UNITED MOTORS (INDIA) LIMITED, MUMBAI V. THE INCOME TAX OFFICER-7(3)(2),

ITA 6291/MUM/2008

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 2320 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 5 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-04-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 02-02-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 24-10-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIRENDRA OJHA
• Keywords: Capital asset; Business income; Depreciation; Business expenditure; Revenue expenditure; Capital expenditure
• Section: 143(3); 142(1); 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL F BENCH, MUMBAI. BEFORE SHRI R.V.EASWAR, SR.VP AND SHRI RAJENDRA SINGH, AM I.T.A. NO.6291/MUM/2008 (ASSESSMENT YEAR: 2004-05) UNITED MOTORS (INDIA) LTD., 1 ST FLOOR, 70, NAGINDAS MASTER ROAD, FORT, MUMBAI-400 023. PAN:AAACU0567F VS. THE INCOME TAX OFFICER, 7(3)(2) MUMBAI. (APPELLANT) (RESPONDENT) APPELLANT BY : MR. PORUS KAKA RESPONDENT BY : MR. VIRENDRA OJHA, DR O R D E R PER R.V.EASWAR, SENIOR VICE PRESIDENT: THIS IS AN APPEAL BY THE ASSESSEE RELATING TO ASSESSMENT YEAR 2004-05 A ND IT IS DIRECTED AGAINST THE ORDER PASSED BY THE CIT UNDER SECTION 263 OF THE ACT ON 18.09.2008. 2. THE BRIEF FACTS GIVING RISE TO THE APPEAL MAY BE NOTED. THE ASSESSEE IS A PUBLIC LIMITED COMPANY ENGAGED IN THE SALES AND SERVICE OF AUTOMOBILES. IT FILED A RETURN OF INCOME DECLARING A LOSS OF RS.4,33,62,100/-. IT WAS ACCOMPANIED BY AUD ITED PROFIT AND LOSS ACCOUNT, BALANCE SHEET AND THE TAX AUDIT REPORT. THE RETURN WAS FIRST PROCESSED UNDER SECTION 143(1) BUT LATER SELECTED FOR SCRUTINY. NOTICES WERE ISSUED UNDER SE CTION 142(1) AND SECTION 143(2), IN RESPONSE TO WHICH THE ASSESS EE SUBMITTED ELABORATE DETAILS AND EXPLAINED THE RETURN OF INCOM E. ULTIMATELY, THE ASSESSMENT WAS COMPLETED UNDER SECTION 143(3) B Y AN ORDER DATED 31.10.2006 ON A LOSS OF RS.4,07,10,983/- UNDE R THE HEAD BUSINESS AND RS.35,03,489/- UNDER THE HEAD CAPIT AL GAINS. THERE WAS ALSO A LONG TERM CAPITAL LOSS BROUGHT FOR WARD FROM ITA NO.6291/M/08 2 THE ASSESSMENT YEAR 2002-03 WHICH WAS ALSO ALLOWED TO BE CARRIED FORWARD TO THE SUBSEQUENT YEARS. 3. ON 31.07.2008 THE CIT ISSUED NOTICE UNDER SECTIO N 263 OF THE ACT PROPOSING TO REVISE THE ASSESSMENT ON THE G ROUND THAT THE ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICE R WAS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE RE VENUE. IN PARTICULAR, HE STATED IN THE NOTICE THAT THE ALLOWA NCE OF RS.16,46,917/- ON ACCOUNT OF COST OF IMPROVEMENT O F LEASEHOLD ASSETS WRITTEN OFF AND RS.40,20,388/- DEBITED ON A CCOUNT OF ADVANCES AGAINST RENTAL PROPERTIES WRITTEN OFF WA S ERRONEOUS SINCE THESE EXPENSES WERE NOT REVENUE IN NATURE. HE RELIED ON SCHEDULE N, PARA-6 OF THE NOTICE FORMING PART OF THE ASSESSEES ACCOUNTS IN WHICH IT WAS STATED THAT THE COMPANY HA D SURRENDERED THE LEASEHOLD PROPERTIES AND THEREFORE THE COST OF IMPROVEMENT OF THE LEASEHOLD ASSETS HAVE BEEN WRIT TEN OFF AND DEBITED TO THE PROFIT AND LOSS ACCOUNT. ACCORDING T O THE CIT, OMISSION TO DISALLOW THE AFORESAID TWO AMOUNTS AGGR EGATING TO RS.56,67,305/- HAD RESULTED IN EXCESS COMPUTATION O F THE LOSS IN THE ASSESSMENT. THE CIT ALSO CONSIDERED THAT TH E ALLOWANCE OF PRIOR PERIOD EXPENSES OF RS.7,42,653/- WAS ALSO ERRONEOUS AND THAT AFTER SETTING OFF THE PRIOR PERIOD INCOME OF RS.1,81,990/-, THE NET AMOUNT OF RS.5,60,663/- REPR ESENTED UNDER-ASSESSMENT OF INCOME. ACCORDING TO THE CIT, SUCH UNDER-ASSESSMENT WAS ALSO TO BE REVISED UNDER SECTI ON 263. 