Short Overview Where assessee paid lease rent in advance for period of lease varied from 15 to 99 years, nature of lease premium paid spread over lease period, was revenue in nature and therefore, allowable in computing business income.

Assessee had made payment for lease period varied from 15 to 99 years and the proportionate amount of lease premium, spread over the lease period, was claimed by it as deduction in arriving at its business income on the plea that the lease premium paid was nothing but upfront payment of lease rent. In the assessment order the AO held that the amount was spent to acquire leasehold right for a long period, which was capital asset, and the benefit enjoyed by the assessee in the form of leasehold right was enduring in nature. CIT(A) deleted the disallowance.

It is held that The lease premium paid did not constitute capital expenditure but it was a revenue expenditure because by incurring such expenditure the assessees did not acquire any asset but only facilitated carrying on the business more profitably by paying token rent. Nature of lease premium paid was revenue in nature and therefore allowable in computing business income. In the circumstances once the nature of payment is found to be for the purpose of carrying on business and not to acquire capital asset, then such expenditure had to be considered to be in the revenue field and therefore, allowable as per the method of accounting followed by the assessee.

Decision: In assessee’s favour.

Relied: Jt. CIT v. Mukund Ltd. (2007) 291 ITR 249 (Mum) : 2007 TaxPub(DT) 1600 (Mum-Trib), Dy. CIT v. Sun Pharmaceuticals Industries Ltd. (2010) 329 ITR 479 (Guj) : 2010 TaxPub(DT) 420 (Guj-HC), Asstt. CIT v. Delhi International Airport (P) Ltd, dated 14-12-2017 in ITA Nos. 2720/Del/2011 and CIT v. HMT Ltd. (1993) 203 ITR 820 (Karn) : 1993 TaxPub(DT) 915 (Karn-HC).

Followed: CIT v. Madras Industrial Investment Corporation (1997) 225 ITR 802 (SC) : 1997 TaxPub(DT) 1209 (SC) and CIT v. Madras Auto Service (1998) 233 ITR 468 (SC) : 1998 TaxPub(DT) 1407 (SC).

Referred: Aditya Minerals (P) Ltd. v. CIT (1999) 239 ITR 817 (SC) : 1999 TaxPub(DT) 1424 (SC), CIT v. Panbari Tea Co. Ltd. (1965) 57 ITR 422 (SC) : 1965 TaxPub(DT) 315 (SC) and CIT v. Associated Cement Co Ltd. (1988) 172 ITR 257 (SC) : 1988 TaxPub(DT) 1173 (SC).

 

IN THE ITAT, KOLKATA BENCH

A.T. VARKEY, J.M. & A.L. SAINI, A.M.

Asstt. CIT v. Balmer Lawrie & Co. Ltd.

I.T.A. No. 2264/Kol/2017 & 2483/Kol/2017

1 July, 2019

Assessee by: D.S. Damle, FCA

Revenue by:Sankar Halder, JCommissioner, Sr. Departmental Representative

A.T. Varkey, J.M.

Both these cross appeals filed by the revenue and assessee are against the order of learned Commissioner (Appeals)-2, Kolkata, dated 10-8-2017 for assessment year 2014-15. We shall first deal with the appeal of the Revenue in ITA No. 2264/Kol/2017.

2. The solitary issue involved in this appeal is whether the learned Commissioner (Appeals) was justified in not treating the payment of advance rent to the lessors in respect of different lands taken on lease for the purpose of business amounting to Rs. 79,68,169 as capital expenditure. Briefly stated the facts of the case are that in its Profit& Loss Account the assessee, by way of amortization debited a sum of Rs. 79,68,169 being pro-rata amount of lease premium which the appellant had paid in respect of several plots of land obtained for setting up industrial/infrastructure undertakings. The lease period varied from 15 to 99 years and the proportionate amount of lease premium, spread over the lease period, was claimed by as deduction in arriving at its business income on the plea that the lease premium paid was nothing but upfront payment of lease rent. In the assessment order the assessing officer held that the amount was spent to acquire leasehold right for a long period, which was capital asset, and the benefit enjoyed by the appellant in the form of leasehold right was enduring in nature.

Relying on the decision of the Hon’ble Delhi High Court in Gail India Ltd. v. Jt. CIT in (IT Appeal Nos. 956 & 957 of 2011, dt. 5-11-2012) : 2014 TaxPub(DT) 4880 (Del-HC) the assessing officer held that the amount claimed as amortization of lease premium was capital expenditure and therefore not allowable as deduction in computation of business income. On appeal the learned Commissioner (Appeals) deleted the disallowance following the order of the coordinate Bench of this Tribunal in assessee’s own case for assessment year 2003-04 in ITA No. 348/Kol/2007, dated 11-4-2008. Being aggrieved by the said order, the Revenue is now in appeal before us.

3. At the time of hearing of the appeal, the learned Departmental Representative admitted that the assessee’s claim for pro-rata write off in respect of lease premium was allowed by this Tribunal in its Order, dated 11-4-2008. He however brought to our attention that the Special Bench of this Tribunal at Mumbai in its decision in the case of Jt. CIT v. Mukund Ltd. (2007) 291 ITR 249 (Mum) : 2007 TaxPub(DT) 1600 (Mum-Trib) had however held that pro-rata amortization of advance rent for obtaining leasehold land was not permissible as deduction. He submitted that although the coordinate Bench of the Tribunal decided the appeal of the assessee for assessment year 2003-04 in assessee’s favor by the Order, dated 11-4-2008; the same was rendered without considering the binding decision of the Special Bench, which was pronounced 15-2-2007. He further drew our attention to the decision of ‘B’ Bench, Kolkata of this Tribunal in assessee’s own case for assessment year 2008-09 in ITA No. 1481/Kol/2011, dated 30-4-2012 wherein the coordinate Bench of this Tribunal taking note of the decision of the Special Bench, Mumbai in the case of Jt. CIT v. Mukund Ltd. (supra) declined to follow earlier decision in assessee’s favor for the assessment year 2003-04.

