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TMI Blog2023 (2) TMI 461X X X X Extracts X X X X X X X X Extracts X X X X ..... . AR, has also been rendered in the context of Focus Product Scheme. In this decision, the bench held that the receipts would be capital in nature. While concluding so, the bench applied purpose test laid down by Hon ble Supreme Court in various decisions. It was finally held by the bench that receipts would be capital receipt not liable to tax under the provisions of Income Tax Act, 1961. This decision also supports the case of the assessee. Therefore, considering the facts of the case and respectfully following the earlier decisions of Tribunal in assessee s own case [ 2016 (7) TMI 951 - ITAT CHENNAI] we would hold that the receipts so earned by the assessee would be capital in nature and hence, not taxable. Decided in assessee s favour. Expenditure on construction of building on leasehold land - expenditure was capitalized in the books of accounts but claimed as revenue expenditure in the computation of income on the ground that the assessee did not have the ownership of building and it had to leave it as vacant when the lease of the land would be terminated - The amount so expanded would not be eligible for depreciation u/s 32 since the building is not owned by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ggarwal, AM For the Assessee : Shri T. Banusekar, (CA)- Ld. AR For the Revenue : Shri S. Senthil Kumaran, (CIT)-Ld. DR ORDER MANOJ KUMAR AGGARWAL (ACCOUNTANT MEMBER): 1. Aforesaid appeals by Revenue for Assessment Years (AYs) 2014- 15 2015-16 arise out of separate orders of learned first appellate authority. However, it is admitted position that facts as well as issues are substantially the same in both the years and adjudication of one year shall apply to the other year also. 2. The appeal for AY 2014-15 arises out of the order passed by Learned Commissioner of Income Tax (Appeals)-3, Coimbatore [CIT(A)] on 12-12-2017 in the matter of an assessment framed by Learned Assessing Officer (AO) u/s 143(3) on 30-12-2016. The grounds raised by the revenue read as under: - i) Whether on the facts and circumstances of the case and in law the Ld.CIT is justified in holding that incentive given by the Govt to the assessee for exploring new market is a capital receipt, whereas the object of the incentive was to enable the assessee to carry on the business more profitably and hence it is revenue receipt? ii) Whether on the facts and circumstances of the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have high employment intensity in rural and semi-urban areas so as to offset territorial inefficiencies, infrastructure and other associated costs involved in marketing of these products in the international market. Under the scheme, an exporter get license to the extent of 2% of FOB value of export made by him which ultimately leads to saving in customs duty on imports. This license is freely transferrable at prevailing market prices. 4.2 The assessee sold such scrips during the year and claimed the receipts to be capital receipts not taxable under any provisions of the Act. To support the same, reliance was placed on the decision of Hon ble Madras High Court in CIT vs Eastern Seafoods Exports (P) Ltd. as well as the decision of this Tribunal in assessee s own case for AYs 2011-12 2012-13 wherein it was held that incentive under MLFPS being the incentive given by the government for exploring the new markets, would be capital in nature. This decision by Tribunal in assessee s own case, inter-alia, followed the ratio laid down by Hon ble Supreme Court in M/s Ponni Sugars Chemicals Ltd. (306 ITR 392) . 4.3 However, Ld. AO opined that the receipts were nothing but an ince ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not for running the business profitably but for expanding the market area. Therefore, this Tribunal is of the considered opinion that the incentive given by the Government to the assessee for exploring the new market is a capital receipt, hence it cannot be treated as income either u/s 2(24) or 28 of the Act. In view of the above, we are unable to uphold the order of the lower authority. Accordingly, the orders of the lower authorities are set aside and the addition made by the Assessing Officer is deleted. It could be observed that the bench, relying upon the decision of Hon ble Apex Court M/s Ponni Sugars Chemicals Ltd. (supra) held that if the object of the subsidy was to enable the assessee to carry on the business more profitably then the receipt would be on revenue side. On the other hand, if the object of assistance was to enable the assessee to set up a new unit or expand the existing unit, then the receipt would be on capital account. In the case of the assessee, it was found that the scheme provided for an incentive for exploring the new markets across the globe. Exploring a new market for a specified area would naturally expand the market area of the assessee. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be revenue in nature. The Ld. CIT-DR drew support from CBDT Circular No.564 dated 05.07.1990 which provide that the export incentives shall have to be considered as profits of the business for computing deduction u/s 80HHC which corroborates that the receipts of export incentives are revenue in nature. It was thus submitted that the receipts would be taxable u/s 28(iiib). 7. We find that the Market Linked Focus Product Scheme (MLFPS) as promoted under Foreign Trade Policy (FTP) has the main objective to incentivize export of such products which have high export intensity / employment potential. The object of the scheme is to offset infrastructure inefficiencies and other associated costs involved in marketing of these products. The scheme would ultimately enable the assessee to expand market area. Under the scheme, the assessee is entitled to duty credit scrips equivalent to 2% of FOB value of exports which could be utilized to save customs duty on imports. The entitlement could also be sold in the market. The assessee has sold these scrips during the year and claimed the receipts to be capital receipts. It could be seen that the scheme does not provide for any matching expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the expenditure vis- -vis the quantum of subsidy received by the assessee. 