2014 (8) TMI 70 - HC - Income Tax

Depreciation - Expenses on construction of building on leasehold land Applicability of section 32(1A) Held that - The expenses incurred by the assessee falls into the second category Following the decision in CIT Vs. MADRAS AUTO SERVICE PVT. LTD 1998 (8) TMI 1 - SUPREME Court - unless the expenditure incurred for construction of the building is treated as capital expenditure, the question of her claiming the benefit u/s 32 (1A) does not arise - The Act does not maintain any distinction as to the purport of capital expenditure with reference to different provisions - Either it has to be treated as capital expenditure for all purposes covered by the Act or not at all Decided in favour of Revenue. Rents received from building property on leasehold land Income from business or house property Held that - Assessee was treated as lessee, may be for a period of 30 years and for certain years, the income derived from the building was treated as the one from business -The construction of the building on the land taken on lease was obviously for the purpose of business and not with an intention to own it - If the intention of the respondent was to own the property, the transaction would have been different altogether - Though the lease is one of the forms of transfer of property, it does not lead to conferment of rights of ownership - That would be possible only when a sale as defined under Section 54 of the Transfer of Property Act takes place income to be treated as business income - Decided against Revenue.

Issues Involved:

1. Whether the expenditure incurred by the assessee on the construction of the building on leasehold land is a revenue expenditure.
2. Applicability of Section 32 (1A) of the Income Tax Act to the case.
3. Whether the rent received from the building constructed on leasehold land is assessable under the head 'business' or 'property'.
4. Ownership status of the superstructure (building) constructed by the assessee on the leasehold land.

Detailed Analysis:

Issue 1: Revenue vs. Capital Expenditure

The primary issue was whether the expenditure incurred by the respondent (assessee) for constructing a building on leasehold land should be treated as capital expenditure or revenue expenditure. The Revenue argued that the expenditure should be treated as capital expenditure since it resulted in an enduring benefit akin to ownership. Conversely, the respondent contended that the expenditure should be treated as revenue expenditure, as the respondent did not acquire ownership rights over the property.

The court noted that capital expenditure results in an enduring benefit and is typically incurred by the owner of the property. In this case, the respondent, being a lessee and not the owner, incurred the expenditure. The court referred to the Supreme Court's judgment in CIT Vs. MADRAS AUTO SERVICE PVT. LTD., which supported the respondent's stance. Consequently, the court ruled in favor of the respondent, treating the expenditure as revenue expenditure.

Issue 2: Applicability of Section 32 (1A)

This issue was contingent on the resolution of Issue 1. Section 32 (1A) pertains to capital expenditure. Since the court ruled that the expenditure was revenue in nature, the provisions of Section 32 (1A) did not apply. The court concluded that this question was redundant and answered it in favor of the Revenue, stating that the respondent was not entitled to benefits under Section 32 (1A).

Issue 3: Head of Income - Business vs. Property

The third issue was whether the income derived from the leased premises should be assessed under the head 'business' or 'property'. The Revenue argued that the respondent should be treated as the owner of the property for tax purposes, and thus the income should be assessed as property income. The respondent maintained that the income should be treated as business income, as the construction and leasing of buildings were part of their business activities.

The court observed that for the assessment year 1986-87, the Income Tax Officer had treated the income as business income. The court referred to the legal principle that a lessee cannot be treated as the owner unless the lease is transformed into ownership through the prescribed legal process. The court rejected the Revenue's argument, emphasizing that the construction was for business purposes and not for ownership. Thus, the court ruled in favor of the respondent, treating the income as business income.

Issue 4: Ownership of the Superstructure

The fourth issue questioned the ownership status of the building constructed by the respondent on the leasehold land. The court noted a defect in the framing of this question, as it was contradictory to the established facts. The respondent was recognized as a lessee, and the income derived from the building was treated as business income in certain years. The court reiterated that a lease does not confer ownership rights, which can only be acquired through a sale as defined under Section 54 of the Transfer of Property Act.

The court found the question to be superfluous and unnecessary, given that the respondent was never treated as the owner of the superstructure. The court thus did not provide a separate answer to this issue.

Conclusion:

The court answered the reference by ruling in favor of the respondent on Issues 1 and 3, treating the expenditure as revenue expenditure and the income as business income. Issue 2 was answered in favor of the Revenue, deeming it redundant. Issue 4 was considered superfluous and unnecessary.

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