Relying on the later decision of this Tribunal in assessee’s own case for assessment year 2008-09, the learned Departmental Representative urged that the order of the assessing officer be upheld.

4. Per contra the learned Authorised Representative of the appellant submitted that the learned Commissioner (Appeals) was fully justified in allowing the assessee’s claim. Drawing attention to the grounds of appeal the learned Authorised Representative pointed out that the Revenue has not per se questioned that the amount paid by the assessee at the time of obtaining lease, was upfront payment of rent for the business purpose and which was amortized over the duration of lease on proportionate basis. The learned Authorised Representative submitted that under the lease agreement the assessee paid upfront lease premium and thereafter the assessee was paying token rent of Re.1 to Rs. 100 annually which did not constitute the fair rent having regard to the areas of lands taken on lease. He therefore submitted that the basic character of the payment made at the time of obtaining lease was lump-sum payment of rent for the entire duration of the lease and therefore the pro-rata write off was allowable as revenue expenditure. The learned Authorised Representative further submitted that in its decision, dated 30-4-2012 for the assessment year 2008-09 the coordinate Bench of this Tribunal refused to follow its own order for assessment year 2003-04 only for the reason that the Special Bench, Mumbai in its Order, dated 15-2-2007 in the case of Jt. CIT v. Mukund Ltd. (supra) had taken a contrary view. In the said decision the Tribunal had held that the lump sum lease premium paid for obtaining long-term lease constituted capital expenditure and therefore no deduction therefore was permissible either in lump-sum in the year of payment or on prorata basis over the duration of lease. The learned Authorised Representative however drew our attention to the decision of the Hon’ble Gujarat High Court in the case of DCIT v. Sun Pharmaceuticals Industries Ltd. (2010) 329 ITR 479 (Guj) : 2010 TaxPub(DT) 420 (Guj-HC) wherein the Hon’ble Gujarat High Court took a view contrary to the decision of the Special Bench and allowed the deduction for the entire upfront lease premium paid in single year, holding that the expenditure incurred was revenue in nature and therefore fully allowable in the year of its incurrence. The learned Authorised Representative also brought to our attention the decision of the coordinate Bench of this Tribunal at Delhi in the case of ACIT v. Delhi International Airport (P) Ltd, dated 14-12-2017 in ITA Nos. 2720/Del/2011 wherein this Tribunal similarly allowed the assessee’s claim for deduction of upfront lease premium of Rs. 150 crores paid by the assessee to Airport Authority of India for obtaining the lease of airport property at Delhi for a period of 30 years. Drawing attention to the facts of the case the learned Authorised Representative submitted that in the decided case the assessee had paid upfront lease premium of Rs. 150 crores for obtaining lease of land for a period of 30 years and in the assessment order the assessing officer himself had allowed the deduction on pro-rata basis for 1/30th of the lease premium. Before the Tribunal, relying strongly on the judgment of the Hon’ble Apex Court in the case of CIT v. Madras Industrial Investment Corporation (1997) 225 ITR 802 (SC) : 1997 TaxPub(DT) 1209 (SC) the Revenue had urged that since the premium was paid for obtaining lease of land for a period of 30 years the assessee could only claim the pro-rata deduction over the duration of lease and could not claim the same in the initial year when the lease premium was paid. The learned Authorised Representative urged that the Income Tax Act, 1961 being an all India statute, the Revenue could not adopt diametrically opposite stands in different cases involving identical facts. He therefore submitted that if in the case of ACIT v. Delhi International Airport (P) Ltd. (supra) the Revenue, in principle, endorsed the claim for pro-rata write off of lease premium paid over the duration of lease then it could not oppose the same principle in the appellant’s case to deny the rightful deduction.

5. The learned Authorised Representative further submitted that out of the total claim of Rs. 79,68,169, the deduction of Rs. 78,78,111 pertained to leases obtained for setting up, maintaining and operating Container Freight Stations in Maharashtra and Bengal. The learned Authorised Representative submitted that Ministry of Finance, Department of Revenue permitted the assessee to set-up, operate and maintain CFSs which for the purposes of section 80IA(4) is regarded as ‘infrastructure facility’. He drew our attention to the decision of the coordinate Bench of this Tribunal in the case of Dy. CIT v. Century Plyboards India Ltd, dated 31-7-2017 in ITA No. 1873/Kol/2014 wherein identical issue was considered and decided by the Tribunal in assessee’s favor. He submitted that in the decided case the Tribunal, following the Circular No. 9/2014, dated 23-4-2014 issued by the CBDT, allowed the assessee’s claim for pro-rata write off for upfront lease premium paid over the duration of lease. The learned Authorised Representative pointed out that the Board Circular was issued after the decision of this Tribunal was rendered in assessee’s case for assessment year 2008-09 and the said Circular being beneficial in nature, the deduction for pro-rata write off for lease premium paid be upheld.

