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2016 (5) TMI 472 - HC - Income TaxExpenditure for construction of superstructures by the appellant on leased land - determining the nature of expenditure - capital expenditure or revenue expenditure - Held that - The plain reading of the language of Explanation 1 indicates that the legal fiction was created as if the said structure or work is the building owned by the assessee. There is no warrant of reading Explanation 1 in a manner to read that when the assessee who holds a lease or other right of occupancy incurs any expenditure for purposes of the business or profession 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 to the building, then the said expenditure has to be treated as capital expenditure. The legal fiction has not been created to treat the said such work as mentioned therein as capital expenditure rather, the fiction has been created that when such work is carried out, it shall be treated as structure or work owned by the assessee. The words any capital expenditure used in Explanation 1 indicate that the legal fiction has to be read when any capital expenditure is incurred. Thus whether any capital expenditure has been incurred is a question which has to be decided on the basis of facts of each case and relevant tests applicable. Explanation 1 cannot be read as to mean that when works mentioned therein are carried out by the assessee, it shall be treated as capital expenditure. Explanation 1 however shall be attracted when expenditure is treated as capital expenditure. The use of the word any before the capital expenditure emphasises that the provision is attracted when there is any capital expenditure. The Division Bench in its reference order in Joy Alukkas case 2014 (6) TMI 80 - KERALA HIGH COURT is not correct in its assumption that by Explanation 1 to section 32(1) Parliament manifested its legislative intention to treat the expenditure incurred by the assessee on leasehold building as capital expenditure. Had the Legislature intended to provide that all such expenditure incurred by the assessee as referred to in Explanation 1 shall be treated as capital expenditure, the explanation would have used different phraseology. It is well settled principle of statutory interpretation that language of the statute should be read as it is. Thus Explanation 1 has to be read as it is. The above rule of statutory interpretation was laid down by the apex court in CIT v. Tara Agencies 2007 (7) TMI 4 - SUPREME COURT OF INDIA Thus whether a particular expenditure is a capital expenditure or revenue expenditure is to be found out from the facts of each case and by applying the relevant tests in each case and when it is found that nature of such expenditure is capital expenditure, Explanation 1 shall automatically come into operation. As has been observed above, whether an expenditure incurred by the assessee in a particular case is a capital expenditure or revenue expenditure has to be decided on the facts of that case by applying the relevant tests. Explanation 1 to section 32(1)(i) does not intend to lay down that whenever expenditure has been incurred by the assessee for the purpose of business or profession on the construction of any structure or doing of any work in or in relation to or by way of renovation or improvement to the building, then such expenditure has to be mandatorily treated as capital expenditure. The Explanation only meant that in the event any capital expenditure is incurred by the assessee, the provisions of section 32(1) shall be applicable as if the said structure or work is a building owned by the assessee. We thus answer the reference holding that the ratio of the judgment of the Division Bench in Joy Alukkas case 2014 (6) TMI 80 - KERALA HIGH COURT as expressed in paragraph 28 of the judgment needs no reconsideration. We further hold that whether an expenditure incurred by the assessee is a capital expenditure or revenue expenditure is to be decided on the facts of each case by applying the relevant tests.We make it clear that we have not expressed any opinion on the merits of the case. Let our answer be placed before the appropriate Division Bench to consider all issues and decide the appeals accordingly.
Issues Involved:
1. Correctness of the earlier Division Bench judgment in Joy Alukkas India Pvt. Ltd. v. Asst. CIT. 2. Classification of expenditure as capital or revenue in the context of leasehold improvements. 3. Interpretation of Explanation 1 to section 32(1)(i) of the Income-tax Act, 1961. Detailed Analysis: 1. Correctness of the Earlier Division Bench Judgment in Joy Alukkas India Pvt. Ltd. v. Asst. CIT: The Division Bench had doubts about the correctness of the judgment in Joy Alukkas India Pvt. Ltd. v. Asst. CIT, which led to the referral of the matter to a Full Bench. The Full Bench was tasked with reconsidering whether the principles laid down in the Joy Alukkas case were appropriate, particularly in light of Explanation 1 to section 32(1)(i) of the Income-tax Act, 1961. 2. Classification of Expenditure as Capital or Revenue in the Context of Leasehold Improvements: The assessee, Indus Motor Company Pvt. Ltd., incurred expenditures for constructing superstructures on leasehold lands and setting up workshop facilities. The primary issue was whether these expenditures should be classified as capital or revenue. The Tribunal had classified these expenditures as capital, relying on Explanation 1 to section 32(1)(i). The Full Bench examined the facts and previous judgments, including the Joy Alukkas case, where the expenditure on repairs and improvements in leased premises was considered. The Full Bench noted that the determination of whether an expenditure is capital or revenue depends on the facts of each case and relevant tests. The Division Bench in Joy Alukkas had concluded that improvements for better business ambiance without changing the building's structure constituted revenue expenditure. 3. Interpretation of Explanation 1 to Section 32(1)(i) of the Income-tax Act, 1961: The Full Bench analyzed Explanation 1 to section 32(1)(i), which provides that if an assessee incurs capital expenditure on a leased building, it should be treated as if the structure or work is owned by the assessee. The Full Bench clarified that Explanation 1 does not mandate that all expenditures on leased premises should be treated as capital expenditure. Instead, it applies only when the expenditure is already determined to be capital in nature. The Full Bench emphasized that the legal fiction created by Explanation 1 is limited to treating the structure or work as owned by the assessee for depreciation purposes. It does not automatically classify all expenditures as capital. The nature of the expenditure must be determined based on the facts and relevant tests. Conclusion: The Full Bench concluded that the ratio laid down in the Joy Alukkas case, particularly in paragraph 28, was correct and did not require reconsideration. The determination of whether an expenditure is capital or revenue must be based on the facts of each case, applying relevant tests. Explanation 1 to section 32(1)(i) does not mandate that all expenditures on leased premises are capital; it only applies when the expenditure is already classified as capital. The Full Bench did not express any opinion on the merits of the case and referred the matter back to the appropriate Division Bench for a decision on all issues.
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