2021 (8) TMI 604 - AT - Income Tax

Nature of expenditure - Construction cost incurred on building constructed on leasehold land - revenue or capital expenditure - CIT-A opined that the AO has erred in treating expenditure incurred for construction of building on leasehold land as capital in nature and accordingly, deleted additions - HELD THAT - In this case, CIT(A), after considering the fact that case of the assessee is squarely covered by the decision of the Hon'ble Supreme Court in the case of M/s. Madras Auto Service (P) Ltd. 1998 (8) TMI 1 - SUPREME COURT has held that when the assessee constructs building on leasehold land without ownership, then cost incurred for construction of building is revenue expenditure which deductible. The said findings of the learned CIT(A) is supported by the decision of the Hon'ble Supreme Court in the case of M/s. Madras Auto Service (P) Ltd. (supra) and the decision of Hon'ble High Court of Madras in the case of TVS Lean Logistics Ltd. 2007 (6) TMI 44 - HIGH COURT, MADRAS CIT(A) has also recorded categorical finding of fact that the assessee has derived clear advantage of saving in rent by incurring expenditure on construction of building in lieu of rent. Further, there is clear commercial advantage in terms of saving in rent payments as narrated by the ld. CIT(A) in her order. Therefore, we are of the considered view that there is no error in the findings recorded by the learned CIT(A) in deleting additions made by the Assessing Officer towards disallowance of cost of construction on leasehold land. We are of the considered view that there is no error in the findings recorded by the learned CIT(A) to delete additions made by the Assessing Officer towards cost of construction incurred on leasehold land, hence, we are inclined to uphold order of the learned CIT(A) and reject grounds taken by the Revenue.

Issues Involved:
1. Whether the expenditure incurred on construction of a building on leasehold land should be treated as revenue or capital in nature.
2. Whether the contract between the parties is null and void.
3. Whether the expenditure is a device to avoid tax.
4. Whether the expenditure results in the creation of an asset of enduring benefit.
5. Whether the expenditure results in a saving of revenue expenditure in the form of rent.

Issue-wise Detailed Analysis:

1. Nature of Expenditure:
The primary issue is whether the expenditure incurred on constructing a building on leasehold land should be treated as capital or revenue in nature. The Tribunal referenced the Supreme Court's decision in the case of Madras Auto Service (P) Ltd. and the Madras High Court's decision in TVS Lean Logistics Ltd., which held that if the construction is for business advantage and not for acquiring a capital asset, the expenditure is revenue in nature. The Tribunal noted that the assessee did not acquire ownership of the land but constructed the building for business purposes, thereby saving rental costs, and thus, the expenditure is revenue in nature.

2. Validity of the Contract:
The Revenue argued that the contract was null and void because the lease period was not effectively operational due to the construction period overlapping with the lease period. However, the Tribunal did not find merit in this argument, as the primary focus was on the nature of the expenditure and its business advantage rather than the technicalities of the lease period.

3. Tax Avoidance Device:
The Revenue contended that the expenditure was a device to avoid tax. The Tribunal, however, found no evidence supporting this claim. The assessee demonstrated that the construction resulted in significant savings in rent, aligning with the precedent that such expenditure is for business advantage and not a tax avoidance scheme.

4. Creation of an Enduring Asset:
The Revenue argued that the expenditure resulted in the creation of an asset of enduring benefit, which should be treated as capital expenditure. The Tribunal, referencing the Supreme Court's decision, held that since the building was constructed on leasehold land and the ownership of the building did not vest with the assessee, the expenditure did not result in the acquisition of a capital asset but was for business advantage, thus making it revenue in nature.

5. Saving of Revenue Expenditure:
The Tribunal upheld the CIT(A)'s finding that the construction resulted in significant savings in rental payments, providing a clear business advantage. This aligned with the decisions in Madras Auto Service (P) Ltd. and TVS Lean Logistics Ltd., where similar savings justified treating the expenditure as revenue in nature.

Conclusion:
The Tribunal dismissed the appeals filed by the Revenue for both assessment years, upholding the CIT(A)'s decision that the expenditure incurred on constructing the building on leasehold land is revenue in nature. The Tribunal found no merit in the Revenue's arguments regarding the validity of the contract, tax avoidance, or the creation of an enduring asset. The Tribunal emphasized the business advantage and savings in rent, consistent with the Supreme Court and High Court precedents, thereby affirming the CIT(A)'s order.

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