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2014 (12) TMI 130 - AT - Income TaxTreatment of expenses incurred on construction of superstructure on leasehold land Revenue expenses or capital expenses - Whether the assessee is carrying on business or profession in a leased building or other rights of occupancy and whether the assessee has incurred any capital expenditure for the purpose of business on the construction of any structure or doing of any work in or in relation to and by way of renovation or extension or improvement in the building Held that - The assessee has taken the land on leasehold on which the assessee constructed super structure and claimed as revenue expenditure revenue contended that the assessee constructed the building in the leased land and it is not the case of renovation of the leased building or improvement of the leased building - These construction activities carried out by the assessee if put on to the test of Explanation 1 would show that the construction made by the assessee on the leased out premises would amount to capital expenditure in Commissioner of Income-Tax Versus Madras Auto Service Pvt. Limited 1998 (8) TMI 1 - SUPREME Court - what advantage did the assessee get by constructing a building which belonged to somebody else and spending money for such reconstruction - The assessee got a long lease of a newly constructed building suitable to its own business at a very concessional rent - The expenditure was made in order to secure a long lease of new and more suitable business premises at a lower rent - it is essential that the expenditure incurred on the construction of any structure on the leased premises should result in enduring benefit - the case of the assessee very much falls within the ambit of Explanation 1 of section 32(1) of the Act Decided in favour of revenue.
Issues Involved:
1. Treatment of expenditure incurred on construction of superstructure on leasehold land as revenue expenditure. 2. Allowability of loss incurred on discarded assets as revenue loss. Detailed Analysis: 1. Treatment of Expenditure Incurred on Construction of Superstructure on Leasehold Land as Revenue Expenditure: The primary issue in these appeals is whether the expenditure incurred on constructing superstructures on leasehold land should be treated as revenue expenditure or capital expenditure. The assessee, a dealer of vehicles and an authorized service center, incurred substantial costs for constructing superstructures and setting up workshop facilities on leasehold premises. The Assessing Officer (AO) treated these expenses as capital expenditure, whereas the assessee claimed them as revenue expenditure based on the decision of the Hon'ble Madras High Court in CIT vs. TVS Lean Logistics Ltd. (293 ITR 432). The CIT(A) sided with the assessee, referencing the Cochin Bench of ITAT's decision in ACIT vs. MM Publications Ltd. and the Madras High Court's judgment in TVS Lean Logistics Ltd., which held that such expenditures are revenue in nature if the construction is for business purposes and the building is not owned by the assessee. The CIT(A) observed that the construction was for business purposes and did not result in the acquisition of a capital asset, thus qualifying as revenue expenditure. However, the Revenue argued that the provisions of section 32(1) of the Act should apply, and the expenditure should be considered capital in nature. The Revenue cited the jurisdictional High Court's decision in Joy Alukkas Pvt. Ltd. and contended that the construction of a superstructure on leasehold land does not qualify as an improvement or repair, thus not fitting the criteria for revenue expenditure. The Tribunal examined Explanation 1 to section 32(1) of the Act, which deals with capital expenditure on leased premises. The Tribunal noted that the construction of superstructures on leased land falls within the ambit of capital expenditure as per the Explanation. The Tribunal also referred to the Supreme Court's judgment in Madras Auto Service (P) Ltd., which emphasized that expenditure resulting in enduring business advantage, even if the asset belongs to someone else, should be considered revenue expenditure. However, the Tribunal concluded that the assessee's case falls within the scope of Explanation 1 to section 32(1) and therefore should be treated as capital expenditure. Consequently, this ground of the Revenue was allowed. 2. Allowability of Loss Incurred on Discarded Assets as Revenue Loss: For the assessment year 2009-10, the issue was whether the loss incurred on discarded assets should be treated as revenue loss. The CIT(A) allowed the loss as revenue expenditure, but the Revenue contested this decision. The Tribunal held that the loss on discarded assets is a capital loss, not a revenue loss, as it pertains to the loss of a capital asset. Therefore, this ground of the Revenue was also allowed. Conclusion: The Tribunal allowed all the appeals filed by the Revenue, concluding that the expenditure on constructing superstructures on leasehold land should be treated as capital expenditure and the loss on discarded assets should be treated as a capital loss. The judgment emphasized the importance of adhering to the statutory provisions and judicial precedents in determining the nature of such expenditures.
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