4. THE ASSESSEE SUBMITTED DETAILED REPLIES TO THE C IT ON 18.08.08, 08.09.08 & 16.09.08. AS REGARDS THE WRITE OFF OF THE COST OF IMPROVEMENT OF LEASEHOLD ASSETS, THE ASSESS EES SUBMISSION WAS THAT THE AMOUNT OF RS.16,46,917/- RE PRESENTED THE EXPENDITURE WHICH WAS CAPITALIZED OVER THE YEAR S LESS THE DEPRECIATION ACTUALLY ALLOWED AND THE WRITE OFF WAS NECESSARY BECAUSE THE LEASEHOLD ASSETS HAD BEEN SURRENDERED. THE CIT DID ITA NO.6291/M/08 3 NOT ACCEPT THE SUBMISSION. ACCORDING TO HIM, THE WR ITE OFF REPRESENTED THE WRITTEN DOWN VALUE OF THE CAPITAL A SSETS AND THEREFORE THE LOSS RESULTING ON ACCOUNT OF THE SURR ENDER WAS A CAPITAL LOSS AND NOT ALLOWABLE IN THE ASSESSMENT. I N SO FAR AS THE ASSESSING OFFICER HAD ALLOWED THE SAME, THE ASSESSM ENT WAS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE RE VENUE. 5. AS REGARDS THE WRITE OFF ALL THE ADVANCES AGAINS T RENTAL PROPERTIES OF RS.40,20,388/-, THE ASSESSEE SUBMITTE D THE RELEVANT DETAILS BEFORE THE CIT AND CLAIMED THAT TH E EXPENDITURE REPRESENTED REVENUE EXPENDITURE AND THE ALLOWANCES THEREOF IN THE ASSESSMENT WAS PROPER. THE CIT HOWEVER HELD TH AT THE DEPOSITS REPRESENTED CAPITAL AMOUNTS AND IF THEY WE RE NOT RETURNED TO THE ASSESSEE, THE LOSS WAS CAPITAL LOSS NOT ALLOWABLE IN COMPUTING THE INCOME. HE DEALT WITH THE AUTHORIT IES CITED BY THE ASSESSEE AND HELD THAT IN ALL THOSE CASES THE A SSESSEE HAD ADVANCED LOANS WHICH WERE DIFFERENT FROM DEPOSITS A ND THEREFORE THEY WERE NOT APPLICABLE. HE THUS HELD THAT THE ALL OWANCE OF CAPITAL LOSS IN THE ASSESSMENT WAS ERRONEOUS AND PR EJUDICIAL TO THE INTEREST OF THE REVENUE. 6. AS REGARDS THE PRIOR PERIOD EXPENSES/INCOME, TH E CIT RESTORED THE SAME TO THE ASSESSING OFFICER FOR FACT UAL VERIFICATION OF THE ASSESSEES CONTENTIONS THAT THERE WAS NO UND ER- ASSESSMENT. ULTIMATELY THE ASSESSMENT ORDER, IN SO FAR AS IT RELATED TO THE CLAIMS OF RS.16,46,917/- ON ACCOUNT OF COST OF IMPROVEMENT OF LEASEHOLD ASSETS WRITTEN OFF AND RS.40,20,388/- ON ACCOUNT OF ADVANCES AGAINST RENT AL PROPERTIES WRITTEN OFF WAS SET ASIDE AND THE ASSES SING OFFICER WAS DIRECTED TO PASS A FRESH ASSESSMENT ORDER IN TH E LIGHT OF THE DIRECTIONS CONTAINED IN THE ORDER OF THE CIT. THE A SSESSEE WAS TO BE GIVEN PROPER OPPORTUNITY. ITA NO.6291/M/08 4 7. THE ASSESSEE IS IN APPEAL AGAINST THE AFORESAID ORDER OF THE CIT CONTENDING THAT THE ASSESSMENT ORDER WAS NE ITHER PREJUDICIAL TO THE INTEREST OF THE REVENUE NOR ERRO NEOUS. IT WAS CLAIMED THAT EVEN ON MERITS THE ASSESSEE WAS ENTITL ED TO DEDUCT THE AFORESAID AMOUNTS FOR COMPUTING ITS INCOME. 8. IN SUPPORT OF THE SUBMISSION THAT THE ASSESSMENT ORDER WAS NOT ERRONEOUS, OUR ATTENTION WAS DRAWN TO THE J UDGEMENT OF THE SUPREME COURT IN CIT VS. MAX INDIA LTD., (2007) 295 ITR 282. ON THE BASIS OF THIS JUDGEMENT, IT WAS CONTEND ED BEFORE US THAT AT LEAST TWO VIEWS WERE POSSIBLE ON THE QUESTI ON OF TAXABILITY OF THE TWO AMOUNTS CLAIMED BY THE ASSESS EE AND IF THAT IS SO, THERE CAN BE NO RESORT TO ACTION UNDER SECTION 263. THE SUPREME COURT IN THE CASE CITED ABOVE HAS HELD THAT WHEN THE ASSESSING OFFICER ADOPTS ONE OF THE TWO COURSES PERMISSIBLE IN THE LAW WHICH HAS RESULTED IN LOSS OF REVENUE OR HAS ADOPTED ONE OF THE TWO POSSIBLE VIEWS WITH WHICH THE COMMI SSIONER DOES NOT AGREE, THE ASSESSMENT ORDER CANNOT BE TREA TED AS AN ERRONEOUS ORDER PREJUDICIAL TO THE INTEREST OF THE REVENUE, UNLESS THE VIEW TAKEN BY THE ASSESSING OFFICER IS SUSTAINA BLE IN LAW. KEEPING THIS JUDGEMENT IN VIEW, WE HAVE TO LOOK AT THE FACTS RELATING TO THE ALLOWANCE OF RS.40,20,388/- REPRESE NTING THE FORFEITURE OF THE SECURITY DEPOSITS PLACED BY THE ASSESSEE ON ACCOUNT OF THE PROPERTIES TAKEN ON RENT. THE ASSESS EE HAS ENTERED INTO SEVERAL AGREEMENTS WITH THE LANDLORDS AND COPIES OF THESE AGREEMENTS ARE CONTAINED IN THE PAPER BOOK. T HESE AGREEMENTS ARE TITLED LEAVE AND LICENCE AGREEMENT . FOR EXAMPLE IN THE LEAVE AND LICENCE AGREEMENT BETWEEN THE ASSESSEE AND SHAPOORJI PALLONJI & CO. LTD., THE ASS ESSEE HAS BEEN DESCRIBED AS LICENSEE. THE PREAMBLE STATES THA