Lease premium paid in respect of 90 years’ lease is not a revenue expenditure – Delhi HC

Krishak Bharati Cooperative Ltd v DCIT [IT APPEAL NO. 205 OF 2010 dtd 12.07.0212] Delhi High Court

Facts of the case:

The assessee had entered into a lease agreement with NOIDA on 06.01.1989  by which the land in question was demised for a period of 90 years. The assessee was entitled to construct an office complex on the land. The assessee was required to pay premium of Rs. 2,53,96,993/- to NOIDA at the time of the allotment, or demise. In addition, under the lease deed, the assessee had to pay annual lease rent @ 2.5 per cent of the premium. The lease rent could be enhanced after 12 years. The assessee amortized the expenditure by way of premium over the period of lease, and claimed deduction of Rs. 2,75,045/- in the assessment year. 

The AO held that lease of land for 90 years conferred a benefit of enduring nature to the assessee, particularly in the light of the definition of the expression “immovable property” furnished in section 269UA(d)(i) and, consequently, it was in the nature of capital expenditure. This amount was, as a result not allowed as deduction.

Assessee’s contentions:

  • The assessee was entitled to construct an office complex, but had limitations in respect of the right to lay water mains, drainage sewerage and electrical wire under or above the premises. 
  • The assessee was not entitled to transfer the plot of land before erection of building without prior permission of the NOIDA. 
  • The assessee could borrow monies by mortgaging the land
  • The amortized amount was claimed in past for over 15 years and consistently accepted by the assessing authorities. 
  • Initial lease premium was in reality towards advance rent, and the amount payable as annual rent every year, having regard to the totality of circumstances, was a pittance. The said annual amount was highly depressed, because the advance lease amount had been paid up front, in 1989. Such expenditure therefore would have to be treated as revenue expenditure.
  • Reliance is placed on Supreme Court ruling in the case of CIT v.Madras Auto Service (P) Ltd. [1998] 233 ITR 468, where it was held that to decide the nature of expenditure, one has to look at it from a commercial point of view.
Tax Authority’s arguments:
  • So long as the lessee/ assessee held the property, it had the right to put up constructions, and use it in accordance with the land use, i.e. industrial/commercial purpose. If it desired to transfer its rights, the conditions precedent were minimal.
  • As far as the rule of consistency is concerned, the decision in Radhasaomi Satsang (SC) itself is authority that there is no res judicata in tax matters.
  • Supreme Court in Madras Auto Service (supra) in this Court’s opinion, cannot be applied to the facts of this case
  • In the case of ruling of Gujarat High Court in the case of Dy. Commissioner of Income Tax v. Sun Pharma 2010 (329) ITR 479, the assessee, claimed deduction of Rs. 48,02,616,- payment to the Gujarat Industrial Development Corporation (GIDC). 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.
  • The assessee argues that the annual rent is depressed, and does not reflect the market rent. However, there is no material to support this submission. Nor is there any material to support the argument that the amount of Rs. 2.53 crore paid over 23 years ago did not constitute the true and real consideration for creating an interest in the property. 
  • The terms of the lease agreement stipulate that the registration and stamp duty and charges were borne by the lessee (assessee).
  • The court is also conscious of the fact that the tenure of the lease is quite substantial, and virtually creates ownership rights in favour of the lessee, who is at liberty to construct upon the plot. 
  • Exclusive possession was handed over to the assessee at the time of creation of the lease.
  • Having regard to all these factors, this Court is un-persuaded by the assessee’s submission that the amount of Rs. 2.53 crores paid in 1989 had to be treated as advance rent, which could be amortized annually, in equal instalments, as is urged on its behalf.
  • In Radhasaomi itself, the Supreme Court acknowledged that there is no res judicataas regards assessment orders, and assessments for one year may not bind the officer for the next year.

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