AMIT RASTOGI HUF, MEERUT V. ITO, WARD- 1(1), MEERUT

ITA 2128/DEL/2018

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 4662 (ITAT-DELHI)
• Duration Of Justice: 6 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-10-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Assessment Year: 2015-2016
• Appeal Filed On: 27-03-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ASHONA NEB
• Assessee Lawyers: V RAJ KUMAR
• Keywords: Depreciation; Charitable institution; Question of law; Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH B NEW DELHI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER & SHRI O.P. KANT, ACCOUNTANT MEMBER I.T.AS. NO. 2244, 2245 & 5126 TO 5141/DEL/2014 ASSESSMENT YEARS: 1992-93 TO 2010-11 SHANKAR TRADING CO. (P) LTD. A-55, GROUP INDUSTRIAL AREA, WAZIPUR, DELHI. V. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-8(1), NEW DELHI. TAN/PAN: AAACS 9302A (APPELLANT) (RESPONDENT) APPELLANT BY: S/SHRI K. SAMPATH & V. RAJ KUMAR, ADV. RESPONDENT BY: MS. ASHONA NEB, SR.D.R.. DATE OF HEARING: 10 09 2018 DATE OF PRONOUNCEMENT: 24 10 2018 O R D E R PER BENCH: THE AFORESAID APPEALS HAVE BEEN FILED BY THE ASSESS EE AGAINST SEPARATE IMPUGNED ORDERS PASSED BY LD. CIT (APPEALS )-XI, NEW DELHI FOR THE QUANTUM OF ASSESSMENT PASSED U/S.143(3) FOR THE ASSESSMENT YEARS 1992-93 TO 2010-11. SINCE COMMON IS SUES ARE INVOLVED IN ALL THE APPEALS ARISING OUT OF IDENTICAL S ET OF FACTS, THEREFORE, SAME WERE HEARD TOGETHER AND ARE BEING DISP OSED OF BY WAY OF THIS CONSOLIDATED ORDER. 2. THE BRIEF FACTS AND BACKGROUND OF THE CASE ARE TH AT THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF MA NUFACTURING AND SALE OF KATTHA AND CUTCH. IT HAS TAKEN A FACTORY ON LEASE FROM MEHTA CHARITABLE PRAJNALAYA TRUST (HEREINAFTER REFERR ED TO AS I.T.AS. NO. 2244, 2245 & 5126 TO 5141/DEL/2014 2 TRUST) W.E.F. 01.06.1978. THE TRUST WAS ALSO ENGAGE D IN BUSINESS OF MANUFACTURING OF THE SAME PRODUCTS. FROM TIME TO TIME VIDE SEPARATE LEASE DEED EXECUTED BETWEEN THE ASSESSEE COM PANY AND THE TRUST, A LEASE RENTAL WERE REGULARLY INCREASED. EARLIER IT WAS RS.25,000/- PER MONTH AND PRIOR TO YEAR 1989, IT WAS ENHANCED TO RS.50,000/-. LATER ON VIDE LEASE DEED DATED 01.04.19 89, THE MONTHLY LEASE RENT WAS INCREASED TO RS.1 LAC AND AFTE R 18.01.1992 AGAIN, THE LEASE RENT WERE ENHANCED TO RS.6,75,000/- PER MONTH AND FINALLY W.E.F. 01.04.1997 LEASE RENT WAS FURTHER ENHANCED TO RS.7,50,000/- WITHIN ANNUAL INCREMENT. THE LEASE REN TAL PAID BY THE ASSESSEE COMPANY WAS CLAIMED AS EXPENDITURE IN THE P&L ACCOUNT. THE ASSESSING OFFICER WAS OF THE OPINION THAT , FIRSTLY , THE ASSESSEE COMPANY HAD CLAIMED BENEFIT OF AN ENDURING NATURE AND ACCORDINGLY, DISALLOWED THE INCREASE AMOUNT OF RENT ON THE GROUND THAT IT IS IN THE NATURE OF CAPITAL EXPENSES; SECONDLY , HE ALSO INVOKED PROVISION OF SECTION 40A(2). SIMILAR DISALLO WANCES WERE MADE IN THE ALL THE YEARS. 3. LD. CIT (A) HAS CONFIRMED THE SAID ACTION OF THE A SSESSING OFFICER ON THE GROUND THAT UNUSUAL INCREASE IN THE RENT WAS PRIMARILY FOR THE PURPOSE OF REDUCING THE TAX INCIDEN T ON THE PROFITS EARNED BY THE ASSESSEE COMPANY AND NOT FOR BUS INESS PURPOSE. THE TRIBUNAL HELD THAT ENHANCED LEASE RENT W AS IN THE NATURE OF CAPITAL EXPENDITURE, AND THEREFORE, NOT ALLOWA BLE. EVEN THE INVOKING OF PROVISION OF SECTION 40A (2) WAS CONF IRMED. 