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2015 (12) TMI 1031 - KERALA HIGH COURT

2015 (12) TMI 1031 - KERALA HIGH COURT - [2015] 378 ITR 706 (Ker) - Amount expended for putting up multi-storied structures on leasehold land and refurbishing leasehold buildings - capital or revenue expenditure - entitlement to depreciation - ITAT held the amount expended as capital expenditure, rejecting the claim of the appellant for treating the same as revenue expenditure and, therefore, deductible under section 32(1) and Explanation 1 of the Income-tax Act - Held that:- On a reading of Exp .....

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he assessee and the building owner.

So far as the question regarding the expenditure incurred by the assessee for refurbishing 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, decoratin .....

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n 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 scope for providing a different meaning for the words used and, hence, we are bound to consider the question by giving the literal meaning to the expressions and phraseo .....

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os, Isaac Thomas and Noby Thomas Cyriac, Advocates, for the appellant. JUDGMENT The judgment of the court was delivered by 1. Shaji P. Chaly J.-These appeals arise from the orders of the Income- tax Appellate Tribunal, Cochin Bench, in I. T. A. Nos. 212 of 2014, 213 of 2014 and 214 of 2014, respectively, dated July 25, 2014. The subject matter of the appeals relate to the assessment years 2007-08, 2008-09 and 2009- 10. The Tribunal has passed a common order allowing the appeals filed by the Reve .....

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y a common order. Therefore, it is only expedient that these appeals are also considered together. 3. The assessee is a leading dealer of vehicles, spares and accessories of Maruti Suzuki and is an authorised service provider, of vehicles manufactured by the said company. The assessee is having dealership in various districts across Kerala and in Chennai, State of Tamil Nadu. The return of income for the aforesaid assessment years were processed under section 143(1) of the Income-tax Act, 1961 ( .....

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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 .....

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ssessee, the assessing authority added an amount of ₹ 3,12,34,772 (Rs. 1,22,66,205 towards con struction of superstructure on leasehold lands and ₹ 1,89,68,567 incurred for repairs, refurbishing and improvements of buildings taken on lease) against capital expenditure after declining the claim made by the assessee that the expenditure incurred by it are liable to be deducted since they are revenue expenditure. Assessment year 2008-09 Return was filed on September 30, 2008, a revised .....

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nd added the same to the capital expenditure, refusing deduction claimed by the assessee against revenue expenditure. Assessment year 2009-10 The assessee filed return on September 30, 2009. Thereafter, the same was revised on March 18, 2010. Scrutiny was carried out by the Assessing Officer and, thereafter, apart from various other additions, an amount of ₹ 4,02,16,063 (Rs. 3,37,33,873 towards construction of superstructure and ₹ 64,82,190 incurred for repairs, refurbishing and impr .....

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the case, the Appellate Tribunal is right in confirming the disallowance of ₹ 1,22,66,205 incurred for construction of superstructures by the appellant on leased land as capital expenditure ? (2) 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 ₹ 1,22,66,205 incurred for the construction of superstructures by the appellant on leased land is capital expenditure ? (3 .....

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s 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 also it was .....

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ction. 10. Learned senior counsel has relied on the decisions in CIT v. Madras Auto Service (P.) Ltd. [1998] 233 ITR 468 (SC), CIT v. TVS Lean Logistics Ltd. [2007] 293 ITR 432 (Mad). He also placed reliance on the judgment of this court in Joy Alukkas India Pvt. Ltd. v. Asst. CIT I. T. A. No. 230 of 2013-[2015] 5 ITR-OL 340 (Ker), and contended that the facts and circumstances discussed therein are similar to the facts and circumstances involved in the present case. 11. In Madras Auto Service ( .....

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have looked upon expenditure which did bring about some kind of an enduring benefit to the company as a revenue expenditure when the expenditure did not bring into existence any capital asset for the company. The asset which was created belonged to somebody else and the company derived an enduring business advantage by expending the amount. In all these cases, the expenses have been looked upon as having been made for the purpose of con ducting the business of the assessee more profitably or mo .....

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h 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 i .....

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the case of the assessee and Explanation 1 to section 32(1) of the Act is not attracted to the instant case of the assessee at all. Of course, an argument was advanced on behalf of the Revenue that the words 'where the business or profession 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' would also include lands and would be read as 'where the business or profession of the assessee is carried on in a land .....

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out the creases but it cannot change the texture of the fabric, cannot enlarge the scope of legislation or intention when the language of the provision is plain and unambi guous, cannot add or subtract words to a statute or read something into it which is not there and cannot rewrite or recast legislation, vide Nasiruddin v. Sita Ram Agarwal [2003] 2 SCC 577." 13. In the decision in Joy Alukkas (supra), this court has taken into account almost all the decisions of the hon'ble apex court .....

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dering the facts involved in the said case, it was concluded in paragraphs 29 and 30 of the judgment thus : "29. Advantage to facilitate trade, operations providing the man agement to conduct business more effectively to make profits without the need of expanding or extending capital asset (permanent struc ture), what assessee acquires by spending money is to achieve good ambience which may result in profits without changing the building itself in which the business is conducted. The outgoi .....

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. 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 .....

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ion should be whether by construction of the building on leasehold land or using the building on lease or refurbishing the same, the assessee has acquired of derived any enduring benefit out of the use if the same. And further that after introduction of Explanation 1 supra, so far as the building taken on lease and repaired or refurbished is concerned, the same is clearly covered under Explanation 1 to section 32(1) of the Act. Therefore, the senior counsel contended that the expenditure incurre .....

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aph 4 of the said decision, which is as follows (page 64) : "The amount admittedly has been expended for reclaiming, a piece of land over which, licence has been granted to the assessee to instal a petrol pump by the Burmah Shell Oil Distributing Co. It cannot be said that the improvements that have been effected on the land con sisting of filling up the ditches and raising the land and of construct ing a wall are not of a capital nature. Even so, it is suggested that, because the assessee .....

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nt and against the asses see. In view of our answer to question No. (1), question No. (2) can 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 case .....

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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 asset of capital nature." 17. Taking us through the facts of the case in Alembic Chemical Works Co. Ltd. also, the learned counsel contended that the ratio laid down by the hon'ble apex court is tha .....

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and general tests have been suggested from time to time to ascertain on which side of the line the outlay in any particular case might rea sonably be held to fall. These tests are generally efficacious and serve as useful servants ; but as masters they tend to be over-exact ing." 18. Learned senior counsel further contended that the judgment in Madras Auto Service (supra) was also rendered in the context of the Act, as it stood prior to the introduction of Explanation 1 to section 32(1) an .....

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Court has further held in the aforesaid case that 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 Legislature, the court cannot correct or make up the deficiency, espe cially when a literal reading thereof produces an intelligible result an any departure from the literal rule would really be amending the law in the garb of interpretation, which is not permissible and which would b .....

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g 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 subs .....

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233 ITR) : '11. All these cases have looked upon expenditure which did bring about some kind of an enduring benefit to the company as a revenue expenditure when the expenditure did not bring into exist ence any capital asset for the company. The asset which was created belonged to somebody else and the company derived an enduring business advantage by expending the amount. In all these cases, the expenses have been looked upon as having been made for the pur pose of conducting the business .....

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an conclude that it is essential that the expenditure incurred on the construction of any structure on the leased premises should result in enduring benefit. In our consi dered opinion, the case of the assessee very much falls within the ambit of Explanation 1 to section 32(1) of the Act and in view of Supreme Court judgment in the case of Madras Auto Service, cited supra, we are not considering the various judgments cited by the learned authorised representative. 30. In view of the above, we fi .....

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1 questions which are to be answered are : (i) Whether the assessee is carrying on business or profession in a leased building or other rights of occupancy ? (ii) Whether the assessee has incurred any capital expenditure for the purpose of business on the construction of any structure 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 pu .....

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o 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 the purposes of the bus .....

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h the assessee, enjoying a leasehold right on a building is treated as the owner of the building. So according to us, the question to be considered in such a case is whether the assessee has acquired any enduring benefit by putting the refurbished building to use over a period of time in accordance with the agreement entered into between the assessee and the building owner. 23. So far as the question regarding the expenditure incurred by the assessee for refurbishing the building taken on lease .....

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