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Dy. Commissioner Of Income Tax (S) v. Sun Pharmaceutical Ind. Ltd. Opponent(S)

Gujarat High Court

Mar 23, 2009

Judgment

Subsequent
References

CaseIQ

Smart Summary (Beta)

Summary of Oral Judgment (Per: Honourable Mr. Justice D.A. Mehta)

Factual and Procedural Background

The proceedings concern an appeal admitted on 26.07.2000 raising the substantial question of law:

“Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in reversing the Commissioner of Income-tax (Appeal)'s order and deleting the disallowance of Rs. 48,02,616/- being lease rent paid to G.I.D.C on the ground that it was revenue expenditure?”

The Assessment Year is 1994-95 (accounting year ended 31.03.1994). The assessee-company claimed deduction of Rs. 48,02,616 paid to Gujarat Industrial Development Corporation (GIDC). The Assessing Officer disallowed the claim on the basis that the assessee had acquired an enduring benefit (use of land for 99 years) and thus a capital asset, noting the transaction was effected through a registered deed.

The assessee's appeal to the Commissioner (Appeals) failed. In the Second Appeal before the Income Tax Appellate Tribunal (ITAT) the assessee succeeded by an order dated 17.02.1999. The Revenue challenged the Tribunal's order in the present appeal. The court delivered an oral judgment dismissing the revenue appeal.

Legal Issues Presented

Whether the Income Tax Appellate Tribunal was correct in law in reversing the Commissioner (Appeals)'s order and deleting the disallowance of Rs. 48,02,616 as revenue expenditure (i.e., whether the payment to GIDC was revenue in nature or capital in nature)?

Arguments of the Parties

Appellant (Revenue) — Arguments

Pointed to the phrase “allotment price” in the lease agreement and submitted that the payment was a premium for acquiring leasehold rights and therefore capital in nature.
Emphasized that the lease was for a period of 99 years, effectively amounting to ownership rights; relied on the principle in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax, [1955] 27 ITR 34 (S.C) that a payment made once and for all to bring into existence an advantage of an enduring nature is capital expenditure.
Contended that the Tribunal erred in treating the payment as revenue expenditure.

Respondent (Assessee) — Arguments

Relied on Commissioner of Income-tax v. H.M.T Ltd. (No. 3), [1993] 203 ITR 820 (Kar.), noting that that decision considered the Madras High Court judgment in Commissioner of Income-tax v. Madras Auto Service Ltd., [1985] 156 ITR 740 (Mad.), which was later confirmed by the Supreme Court in Commissioner of Income-tax v. Madras Auto Service Ltd., [1998] 233 ITR 468 (S.C.).
Submitted that the Tribunal had applied the ratio of the cited Apex Court decisions (including CIT v. Madras Auto Services Pvt Ltd. (supra) and Empire Jute Co. Ltd. v. Commissioner of Income-tax, [1980] 124 ITR 1 (S.C)) and that the Tribunal's order was therefore in accordance with law and should not be interfered with.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax, [1955] 27 ITR 34 (S.C)	That a payment made once and for all for bringing into existence an advantage of enduring nature is capital in nature.	Relied on by the Revenue to argue the payment was capital. The court considered this submission but upheld the Tribunal's contrary conclusion based on facts and other Apex authorities applied by the Tribunal.
Commissioner of Income-tax v. H.M.T Ltd. (No. 3), [1993] 203 ITR 820 (Kar.)	Referenced as a decision that had considered the Madras High Court judgment in Madras Auto Service Ltd. (1985).	Invoked by the assessee to support the line of authority relied upon by the Tribunal; the court noted the Tribunal had applied the relevant higher-court authorities consistent with this position.
Commissioner of Income-tax v. Madras Auto Service Ltd., [1985] 156 ITR 740 (Mad.)	A Madras High Court decision relevant to classification of payments as capital or revenue (as noted in the opinion).	Noted as considered in subsequent decisions; the Tribunal applied the principle as affirmed by the Supreme Court and the present court found the Tribunal's reliance on that line of authority permissible.
Commissioner of Income-tax v. Madras Auto Service Ltd., [1998] 233 ITR 468 (S.C)	The Supreme Court confirmation of the Madras High Court decision, cited as authoritative precedent.	The Tribunal applied the ratio of this Apex Court decision; the present court accepted that application and declined to interfere with the Tribunal's order.
Empire Jute Co. Ltd. v. Commissioner of Income-tax, [1980] 124 ITR 1 (S.C)	An earlier Supreme Court decision cited as part of the applicable ratio (as applied by the Tribunal).	The Tribunal applied and followed this authority; the court found no legal infirmity in the Tribunal's application of this precedent.

Court's Reasoning and Analysis

The court proceeded on the basis that the material facts were not in dispute and noted the Tribunal's factual findings after analyzing the lease deed. The Tribunal had found:

The land leased remained the property of GIDC; the lease deed was registered as required by the Registration Act but registration did not effect a transfer of ownership.
The lease rent was very nominal (cited as Rs. 40 per year in the assessee's contention), and obtaining the land on lease had not altered the company's capital structure or increased its assets.
The benefit obtained by the assessee was the facility to carry on business profitably by paying nominal rent, not the acquisition of a capital asset.

Applying these findings of fact and the relevant Apex Court authorities (as applied by the Tribunal), the court concluded there was no legal infirmity in the Tribunal's order. The court emphasized that even the Assessing Officer had recorded that the payment was for use of land. The court also observed that the Revenue had not challenged these factual findings in the Memorandum of Tax Appeal and had not proposed a question on that issue. Given the factual findings and the Tribunal's application of binding authorities, the court found no ground to interfere with the Tribunal's conclusion that the payment was revenue expenditure.

