1998 (8) TMI 1 - SC - Income Tax

Acting under the lease agreement the assessee invested a sum of Rs. 1, 62, 835 in the previous year relevant to the assessment year 1968-69 and Rs. 50, 937 during the succeeding year in constructing a new building on the said land - Tribunal was right in holding that the building expenses of Rs. 1, 62, 835 are not liable to be taken into account as deductible expenditure in arriving at the real income of the assessee for the assessment year 1968-69 - Impugned expenditure are revenue expenditure

Summary

Issues:
1. Determination of whether the expenditure incurred by the assessee in constructing a new building is revenue expenditure or capital expenditure.
2. Interpretation of the nature of the benefit obtained by the assessee through the construction of the new building.
3. Application of legal tests to distinguish between capital expenditure and revenue expenditure.
4. Analysis of relevant case laws where expenditure led to an enduring benefit but did not result in ownership of the asset by the assessee.

Issue 1: Determination of Expenditure Nature
The assessee, a limited company engaged in the sale of motor parts, constructed a new building on leased premises. The lease agreement allowed the assessee to demolish the existing premises and build a new structure without compensation to the lessors. The Income-tax Tribunal treated the construction expenditure as revenue expenditure, allowing deduction. The Department contended it was capital expenditure. The High Court upheld the Tribunal's view, stating the expenditure was revenue expenditure as it secured a long lease of suitable premises at a low rent.

Issue 2: Benefit Analysis
The assessee's expenditure aimed to secure a long lease of a new building at a reduced rent. The new building, although not owned by the assessee, provided a substantial saving in monthly rent for 39 years. The commercial advantage gained was lower expenditure in the form of rent, indicating a revenue expenditure nature.

Issue 3: Application of Legal Tests
The Supreme Court referred to the Assam Bengal Cement Co. Ltd. case to distinguish between capital and revenue expenditure. The court emphasized that expenditure leading to an enduring asset for trade benefit is capital expenditure. In this case, as the building did not belong to the assessee and the only advantage was reduced rent, the expenditure was rightly treated as revenue expenditure.

Issue 4: Analysis of Relevant Case Laws
The court examined cases like Lakshmiji Sugar Mills, L. H. Sugar Factory, and Associated Cement Companies, where expenditure created enduring benefits but not ownership of assets. In each case, the expenditure was considered revenue expenditure as it facilitated business operations without acquiring capital assets. The court emphasized that the expenditure's purpose was to conduct business profitably, similar to the present case where the assessee obtained a business advantage through reduced rent without acquiring ownership of the building.

In conclusion, the Supreme Court dismissed the appeals, affirming the expenditure as revenue expenditure due to the enduring business advantage gained through reduced rent without ownership of the asset.