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2016 (5) TMI 99 - ITAT CHENNAI

2016 (5) TMI 99 - ITAT CHENNAI - [2016] 46 ITR (Trib) 138 - Disallowance u/s 14A - Held that:- In respect of the assessment year 2007-08, in our opinion, rule 8D has no application, since this was inserted with effect from March 24, 2008. Since rule 8D has no retrospective effect, it cannot be applied for the assessment year 2007-08. Accordingly, for the assessment year 2007-08, we direct the Assessing Officer to disallow 2 per cent. This ground of appeal is partly allowed for the assessment yea .....

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income earned and not beyond that. Accordingly, the Assessing Officer is directed to look at this issue on this angle and decide it afresh in the light of the above decision of the Mumbai Bench of the Tribunal - Decided partly in favour of assessee

Allowance of expenditure in respect of preliminary expenses under section 35D - Held that:- There is no doubt that expenses were not incurred before the commencement of the business. Therefore, the first condition is not complied with. The .....

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he expression "undertaking" denotes a visible expenditure on the physical facilities for manufacture and production. An undertaking is always having an area of physical structure which produces goods and services by utilising the necessary factors of production. Enhancement of the geographical area of marketing does not amount to expansion or extension of the undertaking. The expression used in the statute is "extension of its undertaking". It clearly manifests that an apparent extension or expa .....

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ure was incurred for services rendered in connection with the issue of shares to raise the capital block of the assessee-company - Held that:- Once shares are issued for cash, the assessee-company gets the funds in its hands and once the funds have come into the hands of the assessee-company, the process of issue of share capital is complete. Therefore, the scope of expenditure incurred for raising the share capital by issuing shares must also stop at that point. The scope should not be enlarged .....

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s remains as capital. Therefore, the argument of the learned authorised representative that the expenditure incurred for issue of shares to and raise share capital for working capital requirements need to be allowed as revenue expenditure cannot be accepted. Accordingly, this ground of appeal of the assessee is rejected and the ground of appeal of the Revenue is allowed.

Disallowance of depreciation on application of software at lower rate - disallowance of depreciation on behalf of t .....

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ssessee has revised its claim of depreciation on software and intangible asset of IPR. However, the Additional Commissioner of Income-tax denied the depreciation on the IPR, represented by the software GBM on the ground that depreciation to an extent of 100 per cent. in respect of this asset was already claimed by TGSL and in view of Explanation 3 placed under section 43(1), the actual cost of this asset, in the hands of the assessee, has to be reckoned as "nil" only. This conclusion of the Addi .....

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he assessee is not entitled for depreciation which was already claimed by TGSL and thereby restricting the depreciation at 25 per cent. on IPR and 60 per cent. on other software - Decided against assessee

Disallowance of depreciation on temporary wooden structures - main contention of the assessee is that whatever improvement took place in the leasehold premises and all the assets created therein are temporary in nature and it does not result in enduring benefit - Held that:- It is es .....

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ion 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 afore said material, keeping in mind the principles enunciated in the judgments by the Supreme Court and keeping in mind section 37 and section 32 of the Act, that one has to determine whether the expenditure is revenue expenditure or capital expenditure. What would apply to civil work equally applies to electrical work or interior decoration. The assessee had not stated the .....

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Apportioning common expenses towards STPI unit not on the basis of turnover followed by the company - Held that:- The Commissioner of Income-tax (Appeals) has given a finding that apportionment of expenses to be done on the basis of turnover of the STPI unit and non-STPI unit. In our opinion, this is fair and appropriate finding, which is confirmed - I. T. A. Nos. 2780, 2781, 2782/Mds/2014and 1276/Mds/2015, 2789, 2790, 2791, 2792/Mds/2014and 1220/Mds/2015 - Dated:- 27-11-2015 - Chandra Poojari .....

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r for the sake of convenience. 2. The first ground in the assessee's appeal in I. T. A. No. 2789/Mds/2014 for the assessment year 2006-07 in the assessee's case is with regard to disallowance under prior period expenses of ₹ 9,65,903. 3. The facts of the issue are that the assessee has claimed an expenditure of ₹ 9,65,903 towards prior period expenses. Since these expenses do not relate to the assessment year 2006-07, the same was disallowed by the Assessing Officer. On appea .....

