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TMI Blog2014 (6) TMI 80X X X X Extracts X X X X X X X X Extracts X X X X ..... of lease the items on which expenditure was spent could be retrieved by the appellants-assessees, it shall not amount to capital expenditure but it can be termed only as revenue expenditure. Transfer pricing adjustment – Held that:- There is no justification for the revenue to ignore certain comparable cases only on the ground that those two assessees sustained losses in some years - In comparable cases produced by the assessee with respect of international transactions, the revenue has to bear in mind the case of the assessees based on the computations made in the comparable cases – Decided in favour of Assessee. - ITA. No. 230 of 2013 - - - Dated:- 20-1-2014 - CJ Dr. Manjula Chellur And A. M. Shaffique,JJ. For the Petitioner : Sri. Joseph Markose, Senior Advocate For the Respondent : Sri. P. K. Raveendranatha Menon, SR. S.C, I.T JUDGMENT Manjula Chellur, C.J. The above two appeals involve common substantial questions of law pertaining to deductions under Section 37 of the Income Tax Act so far as the expenditure spent by the appellants- assessees on the premises taken on lease towards repairs, fixtures etc. The consistent claim of the appellants- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, the test of enduring benefit or advantage cannot be applied to the facts of the present case and by virtue of settled position, each case has to be analysed depending upon the nature of expenditure irrespective of benefit of long duration or enduring benefit or advantage. According to them, irrespective of enduring benefit lasting for many years, in the absence of creation of an asset said to be belonging to the assessee, such expenditure can never be termed as capital expenditure and can always be a revenue expenditure. 4. So far as transfer pricing, according to learned Senior Counsel Sri.S.Ganesh, there was no justification for the Tribunal to refuse to consider the computations of two assessees solely on the ground that they had losses in some years. Once comparable computations of 18 similarly placed assessees are placed on record pertaining to jewellery and also textile business all the cases have to be taken into consideration without any discrimination based on facts. 5. As against this, learned Senior Standing Counsel Sri.P.K.Raveendranatha Menon contends that whenever expenditure is made to make or bring out sales outlets, if it is an income earning effort, irres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstitute a capital expenditure or revenue expenditure. Their Lordships, by referring to Section 10(2)(xv) of the Indian Income Tax Act, 1922 while considering what amounts could be deductible had an occasion to deal with the entire matter from every angle including decisions of other countries across the world on similar controversy. It was held that an expenditure incurred by an assessee can qualify for deduction by virtue of Section 10(2)(xv) of the Act only if it is incurred wholly and exclusively for the purpose of his business, but fulfillment of this requirement alone is not enough, as it has to be further clarified whether such business expenditure comes within the ambit of revenue expenditure or expenditure of capital nature. The amount claimed in the said case was 2,03,255/- paid by the assessee. They referred to CIT v. Maheshwari Devi Jute Mills Ltd. [(1965)57 ITR 36] wherein it was opined that the claim of the assessee has to be brought under the expenditure of capital nature. In the case of Maheshwari Devi Jute Mills' case (Supra) assessee was the receiver of amount for sale of loom hours and the question was whether it was revenue receipt or capital receipt. As it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case....... 8. In the case of Empire Jute Co.Ltd's case (Supra), the stand of the revenue was by purchase of loom hours the assessee acquired a right to produce more than what it otherwise would have been entitled to do and this right to produce additional quantity of goods constituted addition to or augmentation of its profit-making structure. Their Lordships opined that though it is true that if disbursement is made for acquisition of a source of profit or income, it would ordinarily, in the absence of any other countervailing circumstances, be in the nature of capital expenditure, but the same cannot be universally applied and in Empire Jute Co.Ltd's case (Supra) the situation was, assessee acquired a source of profit or income, when he purchased loom hours. It is different from the case of Maheshwari Devi Jute Mills (Supra), as the assessee was the payer of the amounts and not the payee. Their Lordships opined, there was no enlargement of the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way to operations to be carried on profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. 