1. This appeal by the Revenue and the cross-objection by the assessee for the asst. yr. 1992-93 are directed against the order of CIT(A). In exercise of the powers vested under Section 255(3) of the IT Act, 1961, the President of the Tribunal has constituted this Special Bench to decide the following question arising in the case of the present assessee: Whether the CIT(A) was justified in holding that the assessee is entitled to deduction of 1/99th of the sum of Rs. 2,04,00,000 being proportionate rent in respect of amortization of payment for acquisition of leasehold rights? 2. The Hon'ble President has referred the other grounds raised in this appeal by the Revenue as well as the assessee for decision thereof and the entire appeals are referred to the Special Bench for disposal.
1. On the facts and in the circumstances of the case and in law, the CIT(A) erred in deleting the addition of Rs. 6,04,137 on account of provision for doubtful debts.
The learned Counsel for the assessee fairly conceded that in view of the retrospective amendment to Section 36(1)(vii) of the Act, the ground is to be decided in favour of the Department. The learned CIT Departmental Representative has supported the contention of the learned Counsel for the assessee. We have considered the rival submissions. The issue of provision of doubtful debts is decided in favour of the Revenue in view of the retrospective amendment to the relevant provision of Section 36(1)(vii) of the Act and accordingly the ground of appeal No. 1 of the Revenue is allowed.
2. On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing to allow as business expenditure the foreign tour expenses of Rs. 2,11,603.
The learned CIT (Departmental Representative) submitted that the AO has detailed reasons for disallowing foreign tour expenses of Mrs. A.V.Shah in the assessment order. He submitted that the assessee has failed to file any evidence to show that the tour of wife of the chairman of the assessee company was for business purposes of the assessee. He relied on series of decisions of CIT v. T.S. Hajee Moosa & Co.
, Saiabhai Technological Development Syndicate (P) support of his argument. The learned Counsel for the assessee submitted that the facts of this year are identical with that of the facts in the earlier years in the case of the assessee and the issue has been decided by the Tribunal in favour of the assessee throughout in the preceding years. He submitted that Tribunal has decided in favour of the assessee in assessee's own case for the earlier asst. yrs. 1987-88, 1988-89, 1989-90, 1990-91, 1991-92 and also in the later asst. yr.
1995-96. He submitted that the Departmental reference application for the asst. yr. 1986-87 was rejected by the Tribunal.
5.We have considered the rival submissions. We find that the assessee has applied for release of foreign exchange to the RBI for the tour of wife of the chairman of the company Mrs. A.V. Shah and the same was approved by the RBI. It was specifically mentioned by the assessee company in the application to the RBI that the tour of Mrs. A.V. Shah is necessary due to medical advice given to the chairman of the company. The facts of the issue are same as in the earlier years wherein the issue was decided by the Tribunal in favour of the assessee. The issue is covered in favour of the assessee with the decisions of the Tribunal in earlier assessment years as well as in the asst. yr. 1995-96 and accordingly in the absence of any reason for not taking a consistent view, we dismiss the ground of appeal No. 2 of the Revenue.
3. On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing to allow the guest house expenses of Rs. 3,22,310 disallowed by the AO under Section 37(4) of the IT Act.
The learned Counsel for the assessee fairly conceded that the issue is covered in favour of the Revenue with the decision of Hon'ble Supreme Court in the case of Britannia Industries Ltd. v. CIT . The learned CIT Departmental Representative has supported the contention of the learned Counsel for the assessee. We have considered the rival submissions. The issue being covered with the decision of the Hon'ble apex Court cited supra, is decided in favour of the Revenue and the ground of appeal No. 3 of the Revenue is allowed.
4. On the facts and in the circumstances of the case and in law, the CIT(A) erred in holding that the disallowance of Rs. 57,250 can be made for the asst. yr. 1992-93 without specifying with any detail as to how many years representations were carried out by the Authorised Representative in asst. yr. 1992-93.
The learned Counsel for the assessee submitted that the disallowance under Section 40A(12) of the Act was made by the AO by observing that a sum of Rs. 10,000 is only allowable in respect of the assessment year under consideration. The CIT(A) has taken a view that the expenditure of Rs. 10,000 is allowable in respect of each year of assessment for which representative fees is paid by the assessee to its Authorized Representative. In, this case, the Authorized Representative has rendered service contemplated under Section 40A(12) for a number of assessment years and in respect of each year expenditure of Rs. 10,000 is allowable. The learned Counsel for the assessee has relied on the decision of the Mumbai Tribunal in assessee's own case in the earlier asst. yr. 1991-92 and decision of Calcutta Tribunal in the case of Asstt. CIT v. Birla Buildings Ltd. (1992) 43 LTD 586 (Cal). The learned CIT (Departmental Representative) could not controvert the submission of the learned Counsel for the assessee. We have considered the rival submissions. The issue of allowability of expenditure of Rs. 10,000 for each year of assessment for which representation fees has been paid to the Authorized Representative by the assessee, is covered in favour of the assessee with the decision of the Mumbai Tribunal in assessee's own case for the earlier asst. yr. 1991-92 and also by Calcutta Tribunal in the case of Asstt. CIT v. Birla Buildings Ltd. (supra). Accordingly, the order of the CIT(A) on this issue is confirmed and ground of appeal No. 4 of the Revenue is dismissed.
5. On the facts and in the circumstances of the case and in law, the CIT(A) erred in deleting the additions of Rs. 2,76,937 by holding that no disallowance under r. 6B should be made if the presentation articles did not contain the logo of the company.
The learned Counsel for the assessee submitted that the issue is covered in favour of the assessee with the decision of Mumbai Tribunal in assessee's own case in all the earlier asst. yrs. 1986-87, 1987-88, 1989-90, 1990-91 and 1991-92 and also by the decision of Hon'ble Bombay High Court in the case of CIT v. Allana Sons (P) Ltd. . The learned CIT (Departmental Representative) could not controvert the submission of the learned Counsel for the assessee.
