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2015 (8) TMI 669 - BOMBAY HIGH COURT

2015 (8) TMI 669 - BOMBAY HIGH COURT - [2015] 378 ITR 114 (Bom) - Entitlement to depreciation - expenses incurred to complete the title/ ownership of the land - whether the payment of ₹ 23.35 lakhs was in the nature of revenue expenditure or capital expenditure? - Held that:- The impugned orders of the authorities have reached a correct finding of fact that the land was not being used for the purposes of the Appellant's business. It was a vacant land to be exploited in the future. The busi .....

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by the Appellant upon the decision of this Court in Brihan Maharashtra Sugar Syndicate (1986 (3) TMI 21 - BOMBAY High Court) is not of any assistance to it. The Appellant therein` held land which it used for sugarcane cultivation so as to carry on its business of manufacturing sugar. This land was being acquired under the Land Ceiling Act. The Appellant therein incurred expenses to protect the land which was used for its sugarcane cultivation from acquisition. Therefore, it was an expenses incu .....

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t amount of ₹ 23.35 lakhs is an expenditure on revenue account.

We have found that the expenditure of ₹ 23.35 lakhs has been incurred so as to complete the title/ ownership of the land. Therefore, the above expenditure cannot be attributed to the construction of the building. The construction of the building mandated by the exemption order under Section 20 of ULCA is only on consequence of the title/ ownership becoming complete. Therefore, we see no reason to interfere on .....

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Per M. S. Sanklecha, J.) This appeal under Section 260A of the Income Tax Act, 1961 (the Act) challenges the order dated 2nd February, 2000 passed by the Income Tax Appellate Tribunal (the Tribunal), raising a perennial issue of deciding the difference between revenue and capital expenditure. 2. The Assessment Year involved is A. Y. 1990-91. 3. On 25th February, 2002, this Appeal was admitted on the following substantial questions of law: "(a) Whether on the facts and in the circumstances o .....

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e Appellant is engaged in the business of manufacturing of cutting tools at its factory. The Appellant owned another area of land other then the land on which factory is situated, admeasuring 47,296 sq. mtrs (the said land) which was vacant at village Aundh in District Pune; (b) In 1976, the Urban Land (Ceiling and Regulation)Act, 1976 (ULCA) was enacted. On 14th January, 1981, the Appellant applied to the Competent Authority under ULCA for exempting an area of 10,462 sq.mtr. (exempted land) out .....

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the MHADA be withdrawn. It appears that the State Government treated the Appellant's representation as an application for exemption under Section 20 of the ULCA and consequently by an order dated 29th November, 1989, granted exemption to a portion of the said land i.e. the area of 10,462 sq. mtrs, in the aggregate (exempted land). This was with an obligation to construct hostel, training centre and guest house on an area of 6,767 sq. mtrs and also to construct tenements of 50 to 80 sq. mtrs .....

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t its profit for the A. Y. 1990-91. The Assessing Officer by an order dated 19th December, 1991 did not accept the Appellant's claim that the aforesaid payment of ₹ 23.35 lakhs was revenue expenditure and held that payment was in the nature of capital expenditure on the following grounds: (i) The exempted land was not being used for the purpose of business. Thus, the acquisition would not have had any immediate effect on the Appellant's carrying on business; (ii) The amount of S .....

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nsure that the 10,642 sq. mtr. (exempted land) is not acquired under the ULCA; (ii) The payment was made to regain exempted land which would be otherwise lost; (iii) Obtained a benefit of enduring nature in respect of the exempted land; and (iv) The payment was not for the purpose of business but to acquire full ownership of the exempted land. Thus, the appeal was dismissed on the above account by holding that the payment of ₹ 23.35 lakh was revenue expenditure. (f) Being aggrieved, the Ap .....

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virtue of ULCA; (iii) Payment not made to avert threat to the running of its business; and (iv) The payment ensured enduring benefit in respect of the exempted land as otherwise the acquisition of the land under the ULCA with nominal compensation. (B) So far the alternative contention that ₹ 23.35 lakh be considered a part of the costs of the building and be allowed as depreciation. The Tribunal held as under:The expenditure of ₹ 23.35 lakhs as incurred was to perfect and/or cure th .....

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the impugned order holds that the amount of ₹ 23.35 lakhs has been paid to cure a defect in title, therefore holding that the above expenditure is on capital account; (b) The mere enactment of ULCA does not in any manner affect the title of the Appellant to the said land and in particular, 10,462 sq. mtr, of exempted land by virtue of Section 20 of the ULCA. The title of the Appellant on said land would only be lost when notification is issued under Section 10 of the ULCA. Thus, the title .....

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yments made to protect the business asset from the threat of acquisition would be on revenue account; and (d) It is submitted that the decision of this Court in C.S.T. v/s. Brihan Maharashtra Sugar Syndicate Ltd., 165 ITR 275 completely concludes the issue in favour of the Appellant wherein it has been held that expenditure incurred on litigation for preserving and preventing a loss of land by virtue of land ceiling enactment, is an expenditure which is revenue in nature. In the above circumstan .....

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the purpose of carrying on its business as the business of manufacturing cutting tools would continue whether or not the exempted land was acquired under ULCA. Therefore, in the above facts, the expenditure of ₹ 23.35 lakhs cannot be considered on revenue account; (b) The amounts of ₹ 23.35 lakhs was paid by the RespondentAssessee to the State Government so as to continue to have possession of the land for indeterminate period. Thus ownership became complete and the benefit obtained .....

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the Appellant on conditions of constructing building on the land and payment of ₹ 23.35 lakhs that an area of 10,462 sq. mtr. of land exempted. Therefore, the payment made was in the nature of capital expenditure for excluding the operation of ULCA in respect of 10.462 sq. mtrs. of land. In view of the above, it is submitted that no interference with the order of the Tribunal is called for to the extent it holds that the payment of ₹ 23.35 lakhs was in the nature of capital expendit .....

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the nature of capital expenditure. However, no definition or rules to determine the character of expenditure i.e. capital or revenue is found in the Act. The Courts have repeatedly made attempts to formulate tests to distinguish between capital and revenue expenditure. However, no single test/ rule has yet been evolved to distinguish between revenue and capital expenditure. Finally, each case has been decided and would have to be decided upon some particular aspect i.e. fact that exists in case .....

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tests to distinguish between capital and revenue expenditure nor the Courts have been able to evolve an universal tests to distinguish between the two types of the expenditure. However, the observations of the Courts will be helpful to decide the character of the expenditure under examination. The entire issue whether the expenditure is capital or revenue has to be looked at through the eyes of the businessman incurring the expenditure. This in the context of a commercial perspective. 10. Keepin .....

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issuing necessary notification under Section 10 thereof, the Appellant on its own moved the Competent Authority, seeking exemption under Section 20 of ULCA for an area of 10,462 sq. mtrs out of the 47,290 sq. mtrs. of excess vacant land which is liable for acquisition and would be so in due course; (d) The exemption was granted by the Competent Authority under Section 20 of ULCA by putting conditions viz: constructing building on the land, prohibiting sale/ transfer of the land on which the cons .....

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nditure as contended by the Appellant or as capital expenditure as contended by the Revenue. 12. The Appellant's primary submission is that it is the owner of the said land including 10,462 sq. mtrs of exempted land at all times. It is submitted that the title of the exempted land is and has always been with the Appellant. The payment of ₹ 23.35 lakhs made by the Appellant was only to protect its title to 10.462 sq. mtrs. by claiming exemption under Section 20 of the ULCA. The Appellan .....

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nd inasmuch as they could construct on the same and/or deal with it, notwithstanding the enactment of the ULCA, reliance was placed upon: (I) Srinivasa Builders Pvt. Ltd. v/s. Government of Andhra Pradesh (APLJ 1978 (1) page 174) (Andhra Pradesh High Court, Single Judge); (II) G. Jayamala v/s. Commissioner of Municipal Corporation, Hyderabad 1989(1) APLJ 3636 - (Andhra Pradesh High Court, Division Bench) and; (III) Ghanshyamdas v/s. Union of India in LPA 765/ 2003 rendered on 2nd September, 2011 .....

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at on the land being notified as excess vacant land by the Competent Authority, then the party concerned will take such steps as are necessary to make the excess vacant land available to the State. Therefore, the construction on the land impliedly was to be carried out by the Appellant at its own risk. It would thus include the obligation to demolish the construction. In the present facts, the Appellant was not willing to take such a risk and for that reason in their representation dated 30th Ma .....

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payment of ₹ 23.34 lakhs. Similarly, the unreported decision of Delhi High Court in Ghanshyamdas Sheth (supra) would not apply to the present facts as it inter alia concludes that there can be no dealing with the excess land by way of transfer, sale etc. only between the notification issued under Section 10(1) and Section 10(3) of the ULCA. It does not even remotely suggest that prior to notification under Section 10 of the ULCA there is an unfettered right to dispose of and/or sell the p .....

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d cases, the issue whether the land is in excess or not is a matter of dispute i.e. not settled. Although in the Delhi High Court's decision, the notification under Section 10 of ULCA was a subject matter of challenge by way of a Writ Petition. In this case, the Appellant has itself declared to the Competent Authority that the said land is in excess of the ceiling limit. Hence, it was only a matter of time. Therefore, the Appellant was aware or had accepted the fact that the exempted land wo .....

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se on an area of 6,667 sq. mtrs, for Appellant's use and in the balance area of 3695 sq. mtrs., the Appellant was required to built tenements, each having an area of up to 80 sq. mtrs. In the aforesaid background, the aforesaid amount of ₹ 23.35 lakhs was paid by a businessmen to ensure that the area of 10,462 sq. mtrs out of the total exempted land of 47,296 sq. mtrs is available for the Appellant's use and taken out of the ambit of Section 3 of ULCA. In case, the Appellant's .....

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payment of ₹ 23.35 lakhs, the Appellant received a benefit of enduring nature inasmuch as 10,462 sq. mtr of land came out of the clutches of ULCA and an area of 6767 sq. mtr was available for all times to be used by the Appellant including the power to sell of the land along with the structures thereon. In the above facts, the payment of ₹ 23.35 lakhs from a businessman's point of view is a payment made to stop/stall the acquisition of land which a businessman was able to forese .....

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the land. Thus a right to transfer, unfettered in any manner became available to the Appellant after construction of the building on the land. This right was not available to the Appellant prior to the grant of the exemption as the disposition was fettered because of the certain acquisition of land as even according to the Appellant, vacant land was in excess of the ceiling limit under ULCA. This payment made by the Appellant in its nature is different from a payment made to protect the propert .....

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ppellant. This would conclusively determine that the payment in this case was capital in nature in the capital field. 16. It was also contended that the title to the exempted land in respect of which the payment was made, was at all times with the Appellant. Therefore, it could not be a case of acquisition of asset or curing a defect in the title so as to become an expenditure which is capital in nature. It is a settled position that a title is an evidence of ownership to the property. Ownership .....

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s removed in the ownership of the land. Therefore, the title which is evidence of ownership in the present facts was not complete ownership as the same was fettered by the provisions of ULCA. This removal of a fetter by making payment completes the ownership of the land which was otherwise imperfect and would be reflected in the title on grant of exemption, the title to the exempted land is no longer encumbered by the provisions of ULCA. Therefore, we do not accept the Appellant's contention .....

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v/s. CIT 75 ITR 375 that to determine an expenditure to be a capital expenditure, it must be incurred in getting rid of a defect in title or a threat to litigation. Moreover, in this case, the threat to a certain acquisition would be on a higher footing then a threat to litigation. Therefore, it has been correctly held to be capital in nature on both counts i.e. getting rid of a defect and avoiding a certain acquisition. 17. We are of the view that the impugned orders of the authorities have re .....

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Empire Jute Co. Ltd. v/s. CIT 124 ITR 1, Bikaner Gypsum v/s. CIT 187 ITR 39 and Shree Meenakshi Mills Ltd. v/s. CIT 10 62 ITR 207 would have no application to the present facts. In Empire Jute Co. Ltd. (supra), the advantage of enduring benefit was not obtained in the capital field i.e. the payment made merely facilitated the assessee's day to day business while leaving the fixed capital untouched. In this case, the payment is in the capital field and does not in any manner affect the day to .....

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edings in relation to the Assessee's right to carry on its day to day business. This is not so in the present facts. 18. The reliance by the Appellant upon the decision of this Court in Brihan Maharashtra Sugar Syndicate (supra) is not of any assistance to it. The Appellant therein held land which it used for sugarcane cultivation so as to carry on its business of manufacturing sugar. This land was being acquired under the Land Ceiling Act. The Appellant therein incurred expenses to protect .....

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ihan Maharashtra Sugar Syndicate (supra), can arise. 19. In view of the above, we see no reason to disturb the finding of the Tribunal upholding the order of the lower authority that amount of ₹ 23.35 lakhs is an expenditure on revenue account. Regarding Question - 2 20. Mr. Mistri, learned Senior Counsel for the Appellant submits that in the alternative, in case the amount of ₹ 23.35 lakhs is considered to be capital in nature, then the same must be added to the cost of constructing .....

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