The division bench of Madras High Court held that, Lease compensation charges should be treated as ‘revenue expenditure’ and hence allowable as deduction under section 36(1)(iii) of the Income Tax Act.
The Assessee is engaged in the manufacture of Soft drinks under a franchise from Coco Cola. It had two bottling plants.
The Assessee had set up a new plant in Nemam to commence production from March 1997. In this regard, an ‘Agreement to enter into Lease’ dated 23.2.1995 was entered into between the assessee and M/s.Sundaram Finance Limited for financing of the plant and machinery, at the behest of the assessee and subsequent lease thereof by SFL to the assessee. The agreement provided for various terms and conditions for the intended lease including the payment of compensation charges at the rate of 21%.
While dealing the allowability of an amount of Rs.1,84,63,029/- being compensation charges, the assessee submitted that the new plant at Nemam constituted an extension of the existing business and not a new business. The expenditure was revenue in nature, also allowable under section 37 of the Income Tax Act.
The division bench observed that, “The rejection of the claim u/s 36(1)(iii) was for the reason that the assessee was not per se, the borrower of the funds. However the agreement dated 23.2.1995, while providing for the financial assistance extended by SFL for the purchase of the plant and machinery, also provides for the subsequent lease of the machinery to the assessee. Thus, the arrangement with SFL for financing the acquisition and leasing of the equipment is only for the business purposes of the assessee. The sum and substance of the arrangement is that the assessee engages the services of SFL for rendering financial assistance for acquisition of equipment for its business. SFL, while advancing the funds, negotiates the purchases of the equipment and the assessee undertakes to pay charges at the rate of 21% to compensate SFL for the advances made by it to the manufacturers and suppliers of equipment. The assessee assumes the role of the borrower in this situation. The compensation charges paid are in the nature of interest, liable to be allowed in terms of section 36(1)(iii) of the Income Tax Act”.
The division bench comprising of Justice Nooty Ramamohana Rao and Justice Anita Sumanth also observed that, value of the broken bottles need not be reduced from the written down value for the purpose of calculation of short term capital gains arising from sale of bottles.
“In accordance with the provisions of section 50, where a capital asset forms part of a block of assets and depreciation has been allowed in regard to the same, then, in the computation of capital gain on the transfer of such asset, the cost of acquisition shall be the written down value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block acquired during the previous year. In such an event, and in the light of the fact that the breakages have not been claimed in the computation of income, there is no justification for any further reduction from WDV”, the bench observed.
While disposing the appeal filed by Commissioner of Income Tax, the allowed the revenue contention that, Amount received as sale consideration in respect of goodwill should not be assessed to long term capital gains. The amount representing goodwill is thus liable to be taxed in the present year.
Read the full text of the Judgment below.