4. RIGHT FROM THE ASSESSMENT YEAR 1992-93 TO ASSE SSMENT YEAR 2007-08, THE MATTER HAD TRAVELLED UP TO THE HON'BLE DELHI HIGH COURT, WHEREIN THEIR LORDSHIPS HAD SUMMARIZED THE FOLLOWING QUESTION OF LAW FOR ADJUDICATION:- I.T.AS. NO. 2244, 2245 & 5126 TO 5141/DEL/2014 3 I) WHETHER THE LEASE RENT OF RS 6,75,000/- PER MON TH PAID BY THE ASSESSEE TO THE TRUST WAS A CAPITAL EXPENDITURE OR REVENUE EXPENDITURE OR PARTLY CAPITAL AND PARTLY REVENUE EX PENDITURE; (II) WHETHER THE PAYMENT MADE BY THE ASSESSEE TO TH E TRUST OR ITAS 53/2000, 251/2007, 253/2007, 257/2007, 223/2002 247 /2002, 45/2005, 50/2005, 1207/2005, PART OF IT COMES WITHI N THE PURVIEW OF SECTION 40A(2) OF THE ACT; (III) IF ISSUE NO. 2 IS DECIDED IN FAVOUR OF THE RE VENUE, WHETHER THE PAYMENT MADE BY THE ASSESSEE TO THE TRUST WAS EXCES SIVE OR UNREASONABLE, HAVING REGARD TO THE FAIR MARKET VALU E OF THE GOODS, SERVICES OR FACILITIES FOR WHICH THE PAYMENT WAS MA DE OR LEGITIMATE NEEDS OF THE BUSINESS OF THE ASSESSEE OR THE BENEFI T DERIVED BY OR ACCRUING TO IT FROM THOSE GOODS, SERVICES OR FACILI TIES. 4.1 ON PERUSAL OF THE LEASE RENTAL AGREEMENT WHEREBY RENT WERE ENHANCED FROM TIME TO TIME, THE HON'BLE HIGH COURT NOTED THAT SAME WAS DUE TO FOLLOWING REASONS: (A) THE TRUST RELINQUISHING ITS RIGHTS TO PURCHASE KHAIRWOOD IN HIMACHAL PRADESH; (B) THE TRUST AGREEING NOT TO INDULGE IN COMPETITIO N WITH THE ASSESSEE IN A RADIUS OF LESS THAN 1000 KMS. (C) THE TRUST HAVING INCURRED EXPENDITURE IN THE YE AR 1989-90 ON MODERNIZATION AND IMPROVEMENT OF THE PLANT AND MACH INERY WHICH IT HAD LEASED TO THE ASSESSEE. ITAS 53/2000, 251/2007, 253/2007, 257/2007, 223/2002 247/2002, 45/2005, 50/2005, 1207/2005, YET ANOTHER FACTOR CONTRIBUTING TO REVIS ION OF LEASE MONEY COULD BE THE NORMAL APPRECIATION IN THE LEASE RENTAL, IN LINE WITH THE LEASE RENT PREVAILING IN THE MARKET. 4.2. THE HON'BLE HIGH COURT FURTHER OBSERVED THAT THER E CAN BE I.T.AS. NO. 2244, 2245 & 5126 TO 5141/DEL/2014 4 NO DISPUTE ON ENHANCEMENT OF LEASE RENTAL TO THE EXTENT , IT IS ATTRIBUTABLE TO THE EXPENDITURE INCURRED BY THE TRUST IN THE YEAR 1998-90 ON THE MODERNIZATION OR IMPROVEMENT OF PLANT A ND MACHINERY WHICH THE LESSEE HAD TAKEN ON LEASE WOULD BE A REVENUE EXPENDITURE, SINCE IT WOULD HAVE THE EFFECT OF ENHANCIN G THE LEASE RENT OF THE PLANT AND MACHINERY IN THE OPEN MARKET. HOWE VER, HOW MUCH OF THE ENHANCEMENT IN THE LEASE RENT IS ATTRIBUTABLE TO THE MODERNIZATION AND IMPROVEMENT IN THE PLANT AND MACHINE RY IS A MATTER WHICH THE ASSESSING OFFICER HAS TO DECIDE AFTE R GIVING THE OPPORTUNITY TO THAT OF THE ASSESSEE TO THE LEASE AGREEME NT IN THIS REGARD. 4.3. AFTER EXAMINING THE NATURE OF AGREEMENT AMONGST THE PARTIES AND DISCUSSING VARIOUS JUDGMENTS ON THE ISSUE OF CAPITAL EXPENDITURE VS. REVENUE EXPENDITURE AND APPLYING THE TEST LAID DOWN THEREIN, THE HON'BLE HIGH COURT HELD THAT:- 1. THAT PART OF THE ENHANCEMENT OF LEASE RENT, WHIC H IS ATTRIBUTABLE TO MEHTA CHARITABLE TRUST SURRENDERING ITS RIGHT TO PU RCHASE KHAIR WOOD IN FAVOUR OF THE ASSESSEE COMPANY CONSTITUTES REVENUE EXPENDITURE, 2. THAT PART OF THE ENHANCEMENT OF LEASE RENT, WHIC H IS ATTRIBUTABLE TO IMPROVEMENT AND MODERNIZATION OF PLANT AND MACHINER Y CARRIED OUT BY THE TRUST IN THE YEAR 1989-90, CONSTITUTES REVENUE EXPE NDITURE. 3. THE ENHANCEMENT IN LEASE RENT, IF ANY, WHICH IS ATTRIBUTABLE TO NORMAL APPRECIATION, IF ANY, IN LINE WITH THE LEASE RENTAL S PREVAILING IN THE MARKET CONSTITUTES REVENUE EXPENDITURE. 4. THE ENHANCEMENT IN LEASE RENT, WHICH IS ATTRIBUT ABLE TO MEHTA CHARITABLE TRUST AGREEING NOT TO INDULGE IN COMPETITION WITH T HE ASSESSEE WITHIN A RADIUS LESS THAN 1000 KMS FROM THE DEMISES PROPERTY , CONSTITUTES CAPITAL EXPENDITURE. I.T.AS. NO. 2244, 2245 & 5126 TO 5141/DEL/2014 5 5. SINCE, THE TRUST IS NOT AN 'ASSOCIATION OF PERSO NS', THE PROVISIONS OF SECTION 40A(2) OF THE INCOME TAX ACT ARE NOT ATTRAC TED TO THE TRANSACTION BETWEEN THE TRUST AND THE ASSESSEE COMPANY. 