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263, the Assessing Officer passed impugned assessment order under section 143(3) read with section 263, vide order dated October 26, 2010. Since the present appeal is emanating from the order passed under section 143(3) read with section 263 of the Act, the addition was not emanating in consequential order and it is emanating from the original assessment order passed under section 143(3) of the Act dated December 12, 2008. Being so, the contention of the learned authorised representative is tha .....

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263 of the Act dated October 26, 2010. Being so, the assessee failed to challenge the addition in the original assessment. Now, it cannot challenge this ground, as this is not subject matter of order passed under section 263. Accordingly, this ground is rejected. 5. The next ground in the assessee's appeal in I. T. A. Nos. 2790, 2791 and 2792/Mds/14 is with regard to the direction given by the Additional Commissioner of Income-tax under section 144A of the Act and confirmed that action of t .....

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ssee has received an amount of ₹ 26,20,821 as a dividend during the year which has been claimed as exempt under section 10(34) of the Act. Since any expenditure relatable to earning of exempt income is not permissible to be claimed as expenditure, the Assessing Officer has worked out the disallowance by invoking the provisions of section 14A read with rule 8D. The Assessing Officer has observed that even though the assessee incurs various expenditure to maintain its establishment and admin .....

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of ITO v. Daga Capital Management P. Ltd. (I. T. A. No. 1372/Delhi/2005) [2009] 312 ITR (AT) 1 (Mumbai) [SB], Maxopp Investments Ltd. (I. T. A. No. 183/Del/2005) and Cheminvest Ltd. (I. T. A. No. 2048/Del/2005), he has made the disallowance since the provisions of section 14A(2) and (3) are procedural in nature and effective retrospectively. Aggrieved, the assessee went in appeal before the Commissioner of Income-tax (Appeals), who confirmed the disallowance at 5 per cent. of the gross dividend .....

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ffect from March 24, 2008. Since rule 8D has no retrospective effect, it cannot be applied for the assessment year 2007-08. Accordingly, for the assessment year 2007-08, we direct the Assessing Officer to disallow 2 per cent. exempted income in view of the decision of the jurisdictional Madras High Court in the case of Simpson and Co. Ltd. v. Deputy CIT (TCA No. 2621 of 2006 dated October 15, 2012). This ground of appeal is partly allowed for the assessment year 2007-08. 11. Coming to the assess .....

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. In our opinion, the decision of the Mumbai Bench of the Tribunal in the case of Daga Global Chemicals P. Ltd. v. Asst. CIT [2016] 46 ITR (Trib) 70 (Mumbai) in I. T. A. No. 5592/Mum/2012, dated January 1, 2015, and the decision of the Delhi High Court in the case of Joint Investments P. Ltd. v. CIT [2015] 372 ITR 694 (Delhi) in I. T. A. No. 117 of 2015, dated February 25, 2015, is having bearing on this issue, wherein it was observed as under : "6. Heard both the parties. On a perusal of t .....

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ical to the ground raised by submitting that no expenditure directly or indirectly was incurred by the assessee for earning exempt income and further the investment in shares was made in earlier years out of own funds and not out of borrowed funds, therefore, no disallowance under section 14A read with rule 8D is to be made. 3. On the other hand, Shri Akhilendra Yadav strongly defended the conclusion arrived at by the learned Commissioner of Income tax (Appeals) by contending that a well reasone .....

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vent and pharmaceutical raw materials declared its income at ₹ 74,40,000 on September 26, 2009. The assessee credited dividend income of ₹ 1,82,262 in its profit and loss account. The Assessing Officer while framing the assessment invoked section 14A read with rule 8D by contending that the assessee claimed various expenses which are related to exempt income in its profit and loss account and disallowed ₹ 14,58,412. On appeal, before the learned Commis sioner of Income tax (App .....

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erefore, there is no question of disallowance of ₹ 14,58,412 by invoking section 14A read with rule 8D under the facts available on record. It was also explained by learned counsel for the assessee that on identical fact in earlier years, no disallowance was made. In the present assessment year also, no borrowed funds were invested by the assessee for making investment in shares or for earning dividend income. At best, if any disallowance could be made that can be restricted to ₹ 1,4 .....

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lity of the provisions of section 14A read with rule 8D. However, the alternative claim of the assessee was that disallowance if at all should be made, it should be restricted to exempt income earned and not beyond that. Accordingly, the Assessing Officer is directed to look at this issue on this angle and decide it afresh in the light of the above decision of the Mumbai Bench of the Tribunal. Accordingly, this ground of appeal is partly allowed for the assessment years 2008-09 and 2009-10. 13. .....

