M/s. Shankar Trading Co. (P) Ltd., New Delhi V. DCIT, New Delhi

ITA 5510/DEL/2014

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 5644 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 3 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 28-06-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 10-10-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Depreciation; Charitable institution; Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH C NEW DELHI BEFORE SHRI G.D. AGARWAL, VICE PRESIDENT AND SHRI AMIT SHUKLA, JUDICIAL MEMBER I.T.A. NO.5510/DEL/2014 ASSESSMENT YEAR: 2011-12 SHANKAR TRADING CO. (P) LTD., A-55, GROUP INDUSTRIAL AREA, WAZIRPUR, DELHI. VS. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-8(1), NEW DELHI. TAN/PAN: AAACS 9302A (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI K. SAMPATH, ADV. RESPONDENT BY: SHRI AMIT KATOCH, SR.D.R. DATE OF HEARING: 24 01 2019 DATE OF PRONOUNCEMENT: 31 01 2019 O R D E R PER AMIT SHUKLA, J.M.: THE AFORESAID APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE IMPUGNED ORDER DATED 21.07.2014, PASSED BY LD. COMMISSIONER OF INCOME TAX (APPEALS)-XI, NEW DELHI, FOR THE QUANTUM OF ASSESSMENT PASSED U/S.143(3) FOR THE ASSESSMENT YEAR 2011-12. IN THE GROUND OF APPEAL T HE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL ;- 1. THAT THE COMMISSIONER OF INCOME TAX (APPEALS)[CIT( A)] ERRED ON FACTS AND IN LAW IN SUSTAINING DISALLOWANCE OF LEASE RENT PAID T O MEHTA CHARITABLE PRAJANALAYA TRUST (MCPT) IN RESPECT OF FACTORY TAKEN ON LEASE, HOLDING A PART OF SUCH LEASE RENT TO BE CAPITAL EXPENDITURE FOLLOWING THE APPELLATE O RDER PASSED BY THE HONBLE DELHI HIGH COURT IN THE APPELLANTS CASE FOR EARLIER YEAR S. 2. THAT THE COMMISSIONER OF INCOME TAX (APPEALS) ERRE D ON FACTS AND IN LAW IN NOT APPROPRIATELY BIFURCATING THE LEASE RENT AS ATTRIBU TED TOWARD THE NON-COMPLETE I.T.A. NO.5510/DEL/2014 2 COVENANT UNDERTAKEN BY MCPT AND INSTEAD UPHOLDING T HE WORKING/METHODOLOGY ADOPTED BY THE ASSESSING OFFICER WHILE GIVING EFFEC T TO THE ORDER PASSED BY THE HONBLE DELHI HIGH COURT IN THIS REGARD. 3. THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRE D ON FACTS AND IN LAW IN CONSIDERING THE ESCALATION IN FIXED LEASE RENT @ 5% P.A INSTEAD OF 11% CONSIDERED BY THE APPELLANT. 3.1 THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRE D ON FACTS AND IN LAW IN CONSIDERING RENT ATTRIBUTABLE TO IMPROVEMENT AND MO DERNIZATION OF PLANT AND MACHINERY @ 12% AS AGAINST 18% CONSIDERED BY THE AP PELLANT. 3.2 THAT THE COMMISSIONER OF INCOME TAX (APPEALS) ERRE D ON FACTS AND IN LAW IN CONSIDERING PART OF LEASE RENT ATTRIBUTED TO RIGHT TO PURCHASED @ 10% OF THE AVERAGE PURCHASE PRICE AS AGAINST 15% CONSIDERED BY THE APPELLANT. 