5. HON'BLE HIGH COURT HAS THUS HELD THAT, FIRSTLY , PROVISION OF SECTION 40A(2) IS NOT ATTRACTED TO THE TRANSACTION INVOLVED ; AND SECONDLY , THE LEASE RENTAL HAS TO BE BIFURCATED UNDER FOUR CATEGORIES, THE THREE OF WHICH WERE HELD TO BE CONSTITUT ING REVENUE EXPENDITURE, I.E., I) PART OF ENHANCEMENT OF LEASE REN T WHICH IS ATTRIBUTABLE TO THE TRUST SURRENDERING ITS RIGHT TO PURCHAS E KHAIR WOOD; II) PART OF ENHANCEMENT OF LEASE RENT WHICH IS ATTRIBUTABLE TO THE IMPROVEMENT AND MODERNIZATION OF PLANT AND MACHINE RY CARRIED OUT BY THE TRUST IN THE YEAR 1989-90 WILL CONSTR UE REVENUE EXPENDITURE; AND III) ENHANCEMENT OF THE LEASE RENT WH ICH IS ATTRIBUTABLE TO NORMAL APPRECIATION IN LINE WITH PREVAILI NG MARKET RATE WOULD ALSO CONSTRUE REVENUE EXPENDITURE. HOWEVER , IN SO FAR AS THE ENHANCEMENT OF LEASE RENT ATTRIBUTABLE TO THE TRUST A GREEING NOT INDULGE IN COMPETITION WITH THE ASSESSEE WITHIN A R ADIUS OF LESS THAN 1000 KM FROM THE DEMISE PROPERTY WOULD CONS TITUTE CAPITAL EXPENDITURE, I.E., SOME KIND OF NON COMPETE FEE. WITH THIS DIRECTION, ASSESSING OFFICER WAS DIRECTED TO APPORTION THE LEASE RENT IN VARIOUS CATEGORIES AND TO PASS A FRESH ASSESS MENT ORDER IN TERMS OF APPORTIONMENT MADE BY HIM. 6. BEFORE THE ASSESSING OFFICER, ASSESSEE AFTER EXP LAINING THE ENTIRE FACTS AND BACKGROUND OF THE CASE, GAVE BIFURCA TION AND BASIS OF COMPUTATION FOR DISALLOWANCE ON PART OF LEASE CHARG ES IN ACCORDANCE WITH THE HON'BLE HIGH COURT ORDER WHICH HA S BEEN INCORPORATED AND DEALT BY THE ASSESSING OFFICER AND LD . CIT (A) IN THEIR ORDER WHICH FOR THE SAKE OF READY REFERENCE IS ALSO REPRODUCED HEREIN BELOW:- I.T.AS. NO. 2244, 2245 & 5126 TO 5141/DEL/2014 6 ASST. YEAR LEASE CHARGES PAID (A) PART OF LEASE RENT FEE FOR SURRENDERING THE RIGHT TO PURCHASE @ 15% ON AVERAGE PURCHASE OF KHAIR WOOD (B) FIXED AMOUNT OF LEASE RENT NORMAL ESCALATION N FIXED TEASE RENT % 11% FOR 20 YEARS PLUS BASIC LEASE CHARGES (C) RENT ATTRIBUTABLE TO IMPROVEMENT AND MODERNIZATION OF PLANT AND MACHINERY DURING THE AY 1990-91 TO 1995-96 A, 18% NORMAL ESCALATION ON (A) @ 9.5% FOR 17 YEARS PLUS BASIC RENT AMOUNT (D) SUM OF RENT ATTRIBUTABLE TO REVENUE NATURE (E) [(EMB) + (C) -(D)] BALANCE AMOUNT OF RENT ATTRIBUTABLE TO CAPITA! NATURE (F) 1(F) = (A)- (E)] 1992 - 93 2,925.000 6.74.813 1.200,000 1.641,157 524.059 524.059 2,840.029 84.971 1993 - 94 8,100,000 2,699,251 1.200.000 1.821.684 1.107,812 1.157,598 5,678,533 2,421,467 1994 - 95 8,100.000 2,699,251 1.200,000 2.022.070 1,232,524 1,392.281 6.113.602 1,986,398 1995 - 96 8,100,000 2.699,251 1.200.000 2,244,497 1,382,514 1.674.538 6,618,286 1,481,714 1996 - 97 8.100.000 2,699,251 1,200,000 2,491,392 1,382.514 1,833,619 7,024.262 1,075,738 1997 - 98 8,100.000 2,699,251 1,200,000 2,765,445 1.382,514 2.007.813 7,472,509 627,491 1998 - 99 8.100.000 2,699,251 1,200,000 3,069.644 1,382,514 2,198.555 7,967,450 132,550 1999 - 00 9,450,000 2,699.251 1,200,000 3,407,305 1,382,514 2,407,418 8,513,974 936,026 2000 - 01 9,922,500 2,699,251 1,200,000 3.782.109 1.38 2,514 2,636,122 9,117,482 805,018 2001 - 02 10,418,628 2,699,251 1,200,000 4,198,141 1,382,514 1.886.554 9. 783,946 634,682 2002 - 03 10.939,560 2,699,251 1,200,000 4.659,936 1,382,514 3.160.776 10,519,954 419,596 2003 - 04 11,486,544 2,699,251 1,200,000 5,17 2,529 1.382,514 3,461,050 11.332.830 153,714 2004 - 05 11,486,544 2,699,251 1,200,000 5,741,507 1,382,514 3,789,850 12.230,608 (744,164) 2005 - 06 11,486,544 2,699.251 1,200,000 6.373.073 1,382.514 4,149,886 13,222,210 (1,735,666) 2006 - 07 11.486.544 2.699.2 51 1,200,000 7,074,111 1.382.514 4,544,125 14.317.487 (2,830.943) 2007 - 08 11.486.544 2.699.251 1.200.000 7,852.263 1.382.514 4,975.8 1 7 15,527,331 (4.040.787) 2008 - 09 11.486.544 2,699.251 1.200.000 8.716.012 1.382.514 5,448.519 18.863.783 (5,377,239) 2 009 - 10 11.486.544 2,699,251 1.200.000 9.674,774 1.382.514 5,996.129 18.340,153 (6.853,609) 2010 - 11 11.486,544 2,699,251 1,200,000 10,738,999 1,382,514 6,532,911 19,971,161 (8,484,617) 7. HOWEVER, THE LEARNED ASSESSING OFFICER DISAGREED WITH THE COMPUTATION GIVEN BY THE ASSESSEE AND HAS PROCEEDED TO MAKE HIS OWN COMPETITION AFTER DISCUSSING AS UNDER: I. RIGHT OF PURCHASE KHAIRWOOD: 7. RIGHT TO PURCHASE OF KHAIRWOOD HAS BEEN SURRENDERED IN FAVOUR OF THE ASSESSEE BY THE TRUST AND HAS BEEN HE LD REVENUE EXPENDITURE BY THE HON'BLE HIGH COURT VIDE PARA 21 OF THE ORDER. IN COMPLIANCE TO THE ORDER OF THE HON'BLE HIGH COUR T, PART OF THE I.T.AS. NO. 2244, 2245 & 5126 TO 5141/DEL/2014 7 ENHANCED RENT IS TO BE ATTRIBUTED AGAINST THE SURRE NDER OF PURCHASING RIGHTS. IN THIS CONNECTION THERE IS NO S CIENTIFIC FORMULA OR YARDSTICK TO WORK OUT THE REASONABLE AMOUNT AS A LLOWANCE UNDER THIS HEAD. HOWEVER FOR THIS PURPOSE, THE BASI S FOR THIS WORKING IS BEING TAKEN AS THE AVERAGE PURCHASES OF KHAIR WOOD BY THE TRUST M/S. MEHTA CHARITABLE TRUST DURING THE FINANCIAL YEARS 1989-90, 1990-91 & 1991-92. THE DETAILS OF IT S PURCHASES AND AMOUNT OF AVERAGE PURCHASE FOR THESE YEARS AS P ER THE SUBMISSION OF THE ASSESSEE IS AS UNDER; FINANCIAL YEAR AMOUNT 1989 - 90 1,50,11,600.00 1990 - 91 2,12,01,081.00 1991 - 92 1,77,72,354.00 TOTAL A MOUNT 5,39,85,035.00 AVERAGE 1,79,95,012.00 7.1 THE ASSESSEE VIDE ITS REPLY DATED 10.12.2013 HA S MADE A CLAIM OF 15% OF THE AVERAGE PURCHASES AS ITS COMPEN SATION. THIS AMOUNT COMES OUT TO BE 1.79,95,012 X 15% = 26,99,25 1/-. THE CLAIM OF THE ASSESSEE SEEMS TO BE ON, HIGHER SIDE. HOWEVER IT SEEMS BE REASONABLE AND ACCEPTABLE TO ALLOW A FIXED PERCENTAGE OF THE LEASE RENT AFTER CONSIDERING THE REQUEST OF THE ASSESSEE COMPANY IN THIS REGARD AN ALLOWANCE D 10% OF THE AV ERAGE PURCHASES OF M/S MEHTA CHARITABLE TRUST FOR THE THR EE IMMEDIATE PRECEDING FINANCIAL YEARS ' IS CONSIDERED TO BE REA SONABLE. 10% OF 1,79,95,012/- COMES OUT TO RS 17.99,501/- OR RS. 17 ,99,500/-. SINCE THE LEASE DEED WAS EXECUTED IN THE MONTH OF J ANUARY 1992, THIS ALLOWANCE WILL BE L/4TH OF 17,99,500/- FOR AY. 1992-93 WHICH COMES OUT TO RS. 4,49,875/-. FOR SUBSEQUENT ASSESSM ENT YEARS I.T.AS. NO. 2244, 2245 & 5126 TO 5141/DEL/2014 8 THIS ALLOWANCE WOULD BE UNIFORMLY AT RS. 17,99,500/ - @L 10%. II.ENHANCEMENT OF LEASE RENT IN ....... LINE ...... PREVAILING IN THE MARKET. 8. HON'BLE HIGH COURT HAS DIRECTED TO ALLOW NORMAL APPRECIATION IN THE LEASE RENT KEEPING IN VIEW THE RENTALS PREVAILING IN THE MARKET. FOR THIS PURPOSE THE ASSE SSEE WAS ASKED TO PROVIDE DETAILS OF EXITING RENTALS FOR VAR IOUS ASSESSMENT YEARS OF THE LEASE RENTAL PREVAILING IN THE MARKET. THE ASSESSEE HAS SHOWN ITS INABILITY IN FURNISHING SUCH DETAILS. IN THIS REGARD, REQUEST LETTERS WERE ALSO ISSUED TO THE SDM, UNA (HP) AND EXECUTIVE ENGINEER, HPPWD, REQUES TING THEM TO PROVIDE THE DETAILS SO THAT THE UNDERSIGNED MAY GET AN IDEA ABOUT THE PREVAILING LEASE RENTALS FOR DIFF ERENT ASSESSMENT YEARS. TILL THIS DATE OF ORDER NOTHING H AS BEEN HEARD FROM THE EXECUTIVE ENGINEER, HPPWD. THE ASSES SEE HAS MADE A REQUEST TO ALLOW AN APPRECIATION AT THE RATE OF 11 PER CENT WHICH SEEMS TO BE VERY UNREASONABLE AND HIGH. THEREFORE, THE REQUEST OF THE ASSESSEE IS NOT ACCEP TABLE. NORMALLY THE APPRECIATION IN THE LEASE RENT IS BASE D ON LOCAL AREA MARKET TREND AND MARKET DEMAND. IT MAY VARY FR OM PLACE TO PLACE. NORMALLY AN APPRECIATION IN RENT IN THE CASE OF RESIDENTIAL PROPERTIES ACROSS THE COUNTRY IS SEEN ( A 10 % YEARLY. BUT THIS IS NOT TRUE FOR THE 'COMMERCIAL' P ROPERTIES IN THE COMMERCIAL PROPERTIES THIS VARIATION MAY BE FRO M ZERO TO TEN PERCENT OR EVEN MORE DEPENDING UPON LOCATION, A REA AND PREVAILING MARKET PRICE FACTORS AND DEMAND OF THE V ACANT PLOTS/PLANTS NEITHER THE ASSESSEE HAS PRODUCED ANY EVIDENCE IN THIS REGARD NOR THE COMPETENT LOCAL AUTHORITIES OF THE AREA OF HIMACHAL PRADESH WHERE IT IS SITUATED WOULD HAVE SUPPLIED I.T.AS. NO. 2244, 2245 & 5126 TO 5141/DEL/2014 9 AND INPUT IN THIS REGARD THE INDUSTRIAL PLOT IN QUE STION IS LOCATED IN A REMOTE AREA AT AMB, LOCATED IN DISTRIC T UNA, HIMACHAL PRADESH. THE PLOT IS LOCATED IN A AN INDUS TRIALLY UNDER DEVELOPED AREA. 1 DON'T FIND ANY REASON IN SU CH AN AREA FOR ANY SHORTAGE OF ANY INDUSTRIAL PLOT TO THE PROB ABLE CUSTOMERS OR THE TENANTS. RATHER IN SUCH PLACES THE RE HAPPENS TO BE SURPLUS NUMBER OF INDUSTRIAL PLOTS AND LESS N UMBER OF TAKERS OF SUCH PLOTS ON RENT. FOR THESE REASONS. I DON'T FIND ANY MERIT IN THE RATE PROPOSED BY THE ASSESSEE FOR ANNUAL INCREASE. HOWEVER, KEEPING IN MIND THE INTEREST OF THE OWNER I.E. M/S MEHTA CHARITABLE TRUST, IT WOULD BE REASON ABLE TO ADOPT AN INCREASE IN LEASE RENTAL @ 5% PER YEAR, ON RS. 12,00,0001- FROM ASSESSMENT YEAR 1992-93 ONWARDS. S INCE IN A. V. 1992- 93, THE ENHANCEMENT DEED WAS IN OPER ATION FOR ONLY THREE MONTHS, IT IS BEING ALLOWED FOR 3 MONTHS ONLY. III. ENHANCEMENT IN PLANT & MACHINERY FOR THE PURPO SE MODERNIZATION DONE BY LEASER. 9.HON'BLE HIGH COURT HAS DIRECTED VIDE PARA 17 OF I TS ORDER (PAGE NO. 13 OF THE ORDER). IN PARTICULARS, THE ASS ESSING OFFICER WILL HAVE TO ASCERTAIN ... WHAT LEASE RENT MODERNIZ ED AND IMPROVED PLANT AND MACHINERY WOULD HAD FETCHED IN T HE MARKET, AS ON 1.4.1992 WHEN THE REVISED LEASE COMME NCED AND THE RENT WHICH SUCH PLANT AND MACHINERY WOULD H AVE FETCHED IN THE OPEN MARKET PRIOR TO ITS MODERNIZATI ON AND IMPROVEMENT IN THE YEAR 1989-90. THE DETAILS OF EXPENDITURE MADE BY THE LESSOR M/S M EHTA CHARITABLE TRUST ON THE REQUEST OF LESSEE M/S SHANK ER TRADING COMPANY FOR THE MODERNIZATION AND IMPROVEME NT TOWARDS PLANT AND MACHINERY ARE TABULATED ON THE BA SIS OF BALANCE SHEETS OF M/S MEHTA CHARITABLE TRUST SUPPLI ED BY THE I.T.AS. NO. 2244, 2245 & 5126 TO 5141/DEL/2014 10 ASSESSEE. 8. LD. CIT (A) HAS CONFIRMED THE ACTION OF THE ASSESSI NG OFFICER HOLDING THAT ASSESSING OFFICER HAS APPLIED HIS MIND P ROPERLY IN ALLOCATING THE LEASE RENT UNDER THE DIFFERENT HEADS AND THE WORKING GIVEN BY THE ASSESSEE IS NOT CORRECT BECAUSE THE TOTAL R EVENUE EXPENDITURE FROM ASSESSMENT YEAR 2004-05 ONWARDS IS M ORE THAN THE ACTUAL PAYMENT OF LEASE CHARGES WHICH CANNOT HELD TO BE CORRECT. 9. WE HAVE HEARD THE RIVAL SUBMISSIONS MADE BY THE P ARTIES, PERUSED THE RELEVANT FINDINGS GIVEN IN THE IMPUGNED OR DERS AS WELL AS MATERIAL REFERRED TO BEFORE US. THE MAIN ISSUE BE FORE US IN ALL THE APPEALS IS, HOW THE ENHANCEMENT OF LEASE RENT GIVEN BY THE ASSESSEE COMPANY TO THE TRUST IS TO BE ALLOCATED IN TERM S OF DIRECTIONS GIVEN BY THE HON'BLE HIGH COURT, WHICH IS, FIRSTLY , THE PART OF THE ENHANCEMENT FOR SURRENDERING THE RIGHT TO PURCHASE KHAIR WOOD WOULD CONSTITUTE REVENUE EXPENDITURE; SECONDLY , PART OF THE RENT WOULD BE ATTRIBUTABLE TO IMPROVEMENT AND MODERNIZATION OF PLANT AND MACHINERY CARRIED OUT BY THE TRUST IN THE YEAR 1989-90 WOULD BE REVENUE EXPENDITURE; THIRDLY , ENHANCEMENT WHICH IS ATTRIBUTABLE TO NORMAL APPRECIATION IN LINE WITH PREVAILING MARKET RIGHT OF LEASE RENT WOULD CONST ITUTE REVENUE EXPENDITURE; AND LASTLY , ENHANCEMENT IN LEASE RENT ATTRIBUTABLE FOR NOT INDULGING IN COMPETITION, I.E., NON COMPETE FEE WOULD CONSTRUE CAPITAL EXPENDITURE. THUS OUR ENTIRE ENDEAVOR IN ALL TH E YEARS IS TO ALLOCATE THE CAPITAL EXPENDITURE ON ACCOUNT OF NON-COMP ETE FEE, I.E., TRUST AGREEING NOT TO INDULGE IN THE COMPETITION W ITHIN A SPECIFIC RADIUS FROM THE DEMISE PROPERTY. 10. AS REGARDS THE RIGHT OF PURCHASE OF KHAIR WOOD , THE I.T.AS. NO. 2244, 2245 & 5126 TO 5141/DEL/2014 11 ASSESSEE HAS CLAIMED THAT 15% OF THE AVERAGE PURCHASES CAN BE TAKEN FOR THE PURPOSE OF COMPENSATION WHICH ASSESSING OFFICER HAS HELD THAT IT SHOULD BE @ 10% OF THE AVERAGE PURCHASES. HOW HE HAS TAKEN IT 10% HAS NOT BEEN PROVIDED BY HIM. ON THE OTHER HAND, LD. COUNSEL FOR THE ASSESSEE, SHRI K. SAMPATH H AS FILED COPY OF THE ASSESSMENT ORDERS FOR THE ASSESSMENT YEARS 1989- 90 TO 1992-93 IN THE CASE OF TRUST, I.E., M/S. MEHTA CHARITA BLE PRAJNALAYA TRUST AND POINTED OUT THAT IN ASSESSMENT YEAR 1989- 90 THE GROSS PROFIT RATE ON SALE OF KATTHA BY THE TRUS T WAS 21%; FOR THE ASSESSMENT YEAR 1990-91 IT WAS 13.81%; FOR THE ASSE SSMENT YEAR 1991-92 IT WAS 14.8%; AND FOR THE ASSESSMENT YEAR 1992-93 IT WAS 20.04% WHICH AVERAGES TO 17.4%. SUCH AN ASSESS MENT ORDER IN THE CASE OF THE TRUST CONSTITUTES A VALID BASIS FOR ESTIMATING THE AVERAGE PURCHASE OF THE KHAIR WOOD. 11. ON THE OTHER HAND, LEARNED SENIOR DR STRONGLY RE LIED UPON THE ORDER OF THE ASSESSING OFFICER AND LD. CIT (A) AN D SUBMITTED THAT THE WORKING GIVEN BY THE ASSESSEE IS PURELY BASED ON ESTIMATE WHICH CANNOT BE UPHELD FOR THE REASON THAT FROM ASSESSM ENT YEAR 2004-05 ONWARDS THE AMOUNT OF RENT ATTRIBUTABLE TO CAPITAL EXPENDITURE HAS GONE INTO NEGATIVE WHICH IS AGAINST TH E MANDATE AND THE DIRECTION OF THE HON'BLE HIGH COURT, THEREFORE, THE WORKING GIVEN BY THE ASSESSING OFFICER NEEDS TO BE UPHELD. 12. AFTER CONSIDERING THE ENTIRE FACTS AND THE SUBMIS SIONS MADE BY THE PARTIES, WE FIND THAT ASSESSING OFFICER HA S APPLIED RATE OF 10% OF THE AVERAGE PURCHASES ON RIGHT TO PUR CHASE OF KHAIR WOOD SURRENDERED IN FAVOUR OF THE ASSESSEE BY THE TRU ST. THE ASSESSING OFFICER HAS NOT GIVEN ANY REASON AS TO WHY ALLOWANCE @10% OF THE AVERAGE PURCHASES SHOULD BE GIVEN. ON THE CONTRARY, I.T.AS. NO. 2244, 2245 & 5126 TO 5141/DEL/2014 12 THE ASSESSEE BEFORE US HAS DEMONSTRATED THAT IN THE CAS E OF THE TRUST THE GROSS PROFIT RATE ON SIMILAR PRODUCT WAS MORE THAN 17%. THE ASSESSEE HAS CLAIMED RATE OF 15% OF THE AVERAGE PURCHASES AS ITS COMPENSATION FOR THE PURPOSE OF ALLOCATION OF ENHA NCED RENT TOWARDS CAPITAL EXPENDITURE. SUCH A RATE OF 15% IS INC ONSONANCE WITH THE AVERAGE GP RATE IN THE CASE OF THE TRUST, THERE FORE, ALLOWANCE OF 15% IS HELD TO BE QUITE REASONABLE. ACC ORDINGLY, WE DIRECT THE ASSESSING OFFICER TO TREAT PART OF THE LEASE R ENT FEE FOR SURRENDERING THE RIGHT TO PURCHASE @15% OF AVERAGE P URCHASES OF KHAIR WOOD. 13. AS REGARDS ENHANCEMENT OF THE LEASE RENT IN LINE OF THE PREVAILING MARKET RATE, THE ASSESSEE BEFORE THE ASSESS ING OFFICER AS WELL AS BEFORE THE LD. CIT(A) HAS SUBMITTED THAT IT HAS TA KEN SIMILAR LEASE OF A PROCESSING UNIT FROM HIMACHAL PRA DESH MARKETING CORPORATION WHICH IS AN UNDERTAKING OF GOVER NMENT OF HIMACHAL PRADESH, TO WHOM ASSESSEE HAS PAID SUM RS.3 0 LAC PER ANNUM BY WAY OF LEASE RENTAL TO THE SAID GOVERNMENT UN DERTAKING WHICH IS MUCH SMALLER IN SIZE AND IF SAME IS COMPAR ED THEN IT IS AT ARMS LENGTH TRANSACTION. FOLLOWING COMPARABILITY ANAL YSIS OF THE AREA OF LAND AND SALE OF ANNUAL PRODUCT WAS GIVEN: MCPT HPMC (1) INVESTMENT IN FIXED ASSETS 56,18,414 6,4 9,177 (2) AREA OF LAND 21800 SQ. MT. 2000 SQ. MT. (3) SALE OF ANNUAL PRODUCT IN F.Y. 1993-94 14.82 CRORE 2.98 CRORE 14. BASED ON THIS COMPARABILITY ANALYSIS, IT WAS CONTE NDED THAT LEASE RENT CANNOT BE HELD TO BE EXCESSIVE. THE ASSESS EE HAD REQUESTED TO ALLOW NORMAL ESCALATION IN THE FIXED LEA SE RENT @11% I.T.AS. NO. 2244, 2245 & 5126 TO 5141/DEL/2014 13 PER ANNUM OF THE LAST YEAR, WHEREAS THE LEARNED ASSESSING OFFI CER HAS HELD THAT IT WOULD BE REASONABLE TO ADOPT LEASE RENTA L @5% PER YEAR. 15. BEFORE US, THE LEARNED COUNSEL SUBMITTED THAT THE NOR MAL APPRECIATION IN RENT IN THE CASE OF COMMERCIAL PROPERT Y IS MORE THAN 10%, WHEREAS THE LEARNED DR SUBMITTED THAT ASSESSEE COULD NOT PRODUCE ANY EVIDENCE FROM ANY COMPETENT LOCAL AU THORITY WHICH CAN SUPPLY INPUT, AND THEREFORE, SUCH AN ESCAL ATION OF 10% OR 11% IS NOT SUPPORTED BY ANY PROPER EVIDENCES. 16. FROM THE JUDGMENT OF THE HON'BLE HIGH COURT, IT IS SEEN THAT THE HON'BLE HIGH COURT HELD THAT THE PORTION ATTRIBUTABLE TO NORMAL APPRECIATION IN LINE THE LEASE RENTAL PREVAILIN G IN THE MARKET SHOULD BE ALLOWED FOR WHICH THE ASSESSEE HAS CLAIMED SHOULD BE 10% TO 11% OF THE LEASE RENT CHARGED ON LAST YEAR AS A ESCALATION AND ASSESSING OFFICER HAS RESTRICTED TO 5%. SINCE, IT IS LEASE OF A COMMERCIAL PROPERTY; THEREFORE, THE ANNUAL ESCALATION WOULD NORMALLY BE MORE THAN THE RESIDENTIAL PROPERTY. THE ASSESSEE HAS GIVEN A COMPARISON OF PROPERTY TAKEN ON LEASE WITH HPMC TO SHOW THAT COMPARATIVELY ASSESSEE IS PAYING MORE HPMC, AND THEREFORE, KEEPING IN THAT BENCHMARK THE ESCALATION OF 10% TO 11% IS REASONABLE. THOUGH, BOTH THE PARTIES HAVE BEEN UNABLE TO GIVE ANNUAL RATE PREVAILING IN THE MARKET, HOWEVER, ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND LOOKING TO THE FACT TH AT ASSESSEE IS PAYING PERCENTAGE- WISE MORE RENT TO THE GO VERNMENT UNDERTAKING ON A SIMILAR LEASE OF COMMERCIAL PROPERT Y, THEREFORE, WE HOLD THAT 10% OF ANNUAL ESCALATION WOULD BE REASONA BLE FROM ASSESSMENT YEAR 1992-93 ONWARDS. 17. NOW COMING TO THE ISSUE OF ENHANCEMENT WHICH IS A TTRIBUTED I.T.AS. NO. 2244, 2245 & 5126 TO 5141/DEL/2014 14 TO IMPROVEMENT AND MODERNIZATION OF PLANT AND MACHINERY CARRIED OUT BY TRUST, WE FIND THAT ASSESSEE HAS GIVEN DETAIL O F EXPENDITURE MADE BY THE LESSOR TRUST FOR THE MODERNIZATION AND IMPR OVEMENT TOWARDS PLANT AND MACHINERY WHICH HAS BEEN TABULATED I N THE FOLLOWING MANNER: SI. NO. NAME OF THE ASSETS FY 1989 - 90 FY 1990- 91 FY 1991 - 92 FY 1992- 93 FY 1993 - 94 FY 1995 - 96 TOTAL 1 BUILDING 2,34,664 3,26,545 - 4,28,176 4,58,383 30,605 14,78,373 2 MACHINERY 3,25,518 9,43,530 1,92,701 6,65,001 57,598 - 21,84,644 3 SHED 1,06,863 5,04,255 45,296 6,61,751 1,34,842 6,86.671 21,39,678 4 LAND - 2.31,772 - - 42.021 1,16,000 3,89,793 5 REFRIGERATION PLANT - - - 14,88,143 - - 14,88,143 TOTAL 6,67,341 20.06,102 2,37,991 32.43,071 6,92,844 8,33,276 76,80,631 17.1 ASSESSEE HAS CLAIMED 18% OF ITS INVESTMENT D ONE BY THE TRUST FOR MODERNIZATION AND IMPROVEMENT OF PLANT AND MA CHINERY, BUILDING, ETC. OUT OF LEASE RENT, WHEREAS THE ASSESSIN G OFFICER HAS RESTRICTED IT TO 12% ON THE GROUND THAT 12% OF INTEREST ON INVESTMENT IS THE PROPER BENCHMARK. 18. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE HA D GIVEN SBI BPLR TO POINT OUT THAT 1992-93 WHEN LENDING RATE WAS 12% AND IN ASSESSMENT YEAR 2010-11 IT WAS 13%. HE POINTED OUT THAT IF THE WHOLESALE PRICE INDEX IS TAKEN INTO CONSIDERATION THEN ANNUAL VARIATION OF 18% IS VERY REASONABLE. 19. THE LEARNED DEPARTMENT REPRESENTATIVE ON THE OTHER HA ND SUBMITTED THAT PLR TAKES INTO ACCOUNT INFLATION AND DEVALU ATION OF RUPEES TAKEN ON ACCOUNT AND WPI CANNOT BE MADE APPLICA BLE HERE IN THIS CASE. THUS, RENT ATTRIBUTED BY THE ASSESSING OFF ICER @12% IS REASONABLE. 20. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND ON PERUSAL OF I.T.AS. NO. 2244, 2245 & 5126 TO 5141/DEL/2014 15 THE MATERIAL FACTS ON RECORD, WE FIND THAT THE HON'BLE H IGH COURT HAS DIRECTED THAT ENHANCEMENT OF LEASE RENT WHICH IS AT TRIBUTABLE TO IMPROVEMENT AND MODERNIZATION OF PLANT AND MACHINER Y, BUILDING, ETC. BY THE TRUST HAS TO BE WORKED OUT. THE B ASIS GIVEN BY THE ASSESSING OFFICER THAT 12% ON INTEREST ON INVESTM ENT SHOULD BE GIVEN INTO ACCOUNT. IF ONE GOES BY SBI PRI ME LENDING RATE RIGHT FROM THE ASSESSMENT YEARS 1992-93 TO 2010-1 1, IT IS SEEN THAT IT RANGES BETWEEN 10.25 TO 17%. THE AVERAGE O F WHICH WORKED OUT TO MORE THAN 15%, BECAUSE UP TILL ASSESSMEN T YEAR 1998-99 THE PLR RATE WAS MORE THAN 13% AND AFTER 2006- 07 ALSO IT IS RANGING BETWEEN 12 TO 14%. THUS, 12% RATE AS TAKE N BY THE ASSESSING OFFICER SEEMS TO BE ON A VERY LOWER SIDE E VEN THOUGH THIS COULD NOT BE PROPER BASE. SINCE SUBSTANTIAL INVESTM ENT WAS DONE BY THE TRUST IN VARIOUS YEARS, THEREFORE, LOOKIN G TO QUANTUM OF INVESTMENT MADE AND ESCALATION OVER THE PERIOD OF TI ME THE RATE OF 18% CLAIMED BY THE ASSESSEE SEEMS TO BE QUITE REASO NABLE AND ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO TAKE RE NT ATTRIBUTABLE TO IMPROVEMENT AND MODERNIZATION OF PLANT AND MACHINERY, BUILDING, ETC DURING THE ASSESSMENT YEARS 1 989-90 TO 1995-96 @18%. 