Holding and Implications

Appeal dismissed.

Direct effect: The Tribunal's decision that the lease rent of Rs. 48,02,616 paid by the assessee to GIDC was allowable as revenue expenditure is upheld; the assessee's claim stands allowed. The appeal is dismissed with no order as to costs.

The opinion does not discuss broader doctrinal changes or announce a new legal precedent beyond applying existing Supreme Court authority; the decision affirms the application of earlier Apex Court ratios to the facts of this case.

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ORAL JUDGMENT

(Per: HONOURABLE MR. JUSTICE D.A MEHTA)

1. At the time of admission on 26.07.2000 following substantial question of law came to be formulated by this Court:

2. The Assessment Year in question is 1994-95, the relevant Accounting Year being Financial Year ended on 31.03.1994 The assessee, a Company, claimed deduction of a sum of Rs. 48,02,616/-, being payment to Gujarat Industrial Development Corporation (GIDC). The Assessing Officer called upon the assessee to substantiate the said claim. It was contended that the lease rent in respect of the land allotted to the assessee-company being very nominal, i.e @ Rs. 40/- per year, the said payment was nothing else but advance rent and hence, allowable as revenue expenditure. After going through the lease agreement the Assessing Officer disallowed the claim holding that the assessee had acquired a benefit of enduring nature in the form of use of land for a period of 99 years. That the land had been transferred through a Registered Deed involving transfer of immovable property and thus, the assessee had acquired a fixed asset in the form of a parcel of land.

3. The assessee carried the matter in appeal before Commissioner (Appeals) but failed. In Second Appeal before Tribunal the assessee succeeded. It is this order of Tribunal dated 17.02.1999 which is under challenge.

4. Learned advocate for the appellant-revenue has assailed the impugned order of Tribunal by referring to the phrase “allotment price” used in the lease agreement to submit that the payment in question was towards premium for acquiring leasehold rights and thus was capital in nature. It was submitted that the Tribunal failed to appreciate the transaction between the parties. That the lease was for a period of 99 years and thus virtually the assessee had acquired ownership rights. In support of the submissions made reliance has been placed on the Apex Court decision in case of Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax, [1955] 27 ITR 34 (S.C) to contend that the payment having been made once and for all for bringing into existence an advantage of enduring nature, the same was on capital account. The learned counsel therefore, submitted that the Tribunal had committed an error in law in treating the said payment on revenue account.

5. On behalf of the respondent-assessee learned Senior Advocate invited attention to decision of Karnataka High Court in the case of Commissioner of Income-tax v. H.M.T Ltd. (No. 3), [1993] 203 ITR 820 (Kar.), to submit that the said decision had considered judgment of Madras High Court in the case of Commissioner of Income-tax v. Madras Auto Service Ltd., [1985] 156 ITR 740 (Mad.), which had since been confirmed by the Apex Court in the case of Commissioner of Income-tax v. Madras Auto Service Ltd., [1998] 233 ITR 468 (S.C). That the Apex Court decision in case of CIT v. Madras Auto Services Pvt Ltd. (supra) as well as earlier decision of the Apex Court in the case of Empire Jute Co. Ltd. v. Commissioner of Income-tax, [1980] 124 ITR 1 (S.C) has been applied and followed by the Tribunal. Thus, the Tribunal having applied the ratio of Apex Court decisions had made an order in accordance with law which was not required to be interfered with.

6. The facts are not in dispute. The lease agreement entered into between the assessee and GIDC has been analyzed and relevant terms summarized by the Tribunal. It is not necessary to refer to the said terms in detail in the present proceedings. Suffice it to state that the Tribunal, on appreciation of the Deed in question, has recorded following findings of fact:

“It is not disputed that the land which has been leased out to the assessee did not cease to be belonging to GIDC, the lessor. The lease deed was registered because as per the Registration Act it is compulsorily registrable, but it has not changed the ownership. It is not also disputed that the lease rent is very nominal and by obtaining this land by lease the capital structure of the company has not been changed. …”

“… Thus, by this payment the assets of the assessee company had not been increased because the land continued to be the land of GIDC. The benefit the assessee got is only of an advantage of carrying on the business more profitably by paying nominal rent on the land. The issue can be considered in another angle. It cannot be disputed that if the land is not obtained by the assessee it would not be possible for it to carry on the business. …”

7. The Tribunal has thus, after referring to two decisions of Supreme Court, held that the land in question was not acquired by the assessee. That merely because the deed was registered the transaction in question would not assume a different character. The lease rent was very nominal. By obtaining the land on lease the capital structure of the assessee did not undergo any change. The assessee only acquired a facility to carry on business profitably by paying nominal lease rent.

8. In light of the aforesaid findings of fact and the ratio of the Apex Court decisions, the Court does not find this to be a case which warrants interference. Even the Assessing Officer has recorded that the payment was for use of land. There is no legal infirmity committed by the Tribunal.

9. Before parting it is necessary to note that the appellant-revenue was not even aggrieved by the aforesaid findings recorded by the Tribunal and had not even proposed a question on this issue when the tax appeal was filed as the Memorandum of Tax Appeal reveals.

10. In the aforesaid facts and circumstances of the case, the Tribunal was justified in holding that the lease rent paid by the assessee to GIDC was allowable as revenue expenditure. The appeal is dismissed accordingly with no order as to costs.