(Prayer: Appeals under Section 260A of the Income Tax Act,1961, against the common order of Income Tax Appellate Tribunal, “A” Bench, Chennai, in I.T.A.No.982 & 983/Mds/2012, dated 05.09.2012, for Assessment Years 2007- 2008 and 2008-2009.)

Dr. G. Jayachandran, J.

1. These appeals are filed by the assessee, being aggrieved by the common order passed by the Income Tax Appellate Tribunal, “A” Bench, Chennai, dated 05.09.2012, in I.T.A.Nos.982 and 983/Mds/2012, dismissing the appeals, challenging the orders of the Assessing Authority and the Appellate Authority, disallowing depreciation claimed on Rs.3.00 crores paid as compensation for acquiring the easementary right of the building constructed by the assessee.

2. The Department had taken a consistent stand that payment of Rs.3.00 crores by M.Saravanan to his brother M.Balasubramanian was a personal/an individual transaction made by the assessee and the payment was only to the land and not to the building.

3. The admitted facts in this case are, that the assessee firm had put up a building once owned by M.Saravanan and his brother M.Balasubramanian jointly. After partition, one brother, by name, M.Balasubramanian had no right over the land on which the assessee put up the construction. However, when the construction was put up by the assessee, it was objected by M.Balasubramanian and a Writ Petition was filed, stating that the construction was without any proper permission. Pending disposal of the Writ Petition, brothers entered into a compromise agreement, wherein the easementary right of way vested with Balasubramanian was relinquished on receipt of Rs.3.00 crores. The said amount of Rs.3.00 crores was the subject matter of assessment in appeals.

4. It was contended by the assessee that money was paid by the owner of the land to enhance the value of the building built by the assessee and to have exclusive access to the building. The Department had taken a contra stand that whatever money paid was by one individual to another individual only in respect of the land and depreciation claimed on the payment of Rs.3.00 crores by the assessee who is the leaseholder of the land and the owner of the building alone is not permissible. The claim of the assessee was rejected by the Tribunal. Hence, this Tax Case.

5. Learned Standing Counsel for the respondent Department, referring to Section 32 of the Income Tax Act,1961, and explanation (1) thereto, would submit that the business of the assessee carried on in the leased building cannot seek depreciation unless and until the payment is made for renovation or improvement of the building. He would also submit that purchase of leasehold right from the neighbouring land owner does not tantamount to any improvement to the building.

6. Learned counsel appearing for the appellant would submit that purchase of leasehold right was only to enhance the value of the building and, by entering into compromise, exclusive utility of the building by its owner has improved, therefore, the explanation (1) to Section 32 of the Income Tax Act,1961, squarely applies to the case of the assessee.

7. At the time of admission of these appeals, the following substantial question of law was framed:

               “Whether the Appellate Tribunal is correct in law in sustaining the disallowance of the claim of depreciation relating to the building block in terms of Section 32 of the Act on the enhanced value of such block consequent to the payment of compensation to the co-owner/brother for withdrawing the writ petition filed to prevent the construction of the building ?”

8. On perusing the assessment order, we find that the Assessing Authority disallowed the depreciation claim on the ground that the payment of compensation had not resulted in acquisition of any right and it was not relevant to the assessee’s case, since the payment was made not by the assessee, but by an individual, whereas the Appellate Authority had given a different reason for dismissing the appeals of the assessee. The Appellate Authority had suspected the payment of Rs.3.00 crores and held that, under no stretch of imagination, the expenditure of Balasubramanian in his individual capacity could be charged to building account, as the said building was owned by the firm and even if the compensation amount was funded by the firm, Saravanan’s account was required to be debited with the said sum as expenditure paid on behalf of him. According to the Appellate Authority, the money paid by Saravanan was a contractual liability in his personal capacity and the said amount, in no way, could be relatable to the building constructed by the firm, which was a distinct entity assessable under the Act.

9. We find that the Department has failed to appreciate the fact that the brothers were running the firm together and later parted away. In the course of their division, one of the brothers, as an erstwhile partner of the land, had claimed easementary right. Subsequently, on a compromise with the erstwhile partner, who also happened to be his brother, the assessee had paid Rs.3.00 crores as compensation, for relinquishing the easementary right.

10. Easementary right is an intangible right, which cannot be visualised unlike improvement in the building or renovation to the building. However, it adds value to the property, free from charge, let or hindrance. Therefore, on acquiring an intangible right to the building by paying compensation, the assessee is entitled for depreciation as per Section 32 of the Act, as explained under provision (1).

11. Unfortunately, the Tribunal has confined and restricted the expression used in the explanation, exclusively for tangible right and improvement. Therefore, there is a patent error in the appreciation of Section 32 of the Income Tax Act,1961, while disallowing the depreciation claim of the assessee. Accordingly, the substantial question of law, as framed above, is answered in the negative and held in favour of the assessee.

12. In the result, the Tax Case Appeals are allowed and the order passed by Income Tax Appellate Tribunal, “A” Bench, Chennai, dated 05.09.2012, in I.T.A.No.982 & 983/Mds/2012, is set aside. Consequently, the connected M.P.No.1 of 2013 is closed.