10. Other relevant case referred to is Alembic Chemical Works Co.Ltd. v. Commissioner of Income-Tax, Gujarat [(1989)177 ITR 377 (SC)]. The appellant-assessee Company in the above case was engaged in manufacturing of antibiotics and pharmaceuticals. A licence was granted for the manufacture of penicillin. This manufacturing outlay commenced in 1963 and initially only moderate yields of penicillin was achieved. In order to increase the yield, the assessee negotiated with a reputed Japanese enterprise engaged in the manufacture of antibiotics, which ultimately resulted in an agreement between the parties dated 9.10.1963. The Japanese Company is one Meiji. Once for all payment was agreed to supply to the appellant-assessee the subcultures of Meiji's most suitable penicillin producing strains, in a pilot plant, the technical information, know-how and written description of Meiji's process for fermentation of penicillin including the design and specifications of the main equipment, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financial outlay under the agreement, therefore, it was revenue in nature and was allowable as deduction in computing the business profits of the appellant. Their Lordships further opined in the above case as under: (i) 'It would be unrealistic to ignore the rapid advances in research in antibiotic medical microbiology and to attribute a degree of endurability and permanence to the technical know-how at any particular stage in this fast changing area of medical science. The state of the art in some of these areas of high priority research is constantly updated so that the know-how could not be said to bear the element of the requisite degree of durability and nonephemerality to share the requirements and qualifications of an enduring capital asset. The rapid strides in science and technology in the field should make us a little slow and circumspect in too readily pigeonholing an outlay, such as this, as capital.' (ii) 'In the infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue arises, it is well nigh impossible to formulate any general rule, even in the generality of cases, sufficiently accurate and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n which, by itself, is determinative as to whether a particular outlay is capital or revenue. The once for all payment test is also inconclusive. What is relevant is the purpose of the outlay and its intended object and effect, considered in a common sense way having regard to the business realities. Therefore, they opined, in a given case the test of enduring benefit might break down. They also referred to Empire Jute Co.Ltd's case (Supra), which is already discussed above. 13. Another judgment referred to by the appellant is Commissioner of Income Tax, Madras v. T.V.Sundaram Iyengar and Sons P. Ltd. [(1990)186 ITR 276 (SC)]. In this case assessee spent amounts for purchasing land in the name of government for the purpose of construction of houses for employees under subsidised scheme of government. The Apex Court opined that the amounts spent by the respondent was revenue expenditure. The respondent was not the owner of the land and only contributed a portion of the construction cost towards the subsidised welfare scheme. The fact that the scheme was not for any temporary or particular duration has made little difference to the nature of expenditure. In other words, facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpose of understanding the present case. Houses were constructed as per the scheme of Coal Mine Labour Housing Board for the employees of the colliery. Expenditure was also substantially repaid by the Housing Board. It was opined that said expenditure was not bringing into existence any enduring benefit but was incurred for carrying on its business, therefore, it amounts to revenue expenditure. They arrived at this conclusion by opining that in the light of possible and probable long span of company's life, the indirect profit which the assessee-company may derive through contented workmen for a limited period of just 15 years cannot constitute such a lasting benefit as to classify the expenditure as capital in nature. 17. CIT v. Birla Jute Manufacturing Co. Ltd. [(1990) 182 ITR 497 (Cal)] is a judgment of the Calcutta High Court. For laying of service lines, an agreement was entered into between the assessee and West Bengal Electricity Board. The Apex Court held that the expenditure incurred by the assessee could not be treated in the commercial sense bringing an advantage in the capital field with monthly payment towards cost of asset which never belonged to assessee. In s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lease by the assessee and the repairs were carried out for the purpose of business to create ambience and carry out repairs to the premises used as the office of the assessee as there was stiff competition in the business, therefore, the opinion of the Tribunal opining it as revenue expenditure was upheld. 