T THE ASSESSEE WAS IN NEED OF ACCOMMODATION FOR AUTOMOBIL E WORKSHOP, REPAIR & SERVICE STATION AND ON BEING AP PROACHED, THE LICENSOR GAVE THE LICENCE AND CONSENT TO THE AS SESSEE TO ITA NO.6291/M/08 5 OCCUPY AND USE THE LAND AND THE STRUCTURE. CLAUSE 2 (II) PROVIDED THAT THE ASSESSEE WOULD PAY INTEREST FREE DEPOSIT O F RS.2.5 LAKHS TO THE LICENSOR FOR THE DUE PERFORMANCE OF THE CONT RACT TO BE REFUNDED ON THE DETERMINATION OF THE LICENCE AND U PON HANDING OVER THE CLEAR AND PEACEFUL VACANT POSSESSION OF T HE PREMISES IN A SATISFACTORY MANNER. UNDER SUB-CLAUSE (V), THE ASSESSEE WAS BOUND TO USE THE LICENSED PREMISES ONLY AS AUTO MOBILE WORKSHOP, REPAIR & SERVICE STATION FOR THE PURPOSE OF CARRYING ON ITS EXISTING BUSINESS. ANOTHER AGREEMENT OF LEAV E AND LICENCE ENTERED INTO IN FEBRUARY, 2002 (PAGE 23 OF THE PAPE R BOOK) IN RESPECT OF THE GROUND FLOOR OF THE BUILDING KNOWN A S SANGHRAJKA HOUSE ALSO DESCRIBED THE ASSESSEE AS A LICENSEE AND THE OWNERS OF THE PROPERTY AS LICENSORS. THERE ARE SEVERAL OTHER AGREEMENTS COMPILED IN THE PAPER BOOK WHICH A RE ALL DESCRIBED AS LEAVE AND LICENCE AGREEMENTS. FOR INS TANCE, CLAUSE 9 OF THE AGREEMENT OF LEAVE AND LICENCE ENTERED INT O IN AUGUST, 2002 PROVIDED THAT NOTHING CONTAINED IN THE AGREEME NT SHALL BE CONSTRUED AS CREATING ANY RIGHT, EASEMENT, INTEREST , TENANCY OR SUB-TENANCY IN FAVOUR OF THE LICENSEE IN OR OVER OR UPON THE PREMISES OR ANY PART THEREOF OR TRANSFERRING ANY IN TEREST IN THE PREMISES IN FAVOUR OF THE LICENSEE (ASSESSEE HEREIN ), OTHER THAN THE PERMISSIVE USE GRANTED TO THE ASSESSEE. ALL TH E AGREEMENTS OF THE LEAVE AND LICENCE THUS GAVE ONLY A LICENCE O R A PERMISSIVE USE OF THE PREMISES TO THE ASSESSEE. THE INTEREST F REE DEPOSITS MADE BY THE ASSESSEE WAS TO BE RETURNED ON THE DETE RMINATION OF THE LEAVE AND LICENCE AGREEMENT BUT THOSE DEPOS ITS WHICH WERE NOT RETURNED TO THE ASSESSEE WERE WRITTEN OFF AS ADVANCES AGAINST RENTAL PROPERTIES WRITTEN OFF. 9. IT APPEARS TO US ON THE AFORESAID FACTS THAT BY MAKING THE INTEREST FREE DEPOSITS FOR THE PURPOSE OF OBTAINING THE PERMISSIVE USE OR LICENCE TO USE THE PREMISES, THE ASSESSEE DI D NOT OBTAIN ANY ENDURING ADVANTAGE OR CAPITAL ASSET. THERE ARE TWO ITA NO.6291/M/08 6 JUDGEMENTS WHICH LEND SUPPORT TO THE ASSESSEES CLA IM. THE FIRST JUDGEMENT IS THAT OF THE BOMBAY HIGH COURT IN THE C ASE OF IBM WORLD TRADE CORPORATION VS. CIT, (1990) 186 ITR 41 2. IN THAT CASE, THE ASSESSEE WAS ENGAGED IN THE MANUFACTURE O F ACCOUNTING AND COMPUTING MACHINES. IT ENTERED INTO ONE AGREEMENT WITH ANOTHER COMPANY UNDER WHICH THAT COM PANY UNDERTOOK TO CONSTRUCT A FACTORY AND GIVE THE SAME ON LEASE TO THE ASSESSEE. THAT COMPANY HOWEVER REQUIRED FUNDS T O BUILD THE FACTORY AND IN ORDER TO FACILITATE THE SPEEDY CONS TRUCTION OF THE FACTORY, THE ASSESSEE ADVANCED NEARLY RS.1 LAKH TO THE COMPANY. EVENTUALLY, THE LANDLORD COMPANY BECAME INSOLVENT A ND THE AMOUNT ADVANCED, INCLUDING INTEREST, WHICH CAME TO RS.1,08,088/- WAS WRITTEN OFF IN THE ASSESSEES BOO KS AND CLAIMED AS BUSINESS LOSS. THE TRIBUNAL UPHELD THE DISALLOWANCE OF THE SAME IN THE ASSESSMENT. HOWEVER WHEN THE MAT TER WAS REFERRED TO THE HONBLE HIGH COURT, IT WAS HELD THA T THE AMOUNTS ADVANCED BY THE ASSESSEE FOR THE PURPOSE OF ACQUIRI NG THE FACTORY ON LEASE WAS AN ADVANCE FOR THE PURPOSE OF ASSESSEES BUSINESS, THAT THE LENGTH OF THE PERIOD OF THE LEAS E WAS NOT VERY MATERIAL FOR THE PURPOSE OF DETERMINING THE NATURE OF THE EXPENDITURE INCURRED ON THEM AND THAT SINCE THE AC QUISITION OF THE PREMISES ON LEASE WOULD NOT ORDINARILY BE IN TH E CAPITAL FIELD, THE AMOUNTS ADVANCED BY THE ASSESSEE PURSUAN T TO THE LEASE AGREEMENTS TO THE LANDLORD FOR THE PURPOSE OF AND IN CONNECTION WITH THE ACQUISITION OF THE PREMI SES ON LEASE SHOULD BE HELD TO BE FOR THE PURPOSE OF