6. We have heard both the parties and perused various judicial decisions relied upon as well as the applicable legal provisions. From the facts narrated before us, we find that the assessee has been claiming amortization of lease premium payments since earlier years and till assessment year 2002-03 no dispute arose between the parties. In the assessment for the assessment year 2003-04 the assessing officer however disallowed the assessee’s amortization claim holding it to be capital in nature and in support of this conclusion, he relied on the judgment of the Hon’ble Supreme Court in the case of Aditya Minerals (P) Ltd. v. CIT (1999) 239 ITR 817 (SC) : 1999 TaxPub(DT) 1424 (SC). The assessing officer’s order was upheld by the learned Commissioner (Appeals) but on further appeal the ‘B’ Bench of this Tribunal in ITA No. 348/Kol/2007, dated 11-4-2008 upheld the assessee’s claim. In arriving at its decision the Tribunal had considered the judgment of the Hon’ble Karnataka High Court in the case of CIT v. HMT Ltd. (1993) 203 ITR 820 (Karn) : 1993 TaxPub(DT) 915 (Karn-HC) which in turn was based on the decision of the Hon’ble Supreme Court in the case of CIT v. Panbari Tea Co. Ltd. (1965) 57 ITR 422 (SC) : 1965 TaxPub(DT) 315 (SC). In the said judgment the Hon’ble Supreme Court had observed that the use of the word ‘premium’ in respect of advance rent did not render the payment anything more than rent paid in advance, instead of paying the same in future periodically. The coordinate bench of this Tribunal also took note of the judgment of the Hon’ble Supreme Court in the case of CIT v. Associated Cement Co Ltd. (1988) 172 ITR 257 (SC) : 1988 TaxPub(DT) 1173 (SC) wherein it was held that entire premium paid in lumpsum was deductible as business expenditure in the very first year because such payment obviated the need of making periodical payments of higher rent. The Tribunal also noted that the Hon’ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT (supra) had held that the facts of the case may justify an assessee to spread and claim the expenditure incurred in a particular year over a period of ensuing years if allowing the entire expenditure in one year gives distorted picture of profits of that particular year.

Keeping in mind these decisions, the coordinate bench of this Tribunal allowed the assessee’s claim for amortization of lump-sum lease premium paid. It is true that in a later decision, dated 30-4-2012 in ITA No. 1481/Kol/2011 for assessment year 2008-09 the ‘B’ Bench of this Tribunal declined to follow the ratio laid down in the appellate order passed in assessee’s own case for assessment year 2003-04. On perusal of the said order we however find that decision of the Tribunal in assessment year 2008-09 was influenced more by the fact that while deciding the appeal for assessment year 2003-04 on 11-4-2008 the Bench had not considered the decision of the Special Bench, Mumbai in the case of Mukund Limited (supra) which was pronounced on 15-2-2007 and was binding on the Division Bench. In the considered view of the Tribunal therefore the order of the coordinate Bench for assessment year 2003-04 was per in curium because the decision of the Special Bench was not considered even though the facts of the assessee’s case and the facts involved in the case of Mukund Limited (supra) were identical. We therefore find that the decision of the coordinate Bench in the assessee’s case for assessment year 2008-09 was rendered solely on the basis of the decision of the Special Bench, Mumbai rendered in the case of Mukund Limited (supra).

7. On perusal of the decision in the case of Mukund Limited (supra), we note that in arriving at its finding the Special Bench of this Tribunal had relied on various decisions inter alia including the decision of the Khimline Pumps (P) Ltd. v. CIT (2002) 258 ITR 459 (Bom) : 2002 TaxPub(DT) 1655 (Bom-HC) wherein the Hon’ble Bombay High Court had held that expenditure on account of lease premium was capital in nature and therefore no deduction was permissible in respect of such expenditure either in one lump-sum or by amortization over the tenure of the lease. Since the Special Bench was constituted at Mumbai, the judgment of the Hon’ble Bombay High Court was binding being the decision of the jurisdictional High Court. We however find that on the identical facts the Hon’ble Gujarat High Court in its later judgment, dated 23-3-2009 in the case of Dy. CIT v. Sun Pharmaceuticals Industries Ltd. (supra) took the view, which was contrary to the view taken by the Hon’ble Bombay High Court. In the decided case the Hon’ble Gujarat High Court noted that the lease rent paid annually was very nominally and by obtaining by way of lease the capital structure of the assessee had not changed. It was therefore noted that, by making such payment, the assets of the assessee company had not increased because the land continued to belong to GIDC. The Hon’ble High Court noted that the only benefit, which the assessee got, was the advantage of carrying on the business more profitably by paying nominal rent on land. The Hon’ble High Court therefore did not find any reason to interfere with the order of the Tribunal wherein the Tribunal had allowed the deduction for upfront lease premium of Rs. 42,02,616 paid to GIDC holding it to be revenue expenditure. We therefore find that in the decision rendered in March 2009 the Hon’ble Gujarat High Court concurred with the view expressed by the Hon’ble Karnataka High Court in the case of CIT v. HMT Ltd. (supra). In both these decisions the Hon’ble High Courts had held that the lease premium paid did not constitute Capital expenditure but it was a revenue expenditure because by incurring such expenditure the assessees did not acquire any asset but only facilitated carrying on the business more profitably by paying token rent. In arriving at such conclusion the Hon’ble Gujarat High Court had relied on the judgment of the Hon’ble Supreme Court in the case of CIT v. Madras Auto Service (1998) 233 ITR 468 (SC) : 1998 TaxPub(DT) 1407 (SC). We note that although the judgment of the Hon’ble Gujarat High Court was rendered on 23-3-2009, the coordinate bench of this Tribunal while deciding the Revenue’s appeal in the assessee’s case for assessment year 2008-09 had not taken note of the same and went on to hold the expenditure claimed to be capital in nature. We however find that in the decision the Hon’ble Gujarat High Court rendered subsequent to the decision of the Special Bench in Mukund Ltd. (supra), it has been specifically held that the nature of lease premium paid was revenue in nature and therefore allowable in computing business income. In light of the foregoing and the later decision of the coordinate Bench of this Tribunal at Delhi in the case of ACIT v. Delhi International Airport (P) Ltd. (supra) for reasons discussed in detail (infra), and also the CBDT Circular No. 9/2014, dated 23-4-2014 (infra), we are inclined to follow the later judgment of Hon’ble Gujarat High Court in the case of Dy. CIT v. Sun Pharmaceuticals Industries Ltd. (supra).