21. ANOTHER VERY IMPORTANT SUBMISSION MADE BY MR. K. SAMPATH BEFORE WAS THAT THE CAPITAL EXPENDITURE ATTRIBUTABLE TO NO N- COMPETE FEE OR AMOUNT RECEIVED FOR NOT CARRYING OUT A NY ACTIVITY IN RELATION TO BUSINESS OR PROFESSION COMES WITHIN THE A MBIT OF CERTAIN KMS. AMOUNTS TO COMMERCIAL RIGHTS BEING INTANG IBLE ASSETS, AND THEREFORE, DEPRECIATION U/S. 32(1)(II) WHI CH IS APPLICABLE W.E.F. 01.14.1998 SHOULD BE ALLOWED @25% PER ANNUM . APART FROM THAT, AFTER 01.04.2003 THE NON COMPETE FEE OR MONEY RECEIVED FOR NOT CARRYING OUT ANY ACTIVITY IN RELATION TO ANY I.T.AS. NO. 2244, 2245 & 5126 TO 5141/DEL/2014 16 BUSINESS IS TREATED AS REVENUE RECEIVED IN THE HANDS OF THE PERSON RECEIVING THE SAME WHICH INTER ALIA MEANS THAT IT HAS TO BE TREATED AS REVENUE EXPENDITURE IN THE HANDS OF THE ASSESSEE-C OMPANY, THEREFORE, HE SUBMITTED THAT DIRECTION MAY BE GIVEN TO THE ASSESSING OFFICER TO ALLOW SUCH STATUTORY CLAIM ON THE CAPITAL EXPENDITURE AND/OR ALLOW SUCH NON- COMPETE FEE TO BE REVENUE EXPENDITURE. 22. LEARNED DEPARTMENT REPRESENTATIVE STRONGLY OBJECTED TO SUCH A PROPOSITION AND SUBMITTED THAT ONCE THE HON'BLE HI GH COURT HAS HELD THAT CERTAIN PORTION OF LEASE RENT IS TO BE TREATED AS CAPITAL EXPENDITURE, NOW THE SAME CANNOT BE HELD TO BE A LLOWABLE AS REVENUE EXPENDITURE. 23. AFTER CONSIDERING THE AFORESAID SUBMISSIONS, W E FIND THAT IN SO FAR AS THE CLAIM OF THE LEARNED COUNSEL THAT DEPRECI ATION SHOULD BE ALLOWED ON SUCH A CAPITAL EXPENDITURE, BECAUSE IT IS IN THE NATURE OF INTANGIBLE ASSET, WE FIND SUBSTANCE IN SUCH A CONTENTION BECAUSE PART OF THE LEASE RENT HAS BEEN HELD TO BE ON A CCOUNT OF PAYMENT MADE TO THE TRUST FOR NOT INDULGING IN COMPETITION , I.E., IT IS IN THE FORM OF NON-COMPETE FEES AND SUCH A NON -COMPETE FEE OSTENSIBLY FALLS IN THE CATEGORY OF COMMERCIAL RIGHTS AS DEFINED IN SECTION 32(1)(I), THEREFORE, ASSESSEE IS LIABLE FOR D EPRECIATION FROM 1 ST APRIL, 1998. IN SO FAR AS THE CLAIM FOR ENTIRE NON C OMPETE FEE SHOULD BE TREATED AS REVENUE EXPENDITURE BECAUSE OF A MENDMENT BROUGHT W.E.F. 01.04.2003 IN SECTION 28(VA), WE DIRE CT THE ASSESSING OFFICER TO EXAMINE THIS ASPECT AND WHAT IS A LLOWABLE AS PER THE STATUTE IN RESPECT OF CERTAIN PAYMENT THEN THE SAME NEEDS TO BE ALLOWED. 24. IN VIEW OF THE FINDING GIVEN ABOVE, OUR DIREC TION TO THE ASSESSING OFFICER IS SUMMARIZED HEREUNDER:- I.T.AS. NO. 2244, 2245 & 5126 TO 5141/DEL/2014 17 I. PART OF THE ENHANCED LEASE RENT PAID FOR SURRENDERING THE RISE TO PURCHASE THE KHAIR WOOD SHOULD BE TAKEN @15% OF THE AVERAGE PURCHASES PRICE. II. THE NORMAL ESCALATION ON FIXED RENT SHOULD BE TAKEN @10% OF THE LEASE CHARGES PER YEAR. III. THE RENT ATTRIBUTABLE TO MODERNIZATION AND IMPROVEMENT PLANT AND MACHINERY SHOULD BE TAKEN @18%. IV. THE ASSESSING OFFICER SHOULD ALLOW DEPRECIATION W.E. F. 01.04.1998 ON THE PORTION OF THE RENT WHICH IS HELD TO BE CAPITAL IN NATURE IN ACCORDANCE WITH LAW AND ALSO EXAM INE THE ASSESSEES CONTENTION THAT WHETHER THE NON COMPETE F EE CAN BE ALLOWED AS AN EXPENDITURE IN TERMS OF AMENDME NT IN THE STATUTE W.E.F. 01.04.2003. 25. BASED ON THE AFORESAID DIRECTION, THE ASSESSING O FFICER SHOULD WORK OUT THE NET DISALLOWABLE EXPENDITURE FOR THE VARIOUS ASSESSMENT YEARS. ACCORDINGLY, ALL THE APPEALS OF THE ASSESSEE ARE TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 26. IN THE RESULT, ALL THE APPEALS OF THE ASSESSEE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 24 TH OCTOBER, 2018. SD/- SD/- [O. P. KANT] [AMIT SHUKLA] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 24 TH OCTOBER, 2018 PKK: