9911796707
TMI Blog2018 (10) TMI 1862X X X X Extracts X X X X X X X X Extracts X X X X ..... uring of the same products. From time to time vide separate lease deed executed between the assessee company and the Trust, a lease rental were regularly increased. Earlier it was Rs. 25,000/- per month and prior to year 1989, it was enhanced to Rs. 50,000/-. Later on vide lease deed dated 01.04.1989, the monthly lease rent was increased to Rs. 1 lac and after 18.01.1992 again, the lease rent were enhanced to Rs. 6,75,000/- per month and finally w.e.f. 01.04.1997 lease rent was further enhanced to Rs. 7,50,000/- within annual increment. The lease rental paid by the assessee company was claimed as expenditure in the P&L account. The Assessing Officer was of the opinion that, firstly, the assessee company had claimed benefit of an enduring nature and accordingly, disallowed the increase amount of rent on the ground that it is in the nature of capital expenses; secondly, he also invoked provision of Section 40A(2). Similar disallowances were made in the all the years. 3. Ld. CIT (A) has confirmed the said action of the Assessing Officer on the ground that unusual increase in the rent was primarily for the purpose of reducing the tax incident on the profits earned by the assessee comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the lease rent of the plant and machinery in the open market. However, how much of the enhancement in the lease rent is attributable to the modernization and improvement in the plant and machinery is a matter which the Assessing Officer has to decide after giving the opportunity to that of the assessee to the lease agreement in this regard. 4.3 After examining the nature of agreement amongst the parties and discussing various judgments on the issue of capital expenditure vs. revenue expenditure and applying the test laid down therein, the Hon'ble High Court held that:- "1. That part of the enhancement of lease rent, which is attributable to Mehta Charitable Trust surrendering its right to purchase khair wood in favour of the assessee company constitutes revenue expenditure, 2. That part of the enhancement of lease rent, which is attributable to improvement and modernization of plant and machinery carried out by the Trust in the year 1989-90, constitutes revenue expenditure. 3. The enhancement in lease rent, if any, which is attributable to normal appreciation, if any, in line with the lease rentals prevailing in the market constitutes revenue expenditure. 4. The enhanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8% Normal escalation on (A) @ 9.5% for 17 years plus basic rent amount (D) Sum of rent attributable to revenue nature (E) [(EMB) +(C) -(D)] Balance amount of rent attributable to capita! nature (F) 1(F) = (A)- (E)] 1992-93 2,925.000 6.74.813 1.200,000 1.641,157 524.059 524.059 2,840.029 84.971 1993-94 8,100,000 2,699,251 1.200.000 1.821.684 1.107,812 1.157,598 5,678,533 2,421,467 1994-95 8,100.000 2,699,251 1.200,000 2.022.070 1,232,524 1,392.281 6.113.602 1,986,398 1995-96 8,100,000 2.699,251 1.200.000 2,244,497 1,382,514 1.674.538 6,618,286 1,481,714 1996-97 8.100.000 2,699,251 1,200,000 2,491,392 1,382.514 1,833,619 7,024.262 1,075,738 1997-98 8,100.000 2,699,251 1,200,000 2,765,445 1.382,514 2.007.813 7,472,509 627,491 1998-99 8.100.000 2,699,251 1,200,000 3,069.644 1,382,514 2,198.555 7,967,450 132,550 1999-00 9,450,000 2,699.251 1,200,000 3,407,305 1,382,514 2,407,418 8,513,974 936,026 2000-01 9,922,500 2,699,251 1,200,000 3.782.109 1.382,514 2,636,122 9,117,482 805,018 2001-02 10,418,628 2,699,251 1,200,000 4,198,141 1,382,514 1.886.554 9. 783,946 634,682 2002-03 10.939,560 2,699, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee company in this regard an allowance d 10% of the average purchases of M/s Mehta Charitable Trust for the three immediate preceding financial years ' is considered to be reasonable. 10% of 1,79,95,012/- comes out to Rs. 17.99,501/- or Rs. 17,99,500/-. Since the lease deed was executed in the month of January 1992, this allowance will be l/4th of 17,99,500/- for AY. 1992-93 which comes out to Rs. 4,49,875/-. For subsequent assessment years this allowance would be uniformly at Rs. 17,99,500/- @l 10%. II.Enhancement of lease rent in ....... line ...... prevailing in the market." 8. Hon'ble high court has directed to allow normal appreciation in the lease rent keeping in view the rentals prevailing in the market. For this purpose the assessee was asked to provide details of exiting rentals for various assessment years of the lease rental prevailing in the market. The assessee has shown its inability in furnishing such details. In this regard, request letters were also issued to the SDM, Una (HP) and Executive Engineer, HPPWD, requesting them to provide the details so that the undersigned may get an idea about the prevailing lease rentals for different assessment yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re made by the lessor M/s Mehta Charitable Trust on the request of Lessee M/s Shanker Trading Company for the modernization and improvement towards plant and machinery are tabulated on the basis of Balance sheets of M/s Mehta Charitable Trust supplied by the assessee." 