THE ASSESSE ES BUSINESS. IN THIS VIEW OF THE MATTER, THE LOSS WAS ALLOWED AS A BUSINESS LOSS. THE CASE OF THE PRESENT ASSESSEE SEEMS PRIMA -FACIE COVERED BY THE JUDGEMENT. THE DIFFERENCE BETWEEN TH AT CASE AND THE PRESENT CASE, AS POINTED OUT BY THE CIT AS WELL AS BY THE DEPARTMENT BEFORE US IS THAT IN THAT CASE THE AMOUN TS WERE ADVANCED AS LOANS WHEREAS IN THE PRESENT CASE THE A MOUNTS WERE PLACED BY THE ASSESSEE WITH THE LANDLORDS AS D EPOSITS ITA NO.6291/M/08 7 WHICH DID NOT CARRY ANY INTEREST. IT SEEMS TO US TH AT THE DISTINCTION IS SUPERFLUOUS AND NOT SUBSTANTIAL AND WOULD MAKE NO DIFFERENCE TO THE RATIO OF THE JUDGEMENT. THE P RESENT CASE SEEMS TO BE STRONGER ON FACTS BECAUSE WE ARE CONCER NED ONLY WITH LEAVE AND LICENCE AGREEMENTS UNDER WHICH THE A SSESSEE OBTAINED NO INTEREST IN THE PROPERTIES BUT WAS MERE LY PERMITTED TO USE THE SAME UNDER LEAVE AND LICENCE OF THE LAND LORDS. THE ASSESSEE IN THE CITED JUDGEMENT OBTAINED A LEASE OF THE PREMISES WHICH IS ACTUALLY A TRANSFER OF INTEREST IN THE PRO PERTY; NEVERTHELESS IT WAS HELD THAT THE ACQUISITION OF TH E LEASE WAS FOR THE PURPOSE OF THE BUSINESS AND THEREFORE THE AMOUN TS ADVANCED BY THE ASSESSEE FOR ACQUIRING THE LEASE OF THE FACTORY WAS A BUSINESS ADVANCE AND THEREFORE IT WAS HELD TH AT WHEN THE ADVANCE WAS LOST ON ACCOUNT OF THE INSOLVENCY OF TH E LANDLORD, THE ASSESSEE WAS ENTITLED TO CLAIM THE SAME AS BUSI NESS LOSS. IN THE CASE OF THE PRESENT ASSESSEE, THE DEPOSITS WER E NOT TO CARRY ANY INTEREST. HOWEVER, THE ASSESSEE, AS ALREADY NOT ED, DID NOT ACQUIRE ANY INTEREST IN THE PROPERTIES AND ALL THAT HE WOULD ENTITLE TO WAS TO OCCUPY THE PREMISES UNDER LEAVE A ND LICENCE OF THE LANDLORDS. IN SUCH CIRCUMSTANCES, THERE IS A P RIMA-FACIE CASE THAT THE LOSS OF THE SECURITY DEPOSITS MUST BE CONSIDERED TO BE A LOSS INCIDENTAL TO THE BUSINESS. 10. THERE IS ONE MORE JUDGEMENT WHICH IS THAT OF TH E SUPREME COURT IN CIT VS. MADRAS AUTO SERVICE (P.) L TD., 233 ITR 468. IN THIS CASE ALSO THE ASSESSEE HAD A LEASE FOR 39 YEARS OF THE PROPERTY. HE DEMOLISHED THE BUILDING AND CON STRUCTED NEW BUILDINGS AT HIS OWN EXPENSES. THE NEW BUILDIN G WAS TO BELONG TO THE LESSOR AND NOT THE ASSESSEE. THE ASS ESSEE WAS ENTITLED TO MERELY USE THE NEW BUILDING AT A VERY L OW RENT. IN THESE CIRCUMSTANCES, THE SUPREME COURT HELD THAT TH E AMOUNT SPENT BY THE ASSESSEE ON CONSTRUCTION OF THE NEW BU ILDING WAS DEDUCTIBLE AS BUSINESS EXPENDITURE, THE ONLY ADVANT AGE DERIVED ITA NO.6291/M/08 8 BY HIM BY SPENDING THE MONEY BEING THAT HE GOT THE LEASE OF THE NEW BUILDING AT LOW RENT WHICH WAS AN ADVANTAGE FROM THE BUSINESS POINT OF VIEW AND NOT A CAPITAL ADVANTAGE. ON THIS BASIS, THE AMOUNTS SPENT BY THE ASSESSEE ON CONSTRU CTING THE PROPERTY FOR THE LESSOR WAS ALLOWED AS A DEDUCTION IN COMPUTING THE ASSESSEES BUSINESS PROFITS. THE FACTS OF THE PRESENT CASE ARE STRONGER. THE RATIO OF THIS JUDGEMENT OF THE SU PREME COURT ALSO PRIMA-FACIE SUPPORTS THE ASSESSEES CASE. THUS WE FIND THAT THE VIEW TAKEN BY THE ASSESSING OFFICER THAT THE LO SS OF RS.40,20,388/- ARISING ON ACCOUNT OF THE WRITE OFF OF THE ADVANCES AGAINST RENTAL PROPERTIES WAS A LOSS INCID ENTAL TO THE BUSINESS CANNOT BE SAID TO BE UNSUSTAINABLE IN LAW. IT IS CERTAINLY ONE OF THE POSSIBLE VIEWS WHICH HAS THE B ACKING OF THE JUDGEMENT OF THE SUPREME COURT IN THE CASE OF MADRA S AUTO SERVICE (P.) LTD.(SUPRA) AND THAT OF THE HONBLE BO MBAY HIGH COURT IN THE CASE OF I.B.M. WORLD TRADE CORPORATION (SUPRA). IN THIS VIEW OF THE MATTER, WE HOLD THAT THE ASSESSING OFFICER WAS RIGHT IN ALLOWING THE AFORESAID AMOUNT AS A DEDUCTI ON AND HIS ACTION CANNOT BE CALLED ERRONEOUS OR PREJUDICIAL TO THE INTEREST OF THE REVENUE. 