4. THAT THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED ON FACTS OF THE CASE AND IN LAW IN UPHOLDING THE COMPUTATION MECHANISM ADOPTED BY THE ASSESSING OFFICER IN RESPECT OF DISALLOWANCE OF PART OF LEASE CHARGES, I N PURSUANCE TO OBSERVATION OF THE DELHI HIGH COURT IN THE MATTER OF APPELLANT IN RESP ECT OF SAID ISSUE, AS AGAINST APPELLANTS METHOD IN RESPECT OF COMPUTATION OF SUC H PART DISALLOWANCE OF LEASE CHARGES. 4.1 THAT THE COMMISSIONER OF INCOME TAX (APPEALS) E RRED ON FACTS OF THE CASE AND IN LAW IN NOT APPRECIATING/IGNORING THE AP PELLANTS METHOD OF COMPUTATION OF PART DISALLOWANCE OF LEASE CHARGES WITHOUT PROVI DING ANY COGENT REASONS FOR DOING SO. 2. AT THE OUTSET, LEARNED COUNSEL SUBMITTED THAT THIS PRECISE ISSUE HAS BEEN DECIDED BY THE TRIBUNAL IN A SSESSEES OWN CASE VIDE ORDER DATED 24.10.2008 RIGHT FROM THE ASSESSMENT YEARS 1992-93 TO 2010-11, WHEREIN AFTER DETAILED DISCUSSION THE TRIBUNAL HAS SET ASIDE THE ISSUES TO THE ASSESSING OFFICER WITH CERTAIN DIRECTIONS. 3. LEARNED DEPARTMENT REPRESENTATIVE ALSO ADMITTED THAT THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF T RIBUNAL AND MATTER CAN BE SENT BACK TO THE ASSESSING OFFICER TO BE DECIDED IN LINE OF THE DIRECTION GIVEN BY THE TRIBUNAL. I.T.A. NO.5510/DEL/2014 3 4. FROM THE PERUSAL OF THE IMPUGNED ORDERS, IT IS S EEN THAT BOTH ASSESSING OFFICER AND LD. CIT (A) HAVE FOLLOWE D THE EARLIER YEAR ORDERS. 5. THE BRIEF FACTS AND BACKGROUND OF THE CASE ARE T HAT THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURING AND SALE OF KATTHA AND CUTCH. IT HAS TAKEN A FACTORY ON LEASE FROM MEHTA CHARITABLE PRAJNALAYA TR UST (HEREINAFTER REFERRED TO AS TRUST) W.E.F. 01.06.1 978. THE TRUST WAS ALSO ENGAGED IN BUSINESS OF MANUFACTURING OF TH E SAME PRODUCTS. FROM TIME TO TIME VIDE SEPARATE LEASE DEE D EXECUTED BETWEEN THE ASSESSEE COMPANY 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 01.04.1 989, THE MONTHLY LEASE RENT WAS INCREASED TO RS.1 LAC AND AF TER 18.01.1992 AGAIN, THE LEASE RENT WERE ENHANCED TO RS.6,75,000/- PER MONTH AND FINALLY W.E.F. 01.04.19 97 LEASE RENT WAS FURTHER ENHANCED TO RS.7,50,000/- WITHIN A NNUAL INCREMENT. THE LEASE RENTAL PAID BY THE ASSESSEE CO MPANY 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 A ND 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). SIMILA R DISALLOWANCES WERE MADE IN THE ALL THE YEARS. 