1994 (8) TMI 76 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of expenditure incurred on construction of the building on leasehold land.
2. Classification of rental income as business income or property income.
3. Allowability of depreciation on the construction cost.
4. Timeliness and validity of the Revenue's cross-objections.

Issue-wise Detailed Analysis:

1. Disallowance of Expenditure Incurred on Construction of the Building on Leasehold Land:
The primary dispute in the assessee's appeals revolves around the disallowance of the expenditure incurred on constructing a building on leasehold land. The assessee entered into an agreement with the lessor to construct a building at their own cost on the leasehold land, with the ownership of the building belonging to the lessor. The Assessing Officer initially allowed a fraction of the construction cost as expenditure but later disallowed the entire cost, treating it as capital expenditure. The CIT (Appeals) upheld this view but allowed depreciation under section 32(1A). The Tribunal, however, concluded that the expenditure incurred by the assessee was revenue in nature and should be allowed, as it was integral to the profit-earning process and did not result in the acquisition of any asset by the assessee.

2. Classification of Rental Income as Business Income or Property Income:
The classification of rental income was another point of contention. The Assessing Officer initially assessed the rent as business income but later classified it under property income. The CIT (Appeals) reverted to the original classification, treating the rental income as business income. The Tribunal upheld this view, emphasizing that the activities carried out by the assessee, including construction and sub-leasing, constituted a business activity. The Tribunal referenced the Supreme Court's decision in S.G. Mercantile Corpn. (P.) Ltd. v. CIT, which supported the classification of such income as business income.

3. Allowability of Depreciation on the Construction Cost:
The Tribunal examined whether the assessee could claim depreciation under section 32(1A). It concluded that depreciation is allowed only to the owner of a capital asset. Since the assessee did not own the constructed building, they were not entitled to claim depreciation. The Tribunal noted that section 32(1A) is an enabling provision for lessees but does not alter the nature of the expenditure. Consequently, the Tribunal directed the revenue authorities to allow the expenditure as revenue expenditure and withdraw any depreciation or other deductions previously allowed.

4. Timeliness and Validity of the Revenue's Cross-Objections:
The Revenue filed cross-objections beyond the stipulated time, citing reasons such as change of jurisdiction and administrative delays. The Tribunal condoned the delay, finding reasonable cause for the late filing. However, on the merits, the Tribunal dismissed the cross-objections. The Tribunal reiterated that the rental income should be assessed as business income and not as property income, referencing the Tribunal's decision in the case of Satish Chandra Modi and the Supreme Court's decision in S.G. Mercantile Corpn. (P.) Ltd. Furthermore, the Tribunal agreed with the Revenue that depreciation and other related expenditures could not be allowed as the entire construction cost was treated as revenue expenditure.

Conclusion:
The Tribunal allowed the assessee's appeals, directing the revenue authorities to treat the construction expenditure as revenue expenditure and assess the rental income as business income. The Revenue's cross-objections were dismissed, and any previously allowed depreciation or other deductions were ordered to be withdrawn.