2015 (2) TMI 399 - AT - Income Tax

Sheds constructed on lease-hold land - Capital expenditure v/s revenue expenditure - whether case of assessee falls within the ambit of Explanation-1 to Section 32(1) of the Income Tax Act, 1961? - Held that - Perusal of the records show that the assessee was allotted four yards for storage i.e., open space without shed. The assessee contributed for construction of sheds on the space provided by the Tamil Nadu Foodgrains Marketing Yard Ltd. Thus, there was no building or any structure in existence on the land in relation to which any renovation or extension or improvement or any similar work was carried out by the assessee. The Hon'ble Madras High Court in the case of CIT Vs. TVS Lean Logistics Ltd., (2007 (6) TMI 44 - HIGH COURT, MADRAS ) has held that Explanation-1 will not apply where there is no building. In the present case, the facts as emanating from records show that the assessee has not taken any building on lease. Further, the assessee has stated that with the contribution for construction of sheds, the assessee shall be entitled for lower monthly lease rents. This fact has not been disputed by the Revenue. The payment of lease rentals is a revenue expenditure. Thus, the contribution made by assessee initially would save revenue expenditure in later years. Thus, in the light of the judgments discussed above, it can be safely construed that the expenditure incurred towards construction of sheds by the assessee is revenue in nature. - Decided in favour of assessee.

Summary

Issues:
1. Classification of expenditure on construction of sheds on lease-hold land as revenue or capital in nature.

Analysis:
The appeal involved a dispute regarding the classification of expenditure incurred by the assessee on the construction of sheds on lease-hold land as revenue or capital in nature for the Assessment Year 2009-10. The Assessing Officer considered the expenditure as capital expenditure under Explanation-1 to Section 32(1) of the Income Tax Act, 1961, disallowing it for depreciation. The Commissioner of Income Tax (Appeals) upheld this decision, leading to the assessee appealing to the Tribunal.

The assessee argued that the construction of sheds did not result in the creation of any enduring asset and should be considered revenue expenditure. The assessee highlighted that the sheds were constructed on land leased from Tamil Nadu Foodgrains Marketing Yard Limited and would be transferred back to the lessor after the lease period. The assessee relied on legal precedents, including the decision of the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. and the Hon'ble Madras High Court in the case of CIT Vs. TVS Lean Logistics Ltd.

On the other hand, the Revenue contended that post the insertion of Explanation-1 to Section 32(1), any construction on lease-hold premises should be treated as capital expenditure. The Revenue supported its argument by citing legal decisions such as L.H. Sugar Factory & Oil Mills (P) Ltd. Vs. CIT, Indian Aluminium Co. Ltd. Vs. CIT, and a decision of a co-ordinate bench of the Tribunal in the case of ABT Ltd. Vs. ACIT.

After hearing both parties and examining the relevant provisions and legal precedents, the Tribunal focused on the interpretation of Explanation-1 to Section 32(1) introduced in 1986. The Tribunal referred to the Hon'ble Madras High Court's judgment in the case of CIT Vs. TVS Lean Logistics Ltd., which clarified that the Explanation would not apply if no building was taken on lease. The Tribunal noted that the assessee had not taken any building on lease and had only contributed towards the construction of sheds for storage purposes.

Additionally, the Tribunal considered the argument that the initial expenditure by the assessee would result in saving revenue expenditure in subsequent years, supporting the contention that the expenditure should be treated as revenue in nature. The Tribunal distinguished the facts of the case from the legal decisions cited by the Revenue, concluding that the expenditure on shed construction was revenue in nature.

In light of the above analysis and findings, the Tribunal allowed the appeal of the assessee, setting aside the impugned order of the Commissioner of Income Tax (Appeals). The judgment was pronounced on October 27, 2014, in Chennai.