Friday, 25 April 2014

Whether when land is taken on lease for longer period against lumpsum payment and transfer is in perpetuity, such expenditure can still be construed as revenue in nature - NO: HC

THE issue before the Bench is - Whether when a land is taken on lease for longer period against lumpsum payment and the transfer is in perpetuity, such expenditure can still be construed as revenue in nature. And the verdict goes against the assessee.
Facts of the case
The assessee is engaged in the manufacture of Automotive Ancillary Products. They took land on lease from MIDC and paid a sum of Rs.20,00,000/-, pursuant to the agreement. The assessee claimed the sum as payment of rental in lumpsum and therefore, it was treated as revenue expenditure. The AO rejected the stand holding that the amount paid by the assessee was for the purpose of acquiring the land for a period of 80 years, which rendered enduring advantages to the assessee. The AO also took note of the fact that the assessee had paid further amount of Rs.5.04 lakhs towards the enhancement cost to the land. Therefore, the AO found the expenditure to be of a capital expenditure.
The CIT(A) confirmed the view taken by the AO that the transfer in favour of the assessee was in effect a transfer in perpetuity and therefore, the expenditure incurred, was a capital expenditure. The Tribunal held that to decide whether the expenditure was capital or revenue, one had to look at the expenditure from a commercial point of view and the fact that the payment made in lump sum for the entire duration of the lease did not alter the character of revenue expenditure and allowed the Assessee's appeal.

On Appeal before the HC the Revenue's Counsel submitted that the entire amount of lease paid by the assessee, at one time or in instalments, it would be a capital expenditure.

The Assessee's Counsel submitted that the agreement between the assessee and the IFML was infact a lease transaction and the payment of the lease rent in lumpsum did not alter the nature of the transaction and the payment was essentially towards the lease rental, which qualified for being treated as revenue expenditure. Merely because, the lease rent was paid in lumpsum did not alter the character of the expenditure.

Held that,

++ the nature of transaction in favour of the assessee is in perpetuity. It is seen that the transfer in favour of the assessee was absolute i.e., all rights, title and interest, which were derived by IFML were absolutely transferred in favour of the assessee. It is clear from the reading of the assignment deed that once the assignment is approved by the MIDC, the vendor had no interest at all in the so called lease property. It is difficult for to draw inference of the agreement in question only be treated as a sub-lease and not an assignment. Furthermore, the assignment deed itself does not say anything about the reversion of the property back to the hands of the assigner namely, IFML. On the other hand, the rights of the assignor on approval of the assignment comes to an end in toto. The nature of transaction amounts to a transfer of a capital assets. The AO rightly construed the law to hold that the expenditure is of capital in nature and not the revenue expenditure;

++ the lumpsum amount paid does not make a permanent lease any the less alienation than a sale. The Order of the Tribunal set aside.

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