6. RIGHT FROM ASSESSMENT YEAR 1992-93 TO ASSESSMENT I.T.A. NO.5510/DEL/2014 4 YEAR 2007-08, THE ISSUE INVOLVED HAD TRAVELLED UP T O THE HON'BLE DELHI HIGH COURT, WHEREIN THEIR LORDSHIPS A FTER DETAILED DISCUSSION HAD REMANDED BACK THE MATTER TO THE FILE OF THE ASSESSING OFFICER AFTER EXAMINING THE NATURE OF AGREEMENT AMONGST THE PARTIES AND DISCUSSING VARIOU S JUDGMENTS ON THE ISSUE OF CAPITAL EXPENDITURE VS. RE VENUE 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. 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. 7. HON'BLE HIGH COURT HAS THUS HELD THAT, FIRSTLY , PROVISION OF SECTION 40A(2) IS NOT ATTRACTED TO THE TRANSACTI ON INVOLVED; AND SECONDLY , THE LEASE RENTAL HAS TO BE BIFURCATED UNDER FOUR I.T.A. NO.5510/DEL/2014 5 CATEGORIES, THE THREE OF WHICH WERE HELD TO BE CONS TITUTING REVENUE EXPENDITURE, I.E., I) PART OF ENHANCEMENT O F LEASE RENT WHICH IS ATTRIBUTABLE TO THE TRUST SURRENDERING ITS RIGHT TO PURCHASE KHAIR WOOD; II) PART OF ENHANCEMENT OF LEA SE RENT WHICH IS ATTRIBUTABLE TO THE IMPROVEMENT AND MODERN IZATION OF PLANT AND MACHINERY CARRIED OUT BY THE TRUST IN THE YEAR 1989-90 WILL CONSTRUE REVENUE EXPENDITURE; AND III) ENHANCEMENT OF THE LEASE RENT WHICH IS ATTRIBUTABLE TO NORMAL APPRECIATION IN LINE WITH PREVAILING MARKET RATE WO ULD ALSO CONSTRUE REVENUE EXPENDITURE. HOWEVER, IN SO FAR AS THE ENHANCEMENT OF LEASE RENT ATTRIBUTABLE TO THE TRUST AGREEING NOT INDULGE IN COMPETITION WITH THE ASSESSEE WITHIN A RADIUS OF LESS THAN 1000 KM FROM THE DEMISE PROPERTY WOULD CONSTITUTE CAPITAL EXPENDITURE, I.E., SOME KIND OF NON COMPETE FEE. WITH THIS DIRECTION, ASSESSING OFFICER WAS DI RECTED TO APPORTION THE LEASE RENT IN VARIOUS CATEGORIES AND TO PASS A FRESH ASSESSMENT ORDER IN TERMS OF APPORTIONMENT MA DE BY HIM. 8. THE TRIBUNAL AFTER DETAILED DISCUSSION HAD DECID ED THIS ISSUE IN THE FOLLOWING MANNER: 9. WE HAVE HEARD THE RIVAL SUBMISSIONS MADE BY TH E PARTIES, PERUSED THE RELEVANT FINDINGS GIVEN IN THE IMPUGNED ORDERS AS WELL AS MATERIAL REFERRED TO BEFORE US. THE MAIN ISSUE BEFO RE 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 TERMS OF DIRECTIONS GIVEN BY THE HON'BLE HIGH COURT, WHICH IS, FIRSTLY, THE PART OF THE ENHANCEME NT FOR SURRENDERING THE RIGHT TO PURCHASE KHAIR WOOD WOULD CONSTITUTE REVEN UE EXPENDITURE; SECONDLY, PART OF THE RENT WOULD BE ATTRIBUTABLE TO IMPROVEMENT AND I.T.A. NO.5510/DEL/2014 6 MODERNIZATION OF PLANT AND MACHINERY CARRIED OUT BY THE TRUST IN THE YEAR 1989-90 WOULD BE REVENUE EXPENDITURE; THIRDLY, ENHA NCEMENT WHICH IS ATTRIBUTABLE TO NORMAL APPRECIATION IN LINE WITH PR EVAILING MARKET RIGHT OF LEASE RENT WOULD CONSTITUTE REVENUE EXPENDITURE; AN D LASTLY, ENHANCEMENT IN LEASE RENT ATTRIBUTABLE FOR NOT INDULGING IN COM PETITION, I.E., NON COMPETE FEE WOULD CONSTRUE CAPITAL EXPENDITURE. THUS OUR EN TIRE ENDEAVOR IN ALL THE YEARS IS TO ALLOCATE THE CAPITAL EXPENDITURE ON ACCOUNT OF NON-COMPETE FEE, I.E., TRUST AGREEING NOT TO INDULGE IN THE CO MPETITION WITHIN A SPECIFIC RADIUS FROM THE DEMISE PROPERTY. 