8. We also note that similar issue was considered by the coordinate Bench of this Tribunal at Delhi in the case of ACIT v. Delhi International Airport (P) Ltd. (supra). In that case the assessee, incorporated as a Special Purpose Vehicle, obtained right to operate and maintain an international airport at New Delhi from Airport Authority of India. The assessee was granted airport concessionaire’s right in consideration of the assessee making payment of non-refundable upfront fees of Rs. 150 crores. Upon making such payment the assessee became entitled to use and occupy the airport property for a period of 30 years and after the expiry of lease the airport site was to the handed over back to the Airport Authority of India.

In the assessee’s books it had capitalized the upfront fees of Rs. 150 crores paid. In the computation of total income the assessee however claimed the deduction for the entire upfront lease premium paid on the plea that it was revenue in nature and since by making payment assessee did not acquire any asset, the deduction was permissible for the upfront payment in such year itself. The assessee’s plea was rejected by the assessing officer on the ground that the payment of Rs. 150 crores permitted the assessee right to use the airport premises for a period of thirty years and therefore applying the ratio laid down in the judgment of the Hon’ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT (supra) the assessing officer held that the assessee was entitled to claim the expenditure on prorate basis i.e.1/30th of the premium amount in each year during the tenure of the lease. On appeal the learned Commissioner (Appeals) agreed with assessee’s contention and allowed the deduction for entire upfront fee of Rs. 150 crores paid to Airport Authority of India in the initial year. On appeal the Revenue relying on the decision of the Special Bench of this Tribunal at Mumbai in the case of Jt. CIT v. Mukund Ltd. (supra) and decision of the Hon’ble Supreme Court in the case of Enterprising Enterprises v. DCIT (2007) 293 ITR 437 (SC) : 2007 TaxPub(DT) 804 (SC) claimed that such expenditure was capital in nature and therefore not permissible. Rather it was canvassed by the Revenue that in terms of the judgment of Hon’ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT (supra), the order of the assessing officer be upheld. After considering the submissions of the parties and the judicial decisions relied upon, the Tribunal in Paras 30-31 of its order held as follows:–

“30. Thus, herein this case the test of enduring benefit in acquisition of capital asset as propagated by the revenue would fail for the reason that, for the lease of Airport site which was for 30 years, the payment of Rs. 150 crores was a onetime payment so that the annual lease rent was chargeable at a very nominal rate of Rs. 100 for a huge Airport area of more than 4609 acres. Such a miniscule annual rent of huge area and facility (entire Airport Site) definitely would defy all commercial parlances. Once the any recurring payment towards lease rent is reckoned or classified as revenue expenditure, then even the lump-sum payment or one-time payment for the same purpose has to be given the similar treatment as it partakes the same character. There could not be two different classification of same nature of expenditure. That apart, such onetime payment cannot be classified as creating any capital asset or any kind of profit making apparatus or giving any enduring advantage of a benefit of a trade. At the most the said payment can be reckoned as lease premium or licence fee for the Airport site taken on lease for a period of 30 years. In this case, such a payment cannot be reckoned for the purpose of acquisition of business also, because both the parties have agreed to transfer the right of operating, development and maintenance of the airport on revenue sharing basis which has been termed an ‘annual fee’ which is recurring in nature. Now if such a lump sum payment for the lease of the Airport Site for a period of 30 years can be reckoned as revenue or not, appears to be quite settled proposition in wake of the following judgments which has been highlighted and stressed upon by the learned Sr. Counsel for the assessee before us :–

(i) DCIT v. Sun Pharmaceutical Ind. Ltd. (2010) 329 ITR 479 (Guj) : 2010 TaxPub(DT) 420 (Guj-HC)–In this case, the assessee was the lessee of land. The period of lease was 99 years. In addition to an annual lease rent of Rs. 40 per annum, the assessee paid Rs. 48 lakh to GIDC as advance rent. The assessing officer disallowed the claim for the reason that the assessee obtained an enduring benefit for a period of 99 years in the form of use of the land and therefore he held that the payment was capital in nature. The High Court upheld the finding of the Tribunal that the land in question was not acquired by the assessee and that the lease rent was very nominal and the sum of Rs. 48 lakh was in the nature of rent and the assessee only acquired a facility to carry on business profitably by paying a nominal lease rent together with lump sum amount of Rs. 48 lakh. The fact that the lease deed was registered was irrelevant. Therefore, it was held that the payment was revenue in nature.

(ii) CIT v. H.M.T Ltd. (1993) 203 ITR 820 (Karn) : 1993 TaxPub(DT) 915 (Karn-HC)–A lease agreement was entered into with MIDC for the lease of the plot on which the assessee was mandatorily to construct a building within a period of 2 years for the use of the assessee. After the construction, the assessee was entitled to use both the land and building for 95 years. Under the agreement, the assessee paid a premium of Rs. 12,09,200 for acquiring leasehold rights. The annual rent was fixed at a nominal sum of Re.1 per annum. The assessee made a claim for deduction of the premium paid for the reason that it was actually rent paid in advance and, therefore, was to be considered as revenue expenditure.

It was held by the Karnataka High Court that what was termed as premium and paid in a lump-sum to MIDC was future rent payable by it and that is evident from the fact that the assessee was paying only Re. 1 per annum which is for the purpose of evidencing the character of the transfer of property as a lessee and not for, any other purpose.