We have considered the rival submissions. The issue of disallowance under Rule 6B is covered in favour of the assessee with the decisions of the Mumbai Tribunal in assessee's own case for the earlier assessment years cited supra and also by the decision of the Hon'ble jurisdictional High Court in the case of Allana Sons (P) Ltd. cited supra and accordingly is decided in favour of the assessee and the ground of appeal No. 5 of the Revenue is dismissed.
6. On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing to allow the project development expenses of Rs. 6,41,829 disallowed by the AO.The learned CIT (Departmental Representative) has relied on the order of the AO. He submitted that the expenses incurred in obtaining the feasibility report and the consultation fees etc. paid are capital in nature. The learned Counsel for the assessee submitted that the details of project development expenses were submitted before the AO. He submitted that the issue is covered in favour of the assessee with the decision of the Mumbai Tribunal in assessee's own case for the earlier asst. yrs. 1990-91, 1991-92 and also by the order of Mumbai Tribunal in the case of Excel Industries Ltd. v. Dy. CIT asst. yr. 1989-90 ITA No.8601/Bom/1992 reported at (2004) 86 TTJ (Mumbai) 840-Ed. We have considered the rival submissions and have perused the details of project development expenses. We find that the issue of allowability of project development expenses is covered in favour of the assessee with the decisions of the Mumbai Tribunal relied upon by the learned Counsel for the assessee. Accordingly the issue being covered in favour of the assessee, is decided in favour of the assessee and the ground of appeal No. 6 of the Revenue is dismissed.
7. On the facts and in the circumstances of the case and in law, the CIT(A) erred in deleting the addition of Rs. 30,660 made by the AO being the payments made to clubs.
The learned CIT (Departmental Representative) has relied on the order of the AO. He submitted that the provisions of Section 40A(9) should apply to the facts of the case with regard to disallowance of payments to the clubs. The learned Counsel for the assessee submitted that the issue is covered in favour of the assessee with the decision of the Mumbai Tribunal in assessee's own case for the asst. yrs. 1985-86, 1990-91 and 1991-92. He submitted that the amount of expenses represents only the annual membership fees paid to the club. We have considered the rival submissions. We have also perused the details of payments to the clubs given in the compilation by the assessee. The amount of expenditure claimed by the assessee is annual membership fees paid to the clubs. The issue of disallowance of payments to clubs of Rs. 30,660 is covered in favour of the assessee with the decision of the Mumbai Tribunal in assessee's own case in the earlier assessment years cited supra and accordingly the ground of appeal No. 7 of the Revenue is dismissed.
8. On the facts and in the circumstances of the case and in law, the CIT(A) erred in deleting the addition of Rs. 33,44,338 on account of MODVAT element in the closing stock.
The learned CIT (Departmental Representative) has relied on the order of AO. The learned Counsel for the assessee submitted that the issue is covered in favour of the assessee with the decision of the Mumbai Tribunal in assessee's own case for the earlier asst. yrs. 1989-90, 1990-91 and 1991-92 and also with the decision of the Hon'ble apex Court in the case of CIT v. Indo Nippon Chemicals Co. Ltd. . We have considered the rival submissions. The issue of addition in respect of undervaluation of closing stock on account of MODVAT credit is covered in favour of the assessee with the decision of the Hon'ble apex Court in the case of CIT v. Indo Nippon Chemicals Co.
Ltd. (supra) and accordingly the issue is decided in favour of the assessee and the ground of appeal No. 8 of the Revenue is dismissed.
9. On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing to allow the expenses incurred on discount on issue of commercial paper of Rs. 1,31,70,489 disallowed by the AO.The learned CIT (Departmental Representative) has relied on the order of AO. He submitted that the assessee company has taken short-term loan from Allahabad Bank by issuing commercial papers. The discount and finance charges were incurred for raising the additional capital of the company and therefore, the expenses are capital in nature. He referred to para 15 of the assessment order in support of his argument. The learned Counsel for the assessee submitted that the issue is covered in favour of the assessee with the decision of Mumbai Tribunal in assessee's own case for the earlier asst. yr. 1991-92. He relied on the decision of Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT , Hon'ble Supreme Court in the case of India Cements Ltd. v. CIT and Hon'ble Bombay High Court in the case of Premier Automobiles Ltd. v.CIT . We have considered the rival submissions. We find that the assessee company has debited the amount of Rs. 1.31 crores towards discount and finance charges. The assessee company has taken short-term loan from Allahabad Bank by issuing commercial papers.
The issue of allowability of discount charges on issue of commercial papers for raising short-term loan is covered in favour of the assessee with the decision of'Mumbai Tribunal in assessee's own case for the earlier asst. yr. 1991-92. The issue being covered with the decision of the co-ordinate Bench of the Tribunal in favour of the assessee, is decided in its favour and the ground of appeal No. 9 of the Revenue is dismissed.
10. On the facts and in the circumstances, of the case and in law, the CIT(A) erred in holding that the assessee is entitled to deduction of 1/99th of the sum of Rs. 2,04,00,000 being proportionate rent relatable to asst. yr. 1992-93.
14. This specific issue referred to this Bench by the President of the Tribunal has been reproduced in para 1 of this order, which is again reproduced for ready reference: Whether the CIT(A) was justified in holding that the assessee is entitled to deduction of 1/99th of the sum of Rs. 2,04,00,000 being proportionate rent in respect of amortization of payment for acquisition of leasehold rights.
15. Before proceeding to decide the issue raised in this ground of appeal by the Revenue and also referred by the President, Tribunal to us, we consider it necessary to record the factual matrix of the case.
The assessee company has entered into an agreement with Maharashtra Industrial Development Corporation (MIDC) on 5th March, 1992 by which the assessee was given 50 acres of land by MIDC for the purpose of factory plant at Kalva, Thane and the period of lease is 99 years. An amount of Rs. 2.04 crores was paid by the assessee company as premium to MIDC and the said payment was styled as "premium on leasehold land".
