2015 (12) TMI 1031 - HC - Income Tax

Amount expended for putting up multi-storied structures on leasehold land and refurbishing leasehold buildings - capital or revenue expenditure - entitlement to depreciation - ITAT held the amount expended as capital expenditure, rejecting the claim of the appellant for treating the same as revenue expenditure and, therefore, deductible under section 32(1) and Explanation 1 of the Income-tax Act - Held that - On a reading of Explanation it is categoric and clear that so far as the expenditure incurred as contemplated in the Explanation is concerned, a legal fiction is created, by which the assessee, enjoying a leasehold right on a building is treated as the owner of the building. So according to us, the question to be considered in such a case is whether the assessee has acquired any enduring benefit by putting the refurbished building to use over a period of time in accordance with the agreement entered into between the assessee and the building owner. So far as the question regarding the expenditure incurred by the assessee for refurbishing the building taken on lease is concerned, we are of the considered opinion that, after the introduction of Explanation 1 to section 32(1) of the Act, there is no scope left out at all for any interpretation since by a legal fiction, the assessee is treated as the owner of the building for the period of his occupation. This means that by refurbishing, decorating or by doing interior work in the building an enduring benefit was derived by the assessee for the period of occupation and, therefore, is a capital expenditure and not revenue expenditure. So also, as contended by the senior counsel for the Revenue the criteria that is to be adopted for identifying the enduring benefit is the nature of enhancement and advantage that the assessee has derived by putting the building to use for business purposes. According to us, by adding Explanation 1 to section 32(1), Parliament has manifested its legislative intention to treat the expenditure incurred by the assessee on leasehold building as capital expenditure and, therefore, Explanation 1 to section 32(1) cannot be subjected to any other interpretation Further, the language of Explanation 1 is very plain and clear and there was no scope for providing a different meaning for the words used and, hence, we are bound to consider the question by giving the literal meaning to the expressions and phraseologies by the Legislature applied. In the aforesaid reasons, we are of the opinion that the law laid down by the Division Bench of this court in Joy Alukkas India Pvt. Ltd. 2014 (6) TMI 80 - KERALA HIGH COURT requires reconsideration. Matter referred to larger bench

Summary

Issues Involved:
1. Whether the expenditure incurred for construction of superstructures on leased land should be treated as capital expenditure.
2. Whether the expenditure incurred for repairs, refurbishing, and improvements on buildings taken on lease should be treated as capital expenditure or revenue expenditure.

Detailed Analysis:

Issue 1: Construction of Superstructures on Leased Land as Capital Expenditure
The primary issue was whether the expenditure incurred by the assessee for constructing superstructures on leased land should be treated as capital expenditure. The Tribunal, in its common order, held that such expenditure should be classified as capital expenditure, thus rejecting the assessee's claim for it to be treated as revenue expenditure deductible under section 32(1) and Explanation 1 of the Income-tax Act.

The Tribunal's decision was based on the interpretation of Explanation 1 to section 32(1), which creates a legal fiction treating the assessee as the owner of the building for the period of occupation. The Tribunal emphasized that the construction of a building on leased land results in an enduring benefit to the assessee, meeting the criteria for capital expenditure. The Tribunal also referred to the Supreme Court's decision in Madras Auto Service (P.) Ltd., which held that expenditure resulting in enduring business advantage, even without creating a capital asset owned by the assessee, could be considered revenue expenditure. However, the Tribunal distinguished the current case by emphasizing the legal fiction introduced by Explanation 1.

Issue 2: Repairs, Refurbishing, and Improvements on Leased Buildings as Capital Expenditure
The second issue was whether the expenditure incurred for repairs, refurbishing, and improvements on buildings taken on lease should be treated as capital expenditure. The Tribunal held that such expenditure falls within the ambit of Explanation 1 to section 32(1), thus classifying it as capital expenditure. This decision was based on the enduring benefit derived by the assessee from the refurbishments and improvements, which enhanced the utility of the leased premises for business purposes.

The Tribunal referred to the Kerala High Court's decision in Joy Alukkas India Pvt. Ltd., which had previously held that refurbishing leased buildings should be treated as revenue expenditure. However, the Tribunal noted that this decision did not consider the implications of Explanation 1 to section 32(1). The Tribunal also cited the Supreme Court's decision in Madras Auto Service (P.) Ltd., emphasizing that the nature of the enhancement and the advantage derived by the assessee should be the criteria for identifying enduring benefit.

Conclusion:
The Tribunal concluded that both the construction of superstructures on leased land and the expenditure on repairs, refurbishing, and improvements on leased buildings should be treated as capital expenditure. This conclusion was based on the enduring benefit derived by the assessee and the legal fiction created by Explanation 1 to section 32(1) of the Income-tax Act, which treats the assessee as the owner of the building for the period of occupation. The Tribunal's decision was in line with the legislative intention manifested by Parliament through the introduction of Explanation 1, leaving no scope for alternative interpretations. The Tribunal's order was upheld, and the matter was directed to be placed before the Chief Justice for appropriate orders.