Apart from that certain other judgments were also referred and relied upon which has also has been taken note by the learned Commissioner (Appeals) in the impugned order. Thus, the amount of Rs. 150 crores paid as onetime payment for taking the airport site for 30 years on the facts of the present case has to be treated as revenue expenditure.

31. Here one very important fact which is not in dispute is that assessing officer himself has treated the payment of ‘upfront fees’ as revenue expenditure, in the sense that he has allowed part of the expenditure in this year and it is not the case of assessing officer that it is capital expenditure in which case no part could be allowed in terms of section 37(1) of the Act. This action of the assessing officer itself exonerates the case of the assessee.”

9. From the foregoing findings of the coordinate Bench we find that on the analogous facts where the assessee had paid upfront lease premium for obtaining 30 years lease, the Tribunal held the payment to be revenue in nature and negated the Revenue’s contention that the expenditure was capital in nature and hence not permissible in computing business income. In arriving at this conclusion the coordinate Bench had taken note of the decision of Special Bench of this Tribunal at Mumbai in the case of Jt. CIT v. Mukund Ltd. (supra) as also the judgments of the Hon’ble Gujarat & Karnataka High Courts expressing contrary view. We find that on the analogous facts the Tribunal held that the lease premium paid was nothing but in the nature of lease rent paid on lump sum basis and no capital asset was acquired by the assessee by making such payment so as to justify its characterization as capital expenditure. Once the nature of the expenditure in question is held to be in the revenue field then the question which needs to answered in the present appeal is whether the assessee’s plea for amortization of the lease premium over the tenure of the lease can be allowed particularly when in the case decided by the coordinate Bench at Delhi, it was held that whole of the expenditure was eligible for deduction in the year in which the upfront lease premium was paid. In this regard we find that before the Delhi Bench of this Tribunal the Revenue itself had canvassed the proposition that payment of upfront fee was revenue expenditure but the deduction therefore was required to be allowed on pro-rata basis by following the ratio laid down in the judgment of the Hon’ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. (supra). We find that in the grounds of appeal taken before us the assessing officer has stated that the claim of the assessee was for proportionate write off for advance rent to the lessors in respect of different lands taken on lease for the purposes of business. We therefore find that in principle the assessing officer did not dispute the assessee’s contention that the amount paid by the assessee at the time of obtaining lease was in the nature of lease rent paid in advance and by making such payment the assessee had obtained right to use such land for carrying on its business. In the circumstances once the nature of payment is found to be for the purpose of carrying on business and not to acquire capital asset then such expenditure has to be considered to be in the revenue field and therefore allowable as per the method of accounting followed by the assessee.

10. It is no doubt true that in the case of ACIT v. Delhi International Airport (P) Ltd. (supra) the coordinate Bench allowed the deduction for the entire upfront fee paid for obtaining lease in the year of payment itself even though the lease period was 30 years.

Similarly theHon’ble Karnataka High Court in the case of HMT Ltd. (supra) and Hon’ble Gujarat High Court in the case of Sun Pharmaceuticals Industries Ltd. (supra) allowed the deduction for entire upfront lease premium in the year of payment itself though the lease periods were more than 90 years. In the present case however the assessee has not made claim for the deduction in the year of payment of upfront fees but has sought spread over of such lease premium over the effective life of the lease. The assessee’s claim for amortization over the lease period is supported by the judgment of the Hon’ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. (supra). The following observations in that judgment support the assessee’s methodology of claiming pro-rata deduction for the upfront lease premium over the lease period.

“15. The Tribunal, however, held that since the entire liability to pay the discount had been incurred in the accounting year in question, the assessee was entitled to deduct the entire amount of Rs. 3,00,000 in that accounting year. This conclusion does not appear to be justified looking to the nature of the liability. It is true that the liability has been incurred in the accounting year. But the liability is a continuing liability which stretches over a period of 12 years. It is, therefore, a liability spread over a period of 12 years. Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Thus in the case of Hindustan Aluminium Corporation Ltd. v. CIT, (1983) 144 ITR 474 (Cal) : 1983 TaxPub(DT) 661 (Cal-HC) the Calcutta High Court upheld the claim of the assessee to spread out a lump sum payment to secure technical assistance and training over a number of years and allowed a proportionate deduction in the accounting year in question.

16. Issuing debentures at a discount is another such instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures.”

11. We may also gainfully refer to the observations of the Hon’ble Supreme Court made in the case of Taparia Tools Ltd. v. Jt. CIT (2015) 372 ITR 605 (SC) : 2015 TaxPub(DT) 1438 (SC) which are as follows:–

“17. Thus, the first thing which is to be noticed is that though the entire expenditure was incurred in that year, it was the assessee who wanted the spread over. The Court was conscious of the principle that normally revenue expenditure is to be allowed in the same year in which it is incurred, but at the instance of the assessee, who wanted spreading over, the Court agreed to allow the assessee that benefit when it was found that there was a continuing benefit to the business of the company over the entire period.

18. What follows from the above is that normally the ordinary rule is to be applied, namely, revenue expenditure incurred in a particular year is to be allowed in that year. Thus, if the assessee claims that expenditure in that year, the IT Department cannot deny the same.

However, in those cases where the assessee himself wants to spread the expenditure over a period of ensuing years, it can be allowed only if the principle of ‘Matching Concept’ is satisfied, which upto now has been restricted to the cases of debentures.”

