Safiya Malik

The High Court of Judicature at Madras, Division Bench of Chief Justice Manindra Mohan Shrivastava and Justice G. Arul Murugan held that depreciation cannot be claimed on the amount paid to the State Industries Promotion Corporation of Tamil Nadu Limited (SIPCOT) for infrastructure development. The Bench was hearing appeals concerning an assessee’s claim for depreciation on sums paid to SIPCOT for creating common industrial facilities such as roads and drainage. The Court held that while such payments do not qualify as capital assets eligible for depreciation, they constitute necessary business expenditure, allowing the assessee to claim 5% of the contribution annually as revenue deduction for each year the amount becomes non-refundable.

The assessee, M/s. Hinduja Foundries Ltd., engaged in the manufacture of grey iron and aluminium die castings, entered into a 99-year lease deed dated 10.03.2006 with SIPCOT for an industrial plot. Under Clause 2, the assessee paid ₹1.80 crores as plot deposit and ₹6.20 crores towards development charges. Clause 14(ii) provided that only the plot deposit was refundable, while development charges were refundable with a 5% deduction per year or part thereof, subject to a minimum of 15%, in the event of surrender or resumption.

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The assessee filed its return for AY 2008–09 claiming depreciation at 10% on the ₹6.20 crores paid to SIPCOT, treating it as part of building and as a commercial right under Section 32(1)(ii). The Assessing Officer rejected the claim, holding the amount to be related to land development and not an asset owned by the assessee. The assessee alternatively sought deduction of the development charges as revenue expenditure under Section 37. The CIT(A) upheld the AO’s view, rejecting both the depreciation and the alternate revenue-expenditure claim, stating that the assessee neither developed nor owned the infrastructure and that the expenditure was capital in nature.

In further appeals, the Tribunal affirmed that the assessee was not entitled to depreciation, observing that ownership of the asset was essential. In one batch of appeals, the Tribunal did not consider the alternate ground; in another, it rejected the alternate claim on the ground that no such expenditure was debited in the books or claimed in the return. The statutory provisions involved included Section 32(1)(ii) regarding depreciation on intangible assets and Section 37 concerning revenue expenditure. The materials relied upon were the lease deed, assessment orders, appellate orders, and the nature of payments made to SIPCOT.

The Court observed that the assessee claimed depreciation on ₹6.20 crores treating it as an intangible asset. It recorded that “the assessee having only the long-term leasehold right over the infrastructural facilities is not an owner either wholly or partly owning the intangible asset.” It further stated that “the long-term leasehold right cannot substitute the term ‘owner’,” noting that Section 32(1)(ii) expressly required ownership.

The Court examined the nature of the infrastructural facilities and noted that “the common areas have been retained with the lessor for being developed for providing facilities, like roads, street lights, drainage, etc., for the use of all the other industrial undertakings in common.” It recorded that despite payment of development charges, “the assessee does not acquire any right of ownership” and “the mere contribution for development of the infrastructure will not make the assessee an owner.”

Turning to the alternate claim under Section 37, the Court recorded that “the infrastructural developments towards roads, streets and other facilities are basic requirements, without which the assessee will not be in a position to put up the factory or run the business.” It observed that the expenditure was not in the nature of betterment or an enduring benefit, stating that “there is no addition to value of assets owned by the assessee.”

The Court also recorded that the Tribunal erred in rejecting the alternate claim merely because it was not debited in the books, noting that “they cannot make a double debit when the assessee has already made a claim for this contribution as depreciation.” It further observed: “When the claim of depreciation…has been rejected, then the alternate claim of the assessee to treat it as a revenue expenditure ought to have been considered on its own merits.”

Regarding the manner of deduction, the Court held that the entire amount did not crystallise in one year because “the same is refundable…after deduction of 5% for each year in case of resumption or surrender,” and therefore “the sum paid is to be amortised and the assessee would be entitled for deduction by allowing 5%…at the end of each year when amount gets crystallised.”

The Court held that the substantial questions of law 1 to 3 were answered against the assessee and confirmed the disallowance of depreciation under Section 32(1)(ii). It stated that “the decisions of the Tribunal and the authorities in disallowing the claim of the assessee of depreciation under Section 32(1)(ii) of the Act, is confirmed.”

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For substantial questions of law 4 and 5, the Court held in favour of the assessee, setting aside the Tribunal’s findings. It directed that “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. The AO shall give effect to the decision, by allowing the corresponding deductions as revenue expenditure in each of the AY.”

The Court recorded that the assessee had not pressed questions of law 6 and 7, and accordingly “the appeal pertaining to question of law 6 and 7 stands dismissed as not pressed. The Tax Appeals are partly allowed to the extent indicated above.”

Advocates Representing the Parties

For the Appellants (Assessee): Mr. R. Vijayaraghavan for M/s. Subbaraya Aiyar Padmanabhan Ramamani

For the Respondents (Revenue): Mrs. V. Pushpa, Senior Standing Counsel

Case Title: M/s. Hinduja Foundries Ltd. v. Assistant Commissioner of Income Tax
Neutral Citation: 2025:MHC:2347
Case Number: TCA Nos. 794, 795 of 2016 and 798, 800–803 of 2018
Bench: Chief Justice Manindra Mohan Shrivastava and Justice G. Arul Murugan