10. AS REGARDS THE RIGHT OF PURCHASE OF KHAIR WO OD, THE ASSESSEE HAS CLAIMED THAT 15% OF THE AVERAGE PURCHASES CAN BE TA KEN FOR THE PURPOSE OF COMPENSATION WHICH ASSESSING OFFICER HAS HELD TH AT IT SHOULD BE @ 10% OF THE AVERAGE PURCHASES. HOW HE HAS TAKEN IT 10% H AS NOT BEEN PROVIDED BY HIM. ON THE OTHER HAND, LD. COUNSEL FOR THE ASSESSEE, SHRI K. SAMPATH HAS 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 CHARITABLE PRAJNALAYA TRUST AND POINTED OUT THAT IN ASSESSMENT YEAR 1989-90 THE GROSS PROFIT RATE ON SALE OF KATTHA BY THE TRUST WA S 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 1992-9 3 IT WAS 20.04% WHICH AVERAGES TO 17.4%. SUCH AN ASSESSMENT ORDER I N 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 RELIED UPON THE ORDER OF THE ASSESSING OFFICER AND LD. CIT (A) AND SUBMITTED THAT THE WORKING GIVEN BY THE ASSESSEE IS PURELY BASED ON ES TIMATE WHICH CANNOT BE UPHELD FOR THE REASON THAT FROM ASSESSMENT YEAR 2004-05 ONWARDS THE AMOUNT OF RENT ATTRIBUTABLE TO CAPITAL EXPENDIT URE HAS GONE INTO NEGATIVE WHICH IS AGAINST THE MANDATE AND THE DIREC TION OF THE HON'BLE HIGH COURT, THEREFORE, THE WORKING GIVEN BY THE ASS ESSING OFFICER NEEDS TO BE UPHELD. I.T.A. NO.5510/DEL/2014 7 12. AFTER CONSIDERING THE ENTIRE FACTS AND THE SU BMISSIONS MADE BY THE PARTIES, WE FIND THAT ASSESSING OFFICER HAS APP LIED RATE OF 10% OF THE AVERAGE PURCHASES ON RIGHT TO PURCHASE OF KHAIR WOO D SURRENDERED IN FAVOUR OF THE ASSESSEE BY THE TRUST. THE ASSESSING OFFICER HAS NOT GIVEN ANY REASON AS TO WHY ALLOWANCE @10% OF THE AVERAGE PURCHASES SHOULD BE GIVEN. ON THE CONTRARY, THE ASSESSEE BEFORE US H AS DEMONSTRATED THAT IN THE CASE OF THE TRUST THE GROSS PROFIT RATE ON S IMILAR PRODUCT WAS MORE THAN 17%. THE ASSESSEE HAS CLAIMED RATE OF 15% OF T HE AVERAGE PURCHASES AS ITS COMPENSATION FOR THE PURPOSE OF AL LOCATION OF ENHANCED RENT TOWARDS CAPITAL EXPENDITURE. SUCH A RATE OF 15 % IS INCONSONANCE WITH THE AVERAGE GP RATE IN THE CASE OF THE TRUST, THERE FORE, ALLOWANCE OF 15% IS HELD TO BE QUITE REASONABLE. ACCORDINGLY, WE DIR ECT THE ASSESSING OFFICER TO TREAT PART OF THE LEASE RENT FEE FOR SUR RENDERING THE RIGHT TO PURCHASE @15% OF AVERAGE PURCHASES OF KHAIR WOOD. 13. AS REGARDS ENHANCEMENT OF THE LEASE RENT IN LI NE OF THE PREVAILING MARKET RATE, THE ASSESSEE BEFORE THE ASSESSING OFFI CER AS WELL AS BEFORE THE LD. CIT(A) HAS SUBMITTED THAT IT HAS TAKEN SIMI LAR