10. So far as the decision of this Tribunal in Hyundai Motor India Ltd vs. ACIT (supra) is concerned, the same deal with a case of Focus Market Scheme (FMS). The objective of this scheme is to offset high freight cost and other externalities to select international market with a view to enhance export competitiveness in outside countries. It is a case wherein a finding has been rendered that the assessee received duty credit scrip benefit to offset cost incurred for exploring new market including higher freight cost and other recurring expenses like sales promotion expenses including manpower cost of staff employed in marketing department. These expenses are generally revenue in nature and therefore, the receipt thereof was held to be revenue in nature. However, in assessee s case, the incentive has been received under Focus Product Scheme (FPS) the objective of which is to weed out infrastructure inefficiencies which is in capital field. Therefore, this case law is distinguishable on facts. 11. Another fact that could be noted is that the decision of Hon'ble Rajasthan High Court in PCIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as vacant when the lease of the land would be terminated. The amount so expanded would not be eligible for depreciation u/s 32 since the building is not owned by the assessee. 14.2 However, after perusal of terms of lease deed, Ld. AO held that Explanation-1 to Sec.32 would apply and the expenditure would be capital expenditure which would be eligible for depreciation. Accordingly necessary adjustments were made in the computation of income. 14.3 The Ld. CIT(A) allowed the claim of the assessee by relying upon the decision of this Tribunal for AY 2012-13, ITA Nos.101 to 103/Mds/2016 dated 21.09.2016 as well as the decision of Hon ble High Court of Madras in TVS Lean Logistics Ltd. (293 ITR 432) wherein it was held that such an expenditure would be revenue expenditure. Further, Explanation-1 to Sec.32 applies only when the building is taken on lease and not in situations wherein the building is constructed on leasehold land. The final adjudication of Ld. CIT(A) was as under: - 7.7 Therefore, in the instant case, the appellant has taken only the land on lease and not the building. Though the appellant has spent on construction of the super structure on the vacant land tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Madras Auto Service (P.) Ltd (supra), it was held by Hon ble Court that since the asset created by the assessee did not belong to the assessee and the assessee got the business advantage of using modern premises at a low rent, thus saving considerable revenue expenditure for the next 39 years, both the Tribunal as well as the High Court have rightly come to the conclusion that the expenditure should be looked upon as revenue expenditure. Similarly, in the decision of TVS Lean Logistics Ltd. (supra), it was held that what constitutes a capital expenditure and what does not, to attract Explanation 1 to section 32(1) of the Act, depends upon the construction of any structure or doing any work or in relation to and by way of renovation, extension or improvement to the building which is put up in a building taken on lease by him for carrying on his business and profession of the assessee, but not in a case of construction of any structure or doing any work or relation to where such building is put up / constructed for the purpose of business or the profession of the assessee in a land taken on lease by the assessee since the assessee did not acquire a capital asset, viz., the land ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gone through the judgment of Apex Court in the case of Madras Auto Service (P) Ltd. (supra). The Apex Court at para 6 of its judgment observed as follows:- 6. The test for distinguishing between capital expenditure and revenue expenditure in our country was laid down by this court in Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34. In that case, the appellant-company had acquired from the Government of Assam lease of certain limestone quarries for a period of 20 years for the purpose of manufacture of cement. The lessee had, inter alia, agreed to pay an annual sum during the whole period of the lease as a protection fee and in consideration of that payment, the lessor undertook not to grant to any person any lease, permit or prospecting licence for limestone. This court examined tests laid down in various cases for distinguishing between capital expenditure and revenue expenditure. One of the standard tests now in use was laid down in the case of Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155. It said (page 40 of 27 ITR) : When an expenditure is made, not only once and for all but with a view to bringing into existence an asset or an advantage for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered this as obtaining a business advantage. The expenditure is, therefore, to be treated as revenue expenditure. 7. We have gone through the judgment of Madras High Court in TVS Lean Logistics Ltd. (supra). The Madras High Court after considering Explanation 1 to Section 32(1) of the Act and the judgments of Apex Court in Nasiruddin v. Sita Ram Agarwal (2003) 2 SCC 577 and Raghunath Rai Bareja v. Punjab National Bank (2007) 2 SCC 230, found that similar expenditure is revenue in nature. In fact, the Madras High Court has observed as follows:- 7. Similarly, there should be a literal rule of interpretation of a statute, which is the first and foremost principle of interpretation and where the words of a statute are absolutely clear and unambiguous, recourse cannot be had to the principles of interpretation other than the literal rule and even if the literal interpretation results in hardship or inconvenience, it has to be followed. The language employed in a statute is the determinative factor of the legislative event and even assuming there is a defect or any omission in the words used in the legislation, the court cannot correct or make up the deficiency, especially whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reimbursed the cost of construction of building and claimed depreciation thereon. In this context, Hon ble Apex Court held that the tenant would not be eligible for depreciation as per Explanation 1 to section 32(1) on the expenditure incurred towards construction of building since only when the assessee holds a lease right or other right of occupancy and any capital expenditure is incurred by the assessee 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 and the expenditure on construction is incurred by the assessee, the assessee would be eligible to claim depreciation. The Hon'ble Supreme Court has denied the claim of depreciation for the reason that where construction was not carried out by assessee himself, said explanation to section 32 would not come to the aid of assessee for claiming depreciation. However, in the present case, the assessee has already been found eligible to claim depreciation @10% by invoking Explanation-1 to Section 32(1). Therefore, the aforesaid decision of Hon'ble Supreme Court which held that the expenditure so incurred is not in the capital f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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