The assessee claimed this amount as revenue expenditure and the AO disallowed the same by holding it as being of capital nature. The reasoning of the AO while holding the expenditure of Rs. 2.04 crores as that of capital in nature as recorded in the assessment order is that the assessee did not claim the amount as a revenue expenditure in the original return of income and only claimed this in the revised return of income. As per the terms and conditions of the agreement dt. 5th March, 1992 of the assessee company with MIDC, the assessee was permitted to construct factory building therein and was permitted to utilise the property and building for 99 years. The rent fixed as per the agreement dt. 5th March, 1992 with MIDC is Re. 1 per annum. The premium of Rs. 2.04 crores is over and above the rent fixed in the agreement which means that the lessor had differentiated between the rent and premium in the agreement itself. The AO referred to the decision of the Hon'ble Karnataka High Court in the case of CIT v.H.M.T. Ltd. , relied upon by the assessee and observed that the decision of Hon'ble Karnataka High Court has not been accepted by the Revenue and the matter is pending before the Hon'ble Supreme Court. The assessee went in appeal against the order of the AO and the CIT(A) concluded that the payment of Rs. 2.04 crores was an advance rent paid by the assessee for the land to the MIDC for the reason that the entire amount of Rs. 2.04 crores cannot be treated as capital expenditure as the assessee did not acquire any ownership of the property. The assessee is a lessee and the said lease is transferable and renewable at the option of the lessor. The CIT(A) agreed with the decision of the Hon'ble Karnataka High Court in the case of CIT v.H.M.T. Ltd. cited supra that it was rent paid in advance. The CIT(A) held that since it was an expenditure relatable to 99 years, it should be allowed on proportionate basis. The CIT(A) disagreed with the assessee that once expenditure is held as revenue, it has to be allowed in one year. He relied on the decision of Hon'ble Supreme Court in the case of Madias Industrial Investment Corporation Ltd. v. CIT (supra) which pertains to the issue of allowance of expenditure on premium on debentures. Against this decision of the CIT(A), both the Revenue as well as the assessee are in appeal before the Tribunal.
16. This case has three dimensions and gives rise to three possible propositions namely, the expenditure of Rs. 2.04 crores paid by the assessee to the MIDC for acquiring 50 acres of land for the purpose of its factory plant for a period of 99 years is either capital in nature or revenue in nature and allowable in one year or though revenue in nature but being advance payment of rent for 99 years, it should be allowed on proportionate basis at 1/99th of the sum of Rs. 2.04 crores paid by the assessee being proportionate rent in respect of amortization of payment for acquisition of leasehold rights.
17. In the light of the factual matrix of the case as detailed above and the possible propositions, we record the arguments put forward by the parties before us. The learned CIT (Departmental Representative) submitted that the reasoning of the CIT(A) that since the assessee is not the owner of the property as a lessee, the expenditure cannot be treated as capital in nature is flawed. The essential ingredient to determine the nature of expenditure is not the ownership, but whether the benefit conferred on the assessee is of enduring nature. He submitted that the lease of 99 years is a perpetual lease and therefore, benefit of enduring nature is conferred in this case on the assessee and therefore, the expenditure shall be treated as capital in nature. He submitted that in the case of CIT v. H.M.T. Ltd. (supra), the finding of the Tribunal as a matter of fact was that the amount paid by the assessee in lump sum to MIDC was the future rent payable by it and which the assessee had to pay periodically and therefore, the decision of the Hon'ble Karanataka High Court is not applicable to the facts of the case of the assessee. He submitted that the premium of Rs. 2.04 crores paid to MIDC is over and above the rent fixed in the agreement dt. 5th March, 1992 meaning thereby that the lessor had differentiated between rent and premium in the agreement itself. The learned CIT (Departmental Representative) submitted that Pune Bench of the Tribunal in the case of Devi Construction Co. v. Asstt. CIT (ITA No. 1769/Pn/1990) has considered this very issue and also the decision of the Hon'ble Karnataka High Court in H.M.T. Ltd. (supra). In the case of Devi Construction Co. (supra) the assessee has claimed expenditure of Rs. 1,25,000 being a premium paid to MIDC for premium on leasehold land. The assessee claimed the lease premium as in the nature of advance rent. The period of lease in this case was for 99 years and the lease was also from MIDC as in the case of the assessee. Pune Tribunal held that the expenditure claimed by the assessee company was capital in nature. Pune Tribunal has recorded that the decision of the Karnataka High Court in the case of H.M.T. Ltd. (supra) is distinguishable in the sense that the High Court has proceeded on the finding of fact recorded by the Tribunal that the payment to MIDC was the future rent of the land. The learned CIT (Departmental Representative) submitted that the ratio of the decision of the Pune Tribunal in the case of Devi Construction Co. (supra) is applicable to the case of the assessee since the facts of the case of assessee are identical with that of the case of Devi Construction Co. (supra). The learned Departmental Representative submitted that the amount of Rs. 2.04 crores is the price of transfer of possession of the land by MIDC in favour of the assessee for a period of 99 years in terms of Section 105 of the Transfer of Property Act. Thus the assessee gets enduring benefit against the lump sum payment of Rs. 2.04 crores. The learned CIT (Departmental Representative) relied on series of decisions in support of his arguments. He relied on the decision in the cases of CIT v. Project Automobiles (1988) 67 CTR (MP) 52 : (1987) 167 ITR 781 (MP), CIT v. Panbari Tea Co. Ltd. (1965) 57 ITR 422 (SC), Sudharshan Chemicals Ltd. ITA No. 37/Pn/1997, Aditya Minerals (P) Ltd. v. CIT and CIT 284 : (2002) 258 ITR 459 (Bom) in support of his argument. The learned CIT (Departmental Representative) submitted that the decision of Hon'ble jurisdictional High Court in the case of Khimline Pumps Ltd. (supra) squarely covers the issue in the present case in favour of the Revenue. He submitted that in the case of Khimline Pumps Ltd. (supra), the facts were that open plot of land in Kalva, Thane was leased out by MIDC to assessee for a period of 95 years on payment of yearly rent of Re. 1 and in consideration of the payment of Rs. 1,62,400 as premium.
In the facts of the case, the Hon'ble jurisdictional High Court upheld the order of the AO holding the payment as capital in nature. He submitted that facts being identical with the case of the assessee, the issue be decided in favour of the Revenue and the amount of Rs. 2.04 crores paid by the assessee as premium for acquisition of leasehold rights for 99 years may be held as capital in nature. The learned CIT (Departmental Representative) submitted that the decision of Hon'ble Supreme Court in the case of CIT v. Madras Auto Service (P) Ltd. relied upon by the assessee has been distinguished by the Hon'ble Bombay High Court in the case of CIT v. Khimline Pumps Ltd. (supra).
18. The learned Counsel for the assessee has opposed the submission of the learned CIT (Departmental Representative). He submitted that in the subsequent asst. yrs. 1995-96, 1996-97, the AO has allowed proportionate deduction of 1/99th of the sum of Rs. 2.04 crores being proportionate rent in respect of amortization of the payment for acquisition of leasehold rights. He referred to various clauses of terms and conditions of the agreement dt. 5th March, 1992 entered into between the assessee company and the MIDC, copy of which is filed in the compilation before the Tribunal. He submitted that the decision of Hon'ble Karnataka High Court in the case of H.M.T. Ltd. (supra) is applicable to the facts of the case of the assessee. He relied on the decision of Hon'ble Madras High Court in the case of CIT v. Gemini Arts (P) Ltd. (2002) 254 FTR 201 (Mad). He submitted that the assessee is only a licensee as per the terms and conditions of agreement dt. 5th March, 1992 and no lease agreement has been entered into with MIDC till date. He submitted that in fact the rent of Re. 1 per annum is not an economic rent and hence amount of Rs. 2.04 crores is substitution of rent for longer period. He relied on the decision of Hon'ble Supreme Court in the case of CIT v. Madras Auto Service (P) Ltd. (supra). He submitted that the terms and conditions of the agreement dt. 5th March, 1992 show that the vacant possession of the land has to be handed over to MIDC after the expiry of lease period of 99 years. The learned Counsel for the assessee submitted that the case law relied upon by the learned CIT (Departmental Representative) are distinguishable on facts.
The learned Counsel for the assessee submitted that the decision of Hon'ble Bombay High Court in the case of Khimline Pumps Ltd. (supra) is not applicable to the case of the assessee since in the case of Khimline Pumps Ltd. (supra) the assessee was not the original lessee of the premises. He relied on the decision of Hon'ble Supreme Court in the case of Durga Das Khanna v. CIT and also decision of Mumbai Tribunal in ITA No. 3742/Mum/2004. The learned Counsel for the assessee submitted that nomenclature of the agreement with MIDC is not decisive of the issue and the facts remain that the assessee did not acquire any ownership of the property and therefore the expenditure being relatable to 99 years, it should be allowed on proportionate basis. The assessee by the terms of the agreement dt. 5th March, 1992 with MIDC is obliged to handover the vacant possession of the land in question to the lessor MIDC after the expiry of 99 years of lease period.
19. The learned CIT (Departmental Representative) in his rejoinder submitted that it is a case of perpetual lease being of 99 years and being inheritable also is as good as sale in favour of the assessee. He submitted that the decision of Hon'ble Supreme Court in the case of Durga Das Khanna v. CIT (supra) relied upon by the learned Counsel for the assessee, is in fact in favour of the Revenue.
20. We have considered the rival submissions carefully. We have perused the various copies of documents filed by the parties in the compilation filed before us. The material facts of the case are not in dispute. The assessee has entered into an agreement with MIDC on 5th March, 1992 by which it was given 50 acres of land by MIDC in the Kalva Industrial Area, Thane, for the purpose of factory plant and the period of lease is 99 years. The amount of Rs. 2.04 crores was paid by the assessee and the said payment was styled as "premium on leasehold land". The rent was fixed at Re. 1 per annum and the premium of Rs. 2.04 crores is over and above rent fixed in the agreement. We find that to decide that whether amount paid by the assessee for acquisition of leasehold rights in the premises is capital in nature or revenue in nature or an advance payment of rent, one has to examine all the facts and circumstances of the respective case. In case it is found that as a matter of fact the amount paid for acquisition of leasehold rights of the premises was in the nature of advance payment of rent for future years and is revenue in nature, then the same has to be allowed on proportionate basis in respect of amortization of payment for acquisition of leasehold rights.
In case it is found as a matter of fact that the amount for acquisition of leasehold rights was paid as "premium" or "Salami", the same shall be capital in nature and shall not be deductible.
21. In the case before us the lease is for a period of 99 years, which is as good as a perpetual lease in favour of the assessee. There is no material on record to suggest that the amount of Rs. 2.04 crores paid to the Government concern MIDC was an advance payment of rent for the period of lease paid in lump sum by the assessee company. The terms of agreement dt. 5th March, 1992 entered into between assessee company and the Government body M/s MIDC clearly mention that a sum of Rs. 2.04 crores is the amount of deposit to be adjusted towards "premium" payable by the licensee for the allotment of 50 acres of land in Kalva Industrial Area. The plea of the assessee that the lease agreement was not entered into till date and hence, the status of the assessee is that of a licensee only, makes no difference, since on p. 2 of the agreement of the assessee company with MIDC dt. 5th March, 1992, it is specifically mentioned that the licensee shall be deemed to be bare licensee only of the premises at the same rent and subject to same terms as if the lease had been actually executed. A reading of the agreement dt. 5th March, 1992 entered into with MIDC clearly shows that the amount of Rs. 2.04 crores was paid by the assessee company to MIDC as "premium" or "Salami" for the acquisition of the premises on lease for a period of 99 years. In reply to a specific query from the Bench, the learned Counsel for the assessee submitted that the cost of boundary walls on this 50 acres of land was capitalized in the account books of the assessee and depreciation was claimed by the assessee. The action of the AO in allowing proportionate rent in the subsequent asst.