LEASE OF A PROCESSING UNIT FROM HIMACHAL PRADESH MARKETING CORPORATION WH ICH IS AN UNDERTAKING OF GOVERNMENT OF HIMACHAL PRADESH, TO W HOM ASSESSEE HAS PAID SUM RS.30 LAC PER ANNUM BY WAY OF LEASE RENTAL TO THE SAID GOVERNMENT UNDERTAKING WHICH IS MUCH SMALLER IN SIZ E AND IF SAME IS COMPARED THEN IT IS AT ARMS LENGTH TRANSACTION. FO LLOWING COMPARABILITY ANALYSIS OF THE AREA OF LAND AND SALE OF ANNUAL PRO DUCT 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 2.9 8 CRORE 14. BASED ON THIS COMPARABILITY ANALYSIS, IT WAS CO NTENDED THAT LEASE RENT CANNOT BE HELD TO BE EXCESSIVE. THE ASSESSEE H AD REQUESTED TO ALLOW I.T.A. NO.5510/DEL/2014 8 NORMAL ESCALATION IN THE FIXED LEASE RENT @11% PER ANNUM OF THE LAST YEAR, WHEREAS THE LEARNED ASSESSING OFFICER HAS HELD THAT IT WOULD BE REASONABLE TO ADOPT LEASE RENTAL @5% PER YEAR. 15. BEFORE US, THE LEARNED COUNSEL SUBMITTED THAT T HE NORMAL APPRECIATION IN RENT IN THE CASE OF COMMERCIAL PROP ERTY IS MORE THAN 10%, WHEREAS THE LEARNED DR SUBMITTED THAT ASSESSEE COUL D NOT PRODUCE ANY EVIDENCE FROM ANY COMPETENT LOCAL AUTHORITY WHICH C AN SUPPLY INPUT, AND THEREFORE, SUCH AN ESCALATION OF 10% OR 11% IS NOT SUPPORTED BY ANY PROPER EVIDENCES. 16. FROM THE JUDGMENT OF THE HON'BLE HIGH COUR T, IT IS SEEN THAT THE HON'BLE HIGH COURT HELD THAT THE PORTION ATTRIBUTAB LE TO NORMAL APPRECIATION IN LINE THE LEASE RENTAL PREVAILING IN THE MARKET SHOULD BE ALLOWED FOR WHICH THE ASSESSEE HAS CLAIMED SHOULD B E 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 COMMERCIA L PROPERTY; THEREFORE, THE ANNUAL ESCALATION WOULD NORMALLY BE MORE THAN THE R ESIDENTIAL PROPERTY. THE ASSESSEE HAS GIVEN A COMPARISON OF PROPERTY TAK EN 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 UNAB LE TO GIVE ANNUAL RATE PREVAILING IN THE MARKET, HOWEVER, ON THE FACT S AND CIRCUMSTANCES OF THE CASE AND LOOKING TO THE FACT THAT ASSESSEE IS P AYING PERCENTAGE- WISE MORE RENT TO THE GOVERNMENT UNDERTAKING ON A SIMILA R LEASE OF COMMERCIAL PROPERTY, THEREFORE, WE HOLD THAT 10% OF ANNUAL ESC ALATION WOULD BE REASONABLE FROM ASSESSMENT YEAR 1992-93 ONWARDS. 17. NOW COMING TO THE ISSUE OF ENHANCEMENT WHICH IS ATTRIBUTED TO IMPROVEMENT AND MODERNIZATION OF PLANT AND MACHINER Y CARRIED OUT BY TRUST, WE FIND THAT ASSESSEE HAS GIVEN DETAIL OF EX PENDITURE MADE BY THE LESSOR TRUST FOR THE MODERNIZATION AND IMPROVEMENT TOWARDS PLANT AND MACHINERY WHICH HAS BEEN TABULATED IN THE FOLLOWING MANNER: I.T.A. NO.5510/DEL/2014 9 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 DONE BY THE TRUST FOR MODERNIZATION AND IMPROVEMENT OF PLANT AND MACH INERY, BUILDING, ETC. OUT OF LEASE RENT, WHEREAS THE ASSESSING OFFICER HA S 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 HAD GIVEN SBI BPLR TO POINT OUT THAT 1992-93 WHEN LENDING RATE WAS 12% AN D IN ASSESSMENT YEAR 2010-11 IT WAS 13%. HE POINTED OUT THAT IF THE WHOLESALE PRICE INDEX IS TAKEN INTO CONSIDERATION THEN ANNUAL VARIATION O F 18% IS VERY REASONABLE. 