TMI Blog2012 (6) TMI 540X X X X Extracts X X X X X X X X Extracts X X X X ..... t stated the nature of civil works constructed, the nature of interior decoration made to the leasehold premises and also the nature of electrical work undertaken. Tribunal without going into the question as to the nature of civil work, electrical work and interior decoration done to the lease premises has proceeded on the assumption that it constitutes a revenue expenditure. matter is remanded to the assessing authority to consider whether the said expenditure is revenue expenditure or capital expenditure - I T APPEAL No. 805 of 2006 - - - Dated:- 2-8-2011 - N. Kumar and Ravi Malimath, JJ. K.V. Aravind and M.V. Seshachala for the Appellant. G. Sarangan and Smt. Vani H. for the Respondent. JUDGMENT N. Kumar, J. This appeal is by the Revenue challenging the order passed by the Tribunal which held that the expenditure incurred by the assessee by way of electrical work, civil work and interior decoration is in the nature of the revenue expenditure and therefore directed the Assessing Officer to allow the entire expenditure under this head as revenue as claimed by the assessee. 2. The assessee is a listed public company and engaged in the manufacture, sale a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital expenditure. Aggrieved by the same, the assessee preferred an appeal. The appellate Commissioner on reconsideration of the aforesaid material was of the view that as no material was brought on record either by the assessing officer or the assessee to show that the expenses incurred were in the nature of replacement expenses i.e., electrical installation and civil work were carried out with the purpose of making repairs to the existence units, upheld the order of the assessing authority. He also took note of the copies of the bills and pointed out that the said bills show that expenses of electrical installation and civil works were for the purpose of the office premises at Bangalore and therefore after taking note of the various judgments, he was of the view that expenses incurred were on account of the new office premises on the leasehold property of the assessee and such expenses brought into existence a new asset which gave an enduring benefit to the assessee and therefore he upheld the order of the assessing authority. Aggrieved by the same, the assessee preferred an appeal before the Tribunal. The Tribunal accepted the case of the assessee. In view of the fact that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r interference is made out. 6. In support of their contentions, the learned counsel for both the parties have relied on several judgments. 7. The Apex Court in the case of Travancore-Cochin Chemicals Ltd. v. CIT [1977] 106 ITR 900 dealing with the aforesaid question held that, 'the authorities both in this country and in England have pointed-out the difficulties in formulating precise rules for distinguishing capital expenditure from revenue expenditure. The line of demarcation has been found to be very thin. Certain broad tests have, however, been laid down, and of them the test suggested by Viscount Cave L.C. in Atherton v. British Insulated Helsby Cables Ltd. [1925] 10 TC 155 (HL) appears to have been largely accepted in this country and their Lordships have quoted few lines from Viscount Cave's Judgment, which are as under: "When an expenditure is made..... with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is incurred while the business is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment. Such expenditure can be looked at either from the point of view of what is acquired or from the point of view of what is the source from which the expenditure is incurred. If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not by the fact whether it is a payment in a lump sum or by instalments. As was otherwise put by Lord Greene, M.R., in Henriksen (Inspector of Taxes) v. Grafton Hotel Ltd. [1942] 2 KB 184: [1943] 11 ITR (Supp) 10 (CA): "The thing that is paid for is of a permanent quality although its permanence, being conditioned by the length of the term, is short lived. A payment of this character appears of a lease, which is admittedly not deductible". The case of Tata Hydro-Electric Agencies Ltd. v. CIT ( supra ), affords another illustration of this principle. It was observed there: "If the purchaser of a business undertakes to the vendor as one of the terms of the purchase that he will pay a sum annually to a third party, irrespective of whether the business yields any profits or not, it would be difficult to say that the annual payments were made solely for the purpose of earning the profits of the business". The expression "once and for all" is used to denote an expenditure which is made once and for all for procuring an enduring benefit to the business as distinguished from a recurring expenditure in the nature of operational expenses. The expression "enduring benefit" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of CIT v. Madras Auto Service (P) Ltd. [1998] 233 ITR 468/99 Taxman 575 has laid down the general principles applicable in determining whether particular expenditure is capital or revenue expenditure. The Court in the above case has approved the standard tests laid down in the Atherton v. British Insulated Helsby Cables Ltd. ( supra ) referred to supra , which was summarized as under:- "( i ) Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment. ( ii ) Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade....If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether. ( iii ) Whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness activity. Such expenses would clearly fall within the expression of repairs to the premises as appearing in section 30(a)(i). The Legislature has made a distinction between expenses incurred by a tenant for "repairs" of the premises and expenses incurred by a person who is not a tenant towards "current repairs" to the premises. This distinction has to be given meaning. Perhaps the logic behind the distinction was that a tenant would, by the very nature of his status as a tenant not undertake expenditure as would endure beyond his likely period of tenancy or create a new asset whereas, an owner may undertake expenditures so as to even bring about new assets of capital nature. It was, therefore, necessary to qualify the expenditure on repairs. The deduction was therefore, limited to expenditure on "current repairs" only. It follows, therefore, that the cost of repairs that have been incurred by a tenant in respect of such premises would have to be allowed under section 30(a)(i). The question of disallowing such an expenditure and relegating the assessee to claim depreciation under section 32 does not arise. The assessee has not claimed depreciation. It has claimed deduction u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. Similarly, where expenditure is incurred while the business is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment, such expenditure would be revenue expenditure. If for running the business or working it with a view to produce the profits, expenditure is incurred, it is a revenue expenditure. The Legislature has made a distinction between expenses incurred by a tenant for "repairs" of the premises and expenses incurred by a person who is not a tenant towards "current repairs" to the premises. This distinction has to be given a meaning. Perhaps the logic behind the distinction was that a tenant would, by the very nature of his status as a tenant, not undertake expenditure as would endure beyond his likely period of tenancy or create a new asset whereas, an owner may undertake expenditures so as to even bring about new assets of capital nature. It was, therefore, necessary to qualify the expenditure on repairs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r improvement of the building, then the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee. Therefore, for the purpose of section 32, which provides for depreciation, if the condition No. 1 is satisfied by a legal fiction, the lessee becomes the owner of the structure constructed on lease premises. Therefore any expenditure incurred for civil work by a lessee in respect of the lease premises, without any further proof cannot be said to be a capital expenditure or revenue expenditure. In order to find out the nature of expenditure, it is necessary to find out the nature of construction put-up, the purpose of construction and the use to which the said construction is put-up and also if it is a case of repair, replacement, addition or improvement has to be gone into. It is only on the aforesaid material, then keeping in mind the principles enunciated in the aforesaid judgments by the Apex Court and keeping in mind section 37 and section 32 of the Act, one has to determine whether the said expenditure is revenue expenditure or capital expenditure. What would apply to civil work equally applies to electrical work or interior decora ..... X X X X Extracts X X X X X X X X Extracts X X X X
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