11. SO FAR AS THE COST OF IMPROVEMENT OF LEASEHOLD ASSETS WRITTEN OFF (RS.16,46,917/-) IS CONCERNED, THE ASSE SSEE HAD INCURRED VARIOUS EXPENDITURE BY WAY OF IMPROVEMENT IN RESPECT OF THE LEASEHOLD ASSETS TO SUIT THE SPECIFIC NEEDS OF ITS BUSINESS. THIS EXPENDITURE AMOUNTED TO RS.40,57,635/- WHICH W AS CAPITALIZED IN THE BOOKS OF ACCOUNT AND DEPRECIATIO N AMOUNTING TO RS.24,10,718/- HAD BEEN CLAIMED AND ALLOWED IN T HE ASSESSMENTS. THE BALANCE STOOD AT RS.16,46,917/- W HICH WAS WRITTEN OFF ON SURRENDER OF THE LEASEHOLD PREMISES. THIS AMOUNT WAS CLAIMED AS A DEDUCTION IN THE RETURN AND IT WAS ALLOWED BY THE ASSESSING OFFICER. WE MAY CLARIFY THAT THOUGH T HE ASSESSEE DESCRIBED THE WRITE OFF AS COST OF IMPROVEMENT OF LEASEHOLD ITA NO.6291/M/08 9 ASSETS WRITTEN OFF, IT IS NOT ACTUALLY LEASEHOLD ASSETS AS WE HAVE ALREADY SEEN. ALL THE AGREEMENTS ARE ONLY LEA VE AND LICENCE AGREEMENTS WHICH PERMITTED THE ASSESSEE TO USE THE PREMISES, WITHOUT CREATING ANY INTEREST IN THE PREMISES IN FA VOUR OF THE ASSESSEE. WE HAVE ALSO SEEN EARLIER THAT A LEASE IS A TRANSFER OF INTEREST IN THE PROPERTY. SINCE THERE IS NO TRANSFE R OF INTEREST IN THE PROPERTY IN FAVOUR OF THE ASSESSEE, THE NOMENCL ATURE GIVEN BY THE ASSESSEE TO THE WRITE OFF APPEARS TO BE SOME WHAT INACCURATE. BUT THAT NEED NOT DETER US FROM LOOKING AT THE ASSESSEES CLAIM ON THE BASIS OF LEGAL PRINCIPLES. MERELY BECAUSE THE ASSESSEE ERRONEOUSLY DESCRIBED THE WRITE OFF, I T DOES NOT FOLLOW THAT THE CLAIM SHOULD BE REJECTED. AS RIGHTL Y POINTED OUT ON BEHALF OF THE ASSESSEE, THE NOMENCLATURE GIVEN B Y THE ASSESSEE IS NOT CONCLUSIVE AND IS CERTAINLY CONTRAR Y TO THE LEGAL POSITION THAT A LEAVE AND LICENCE IS DISTINCT AND S EPARATE FROM A LEASE AND THE FORMER DOES NOT CREATE ANY INTEREST I N THE PROPERTY IN FAVOUR OF THE LICENSEE. THE JUDGEMENT OF THE SUP REME COURT IN THE CASE OF MADRAS AUTO SERVICE (P.)LTD. (SUPRA) SUPPORTS THE ASSESSEE ON THIS POINT ALSO. THE IMPROVEMENTS MADE BY THE ASSESSEE UPON THE PROPERTIES TAKEN ON LEAVE AND LIC ENCE BASIS WERE NO DOUBT CAPITALIZED IN THE ASSESSEES BOOKS A ND DEPRECIATION HAD ALSO BEEN ALLOWED. BUT IN THE YEAR UNDER CONSIDERATION, WE ARE CONCERNED ONLY WITH THE BALAN CE OF THE COST OF THE EXPENDITURE MINUS THE DEPRECIATION ACTU ALLY ALLOWED. IN THE JUDGEMENT OF THE SUPREME COURT CITED ABOVE, IT WAS HELD THAT WHERE THE BUILDING WAS OWNED BY THE LESSOR AND THE LESSEE SPENDS MONEY ON IMPROVING THE SAME OR EVEN CONSTRUC TING A NEW BUILDING THE LESSEE DID NOT ACQUIRE ANY CAPITA L ASSET AND THAT THE ONLY ADVANTAGE WHICH THE LESSEE DERIVED WA S THAT IT GOT LEASE OF A NEW BUILDING AT A REDUCED RENT WHICH WAS ONLY A BUSINESS ADVANTAGE AND NOT AN ADVANTAGE IN THE CAP ITAL FIELD. APPLYING THE RATIO OF THIS JUDGEMENT TO THE PRESENT CASE, IT SEEMS TO US THAT THE PRESENT CASE IS A FORTIORI IN THE SENSE THE ITA NO.6291/M/08 10 ASSESSEE HEREIN IS NOT EVEN THE LESSEE OF THE PROPE RTY BUT ONLY AS LICENSEE WHO WAS ALLOWED THE PERMISSIVE USE OF T HE PREMISES FOR ITS BUSINESS. IF THE ASSESSEE HAD PUT UP CERTAI N IMPROVEMENTS IN THE PREMISES IN ORDER TO FACILITATE THE CARRYING ON OF ITS BUSINESS, WE SHOULD HAVE THOUGHT THAT THE EXPENDITURE ITSELF SHOULD HAVE BEEN ALLOWED AS REVENUE EXPENDIT URE BUT FOR SOME REASON, THE ASSESSEE DID NOT MAKE SUCH A CLAIM BUT CAPITALIZED THE SAME IN ITS BOOKS OF ACCOUNT AND WA S CLAIMING ONLY DEPRECIATION. THE ASSESSEES ERRONEOUS IMPRESS ION OF THE LEGAL POSITION SHOULD NOT BE HELD AGAINST IT WHEN T HE CORRECT LEGAL POSITION IS BROUGHT OUT AND THE CLAIM IS MADE ON THAT BASIS. IN ANY CASE, THE CLAIM OF THE ASSESSEE IS P RIMA-FACIE SUPPORTED BY THE JUDGEMENT OF THE SUPREME COURT IN MADRAS AUTO SERVICE (P.) LTD. AND BY ALLOWING THE SAME, TH E ASSESSING OFFICER COULD NOT BE SAID TO HAVE ADOPTED AN UNSUST AINABLE OR UNTENABLE VIEW. 12. REFERENCE WAS MADE ON BEHALF OF THE DEPARTMENT TO EXPLANATION 1 BELOW SECTION 32(1) WHICH