ITAT: Lease Rent Paid for Acquiring Mining Rights is Capital in Nature and Cannot be Allowed as Tax Deduction

ITAT: Lease Rent Paid for Acquiring Mining Rights is Capital in Nature and Cannot be Allowed as Tax Deduction

The Income Tax Appellate Tribunal (ITAT), Pune while adjudicating an appeal filed in the matter of ZF Steering Gear (India) Ltd., vs. DCIT observed that lease rent paid for acquiring mining rights is capital in nature and cannot be allowed as a deduction.

The brief facts of the case were that the appellant is a company engaged in the business of manufacturing mechanical and power steering gears and spares thereof for commercial vehicles, passengers-buses, multi-utility vehicles, passenger-cars, and tractors.

During the financial years 2011–12 and 2012–13, the assessee company acquired on leasehold 1,52,981 sq. m. of land situated at Gujarat Solar Park from Gujarat Power Corporation Limited (GPCL) and land development charges for a total period of 30 years.

Under the agreement, the appellant was required to pay a very nominal annual rent at the rate of Rs 1 per square meter to GPCL. The appellant also claimed amortization of expenses on leasehold land taken for a windmill and solar project based on the tenure of the lease agreement. The Assessing Officer believed that amortization of lease premium cannot be allowed as “revenue expenditure,” as it is of an enduring nature.

The Return of Income for the assessment year 2014-15 was filed on 29th November, 2014 declaring total income of Rs.42,58,29,650. Against the said return of income, the assessment was completed by the Dy. Commissioner of Income Tax, Central Circle-1(1), Pune (‘the Assessing Officer’) vide order dated 28.12.2016 passed under Section 143(3) of the Income Tax Act, 1961 (‘the Act’) made various disallowances.

Being aggrieved by the disallowances, an appeal was filed before the ld. CIT(A), who vide impugned order confirmed addition under Section 14A and also confirmed the disallowance of claim for allowance of balance of additional depreciation in the subsequent assessment year. However, the ld. CIT(A) held that the subsidy received by the appellant company from the Government of Maharashtra under Package Scheme of Incentive, 2007 is capital in nature, but directed the Assessing Officer to reduce the same from the actual cost of the depreciable asset for the purpose of allowing the depreciation. The ld. CIT(A) also confirmed the addition on account of amortization of leasehold premium paid.

Being aggrieved by the decision of the ld. CIT(A), the appellant filed an appeal before ITAT.

The assessee had challenged the methodology of computation of disallowance under Section 14A read with Rule 8D(2)(iii).

The division member bench of Partha Sarthi Choudhary (Judicial Member) and Inturi Rama Rao (Accountant Member) found merit in the contention of the appellant that for the purpose of computation of amount of disallowance under Rule 8D(2)(iii) has to be considered in the light of decisions passed by various High Court.

Therefore, the ITAT remanded the issue of computation of disallowance under Rule 8D(2)(iii) to the file of the Assessing Officer with the direction to compute the value of those investments which yielded the exempt income alone for the purpose of computing the average value of investments.

Next the assessee had challenged the disallowance of claim for allowance of balance of additional depreciation not allowed in the preceding year on the ground that the asset was not used for less than 180 days.

The bench opined that this issue was no longer res integra as it was decided by the Hon’ble Jurisdictional High Court in the case of PCIT vs. M/s. Godrej Industries Ltd, and the legislative amendment has been brought by inserting third proviso to clause (ii) of sub-section (1) of section 32 of the Act allowing the benefit of balance of 50% of depreciation in the subsequent year in such situation.

The ITAT further relied on the decision passed by Supreme Court in the case of Aditya Minerals Pvt. Ltd. vs. CIT. wherein it was held, that lease rent paid for acquiring mining rights is capital in nature and cannot be allowed as a deduction.

The bench observed, “in the light of the judgment of the Hon'ble Supreme Court in the case of Aditya Minerals Pvt. Ltd. the impugned amortization of lease premium cannot be allowed as “revenue expenditure.”

Therefore, the ITAT partly allowed the appeal filed by the assessee.