No Depreciation On SIPCOT Payments For Infrastructure Development, But Eligible For 5% Annual Revenue Deduction: Madras High Court

Chief Justice Manindra Mohan Shrivastava and G. Arul Murugan were addressing the appeal pertaining to the claim of depreciation on the sum paid to the State Industries Promotion Corporation of Tamil Nadu Limited (SIPCOT) for the development of infrastructural facilities.

In this case, the assessee had entered into a lease deed with SIPCOT, a State Government undertaking, towards the lease of a plot in the industrial park promoted by the SIPCOT at Sriperumbudur.

The assessee had paid a sum of Rs. 6.20 crores towards development charges as per the lease deed dated 10.03.2006, which has been executed with SIPCOT in respect of a 99-year long-term lease for allotment of an industrial plot.

The assessee had filed the return of income by claiming 10% depreciation for the sum paid as a commercial right for the intangible asset under Section 32(1)(ii) of the Income Tax Act.

The Assessing Officer (AO) rejected the claim, holding that the amount paid to SIPCOT is only for the purpose of land development and the rights obtained by the assessee are only towards land and therefore, the claim of depreciation is not allowable on the building.

The assessee's appeals before the CIT (Commissioner of Income Tax (Appeals) and ITAT Chennai were dismissed.

The ITAT, Chennai (Income Tax Appellate Tribunal), had held that the assessee was not eligible to claim depreciation on sums paid to SIPCOT for the development of common infrastructural facilities.

The Tribunal further disallowed the SIPCOT payment as a revenue expense in the same year, if depreciation on it was not allowed.

The assessee argued that a sum of Rs. 6.20 crores paid by the assessee is for the development of the infrastructure and the right acquired by the assessee is an intangible asset, and as such, the assessee is entitled to claim depreciation on the sum paid, as it is a commercial right under Section 32 of the Act.

The revenue submitted that the claim of depreciation by the assessee towards building was allowed by the AO, and only since this payment of Rs. 6.20 crores was towards the development of infrastructure, which pertains to the land, it has been rightly disallowed.

The bench opined that contributions made by the assessee towards development charges not being owned by him and there being no capital asset, qualify for deduction as a revenue expenditure.

The infrastructure developments merely facilitate the running of the business of the assessee, which is an essential requirement without which the business could not be operated. As such, the contributions made by the assessee are eligible to be treated as revenue expenditure, stated the bench.

The bench further disagreed with the assessee that the entire amount contributed by the assessee towards the development charges has to be allowed as revenue expenditure in the AY during which the same has been paid.

The bench opined that in view of the terms and conditions of the lease, as the entire amount paid does not get crystallised and the same is refundable to the assessee after deduction of 5% for each year in case of resumption or surrender, hence, the sum paid is to be amortised and the assessee would be entitled for deduction by allowing 5% of the contribution made towards the development charges at the end of each year when amount gets crystallised, which becomes non-refundable in view of the terms and conditions of the lease.

The bench allowed the 5% deduction of the sum paid as revenue expenditure in the ensuing AY, as and when the 5% gets crystallised at the end of each year.

In view of the above, the bench partly allowed the appeal.

Case Title: M/s. Hinduja Foundries Ltd. v. The Assistant Commissioner of Income Tax

Citation: 2025 LiveLaw (Mad) 410

Case Number: TCA Nos.794 and 795 of 2016

Counsel for Appellant/Assessee: R. Vijayaraghavan

Counsel for Respondent/Department: V. Pushpa

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