yrs. 1995-96 and 1996-97, shall not alter the character of the amount paid by the assessee to MIDC for acquisition of the premises. We are aware that mere use of the word premium in the agreement dt. 5th March, 1992 shall not make the character of the amount of Rs. 2.04 crores paid to MIDC as "premium", if the combine reading of the agreement leads to some other conclusion. In this case, not only the word "premium" has been used in all relevant terms of the agreement dt. 5th March, 1992 with Government concern MIDC, but also considering the terms of the agreement dt. 5th March, 1992 as a whole it is clear that the amount of Rs. 2.04 crores was paid as "premium" for acquisition of leasehold rights in the premises. The Clause 5(b)(i) of the said agreement dt.
5th March, 1992 provides that in case of termination of lease, the "premium" is non-refundable. It provides that in case the licensee fails to complete the said factory building within the time aforesaid and in accordance with the stipulations provided therein, the MIDC without making any compensation or allowance to licensee for the same and without making any payment to the licensee for refund or repayment of the premium aforesaid or any part thereof, can resume the land in question. Thus, in case of termination of lease, the "premium" is nonrefundable and therefore, the same cannot be considered as advance payment of rent. There is no clause in this agreement to show that the amount of Rs. 2.04 crores was paid by the assessee as advance rent for all future years and the lump sum payment of future years' rent has been paid to avail some concession for advance payment of rent or for some other business consideration. The land in question is inheritable also as per the terms and conditions of the agreement with MIDC.Therefore, considering the terms of agreement dt. 5th March, 1992 as a whole, we hold that the consideration of Rs. 2.04 crores was paid to MIDC as a price for obtaining the leasehold rights for a period of 99 years from MIDC in favour of the assessee.
22. The decision of Hon'ble Kamataka High Court in the case of H.M.T.Ltd. (supra) relied upon by the assessee, is distinguishable since the Hon'ble Kamataka High Court has proceeded on the finding of fact recorded by the Tribunal that the payment to MIDC was the future rent of the land. In the case of Devi Construction Co. v. Asstt. CIT (supra), the Pune Tribunal has decided the issue in similar facts in favour of the Revenue. In this case before the Pune Tribunal, the amount was paid to MIDC for obtaining the leasehold rights of certain premises for a period of 95 years against the yearly rent of Re. 1 and a payment of lump sum amount as premium for the land. The Pune Tribunal considered the various decisions of the Hon'ble Courts on the issue and held that there is no condition of existence of an economic rent in addition to the premium paid by the assessee. The Tribunal held that the decision of the Hon'ble Kamataka High Court in the case of H.M.T.Ltd. (supra) is distinguishable since the Hon'ble Kamataka High Court proceeded on the finding of fact recorded by the Tribunal that the payment to MIDC was the future rent of the land. The Pune Tribunal concluded that the amount paid as premium for the leasehold land taken from MIDC is capital in nature and not allowable. In the case of CIT v.Gemini Arts (P) Ltd. (supra) relied on by the learned Counsel for the assessee, we find that decision of Hon'ble Madras High Court is distinguishable since the Hon'ble High Court has proceeded on the basis of fact that the payment of rent was made by the assessee in lump sum for the entire duration of lease period. The decision of Hon'ble Supreme Court in the case of CIT v. Madias Auto Service (P) Ltd. (supra) was discussed by the Hon'ble Bombay High Court in the case of CIT v. Khimline Pumps Ltd. (supra), wherein it was held that the decision of the Hon'ble Supreme Court in Madras Auto Service (P) Ltd. (supra) is distinguishable on facts since in the case before the Hon'ble Supreme Court the old construction was dilapidated and the assessee could not have carried on business in the old structure and under the lease the old structure was permitted to be demolished and the demolition was at the cost of the assessee and the assessee put up a new construction at its own cost and under the lease the lessee had no right, title and interest in the new construction, whereas in the case before the Hon'ble Bombay High Court in the case of Khimline Pumps Ltd. (supra), the assessee was entitled to take away the building on the expiry of the lease. In the case of Sudhaishan Chemicals Ltd. (supra), the Pune Tribunal in similar facts decided the issue in favour of the Revenue and held that considering the entire agreement as a whole, the expenses incurred by the assessee for obtaining the leasehold rights were capital in nature and therefore not allowable as deduction. The facts of the case of Sudhaishan Chemicals Ltd. (supra) are similar to the facts of the case of the assessee before us. In the case of Sudhaishan Chemicals Ltd. (supra), the lump sum payment was made by the assessee company to MIDC for acquisition of leasehold rights for the land for 99 years. In the case of Pancham Acquaculture Farms Ltd. v. ITO ITA No. 3742/Mum/2004 (SMC) allowing amortization of leasehold premium paid for acquiring leasehold rights for a period of 21 years. We find that the learned Single Member of the Tribunal has followed the decision of Hon'ble Madras High Court in the case of CIT v. Gemini Arts (P) Ltd. (supra). We have already discussed the decision of Hon'ble Madras High Court in the case of Gemini Arts (P) Ltd. (supra) and is distinguishable since the Hon'ble Madras High Court has proceeded on the fact that the payment of rent was made in lump sum for the entire duration of the lease period. Another case relied on by the learned Counsel for the assessee is of Hon'ble Supreme Court in the case of Durga Das Khanna v. CIT (supra), which has been contested by the learned CIT (Departmental Representative) by submitting that this decision of the Hon'ble Supreme Court, in fact is in favour of the Revenue. In this case the assessee had taken on lease certain premises for a period of 99 years with a right to assign the lease and alter the structure of the premises so as to convert it into a cinema hall. The assessee after spending Rs. 35,000 on some alterations, felt the necessity for having some more money in order to convert the premises to a cinema house and for this purpose entered into an agreement dt.
23rd Feb., 1946 by which the building was demised to the lessee for a period of 30 years. The lessee agreed to pay under the lease agreement Rs. 55,200 to the assessee towards the cost of erecting the cinema house and also the rent of Rs. 2,100 per month. There were no provisions for the adjustment of the sum of Rs. 55,200 towards rent or for its repayment by the assessee. The Tribunal and the Hon'ble High Court held that the amount of Rs. 55,200 was paid in the nature of advance payment of rent. On appeal, the Hon'ble Supreme Court held that the Tribunal and the High Court were in error in holding that the sum of Rs. 55,200 was advance payment of rent. The Hon'ble Supreme Court held that a sum of Rs. 55,200 was in nature of premium or Salami and it had all the characteristics of a capital payment and was not revenue in nature. In these facts, we find that the decision of the Hon'ble Supreme Court in the case of Durga Das Khanna (supra) is in favour of the Revenue wherein the payment of Rs. 55,200 was held as premium or Salami and capital in nature. In the case of the assessee before us, there is no condition or stipulation in the agreement dt. 5th March, 1992 from which it could be inferred that the sum of Rs. 2.04 crores had been paid by way of advance rent, nor was there any provision for its adjustment towards rent or for its repayment to the assessee. In the facts of the case before us, the ratio of the decision of Hon'ble Supreme Court in the case of Durga Das Khanna (supra) applies and the amount of Rs. 2.04 crores paid by the assessee is in the nature of premium and as such capital in nature.
23. In the case of CIT v. Project Automobiles (supra), the issue was whether the premium paid to obtain land on lease can be claimed as revenue expenditure. The assessee in this case had taken a plot of land for a period of 30 years on lease and a premium of Rs. 62,500 was payable in 12 equal monthly instalments. The Hon'ble Madhya Pradesh High Court held that it is apparent that the assessee obtained a right of enduring nature in the plot in question and in order to obtain this right it had to pay a sum of Rs. 62,500 as premium and therefore, could not on the facts of the case be treated as advance rent. The payment of Rs. 62,500 was apparently in nature of Salami payment in order to obtain the right of an enduring nature in the plot in question and was.
obviously in the nature of capital expenditure.
24. In the case of Panbari Tea Co. Ltd. (supra), the facts were that the assessee company has leased out two estates in consideration of premium and certain amount of annual rent. The premium was claimed by the assessee company as capital receipt. The AO held the same as revenue receipt. The Hon'ble High Court held the receipt as capital receipt. On further appeal, the Hon'ble Supreme Court examined the law pertaining to the concept of premium and held the amount as "Salami".
The Hon'ble Supreme Court referred to the observation of Judicial Committee in Raja Bahadur Kamakshya Narain Singh of Ramgarh v. CIT (1943) 11 ITR 513, 519 (PC) thus "Salami is a single payment made for the acquisition of the right of the lessees to enjoy the benefits granted to them by the lease. That general right may properly be regarded as a capital asset, and the money paid to purchase it may properly be held to be a payment on capital account." The Hon'ble Supreme Court agreed with a finding of Board of Agricultural Income-tax in concluding that salami is of a Single non-recurring character and it is a payment prior to the creation of a tenancy. It is the consideration paid by the tenant for being let into possession and can be neither rent nor revenue but is a capital receipt in the hands of the landlord. The Hon'ble Supreme Court in Panbari Tea Co. Ltd.'s case (supra) held that "The real test of a salami or premium is whether the amount paid, in a lump sum or in instalments, is the consideration paid by the tenant for being let into possession. When the interest of the lessor is parted with for a price, the price paid is premium or salami.
But the periodical payments made for the continuous enjoyment of the benefits under the lease are in the nature of rent. The former is a capital receipt and the latter are revenue receipts. There may be circumstances where the parties may camouflage the real nature of the transaction by using clever phraseology. In some cases, the so-called premium is in fact advance rent and in others rent is deferred price.
It is not the form but the substance of the transaction that matters.
The nomenclature used may not be decisive or conclusive but it helps the Court, having regard to the other circumstances, to ascertain the intention of the parties." The Hon'ble Supreme Court in this case has discussed the provision of Section 105 of the Transfer of Property Act and has observed that "Under Section 105 of the Transfer of Property Act, a lease of immovable property is a transfer of a right to enjoy the property made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms. The transferor is called the lessor, the transferee is called the lessee, the price is called the premium, and the money, share, service or other thing to be so rendered is called the rent. The section, therefore, brings out the distinction between a price paid for a transfer of a right to enjoy the property and the rent to be paid periodically to the lessor". In the case of Aditya Minerals (P) Ltd. (supra), the facts were that the assessee obtained a lease for a period of 15 years at a monthly rent of Rs. 35 per acre. Clause-II of the lease deed stated that the lessee shall deposit with the lessor by way of guarantee for due performance of this lease deed for 15 years, the amount equal to rent of lease of land for the full period of lease and it will be adjustable against the rent of every month. This entire guarantee deposit shall not carry any interest payable to the lessee by the lessor. The lease deed granted to the assessee a liberty to use the land for excavation purpose and subsidiary purpose. The assessee claimed the rent amount worked out for the relevant assessment year as revenue expenditure. The Hon'ble Supreme Court in the facts of the case held the expenditure claimed by the assessee as not allowable deduction in computing the business profit of the assessee company.
25. The case of CIT v. Khimline Pumps Ltd. (supra) has been heavily relied upon by the CIT (Departmental Representative). The facts of the case are that an open plot of land in Kalva Industrial Area, Thane was leased out by MIDC to a company known as APV Equipments Ltd., for a period of 95 years on payment of yearly rent of Re. 1 and in consideration of payment of Rs. 1,62,400 as premium. The lease period was 95 years as per the terms and conditions of the agreement. The lessee would be entitled to remove buildings, erections or structures put up by the lessee on the land and the vacant position of the land has to be handed over to the lessor after the end of 95 years lease period. The company APV Equipments Ltd. went in liquidation by the order of Hon'ble Bombay High dt. 25th July, 1985. M/s APV Equipments Ltd. is ordered to be wound up. Subsequently the Official Liquidator sought consent of MIDC for transfer of premises (land) to the assessee who was the highest offerer. In the deed of assignment, it was mentioned that the value of the land and plant and machinery stood bifurcated for the purpose of payment of stamp duty in two parts i.e., 72 lakhs for the land and building and 3 lakhs for the plant and machinery. During the course of assessment proceedings, in the case of the assessee, i.e., Khimline Pumps Ltd., the AO found that assessee has purchased the whole unit for Rs. 75 lakhs and out of the said amount for Rs. 75 lakhs, Rs. 45 lakhs related to the acquisition of leasehold land and Rs. 27.81 lakhs related to the building and the balance related to the machinery purchased by the assessee. The assessee contended before the AO that Rs. 45 lakhs were paid as advance rent since APV Equipments Ltd. was entitled to use and occupy the property for 95 years for payment of Re. 1 per annum. The assessee contended that on expiry of the lease period of 95 years, the plot with building had to be surrendered to MIDC since the assessee is merely substituting itself in the place of APV Equipments Ltd. The AO held that the payment of Rs. 45 lakhs to the Official Liquidator was for the purchase of leasehold rights and therefore capital in nature. Alternatively, the AO observed that at the highest, proportionate rent attributable to the assessee would be allowed. The AO finally disallowed Rs. 45 lakhs as capital expenditure in the hands of the assessee. The Tribunal was of the view that since benefits of these expenditure of Rs. 45 lakhs would be exhausted in 71 years, the proportionate amount relatable to each year amounting to Rs. 63,380 per annum may be allowed as deduction on account of payment of rent for that year for 71 years. The matter went to the Hon'ble Bombay High Court at the instance of Revenue which upheld the order of the AO and held as under: (i) allowing the appeal of the Department, that, having come to the conclusion that Rs. 45 lakhs was a capital expenditure, the Tribunal could not have directed the Department to apportion the amount over a period of 71 years.
(ii) Rejecting the cross-objection of the assessee, that, on the facts, the Tribunal was right in coming to the conclusion that the sum of Rs. 45 lakhs constituted capital expenditure. The assessee was not the original lessee; the original lessee was APVE Ltd., which paid the premium amount of Rs. 1,62,400. The assessee paid Rs. 75 lakhs including Rs. 45 lakhs, to acquire the whole unit. The payment was to secure an advantage for the enduring benefit of the trade:CIT v. Madras Auto Service (P) Ltd. It is well settled that in order to ascertain the true character and purport of a payment, the Court has to go by the substance of the transaction and not by the manner in which the assessee allocates the item for accounting purposes.
26. We find that the facts of the case before us are similar to the facts of the case in the case of Khimline Pumps Ltd. (supra). We are not impressed by the argument of the learned Counsel for the assessee that the ratio of decision of Hon'ble Bombay High Court in Khimline Pumps Ltd. case (supra) is distinguishable since in Khimline Pumps Ltd. case (supra) the assessee was not the original lessee. This distinction pointed out by the learned Counsel for the assessee is not sustainable for the reason that the decision of the Hon'ble High Court is not based on the fact that the assessee was not the original lessee of the premises. All other facts of the case of the assessee before us are similar to the facts of the case of Khimline Pumps Ltd. (supra). The ratio of the decision of Hon'ble jurisdictional High Court in the case of Khimline Pumps Ltd. (supra) is clearly applicable to the facts of the case of the assessee. In this case of the assessee all the essential ingredients of treating the amount of Rs. 2.04 crores paid by the assessee for acquisition of leasehold rights for 99 years in the land as capital in nature are present. The benefit conferred on the assessee of lease rights is for 99 years against the lump sum payment of Rs. 2.04 crores is of enduring nature. There is no material on record to suggest that the sum of Rs. 2.04 crores had been paid by way of advance rent nor was there any provision for its adjustment towards rent or for its repayment to the assessee. We find that in case, the assessee terminates the lease agreement and handovers the vacant position of the land to MIDC (lessor) prior to the expiry of lease period of 99 years, it shall not be entitled to any refund out of the amount of Rs. 2.04 crores paid by the assessee. There is also no material on record to show that the assessee has made the advance payment of rent for future years to secure any reduction in the rent payable for the future years or for any other business consideration.
Considering the totality of the facts and circumstances of the case and the terms of the agreement dt. 5th March, 1992 entered into between the assessee company and MIDC as a whole, we hold that the consideration of Rs. 2.04 crores paid by the assessee company for obtaining the leasehold rights from MIDC in favour of the assessee for a period of 99 years is capital in nature and therefore, not allowable as deduction to the assessee. The decision of the Hon'ble Supreme Court in the cases of Panbari Tea Co. Ltd. (supra), Durga Das Khanna (supra), Aditya Minerals (P) Ltd. (supra) and Hon'ble jurisdictional High Court in the case of Khimline Pumps Ltd. (supra) would squarely apply to the facts of the case of the assessee, and being binding in nature, we decide the issue in ground of appeal No. 10 of the Revenue in favour of the Revenue and the ground of appeal No. 10 of the Revenue is allowed and the issue referred to the Special Bench by the President, Tribunal is answered in the negative and in favour of the Revenue.