8. Ld. CIT (A) has confirmed the action of the Assessing Officer holding that Assessing Officer has applied his mind properly in allocating the lease rent under the different heads and the working given by the assessee is not correct because the total revenue expenditure from Assessment Year 2004-05 onwards is more than the actual payment of lease charges which cannot held to be correct. 9. We have heard the rival submissions made by the parties, perused the relevant findings given in the impugned orders as well as material referred to before us. The main issue before us in all the appeals is, how the enhancement of lease rent given by the assessee company to the Trust is to be allocated in terms of directions given by the Hon'ble High Court, which is, firstly, the part of the enhancement for surrendering the right to purchase khair wood would constitute revenue expenditure; secondly, part of the rent would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... @10% of the average purchases should be given. On the contrary, the assessee before us has demonstrated that in the case of the Trust the gross profit rate on similar product was more than 17%. The assessee has claimed rate of 15% of the average purchases as its compensation for the purpose of allocation of enhanced rent towards capital expenditure. Such a rate of 15% is inconsonance with the average GP rate in the case of the Trust, therefore, allowance of 15% is held to be quite reasonable. Accordingly, we direct the Assessing Officer to treat part of the lease rent fee for surrendering the right to purchase @15% of average purchases of khair wood. 13. As regards enhancement of the lease rent in line of the prevailing market rate, the assessee before the Assessing Officer as well as before the ld. CIT(A) has submitted that it has taken similar lease of a processing unit from Himachal Pradesh Marketing Corporation which is an undertaking of Government of Himachal Pradesh, to whom assessee has paid sum Rs. 30 lac per annum by way of lease rental to the said government undertaking which is much smaller in size and if same is compared then it is at arm's length transaction. Followin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which has been tabulated in the following manner: SI. No. Name of the Assets FY 1989-90 FY 1990- 91 FY 1991-92 FY 1992- 93 FY 1993-94 FY 1995-96 Total 1 Building 2,34,664 3,26,545 - 4,28,176 4,58,383 30,605 14,78,373 2 Machinery 3,25,518 9,43,530 1,92,701 6,65,001 57,598 - 21,84,644 3 Shed 1,06,863 5,04,255 45,296 6,61,751 1,34,842 6,86.671 21,39,678 4 Land - 2.31,772 - - 42.021 1,16,000 3,89,793 5 Refrigeration Plant - - - 14,88,143 - - 14,88,143 Total 6,67,341 20.06,102 2,37,991 32.43,071 6,92,844 8,33,276 76,80,631 17.1 Assessee has claimed 18% of its investment done by the Trust for modernization and improvement of plant and machinery, building, etc. out of lease rent, whereas the Assessing Officer has restricted it to 12% on the ground that 12% of interest on investment is the proper benchmark. 18. Before us, the ld. counsel for the assessee had given SBI BPLR to point out that 1992-93 when lending rate was 12% and in Assessment Year 2010-11 it was 13%. He pointed out that if the wholesale price index is taken into consideration then annual variation of 18% is very reasonable. 19. The learned Department Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure and/or allow such non- compete fee to be revenue expenditure. 22. Learned Department Representative strongly objected to such a proposition and submitted that once the Hon'ble High Court has held that certain portion of lease rent is to be treated as capital expenditure, now the same cannot be held to be allowable as revenue expenditure. 23. After considering the aforesaid submissions, we find that in so far as the claim of the learned counsel that depreciation should be allowed on such a capital expenditure, because it is in the nature of intangible asset, we find substance in such a contention because part of the lease rent has been held to be on account of payment made to the Trust for not indulging in competition, i.e., it is in the form of 'non-compete fees' and such a 'non-compete fee' ostensibly falls in the category of commercial rights as defined in Section 32(1)(i), therefore, assessee is liable for depreciation from 1st April, 1998. In so far as the claim for entire non compete fee should be treated as revenue expenditure because of amendment brought w.e.f. 01.04.2003 in Section 28(va), we direct the Assessing Officer to examine this aspect and what is al ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
