While clarifying that the absence of ownership over an infrastructure asset negates the claim for depreciation, the Madras High Court held that Hinduja Foundries (HFL-appellant) could not claim depreciation under Section 32(1)(ii) of the Income Tax Act, as it was not the owner, wholly or partly, of the infrastructure; and a mere long-term leasehold right in its favour did not confer ownership.
The Court explained that even though the appellant had obtained a long-term right over the infrastructure, the long-term leasehold right cannot substitute the term ‘owner’. Further, the term ‘owner’ implies that a person owns that particular asset, whereas the long-term right to use does not in any manner make the person owner thereon but only allows that person to use that asset for the specified period.
The Division Bench comprising the Chief Justice Manindra Mohan Shrivastava and Justice G Arul Murugan referred to the provision of Section 32(1), which states that to claim depreciation, the taxpayer has to own the intangible asset either wholly or partly, which is used for business or profession.
Thus, when the language used in the provision is unambiguous, that the appellant has to own the intangible asset wholly or partly for the purpose of claiming depreciation, it cannot be read or interpreted in any other way. Since the appellant has only the long-term leasehold right over the infrastructural facilities, and it is not an owner, either wholly or partly owning the intangible asset, the Revenue Authorities had rightly disallowed the claim of depreciation.
However, the Bench allowed the alternative claim of treating the payments as revenue expenditure under Section 37 of the Income Tax Act, holding that the contributions towards roads, streets, water facilities, drainage, etc., were essential for establishing and running the business and did not create an enduring asset.
Therefore, the Bench directed that the expenditure shall be allowed proportionately, at about 5% per year, in line with the lease terms, as the full amount was not immediately crystallised.
Briefly, the disputes related to payments made by the appellant to SIPCOT for the development of common infrastructural facilities in a long-term lease of industrial plots. The appellant claimed depreciation u/s 32(1)(ii) of the Income Tax Act on these payments, asserting that they conferred a commercial right over the infrastructure. Alternatively, the appellant also sought deduction of the payments as revenue expenditure u/s 37 of the Income Tax Act, arguing that the infrastructural facilities were essential for carrying out business.
The ITAT had disallowed both claims, observing that the appellant did not own the infrastructure and had not booked the development charges in its books of account or in its return of income.
Appearances:
Advocates R Vijayaraghavan, Subbaraya Aiyar, and Padmanabhan Ramamani, for the Appellant/ Taxpayer
Senior Advocate V. Pushpa, for the Respondent/ Revenue
