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TMI Blog2015 (12) TMI 1031X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 sco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e apex court, the Madras High Court and the orders of the Appellate Tribunal, the first appellate authority allowed the appeals and held that the expenditure incurred by the assessee is to be treated as revenue expenditure and, therefore, liable to be deducted. 5. Aggrieved by the said order, the Revenue preferred appeals before the. Tribunal and these appeals were allowed holding that the expenditure incurred by the assessee can only be treated as capital expenditure not deductible and, thus, the order of assessment was restored. This is the circumstances in which the assessee has filed these appeals. 6. Heard the senior counsel appearing for the assessee and the senior counsel for the Revenue. 7. Brief facts relevant to each assessment year are separately stated hereunder for the purpose of convenient disposal : 7. Assessment year 2007-08 Return of income was filed by the assessee on October 30, 2007, declaring an income of ₹ 4,76,18,190. Later on, the assessee filed a revised return on June 12, 2008, declaring an income at ₹ 1,95,59,270. As stated earlier the return was processed under section 143(1) and later, the case was taken up for scrutiny by iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on record to justify the finding of the Appellate Tribunal that the sum of ₹ 1,22,66,205 incurred for the construction of superstructures by the appellant on leased land is capital expenditure ? (3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in confirming the disallowance of ₹ 1,89,68,567 incurred for repairs refurbishing and improvements on buildings taken on lease ? (4) Whether, on the facts and in the circumstances of the case, there is any material or evidence on record to justify the finding of the Appellate Tribunal that the sum of ₹ 1,89,68,567 incurred for repairs refurbishing and temporary improvements such as partitions on buildings taken on lease is not a revenue expense ? 9. The thrust of the contentions put forth by the learned senior counsel for the assessee before us was that since construction was carried out by the assessee on leasehold land on termination or expiry of lease, the building either reverts back to the owner of the land or is dismantled and removed by the assessee as per the terms of the agreement, which in turn becomes mere scrap, no enduring benefit is derived by it so als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be looked upon as revenue expenditure. 12. In the case of TVS Lean Logistics Ltd. (supra), the Madras High Court has considered the question whether by carrying out construction of building on leasehold land, for business advantage, any capital asset has been acquired by the assessee. In the said decision, one remarkable difference from the judgment in Madras Auto Services Ltd. (supra) of the hon'ble apex court is that Explanation 1 to section 32(1) was introduced with effect from April 1, 1988, and the Madras High Court has considered the question with reference to the Explanation so brought into the Income-tax Act. There also the appeal preferred by the Revenue was dismissed holding as follows (page 435 of 293 ITR) : It is not in dispute that the assessee had put up the impugned construction of building only on leasehold land and no building was taken on lease by the assessee. Therefore, the fiction created by Explanation 1 that the building put up by him in the leasehold land or structure or work shall be construed as if the same is owned by the assessee, is not applicable to the case of the assessee and Explanation 1 to section 32(1) of the Act is not attracted to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e outgoing expenditure though forms part of profit earning exercise, in the absence of acquir ing any asset or a right of permanent nature, it cannot be considered as capital expenditure. There is no replacement of complete structure with the new process. The nature of business prior to expenditure in question and afterwards being the same without any change, except some improvements to augment more profits in order to compete with the other competitors in the business regarding new interior designs etc. it cannot be termed as capital 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 jus tified 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 expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not arise and it is so agreed. 15. Learned senior counsel for the Revenue has also relied on the judgments in Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 (SC) and this court in CIT v. Jacobs (P.) Ltd. [1979] 120 ITR 197 (Ker) to contend that in those judgments referred to in Joy Alukkas (supra), section 37 of the Income-tax Act, 1961, was interpreted. and further that those were cases relating to the assessment years prior to the introduction of Explanation 1 to section 32(1) of the Act. Learned counsel also canvassed for the proposition that no one fact in a case may be similar to the facts arid circumstances of another case and, therefore, ultimately the issues are to be considered and decided with specific reference to the facts involved in the case under consideration. 16. Senior counsel also referred us to Jacobs (P.) Ltd. (supra), where at page 205, towards the end of paragraph 2, it was held as follows : The present is a case relating to the application of income to dis charge a liability incurred not in the course of running the business but a liability undertaken to the purpose of acquiring the sole selling agency right which was indisputably an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bserved as under (page 472) : '5 In order to decide whether this expenditure is revenue expen diture or capital expenditure, one has to look at the expenditure from a commercial point of view. What advantage did the assessee get by constructing a building which belonged to somebody else and spend ing money for such construction ? The assessee got a long lease of a newly constructed building suitable to its own business at a very con cessional rent. The expenditure therefore, was made in order to secure a long lease of new and more suitable business premises at a lower rent. In other words, the assessee made substantial savings in monthly rent for a period of 39 years by expending these amounts. The saving in expenditure was a saving in revenue expenditure in the form of rent. Whatever substitutes for revenue expenditure should normally be considered as revenue expenditure. Moreover, assessee in the present case did not get any capital asset by spending the said amounts. The assessee therefore could not have claimed any depre ciation. Looking to the nature of the advantage which the assessee obtained in a commercial sense, the expenditure appears to be revenue expenditure. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tructure or doing of any work in or in relation to and by way of renovation or extension or improvement in the building ? 24. If the answer to the aforementioned questions is in affirmative, the assessee falls within the purview of Explanation 1 to section 32(1). In the instant case, it is an admitted fact that the assessee has taken land on lease for setting up of service stations. It is also undis puted that the assessee has constructed the building at the leased premises. Thus the assessee has constructed super structure. These construction activities carried out by the assessee if put on to the test of Explanation 1 would show that the construction made by the assessee on the leased out premises would amount to capital expen diture. 21. In order to evaluate the situation contemplated under Explanation 1 to section 32(1) of the Act, it is only appropriate that the same is extracted hereunder for the purpose of discussion : Explanation 1.-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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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