12. From the foregoing observations it is evident that in the opinion of the Hon’ble Supreme Court in certain cases where the assessees themselves opt to spread the expenditure over a period of ensuing years then such a claim of the assessee can be allowed only if the principle of matching concept is satisfied. In the present admittedly the assessee has obtained leases from Governmental autonomous bodies such as CIDCO, KPT etc. for the purpose of carrying on assessee’s business and used these lease hold lands for setting up industrial undertakings/infrastructure facilities thereon. As such the benefit of the lease is being enjoyed by the assessee over the lease period. The assessee therefore is assured of deriving revenue from the business carried from these leased premises over the tenure of lease and therefore the corresponding cost in the form of pro-rata lease premium is required to be netted off against revenues generated from the business, applying the principle of matching of cost with revenue so as to disclose true & fair amount of operating profits of each year. We therefore find that since in the present case the assessee has satisfied the matching concept test, as prescribed by the Hon’ble Supreme Court, the assessee’s claim for amortization of lease premium is allowable.

13. We also note that the assessee’s claim for amortization of lease premium principally related to leases of four plots of land at Mumbai & Kolkata which are used for setting up Container Freight Stations (CFS), considered as ‘infrastructure facility’ for the purposes of section 80IA of the Act. With the permissions obtained from the Ministry of Finance, Dept. of Revenue, the assessee has set up devel CFSs on the leased premises. The issue of allowability of amortization of lease premium paid in respect of leased land on which CFS was set up, was considered by the coordinate bench of this Tribunal in the case of Dy. CIT v. Century Plyboards India Ltd. (supra). In that case also the assessee had paid lease premium of Rs. 156 lacs for obtaining lease of land from Kolkata Port Trust for a period of 15 years. In its books as well as in the return of income the assessee claimed amortization of the lease premium over the period of 15 years. This claim was rejected by the assessing officer. On appeal the learned Commissioner (Appeals) allowed the deduction by following the CBDT Circular No. 9/2014, dated 23-4-2014. On appeal relying on the judgment of the Hon’ble Supreme Court in the case of Enterprising Enterprises v. CIT (supra) the Revenue claimed that such expenditure being capital in nature was not allowable in computing business income of the assessee. The Tribunal however noted that the judgment of the Hon’ble Supreme Court was rendered on 4-12-2006 but thereafter the CBDT issued the Circular on 23-4-2014 wherein expenditure of such nature was permitted to be spread over the lease period after the commencement of business. The relevant findings of the coordinate Bench of this Tribunal was as follows:–

16. We have heard rival contentions of both the parties and perused and carefully considered the material on record; including the judicial pronouncements cited and placed reliance upon. The issue in the instant case revolves to the amount of the lease premium amortized by the assessee over a lease period as discussed above. The assessee after the commencement of the business has claimed the proportionate deduction of the aforesaid expenditure pertaining to the year under consideration. Undisputedly the proportionate deduction was claimed by assessee under section 37(1) of the Act after the commencement of its business.

16.1. Indeed, case law relied on by learned Departmental Representative as discussed above is against the assessee wherein it has been held by the Hon’ble Madras High Court in the case of Enterprising Enterprise (supra) and aforesaid judgment was delivered by the Hon’ble Madras High Court vide Order, dated 1-4-2004 which was subsequently affirmed by Hon’ble Supreme Court vide Order, dated 4-12-2006. However, subsequent to the aforesaid judgment, we find that the CBDT has issued a Circular 9/2014, dated 23-4-2014 wherein the impugned expenditure was allowed over the lease period after the commencement of business and relevant extract of the Circular is reproduced below :–

2. In such project, the developer (hereinafter referred to as “assessee”), in terms of concessionaire agreement with Government or its agencies is required to construct, develop and maintain the infrastructural facility of roads/highways which, inter alia, includes laying of roads, bridges, highways, approach roads, culverts, public amenities etc. at its own cost and its utilization thereof for a specified period. In lieu of consideration of the expenditure incurred on construction, operation and maintenance of the infrastructure facility covered by the period of the agreement, the assessee is accorded a right to collect toll from users of such facility. The expenditure incurred by such assessee on development and construction of such infrastructural facility are capitalized in the accounts. It is seen that in returns-of-income, assessee are generally claiming depreciation on such capitalized expenditure treating it as an ‘intangible asset’ in terms of section 32(1)(ii) of the Act while in assessments, such claims are being disallowed by the assessing officer on the grounds that such infrastructural facility is not owned, wholly or partly, by the tax payer which is an essential condition for claiming depreciation and further right to collect toll does not fall in an of the categories of ‘intangible assets’ specified in sub-clause (ii)of sub-section (1) of section 32 of the Act.

3. In BOT arrangements for development of roads/highways, as a matter of general practice, possession of land is handed over to the assessee by the Government/notified authority for the purposes of Construction of the project without any actual transfer of ownership and such assessee has only a right to develop and maintain such asset. It also enjoys the benefits arising from use of asset through collection of Toll for a specified period without having actual ownership over such asset. Therefore, the rights in the land remain vested with the Government or its agencies. Thus, as assessee does not hold any rights in the project except recovery of toll fee to recoup the expenditure incurred, it cannot therefore be treated as an owner of the property, either wholly or partly, for purposes of allowability of depreciation under section 32(1)(ii) of the Act. Thus, present provisions of the Act do not allow claim of depreciation on Toll ways due to non fulfilment of ownership criteria in such cases.