27.The ground No. 1 of cross-objection of the assessee is regarding disallowance under Rule 6D of Rs. 1,14,207. The learned Counsel for the assessee fairly conceded that the issue is covered in favour of the Revenue with the decision of the Hon'ble Bombay High Court in case of CIT v. Aorow India Ltd. and Mumbai Tribunal in assessee's own case in the earlier assessment years. The learned CIT (Departmental Representative) has supported the contention of the learned Counsel for the assessee. We have considered the rival submissions. The issue of disallowance under Rule 6D of the IT Rules is covered against the assessee with the decision of the Hon'ble jurisdictional High Court cited supra and decision of the Mumbai Tribunal in assessee's own case in the earlier assessment years and accordingly the ground No. 1 of cross-objection of the assessee is dismissed.
28. The second ground of cross-objection of the assessee is regarding addition of sundry credit balances written back amounting to Rs. 8,62,773. The learned Counsel for the assessee submitted that the details of credit balances appropriated have been filed in the compilation before the Tribunal. He submitted that the issue is covered in favour of the assessee with the decisions in cases of CIT v. Sugauli Sugar Works (P) Ltd. and Mumbai Tribunal in assessee's own case for the asst. yrs. 1990-91 and 1991-92.
29. We have considered the rival submissions. The issue of addition of sundry credit balances written back is covered with the decision of the Mumbai Tribunal in assessee's own case for the earlier asst. yrs.
1990-91 and 1991-92. We have also perused the details of credit balances appropriated by the assessee, filed in the compilation before the Tribunal. We find that the Tribunal in assessee's own case for the asst. yr. 1990-91 in CO No. 327/Mum/1999 (in ITA No. 3486/Mum/1997) has decided the issue in favour of the assessee by following the decision of Hon'ble Supreme Court in the case of Chief CIT v. Kesaria Tea Co.
Ltd. (supra). Accordingly, the issue being covered in favour of the assessee with the decision of the Mumbai Tribunal in assessee's own case for the asst. yr. 1990-91, is decided in its favour and the addition made is deleted and the ground No. 2 of cross-objection of the assessee is allowed.
3.1 On the facts and in the circumstances of the case and in law, the CIT(A) erred in rejecting the claim made by the respondent for deduction of the sum of Rs. 2,04,00,000 being the lease premium paid to MIDC. 3.2 In rejecting the said claim the CIT(A) erred in not appreciating the fact that since the lease rent was only Re. 1 per annum, it was obvious that the sum of Rs. 2,04,00,000 stated as lease premium actually represented advance rent and was allowable as a deduction in the said year.
3.3 The CIT(A) further erred in not appreciating that as the facts in the instant case were identical to the facts before the Kamataka High Court in the case of CIT v. H.M.T. Ltd. the ratio of the said judgment squarely applied and hence the entire premium paid amounting to Rs. 2,04,00,000 ought to have been allowed instead of allowing deduction proportionately over the period of the lease.
3.4 In view of the above grounds of cross-objections, the respondent prays that the Dy. CIT be directed to allow the deduction in respect of a sum of Rs. 2,04,00,000 in respect of premium paid for leasehold land.
31. We have heard the parties. The issue of deductibility of premium on lease hold land amounting to Rs. 2.04 crores is identical to the ground of appeal No. 10 in the Revenue's appeal for the same asst. yr.
1992-93. For the reasons recorded while disposing of the ground of appeal No. 10 in Revenue's appeal in the foregoing paras of this order/we hold that there is no merit in this ground of cross-objection of the assessee and accordingly the ground No. 3 of cross-objection of the assessee is dismissed.
32. The assessee has requested for admission of the following additional grounds of cross-objection: 1. In view of the amendment to Section 36(1)(vii) w.e.f. 1st April, 1989, ground No. 1 in the Departmental appeal bearing ITA No. 3488/Mum/1999, in respect of provision for doubtful debts amounting to Rs. 6,04,137 will have to be decided in favour of the Revenue.
2. In view of the above facts and in the circumstances of the case and in law the respondent prays that directions may be issued to grant deduction in respect of the aforesaid amount of Rs. 6,04,137 in the year/s in which the corresponding debts have been written off against the provision for doubtful debts created in the above assessment year. A statement showing the year/s in which debts aggregating to Rs. 6,04,137 have been written off out of the above provision is enclosed herewith and marked Exhibit T.33. We have heard the parties regarding the admission of the additional grounds of cross-objection filed by the assessee. In the facts of the case, we admit the additional grounds of cross-objection preferred by the assessee.
34. The learned Counsel for the assessee submitted that in view of retrospective amendment to Section 36(1)(vii) of the Act w.e.f. 1st April, 1989, the ground of appeal No. 1 in the Revenue's appeal for the asst. yr. 1992-93 has to be decided in favour of the Revenue and accordingly the debts written off against the provision in the subsequent years ought to be allowed in the respective years. He submitted that the issue is covered in favour of the assessee with the decision of Mumbai Tribunal in assessee's own case for the asst. yrs.
1990-91, 1991-92 and 1995-96. The learned CIT (Departmental Representative) submitted that the subsequent asst. yrs. 1993-94 and 1994-95 are not pending before the Tribunal and therefore, no direction can be given for the allowability of the debts written off against the provision in the subsequent asst. yrs. 1993-94 and 1994-95.
35. We have considered the rival submissions. The issue of direction for allowing the debts written off against the provision in the subsequent assessment years is covered in favour of the assessee with the decision of Mumbai Tribunal in assessee's own case for the asst.
yrs. 1990-91, 1991-92 and 1995-96. The issue of deduction for provisions for doubtful debts has been decided in favour of the Revenue due to retrospective amendment to the provision of Section 36(1)(vii) of the Act and the ground of appeal No. 1 for the asst yr. 1992-93 in the Revenue's appeal has been allowed in favour of the Revenue.
Accordingly the debts written off against the provision in the subsequent years have to be allowed in those years and accordingly we direct the AO to consider the assessee's claim for deduction in subsequent years in respect of debts which are written off against the provision for doubtful debts in the subsequent assessment years. We direct accordingly.
36. In the result, the appeal of the Revenue and cross-objection of the assessee are partly allowed.