19. THE LEARNED DEPARTMENT REPRESENTATIVE ON THE OT HER HAND SUBMITTED THAT PLR TAKES INTO ACCOUNT INFLATION AND DEVALUATION OF RUPEES TAKEN ON ACCOUNT AND WPI CANNOT BE MADE APPLICABLE HERE IN THIS CASE. THUS, RENT ATTRIBUTED BY THE ASSESSING OFFICER @12% IS REASONABLE. 20. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND ON PERUSAL OF THE MATERIAL FACTS ON RECORD, WE FIND THAT THE HON'BLE HIGH COURT HAS DIRECTED THAT ENHANCEMENT OF LEASE RENT WHICH IS ATTRIBUTABL E TO IMPROVEMENT AND MODERNIZATION OF PLANT AND MACHINERY, BUILDING, ETC . BY THE TRUST HAS TO BE WORKED OUT. THE BASIS GIVEN BY THE ASSESSING OFF ICER THAT 12% ON INTEREST ON INVESTMENT SHOULD BE GIVEN INTO ACCOUNT . IF ONE GOES BY SBI PRIME LENDING RATE RIGHT FROM THE ASSESSMENT YEARS 1992-93 TO 2010-11, IT IS SEEN THAT IT RANGES BETWEEN 10.25 TO 17%. THE AVERAGE OF WHICH WORKED OUT TO MORE THAN 15%, BECAUSE UP TILL ASSESS MENT YEAR 1998-99 THE PLR RATE WAS MORE THAN 13% AND AFTER 2006-07 AL SO IT IS RANGING BETWEEN 12 TO 14%. THUS, 12% RATE AS TAKEN BY THE A SSESSING OFFICER I.T.A. NO.5510/DEL/2014 10 SEEMS TO BE ON A VERY LOWER SIDE EVEN THOUGH THIS C OULD NOT BE PROPER BASE. SINCE SUBSTANTIAL INVESTMENT WAS DONE BY THE TRUST IN VARIOUS YEARS, THEREFORE, LOOKING TO QUANTUM OF INVESTMENT MADE AND ESCALATION OVER THE PERIOD OF TIME THE RATE OF 18% CLAIMED BY THE ASSESSEE SEEMS TO BE QUITE REASONABLE AND ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO TAKE RENT ATTRIBUTABLE TO IMPROVEMENT AND MODERNIZA TION OF PLANT AND MACHINERY, BUILDING, ETC DURING THE ASSESSMENT YEAR S 1989-90 TO 1995- 96 @18%. 21. ANOTHER VERY IMPORTANT SUBMISSION MADE BY MR. K . SAMPATH BEFORE WAS THAT THE CAPITAL EXPENDITURE ATTRIBUTABLE TO N ON-COMPETE FEE OR AMOUNT RECEIVED FOR NOT CARRYING OUT ANY ACTIVITY I N RELATION TO BUSINESS OR PROFESSION COMES WITHIN THE AMBIT OF CERTAIN KMS. A MOUNTS TO COMMERCIAL RIGHTS BEING INTANGIBLE ASSETS, AND THEREFORE, DEPR ECIATION U/S. 32(1)(II) WHICH IS APPLICABLE W.E.F. 01.14.1998 SHOULD BE ALL OWED @25% PER ANNUM. APART FROM THAT, AFTER 01.04.2003 THE NON C OMPETE FEE OR MONEY RECEIVED FOR NOT CARRYING OUT ANY ACTIVITY IN RELAT ION TO ANY BUSINESS IS TREATED AS REVENUE RECEIVED IN THE HANDS OF THE PER SON RECEIVING THE SAME WHICH INTER ALIA MEANS THAT IT HAS TO BE TREATED AS REVENUE EXPENDITURE IN THE HANDS OF THE ASSESSEE-COMPANY, THEREFORE, HE SU BMITTED 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 OBJ ECTED TO SUCH A PROPOSITION AND SUBMITTED THAT ONCE THE HON'BLE HIG H COURT HAS HELD THAT CERTAIN PORTION OF LEASE RENT IS TO BE TREATED AS C APITAL EXPENDITURE, NOW THE SAME CANNOT BE HELD TO BE ALLOWABLE AS REVENUE EXPENDITURE. 