4. There is no doubt that where the assessee incurs expenditure on a project for development of roads/highways, he is entitled to recover cost incurred by him towards development of such facility (comprising of construction cost and other pre-operative expenses) during the constructions cost and other pre-operative expenses) during the construction period. Further, expenditure incurred by the assessee on such BOT projects brings to it an enduring benefit in the form of right to collect the toll during the period of the agreement. Hon’ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT in (1997) 225 ITR 802 (SC) : 1997 TaxPub(DT) 1209 (SC) allowed spreading over of liability over a number of years on the ground that there was continuing benefit to the company over a period. Therefore, analogously, expenditure incurred on an infrastructure project for development of roads/highways under BOT agreement may be treated as having been made/incurred for the purposes of business or profession of the assessee and same may be allowed to be spread during the tenure of concessionaire agreement.

5. In view of above, Central Board of Direct Taxes, in exercise of the powers conferred under section 119 of the Act hereby clarifies that the cost of construction on development of infrastructure facility of roads/highways under BOT projects may be amortized and claimed as allowable business expenditure under the Act.

6. The amortization allowable may be computed at the rate which ensures that the whole of the cost incurred in creation of infrastructural facility of road/highway is amortized evenly over the period of concessionaire agreement after excluding the time take for creation of such facility.

7. In the case where an assessee has claimed any deduction out of initial cost of development of infrastructure facility of roads/highways under BOT projects in earlier year, the total deduction so claimed for the assessment years prior to the assessment year under consideration may be deducted from the initial cost of infrastructure facility of roads/highways and the cost ‘so reduced’ shall be amortized equally over the remaining period of toll concessionaire agreement.

8. It is hereby clarified that this Circular is applicable only to those infrastructure projects for development of road/highways on BOT basis where ownership is not vested with the assessee under the concessionaire agreement.

9. This, may be brought to the notice of all concerned.

The aforesaid Circular was issued on 23-4-2014 and subsequent to the judgment of Hon’ble Madras High Court as well as Hon’ble Supreme Court. The Circular being beneficial to the assessee is binding on the lower authorities. In our considered view, the assessing officer before making any disallowance should have referred to the aforesaid Circular. In the background of the above discussion and precedent of the cases we do not find any infirmity in the order of learned Commissioner (Appeals) and accordingly we uphold the same. This ground of Revenue is dismissed.

14. We thus find that the on identical facts the coordinate Bench of this Tribunal by applying the CBDT Circular No. 9/2014, dated 23-4-2014 granted the assessee’s claim for amortization of lease premium over the effective life of lease. For the reasons discussed in the foregoing therefore we do not find any infirmity in the order of the learned Commissioner (Appeals) granting amortization of lease premium of Rs. 79,68,169 in computing business income of the assessee. In the result, the appeal of the Revenue fails.

15. Now we take up the assessee’s appeal in ITA No. 2483/Kol/2017. In this appeal the assessee has objected to the learned Commissioner (Appeals)’s order upholding the disallowance of Rs. 2,90,26,398 out of the appellant’s claim for deduction under section 80IA of the Act. Briefly stated the facts of the case are that in the return of income the appellant claimed deduction of Rs. 19,77,40,855 under section 80IA of the Act being the profit derived from CFS undertaking.

On perusal of the Profit & Loss Account of the eligible undertaking the assessing officer found that Rs. 2,90,26,398 was accounted as interest from the current account. The assessing officer held that since such interest was not derived from the industrial undertaking he show caused the asseessee to furnish its explanation. Since no explanation was forthcoming, relying on the judgments of the Hon’ble Supreme Court in the case of Sterling Foods Ltd. (1999) 237 ITR 579 (SC) : 1999 TaxPub(DT) 1271 (SC), Pandian Chemicals Ltd. (2003) 262 ITR 278 (SC) : 2003 TaxPub(DT) 1233 (SC) and Liberty India Ltd. (2009) 183 Taxman 349 (SC) : 2009 TaxPub(DT) 2027 (SC) the assessing officer held that the interest amount was liable to be excluded. In assessing officer’s opinion in order to claim the deduction under section 80IA/80HH etc. it was necessary for the assessee to prove first degree nexus of the income with the operations of the eligible undertaking. Since the assessee failed to prove such nexus, the assessing officer held that the interest on current account amounting to Rs. 2,90,26,398 was to be excluded from the deductible profits of the eligible undertaking.

On appeal the learned Commissioner (Appeals) confirmed the impugned disallowance. Being aggrieved the appellant is in appeal before us.

16. Assailing the order of the learned Commissioner (Appeals), the learned Authorised Representative argued that the authorities below did not understand the basic jurisdictional facts nor understood the entries made in the audited accounts of the eligible undertaking furnished in prescribed Form 10CCB. He submitted that the both the authorities failed to note the basic fact that the sum of Rs. 2,90,26,398 was never credited in the stand-alone profit & loss account of the eligible undertaking.