PROVIDES FO R A CASE WHERE THE BUSINESS OF THE ASSESSEE IS CARRIED ON IN A BUILDING NOT OWNED BY HIM AND ON WHICH CAPITAL EXPENDITURE I S INCURRED BY HIM FOR THE PURPOSES OF THE BUSINESS. IT PROVIDE S THAT SUCH CAPITAL EXPENDITURE REPRESENTED BY THE CONSTRUCTION OF ANY STRUCTURE OR RENOVATION OR EXTENSION OR IMPROVEMENT TO THE BUILDING WOULD BE ELIGIBLE FOR DEPRECIATION. WE ARE UNABLE TO GIVE EFFECT TO THE ARGUMENT OF THE REVENUE BECAUSE FIRS TLY THE EXPLANATION CONTAINS AN ENABLING PROVISION WHICH P ROVIDES THAT EVEN WHERE CAPITAL EXPENDITURE IS INCURRED BY AN AS SESSEE ON A PROPERTY NOT BELONGING TO HIM, HE WOULD BE ELIGIBLE FOR DEPRECIATION ON SUCH EXPENDITURE IF IT IS REPRESENT ED BY ANY STRUCTURE ETC. SECONDLY AND MORE IMPORTANTLY, THE EXPLANATION APPLIES ONLY TO AN ASSESSEE WHO HOLDS A LEASE OR O THER RIGHT OF OCCUPANCY AND INCURS SUCH CAPITAL EXPENDITURE. IT APPEARS TO ITA NO.6291/M/08 11 US THAT THE WORDS OTHER RIGHT OF OCCUPANCY APPEAR ING IN THE EXPLANATION SHOULD BE CONSTRUED EJUSDEM GENERIS WITH THE WORD LEASE AND IF THAT IS SO, THE RIGHT OF OCCUPANCY SHOULD BE OF SUCH A NATURE THAT THE ASSESSEE SHOULD POSSESS AN I NTEREST IN THE PROPERTY AND THE OCCUPANCY MUST BE REFERABLE TO THAT INTEREST. A MERE RIGHT OF OCCUPANCY UNDER LEAVE AND LICENCE AGREEMENT, WITHOUT ANY INTEREST IN THE PREMISES ITS ELF, CANNOT BE CONSIDERED TO BE SUFFICIENT TO ATTRACT THE EXPLANAT ION. WE MAY REFER TO THE ORDER OF THE SPECIAL BENCH OF THE TRIB UNAL, MUMBAI IN THE CASE OF VOLTAS LTD. VS. ACWT., (2008) 113 IT D 19(SB) WHERE IT WAS OBSERVED THAT A LICENCE NEITHER PASSES ANY INTEREST NOR ALTERS OR TRANSFERS PROPERTY IN ANYTHING BUT ON LY MAKES AN ACTION LAWFUL WHICH WITHOUT THE LICENCE WOULD HAVE BEEN UNLAWFUL. LICENCE TO USE THE PROPERTY, IT WAS OBSE RVED BY THE SPECIAL BENCH, IS TRADITIONALLY DISTINGUISHABLE FRO M A LEASE INASMUCH AS THAT THE LICENSEE DOES NOT HAVE POSSES SION OR ANY INTEREST IN THE PROPERTY. LEAVE AND LICENCE IS TH US MATERIALLY DIFFERENT FROM A LEASE. IN MAKING THESE OBSERVATION S, THE SPECIAL BENCH RELIED ON SECTION 52 OF THE INDIAN EASEMENTS ACT, WHICH DEFINES A LICENCE. THE ASSESSEE IN THE PRESENT CASE IS HAVING A MERE LICENCE TO USE THE PROPERTY WHICH CANNOT BE EQ UATED TO A LEASE OR A RIGHT OF OCCUPANCY INVOLVING AN INTEREST IN THE PROPERTY. 13. IT WAS THEN ARGUED ON BEHALF OF THE REVENUE THA T THERE IS NOTHING IN THE ASSESSMENT ORDER TO SHOW THAT THE AS SESSING OFFICER TOOK AN INFORMED DECISION AFTER WEIGHING TH E VARIOUS POSSIBILITIES OR VIEWS THAT CAN BE VALIDLY TAKEN IN RESPECT OF THE ASSESSEES CLAIMS. IT WAS ARGUED THAT THE ASSESSING OFFICER OUGHT TO HAVE CARRIED OUT AN INVESTIGATION INTO THE CLAIMS AND ERRED IN NOT DOING SO WHICH HAS ITSELF MADE THE ORD ER ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE. THE NOTICE DATED 31.07.2008 DOES NOT IN TERMS REFER TO SUCH A DEFICI ENCY IN THE ITA NO.6291/M/08 12 ASSESSMENT ORDER. ACTION UNDER SECTION 263 SEEMS TO HAVE BEEN TAKEN ON THE PREMISE THAT THE ASSESSING OFFICER OUG HT NOT TO HAVE ALLOWED THE CLAIMS OF THE ASSESSEE ON MERITS. THERE IS NO OBSERVATION IN THE NOTICE TO THE EFFECT THAT THE AS SESSMENT ORDER WAS COMPLETED IN HASTE OR WITHOUT ANY ENQUIRY. IF N O SUCH DEFICIENCY IN THE ASSESSMENT PROCEEDINGS HAS BEEN P OINTED OUT IN THE NOTICE AND THE ACTION UNDER SECTION 263 HAS NOT BEEN FOUNDED ON THE SAME, IT IS NOT OPEN TO US TO SUBSTI TUTE OUR REASONS IN THE PLACE OF THE REASONS GIVEN BY THE CI T AND AUTHORITY FOR THIS PROPOSITION CAN BE FOUND IN THE DECISION OF THE PUNJAB & HARYANA HIGH COURT IN CIT VS. JAGADHRI ELE CTRIC SUPPLY & INDUSTRIAL CO., 140 ITR 490 AND THAT OF TH E KERALA HIGH COURT IN CIT VS. CHANDRIKA EDUCATIONAL TRUST, 207 ITR 108. 14. IT WAS THEN SUBMITTED BY THE REVENUE THAT THERE WAS NO CLAUSE IN THE LEAVE AND LICENCE AGREEMENT PERMITTIN G THE ASSESSEE TO MAKE IMPROVEMENTS. THIS CONTENTION IS N EITHER HERE NOR THERE BECAUSE IT IS A FACT, WHETHER THERE WAS A PROVISION IN THE AGREEMENTS OR NOT, THAT THE ASSESSEE DID INCUR EXPENDITURE IN MAKING IMPROVEMENTS TO THE PREMISES TAKEN ON LEA VE AND LICENCE BASIS IN ORDER TO FACILITATE THE CARRYING O N OF ITS BUSINESS. THE QUESTION IS NOT WHETHER WHAT THE ASSESSEE DID W AS LAWFUL OR PERMITTED UNDER THE AGREEMENTS, BUT IT IS WHETHER T HE EXPENDITURE REMAINING UNWRITTEN OFF IN THE ASSESSEE S BOOKS CAN BE WRITTEN OFF AND CLAIMED AS A DEDUCTION WHEN THE AGREEMENTS CAME TO AN END AND THE ASSESSEE VACATED THE PREMISE S. ON THIS ASPECT, WE HAVE ALREADY EXPRESSED OUR VIEW. IT WAS THEREAFTER ARGUED BY THE REVENUE THAT THE CIT CAN INVOKE SECTI ON 263 EVEN IN RESPECT OF A DEBATABLE ISSUE AND REFERENCE WAS M ADE TO THE JUDGEMENT OF THE MADHYA PRADESH HIGH COURT IN CIT V S. KOHINOOR TOBACCO PRODUCTS P. LTD., 234 ITR 557. A R ESPECTFUL PERUSAL OF THE JUDGEMENT SHOWS THAT THERE THE CIT H AD TAKEN ITA NO.6291/M/08 13 ACTION UNDER SECTION 263 ON THE GROUND THAT THE ASS ESSING OFFICER DID NOT CARRY OUT ANY ENQUIRY TO ASCERTAIN WHETHER THE INCOME RECEIVED FROM LETTING OUT SOME PROPERTIES WA S ASSESSABLE AS BUSINESS INCOME OR AS PROPERTY INCOME. THE CIT RESTORED THE ASSESSMENT BACK TO THE ASSESSING OFFICER ASKING HIM TO DECIDE THE ISSUE AFRESH. IN DOING SO, HE HAD OBSERVED THAT THE ISSUE WHETHER SUCH INCOME WAS ASSESSABLE AS BUSINESS INCO ME OR AS PROPERTY INCOME WAS DEBATABLE. IN THIS BACKGROUND, IT WAS HELD BY THE HIGH COURT THAT MERELY BECAUSE THE CIT HAD M ADE AN OBSERVATION THAT THE ISSUE WAS DEBATABLE, HIS POWE R TO INVOKE SECTION 263 CANNOT BE STRUCK DOWN IF THE ACTION UND ER THAT SECTION WAS ACTUALLY BASED ON THE FACT THAT THE ASS ESSING OFFICER HAD NOT CARRIED OUT A PROPER ENQUIRY INTO THE ASSES SEES CLAIM. THIS JUDGEMENT, WITH RESPECT, DOES NOT SEEM TO SUPP ORT THE REVENUE IN THE PRESENT CASE BECAUSE AS POINTED OUT BY US EARLIER, THE CIT IN THE PRESENT CASE HAS NOT TAKEN ACTION ON THE GROUND OF LACK OF ENQUIRY BY THE ASSESSING OFFICER. HE HAS MERELY STATED THAT THE ASSESSING OFFICER OUGHT NOT TO HAVE ALLOWED THE CLAIMS OF THE ASSESSEE AND IT HAS BEEN DEMONSTRATED BEFORE US ON BEHALF OF THE ASSESSEE THAT ITS CLAIMS WERE PRIMA- FACIE ALLOWABLE, HAVING REGARD TO THE JUDGEMENT OF THE SUPREME COURT IN CIT VS. MADRAS AUTO SERVICE (P.) LTD., (SU PRA) AND THAT OF THE BOMBAY HIGH COURT IN IBM WORLD TRADE CORPORA TION VS. CIT (SUPRA). THE PRESENT CASE IS COVERED, ON THIS A SPECT, BY THE JUDGEMENT OF SUPREME COURT IN CIT VS. MAX INDIA LTD . (SUPRA) WHERE IT HAS BEEN HELD THAT NO ACTION CAN BE TAKEN UNDER SECTION 263, IF THE ASSESSING OFFICER HAD ADOPTED O NE OF THE TWO OR MORE POSSIBLE VIEWS ON THE ISSUE AND IN SUCH A C ASE THE ASSESSMENT CANNOT BE TERMED AS ERRONEOUS OR PREJUDI CIAL TO THE INTEREST OF THE REVENUE. 15. THE JUDGEMENT OF THE ALLAHABAD HIGH COURT IN MA NNULAL MATADEEN VS. CIT., (2005) 277 ITR 346, CITED BY THE REVENUE, IS ITA NO.6291/M/08 14 SIMILAR TO THE JUDGEMENT OF THE MADHYA PRADESH HIGH COURT(SUPRA). THERE ALSO THE ASSESSING OFFICER HAD NOT MADE THE NECESSARY ENQUIRIES BEFORE ALLOWING DEDUCTION OF TH E INTEREST. THE ASSESSING OFFICER HAD NOT MADE ENQUIRIES INTO T HE JOURNAL ENTRIES PASSED BY THE ASSESSEE IN THAT CASE AND WIT HOUT EXAMINING THEM HAD ALLOWED THE INTEREST AS A DEDUCT ION. THE CITS ACTION UNDER SECTION 263 WAS UPHELD UNDER THE SE CIRCUMSTANCES. 16. THE JUDGEMENT OF THE DELHI HIGH COURT IN DUGGA L AND CO. VS. CIT, (1996) 220 ITR 456 ALSO FALLS IN THE SAME CATEGORY, WHERE THE ACTION UNDER SECTION 263 WAS UPHELD BECA USE IT WAS TAKEN ON THE GROUND THAT THE ASSESSING OFFICER DID NOT MAKE ANY ENQUIRY INTO THE RETURN EVEN THOUGH SUCH AN ENQ UIRY WAS CALLED FOR. IN THIS CASE ALSO THE ASSESSING OFFICER HAD ALLOWED INTEREST AT A HIGHER PERCENTAGE EVEN THOUGH THE ASS ESSEE HAD CHARGED INTEREST FROM OTHERS AT A MUCH LOWER PERCEN TAGE. ACCORDING TO THE CIT, THE ASSESSING OFFICER OUGHT T O HAVE INVESTIGATED INTO THE FACTS SUBMITTED IN THE RETURN BEFORE ALLOWING THE CLAIM AND FAILURE TO DO SO MADE THE AS SESSMENT ORDER ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE. 17. THUS, THE MADHYA PRADESH, ALLAHABAD AND DELHI H IGH COURTS DECISIONS ARE NOT RELEVANT TO THE PRESENT CA SE WHERE THERE IS NO ALLEGATION BY THE CIT IN THE NOTICE OR IN THE ORDER THAT THE ASSESSMENT WAS COMPLETED WITHOUT ANY ENQUI RY OR INVESTIGATION. 18. THE DEPARTMENT THEN REFERRED TO JUDGEMENT OF SU PREME COURT IN THE CASE OF HASIMARA INDUSTRIES LTD. VS. C IT, (1998) 98 TAXMAN 352 IN ORDER TO CONTEND THAT THE COST OF IMP ROVEMENTS INCURRED BY THE ASSESSEE WAS CAPITALIZED IN ITS BOO KS AND ONLY DEPRECIATION WAS CLAIMED THEREON AND THUS THE ENTRY MADE IN ITA NO.6291/M/08 15 THE BOOKS OF ACCOUNT CONCLUSIVELY PROVED THAT THE E XPENDITURE WAS CAPITAL IN NATURE AS HELD BY THE CIT. A RESPECT FUL PERUSAL OF THE JUDGEMENT SHOWS THAT IT DOES NOT LAY DOWN THE P ROPOSITION CANVASSED ON BEHALF OF THE REVENUE. IN THAT CASE, THE ASSESSEE WAS ENGAGED IN THE MANUFACTURE OF TEA AND ENTERED I NTO A LEAVE AND LICENCE AGREEMENT WITH A COTTON MILL WHICH WAS UNDER LIQUIDATION. THE ASSESSEE PAID AN ADVANCE OF RS.20 LAKHS TO THE COTTON MILL FOR MODERNISATION OF ITS MACHINERY. TH E COTTON MILL WAS UNABLE TO REPAY THE ADVANCE ON THE EXPIRY OF T HE LEAVE AND LICENCE AGREEMENT AND SO THE SAME WAS WRITTEN OFF I N THE BOOKS OF THE ASSESSEE AND CLAIMED AS A BUSINESS LOSS. T HE SUPREME COURT NOTICED THAT THE ASSESSEES BUSINESS WAS IN THE MANUFACTURE OF TEA AND NOT IN COTTON MANUFACTURING. IT HAD OBTAINED ONLY THE OPERATING RIGHTS FROM THE COTTON MILL UNDER LEAVE AND LICENCE AGREEMENT FOR THE PURPOSE OF ACQU IRING THE PROFIT MAKING APPARATUS FOR A PERIOD OF THREE YEARS AND THAT THE BUSINESS OF RUNNING THE COTTON MILL WAS NOT ITS OWN . SINCE IT WAS ONLY OPERATING THE MILL UNDER LEAVE AND LICENCE BASIS, THE AMOUNT OF THE ADVANCE OF RS.20 LAKHS GIVEN BY THE A SSESSEE TO THE COTTON MILLS WAS NOT FOR ITS OWN PURPOSE BY WAY OF BUSINESS EXPENDITURE FOR MODERNISING THE MILL BUT REPRESENTE D CAPITAL TO THE COTTON MILL WHICH IN TURN UNDERTOOK TO MODERNI ZE THE MILL. THE ASSESSEE HAD PASSED RESOLUTIONS SHOWING THAT TH E AMOUNTS WERE NOT IN THE NATURE OF LOANS OR MONEY LENDING TRANSACTIONS. THE ADVANCES NOT BEING IN THE NATURE OF LOANS IN TH E COURSE OF MONEY LENDING BUSINESS AND NOT HAVING BEEN MADE FOR THE PURPOSE OF ASSESSEES OWN BUSINESS, THE SUPREME COU RT HELD THAT THE AMOUNT CANNOT BE CLAIMED AS A BUSINESS LOS S. WE FAIL TO SEE HOW THIS JUDGEMENT CAN BE OF ANY HELP TO THE REVENUE. NO CASE HAS BEEN MADE OUT BY THE CIT OR BY THE LEARNED D.R. BEFORE US TO THE EFFECT THAT THE EXPENDITURE INCURRED BY T HE ASSESSEE IN THE PREMISES TAKEN ON LEAVE AND LICENCE BASIS WERE NOT CONNECTED TO ITS BUSINESS OPERATIONS. UNLESS IT IS SUCCESSFULLY ITA NO.6291/M/08 16 SHOWN THAT THE EXPENDITURE HAD NOTHING TO DO WITH T HE CARRYING ON OF THE ASSESSEES BUSINESS, THE CONTENTION OF TH E REVENUE THAT THE LOSS CANNOT BE ALLOWED AS A BUSINESS LOSS MUST FAIL. 19. FOR THE AFORESAID REASONS, WE SET ASIDE THE ORD ER PASSED BY THE CIT UNDER SECTION 263 OF THE ACT AND ALLOW T HE APPEAL OF THE ASSESSEE WITH NO ORDER AS TO COSTS. ORDER PRONOUNCED ON THIS 13 TH DAY OF APRIL, 2010. SD/- (RAJENDRA SINGH) SD/- ( R.V.EASWAR ) ACCOUNTANT MEMBER SENIOR VICE PRESIDENT MUMBAI, DATED 13 TH APRIL, 2010. SOMU COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE DCIT-7(3), MUMBAI. 4. THE CIT-7, MUMBAI 5. THE DR F BENCH /TRUE COPY/ BY ORDE R ASSTT. REGISTRAR, I.T.A.T, MUMBAI