M/S NEW MANGALORE PORT TRUST V. ASST COMMISSIONER OF INCOME TAX

ITA/227/2016

AI Insights

The case involves the New Mangalore Port Trust (NMPT), which entered into long-term lease agreements with Udupi Power Corporation Ltd, ABG Infralogistics Ltd, and Ambuja Cements Ltd, receiving upfront premiums. The core issue was whether these upfront premiums should be recognized as income in the year received or amortized over the lease period of 30 years. The Assessing Officer initially treated the entire upfront premium as income for the current year, a decision upheld by the CIT(A) and ITAT. However, the High Court found that the matter required reconsideration, particularly in light of the Comptroller and Auditor General's audit report suggesting amortization of the premium.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 753914 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 31-10-2022
• Assessment Year: misc
• Other Referred Cases: Member for the Board of Agricultural Income Tax, Assam Vs. Sindhurani Chaudhurani and Ors, Commissioner of Income Tax & ANR Vs. H.S. Ramachandra Rao
• Laws Referred To: Income Tax Act 1961
• Result in Favour of: Partly Allowed
• Court: HIGH COURT
• Department Lawyers: E I SANMATHI
• Assessee Lawyers: A SHANKAR; A MDHUSUDHAN
• Keywords: Capital receipt; Concession Agreement; Income recognition; Lease Deed; License agreement; Upfront Premium
• Section: 260-A

Judgement Text

" - 1 - ITA No. 227 of 2016 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 31ST DAY OF OCTOBER, 2022 PRESENT THE HON'BLE MR JUSTICE P.S.DINESH KUMAR AND THE HON'BLE MR JUSTICE T G SHIVASHANKARE GOWDA INCOME TAX APPEAL NO. 227 OF 2016 BETWEEN: M/S NEW MANGALORE PORT TRUST REPRESENTED BY ITS FINANCIAL ADVISOR & CHIEF ACCOUNTS OFFICER SRI.CHILVAKULA RAMANI PANAMBUR, MANGALORE-575 010 …APPELLANT (BY SRI. A.SHANKAR, SENIOR ADVOCATE ALONG WITH SRI. A. MDHUSUDHAN, ADVOCATE) AND: ASST. COMMISSIONER OF INCOME TAX CIRCLE 1 (1), C.R.BUILDING, ANNEXE, ATTAVAR MANGALORE-575 001 …RESPONDENT (BY SRI. E.I.SANMATHI, SENIOR STANDING COUNSEL) THIS INCOME TAX APPEAL IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 06/11/2015 PASSED IN ITA NO. 1299/BANG/2013, FOR THE ASSESSMENT YEAR 2009-10 AND ETC. THIS APPEAL, COMING ON FOR FINAL HEARING, THIS DAY, HON'BLE P.S. DINESH KUMAR J., DELIVERED THE FOLLOWING: Digitally signed by HARSHITHA B Location: HIGH COURT OF KARNATAKA - 2 - ITA No. 227 of 2016 JUDGMENT This appeal by assessee challenging the order dated 06.11.2015 in ITA.No.1299/Bang/2013 for the Assessment year:2009-10 has been admitted to consider questions of law raised by the assessee. 2. After hearing Shri.A.Shankar, learned Senior Advocate for assessee and Shri.E.I.Sanmathi, Senior Standing Counsel for respondent and in our considered view following four questions arise for consideration. 1. Whether the Tribunal is justified in law in holding that the entire upfront premium received by the appellant on the execution of the concession agreement with Udupi Power Corporation Ltd of Rs.9,00,00,000/- constituted the income of the current year and cannot be recognized as income on proportionate basis over the period of the agreement of 30 years and also as observed by the Comptroller & Auditor General in their audit report on the facts and circumstances of the case? 2. Whether the Tribunal is justified in law in holding that the entire upfront premium received by the appellant on the execution of the license agreement with ABG Infralogistics Ltd of - 3 - ITA No. 227 of 2016 Rs.5,81,08,700/- constituted the income of the current year as against Rs.19,36,956/-(1/30th) which is accounted as income in the books of account and offered to tax by the appellant on the facts and circumstances of the case? 3. Whether the Tribunal is justified in law in holding that the entire upfront premium received by the appellant on the execution of the lease deed with Ambuja Cements Ltd of Rs.10,34,16,282/- constituted the income of the current year as against Rs.34,47,209/- (1/30th) which is accounted as income in the books of account and offered to tax by the appellant on the facts and circumstances of the case? 4. Whether the Tribunal is justified in law in holding that the upfront premium from Udupi power Corporation Ltd of Rs.9,00,00,000/-, ABG Infralogistics Ltd of Rs.5,81,08,700/- and Ambuja Cements Ltd of Rs.10,34,16,282/- received for a period of 30 years constitutes income in the impugned assessment year and consequently passed a perverse order on the facts and circumstances of the case? 3. Brief facts of the case are, during Financial year 2008-09, Assessee, New Mangalore Port Trust1 has entered into concession/lease agreements with three 1 'NMPT' for short - 4 - ITA No. 227 of 2016 entities namely M/s Udupi Power Corporation limited2, M/s ABG Infralogistics Limited3 and M/s Ambuja Cements limited4 for a period of 30 years and received the premium upfront. In respect of UPCL, assesse has shown the upfront premium amount in the P&L account. In the case of ABG and ACL, premium amount has been amortized and shown as current liability. 4. Shri.A.Shankar, learned Senior Advocate for assesse submitted that the assesse recognized 1/30th of the upfront premium received in respect of the three entities as income for the respective years and for A.Y. 2009-10 in this case. The assessing officer in para 6.3 of his order dated 29.12.2011 has held thus: “ As per article 9.1 of the agreement, the (sic) sum of Rs.9 crores is not for 30 years and it is not dependent on number of years. Apart from License 2 'UPCL' for short 3 'ABG' for short 4 'ACL' for short - 5 - ITA No. 227 of 2016 Fee (Upfront fee), the assessee is in receipt of revenue in the form of Royalty etc”. 5. Assessing officer has rejected assessee’s contention that as per the observations of the Comptroller And Auditor General, as the upfront lease rent received for 30 years has been amortized, assessee can offer the income on proportionate basis namely 1/30th. Though this aspect has been recorded in the para B.4 in the audit report dated 2008-09 (Annexure-G), AO has rejected the said contention. 6. The CIT(A) vide order dated 05.02.2012 without proper appreciation of facts and law has confirmed the order passed by Assessing Officer. The ITAT has accepted that lease is for 30 years as per the respective concession agreements, but held that assessee was not required to perform any further obligation under the agreement. According to the ITAT assessee has received the consideration for grant of lease from the said three companies in lumpsum without any corresponding - 6 - ITA No. 227 of 2016 obligation to be discharged and accordingly, upheld the order passed by Assessing Officer. 7. Shri.A.Shankar, urged following grounds in support of this appeal. • The premia amounts are not without any obligation. The assesse is required to provide several service such as security service, electricity, water connection, maintenance of road, providing properly asphalted approach roads, sprinkling of water every day inside the Port premises to control the dust and to comply conditions imposed by Karnataka State Pollution Control Board, clearing the garbage and waste materials dumped by lessees in common garbage bin within Port premises etc. • The premium received is under the capital receipt therefore not liable for tax. In support of this contention he placed reliance on Member for the - 7 - ITA No. 227 of 2016 Board of Agricultural Income Tax, Assam Vs. Sindhurani Chaudhurani and Ors5. 8. In substance Shri.A.Shankar's argument is, premium being a capital receipt, is not taxable. The assessee is required to provide various services for 30 years and assessee is entitled to amortize the amount and offer proportionate 1/30th amount as per AS-19 as approved by the Comptroller And Auditor General. 9. Shri.E.I.Sanmathi for the Revenue arguing in support of the assessment order submitted that there is no clause in the lease agreement that the upfront premium is refundable and there is no other clause which mandates the assesse to provide services. Therefore, the assessee is getting income in the relevant financial year. In support of this contention, he placed reliance on the judgment of 5 (1957) 32 ITR 169 (SC) - 8 - ITA No. 227 of 2016 Hon'ble Apex court in the case of Commissioner of Income Tax & ANR Vs. H.S. Ramachandra Rao6. 10. We have carefully considered the rival contentions and perused records. 11. In the first three questions, the issue involved is whether the assessee is entitled to amortize and offer 1/30th of the amount received as income every year?. The fourth question is whether tribunal is justified in holding that the entire upfront premium constituted the income for the current year?. 12. Shri.Shankar’s contention is that the land has been given on long lease/license for 30 years. The consideration amount received in respect of an immovable property, either while conveying property or granting long license/lease shall be a capital receipt. He has placed reliance on Sindhurani Chaudhurani supra. 6 (2011) 330 ITR 0322 - 9 - ITA No. 227 of 2016 13. The said question which cameup for consideration before the ITAT and the ITAT has observed as under: \" We have considered the rival submissions as well as the relevant material on record. There is not dispute that the assessee has granted lease for 30 years in respect of the port land to three companies viz. UPCL, ABG Infralogistics and M/s Abmuja Cements Ltd., vide respective concession agreement. The assessee has received upfront premium from these three concessionaries at the time of execution of the agreement. We find that the transaction of leasing out the land to these companies for 30 years is completed by execution of the agreement and thereafter the assessee was not required to do or perform any act or obligation under the agreement. Thus, in other words, the assessee has received consideration for grant of license/lease to these three companies in lump sum apart from the annual license fee/royalty without any corresponding obligation to be discharged by the assessee. Thus upfront premium amount is admittedly non-refundable amount irrespective of the premature termination of the concession/lease agreement. The assessee has supported its claim by matching concept of accounting as well as accounting standard 19. However, when there is no corresponding liability or obligation to be discharged by the assessee after receipt of this amount as upfront, then this - 10 - ITA No. 227 of 2016 argument of the assessee of matching concept goes against the claim of the assessee. Even as per the matching concept of recognizing the income the amout received by the assessee is required to be considered as income of the current year when the assessee has completed and discharged all its obligation by executing the agreement and no further liability was to be discharged by the assessee for next 30 years under the concession agreement. The consideration received by the assessee during the year matches with the discharge of liability or obligation by execution of the agreement and handing over the land in question to the concessionaire for development of facility and utilization of the same. Once the assessee was no longer liable to render any service in future being a corresponding discharge of obligation or rendering of service consequently, there would be no question of accrual of income in future years. We further note that the assessee itself has recognized the entire upfront premium received as income for the year under consideration as per the P & L Account as well as schedule 15 to the P & L Account wherein the assessee has recognized Rs.26,85,19,000/- as lease rental comprising the upfront premium received from three concessionaries. Therefore, when the assessee claims to have followed the accrual basis of accounting and recognizing the income on accrual basis then this very fact of recognizing the entire upfront premium as income in the books of account shows that the entire - 11 - ITA No. 227 of 2016 receipt accrued during the year under consideration. Though the C & AG has raised some objections in his Audit report in respect of recognizing the entire income as the year under consideration and recommended only proportionate amount of upfront premium to be considered as income of the year under consideration, however, the said remarks of the C & AG would not change the character or the incidence of accrual of the income.\" (Emphasis Supplied) 14. The issue involved in \"Sindhurani Chaudharani\" supra is payment of 'Salami' and in this case it is upfront premium which non refundable. Therefore the matter requires reconsideration in the hands of the Assessing Officer referring to relevant facts and law. 15. According to Shri.A.Shankar, if the accounting is as per AS-19 and even as per general principles of accounting, the upfront premium can be amortized on the principles of matching concept because the assessee has to provide various services. We have also noticed that - 12 - ITA No. 227 of 2016 Comptroller And Auditor General in his report has held that premium can be amortized. 16. In view of the above, in our considered opinion, the matter requires reconsideration in the hands of the Assessing Officer. Hence, the following; ORDER (a) The assessment order dated 29.12.2011 (Annexure B) passed by AO, the Order dated 05.02.2012, passed by CIT(A) (Annexure D) and order dated 06.11.2015 in ITA No.1299/BANG/2013 passed by ITAT are set aside. (b) The matter is remitted to the file of the Assessing Officer for fresh consideration in accordance with law after providing an opportunity of hearing to the assessee. (c) All contentions of both assessee and revenue are kept open. - 13 - ITA No. 227 of 2016 (d) Since the matter has been remitted to the Assessing Officer, questions of law do not require any answer and hence not answered. Appeal is disposed of. No costs. Sd/- JUDGE Sd/- JUDGE BH "