Rather the said amount represented net interest debited to the profit & loss account of the eligible undertaking and therefore on this material fact alone the decisions of the Hon’ble Supreme Court relied upon by the assessing officer had no application. Drawing attention to the submissions filed before the learned Commissioner (Appeals) extracted at Pages 6 to 8 of the impugned order and also the audited accounts of the company and of the eligible undertaking, the learned Authorised Representative submitted that in the accounts of the eligible undertaking only memorandum entries relating to interest were made both on the credit and debit side. Learned Authorised Representative explained that both the interest amounts represented notional interest on the funds transacted between the eligible undertaking and the Head Office of the appellant at Kolkata. He explained that the eligible undertaking carried on CFS business in the course of which the undertaking always possessed surplus funds which were transferred to the Head Office to finance appellant’s other business activities. He further submitted that for setting up the CFS project, the Head Office had utilized its own funds for meeting the cost of fixed assets. As per the accounting practice regularly followed by the appellant for determining profitability of each profit centre, entries for charging notional interest were passed in the books of the respective undertakings/cost centers. To determine stand alone profitability of CFS undertaking interest @ 11% was debited on the funds invested by the HO. Following the methodology consistently followed in the past, in the profit & loss account of CFS undertaking of the assessment year 2014/15, interest of Rs. 3,28,20,202 was debited. Such interest was never actually paid by CFS undertaking to the HO. Similarly in respect of the funds provided by the CFS undertaking to the HO during the relevant year, interest @ of 11%, amounting to Rs. 37,93,804 was credited in the stand-alone P&L Account of CFS undertaking. Such interest was also recognized in the books on notional basis without there being actual interest payment by the HO. The learned Authorised Representative submitted that both debit & credit entries in the profit & loss account of the eligible undertaking were made on hypothetical basis and no actual payment of interest between the HO and the eligible undertaking was affected. The learned Authorised Representative further submitted that the assessee prepared one consolidated audited financial statement in respect of all its business activities and only one return of income was filed on consolidated basis. In drawing up the consolidated Profit & Loss Account of the company as whole, intra unit transactions stood cancelled out and thereby neither any interest income nor interest expenditure in respect of intra-unit fund transfers appeared in the annual audited financials of the company. The learned Authorised Representative submitted that stand-alone accounts of the eligible undertaking accounted for interest expense& income of Rs. 37,93,804 &Rs. 3,28,20,202 respectively, the net effect of these two figures i.e. Rs. 2,90,26,398, represented notional charge of interest to the profit & loss account of the CFS undertaking. Both the lower authorities however wrongly understood the said amount to be interest income credited in the profit & loss account of the eligible undertaking. The learned Authorised Representative submitted that in arriving at the operating profit of CFS undertaking, eligible for deduction under section 80IA, the net notional interest charge of Rs. 2,90,26,398 was rightly ignored.

He therefore prayed that the disallowance made by the assessing officer be deleted. Per contra the learned Departmental Representative strongly relied on the orders of the authorities below.

17. We have heard the submissions of both parties and gone through the documents placed on record. On scrutiny of the audited profit & loss account of the CFS undertaking we find merit in the learned Authorised Representative’s initial contention that disallowance by the assessing officer was made on assumption of incorrect facts. In the impugned order the assessing officer proceeded on the premise that in the profit & loss account of the eligible undertaking the assessee had credited interest income of Rs. 2,90,26,398 in respect of current account balance. Based on assumption of such fact the assessing officer invoked the ratio laid down in the decisions of the Hon’ble Apex Court wherein it has been held that interest income is not eligible to be included in the profits of the undertakings which are eligible for claiming profit-based deductions under section 80HH/80I etc. We however find that the assessee had both credited and debited notional interest in respect of intra-unit fund transfers and in reality no interest was either paid or received by any of parties. In any case we find that ultimately in the profit & loss account of CFS undertaking there was net debit of Rs. 2,90,26,398 on account of interest on intra-unit fund transfers. In other words the net profit of the CFS undertaking was arrived at after the net charge of interest of Rs. 2,90,26,398. On these facts therefore we find merit in the learned Authorised Representative’s submissions that on facts; decisions of the Hon’ble Supreme Court relied upon by the assessing officer had no application and therefore the basis adopted by the assessing officer for making the impugned disallowance being factually incorrect, the disallowance made by the assessing officer was unwarranted.

18. We also note that net interest of Rs. 2,90,26,398 was never paid by the eligible undertaking to its HO or any other person, and therefore in arriving at the operating profit, eligible for deduction under section 80IA, the assessee rightly ignored the notional charge of interest. The learned Authorised Representative brought to our attention that the methodology of accounting notional interest on intra unit fund transfers was consistently followed in the earlier years as well.

Even in the past years’ profit & loss account of the eligible undertaking, such notional interest was charged but in arriving at the profits eligible for deduction under section 80IA, the same was ignored and on the enhanced income the deduction was claimed and was also allowed in the assessments framed under section 143(3) of the Act. From the chart provided by the appellant in the paper-book, we find that even though the assessing officers made certain adjustments to the profits of the eligible undertaking in the earlier years’ assessments but in none of the assessments except for the assessment year 2012-13 any adverse inference was drawn in respect of the assessee’s claim for exclusion of notional interest expenses accounted in respect of intra-unit fund transfers.

Similar interest disallowance was made by the assessing officer in the assessment order for the assessment year 2012–13 which was deleted by the learned Commissioner (Appeals) 6 Kolkata in his Order, dated 27-10-2017 in Appeal No. 222/Commissioner (Appeals)-6/Kol/2015-16 and the decision of the Commissioner (Appeals) on this issue was accepted by the Revenue by not filing second appeal there against. We also find from the annual audited accounts that in fact the assessee company did not incur interest expenditure. Rather the assessee company earned substantial interest which was assessed to tax in the impugned order. From examination of the audited accounts it was found that the appellant’s net own funds in the form of capital & reserves as on 31-3-2014 were Rs. 819.65 crores which were far in excess of the investment in assets of CFS undertaking. Moreover profits of CFS undertaking in the ten years of its operations were substantially more than the funds invested by HO, on setting up of CFS project. We also note that during the relevant year the gross interest cost of the assessee was Rs. 4.18 crores whereas interest income credited in the profit & loss account was Rs. 35.44 crores. We therefore find that during the relevant year the assessee company made net interest earning of Rs. 31.26 crores. Viewed from any angle therefore we find that the assessee company did not incur any interest expenditure in relation to its CFS undertaking requiring any adjustment to the profits eligible for deduction under section 80IA of the Act. The disallowance of Rs. 2,90,26,398 made by the assessing officer in granting deduction under section 80IA is therefore deleted.

19. In the result the appeal of the Revenue is dismissed and the appeal of the assessee is allowed.