2019 (10) TMI 464 - AT - Income Tax

Disallowance of cost of construction of the building on the leasehold land - HELD THAT - We have gone through the judgment of Madras High Court in TVS Lean Logistics Ltd. 2007 (6) TMI 44 - HIGH COURT, MADRAS after considering Explanation 1 to Section 32(1) of the Act and the judgments of Apex Court in Nasiruddin v. Sita Ram Agarwal 2003 (1) TMI 693 - SUPREME COURT and Raghunath Rai Bareja v. Punjab National Bank 2006 (12) TMI 479 - SUPREME COURT found that similar expenditure is revenue in nature Incentive received from the Government for exploring new market - capital receipt or revenue receipt - HELD THAT - As decided in own case 2016 (7) TMI 951 - ITAT CHENNAI t he Government of India provided the incentive for exploring the new markets across the globe. Exploring a new market for a specified area would naturally expand the market area of the assessee. The incentive given to the assessee is not for running the business profitably but for expanding the market area. Tribunal is of the considered opinion that the incentive given by the Government to the assessee for exploring the new market is a capital receipt, hence it cannot be treated as income either under Section 2(24) or 28 - we are unable to uphold the order of the lower authority. Accordingly, the orders of the lower authorities are set aside and the addition made by the Assessing Officer is deleted - Appeals filed by the Revenue stand dismissed.

Summary

Issues:
1. Disallowance of cost of construction of the building on leasehold land for assessment year 2013-14.
2. Whether the incentive received from the Government for exploring new market is a capital receipt or revenue receipt for assessment year 2016-17.

Detailed Analysis:
1. For the assessment year 2013-14, the issue was the disallowance of the cost of construction of a building on leasehold land. The Departmental Representative argued that the expenditure was capital in nature, while the assessee's representative contended that the expenditure should be allowed as revenue in nature based on judgments of the Madras High Court and the Supreme Court. The Tribunal found that the facts of the case were similar to those in the judgments cited. The Apex Court's test for distinguishing between capital and revenue expenditure was applied, concluding that the expenditure was revenue in nature. The Madras High Court's judgment also supported this view, emphasizing that the construction cost was admissible as revenue expenditure. Therefore, the Tribunal confirmed the lower authority's order.

2. Moving on to the assessment year 2016-17, the issue was whether the incentive received from the Government for exploring new markets was a capital or revenue receipt. Referring to a previous Tribunal order and Circular No.564, the Tribunal noted that the incentive was for exploring new markets globally. Following the Apex Court's principle that subsidies enabling business profitability are revenue receipts, while those for setting up or expanding units are capital receipts, the Tribunal determined that the incentive for market exploration was a capital receipt. Since this view was consistent with previous orders, the Tribunal confirmed the lower authority's decision.

In conclusion, both appeals filed by the Revenue were dismissed by the Tribunal based on the detailed analysis and application of relevant legal principles and judgments.