By TIOL News Service

NEW DELHI, JULY 29, 2015: THE issue before the Bench is - Whether assessee can claim depreciation although land and building vested in Municipal body and assessee had only made part payment to Housing Board but was in full control of buildings. YES is the verdict.

Facts of the case   

New Delhi Municipal Council ('NDMC') invited an offer in 1976 from DAL for the construction of a five star hotel. DAL submitted an offer of paying Rs.28,11,000 per annum as licence fee to the NDMC. However, no agreement as such was executed at that stage. A suit was filed by DAL against NDMC for specific performance with an alternative prayer for damages. The suit ended in a compromise and this led to an agreement being executed between DAL and NDMC. Pursuant to the above agreement, BHL (assessee) came to be incorporated. An agreement was entered into between BHL and DAL which anticipated the transfer of the licence in respect of the land from DAL to BHL. The obligations of DAL as incorporated in the former agreement were set out as obligations of BHL in the latter agreement. Clause 4 of this agreement permitted BHL to allow use of the shopping complex by way of a licence to one or more persons or their nominees with information to DAL. It was provided in Clause 4(a) that BHL would accept "interest-free-deposit from the user at an agreed rate per sq. ft. of the area to be licensed to any party”. The deposit would vary from party to party and from time to time. Of the deposit, the DAL was permitted to retain 25% on the agreed terms and conditions and the balance 75% was to be retained by BHL. DAL was bound to repay the deposit. It was further provided that BHL would be bound to repay the deposit of any licensee as and when the licensee becomes entitled to receive it. Thereafter, a tripartite agreement was entered into between BHL, DAL and NDMC and the licence granted in favour of DAL was transferred to BHL. Apart from formalising such transfer the said agreement provided that the terms and conditions set out in the agreement between the DAL and the NDMC would also form part of the said tripartite agreement. While this agreement incorporated all the clauses in relation to the right to the land and building vesting in the NDMC, it also provided that the NDMC would have a pre-emptive right to purchase the building at the market price. Clause 29 gave BHL the right to give out spaces in the building to sub-licencees. Under Clause 48, licence fee was to be enhanced after every thirty three years provided that the increase in the licence fee would not exceed 100% of that immediately before the enhancement is due.

Apart from the hotel building that was constructed, two other buildings, WTT and WTC were also constructed in another portion of the plot of land adjoining the complex. In the WTT and WTC spaces were given out on licence basis to several sub-licensees by the Assessee for which separate sub-licence agreements were entered into. Deposits were accepted from the sub-licensees in terms of the sub-licence agreements. Clause 27 prohibits the sub-licensees from assigning their interest in the space allotted in any way without obtaining previous written consent of BHL. Clause 1 states that deposit "free of interest” shall remain with BHL "during the subsistence of this agreement”. The licence fee is to be calculated at a rate per sq. ft. of the licence area. Under Clause 7(f), it is stated that the sub-licensee shall deposit a sum equal to three months charges calculated at the said rate and that the said security "shall be free of interest”. Clause 30 states that after adjustment of the outstanding dues, the deposit, free of interest shall be repaid to the sub-licensee on termination or determination of either BHL's licence under the original licence deed or upon termination or determination of the sub-licence in terms of the agreement. Clause 31 clarifies that the allotted space remains under the overall control and supervision of Assessee. Clause 32 gives the Assessee right of entry to any of the allotted spaces without notice for any inspection. Clause 34clarifies that the sub-licensees do not have the right of tenancy/sub-tenancy. Clause 35(a) makes the Assessee responsible to pay all the fees, rates, taxes etc.

Arising out of the different orders of the Assessing Officer under Section 143(3) of the Act for AYs 1989-90, 1990-91, 1991-92, 1992-93, 1993-94, the Assessee filed Appeals before the CIT (A). Against the orders of the CIT (A) both the Revenue and the Assessee filed appeals before the ITAT. By the impugned common order ITAT disposed of the Assessee's appeals and the Revenue's cross appeals for the aforementioned AYs. The questions that were considered by the ITAT were answered by it in favour of the Assessee as follows:

(i) The domain over the hotel property is of the Assessee. It was utilising the property and it was not the case of Revenue that the NDMC ever made a claim for depreciation. It is the Assessee who made the investment, utilised the property, met the expenses of wear and tear and replacement of the property which would be entitled for depreciation.

(ii) The sub-licence agreements in respect of the spaces in the WTT and WTC showed that it as the Assessee which was made responsible to pay all fees, rates, taxes etc. The Assessee had not relinquished its right of domain over the property but had allotted spaces to different sub-licensees who had no right, title etc. except having right of sub-licence which assessee had been permitted by NDMC through the main agreement of licence. Therefore, the Assessee was entitled to depreciation in respect of the WTT and WTC buildings as well. Consequently, the Assessee was entitled to depreciation in respect of sanitary and plumbing also for the whole of the period.

(iii) The Special Bench of the ITAT was seized of the issue whether an Assessee who was running a hotel was entitled to investment allowance. Therefore the issue was remanded to the AO to abide by the decision of the Special Bench when available.

(iv) As regards the question whether the deposits collected from the sub-licensees were taxable in the hands of the Assessee, the view already expressed in favour of the ITAT for the previous AY 1987-88 would apply if any amount received as deposit out of instalment in relation to the said AY i.e. 1987-88 is received in AY 1988-89. As regards the instalments received under the new licence agreements during and after AY 1989-90 the AO would have to decide on their taxability. The AO's order was not clear on this aspect and the matter required to be remanded;

(v) As regards the issue of interest on deferred licence fee, the order of the CIT (A) remanding it to the AO was modified by directing the AO to decide the issue in accordance with law as and when the claim was made by the Assessee.

(vi) The decision of the CIT (A) directing the AO to allow the arrears of licence fees on actual payment basis was upheld.

(vii) The direction of the CIT (A) to the AO to allow depreciation on the increase in liability on account of exchange rate fluctuation on notional basis was also upheld.

Having heard the parties, the Court held that,

A) Depreciation

++ Certain features of the agreements which persuade the Court to concur with the conclusions of the CIT (A) and ITAT are as under:

(i) although the land and building vest in the NDMC notwithstanding that the licence granted in favour of DAL, the entire cost of construction of the buildings was borne by the assessee.

(ii) This is acknowledged in Clause 19 of the first Agreement dated 11th March 1981which states that "the licensor shall have a pre-emptive right to purchase the property built on the site after deducting the market value of the land at the market price then prevalent."

(iii) Under Clause 16 (xv) of the same Agreement, the building has to be kept insured by DAL in the joint names of itself and the NDMC against damage by fire, riots, civil commotion and earthquake etc.

(iv) Under Clause 16 (xii) the licencee was to pay all rates, taxes, charges, claims and out-goings in respect of the land and building except the house tax "as building will vest in the licensor, i.e., NDMC for all intents and purpose”.

(v) The essential purpose of the vesting of the property in the NDMC is to enable it to invoke the provisions of the Public Premises (Eviction of Unauthorized Occupants), Act, 1971 for eviction of the licencee. Otherwise for all practical purposes the entire control of the buildings was with the licensee.

(vi) The fact that it was for the licensee which had the control over the entire building is also acknowledged in Clause 6 where the licensee was given a right to raise loans on the security of the structures/buildings/fixtures and fittings etc.

++ Explanation (1) to Section 32 of the Act also acknowledges that depreciation would be claimed by assessee who carries on business "in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work or in relation to....... the building.” In such event, Section 32 (1) would apply "as if the said structure or work is a building owned by the assessee.

++ for the period earlier than 1st April 1988, in view of the decision in Supreme Court in Commissioner of Income Tax v. Podar Cement Private Limited and Mysore Minerals v CIT, the legal position is no longer res integra. In Podar Cement Private Limited the Supreme Court was called upon to consider whether the income derived by the assessee on the flat or the building were income from other sources and not income from the house property. The Court in that context considered the words 'owner' and accepted that this would include "that person who can exercise the rights of the owner, and not on behalf of the owner but in his own right.” In Mysore Minerals, the Supreme Court explained that "the very concept of depreciation suggests that the tax benefit on account of depreciation legitimately belongs to one who has invested in the capital asset, is utilizing the capital asset and thereby loosing gradually investment caused by wear and tear, and would need to replace the same by having lost its value fully over a period of time.” On the facts of the case, although the assessee had only paid part of the price of the buildings in question to the Housing Board, and although the document of title had not yet been executed in its favour, the Court was of the view that the assessee would be entitled to depreciation.

++ the Court is satisfied that the during the AYs in question Assessee was indeed in full control of the three buildings, viz., the hotel building, the WTT and WTC and that in any event, notwithstanding the clarificatory amendment inserted as Explanation No. 1 in Section 32 with effect from 1st April 1988, the Assessee would be entitled to claim depreciation in respect thereof, including depreciation on the plumbing and sanitary ware installed therein. Consequently, Questions 1 to 4 are answered in the affirmative, i.e., in favour of the Assessee and against the Revenue.

B) Amounts received from sub-licensees

++ The Assessee accepted interest free refundable deposits from the allottees of the spaces. The sub-licence agreements which have been referred to earlier made this position explicit. For the AY 1987-88, the AO treated the deposits as trading receipts and this view was confirmed upto the ITAT. This was the view taken for AY 1988-89 as well.

++ ITAT found that the AO had not examined if the amount received by the Assessee in the concerned AY pertained to a sub-licence agreement executed prior to the AY in question. If it did then it was not taxable in view of the earlier decision of the ITAT. However, if it related to an agreement executed in the year under consideration, then the AO had to decide the issue of taxability in light of the amended provisions.

++ what has been transferred to the sub-licencee is only a right of occupancy for the purpose of licence and nothing more. Whatever benefit the Assessee derived from the deposits has already been reflected in its business income on which it has been taxed.

++ the benefit derived by the Assessee on received finances by way of interest pre-deposit 'stands merged with the income declared by the Assessee during business'. No separate addition on account of benefit derived by the Assessee out of the deposits is separate payment of taxes. In view of the discussion hereinbefore of the clauses of the sub-licence agreements, the Court concurs with the view expressed by the ITAT.

C) Foreign exchange rate fluctuation

++ The questions stand covered in favour of the Assessee and against the Revenue by the decision of the Division Bench of this Court in Commissioner of Income Tax v. Woodward Governor India P. Ltd. which has been affirmed by the Supreme Court in Commissioner of Income Tax v. Woodward Governor India P. Ltd. Consequently, the questions are answered in favour of the Assessee and against the Revenue affirming the order of the ITAT.

(See 2015-TIOL-1708-HC-DEL-IT )