22.Learned Senior Standing Counsel Sri.P.K.Raveendranatha Menon places reliance on the following decisions, apart from referring to certain portions of the decisions in Empire Jute Co.Ltd's case (Supra) and also Alembic Chemical Works Co.Ltd'S case (Supra). He places reliance on Commissioner of Income Tax, Kerala-1 v. Jacobs (P) Ltd. [(1979) 120 ITR 197]. In this case the assessee Company, by agreement dated 24.7.1970 undertook to take over some of the assets and liabilities of wholesale business in liquor, which was being carried on by a firm. The agreement in unequivocal and clear terms referred to two distinct items. One is an ongoing concern of the assets, rights and the liabilities of the vendors described in the schedule and the second one is sale of the right to carry on business as wholeselling agent of M Co., Sherthallai, together with the right to carry on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing in an asset or an advantage for the enduring benefit of a trade, it amounts to capital expenditure and not revenue expenditure. They also opined that the question as to whether a particular benefit can be said to be of enduring character has to be determined on the facts of each case. Their Lordships opined that as there was no evidence to prove that the owner was under an obligation to incur expenditure, the expenditure incurred by the assessee for construction of the shop was not deductible. He also refers to Delhi Cloth General Mills Co. Ltd. v. Addl. Commissioner of Income-Tax [(1986) 160 ITR 857). Expenditure was on electric fittings in retail cloth depots of the assessee and the expenses for purchase of new furniture and racks replacing the old ones in the existing retail depots of the assessee. The Tribunal allowed the deductions on account of expenditure on electric fittings to such expenses as related to old depots only and disallowed the expenses for purchase of furniture and racks as they amount to capital expenses. 24. From the above decisions, we have to appreciate facts of the present case. Appellant in ITA.No.230 of 2013 owns about 37 jewellery shops situat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bience by spending money on interior decoration which has resulted in expenditure on many items. Out of those items, some of them could be retrieved at the end of the lease and could be used by the appellants-assessees again. Some of the improvements made cannot be taken away along with the lessee assessee at the end of the term of the lease. Though in some of the decisions enduring benefit irrespective of creating an asset or not was alone the criterion and later on the Apex Court, while dealing with the subject exhaustively in Empire Jute Co.Ltd's case (Supra), has held that theory of enduring benefit or advantage may break depending upon the facts and circumstances of the case. Therefore, the stand and argument of the revenue that as long as there is income earning effort by whatever means or name you call it, whether it could be expansion or extension of the business, the same has to be considered as capital investment has to be looked into from the facts of the present case. As a matter of fact, in Empire Jute Co.Ltd's case (Supra) distinguishing the facts from the facts of Maheshwari Devi Jute Mills' case (Supra) it was held, what amounts to capital receipt in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 32(1)(i) of the Act refers to 'depreciation' of buildings, which reads as under: (i) buildings, machinery, plant or furniture, being tangible assets; Explanation 1 to Section 32(1) of the Act reads as under: Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work, in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee. 28. Reading of the above provision would mean, whenever an assessee carries on business or profession in a building not owned by him, but over which he has a lease or right and if any capital expenditure is incurred by the assessee for the purpose of business on the construction of any structure or doing any work like renovation or extension or improvement, the provisions of the Section shall apply to the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure. There was no fresh venture by the assessee so far as the business is concerned. Intended object and the effect must be with reference to business realities. Whether advantage or benefit is for a shorter or longer period, it is immaterial. Therefore, character of expenditure is alone the deciding factor. 30. Therefore, the stand of the revenue that the Tribunal was justified in rejecting the claim of the assessees has to be rejected. It is made clear that the business expenditure irrespective of creating enduring benefit or advantage even if it is a profit earning effort unless at the end of the term of lease the items on which expenditure was spent could be retrieved by the appellants-assessees, it shall not amount to capital expenditure but it can be termed only as revenue expenditure. 31. Coming to the next question of transfer pricing made in respect of international transfers, there is no justification for the revenue to ignore certain comparable cases only on the ground that those two assessees sustained losses in some years. In comparable cases produced by the assessee with respect of international transactions, the revenue has to bear in mind the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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