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xpenses incurred in connection with the initial public offer (IPO). The Assessing Officer disallowed the above sum claimed by the assessee by following the directions given by the Additional Commissioner of Income-tax in his order under section 144A. The Additional Commissioner of Income-tax in his order under section 144A has directed the Assessing Officer to disallow the expenditure claimed by the assessee, since the expenditure is not related to the "extension" of its own undertakin .....

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not within the meaning of section 35D. Against this, the assessee went in appeal before the Commissioner of Income-tax (Appeals). 15. On appeal, the Commissioner of Income-tax (Appeals) observed that for amortisation of expenditure under section 35D certain conditions are to be fulfilled. The provisions of section 35D(1)(ii) stipulate that the expenditure to be allowed for amortisation is in connection with the "extension" of its (industrial) undertaking or in connection with its " .....

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visions of section 35D(1)(ii) the preliminary issue expenses will be allowed for amortisation if the assessee has gone on public issue after the commencement of the business in connection with "extension of its (industrial) undertaking" or in connection with its "setting up a new (industrial) unit". The Assessing Officer has denied the benefit since the assessee has utilised the monies for taking an on-going concern TGSL which does not fulfil the condition "extension&quo .....

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pansion was complete in the relevant year itself and the new unit acquired had also commenced its operation and generated income from the same expanded unit which was offered to taxation. It was also submitted that since the assessee has put to use the application software acquired from TGSL it has claimed depreciation of ₹ 16.19 crores during the year. It was further submitted before the Commissioner of Income-tax (Appeals) that the utilisation of funds which were earmarked for working ca .....

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2005, dated June 20, 2012), where the meaning of the "expansion" and "extension" was answered in favour of the assessee. The question raised before the High Court in the above case is as under (page 665) : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in equating a proposal to 'expand' the capacity of production with 'extension' of industrial undertaking under section 35D of the Income-tax Act ?" 18. The High Co .....

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rges for drafting, typing, printing and advertisement of the prospectus. As against this, the expenditure incurred by the appellant is as under : (Rs.) Advertisement expenses 2,35,16,432 Audit expenses 4,94,924 Issue management fees 1,68,78,853 Legal expenses 24,81,523 Other fees and expenses 32,60,408 Printing charges 1,97,46,544 Travel expenses 7,61,913 Total 6,71,40,597 20. According to the Commissioner of Income-tax (Appeals), prima facie only advertisement expenses and printing charges are .....

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red case is as under (page 666) : "Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the word 'being' as used in section 35D(2)(c)(iv) is not 'illustrative' but only 'restricted' to ?" 21. According to the Commissioner of Income-tax (Appeals), following the above decision of the jurisdictional High Court, the meaning of "being" will be taken as "restrictive" and not "illustrative&quo .....

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t as per the SEBI guidelines the company which is going for public issue has to engage underwriters for the guarantee of its issue through its lead merchant banker. The Commissioner of Income-tax (Appeals) further observed that the assessee has entered into an agreement dated September 11, 2006, with SBI Capital Markets Ltd as lead merchant banker, wherein it was mentioned that 2 per cent. of the total issue size is to be paid as lead management fee and 1.25 per cent. of the total issue size is .....

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eals) directed the Assessing Officer to consider the following expenses be eligible for working of amortisation under section 35D(2)(c)(iv) : (Rs.) (i) Advertisement expenses 2,35,16,432 (ii) Printing charges 1,97,46,544 (iii) Underwriting commission 48,52,500 24. Against this, the assessee as well as the Revenue is in appeal. 25. We have heard both the parties and perused the material on record. Before us, the learned authorised representative submitted that the expenditure to be allowed under .....

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t of the Bombay High Court in the case of CIT v. Mahindra Ugine and Steel Co. Ltd. [2001] 250 ITR 696 (Bom). However, the contention of the learned Departmental representative is that no part of the expenditure is to be considered for allowance neither under section 35D nor under section 37(1) of the Act, in view of the judgment of the jurisdictional High Court in the case of Agrocargo Transport Ltd. v. CIT [1997] 224 ITR 90 (Mad), as the provisions of section 35D(1) and (2) of the Act are not s .....

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e relevant year itself and the new unit acquired had also commenced its operation and generated income from the same expended unit, which was offered to taxation. However, there is no evidence to support the findings of the Commissioner of Income-tax (Appeals) that expansion or extension was undertaken by the assessee within the meaning of section 35D(1)(ii) of the Act. The Commissioner of Income-tax (Appeals) did not appreciate the facts relating to applicability of section 35D(1) or (2) by app .....

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iness or in connection with setting up of a new unit. 27. The argument of the assessee-company is that the expenses were incurred in raising the capital money for the expansion of its existing business carried on by the assessee-company and, therefore, it amounted to the extension of its existing business and as such, the assessee is entitled for benefit available under section 35D. 28. We considered this issue very carefully. There is no doubt that expenses were not incurred before the commence .....

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et expansion of an existing business will not amount to extension of the "undertaking". The expression "undertaking" denotes a visible expenditure on the physical facilities for manufacture and production. An undertaking is always having an area of physical structure which produces goods and services by utilising the necessary factors of production. Enhancement of the geographical area of marketing does not amount to expansion or extension of the undertaking. The expression u .....

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ded against the assessee and in favour of the Department. 30. The alternate plea of the assessee is to allow the same under section 37 of the Act and the expenditure was incurred for services rendered in connection with the issue of shares to raise the capital block of the assessee-company. The funds raised by a company through issue of shares automatically increases the capital volume of that company. The funds raised by increasing the capital in that manner may be used by the assessee-company .....

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he scope should not be enlarged further. It is the wisdom of the company to decide in which manner the funds available with it, collected by way of issue of shares, should be applied. If the funds are utilised for working capital requirements, it is only an appropriation of funds available in the hands of the company. Raising the capital and utilising the funds are different. Application of funds does not decide the character of the money collected against the issue of shares. Money collected ag .....

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09-10 and 2010-11 is with regard to disallowance of depreciation on application of software at lower rate and also with regard to disallowance of depreciation on behalf of the entire purchase value of application of software and reducing the rate. 32. The facts of the issue as narrated in I. T. A. No. 2790/Mds/14 for the assessment year 2007-08 are that the Assessing Officer observed that the assessee has claimed an amount of ₹ 16,19,58,990 as depreciation at the rate of 100 per cent. on a .....

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on software. Accordingly, the Assessing Officer, by following the directions of the Additional Commissioner of Income-tax in his order under section 144A of the Act, made a disallowance of ₹ 8,06,44,794 and restricted the depreciation claimed on software to ₹ 1,96,51,441 against ₹ 10,02,96,235 claimed by the assessee in the return of income. Further, the Assessing Officer observed that as per the directions of the Additional Commissioner of Income-tax, he denied the claim of d .....

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and restricted the claim of depreciation on intangible assets (IPR) to 25 per cent. and claimed 100 per cent. on other assets. According to the Commissioner of Income-tax (Appeals), the directions of the Additional Commissioner of Income-tax are reasonable, since the assessee is not entitled to claim depreciation on the amount which is already claimed by the TGSL, the restriction of depreciation to 25 per cent. on intangible assets and 60 per cent. on the other software is also reasonable and h .....

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te of 25 per cent. as prescribed under the Rules. Accordingly, the assessee has revised its claim of depreciation on software and intangible asset of IPR. However, the Additional Commissioner of Income-tax denied the depreciation on the IPR, represented by the software GBM on the ground that depreciation to an extent of 100 per cent. in respect of this asset was already claimed by TGSL and in view of Explanation 3 placed under section 43(1), the actual cost of this asset, in the hands of the ass .....

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3(1) of the Act. Being so, the lower authorities are justified in observing that the assessee is not entitled for depreciation which was already claimed by TGSL and thereby restricting the depreciation at 25 per cent. on IPR and 60 per cent. on other software. Accordingly, this ground of appeal is rejected in all these appeals. 35. The next ground in the assessee's appeals for the assessment years 2006-07 to 2010-11 is with regard to the disallowance of depreciation on temporary wooden struc .....

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te proceedings, the details of additions in temporary partitions filed by the learned authorised representative before the Commissioner of Income-tax (Appeals), vide his letter dated July 21, 2014, are as under : (Rs.) 1. Electrical items, fittings, accessories and labour charges 31,77,305 2. Plumbing items, fittings, accessories and labour charges 26,62,533 3. Tiles, ceramics and floor materials and masonry charges 26,01,480 4. Wood and plywood, carpentry work and labour charges 57,32,530 5. In .....

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nt. Whether the expenditure incurred is on the leasehold premises or not is no more relevant in view of Explanation 1 to section 32 which reads as follows : "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 business or profession on the construction of any structure or doing .....

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ings were considered as capital assets. 40. Further, the Commissioner of Income-tax (Appeals) observed that while dealing with the improvements on leasehold building, the following points have to be taken into consideration : (i) to see whether the said expenditure is on a capital asset which is eligible for claiming depreciation. (ii) for the purpose of depreciation whether it is a leasehold building or own building, they are equally eligible for depreciation. It cannot be mistaken that the exp .....

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rtake of the character of capital expenditure. (iv) to see whether the expenditure incurred by the appellant is for the purpose of "current repairs" or the main purpose behind is to get a "new advantage" out of the above expenses by means of improving the leased premises. If it is to get a "new advantage" then it is capital in nature as per the Supreme Court's decision in the case of CIT v. Saravana Spinning Mills P. Ltd. [2007] 293 ITR 201 (SC). (v) to see whet .....

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se ceiling, tiled flooring, etc., which are not temporary structures. Since it is an improvement on the building, it is capital in nature. There is also no hard and fast rule that all the expenditure on leasehold premises will partake of the character of revenue expenditure. The expenditure incurred by the assessee is definitely for improving the leased premises, making it fit for carrying out its business. Further, the improvements carried out by the assessee on the leased premises are not mean .....

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ovement took place in the leasehold premises and all the assets created therein are temporary in nature and it does not result in enduring benefit. The learned authorised representative relied on the judgment of various High Courts, which are kept on record, to support his argument. In our opinion, a similar issue was came up for consideration before the Tribunal in the case of K. R. Bakes P. Ltd. v. Asst. CIT [2016] 46 ITR (Trib) 73 (Chennai) (I. T. A. No. 1384/Mds/2013, dated May 29, 2015), wh .....

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ovement of the leased building as in the case of Joy Alukkas India Pvt. Ltd. v. Asst. CIT [2015] 5 ITR-OL 340 (Ker) ; 88 CCH 147, cited supra as held by the Kerala High Court. For settling the controversy, we have to go through Explanation 1 to section 32(1) of the Act which was inserted by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, with effect from April 1, 1988, which deals with the situation where the expenditure has been incurred by the assessee on construction of .....

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improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee.' 11. To fall within the ambit of Explanation 1 the 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 a .....

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e 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 expenditure. The assessee in order to support his case has relied on the judgment of the Madras High Court in the case of CIT v. TVS Lean Logistics Ltd. [2007] 293 ITR 432 (Mad). In the said case, the assessee had constructed a building on the leased land for the busi ness advantage. The court held that the entire cost of construction is admis .....

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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.' 13. Thus, it is clear that the ratio laid down by the Madras High Court in the said judgment does not support the case of the assessee 14. In the present case .....

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igible result and any depar ture from the literal rule would really be amending the law in the garb of interpretation, which is not permissible and which would be destructive of judicial discipline. 15. The Supreme Court of India in the case of CIT v. Madras Auto Service (P) Ltd. [1998] 233 ITR 468 (SC) while dealing with a similar controversy has observed as under (page 472) : 'In order to decide whether this expenditure is revenue expend iture or capital expenditure, one has to look at the .....

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y 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, the asses see in the present case did not get any capital asset by spending the said amounts. The assessee therefore could not have claimed any depreciation. Looking to the nature of the advantage which the asses see obtained in a commercial sense, .....

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g the amount. In all these cases, the expenses have been looked upon as having been made for the purpose of conducting the business of the assessee more profitably or more successfully. In the present case also since the asset created by spend ing the said amounts did not belong to the assessee but 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 rig .....

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ature of expenditure, it is necessary to find out the nature of construction put up, the purpose of construction/renovation and the use to which the construction 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 afore said material, keeping in mind the principles enunciated in the judgments by the Supreme Court and keeping in mind section 37 and section 32 of the Act, that one has to determine whether the expend iture is revenu .....

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the above, we remit the issue in dispute to the Assessing Officer to consider whether the expenditure is revenue or capital in nature and decide afresh." 43. Accordingly, we remit the issue in dispute to the Assessing Officer to consider whether the expenditure is revenue or capital in nature and decide afresh in the light of the above order of the Tribunal. 44. The next ground in the Departmental appeal for the assessment years 2007-08, 2008-09 is with regard to apportioning common expens .....

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