23. AFTER CONSIDERING THE AFORESAID SUBMISSIONS, WE FIND THAT IN SO FAR AS THE CLAIM OF THE LEARNED COUNSEL THAT DEPRECIATI ON SHOULD BE ALLOWED ON SUCH A CAPITAL EXPENDITURE, BECAUSE IT IS IN THE NA TURE OF INTANGIBLE ASSET, WE FIND SUBSTANCE IN SUCH A CONTENTION BECAUSE PART OF THE LEASE RENT HAS BEEN HELD TO BE ON ACCOUNT OF PAYMENT MADE TO THE T RUST FOR NOT INDULGING I.T.A. NO.5510/DEL/2014 11 IN COMPETITION, I.E., IT IS IN THE FORM OF NON-COM PETE FEES AND SUCH A NON- COMPETE FEE OSTENSIBLY FALLS IN THE CATEGORY OF CO MMERCIAL RIGHTS AS DEFINED IN SECTION 32(1)(I), THEREFORE, ASSESSEE IS LIABLE FOR DEPRECIATION FROM 1 ST APRIL, 1998. IN SO FAR AS THE CLAIM FOR ENTIRE NON COMPETE FEE SHOULD BE TREATED AS REVENUE EXPENDITURE BECAUSE OF AMENDMENT BROUGHT W.E.F. 01.04.2003 IN SECTION 28(VA), WE DIRECT THE ASSESSING OFFICER TO EXAMINE THIS ASPECT AND WHAT IS ALLOWABLE AS PER TH E STATUTE IN RESPECT OF CERTAIN PAYMENT THEN THE SAME NEEDS TO BE ALLOWED. 24. IN VIEW OF THE FINDING GIVEN ABOVE, OUR DIRE CTION TO THE ASSESSING OFFICER IS SUMMARIZED HEREUNDER:- I. PART OF THE ENHANCED LEASE RENT PAID FOR SURRENDERI NG 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 TAKE N @10% OF THE LEASE CHARGES PER YEAR. III. THE RENT ATTRIBUTABLE TO MODERNIZATION AND IMPROVEM ENT 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 CAPI TAL IN NATURE IN ACCORDANCE WITH LAW AND ALSO EXAMINE THE ASSESSEES CONTENTION THAT WHETHER THE NON COMPETE FEE CAN BE ALLOWED AS AN EX PENDITURE IN TERMS OF AMENDMENT IN THE STATUTE W.E.F. 01.04.2003. 25. BASED ON THE AFORESAID DIRECTION, THE ASSESSING OFFICER SHOULD WORK OUT THE NET DISALLOWABLE EXPENDITURE FOR THE VARIOU S ASSESSMENT YEARS. ACCORDINGLY, ALL THE APPEALS OF THE ASSESSEE ARE TR EATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 9. ACCORDINGLY, BASED ON SIMILAR DIRECTIONS, WE DIRECT THE ASSESSING OFFICER TO WORK OUT THE NET DISALLOWABLE EXPENDITURE FOR THIS ASSESSMENT YEAR. THIS ASSESSMENT YEAR IS A LSO IN LINE WITH THE DIRECTION GIVEN BY THE TRIBUNAL IN EARLIER YEARS. I.T.A. NO.5510/DEL/2014 12 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST JANUARY, 2019. SD/- SD/- [G.D. AGARWAL] [AMIT SHUKLA] VICE PRESIDENT JUDICIAL MEMBER DATED: 31 ST JANUARY, 2019 PKK: