Itxa/1734/2017 Of The Pr. Commissiner Of Income Tax-3 v. M/S. V Hotels Ltd

Priya Soparkar 1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL (IT) NO.1734 OF 2017 Pr.Commissioner of Income Tax-3 … AppellantV/s.M/s V.Hotels Limited… Respondent --- Mr.A.R.Malhotra with Mr.N.A.Kazi, Advocates for theAppellant. Mr.Percy J. Pardiwalla, Senior Advocate with Mr.Atul K. Jasani,Advocates for the Respondent. --- CORAM : UJJAL BHUYAN & MILIND N. JADHAV, JJ. DATE : SEPTEMBER 21, 2020 P.C.:- 1.Heard Mr.Malhotra, learned standing counsel, revenueand Mr.Pardiwalla, learned senior counsel alongwith Mr.AtulJasani, learned counsel for the respondent/assessee. 2.This appeal has been filed by the revenue under section260A of the Income Tax Act, 1961 (briefly”the Act”hereinafter) against the order dated 26[th] August, 2016 passedby the Income Tax Appellate Tribunal, Mumbai Bench “F”, Priya Soparkar 2itxa 1734-17 Mumbai (referred to as “the Tribunal” hereinafter) in ITA No.3190/Mum/2011 and ITA No.4216/Mum/2011, for theassessment year 2006-2007. 3.ITA No.3190/Mum/2011 was filed by the assesseewhereas ITA No.4216/Mum/2011 was filed by the revenue. 4.The two appeals were heard by the Tribunal alongwitha number of appeals filed by the same parties for theassessment years 2005-2006, 2007-2008 and 2008-2009. 5.As already noted above, the present appeal relates tothe assessment year 2006-2007. 6.The appeal has been preferred on the following twoquestions stated to be substantial questions of law:- “1.Whether on the facts and in thecircumstances of the case and in law, Tribunal isjustified in allowing depreciation ofRs.30,67,319.00 on Floor Space Index (FSI) @10% of total consideration, without appreciatingthat grant of additional FSI is not in the nature ofany kind of assets until and unless the additionalflooring/building is constructed, therefore, noteligible for depreciation in this case? 2.Whether on the facts and in thecircumstances of the case and in law, Tribunal isjustified in allowing depreciation amounting toRs.4,88,08,717.00 on intangible assets as claimedby the assessee?” 7.During the hearing on February 12, 2020, there wasconsensus at the Bar that in so far question No.2 is concerned,the same has already been answered by this Court in the caseof the assessee itself in Income Tax Appeal Nos.835 and 836of 2016, decided on 17[th] December, 2018, the onlydifference being that at that stage the assessee was knownas Tulip Hospitality Services Limited. It has been held that itis not a substantial question of law. Thereafter, learnedcounsel for the parties were heard on question No.1. 8.In so far question No.1 is concerned, the issue iswhether Tribunal is justified in allowing depreciation ofRs.30,67,319.00 on the FSI @ 10% of total consideration. 9.Assessee is a company assessed under the Act. It isengaged in hoteliering business. For the assessment yearunder consideration, it filed its return of income disclosingloss of Rs.26,36,59,486.00. In the course of the assessmentproceeding, Assessing Officer observed that the assesseehad claimed depreciation of Rs.63,90,248.00 on FSI; on anopening written down value (WDV) of Rs.2,55,60,990.00,depreciation @ 25% was claimed. Assessee was asked toexplain. Reply of the assessee was examined. In theassessment order dated 13[th] October, 2008 passed undersection 143(3) of the Act, Assessing Officer rejected the saidclaim of the assessee and added back the said sum to thetotal income of the assessee. It was held thus:- Priya Soparkar “3.4 The reply of the assessee has been examinedin the light of the provisions of Income Tax Act andthe nature of payment for purchase of FSI. Priya Soparkar “3.4 The reply of the assessee has been examinedin the light of the provisions of Income Tax Act andthe nature of payment for purchase of FSI. 3.5 The brief facts have been stated by theassessee. The assessee paid a premium ofRs.3,40,81,320/-totheGovernmentofMaharashtra and BMC in lieu of grant of additionalFSI of 10022.94 sq.mts. This additional grant ofFSI was 0.476 times over and above the existingFSI of 1.5. Till date he assessee has paid only anamount of Rs.68,16,264/- to the Government andthe balance amount of Rs.2,72,65,056/- is not yetpaid. 3.6 With the grant of additional FSI, the assesseegot the permission to increase the size of the totalbuilding by constructing additional floors oradditional building to the extent of the FSIavailable. The grant of FSI is not in the nature ofany asset. It is only a payment made to thegovernment for increasing the building size. TheFSI can be used only when the assessee choosesto construct the additional floors on its hotel.Thus, FSI is not in the nature of any right of anytype. 3.7 Under the provisions of Income Tax Act, theassessee can claim depreciation only on the assetsused in its business. By virtue of its nature, FSI inthe very first instance is not a business asset. FSIwill get converted into asset as and whenadditional floors or additional building isconstructed. Therefore, the payment for FSI canonly be included in the value of the building blockas and when the same is utilized. 3.8 In view of the above discussions an amountof Rs.63,90,248/- is added back to the total incomeof the assessee company.” 10.Thus, Assessing Officer took the view that grant of FSIwas not in the nature of any asset. It was only a paymentmade to the government for increasing the size of thebuilding. FSI can be used only when the assessee chooses Priya Soparkar 5 itxa 1734-17 to construct the additional floors. FSI will get converted intoasset as and when additional floors or additional building isconstructed. Thus, payment for FSI can only be included inthe value of the building block as and when the same isutilized. Therefore, the amount claimed as depreciation onabove account was declined and the same was added backto the total income of the assessee. 11.Aggrieved by the above, assessee preferred appealbefore the Commission of Income Tax (Appeals)-7, Mumbai,referred to hereinafter as “CIT(A)”. On the above issue, CIT(A) noted that the reasons for disallowance was the sameas in the immediately preceding assessment year i.e.assessment year 2005-2006 . CIT(A) further noted the waythe issue was decided by him in the appeal for theimmediately preceding assessment year. The same isextracted hereunder:- “I have considered the facts of the case. Theappellant has paid during the year Rs.68,16,264/-only although the value of FSI is Rs.3,40,81,320/-and had claimed depreciation on whole amount @25% as intangible asset u/s.32(1)(ii). The questionis, whether FSI is an intangible asset of ‘similarnature of know how, patent, copyright, trademark, licenses, franchises, etc.’ as provided insection 32(1)(ii) of the Act to be eligible fordepreciation under Income tax Act. The appellant,while arguing that FSI is a commercial right, hasnot explained to which of the items mentioned inthe section 32(2)(ii) of the Act the FSI has a similarnature. Even if it is accepted as a commercialright which will improve the business interest ofthe assessee, in no way it is of similar nature ofknow how, patent, copyright, trade mark licensefranchise etc. Accordingly, the action of A.O. in Priya Soparkar Priya Soparkar disallowing the claim of depreciation u/s.32(2)(ii)of the Act amounting to Rs.85,20,330/- is upheld.However I accept that the amount spent is for thepurpose of business and being of enduring nature,it will add value to the existing building asadditional FSI will enable the company to addmore floors over and above the existing structure.Since it relates to the building block of asset, theoverall cost of the building block will increase bythis amount. Accordingly the A.O. is directed toadd the amount spent during the year i.e.Rs.68,16,264/- to the building block of asset andallow depreciation as per law.” 12.Thus, while action of the assessing officer disallowingthe claim of depreciation was upheld, it was however heldthat the amount spent was for the purpose of business andbeing of enduring nature, it would add to existing value ofthe building as additional FSI would enable the assessee toadd more floors over and above the existing structure. Sinceit related to the building block of the asset, the overall costof the building block would increase by the said amount.Accordingly, assessing officer was directed to add the amountspent during the year to the building block of asset andallow depreciation as per law. 13. CIT(A) vide the appellate order dated 7[th] March, 2011followed the above decision. While the claim of depreciationon FSI as an intangible asset under section 32 (1)(ii) of theAct was not accepted, the payment was allowed to be addedto the building block of asset for depreciation as per law. Priya Soparkar 7 itxa 1734-17 14. As against such finding of CIT(A), appeals and cross-appeals were filed by the assessee and the revenue beforethe Tribunal. While taking up the appeal of the assessee i.e.,ITA No.3190/Mum/2011 for the assessment year 2006-2007,Tribunal noted that the issue relating to disallowance ofdepreciation on FSI was decided by the Tribunal in theassessee’s appeal for the assessment year 2005-2006.Therefore, by the common order dated 26[th] August, 2016,Tribunal held that the finding given in the assessee’s appealfor the assessment year 2005-2006 would apply mutatismuntandis in the appeal for the assessment year underconsideration. In the appeal of the assessee for theassessment year 2005-2006, Tribunal had held as under:- “16. We have considered the rival submissionsand also perused the relevant finding in theimpugned orders as well as entire gamut of factsas discussed above. During the year underconsideration the assessee company has acquiredcertain rights in the form of ‘additional FSI’ fromthe Urban Development Department; Governmentof Maharashtra on its Hotel (Tulip Star Hotel), videletter dated 01.12.2003. The said letter statedthat on payment of requisite premium to theGovernment and the BMC, ‘additional FSI’ of10022.94 sq.meters would be granted to theassessee which would be additional FSI of 0.476over and above the existing FSI of 1.5.Subsequently, order from the Government wasreceived on 04.08.2004 wherein the assessee hadto make the payment of the premium to theGovernment and the BMC amounting toRs.3,40,81,320/-. Such a payment was to bemade under the installment Scheme. Inpursuance thereof, the assessee paid its firstinstallment of Rs.68,16,264/-. Thus, the assesseereceived the rights in the form of ‘additional FSI’which has been capitalized in the books of Priya Soparkar Priya Soparkar accounts. In the books of account, the assesseecompany had debited the whole amount ofRs.3,40,81,320/- in the Schedule of ‘fixed assets’as “Floor Space Index” and a corresponding creditentry was made as a liability payable toGovernment/BMC. In the Balance sheet as on 31[st]March, 2005, under the Schedule “B” showing‘current liabilities and the provision’, the assesseehas shown the liability under the head “premiumpayable” at Rs.2,72,65,056/- (i.e., Rs.340,81,320 –Rs.68,16,264). The assessee had claimeddepreciation @ 25% on the ground that it is asome kind of business or commercial rights,therefore, it falls within the realm and scope of“intangible assets” allowable for depreciation @25% under section 32(1)(ii). This has beennegated by the Ld. CIT(A) on the ground that theFSI does not fall within the scope and ambit ofsection 32(1)(ii). However, he accepted theassessee’s contention that, the amount spent forthe business purpose will go to add to the value ofthe existing building as additional FSI, which willenable the assessee company to add more floorsto the existing structure and it relates to buildingcomplex of assets. Thus, he directed to allow thedepreciation applicable to the building, that is, @10%. However, he has restricted the saiddepreciation on the amount paid during the yearRs.68,16,264/- and not to the entire amount aspayable to the Government. 17.As observed in the earlier part of our order,the Floor Space Index is the ratio of the total floorof the building on a certain location to the size ofthe land of that location. In other words, it isquotient of the ratio of the combined gross floorarea of all the floors. Granting of ‘additional FSI’gives the right to construct the additional floor/son account of increase in Floor Space Index byvirtue of DCR, 1991. Here in this case, it isundisputed fact as discussed above that theassessee received the additional FSI of 10022.94sq.meters for which premium amount ofRs.340,81,320/- was payable to the Government/BMC under the “installment scheme”. The Priya Soparkar 17.As observed in the earlier part of our order,the Floor Space Index is the ratio of the total floorof the building on a certain location to the size ofthe land of that location. In other words, it isquotient of the ratio of the combined gross floorarea of all the floors. Granting of ‘additional FSI’gives the right to construct the additional floor/son account of increase in Floor Space Index byvirtue of DCR, 1991. Here in this case, it isundisputed fact as discussed above that theassessee received the additional FSI of 10022.94sq.meters for which premium amount ofRs.340,81,320/- was payable to the Government/BMC under the “installment scheme”. The Priya Soparkar assessee did pay the first installment ofRs.68,16,264/-, however, the balance installment/payment has not been paid for many years asbrought on record. Once the assessee hasreceived the FSI, it has made the accountingentries in its books by debiting the entire amountof Rs.3,40,81,320/- on the asset side of theBalance sheet by debiting to the details of “FixedAssets” and the corresponding liability ofRs.2,72,65,056 which remained unpaid (i.e.,Rs.3,40,81,320 – Rs.68,16,264 = Rs.2,72,65,056)has been shown as premium payable foradditional FSI to the Government/BMC. Once theentire amount has been debited to the fixedassets and has been brought in the Balance sheetin the Schedule of fixed asset, that is, to the blockof a building, then depreciation prima facie has tobe considered on the full amount debited i.e.Rs.3,40,81,320/-. Before us, the Ld. DR reiteratedthe finding of CIT(A) that the depreciation cannotbe allowed on the whole of the amount, becausethe assessee had only paid the first installment ofRs.68,16,264/-. However we are unable to acceptthis contention, because once the assesseereceives the right to construct extra floor/storey, itenhances the value/cost of the building andassessee under the principle of accounting hasdebited the entire amount of FSI right to the blockof asset of the building by making a correspondingentry as ‘liability’ in the Balance-sheet. This canalso be explained by way of an example; suppose,assessee would have taken a bank loan for payingthe entire or balance premium (sayRs.2,72,65,056) on FSI to the Government/BMC,then assessee would have debited the entireamount to FSI account under the head ‘fixedassets’ and credited to the bank and disclosed itas its liability in the Balance sheet. Now, ifassessee has paid the premium on installmentscheme, then assessee would debit the wholeamount on the asset side and make a credit to thevendor account by showing it as liability payableto him for the amount which remains to be paid. Itis immaterial whether for many years that liability Priya Soparkar or installment has been paid subsequently or not.Once the corresponding liability in the accountshas been shown, then depreciation on the assetshould be given irrespective of the fact that thisyear only part payment was made for theacquisition of that asset. Thus, we hold thatassessee would be eligible for depreciation for theentire amount of Rs.3,40,81,320/- debited to theaccount of asset. Priya Soparkar or installment has been paid subsequently or not.Once the corresponding liability in the accountshas been shown, then depreciation on the assetshould be given irrespective of the fact that thisyear only part payment was made for theacquisition of that asset. Thus, we hold thatassessee would be eligible for depreciation for theentire amount of Rs.3,40,81,320/- debited to theaccount of asset. 18. Now, coming to the rate of depreciation,whether it has to be allowed @ 10% or 25%, we donot find any merits in the contention of theassessee that the additional FSI is a business orcommercial rights falling within the realm andscope of ‘intangible asset’ within the scope ofsection 32(1)(ii). The FSI only relates to giving ofthe right to construct additional floor to theassessee which only goes to enhance the value orcost of the existing asset / building. It strictlypertains to the addition in the building only and,therefore, depreciation allowable would be at therates applicable to the buildings only and for notsome kind of intangible right u/s 32(1)(ii).Accordingly, we uphold the observation and orderof the Ld. CIT(A) to the extent that thedepreciation allowable would be on ratesapplicable to the building only that is, @ 10% andnot @ 25% for some kind of intangible right. Thusin our conclusion, the assessee would be entitledto depreciation @ 10% on the whole of theconsideration towards FSI of Rs.3,40,81,320/-. Inview of our finding ground No.1 is treated asdismissed and ground No.2 is treated as allowed.” 15.From the above, we find that the assessee had acquiredcertain rights in the form of additional FSI over and abovethe existing FSI subject to payment of premium. However,premium was to be paid under an installment scheme. Firstinstallment was paid by the assessee. On payment of firstinstallment, assessee received the rights in the form of Priya Soparkar itxa 1734-17 additional FSI which was capitalized in the books of account.In the books of account, assessee had debited the entirepremium amount in the schedule of fixed assets as FSI anda corresponding credit entry was made as a liability to bepaid. This was also reflected in the balance sheet as thebalance premium amount was shown as liability. 16. After noting that granting of additional FSI gave theright to construct additional floors to the assessee, Tribunalfurther noted about the entries in the books of account andthe balance sheet. Thereafter, a view was taken that oncethe entire amount has been debited to the fixed assets andhas been brought in the balance sheet in the schedule offixed asset i.e. to the block of a building then depreciationwould have to be considered on the full amount of premiumdebited. This is because once the assessee receives the rightto construct extra floor it enhances the value of the building;assessee under the principle of accounting had debited theentire amount of FSI right to the block of asset of thebuilding by making a corresponding entry as liability in thebalance sheet. If assessee had paid the premium oninstallment scheme, then assessee would debit the wholeamount on the asset side and make a credit to the vendoraccount by showing it as a liability payable by it for theamount which remained to be paid, irrespective of the numberof years that liability remained pending. Once thecorresponding liability in the accounts has been shown, thedepreciation on the asset should be given irrespective of thefact that for that year only part payment was made for Priya Soparkar 12 itxa 1734-17 acquisition of the asset. Therefore, Tribunal held that theassessee would be eligible for depreciation for the entireamount of premium debited to the account of the asset. Priya Soparkar 12 itxa 1734-17 acquisition of the asset. Therefore, Tribunal held that theassessee would be eligible for depreciation for the entireamount of premium debited to the account of the asset. 17.In so far rate of depreciation is concerned, Tribunal didnot accept the contention of the assessee that the additionalFSI is a business or commercial right falling within the realmand scope of intangible asset within the meaning of section32(1)(ii) of the Act. FSI only related to giving of the right toconstruct additional floor to the assessee which enhancesthe value or cost of the existing asset/ building. It strictlypertains to addition to the building and therefore depreciationallowable would be at the rate applicable to the buildingand not for some kind of intangible right under section 32(1)(ii). Accordingly, the decision of CIT(A) to the above extentwas upheld. Therefore, Tribunal held that the assessee wouldbe entitled to depreciation @ 10% on the whole of theconsideration towards FSI and not @ 25%. 18.On due consideration we are of the opinion that viewtaken by the Tribunal is a reasonable one, having regard tothe provisions contained in sections 32 (1)(ii) and 43(6)(c)of the Act. That apart, we find that revenue had notquestioned the finding of CIT(A) that the amount spent bythe assessee would add to the value of the existing buildingas additional FSI would be available to the assessee; theamount spent was for the purpose of business and was ofenduring nature; since it related to the building block of theasset, the overall cost of the building block would increase Priya Soparkar 13 itxa 1734-17 by this amount; therefore CIT(A) directed the AssessingOfficer to add the amount spent during the year to thebuilding block of asset and allow depreciation as per law i.e.on the rate applicable to the building which is 10% and not25%. 19.We find from the documents placed on record that theorder of the CIT(A) was accepted by the revenue and aconscious decision was taken not to file further appeal.When the revenue sought to file cross-objection belatedlythe same was dismissed on the ground of limitation. Thatapart, having not filed appeal against such decision of CIT(A), revenue cannot now raise a dispute as to percentage ofdepreciation. In the circumstances, we do not find any goodground to disturb the finding of the Tribunal on this point.Therefore, we are of the view that no substantial question oflaw arises from the order of the Tribunal on this issue. 20.Appeal is accordingly dismissed, but without any orderas to cost. 21.This order will be digitally signed by the PrivateSecretary/Personal Assistant of this Court. All concerned willact on production by fax or email of a digitally signed copyof this order. (MILIND N. JADHAV, J.) (UJJAL BHUYAN, J.) ….