2015 (8) TMI 669 - HC - Income Tax

Entitlement to depreciation - expenses incurred to complete the title/ ownership of the land - whether the payment of ₹ 23.35 lakhs was in the nature of revenue expenditure or capital expenditure? - Held that - The impugned orders of the authorities have reached a correct finding of fact that the land was not being used for the purposes of the Appellant s business. It was a vacant land to be exploited in the future. The business of the Appellant i.e. of manufacturing of cutting tools continued and the factory land nor its manufacturing activities was affected by the ULCA even remotely. Decision of Empire Jute Co. Ltd. v/s. CIT 1980 (5) TMI 1 - SUPREME Court have no application to the present facts as the advantage of enduring benefit was not obtained in the capital field i.e. the payment made merely facilitated the assessee s day to day business while leaving the fixed capital untouched.. The reliance by the Appellant upon the decision of this Court in Brihan Maharashtra Sugar Syndicate (1986 (3) TMI 21 - BOMBAY High Court) is not of any assistance to it. The Appellant therein held land which it used for sugarcane cultivation so as to carry on its business of manufacturing sugar. This land was being acquired under the Land Ceiling Act. The Appellant therein incurred expenses to protect the land which was used for its sugarcane cultivation from acquisition. Therefore, it was an expenses incurred to protect/maintain its running business and/or business asset. It was in the above background, that the Court held that the expenditure incurred for litigation, was revenue in nature. In the present facts, the excess land was not a business asset i.e. not being used in running a business but was to be exploited in future. Therefore, no occasion to apply the decision of this Court can arise. Thus no reason to disturb the finding of the Tribunal upholding the order of the lower authority that amount of ₹ 23.35 lakhs is an expenditure on revenue account. We have found that the expenditure of ₹ 23.35 lakhs has been incurred so as to complete the title/ ownership of the land. Therefore, the above expenditure cannot be attributed to the construction of the building. The construction of the building mandated by the exemption order under Section 20 of ULCA is only on consequence of the title/ ownership becoming complete. Therefore, we see no reason to interfere on this account as also with the impugned order of the Tribunal negating the plea of the Appellant that the amount of ₹ 23.35 lakhs be added to the cost of constructing the buildings so as to avail of depreciation on the same. - Decided in favour of revenue

Summary

Issues Involved:
1. Whether the payment of Rs. 23,34,615 made by the Appellant to the State Government is revenue expenditure or capital expenditure.
2. Whether the expenditure of Rs. 23,34,615 should be added to the cost of constructing the building for the purpose of claiming depreciation.

Detailed Analysis of the Judgment:

Issue 1: Nature of Expenditure (Revenue vs. Capital)
Arguments by the Appellant:
- The Appellant argued that the payment of Rs. 23.35 lakhs was made to protect its title to 10,462 sq. mtrs. of land and should be considered revenue expenditure.
- The Appellant maintained that its title to the land was always intact and the payment was merely to protect its business asset from acquisition.
- The Appellant cited case law, including *C.S.T. v/s. Brihan Maharashtra Sugar Syndicate Ltd.*, to support that expenses incurred to protect business assets from acquisition are revenue in nature.

Arguments by the Respondent:
- The Respondent contended that the land in question was not being used for business purposes and was available for future exploitation.
- The payment ensured the Appellant's ownership of the land for an indeterminate period, providing an enduring benefit, thus making it capital expenditure.
- The Respondent highlighted that the land was in excess of the ceiling limit under the ULCA, and the payment was made to obtain exemption, which is capital in nature.

Court's Analysis:
- The Court noted that the expenditure's nature (capital or revenue) must be assessed based on the facts and the commercial perspective of the businessman.
- The Court found that the Appellant was in possession of excess vacant land and sought exemption under Section 20 of the ULCA to avoid acquisition.
- The payment of Rs. 23.35 lakhs was made to lift the fetter/uncertainty over the use of the land, providing an enduring benefit to the Appellant.
- The Court concluded that the payment was not to protect a running business asset but to ensure the land's availability for future use, thus making it capital expenditure.
- The Court referenced the Supreme Court's criteria in *Assam Bengal Cement Co. Ltd. v/s. CIT* and *Dalmia Jain & Co., v/s. CIT* to determine that the payment aimed to create, cure, or complete the title, making it capital in nature.

Conclusion on Issue 1:
- The Court upheld the Tribunal's finding that the payment of Rs. 23.35 lakhs was capital expenditure.

Issue 2: Addition to Cost of Constructing the Building
Arguments by the Appellant:
- The Appellant argued that if the expenditure is considered capital in nature, it should be added to the cost of constructing the building as mandated by the exemption order under Section 20 of ULCA.
- The Appellant sought depreciation on the combined cost of the land and building.

Arguments by the Respondent:
- The Respondent maintained that the payment was made in respect of the land and should not be added to the cost of constructing the building.

Court's Analysis:
- The Court found that the expenditure of Rs. 23.35 lakhs was incurred to complete the title/ownership of the land, not for constructing the building.
- The construction of the building was a consequence of obtaining the exemption and completing the land's ownership.
- The Court saw no reason to interfere with the Tribunal's decision that the expenditure could not be added to the building's cost for depreciation purposes.

Conclusion on Issue 2:
- The Court upheld the Tribunal's decision that the expenditure of Rs. 23.35 lakhs could not be added to the cost of constructing the building for depreciation.

Final Judgment:
- The Court answered both substantial questions of law in the affirmative, against the Appellant and in favor of the Revenue.
- The appeal was dismissed with no order as to costs.