = 10,75,495/- 07. Aggrieved assessee moved in appeal before the CIT (A). Argument of the assessee was that AO had not displaced its contentions that no expenditure was incurred for earning the exempt income. However the CIT (A) was not impressed. According to him, disallowance under Rule 8D was mandatory. He confirmed the disallowance. 08. Now before us Ld. AR strongly assailing the orders of the authorities below submitted that asses .....

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ury department or investment specialists. Thus according to him, they had not incurred any expenditure for earning exempt income. Reliance was placed on judgment of Hon ble Karnataka High Court in Canara Bank v. ACIT [(2014) 52 taxmann.com 162] and the decision of a coordinate bench in the case of DCIT v. M/s. Subramanya Constructions & Development Co. Ltd [ITA No.404 & CO.89/Bang/2013, dt.20.02.2015]. Unless and until the AO could show that claim of the assessee was wrong as per the Ld. .....

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us expenses have been charged to the Profit & Loss Account. Investments are made/disposed of through brokers and based on their advice. What we pay as brokerage is capitalized/treated as capital expenditure and no revenue deduction is claimed with respect to brokerage against our income. We do not have a treasury department of investment specialists working for us and whose costs have been charged to the accounts. There are no administrative expenses on this count. 11. A look at the investme .....

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ed by us at para 6 above. Opening balance of the investment was ₹ 65,34,74,535/- which by the year end had gone up to ₹ 90,88,10,732/-. It is crystal clear from the above that assessee had a number of transactions in mutual fund units and equity shares during the relevant previous year. It would be naive to presume that assessee would not have incurred any expenditure, but for the brokerage. Claim of the assessee that no indirect expenditure was incurred and there was no necessity of .....

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that the note given by the assessee before the AO which has been reproduced by us at para 10 above was prima-facie incorrect and unbelievable. At the same time it is true that the AO had not called upon the assessee to prove its claim that no expenditure was indeed incurred by it for earning the exempt income. As for the reliance placed by assessee on the decision of coordinate bench in Subramanya Constructions & Development Co. Ltd (supra), investment of the assessee in the said case which .....

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e of Subramanya Constructions & Development Co. Ltd (supra) is not comparable with that of the assessee. 12. Vis-a-vis, judgment of Hon ble Karnataka High Court in the case of Canara Bank (supra), a bank which has to maintain an investment portfolio by the very nature of its activities, in accordance with its statutory duties, cannot be compared with an assessee which was running a hotel. 13. In the circumstances mentioned above, we are of the opinion that, the issue requires a fresh look by .....

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n any financial year, an assessee who is liable to pay advance tax under section 208 has failed to pay such tax or, where the advance tax paid by such assessee under the provisions of section 210 is less than ninety percent. of the assessed tax, the assessee shall be liable to pay simple interest at the rate of 1one per cent. for every month or part of a month comprised in the period from the 1st day of April next following such financial year to the date of determination of total income under s .....

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as reduced by the amount of,- (i) any tax deducted or collected at source in accordance with the provisions of Chapter XVII on any income which is subject to such deduction or collection and which is taken into account in computing such total income ; (ii) any relief of tax allowed under section 90 on account of tax paid in a country outside India ; (iii) any relief of tax allowed under section 90A on account of tax paid in a specified territory outside India referred to in that section ; (iv) a .....

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sub-section (3), tax on the total income determined under sub-section (1) of section 143 shall not include the additional income-tax, if any, payable under section 143. (2) Where, before the date of determination of total income under sub-section (1) of section 143 or completion of a regular assessment, tax is paid by the assessee under section 140A or otherwise,- (i) interest shall be calculated in accordance with the foregoing provisions of this section up to the date on which the tax is so p .....

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le to pay simple interest at the rate of 1one per cent. for every month or part of a month comprised in the period commencing on the day following the date of determination of total income under sub-section (1) of section 143 and where a regular assessment is made as is referred to in sub-section (1) following the date of such regular assessment and ending on the date of the reassessment or recomputation 3under section 147 or section 153A, on the amount by which the tax on the total income deter .....

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